Levy of building cess on a contract for supply and delivery of equipment and materials? Impermissible, holds Supreme Court.
Supreme Court: In the case where Uttar Pradesh Power Transmission Corporation Ltd had levied cess on CG Power and Industrial Solutions Limited based on CAG report only and had withheld dues in respect of other contracts, the bench of UU Lalit and Indira Banerjee*, JJ has termed such levy a forcible extraction of cess and has held,
“… the Cess Act and/or statutory rules framed thereunder prescribe the mode and manner of recovery of outstanding cess under the Cess Act. It is well settled that when statute requires a thing to be done in a particular manner, it is to be done in that manner alone. UPPTCL could not have taken recourse to the methods adopted by it.”
The Court was hearing a dispute between Uttar Pradesh Power Transmission Corporation Ltd. (UPPTCL) and CG Power and Industrial Solutions Limited arising out of a Framework Agreement with UPPTCL for construction of 765/400 KV Substations, at Unnao, Uttar Pradesh.
In terms of the said Framework Agreement, the work was split, and covered by four separate contracts. The first contract was for design, engineering, manufacture, testing at works and supply of all required equipment and materials with accessories and auxiliaries, as detailed in the said contract; the second contract covered erection, testing and commissioning at site including unloading, handling etc.; the third contract covered all civil works including materials for commissioning and handing over of the Substations and the fourth contract covered operations and maintenance for three years.
In sub-clause 5 of the said Frame Work Agreement, under the head “Nature of Contract”, it was clearly stated that the first and second contract shall cover all works other than civil works required to be completed.
Notably, cess under the Cess Act is payable in respect of the Third Contract, which covers all civil works. The first and second contracts, which cover all works other than civil works, and do not involve any construction, do not attract cess under the Cess Act.
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, equipments 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.
UPPTCL had directed CG Power to remit Labour Cess amounting to Rs.2,60,68,814/-, computed at 1% of the contract value, under Sections 3 sub-section (1) and (2) of the Building and Other Construction Workers’ Welfare Cess Act, 1996, hereinafter referred to as the “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, hereinafter referred to as the “Cess Rules” and also Section 2 (1)(d), (g) and (i) of the Building and Other Construction Workers (Regulation of Employment and Condition of Service) Act, 1996.
It was contended before the Court that the levy of cess on the first contract was unwarranted and illegal. It was argued that the four contracts had been treated as a singular contract solely for the purposes of responsibility for timely execution. For all other intents and purposes, including levy of any tax or fees, the contract for supply was understood by the parties as a separate and distinct contract.
Considering all the aspects, the Court noticed that the terms and clauses of the contract made it amply clear that the first contract was for supply and delivery of equipment and materials. It was a pure supply contract, separate and distinct from civil works contract. The UPPTCL itself understood the Cess Act as not applicable to the Supply Contract and accordingly did not deduct cess from the invoices/bills of the Respondent.
The Court noted that the UPPTCL demanded and partly realized cess on the supply Contract, solely on the basis of report of the CAG. Hence, in the absence of any adjudication, it was impermissible for UPPTCL to issue the impugned communication to realize cess solely on the basis of the report of the CAG.
“… the action of UPPTCL in forcibly extracting building cess from the Respondent No.1 in respect of the first contract, solely on the basis of the CAG report, is in excess of power conferred on UPPTCL by law or in terms of the contract. In other words, UPPTCL has no power and authority and or jurisdiction to realize labour cess under the Cess Act in respect of the first contract by withholding dues in respect of other contracts and/or invoking a performance guarantee.”
[Uttar Pradesh Power Transmission Corporation Ltd v. CG Power and Industrial Solutions Limited, 2021 SCC OnLine SC 383, decided on 12.05.2021]
Appearances before the Court by:
Mr. Shishir Prakash, Adv.
Ms. Karuna Krishan Thareja, Adv.
Mr. Rahul Bhatia, AOR
Mr. Ramesh Singh, Sr. Adv.
Ms. Monisha Handa, Adv.
Mr. Mohit D. Ram, AOR