Court rules cess applicable only on construction costs, not entire contract value, in landmark judgment involving Kerala Water Authority contracts.
In a significant ruling, the Kerala High Court has clarified the applicability of the Building and Other Construction Workers Welfare Cess Act, 1996, on construction contracts. The court held that cess should be levied only on the "cost of construction" rather than the entire contract value. The judgment came in response to writ appeals filed by several contractors, including D. Manoharan, Salil Varghese, and Reena Engineers, who challenged the Kerala Water Authority's (KWA) practice of deducting cess at 1% of the entire contract value.
The court, comprising Chief Justice Soumen Sen and Justice Syam Kumar V.M., emphasized that the cess could not be imposed on components of a contract that solely involve the supply of materials, which are not connected to construction activities. The judgment further stated that the contractual nature of an agreement does not automatically justify a cess on the entire value.
The appellants argued that their contracts included separate components for supply and construction, as evidenced by the item-rate Bill of Quantities (BoQ). They contended that cess should only apply to the construction-related components of their contracts. The court agreed, stating that the statutory scheme of the Cess Act mandates levy on construction costs alone.
The court directed the competent Assessing Authority to determine the actual cess payable by examining the contractual documents and the accepted BoQ. It also instructed that any excess cess collected should be refunded or adjusted in future bills. The decision is expected to have far-reaching implications for construction contracts across Kerala, potentially affecting how cess is calculated and levied in future projects.
The ruling underscores the importance of distinguishing between supply and construction components in contracts and aligns with precedents set by the Supreme Court in similar cases.
Bottom Line :
Levy of cess under the Building and Other Construction Workers Welfare Cess Act, 1996, is confined to the "cost of construction" attributable to building or other construction work and not the entire contract value, including supply components.
Statutory provision(s): Building and Other Construction Workers Welfare Cess Act, 1996; Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996; Building and Other Construction Workers Welfare Cess Rules, 1998; Article 366(29-A) of the Constitution of India.
D. Manoharan v. Union of India, (Kerala)(DB) : Law Finder Doc id # 2965173
