NO LABOUR CESS ON SUPPLY OF MATERIALS: ANALYSIS OF SC JUDGEMENT AND SUGGESTED WAY FORWARD
The Hon’ble Supreme Court in the matter of Uttar Pradesh Power Transmission Corporation Limited and Anr. vs. C G Power and Industrial Solutions Limited and Anr. being SLP(C) No. 8630 of 2020 vide order dated 12.05.2021 has held that supply contracts involving supply of equipment and material are exempted from levy of labour cess under Section 3(1) of the Building and Other Construction Workers’ Welfare Cess Act, 1996 (Cess Act) read with the provisions of the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 (BOCW Act) and the Building and Other Construction Workers’ Welfare Cess Rules, 1998 (Cess Rules).
BRIEF FACTS OF THE CASE
Uttar Pradesh Power Transmission Corporation Limited (UPPTCL) entered into a Framework Agreement with C G Power and Industrial Solutions Limited (CGPISL) for construction of a 765/400 Kilo Volt Sub-Station by CGPISL. The entire project was divided into 4 contracts viz. First Contract: Supply and Delivery of Equipment and Material; Second Contract: Handling, Erection, Testing and Commissioning Works; Third Contract: Civil Works; Fourth Contract: Three years of Operation and Maintenance. Subsequent to CGPISL fulfilling the First Contract, the CAG in an audit report raised an objection that UPPTCL did not deduct labour cess in terms of Section 3(1) of the Cess Act from the bills of CGPISL for the First Contract. Pursuant to receipt of the audit report, UPPTCL vide letters dated 02.09.2016 and 29.12.2018 demanded that labour cess was to be collected from CGPSIL on the project cost along with simple interest in respect of the First Contract. CGPISL filed a Writ Petition before the Hon’ble Allahabad High Court challenging the above referred letters contenting that the provisions of the BOCW Act were not applicable to the supply contract and levy and deduction of labour cess in respect of the supply contract was not permissible in law. Hon’ble High Court vide order dated 24.02.2020 set aside the 2 impugned letters of UPPTCL. The Hon’ble High Court held that in the absence of any order for levy and assessment under the Cess Act, recovery of labour cess cannot be made pursuant to an audit objection of the CAG. UPPTCL preferred the instant SLP against the said order.
OBSERVATIONS AND DECISION OF THE HON’BLE SUPREME COURT
- The Court analyzed the contents of the First Contract, which is reproduced below:
- The scope of this contract, hereinafter called the “FIRST CONTRACT”, covers all works related to design, engineering, manufacturing, testing at works, supply of all required equipment and material with accessories and auxiliaries, as detailed in Schedule of Quantities & Prices (Annexure-IV) to Sub-Station site. The scope shall also include supply of any other item necessary for completing the scope of work without any extra cost, if not specified in above Schedule.
The Court noted that a clause in the Framework Agreement provided that the first and second contract shall cover all works other than civil works.
- The Court then analyzed the charging section in respect of leavy of cess being Section 3(1) of the Cess Act, which is reproduced below:
Levy and collection of cess.-(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.
- The Court then examined the definition of ‘building and other construction works’ as provided under Section 2(1)(d) of BOCW Act and observed that the condition precedent for imposition of cess is that the ‘building and other construction works’ must specifically be in the nature of construction, alteration, repairs, maintenance or demolition of and/or in relation to, buildings, streets, roads etc. The Court accordingly concluded that that the statutory scheme of BOCW Act excludes a ‘supply contract’ simply involving supply of equipment and material from its ambit therefore no cess is leviable under Section 3(1) of the Cess Act in respect of the same. Thus, the Court held that the First Contract between UPPTCL and CGSIPL being a purely supply contract did not attract cess under the Cess Act.
- The Court examined the definition of ‘contractor’ as contained in Section 2(1)(g) of the BOCW Act, which is reproduced below:
“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.
The Court observed that a contractor involved in ‘mere supply of goods or articles of manufacture’ did not fall within the meaning of ‘contractor’ under the said section. The Court thus held that CGPISL is not a contractor vis-à-vis the First Contract pertaining to ‘Supply and Delivery of Equipment and Material’.
Thereafter, the Court observed that CGPISL is also not an ‘employer’ within the scope of Section 2(1)(i) of the BOCW Act, relevant portion of which is reproduced below:
“employer”, in relation to an establishment, means the owner thereof, and includes,-
(iii) in relation to a building and other construction work carried on by or through a contractor, or by the employment of building workers supplied by a contractor, the contractor.
After examining the above 2 definitions, the Court held that as CGPISL does not fall within the definition of ‘contractor’ and ‘employer’ under the BOCW Act vis-à-vis the First Contract, CGPISL is not liable to cess in respect of the same under Section 3(1) of the Cess Act.
- The Court found that no intimation or information was given, nor any return was filed with the Assessing Officer in respect of the First Contract either by UPPTCL or CGPISL in terms of Section 4 of the Cess Act read with Rule 6 of the Cess Rules. The Demand and part realization of cess by UPPTCL, solely on the basis CAG’s report, in the absence of any adjudication, assessment or levy, was impermissible in view of several judicial precedents to the effect that as the CAG report is subject to scrutiny of the Parliament therefore it is not proper to rely upon the findings and conclusions contained therein.
- The Court emphasized that as the Cess Act and the rules framed there under prescribed the mode and manner of recovery of cess therefore UPPTCL can recover the cess only by following the prescribed statutory procedure. The Court underlined a settled principle of law that when a statute requires a thing to be done in a particular manner, it is to be done in that manner alone and not in any other manner.
The Court finally held that supply contracts involving supply of equipment and material are exempted from levy of labour cess under the Cess Act. Further, that there is no legal infirmity in the finding of the Hon’ble High Court that UPPTCL acted in excess of power, when there was admittedly no assessment (Section 5 of Cess Act read with Rule 3,4 and 7 of the Cess Rules). Thus, High Court’s Order was upheld and the SLP was dismissed.
SUGGESTED WAY FORWARD:
- Refund of labour cess: Wherever labour cess in respect of supply of materials has been paid, refund application/request must be filed before the appropriate authority.
- Whether ‘erection activity’ is construction?: It remains to be seen whether ‘erection activity’ would also fall within the ambit of ‘construction’. The answer to the said question lies in the individual contract itself, from where the nature and scope of ‘erection activity’ can be determined and consequently it could be ascertained if the same would also fall in the ambit of construction and would be amenable to labour cess or not.
Puneet is the Managing Editor of the blog, Partner at ALA Legal, Advocates. He has 15+ years of experience in providing tax and legal services. Briefed by various professionals for arguing their matters in the High Court, Puneet is the go to counsel especially for arguing tax and constitutional matters in High Courts of various states across India.