India: SC Clears The Air On The Application Of The Building And Other Constructions Workers (Regulation Of Employment And Conditions Of Service) Act, 1996

The recent landmark judgement of the Hon'ble Supreme Court (SC) in Lanco Anpara Power Limited v State of Uttar Pradesh & Ors rendered in Civil Appeal No 6223 of 2016 (reported in (2016) 10 SCALE 99) has put to rest the long contested issue of the applicability 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 Act, 1996 (Welfare Cess Act). The issue arose in a batch of special leave petitions along with a series of writ petitions filed before several High Courts questioning the applicability of the BOCW Act and the Welfare Cess Act to those premises which are registered under the Factories Act, 1948 (Factories Act). Herein, the Appellant / Petitioner construction companies were issued several show cause notices for failing to register under the BOCW Act and for payment of cess under the Welfare Cess Act. The validity of these notices were challenged in several writ petitions before various High Courts on the ground that BOCW Act and the Welfare Cess Act were not applicable to these construction companies as they were registered under the Factories Act. The central question was the interpretation of the exclusion clause, being Section 2(1)(d) of the BOCW Act, which defines "building or other construction work" and excludes any building or other construction work to which the provisions of the Factories Act or the Mines Act, 1952 apply. On the basis of the aforementioned exclusion, it was the argument of the Appellant / Petitioner construction companies, engaged in construction activities, that once the undertaking or the establishment had obtained a license for registration under the Factories Act, the BOCW Act was not applicable on account of the exclusion carved out under Section 2(1)(d) of the BOCW Act. Thus, the construction companies advocated a literal interpretation of the said exclusion clause and further argued that this exclusion even applied to the stage of civil construction of registered factory premises. The Respondents on the other hand, inter alia, called for a more beneficial interpretation to the exclusion clause on the ground that the legislation was a beneficial legislation and must cater to the benefit of construction workers.

THE JUDGMENT IN BRIEF

The Hon'ble SC, based on the facts of the case, held that the establishments / premises registered under the Factories Act employing construction workers in the construction of factory premises were not excluded from the application of the BOCW Act in terms of the aforementioned exclusion clause. The SC reasoned that an establishment / premise would become a factory under Section 2(m) of the Factories Act only when the manufacturing process as defined under Section 2(k) of the Factories Act commenced. Consequently, the provisions of the Factories Act would apply only when the manufacturing process commences, and even upon commencement of the manufacturing activity, it only covered those workers who are engaged in such manufacturing activity under the Factories Act and not construction workers. Further, the Hon'ble SC held that workers constructing a factory would not be understood as workers within Section 2(l) of the Factories Act and hence would not be entitled to the benefits of the Factories Act. This leads to a clear conclusion that a premise / establishment registered under the Factories Act would not constitute a factory by itself in the absence of any manufacturing activity. A corollary to this conclusion being that construction activities carried out in relation to establishments / premises registered / licensed under the Factories Act would not automatically trigger the exclusion clause of the BOCW Act by itself and such premises cannot be understood to be outside the ambit and scope of the BOCW Act.

The Hon'ble SC, while coming to its conclusion, adopted a purposive interpretation to Section 2(1)(d) of BOCW Act giving primacy to the 'superior purpose' contained in the BOCW Act and the Welfare Cess Act, such purpose being the welfare of the unorganised labour class involved in construction activity. The Hon'ble SC further held that a literal interpretation as desired by the construction companies would result in a situation where the construction workers would be deprived of the benefits of both the BOCW Act and the Factories Act, which could not have been the legislative intent and therefore could not be accepted by the Courts.

IMPACT OF THE JUDGMENT

The present judgment is welcome in as much as it upholds the interests of the construction workers. The instant judgement also has an immediate economic impact on companies engaged in construction activities. Under Section 3 of the Welfare Cess Act, these construction companies are liable to the levy of a cess at a rate not exceeding two per cent, but not less than one per cent, of the cost of construction incurred. This, in many cases, can amount to several crores of Rupees. The instant judgment has also not dealt with two important aspects that are very relevant to the present case.

The first is the question of quantification of the cess leviable under the Welfare Cess Act. It is clear that the cess can only be levied for the purposes of the BOCW Act. Section 3 of the Welfare Cess Act provides for the levy and collection of the cess at the aforementioned rates. This cost of construction is defined in Rule 3 of the Welfare Cess Rules, 1998 which states that the cost of construction includes all expenditure incurred by an employer in connection with building or other construction work, but does not include the cost of the land and any compensation paid or payable under the Workmen's Compensation Act, 1923. In R Prabhakara Reddy and Company v State of Madhya Pradesh and Ors ((2016) 1 SCC 600), the Hon'ble SC has, in relation to the quantification of cess, opined to the effect that the cess is a fee for service and hence its calculation, as per settled law, is not to be strictly in accordance with the quid pro quo rule and does not require any mathematical exactitude. Despite this, there remains an ambiguity as to the determination of "cost of construction". One of the major contentions of the construction companies has been that the labour officers assessing the cess under the Welfare Cess Act usually consider the entire contract price of the project for the purposes of calculation of the cess, which includes supply, transportation and several other activities, which cannot be termed as construction activities and are not carried out by construction workers. These construction companies also face a practical difficulty, in as much as not all contracts can be segregated into individual contracts involving construction work, supply work and other works. The contract value on which assessment is carried out consequently increases the amount of cess payable resulting into a heavy unaccounted burden for the construction companies so far as composite contracts are concerned. In the instant case, the Hon'ble SC has left the question of quantification of the cess unanswered by directing that it would be open for the construction companies to agitate any objection as to the calculation of cess before the concerned authorities.

Secondly, a far more relevant question which has been left open is as to upon whom the ultimate liability to pay the cess under the Welfare Cess Act lies. The aforesaid question becomes all the more relevant in situations where the construction companies employ sub-contractors to carry out construction activities. The definition of the term "employer" under Section 2(i) of the BOCW Act includes a contractor, which further includes a sub-contractor. However, this aspect, though not very clearly, but to a large extent, has been cleared by a judgment of the SC itself, in Dewan Chand Builders & Contractors v Union of India ((2012) 1 SCC 101), which noted as follows:

"It is manifest from the overarching schemes of the BOCW Act, the Cess Act and the Rules made thereunder that their sole object is to regulate the employment and conditions of service of building and other construction workers, traditionally exploited sections in the society and to provide for their safety, health and other welfare measures. The BOCW Act and the Cess Act break new ground in that, the liability to pay Cess falls not only on the owner of a building or establishment, but under Section 2(i)(iii) of the BOCW Act "in relation to a building or other construction work carried on by or through a contractor, or by the employment of building workers supplied by a contractor, the contractor." The extension of the liability on to the contractor is with a view to ensure that, if for any reason it is not possible to collect Cess from the owner of the building at a stage subsequent to the completion of the construction, it can be recovered from the contractor. The Cess Act and the Cess Rules ensure that the Cess is collected at source from the bills of the contractors to whom payments are made by the owner. In short, the burden of Cess is passed on from the owner to the contractor."

CONCLUSION

The judgement of the Hon'ble SC in Lanco Anpara Power Limited v State of Uttar Pradesh & Ors has cleared the confusion so far as the applicability of the BOCW Act is concerned in relation to those establishments which are licensed under the Factories Act. However, there still remains a legal ambiguity as to what is ultimately to be understood as "building or other construction work" as defined under Section 2(1)(d) of the BOCW Act and whether the Courts, in a bid to accord a beneficial interpretation to the BOCW Act can extend the scope of Section 2(1)(d) of the BOCW Act to include any and all ancillary activities related to the construction work and levy cess accordingly on the entire contract value of composite construction contracts.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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