Cess on Construction Activities: Clarifying the Ambit of Imposition

Regularization of conditions of work in the informal sector has consistently been on the developmental agenda of successive governments in India. The onset of liberalization massively spurred the economy in the 1990s with consequent increase in developmental activities in the country including inter alia building and construction work. In this context, with the aim of regulating the employment and conditions of service of construction workers, the Building and Other Construction Workers’ (Regulation of Employment and Conditions of Service) Act, 1996 (BOCW Act) was enacted.

Amongst other things, the BOCW Act provided for the constitution of Welfare Boards as nodal agencies for providing assistance to construction workers and securing their welfare. With the aim of augmenting the resources of these welfare boards, the government simultaneously enacted the Building and Other Construction Workers’ Welfare Cess Act, 1996 (Cess Act). Subsequently, pursuant to Section 14(1) of the Cess Act, the government framed the Building and Other Construction Workers Welfare Cess Rules, 1998 (Cess Rules).

Section 3(1) of the Cess Act stipulates that a cess would be levied at a rate not exceeding two percent but not less than one percent on the ‘cost of construction’ incurred by an employer. ‘Cost of Construction’ has been defined in Rule 3 of the Cess Rules to include ‘all expenditure incurred by an employer in connection with the building or other construction work’ with the exclusion of i) cost of land, and ii) any compensation paid or payable to a worker or his kin under the Workmen’s Compensation Act, 1923. Section 2(d) of the Cess Act stipulates that any expression not defined in the Cess Act would have the meaning assigned to such expression in the BOCW Act.

The expression ‘building and other construction work’, part of the definition stipulated in Rule 3 of the Cess Rules, has been defined in the BOCW Act in the following manner:

(d) “building or other construction work” means the construction, alteration, repairs, maintenance or demolition, of or, in relation to, buildings, streets, roads, railways, tramways, airfields, irrigation, drainage, embankment and navigation works, flood control works (including storm water drainage works), generation, transmission and distribution of power, water works (including channels for distribution of water), oil and gas installations, electric lines, wireless radio, television, telegraph and overseas communications, dams, canals, reservoirs, watercourses, tunnels, bridges, viaducts, aqueducts, pipelines, towers, cooling towers, transmission towers and such other work as may be specific in this behalf by the appropriate Government, by notification but does not include any building or other construction work to which the provisions of the Factories Act, 1948 (63 of 1948), or the Mines Act, 1952 (35 of 1952), apply;

Accordingly, the aforesaid provisions make it clear that cess is only required to be imposed on the expenditure incurred on specific construction related activities. Such construction works are exhaustively defined in Section 2(d) of the BOCW Act and activities beyond such enumeration would not attract the provisions of Cess Act and Cess Rules in relation to the imposition of cess.

Judicial intervention on the issue

Despite the aforesaid, employers executing civil contracts and the concerned authorities have remained at loggerheads in so far as the assessment under the aforesaid legislations are concerned. Disputes arise in relation to inclusion of cost of supply component, within the ambit of construction work for purposes of levy of cess. Courts have examined the legal framework to ascertain whether an ancillary activity such as supply would be covered within the ambit of construction work.

The Andhra Pradesh High Court in 2008 in Cormandel Prestcrete Private Limited v. State of Andhra Pradesh and Ors. clearly held that cess is to be collected only on the ‘cost of construction’ and not on the entire value of work, thereby implying that ancillary activities such as supply, though contributing to the entire value of work, would not be liable for cess deduction. A more pointed analysis was however done by the Jharkhand High Court in 2014 in Abhijeet Hazaribagh Toll Road Limited v. Union of India and Ors wherein the Court while dealing with Section 3 of the Cess Act and Rule 3 of the Cess Rules held in categorical terms that ‘under no stretch of imagination, it can be said that the construction activity amount to sale/purchase of goods’. Accordingly, the Court went on to hold that the pith and substance of the BOCW Cess Act was to levy cess on the cost of construction and construction work mainly included activities involving workers and labourers.

The Supreme Court of India stepped in and took note of this issue in 2016 in Lanco Anpara Power Limited v. State of Uttar Pradesh and Others. While dealing with the expression “building or other construction work” as defined under Section 2(1)(d) of the BOCW Act, the Supreme Court held the following:

37. We now advert to the core issue touching upon the construction of Section 2(1)(d) of the BOCW Act. The argument of the appellants is that the language thereof is unambiguous and literal construction is to be accorded to find the legislative intent. To our mind, this submission is of no avail. Section 2(1)(d) of the BOCW Act dealing with the building or construction work is in three parts. In the first part, different activities are mentioned which are to be covered by the said expression, namely, construction, alteration, repairs, maintenance or demolition.

Second part of the definition is aimed at those buildings or works in relation to which the aforesaid activities are carried out. The third part of the definition contains exclusion clause by stipulation that it does not include “any building or other construction work to which the provisions of the Factories Act, 1948 (63 of 1948), or the Mines Act, 1952 (35 of 1952), applies”.

Thus the first part of the definition contains the nature of activity; second part contains the subject matter in relation to which the activity is carried out and the third part excludes those buildings or other construction work to which the provisions of the Factories Act or the Mines Act apply.

The Hon’ble Supreme Court in Lanco Anpara has to some extent put the controversy to rest. The Hon’ble Supreme Court holds that Section 2(1)(d) of the BOCW Act while defining the expression “building or other construction work” lists out various activities, which are to be covered by the said expression namely construction, alteration, repairs, maintenance or demolition. It further holds that the provision in its second part thereafter lists out buildings or works in relation to which the aforesaid activities are carried out. Clearly any ancillary activity such as supply / procurement of equipment and machinery is not prescribed to be covered within the ambit of Section 2(1)(d) of the BOCW Act.

The Chhattisgarh High Court, subsequently in the same year in Arasmeta Captive Power Company Private Limited v. State of Chhattisgarh held that Section 3 of the Cess Act would only be applicable on the construction activity and the construction aspect of the contract, and not on those items which do not fall under the construction activities such as design etc. Such view conveys the understanding that supply, not being a construction aspect of the contract, would not fall within the ambit of construction work and would accordingly not be liable for cess. A similar vein was echoed by the Madhya Pradesh High Court in 2017 in Alfa Infraprop Private Limited v. Cess Assessment Authority and Deputy Commissioner of Labour where it was held that that cess under Section 3 of the Cess Act is to be only imposed on the expenditure on civil construction and not the entire project cost. This judgment was passed having regard to the law already laid down by the Madhya Pradesh High Court in Welspun Solar MP Pvt. Ltd.

While the aforesaid judgments establish that the cost of construction would not include an ancillary activity such as supply, the Madhya Pradesh High Court had taken a different stand in 2012 in G.V.P.R. Engineers Limited v. State of M.P. and Ors and M/S Technical Associates limited v. The Assistant Labour Commissioner, Jabalpur and Ors. Both these judgments concluded in identical terms that the expression “cost of construction” cannot be divided in parts i.e. supply portion and erection portion, and consequently held that since the levy is on the total cost of construction, the same shall include cost of supply portion as also erection portion. However, these decisions appear to have been over-ruled by the Hon’ble Supreme Court vide its Judgment in Lanco Anpara.

Conclusion

Upon examination of the relevant provisions of the Cess Act, BOCW Act and the Cess Rules as also the judgments detailed herein above, it therefore appears:

a. That Cess Act provides for levy of cess on the cost of construction;

b. Cost of construction under Cess Rules is defined to include expenditure in connection with the building or other construction work;

c. Building or other construction work under Section 2(1)(d) of the BOCW Act is defined to include specific construction related activities, and activities beyond such enumeration including inter alia supply of equipments are not provided for under the scheme of the Act.

In our view cess is levied on the ‘cost of construction’ which is restricted to ‘building or other construction work’, which is further narrowed to specific construction related activities enumerated in Section 2(1)(d) of the BOCW Act. This, therefore, signifies that cess is also restricted to specific construction related activities and activities beyond such enumeration including inter alia supply of equipments forming part of the supply component would consequently not attract the provisions of Cess Act and Cess Rules in relation to levy of cess.

The aforesaid view essentially flows from the reading of the Supreme Court judgment in Lanco Anpara. Although the two Madhya Pradesh High Court judgments take a contrary view, however the same do not appear to be in consonance with the scheme of the Act and the language of the provisions. The reasoning of the Supreme Court in Lanco Anpara appears to be more cogent insofar it categorizes the definition of the expression ‘building or other construction work’ into three parts and carries out an exercise of logical deduction to understand the ambit and scope of each of those parts.

Abhijeet Swaroop is a Partner and Gibran Naushad is a Senior Associate at The Guild – Advocates and Associate Counsel