No Welfare Board, No Cess: Supreme Court Reiterates the Bar on Welfare Cess Collection from Developers

The Supreme Court in Prakash Atlanta (JV) v. NHAI holds that constitution of Welfare Boards is a condition precedent for levy and collection of cess under the BOCW Act and the Cess Act.

Introduction

The Supreme Court of India in Prakash Atlanta (JV) v. NHAI¹, held that the constitution of Welfare Boards is essential and a condition precedent for levy and collection of cess under 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 (Cess Act).

The Supreme Court passed a common judgment in a batch of six civil appeals concerning the levy and recovery of welfare cess under the BOCW Act and the Cess Act in highway construction contracts across different States.

Understanding the law

The BOCW Act is a welfare legislation enacted to regulate the employment and service conditions of building and construction workers and to provide for the safety, health, and welfare of such workers. It also provides for the constitution of the Building and Other Construction Workers Welfare Board (Welfare Board) in every State to provide welfare measures and monitor social security schemes for such workers. Similarly, the Cess Act provides for the levy and collection of welfare cess by a Welfare Board at one per cent of the cost of construction, incurred by a principal employer and/or contractor.

Factual background

In the case under reference, the petitioner was awarded a contract by the respondent for a highway construction project in Uttar Pradesh in 2001. At the time, although the BOCW Act and the Cess Act were in force, no Welfare Board had been constituted in the State. Subsequently, the contract was terminated by the respondent in 2008. It is important to note that under the standard National Highways Authority of India (NHAI) contract clauses, a contractor is required to factor into its bid only those taxes, duties, and levies that are actually payable and enforceable as on the cut-off date. If after that date, a new law is brought into effect, it qualifies as “subsequent legislation”, entitling the contractor to claim reimbursement or price adjustment.

The respondent terminated the contract with the petitioner in 2008. However, disputes had arisen between the parties during the subsistence of the contract. The disputes between the parties were referred to arbitration and the Arbitral Tribunal dismissed the respondent’s claims and accepted the petitioner’s claims towards price adjustment. The award was upheld by the Delhi High Court and Supreme Court in challenge proceedings pursued by the respondent.

In 2010, the Government of Uttar Pradesh issued a circular levying one per cent cess under the BOCW Act and the Cess Act with effect from 4 February 2009, including projects that were ongoing as on that date. Subsequently in the execution proceedings in 2012, the respondent sought to deduct 1 per cent cess retrospectively, to adjust the amount allegedly payable by the petitioner towards the cess and paid a sum of Rs 3.13 crores to the petitioner against its claim of Rs 7.70 crores.

A Single Judge Bench of the Delhi High Court took a view that the deduction of one per cent cess till 2008 was valid which was upheld by a Division Bench of the Delhi High Court. The petitioner appealed before the Supreme Court from this judgment.

Issue

The issue raised before the Supreme Court of India was whether the BOCW Act and the Cess Act can be treated as “subsequent legislation” in the contracts entered into by the respondents with its contractors.

Contentions

1. Stance of the petitioner: The petitioner argued that although the BOCW Act and the Cess Act were enacted, they were not in operation in Uttar Pradesh during the subsistence of its contract (2001—2008). The 2010 notification did not create retrospective liability to a contract that had terminated in 2008. Further, since no mechanism for collection of cess existed in 2001, it was not possible for the petitioner to factor the cess component into its bid price, and this liability amounts to imposition of a financial burden which was not anticipated. The petitioner argued that the attempt by the respondent for recovery of cess was raised for the first time in 2012 and was an afterthought.

2. Stance of the respondent: The respondent argued that the levy of cess under the BOCW Act and the Cess Act was permitted, since both the legislations had come into force in 1995—1996, which was before the award of the contract to the petitioner and hence could not be treated as “subsequent legislation”. The absence or delay in constitution of a Welfare Board does not suspend the operation of the BOCW Act and Cess Act as the 2010 notification was made applicable to ongoing projects which permitted recovery of cess for ongoing work executed prior to the date of the notification.

Key takeaways from the ruling

The following are a few important observations made by the Supreme Court of India that laid the foundation for its decision:

1. Dormancy of the legislations: The Court held that while the BOCW Act and the Cess Act were technically “in force” at the time of subsistence of the contract, they remained dormant in practice until Welfare Boards were constituted. Levy and collection of cess without a receiving authority would defeat the statutory scheme and blur the distinction between a fee and a tax.

2. Constitution of Welfare Boards is a condition precedent: Relying on the judgment by the Supreme Court in A. Prabhakara Reddy & Co. v. State of M.P.² (A. Prabhakara case), the Court reaffirmed that constitution of a Welfare Board is a sine qua non for levy or collection of cess. However, registration of workers or disbursement of welfare benefits is not a precondition to such collection.

3. Subsequent legislation: The Court accepted the view of the Arbitral Tribunals that the notifications operationalising the BOCW Act constituted it as “subsequent legislation”, even if the parent statutes pre-existed.

Comment

In line with the principles set out in A. Prabhakara case³, this judgment tends to reconcile the statutory framework mandated under the BOCW Act and the Cess Act with the practical enforcement of these legislations. Instead of relying on the literal interpretation of the legislations, the Court adopted an approach as to whether enforcement of the mechanism of cess collection was possible in practice without existence of the Welfare Boards. The Court reaffirmed that administration implementation by the State was inseparable from the operation of the BOCW Act and Cess Act, since delay in formation of Welfare Boards was the result of administrative inaction with no control by the private contractors.