Summary
The Supreme Court held that indivisible turnkey contracts to supply, install and commission ATMs for a single composite price could not be split so as to levy service tax on a notional 33% of the price under the 'commissioning or installation' entry for July 2003 to April 2006. Following Larsen and Toubro, it held that before the works contract entry came in on 01.06.2007 the Finance Act, 1994 had neither the charge nor the machinery to tax composite contracts, and it upheld CESTAT's order setting aside the demands.
Issues
- Whether turnkey contracts for the supply, installation and commissioning of ATMs were indivisible composite contracts that, during July 2003 to April 2006, could not be split to levy service tax under the 'commissioning or installation' category.
- Whether the Revenue could treat 33% of the gross composite consideration as the value of a taxable 'commissioning or installation' service.
- Whether CESTAT rightly set aside the service tax demands confirmed by the Commissioner.
Provisions considered
- Section 65(105)(zzd), Finance Act, 1994The 'commissioning or installation' entry was held to cover service contracts simpliciter only. It did not reach installation and commissioning that were an integral part of an indivisible turnkey contract for supplying ATMs. (¶¶ 11, 21, 33, 35, 39, 40)
- Section 66, Finance Act, 1994The charging section levied tax only on taxable services listed in Section 65(105). It did not, expressly or by necessary implication, authorise splitting a composite contract to tax one of its elements. (¶¶ 21, 28, 33)
- Section 67, Finance Act, 1994The Court treated this as a machinery provision for valuing a service already charged to tax. It cannot create or enlarge the charge, so it could not support a notional 33% apportionment of the composite price. (¶¶ 20, 21, 28, 33, 34)
- Section 65(105)(zzzza), Finance Act, 1994 (as amended by Finance Act, 2007)The Court held that the 'works contract service' entry, introduced from 01.06.2007 with its own valuation machinery, was a substantive change and not a clarification. It confirmed that composite contracts were outside the earlier entries. (¶¶ 30, 31, 36, 37)
- Article 366(29A)(b), Constitution of IndiaThis provision lets States treat the goods in a works contract as a deemed sale, but the Court noted that it does not turn an indivisible contract into separate contracts. The Finance Act, 1994 had no equivalent provision for the service element during the period in question. (¶¶ 27, 28)
Held
- Liability to tax must come from the charging provision itself; there is no tax by implication. Machinery and valuation provisions only help compute a tax validly imposed and cannot supply a charge the statute does not create. (¶¶ 20, 34)
- During the relevant period the Finance Act, 1994 contained no provision authorising the splitting of an indivisible composite contract to tax one element in isolation. The Revenue could not create a taxable event by attributing a notional percentage of the price to one activity. (¶¶ 22, 28, 29, 33)
- A contract whose dominant object is a taxable service may attract service tax even if goods are supplied incidentally. But an indivisible contract combining transfer of goods with labour and services for a single price cannot be split without statutory authority merely because one obligation fits an existing taxable entry. (¶¶ 29, 35, 39)
- Following Larsen and Toubro, the taxable entries before 01.06.2007 covered service contracts simpliciter only, not indivisible composite works contracts. The introduction of the works contract entry with its own valuation machinery confirms that such contracts were previously outside the charge. (¶¶ 30, 31, 36, 37)
- The ATM contracts were turnkey contracts for a composite price, with no separate bargain or consideration for installation and commissioning; those activities were integral to delivering working ATMs. The attribution of 33% of the price to 'commissioning or installation' had no statutory basis. (¶¶ 23, 32, 34)
- CESTAT's conclusion, drawn from its decision in Daelim Industrial Co., is consistent with the law later declared in Larsen and Toubro, and it rightly set aside the demands. (¶¶ 38, 40, 41)
Result
Revenue's appeals dismissed; CESTAT's final order dated 28.11.2007 setting aside the service tax demands affirmed.