Labor Cess Inapplicable To Material Supply And Consultancy Charges: Jharkhand High Court
The Jharkhand High Court has ruled that Labor Cess should not be imposed on the supply of materials and consultancy charges for a contract that is different from civil works contracts. This decision came after the State appealed against a ruling made by a Single Judge Bench on June 13, 2022. The Single Judge Bench had stated that Labor Cess is not applicable to the supply of materials and consultancy charges for a contract that is distinct from civil works contracts.
The State argued that the Single Judge Bench should not have taken up the case under Article 226 of the Indian Constitution, as there was an alternative option available under Section 11 of the Building and Other Construction Workers Welfare Cess Act, 1996 (Cess Act), along with Section 14 of the Building and Other Construction Workers Welfare Cess Rules, 1998. However, the Jharkhand High Court agreed with the Single Judge’s conclusion that two separate contracts existed and rejected the State’s appeal.
The State-appellants contended that the writ petition filed under Article 226 of the Constitution of India could not have been entertained by the Single Judge, as an alternative remedy was available under Section 11 of the Building and Other Construction Workers Welfare Cess Act, 1996, along with Section 14 of the Building and Other Construction Workers Welfare Cess Rules, 1998.
According to the State’s representative, the deduction of Labour Cess needed to cover the entire project’s cost, encompassing supply, consultancy charges, and engineering. This led the appellant and Jharkhand Urja Sancharan Nigmal Limited (JUSNL) to rightfully deduct the Cess amount from the contractor-writ petitioner’s bills.
The respondent-writ petitioner had a singular contract with JUSNL, covering material supply, erection, and commissioning of SubStations. Thus, the State’s representative argued that the entire work should be treated as a unified construction, comprising consultancy charges, material supply, and engineering.
The State-appellants asserted that the contract should not have been divided in this scenario. They considered the objection raised by the Principal Accountant General (Audit), Jharkhand, and decided to deduct the amount from the contractor-writ petitioner’s bills based on the overall construction cost, including supply, consultancy, and engineering. The actions of JUSNL were deemed correct by the State’s representative. The Single Judge’s ruling was criticized for not considering these aspects in granting directions in paragraph 30 of the order.
The Senior Counsel representing the writ petitioner-respondent argued that the respondent JUSNL had contracted with the petitioner-respondent for constructing Electric Grid Sub Stations in Jharkhand. This construction involved multiple elements such as material supply, equipment, consultancy services, and transmission line erection. Separate agreements were in place for material supply and Grid Sub Station erection, with differing payment terms. As per the Building and Other Construction Workers Welfare Cess Act, 1996, Cess could only be applied to the construction and erection component, excluding material supply and consultancy.
The respondents were accused of wrongly deducting Cess from material supply and consultancy components, beyond the construction and erection portion. The Single Judge acknowledged this error and directed the refund. The Senior Counsel relied on the Supreme Court’s judgment in Uttar Pradesh Power Transmission Corporation Ltd. & Another vs. CG Power and Industrial Solutions Limited & Another (2021) SCC OnLine SC 383.
Verdict of the Single Judge
The Single Judge conducted a thorough analysis of the agreement and contract, determining that it was necessary for the parties to establish two distinct contracts. The first contract pertained to the supply of equipment, materials, including spares, as well as the associated tasks of loading, transportation, delivery at the site, transit insurance, unloading, storage, and on-site handling. The second contract was focused on electrical and civil works.
It was deemed essential that the price bids for both contracts be itemized to ensure clarity in the figures for material and equipment supply, as well as for the provision of services. This detailed breakdown was crucial for the proper awarding of the contract.
The Single Judge also identified that separate agreements had been executed between the parties for each of the distinct contracts. Specifically, LoA No.16 dated 21.02.2019 pertained to the supply of materials, while LoA No.20 dated 21.02.2019 was specific to erection and civil works.
Further examination revealed the existence of a purchase order and a work order concerning the comprehensive task of designing, engineering, material supply, equipment provision, erection, testing, and commissioning of a Grid Sub-Station at Bahragora, Jamua, and Chandankyari on a turnkey basis. The purchase order, identified as P.O. No.02 C.E.(T)/J.U.S.N.L. dated 18.01.2017, covered material supply, while the work order, under W.O. No.02 C.E.(T)/J.U.S.N.L. dated 18.01.2017, encompassed erection, testing, and commissioning for all the provided materials. This further affirmed the existence of two distinct contracts for supply and civil work.
The Single Judge’s investigation also determined that the contract price for the two separate works was clearly delineated. The supply of materials was valued at Rs.87,51,77,838/-, while the work order pertaining to erection and civil works was priced at Rs.26,66,70,906.75. It is our view that these findings definitively indicate the presence of two distinct and separable contracts—one for supply and another for construction.
Verdict of the Division Judge
At the outset, the division bench composed of Chief Justice Sanjaya Kumar Mishra and Justice Ananda Sen delved into the interpretation of Section 3 of the Building & Other Construction Workers’ Welfare Cess Act, 1996. This section pertains to the charging provision, and the Court’s view was that it straightforwardly indicated the imposition and collection of a cess based on a specified percentage of the construction expenses borne by the employer.
Referencing Section 2(d) of the Building & Other Construction Works (Regulation of Employment and Conditions of Service) Act, 1996, the court made an observation. It noted that the definition of “building or other construction work” encompassed activities related to buildings, streets, power transmission, and distribution. This definition encompassed constructions, alterations, repairs, maintenance, or demolitions pertaining to these structures.
The court clarified, “It is quite clear from the conjoint reading of Section 2(d) and Section 3 of the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996, that no cess can be levied on supply or consultancy component. It can only be levied on construction, alteration, repair, maintenance or demolition work.”
“Extending the said levy on consultancy or supply will be a clear deviation from the provisions of the Act. Further, the Hon’ble Supreme Court has decided an exactly similar issue in the case of Uttar Pradesh Power Transmission Corporation Ltd. (supra) and has held that the Act excludes a supply contract from within its ambit,” the court added.
Regarding the plea of an alternate remedy, the court noted that a similar issue had been brought before the Hon’ble Supreme Court in the case discussed in Uttar Pradesh Power Transmission Corporation Ltd. & Another versus CG Power and Industrial Solutions Limited & Another (2021) SCC OnLine SC 383. In this instance, the Supreme Court upheld the possibility of granting relief under Article 226 of the Indian Constitution in matters arising from civil contracts.
“Availability of alternative remedy does not prohibit the High Court from maintaining a writ petition in an appropriate case. In the aforesaid case, the Hon’ble Supreme Court has upheld invocation of Article 226 of the Constitution of India, which involves similar nature of facts. The Hon’ble Supreme Court, in paragraph 71 of the aforesaid judgment has held that UPPTCL (the Company involved in the case before the Hon’ble Supreme Court) has no power or authority or jurisdiction to realize labour cess under the Cess Act by withholding the dues and the State Government has acted in excess of powers by its acts impugned,” the court expressed.
The court pointed out that the Single Judge had weighed all these aspects, particularly the judgment of the Hon’ble Supreme Court, and had thus concluded the writ petition.
Moreover, the Court concurred with the Single Judge’s findings, as they aligned with the Supreme Court’s judgment that addressed the issue at hand. Consequently, the Letters Patent Appeal, having no merit, was dismissed in line with these considerations.
Case Title: The State of Jharkhand and Others vs. M/s Flowmore Limited
Case Citation: 2023 LiveLaw (Jha) 28
Case No.: L.P.A. No.511 of 2022
For the Appellants: Mr. Manoj Tandon, Advocate, Ms. Neha Bhardwaj, Advocate
For the Respondents: Mr. M.S. Mittal, Sr. Advocate, Mr. Salona Mittal, Advocate
For the Respondent (JUSNL) : Mr. Mrinal Kanti Roy, Advocate