2026-VIL-73-SC-ST
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SERVICE TAX Supreme Court Cases

Service Tax – Validity of vivisection of indivisible composite turnkey contracts - Service tax on installation and commissioning services of ATMs at the sites identified by the respective banks - Revenue demanded service tax on 33% of gross contractual consideration treating it as consideration for installation and commissioning activities. Respondent-assessee contended that the contracts were indivisible turnkey contracts for supply of fully functional ATMs and installation and commissioning were merely incidental to this principal obligation - Whether service tax can be levied on a notional portion of composite consideration for supply, installation and commissioning of ATMs where contract is for single consolidated consideration – HELD - The service tax liability must flow from the charging statute itself and no tax can be imposed by implication or expansive construction - Section 66 of Finance Act, 1994 levied service tax on taxable services defined exhaustively in Section 65(105), while Section 67 prescribed the manner of determining value once charge was attracted - During the period July 2003 to April 2006, the Finance Act did not contain any express provision authorizing dissection or vivisection of an indivisible composite turnkey contract. The contracts herein were entire and indivisible embodying single commercial objective of delivery of fully functional ATMs at specified sites for single consolidated consideration without separate bargain or distinct consideration for installation and commissioning - While the Finance Act, 1994 undoubtedly authorised the levy of service tax on specified taxable services, the statute, during the period relevant to the present appeal, did not contain any express provision authorising the dissection or vivisection of an indivisible composite turnkey contract so as to extract and tax one of its constituent elements in isolation - Revenue cannot by administrative attribution or notional apportionment create a taxable event where none existed under charging provisions. Introduction of specific taxable entry for works contract service vide Finance Act, 2007 with effect from 01.06.2007 constitutes clear legislative recognition that existing taxable entries were insufficient to encompass such composite contracts - In the absence of any statutory authority permitting the artificial segregation of the installation and commissioning component from the composite transaction, the Revenue is not entitled to levy service tax by attributing a notional percentage of the total contractual consideration to the taxable category of "commissioning or installation" under Section 65(105)(zzd) of Finance Act, 1994. The conclusion reached by the CESTAT is thus in consonance with the statutory scheme of the Finance Act, 1994 and the law subsequently declared by the Apex Court in Larsen and Toubro Limited - The impugned order dated 28.11.2007 passed by the CESTAT calls for no interference - The Revenue appeals are dismissed - Statutory Provisions - The Constitution (Forty-sixth Amendment) Act, 1982 enlarged the taxing powers of States by inserting Article 366(29A), which created a legal fiction allowing the goods component in indivisible works contracts to be treated as a deemed sale for sales tax and VAT purposes. However, this amendment did not convert indivisible contracts into separate contracts; it merely permitted segregation of the goods element while the contract remained composite - The Finance Act, 1994 contained no corresponding provision authorizing the Revenue to segregate and tax the service element of indivisible composite contracts. Sections 66 and 67 of the Finance Act prescribed only how to levy service tax on enumerated taxable services and how to determine their value once the charge was attracted. Neither section expressly or impliedly authorized vivisection of indivisible turnkey contracts to isolate and tax constituent elements - The critical distinction lies between pure service contracts and indivisible composite contracts. While a contract whose dominant object is rendering a taxable service can attract service tax even if it incidentally includes goods, and while statutes explicitly providing for composite contract taxation can validly operate, the absence of statutory authority prevents the Revenue from artificially splitting an indivisible contract merely because one component element falls within an existing taxable category.
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