Background Facts

This ruling puts to rest the issue as to exigibility of projects to cess under BOCW and Cess Act. There are number of proceedings initiated by the Labor Department to levy cess on the EPC companies, which will now be adjudicated with ease by the concerned commissioners under the Cess Act. Further, the Writ Courts, before whom a plethora of cases against the Cess Orders are pending, can now decide matters in light of this judgement.

In light of this judgment, a Notification/Circular should now be issued by the Employment and Labour Ministry to the concerned Departments with a direction to drop all the pending assessment proceedings where cess is alleged to be levied on the total project costs instead of taking into account construction costs only.

The Supreme Court (SC) vide judgment dated May 12, 2021, in the matter of Uttar Pradesh Power Transmission Corp Ltd & Anr v. CG Power and Industrial Solutions Ltd & Anr1 has held that existence of an arbitration clause does not debar the court from entertaining a Writ Petition. It went ahead and stated that availability of an alternative remedy does not prohibit the High Court (HC) from entertaining a Writ Petition in an appropriate case

Background Facts

  • A Special Leave Petition (SLP) was filed before the Supreme Court (SC) by Uttar Pradesh Power Transmission Corp Ltd (UPPTCL) against an Order dated February 24, 2020 passed by the Allahabad HC, allowing the Writ Petition filed by Crompton Greaves Power and Industrial Solutions Ltd (Respondent No. 1). This Order had set aside the letters dated September 02, 2016 and December 29, 2018 issued by UPPTCL directing the Respondent No. 1 to remit labor cess amounting to INR 2,60,68,814, computed at 1% of the contract value under Section 3(1) and Section 3(2) of the Building and Other Construction Workers' Welfare Cess Act, 1996,(Cess Act) read with Rules 3 and Rule 4 (1), (2) (3) and (4) of the Building and Other Construction Workers Welfare Cess Rules, 1998, (Cess Rules) as well as Section 2 (1)(d), (g) and (i) of the Building and Other Construction Workers (Regulation of Employment and Condition of Service) Act, 1996(BOCW Act).
  • In view of the Framework Agreement executed between Respondent No. 1 and UPPTCL, Petitioner vide its letter dated March 05, 2010, placed a detailed order with Respondent No. 1 for construction of 765/400 kV Substation at Unnao on single source responsibility turn-key basis to be awarded through four separate contracts for Supply-Delivery of Equipment's and Materials, Handling-Erection-Testing-Commissioning Works, Civil Works and O&M respectively. Accordingly, Respondent No. 1 submitted two Performance Bank Guarantees (PBG) on August 30, 2012, for an amount of around INR 13 crore, drawn on the Corporation Bank, Mumbai.
  • Subsequently, there was an audit inspection of the 765 KV Transmission Division, Unnao for the period from April 2012 to April 2016 wherein the Accountant General (CAG) pointed out the lapse on the part of UPPTCL in not deducting labor cess from the supply bills of Respondent No. 1 issued in respect of the First Contract (Supply Contract), observing that every employer was required to levy and collect cess at a rate not exceeding 2% and not less than 1% of the cost of construction incurred by an employer and to deposit the same with the Building and Other Construction Workers Welfare Board. This objection was informed by UPPTCL vide its letter dated September 02, 2016 to Respondent No. 1. Respondent No. 1 replied to this letter vide its letter dated September 14, 2016 and objected to the imposition of labor cess while stating that for the purposes of the supply contract, the company was not covered under the definition of contractor under the Cess Act.
  • Despite the explanation, UPPTCL did not release the PBG of INR 7 crore in order to secure recovery of an amount of INR 2.6 crore towards the cess and instead got it extended up to February 2019. Moreover, vide letter dated December 29, 2018, UPPTCL tried to recover labor cess for the supply part of the composite contract from the pending bills of the Respondent No. 1 and, in case any amount still remained outstanding, it directed its staff to deduct such amount by encashment of the PBG.
  • Pursuant to such action, a Writ Petition M/B No.125 of 2019 was filed by Respondent No. 1 before the HC challenging the said communications. HC accepted the submission of the Respondent No. 1 that in the absence of levy and assessment under the Cess Act and the Rules made thereunder, the letters of the UPPTCL were not sustainable in law. HC allowed the Writ and held that cess could only be recovered in the manner stipulated in the Cess Act and the Rules framed thereunder.
  • UPPTCL impugned the said order of the HC by way of an SLP under Article 136 of the Constitution before SC.

Issues at hand

  • Whether cess can be levied on all contracts, including supply contract or only on contract for civil works?
  • Whether the Writ Petition is maintainable in cases where alternate remedy is already provided in contracts?

Findings of the Court

  • While analyzing the relevant sections of the Cess Act and BOCW Act, the Court took it upon itself to interpret the Acts in their truest sense and observed that as per Section 3 of the Cess Act, tax is only leviable on the basis of the quantum of the building or other construction work involved. Further, it stated that only those contracts which cover civil/construction work would be exigible to cess under Cess Act.
  • While relying on Dewan Chand Builders and Contractors2 , the Apex Court noted that cess under the Cess Act read with BOCW Act is leviable in respect of building and other construction works. The condition precedent for imposition of cess under the Cess Act is the construction, repair, demolition or maintenance of and/or in relation to a building or any other work of construction, transmission towers, in relation inter alia to generation, transmission and distribution of power, electric lines, pipelines etc. Mere installation and/or erection of pipelines, equipment for generation or transmission or distribution of power, electric wires, transmission towers, etc., which do not involve construction work, are not amenable to cess under the Cess Act. Accordingly, the Court dismissed the SLP and held that a contractor who enters into a pure Supply Contract is statutorily exempted from levy under the BOCW Act.
  • With regards to Issue No. 2 the Court held that the existence of an arbitration clause neither debars a court from entertaining a Writ nor can UPPTCL take any objection as to the maintainability of the same before the HC in its reply.
  • The Court, while relying on Whirlpool Corporation3 and Gayatri Construction Co & Ors4 , held that availability of an alternative remedy does not prohibit the HC from entertaining a Writ in an appropriate case. It observed that a HC may entertain a Writ notwithstanding the availability of an alternative remedy, particularly in the following instances:
    • Where the Petition seeks enforcement of a fundamental right
    • Where there is failure of principles of natural justice
    • Where the impugned orders or proceedings are wholly without jurisdiction
    • Where the vires of an Act is under challenge.
  • The court also went on to clarify that even monetary relief can also be granted in a Writ.

Footnotes

1 SLP No. 8630/2020

2 (2012) 1 SCC 101

3 AIR 1999 SC 22

4 (2008) 8 SCC 172

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