1% Construction Cess Only On Actual Construction Cost, Not Entire Contract Value: Kerala High Court

The Kerala High Court on 19 August held that 1% cess under the Building and Other Construction Workers Welfare Cess Act, 1996 can be levied only on the portion of a composite works contract attributable to the actual “cost of construction” and not on the entire contract value.

A Division Bench comprising Chief Justice Soumen Sen and Justice Syam Kumar V.M. passed the ruling while disposing of a batch of 18 writ appeals filed by Class A registered work contractors of the Kerala Water Authority (KWA). The judges held:

"A plain reading of Section 2(1)(d) of the Regulation Act shows that "water works" and "pipelines" are specifically included within the ambit of "building or other construction work". Therefore, there can be no dispute that the projects undertaken by the appellants, when viewed as a whole, fall within the scope of the Regulation Act and are consequently covered by its provisions."

The appellants were engaged in laying pipelines and in the supply, erection, testing and commissioning of water distribution systems. KWA had deducted 1% cess from the entire contract value, including amounts attributable to the supply of pipes, machinery, equipment and other materials.

The contractors contended that their item-rate Bill of Quantities (BoQ) contracts separately identified construction activities and supply components. Relying on the Supreme Court's ruling in Uttar Pradesh Power Transmission Corporation Ltd. v. CG Power and Industrial Solutions Ltd., they argued that cess could not be imposed on pure supply components that did not constitute “building or other construction work”.

KWA, however, argued that the contracts were composite and indivisible works contracts and that the supply of materials formed an integral part of executing the projects. It relied on the tender conditions authorising deduction of 1% towards the Kerala Construction Workers Welfare Fund.

The High Court held that the projects undertaken by the contractors, including the laying of pipelines and development of water distribution infrastructure, fell within the statutory definition of “building or other construction work” under Section 2(1)(d) of the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996. However, it clarified that this did not mean that cess could automatically be imposed on the entire contract value.

The Bench emphasised that Section 3 of the Cess Act provides for levy on the “cost of construction” and not on the “contract value”. It held that the composite nature of a contract does not, by itself, make every component forming part of the contract liable to cess.

It noted that the accepted BoQ separately identified and valued various components, including civil construction activities, machinery, laboratory equipment and other allied items. It held that separately identifiable supply components could not automatically be treated as part of the cost of construction merely because they were incorporated into a composite contract.

Further, the Court held that contractual clauses authorising deduction of cess could not enlarge the scope of the charging provision under the Cess Act. Similarly, the Rules framed under the Act could not be interpreted to permit levy on components that did not constitute the statutory “cost of construction”.

It clarified that it had not itself determined which individual items would be liable to cess. Instead, it directed the competent Assessing Authority to examine the contracts, accepted BoQ, specifications and other relevant material and recompute the cess payable. It held:

"Merely because a contract is structured as an item-rate BoQ Contract, it does not cease to be a composite works contract. Equally, the mere existence of a composite works contract does not automatically render every item comprised therein liable to cess", the Court said.

The Bench also clarified that deductions made from contractors' bills under Rule 4(3) of the Cess Rules were provisional and did not attain finality. The contractors would be entitled to furnish returns and place relevant material before the Assessing Authority for determining their actual cess liability. If any amount was found to have been recovered in excess of the legally payable cess, the Court directed that it be refunded or adjusted against future bills, at the contractor's option.

Accordingly, the High Court directed the entire recomputation exercise to be completed within two months from receipt of the judgment, with any refund found payable to be made within a further one month.

For the Appellants: Advocate N. Krishnaprasad and other counsel appearing for the work contractors.

For the Respondents/Kerala Water Authority: Standing Counsel for the Kerala Water Authority.