Commissioner of Service Tax, Chennai vs M/s Diebold Systems (P) Ltd.

Held: Parliament, by introducing a distinct taxable entry (in form of s.65(105)(zzzza)) relating to “works contract service” with effect from 01.06.2007 (via Finance Act, 2007), simultaneously enacted an appropriate valuation mechanism and composition scheme specifically designed to ascertain and tax only the service element embedded in composite works contracts – This legislative intervention was not an idle exercise, rather it reflected a conscious recognition that the existing taxable entries (under the Finance Act, 1994) did not themselves provide either the charge or the machinery necessary for taxing indivisible composite contracts – Had the Revenue’s interpretation been correct, the introduction of a separate taxable category together with an elaborate statutory machinery for valuation would have been largely otiose. [Para 36]

Taxation of Composite Contracts – Constitutional and statutory framework, discussed – Constitution (Forty-sixth Amendment) Act, 1982 – Contract for the rendition of a taxable service simpliciter vis-à-vis an indivisible composite contract – Distinction between, stated. [Paras 25-31] Finance Act, 1994 – s.65(105), 66, 67 – Statutory scheme – Levy u/s.66 was attracted only where the activity in question answered the description of a taxable service u/s.65(105), whereafter s.67 operated only to determine the measure of tax: Held: At the relevant time, service tax was levied u/s.66 on the value of taxable services referred to in s.65(105) – The expression “taxable service” was exhaustively defined by the legislature by enumerating distinct taxable entries u/s.65(105) of the Act – One such entry was “commissioning or installation”, which contemplated the rendition of a taxable service of “commissioning or installation” as defined under the Finance Act, 1994 – s.67 prescribed the manner in which the value of such taxable service was to be determined – A plain reading of the statutory scheme thus discloses that the levy u/s.66 was attracted only where the activity in question answered the description of a taxable service u/s.65(105), whereafter s.67 operated only to determine the measure of tax – The legislative distinction between the charging provision and the machinery for valuation assumes particular significance in the context of composite commercial transactions involving both the transfer of property in goods and the rendition of services – 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 – Unless the charging provisions themselves contemplated such an exercise, the Revenue could not, by adopting a method of valuation or by attributing a notional percentage of the total consideration to a particular activity, create a taxable event which the statute itself had not recognised. [Paras 21, 22]

Tax/Taxation – Fiscal Jurisprudence – Liability to tax must flow from the charging statute itself – Charging provision and the machinery provisions must be construed harmoniously however, the latter cannot be employed to supply what the former does not enact:

Held: The 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 employed by the legislature, and no tax can be imposed by implication or by an expansive construction of the charging provision – Machinery or valuation provisions facilitate the computation of a tax validly imposed and they do not create or enlarge the charge itself – The charging provision and the machinery provisions must therefore be construed harmoniously, but the latter cannot be employed to supply what the former does not enact. [Para 20]