The Construction Sectors Excess Woes

The construction sector has seen some significant developments and associated litigations impacting cost of construction in the form of a cess being levied as a labour welfare initiative. Phoenix Legal Partner Saket Shukla in this article discusses the Building Cess laws and the obligation to pay Cess..By Saket Shukla and Yamini Roy.The construction sector has seen some significant developments and associated litigations impacting the cost of construction in the form of a cess being levied as a labour welfare initiative. The cess has been imposed through the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 (Building Regulation Act), the Building and Other Construction Workers Welfare Cess Act, 1996 (Cess Act) and the Building and Other Construction Workers Welfare Cess Rules, 1998 (Cess Rules). For brevity, we refer to the Building Regulation Act, Cess Act and Cess Rules as “Building Cess Laws” in this article..The Building Cess Laws, though effective since 1996-98, were not being implemented by various States and the Centre alike and it took the intervention of the Supreme Court of India to set the law in motion when the apex court, in National Campaign Committee for Central Legislation on Construction Labour v. Union of India (2012 (2) SCALE 359). In the above case, under a judgment dated February 7, 2012, the Supreme Court directed the errant states to remedy any non-compliance with these Building Cess Laws and impose cess on the “employer” in compliance with such laws. As a first step, therefore, several States have initiated actions further to their obligations under the Building Cess Laws, due to which the risk of payment of cess and the associated liabilities under the Building Cess Laws has become relevant for developers..In focus: Building Cess Laws .The focus of the Building Cess Laws is welfare of the building and construction worker, which broadly, includes skilled, manual, supervisory, technical or clerical worker, but does not include such workers employed mainly in a managerial or administrative capacity or those who draw wages exceeding INR 1,600. The Building Regulation Act is applicable to every establishment which employs or has employed 10 or more building workers for any building or other construction works in the preceding 12 (twelve) month period, except building or other construction work under the Factories Act, 1948 or the Mines Act, 1952. The phrase ‘building or other construction works’ has a wide import and includes alteration, repairs, maintenance or demolition, of or, in relation to, any public works, infrastructure projects or buildings and residences (applicable only when the construction cost in respect of construction of residences exceeds INR 1,000,000)..The Cess Act was enacted with the objective of augmentation of revenues for the welfare of construction workers. The Central government has made it mandatory for the employer to make payment of cess of an amount calculated at 1% of the construction cost, which cost excludes the cost of land and any compensation paid to workers under the Workmen Compensation Act, 1923..In exercise of the powers under the Cess Act, the Central Government notified the Cess Rules for carrying out the provisions of the Cess Act, which, among other things, includes the assessment of the cess, the manner and the time in which the cess is to be collected..Obligation to pay Cess.An “employer” is responsible to pay 1 per cent of the construction cost as cess for the building or the construction work under the Cess Act. The term “employer” means the owner of the relevant building or construction work and where the construction work is carried on by a contractor, or through workers supplied by a contractor, then in such a case, the contractor. Therefore, given that an “employer” could be the contractor if engaged by the owner, there is room for confusion as to which party which is primarily responsible for payment of cess for the construction works under the Cess Act. This, of course, has given rise to a multitude of disputes involving the government agencies, project developers and contractors. To further complicate the issue, different High Courts have held that the provisions of the Cess Act apply both to the “owner” of the construction as well as the contractor engaged for the construction. However, divergent views have emerged amongst the High Courts’ on whether the primary responsibility to pay cess is of the owner or the contractor..The issue of primary responsibility on payment of cess was discussed by the Delhi High Court in Builders Association of Indian and Others v. Union of India and Others [139 (2007) DLT 578] while ruling on the constitutional validity of the Building Regulation Act. The Delhi High Court made some observations which seem to suggest that the initial responsibility to pay cess is of the contractors. On the other hand, the Kerala High Court, in Vrindavan Apartments Private Limited v. Appellate Authority under the Building and Other Construction Workers Welfare Cess Act [2010 (1) KHC 945] held that the primary responsibility to pay cess under the Cess Act is that of the owner..While deciding an appeal on the constitutional validity of imposition of cess under the Cess Act, the Supreme Court has, in Dewan Chand Builders and Contractors v. Union of India and Others [(2012) 1 SCC 101] discussed the definition of “employer” under the Building Regulation Act, and observed that in relation to government contracts, the Cess Act and the Cess Rules ensure that the cess should be collected from the bills of the contractors and therefore, the burden of cess is passed from the owner to the contractor. The apex court also discussed that the passing on of the liability to the contractor is done with a view to ensure that cess is collected from the contractors even if it is not collected from the owners..Whilst the above are observations of the Supreme Court and not its decision, the premise that the responsibility to pay cess shifts on to the contractors if engaged, is yet to be clarified..Procedure for assessment and levy of interest under the Cess Act.An employer of a building to which the provisions of the Cess Act apply, is required to furnish returns to the relevant governmental authorities. The authorities, after making inquiries, assess the amount of cess payable by the employer and pass an order of assessment in this regard (Assessment Order). Assessment Orders specify the time period within which the cess is required to be deposited with the authorities..The Cess Act provides that failure to pay cess within the time period specified in the Assessment Order results in levy of interest on the unpaid cess amount at the rate of 2% per month, such interest to be calculated from the date on which the payment of cess becomes due till the date of payment. It, therefore, seems that the period for calculation of the interest commences on the expiry of the time period for payment of cess as specified in the Assessment Order. Therefore, unless the Assessment Order is made and a period is specified, it may be argued that interest would not be payable on any unpaid cess. The law on this point is not yet settled..To conclude, whilst the steps taken by the lawmakers and the courts are praiseworthy, the regulations could do with greater clarity which could be through court rulings or from the administrative authorities, to not only effectively implement the Building Cess Laws and achieve the welfare objective but also reduce scope for needless litigation. Clearly, the contracting parties would do well to ensure that they have tightly drafted contracts clarifying the onus for payment of cess and allocation of associated risks inter se..Saket Shuka is a Partner at Phoenix Legal and Yamini Roy is a Senior Associate working in the Delhi office of Phoenix Legal . The views expressed are personal.