Jharkhand High Court Exempts Material Supply and Consultancy Charges from Labour Cess

Jharkhand High Court Exempts Material Supply and Consultancy Charges from Labour Cess

The Jharkhand High Court has issued a verdict asserting that Labour Cess should not be levied on the provision of materials and consultancy charges for contracts separate from civil works contracts. This judgement followed an appeal by the State against a decision rendered by a Single Judge Bench on June 13, 2022.

The Single Judge Bench had determined that Labour Cess does not apply to the supply of materials and consultancy charges for contracts that are distinguishable from civil works contracts.

The State contended that the Single Judge Bench should not have entertained the case under Article 226 of the Indian Constitution, citing an alternative avenue provided by Section 11 of the Building and Other Construction Workers Welfare Cess Act, 1996 (Cess Act), in conjunction with Section 14 of the Building and Other Construction Workers Welfare Cess Rules, 1998. Nevertheless, the Jharkhand High Court concurred with the Single Judge's assessment that distinct contracts were indeed in place, leading to the dismissal of the State's appeal.

The State took a stand that the deduction of Labour Cess was deemed necessary to cover the comprehensive cost of the entire project, inclusive of supply, consultancy charges, and engineering. Consequently, this rationale prompted the appellant, along with Jharkhand Urja Sancharan Nigam Limited (JUSNL), to legitimately deduct the corresponding Cess amount from the bills of the contractor who is also the petitioner.

The petitioner in response contended that they had a sole contract with JUSNL, incorporating material supply, erection, and commissioning of Sub-Stations. Consequently, the State's representative contended that the entire scope of work should be viewed as an integrated construction effort, encompassing consultancy charges, material supply, and engineering.

The State-appellants contended that the contract should not have been fragmented in this context. They referred to the concerns raised by the Principal Accountant General (Audit), Jharkhand, and resolved to subtract the sum from the bills of the contractor-writ petitioner based on the comprehensive construction expense, including supply, consultancy, and engineering.

The Senior Counsel advocating for the respondent and writ petitioner put forth the argument that JUSNL, the respondent in question, had entered into a contract with the petitioner-respondent for the construction of Electric Grid Sub Stations within Jharkhand. This construction undertaking encompassed multiple facets, including material supply, equipment, consultancy services, and the erection of transmission lines. The agreements were separately delineated for material supply and Grid Sub Station erection, with distinct payment terms governing each. In accordance with the stipulations of the Building and Other Construction Workers Welfare Cess Act, 1996, the application of Cess was confined to the construction and erection component, thereby excluding material supply and consultancy services.

The respondents faced allegations of improperly deducting Cess from not only the construction and erection aspect but also from the material supply and consultancy segments. The Single Judge recognised this discrepancy and issued a directive for a refund. The Senior Counsel's argument was founded on the precedent set by the Supreme Court in the case of Uttar Pradesh Power Transmission Corporation Ltd. & Another vs. CG Power and Industrial Solutions Limited & Another (2021) SCC OnLine SC 383.

Conducting an exhaustive evaluation of the agreement and contract, the Single Judge concluded that the parties needed to establish two separate contracts. The initial contract revolved around the provision of equipment, materials (including spares), along with associated responsibilities such as loading, transportation, site delivery, transit insurance, unloading, storage, and on-site handling. On the other hand, the second contract concentrated on electrical and civil works.

The clarity in the figures for material and equipment supply, as well as the provision of services, necessitated a meticulous itemisation of the price bids for both contracts. This thorough breakdown played a critical role in ensuring the accurate and appropriate allocation of the contract.

The Single Judge also observed that the parties had entered into separate agreements for each of the distinct contracts. In particular, LoA No.16 pertained to the supply of materials, while LoA No.20, both dated February 21, 2019, was exclusively related to erection and civil works.

Further scrutiny revealed the presence of a purchase order and a work order covering the comprehensive scope of tasks encompassing design, 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, designated as P.O. No.02 C.E.(T)/J.U.S.N.L, specifically covered material supply. On the other hand, the work order, denoted as W.O. No.02 C.E.(T)/J.U.S.N.L., encompassed erection, testing, and commissioning for all the supplied materials. Notably, both the purchase and work orders bore the date of January 18, 2017.

This reinforced the Single Judge's inquiry, which additionally established that the contract price for the two distinct tasks was unequivocally specified. The material supply was appraised at ₹87,51,77,838, whereas the work order associated with erection and civil works was valued at ₹26,66,70,906.75. The Court maintained that these findings, in its perspective, underscored the existence of two discernible contracts — one for supply and the other for construction.

To begin with, the Division Bench, consisting of Chief Justice Sanjaya Kumar Mishra and Justice Ananda Sen, embarked on an examination of the interpretation of Section 3 of the Building & Other Construction Workers’ Welfare Cess Act, 1996. This particular section deals with the charging provision, and the Court's interpretation was that it unambiguously signifies the imposition and collection of a cess, calculated as a predetermined percentage of the construction expenses undertaken by the employer.

Drawing from Section 2(d) of the Building & Other Construction Works (Regulation of Employment and Conditions of Service) Act, 1996, the Court observed that the definition of "building or other construction work" incorporated various activities associated with structures such as buildings, streets, and power transmission and distribution. This comprehensive definition included the realms of construction, alterations, repairs, maintenance, or demolitions related to these structures.

“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,” the Court stated.

The Court felt that applying this levy to consultancy or supply would unequivocally deviate from the stipulations of the Act. Additionally, it highlighted that the Supreme Court had addressed an almost identical matter in the case of Uttar Pradesh Power Transmission Corporation Ltd. (supra) and had determined that the Act does not encompass supply contracts within its purview.

Addressing the argument regarding an alternative remedy, the Court observed that a comparable matter had been presented before the Supreme Court in the case of Uttar Pradesh Power Transmission Corporation Ltd. & Another versus CG Power and Industrial Solutions Limited & Another (2021) SCC OnLine SC 383. In that instance, the Supreme Court affirmed the potential for providing relief under Article 226 of the Indian Constitution in situations arising from civil contracts.

The Jharkhand High Court noted that the presence of an alternative remedy does not preclude it from entertaining a writ petition in a suitable situation.

“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 said.

The Division Bench stated that the Single Judge had thoroughly considered these factors, with special attention to the Supreme Court's ruling, leading to the ultimate conclusion of the writ petition.

Furthermore, the Court shared the same viewpoint as the Single Judge's findings, given their congruence with the Supreme Court's ruling that pertained to the matter in question. As a result, the Letters Patent Appeal, lacking substantive merit, was dismissed.