COMMISSIONER OF SERVICE TAX, CHENNAI v. M/S DIEBOLD SYSTEMS (P) LTD.

What happened

The respondent supplied, installed and commissioned ATMs under turnkey contracts with banks for a composite consideration. The Revenue assumed that 33% of the gross consideration represented installation and commissioning and issued three show cause notices: No. 6/2005 of 14 February 2005 for July 2003 to July 2004, proposing ₹3,37,39,404; No. 5/2005 of 21 October 2005 for August 2004 to July 2005, proposing ₹4,68,22,103; and No. 52/2006 of 17 October 2006 for August 2005 to April 2006, proposing ₹2,96,02,757. The Commissioner of Service Tax, Chennai confirmed the demands by orders of 23 December 2005 (two) and 23 February 2007 (the first without penalty and the second to the extent of ₹4,27,95,344 with penalty). The CESTAT, by a common order of 28 November 2007, relying on its decision in Daelim Industrial Co., held that the contracts were indivisible turnkey contracts with a single consideration and that no part could be segregated, set aside the orders and dismissed the Revenue's appeal on penalties. The Revenue argued that installation and commissioning fell within section 65(105)(zzd) irrespective of the contract's form; the assessee said that it paid sales tax on the whole value and the Finance Act had no provision for splitting.

Questions before the court

• Could service tax be levied on a notional 33% of the composite consideration under the 'commissioning or installation' entry in the period July 2003 to April 2006?

Why the court ruled this way

The liability to tax must flow from the charging statute, and machinery and valuation provisions do not create or widen the charge (paragraph 20). Service tax was levied under section 66 on taxable services listed in section 65(105), and section 67 only measured the value; during the period, the Act had no provision allowing the dissection of an indivisible composite turnkey contract (paragraphs 21 and 22). The CESTAT's finding, based on the contract terms, of a single commercial objective with composite consideration and no separate consideration for installation or commissioning was accepted (paragraphs 23 and 32). Tracing Gannon Dunkerley and Article 366(29A), the Court noted that the Finance Act had no corresponding provision for segregating the service element (paragraphs 26 to 28). In Commissioner v. Larsen and Toubro, the Court had held that taxable entries before 1 June 2007 covered service contracts simpliciter and that the 2007 introduction of works contract service in section 65(105)(zzzza), with a valuation mechanism, showed that earlier entries were inadequate (paragraphs 30, 31, 36 and 37). There was no statutory foundation for a 33% attribution (paragraph 34), and it did not matter that installation was in fact done (paragraphs 35 and 39). The CESTAT's approach, though earlier than Larsen and Toubro, accorded with it (paragraph 38).

Controlling point

The Revenue was not entitled to levy service tax on a notional portion of the composite consideration.

Order and next steps

The impugned CESTAT order of 28 November 2007 called for no interference and the appeals were dismissed.

Practical implications

A supplier under an indivisible turnkey contract before June 2007 can rely on Larsen and Toubro against a service tax demand on a part of the price; contracts after that date are assessed under works contract provisions.

Limits of this ruling

• The ruling concerns the period July 2003 to April 2006 and indivisible turnkey contracts, and does not decide how composite contracts are taxed after the introduction of works contract service on 1 June 2007.