BOCW: Unravelling the Complexities of Construction Cess

The Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 (‘BOCW’) and the Building and Other Construction Workers Welfare Cess Act, 1996 (‘Cess Act’) were enacted to levy a cess on the cost of construction incurred by the employers on the building and other construction works for ensuring sufficient funds for the Welfare Boards to undertake the social security schemes and welfare measures for building and other construction workers. Construction work would include the construction of a building as well as carrying out renovation and interior works. 

The question, therefore, arises, who should pay the cess? How much of the cess is to be paid? What constitutes the cost of construction?

The provisions of BOCW apply to every establishment including an individual who employs or had employed on any day of the preceding twelve months, ten or more workers in any building or other construction work either residential or commercial. In the case of an individual constructing a residential building where the cost of construction is less than ₹10 lakhs, under such circumstances the provisions of BOCW do not apply. Considering the cost of construction today, the exemption to residential buildings appears redundant.

The owner of the premises as well as the contractor would be required to obtain a registration under the BOCW Act and within 30 days before the commencement of construction work be required to inform the jurisdictional inspector about the commencement of construction. In case of construction of a new building, the owner or the contractor will be required to pay the cess along with the approval of the building plan, whereas, in the case of any renovation or interior work, the same shall be paid within 1 month upon completion of the project.

The total amount of cess to be paid is up to 2% but not less than 1% of the total cost of construction incurred by the owner of the premises or the contractor. Failure to pay cess shall be punishable with imprisonment which may extend to 6 months, or with a fine, or with both.

Rule 3 of the Building and Other Construction Workers Welfare Cess Rules, 1998 states that for levy of cess on the cost of construction shall include all expenditure incurred by an employer in connection with the building or other construction work but shall not include, the cost of land any compensation paid or payable to a worker or his kin under the Workmen's Compensation Act, 1923.

While the objective of the BOCW act was to contribute an amount towards the welfare of building workers, the question of including the total expenditure incurred by an employer in connection with the building, i.e., cost towards both materials and services as well as other ancillary costs towards construction put a burden on the employer or contractor in the form of paying cess. This led to a dilemma as to what constitutes the cost of construction on which the cess is to be paid towards the welfare of building workers, leading to Labour Welfare officers demanding the owner of premises and contractor to pay cess on the total cost of construction.

The issue was laid to rest in the case of Uttar Pradesh Power Transmission Corporation Ltd. and Anr. vs. CG Power and Industrial Solutions Limited & Anr wherein the Supreme Court of India held that cess is not payable in respect of the supply of goods. Further, it clarified that a contract that was for the supply of goods and provision of services that were not construction services as defined under the Act does not attract cess. It further reiterated that a party to a contract who is the supplier of goods, of whatever nature they may be, is not a Contractor under the Act.

This judgment brings clarity and relief to many companies, especially those who undertake interior work. Many establishments have been computing and paying cess on material supply contracts as there was a lack of clarity in the legal position, especially when these contracts were tied into comprehensive agreements.

Establishments will also have to revisit their contracting procedure. Distinct contracts for the supply of goods and labour are advisable. Combined contracts will still raise questions as to the actual bifurcation of cost towards materials.

In the case at hand, the Supreme Court was dealing with a case where four contracts had been entered into between Uttar Pradesh Power Transmission Corporation (‘UPPTCL’) and CG Power (‘CG’). The project was a turnkey project to set up a power station. It involved all facets of activity, ranging from design to maintenance. While timelines had been set for the project as a whole, only one of the contracts dealt with construction and civil works. Three contracts dealt with the supply of goods, design, testing, commissioning and maintenance.

The Auditors of UPPTCL had concluded that the company had failed to levy and deduct cess under the Cess Act for the supply of equipment and material and design. UPPTC sought to partially encash a bank guarantee provided by CG power and pay the cess.

CG power approached the Lucknow bench of the Allahabad High Court challenging this attempt to encash the bank guarantee. The High Court held in favour of CG power and found that the method adopted by UPPTCL to recover cess is incorrect as an assessment by the authorities and a notice of default must precede the attempt by UPPTCL to encash the guarantee. It did not, however, answer the larger questions of law as to the applicability of the Act to CG power itself.

The Supreme Court, through detailed and reasoned interpretations of the provisions of the BOCW and the Cess Act, held that the Act unequivocally excludes mere supply of goods from its ambit even though it may be part of a larger engagement that involves construction. In other words, cess is only payable to those parts of an engagement that involve building and construction work as defined under the Act.

Aditya Kamath is a Partner and Devaiah KG is a Principal Associate at BCP Associates.