Supreme Court Clarifies Cess Applicability on Supply Contracts under the Building and Other Construction Workers Act: Uttar Pradesh Power Transmission Corporation Ltd. vs. CG Power and Industrial Solutions Limited (2021) INSC 303 (12 May 2021)

Date of the Judgment: 12 May 2021
Citation: (2021) INSC 303
Judges: Uday Umesh Lalit, J., Indira Banerjee, J.
Can a government entity demand labor cess on a contract that solely involves the supply of equipment, without any construction work? The Supreme Court of India addressed this crucial question in a recent judgment, clarifying the scope of the Building and Other Construction Workers Welfare Cess Act, 1996. This case between Uttar Pradesh Power Transmission Corporation Ltd. (UPPTCL) and CG Power and Industrial Solutions Limited, revolves around whether cess can be levied on a contract that is purely for the supply of materials, and not for any construction activity. The judgment was delivered by a two-judge bench comprising Justice Uday Umesh Lalit and Justice Indira Banerjee, with the majority opinion authored by Justice Indira Banerjee.

Case Background

The dispute arose from a Framework Agreement between UPPTCL and CG Power and Industrial Solutions Limited (formerly Crompton Greaves Limited) for the construction of a 765/400 KV Substation at Unnao, Uttar Pradesh. The project was divided into four separate contracts: one for the supply of equipment, one for erection, one for civil works, and one for operations and maintenance. UPPTCL sought to levy a 1% labor cess on the total contract value, including the supply contract, citing an audit objection. CG Power contested this, arguing that the supply contract did not fall under the purview of the Building and Other Construction Workers (Regulation of Employment and Condition of Service) Act, 1996 (BOCW Act) or the Building and Other Construction Workers Welfare Cess Act, 1996 (Cess Act). UPPTCL, however, withheld payments and invoked bank guarantees to recover the disputed cess amount.

Timeline:

Course of Proceedings

The High Court of Judicature at Allahabad (Lucknow Bench) ruled in favor of CG Power, setting aside UPPTCL’s demand for labor cess on the supply contract. The High Court held that cess could only be recovered following a formal assessment under the Cess Act and that the demand based on an audit objection was not sustainable. UPPTCL then appealed to the Supreme Court.

Legal Framework

The Supreme Court examined the relevant provisions of the BOCW Act and the Cess Act. Key provisions include:

• Section 2(1)(d) of the BOCW Act: Defines “building or other construction work” to include construction, alteration, repairs, maintenance or demolition of buildings, roads, railways, power transmission, etc., but excludes works covered under the Factories Act, 1948, or the Mines Act, 1952.
  

  “building or other construction work” means the construction, alteration, repairs, maintenance or demolition of or, in relation to, buildings, streets, roads, railways, tramways, airfields, irrigation, drainage, embankment and navigation works, flood control works (including storm water drainage works), generation, transmission and distribution of power, water works (including channels for distribution of water), oil and gas installations, electric lines, wireless, radio; television, telephone, telegraph and overseas communication dams, canals, reservoirs, watercourses, tunnels, bridges, viaducts, aquaducts, pipelines, towers, cooling towers, transmission towers and such other work as may be specified in this behalf by the appropriate Government, by notification, but does not include any building or other construction work to which the provisions of the Factories Act, 1948 (63 of 1948), or the Mines Act, 1952 (35 of 1952), apply.

• Section 2(1)(g) of the BOCW Act: Defines “contractor” as someone who produces a given result, other than a mere supply of goods, by employing building workers, or who supplies building workers for any work.
  

  “contractor” means a person who undertakes to produce a given result for any establishment, other than a mere supply of goods or articles of manufacture, by the employment of building workers or who supplies building workers for any work of the establishment; and includes a sub-contractor;

• Section 2(1)(i) of the BOCW Act: Defines “employer” to include the owner of an establishment, and in cases of construction work carried out through a contractor, the contractor.
  

  “employer”, in relation to an establishment, means the owner thereof, and includes,-
  (i) in relation to a building or other construction work carried on by or under the authority of any department of the Government, directly without any contractor, the authority specified in this behalf, or where no authority is specified, the head of the department;
  (ii) in relation to a building or other construction work carried on by or on behalf of a local authority or other establishment, directly without any contractor, the chief executive officer of that authority or establishment;
  (iii) in relation to a building or other construction work carried on by or though a contractor, or by the employment of building workers supplied by a contractor, the contractor;

• Section 3(1) of the Cess Act: Provides for the levy and collection of cess on the cost of construction incurred by an employer, at a rate between 1% and 2%.
  

  (1) There shall be levied and collected a cess for the purposes of the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 (27 of 1996), at such rate not exceeding two per cent but not less than one per cent of the cost of construction incurred by an employer, as the Central Government may, by notification in the Official Gazette, from time to time, specify.

• Rule 3 of the Cess Rules: Defines “cost of construction” to include all expenditure incurred by an employer in connection with the building or other construction work, but excludes the cost of land and compensation paid under the Workmen’s Compensation Act, 1923.
  

  3. Levy of cess .—For the purpose of levy of cess under sub-section (1) of Section 3 of the Act, cost of construction shall include all expenditure incurred by an employer in connection with the building or other construction work but shall not include—
  — cost of land;
  — any compensation paid or payable to a worker or his kin under the Workmen’s Compensation Act, 1923.

Arguments

Petitioner (UPPTCL)’s Arguments:

• UPPTCL argued that the audit report by the Accountant General pointed out the lapse in not deducting labour cess from the bills of the contractor.
• They contended that the 1% Labour Cess was to be collected from the contractor on the project cost, which includes supply of equipment and materials as well as erection work.
• UPPTCL relied on Clause 8.1 of the Special Conditions of Contract, which states that the prices of imported items shall include all taxes, duties, and levies, arguing that this allows them to deduct cess.
• UPPTCL argued that the four contracts were part of a single project, making the supply contract also liable for cess.
• UPPTCL cited the judgment in Lanco Anpara Power Limited v. State of Uttar Pradesh and Ors. (2016) 10 SCC 329 to support their claim.

Respondent (CG Power)’s Arguments:

• CG Power submitted that they were not covered under the definition of a “contractor” as per the BOCW Act, for the supply contract.
• They argued that the supply contract was a pure supply contract and did not involve any construction work, hence not liable for cess.
• CG Power contended that the Cess Act and BOCW Act are intended for the welfare of construction workers and do not apply to the supply of goods.
• They pointed out that several public authorities and corporations have issued instructions that no cess under the BOCW Act is leviable on a contract for supply of goods.
• They argued that the four contracts were separate, and the supply contract was distinct from the civil works contract.
• CG Power contended that the terms of payment under Clause 9.1 of the Special Conditions of Contract made it clear that the first contract was for supply and delivery of equipment and materials.
• They argued that UPPTCL itself understood the Cess Act as not applicable to the Supply Contract and accordingly did not deduct cess from the invoices/bills of the Respondent.

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether cess under the Cess Act is leviable on a contract for the supply of goods, where no construction activity is involved.
2. Whether the cost of construction under Section 3 of the Cess Act read with Rule 3 of the Cess Rules includes the cost of supply of equipment.
3. Whether UPPTCL could withhold payments or invoke bank guarantees to recover cess without a formal assessment under the Cess Act.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The statutory scheme of the BOCW Act and Cess Act, which is focused on the welfare of construction workers and not on the supply of goods.
• The clear distinction between a supply contract and a construction contract.
• The lack of any provision in the contract that enabled UPPTCL to withhold payments for the supply contract.
• The absence of any formal assessment or levy of cess under the Cess Act before UPPTCL’s actions.
• The principle that when a statute requires a thing to be done in a particular manner, it must be done in that manner alone.

Logical Reasoning

The Court emphasized that the statutory scheme of the BOCW Act excludes a supply contract from its ambit. The Court observed that “The clear statutory scheme of the BOCW Act excludes a supply contract from within its ambit.” The Court also noted that “A contractor who enters into a pure Supply Contract is statutorily exempted from levy under the BOCW Act.” Furthermore, the Court highlighted the importance of following the prescribed procedure for assessment and recovery of cess, stating that “It is well settled that when statute requires a thing to be done in a particular manner, it is to be done in that manner alone.” The court rejected the argument that the four contracts were to be treated as a single contract for the purpose of levy of cess.

The Supreme Court did not find any reason to interfere with the High Court’s order and dismissed the special leave petition.

Key Takeaways

• Cess under the BOCW Act and Cess Act is not applicable to contracts that solely involve the supply of goods without any construction work.
• The definition of “cost of construction” does not include the cost of supply of equipment.
• Government entities cannot demand or recover cess without a formal assessment under the Cess Act.
• The statutory procedures for assessment and recovery of dues must be strictly followed.
• CAG reports cannot be the sole basis for recovery of dues without proper assessment.

Directions

The Supreme Court did not issue any specific directions in this case. However, the judgment clarifies the legal position regarding the applicability of cess on supply contracts, which has implications for future cases.

Development of Law

The ratio decidendi of this case is that a pure supply contract does not attract cess under the Building and Other Construction Workers Welfare Cess Act, 1996. This judgment clarifies the scope of the Cess Act and the BOCW Act, and it reinforces that the statutory procedures for assessment and recovery of dues must be strictly followed. It also reiterates that CAG reports cannot be the sole basis for recovery of dues without proper assessment. This is a significant development in the interpretation of these Acts and provides clarity for contractors and government entities alike.

Conclusion

The Supreme Court’s judgment in Uttar Pradesh Power Transmission Corporation Ltd. vs. CG Power and Industrial Solutions Limited clarifies that labor cess is not applicable to contracts solely for the supply of goods. This decision underscores the importance of adhering to the statutory scheme of the BOCW Act and Cess Act, which are primarily for the welfare of construction workers. The judgment also highlights the need for proper assessment before any recovery of cess and emphasizes that government entities cannot rely solely on audit objections for such recoveries. This ruling provides much-needed clarity on the scope of these Acts and offers a significant precedent for similar cases.