Construction cess not payable on contracts not having any construction component
Lexology | May 24, 2021
The Supreme Court, in its recent judgment, has finally settled a long pending issue by holding that contracts which cover works other than civil works and do not involve any construction, do not attract cess under the Building and Other Construction Workers’ Welfare Cess Act, 1996. The Apex Court in the decision in the case of UP Power Transmission Corporation Limited v. CG Power and Industrial Solutions Limited [Judgement dated 12 May 2021] clarified that mere installation and/or erection of pipelines, equipment for generation, transmission, or distribution of power, electric wires, transmission towers, etc., which do not involve construction work, are not amenable to levy of such cess.
Facts and issues:
- The Appellant/ Employer – UP Power Transmission Corporation Limited entered into a framework agreement with the Respondent (Contractor), for the construction of a 765/400kV power substation, which was split into four separate contracts, for (i) Supply and delivery of equipment, (ii) Handling, erection, testing and commissioning works, (iii) Civil works and (iv) Operation & maintenance.
- The Comptroller and Auditor General (CAG), in its audit, pointed out the lapse on the part of Employer in not deducting cess, as leviable under the Cess Act, from the bills of the Contractor.
- Based on the CAG’s observations, the Employer sought to recover the cess on the total value of work provided under all four contracts, including supply, erection, testing, and commissioning. Admittedly, there were no proceedings that were passed with reference to the assessment or levy of cess under the Cess Act. The Employer, as a consequence, refused to discharge the Performance Bank Guarantee submitted by the Contractor, to secure recovery of an amount of INR 2.6 crore towards cess payable on works under all contracts including the supply part.
- The Employer sought to recover the cess for the supply part from the pending bills and by encashment of the Performance Bank Guarantee. The contracts in the present case did not provide for the Employer to withhold any amount from the bills raised by the Contractor on the Employer towards any taxes, cess, or any other statutory dues of the Contractor.
- Aggrieved by the actions of the Employer, the Contractor approached the Allahabad High Court. The High Court held that, in the absence of any order for levy and assessment under the Cess Act, recovery could not be made solely pursuant to an audit objection raised by the CAG.
- The order of the High Court was assailed before the Supreme Court by way of an appeal.
Findings of the Supreme Court:
- The Supreme Court held that the first and second contracts, which do not cover civil works, do not involve any construction and accordingly are outside the purview of levy under the Cess Act.
- The Contractor was held as not a ‘contractor’, within the meaning as defined under the BOCW Act, nor an ‘employer’ within the meaning provided under the said Act, for the first, second, and fourth contracts. It was observed that the statutory scheme of the BOCW Act excludes a supply contract from within its ambit.
- The Court clarified that mere installation and/or erection of pipelines, equipments for generation, transmission, or distribution of power, electric wires, transmission towers, etc., which do not involve construction work, are not amenable to levy of cess under the Cess Act.
- It was held that when there is no assessment or levy of cess under the Cess Act, the Contractor cannot withhold amounts towards such cess payments. Even otherwise, the recovery can be done only in the mode and manner of recovery of outstanding cess under the Cess Act.
- Further, it was considered that in the absence of contractual provisions, the Employer cannot withhold payments or realize cess by revocation of a Performance Guarantee.
- Lastly, the availability of an alternative remedy (in this case ‘arbitration’) was held not to prohibit the High Court from entertaining a writ petition in an appropriate case.