They Wanted To Split One ATM Contract Into A Taxable Half
Turnkey contracts to supply, install and commission ATMs for banks. The Revenue tried to carve out the installation and tax it. The Supreme Court has dismissed its appeals.
The Court held the Tribunal committed no error in setting aside the demands. The contracts were indivisible turnkey contracts for a composite consideration, and between July 2003 and April 2006 the Finance Act, 1994 did not authorise their vivisection so as to isolate and tax the installation and commissioning component. Liability to tax must flow from the charging statute itself; a valuation provision cannot supply what the charge does not enact.
- The charge comes first. Section 66 bit only where the activity answered a taxable service in Section 65(105).
- Machinery cannot make a charge. Section 67 only measures a tax already validly imposed.
- No tax by implication. A taxing statute admits of neither intendment nor equity.
- A notional percentage is not a charge. The Revenue could not create a taxable event by attributing part of the price to one activity.
- Court
- Supreme Court of India
- Bench
- Justice Shree Chandrashekhar, Justice Prashant Kumar Mishra
- Citation
- 2026 INSC 808
- Reported
- [2026] 8 S.C.R. 453
- Case
- Civil Appeal Nos. 4708-4711 of 2008
- Decided
- 6 August 2026
- Outcome
- Appeals dismissed; no service tax on the composite turnkey contracts
The contracts, and what was demanded
The assessee entered into turnkey contracts with various banks for the supply, installation and commissioning of ATMs, for a single composite consideration.
The Revenue sought to tax the installation and commissioning element under the taxable category of commissioning or installation in Section 65(105)(zzd) of the Finance Act, 1994. The CESTAT set the demands aside.
Why the contract could not be cut up
Under the statutory scheme the levy under Section 66 was attracted only where the activity answered the description of a taxable service under Section 65(105). Section 67 then operated only to determine the measure of the tax.
That distinction between the charging provision and the machinery for valuation matters most in composite transactions involving both a transfer of property in goods and the rendering of services.
During the period from July 2003 to April 2006, the Finance Act contained no express provision authorising the dissection of an indivisible composite turnkey contract so as to extract and tax one of its parts in isolation. Unless the charging provision contemplates that exercise, the Revenue cannot create a taxable event by a method of valuation or by attributing a notional percentage of the consideration to a particular activity.
The principle stated
Liability to tax must flow from the charging statute itself. A taxing statute admits of neither intendment nor equity.
The existence, extent and incidence of a tax must be discernible from the language the legislature used, and no tax can be imposed by implication or by an expansive construction of the charge.
Machinery or valuation provisions facilitate the computation of a tax validly imposed; they do not create or enlarge the charge. The two must be construed harmoniously, but the machinery cannot supply what the charge does not enact.
Who argued it
Appearances as recorded in the judgment of the Court.
Frequently asked
Can service tax be levied on part of a composite contract?
Not for the period in question. The Finance Act, 1994 did not then authorise the vivisection of an indivisible turnkey contract.
Can a valuation rule create a tax?
No. Machinery provisions compute a tax already validly imposed; they cannot supply a charge the statute does not enact.
Resisting a demand that splits a composite contract
- Establish indivisibility from the contract itself — one scope, one consideration, one deliverable.
- Fix the period, and check what the charging provision said during it; the law changed after April 2006.
- Separate charge from machinery in the written submissions; that is the structure the Court used.
- Attack any notional apportionment as an attempt to create a taxable event rather than measure one.
Source. Supreme Court of India, 2026 INSC 808, [2026] 8 S.C.R. 453, Civil Appeal Nos. 4708-4711 of 2008, decided 6 August 2026 by Justice Shree Chandrashekhar, Justice Prashant Kumar Mishra. This explainer is written from the judgment text as reported.
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