REVOLUTIONARY JUDGMENT OF THE HON’BLE SUPREME COURT

September 6, 2021
Newsletter 155/21

REVOLUTIONARY JUDGMENT OF THE HON’BLE SUPREME COURT

IN BOCW MATTERS

UPPTC vs CG Power and Industrial Solutions
FACTS

The respondent had entered into a Framework Agreement with the petitioner for the construction of substations, installation and erection of pipelines and equipment for the generation and transmission or distribution of power. The Framework Agreement, split the work in four contracts as follows:
− Contract 1: Supply and delivery of equipment and material,
− Contract 2: Erection, testing and commissioning,
− Contract 3: All civil works and
− Contract 4: Operation and maintenance for three years.

The contractor shall be fully responsible for the work to be executed under the first
three contracts. Any breach or occurrence or default under one contract shall
automatically be deemed as a breach or occurrence or default of other contracts, giving
the contractee absolute right to take appropriate action under any/ all the contracts.
This includes the right to recover damages from any/ all the contracts or terminate any/
all the contracts (cross fall breach clause).

The contracts shall at all times be construed as a single source responsibility
assignment, complete project management, overall coordination between civil,
electrical supply and the erection works for the timely commissioning of the substation
shall be the contractor’s responsibility
An audit inspection noted that the petitioner was not collecting BOCW cess from the
payments made to the respondent for the total cost of construction (including Contracts
1 and 2).

The respondent objected to this and contended that it was not covered under the
definition of ‘contractor’ under the BOCW Cess Act, 1996 (Act), for the purposes of
the first contract and sought an opinion from the Labour Commissioner.

As the petitioner did not release the performance bank guarantee to secure the BOCW
cess amount, the respondent filed a writ petition before the Lucknow bench of the
Allahabad High Court.

VERDICT OF HIGH COURT:

The High Court accepted the submissions of the respondent and held that BOCW cess
could only be recovered on the basis of order of assessment or levy of BOCW cess
under the Act. In the absence of any order for levy and assessment, recovery could not
be made pursuant to an audit objection of the CAG.
The Uttar Pradesh Power Transmission Corporation preferred SLP No. 8630/2020 in Supreme
Court against the said decision.

SUPREME COURT’S DICTUM

Upon analysing the various provisions of the Act and the relevant clauses of the Framework
Agreement, the Supreme Court held that the respondent was not liable to BOCW cess with
respect to Contracts 1, 2 and 4, as it did not involve construction work. It also held that in the
absence of any assessment or levy under the provisions of the Act, the forcible extraction of
BOCW cess from the respondent, solely on the basis of the CAG report, was in excess of the
powers conferred by law or in terms of the contract. The Supreme Court’s decision is based on
the following rationale and observations:
BOCW cess cannot be deducted from the payment made to the contractor:
The terms of the contract merely state that the contractor shall pay at actual, the duties,
taxes, fees, etc., as are legally applicable. This clause does not enable the contractee to
withhold payments or to realise cess by the revocation of a performance guarantee.
BOCW cess is not leviable on the supply of equipment:
While discussing some landmark Supreme Court decisions, it was observed that the
object of the Act was the welfare of workers engaged in building and construction
work, and the clear statutory scheme of the Act excludes a supply contract from within
its ambit.

The charging section provides for the levy and collection of cess at such rate not
exceeding 2% of the cost of construction incurred by the employer.
The condition precedent for the imposition of BOCW cess under the Act was
construction, repair, demolition or maintenance. Mere installation or erection, which
did not involve construction work, was not amenable to BOCW cess.

A contractor who entered into a pure supply contract was statutorily exempted from
the levy of BOCW cess. The contract provides that it shall be a ‘Divisible Contract’
with single point responsibility; hence, no works contract tax shall be payable and the
purchaser shall not bear any liability on this account.

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 the
levy of any tax or fees, the parties understood the contract for supply as a separate and
distinct contract.

The respondent was neither a ‘contractor’ within the meaning of section 2(1)(g) of the
Act nor was it an ‘employer’ within the meaning of section 2(1)(i) of the Act.

BOCW cess cannot be demanded solely on the basis of the CAG report:

The petitioner had demanded and partly realised BOCW cess on the supply contract,
solely on the basis of the report of the CAG and this was impermissible in the absence
of any adjudication.

The petitioner was not charging BOCW cess on the first contract previously and had
changed its stance only in view of the CAG report.
Reliance was placed on the findings of multiple cases including that of Centre of
Public Litigation wherein it was held that the CAG report was subject to scrutiny by
the Public Accounts Committee and the Joint Parliamentary Committee, and it would
not be proper to refer to the CAG findings and the conclusions contained in it.
Other key observations:

The existence of an arbitration clause in the contract does not debar the High Court
from entertaining a writ petition and it is well settled by a plethora of judgements
that the availability of an alternative remedy does not prohibit the High Court’s from
entertaining a writ petition in an appropriate case.

The petitioner had no power or jurisdiction to realise BOCW cess on the supply
contract by withholding dues on other contracts or invoking a performance guarantee.

TAKE AWAY FROM THE JUDGMENT:

In Madhya Pradesh it has become common to raise a demand for cess even on supply part. A
division bench judgment of Madhya Pradesh has also taken a similar view to emphasise that cess
is not leviable on supply part.
Present decision reiterates the principle that BOCW cess is not liveable in case of contracts
involving the mere supply of equipment without any construction work. The decision also
highlights the importance of the procedure laid down in the law for the levy/ assessment of
BOCW cess, and in the absence of such assessment, BOCW cess cannot be deducted from other
payments/ invoking bank guarantee on the basis of a CAG report, which is subject to further
scrutiny. The Supreme Court has categorically observed that the contracts had been treated as a
singular contract solely for the purposes of responsibility for timely execution and that for all
other intents and purposes—including the levy of any tax or fees—the parties understood the
contract for supply as a separate and distinct contract. It is important to analyse the impact of this
observation on the treatment of such contracts under the tax laws.

Courtesy: PWC
For reference of Judgment UPPTC vs CG Power and Industrial Solutions, please click &
copy the link given below:
https://www.livelaw.in/pdf_upload/uttarpradeshpowertransmissionvscgpowerandindustrialsoluti
onssupremecourt-394950.pdf

Girish S. Patwardhan,
Advocate & President,
Madhya Pradesh Chapter,
Association of Industries & Institutions