The Apex Court Clarifies: Time of Commencement of Cess Liability under the Building and Other Construction Workers’ Laws

[Khyati Maurya and Saransh Sood are fourth-year B.A. LL.B. Students at Gujarat National Law University.]

Introduction

In a significant ruling affecting the construction and infrastructure sector in India, the Supreme Court of India in Prakash Atlanta (JV) v. National Highways Authority of India (the Judgement) clarified an important question concerning the levy of construction worker welfare cess under the Building and Other Construction Workers’ Welfare Cess Act, 1996. (the Cess Act) The Court categorically held that cess under the 1996 Cess Act cannot be levied or collected until the State Welfare Boards, as contemplated under the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 (‘BOCW Act’), have been established and made operational.

Infrastructure projects in India, both greenfield and brownfield, are usually undertaken by way of concession agreements, wherein the state or central government or a body established by it (Concession-Granting Authority or Grantor) grants exclusive rights for the construction and collection of revenue from a project to a private entity (Concessionaire) against the payment of a pre-determined amount.

In recent years, following the enactment of the Cess Act and BOCW Act, it was a common practice for concession-granting authorities to deduct around 1% of the total project amount at the time of granting the concession lease as construction worker welfare cess under the Cess Act. It is this practice that was in question before the Supreme Court in the present case. The apex court clarified that such a deduction could only be made in cases where the State Welfare Boards have been established and were operational at the time of signing the agreement. In this backdrop, this piece aims to analyse this Judgement and underscore the practical implications of the same.

Background of the Case

In government infrastructure contracts, including those executed by the National Highways Authority of India, standard bidding conditions usually require contractors to comply with all applicable laws and to include in their bid price all taxes, duties and levies existing as on a specified cut-off date. NHAI contracts usually stipulate that any duties, taxes, or levies payable “28 days prior to the deadline for submission of bids” must be factored into the contractor’s quoted rates.

Such contracts also contain a “Subsequent Legislation” clause. This provides that if, after the cut-off date, any new law is introduced or any change occurs in existing laws that causes additional cost to the contractor, such cost shall be reimbursed by the government authority through an adjustment in contract price. The purpose of this clause is to protect contractors from unforeseen statutory burdens that arise post the submission of the bid.

In the present case, the Appellants had entered into a contract with the Respondents in the early 2000s. However, the State Welfare Boards under the BOCW Act were constituted in the majority of the states post the conclusion of such contracts, i.e. between 2008- 2010 (¶¶54-55 of the Judgement).

The contractors contended that although the statute had existed since 1995, it had not been operationally implemented in most States until many years later, i.e. post 2010. Accordingly, actual enforceability arose only when State Governments constituted Welfare Boards and notified assessment mechanisms. The contractors emphasised that the Cess Act is not an independent taxing statute but a welfare-oriented fee linked directly to the functioning of Welfare Boards. Thus, they argued that the cess was not payable at the time of the entry into force of the agreements, and hence could not have been included in their quoted price. The contractors thus demanded payment of the welfare cess from NHAI under the ‘subsequent legislation’ clause.

However, the NHAI argued that both the BOCW Act and the Cess Act had come into force in 1996 and were national legislations applicable throughout India. Accordingly, the contractors were presumed to know the law and ought to have accounted for the 1% cess in their bids. It further relied upon Rule 4(3) of the Building & Other Construction Workers’ Welfare Cess Rules, 1998 (the 1998 Rules) to contend that deduction at source was mandatory for government projects.

The question before the Court was, therefore, whether the Cess could be levied only post the constitution of the State Welfare Boards, or was it an existing levy since the enactment of the statute in 1996.

Statutory Provisions Governing Levy and Collection of Cess

The BOCW Act, 1996, is a welfare legislation aimed at regulating employment conditions of building and construction workers and ensuring their health, safety, and social security. Section 18 of the BOCW Act mandates every State Government to constitute a Building and Other Construction Workers’ Welfare Board (State Welfare Board). These Boards are required to create welfare funds, register workers as beneficiaries, and administer benefits such as medical assistance, pensions, and other social security measures.

In order to ensure proper functioning of the State welfare Boards and ensure that they have adequate funds to discharge their functions, the Building and Other Construction Workers’ Welfare Cess Act, 1996, has been enacted. The sole purpose of the Cess Act is to generate financial resources for the State Welfare Boards constituted under the BOCW Act.

Section 3(1) of the Cess Act authorises the levy of a cess at a rate between one and two per cent of the cost of construction incurred by an employer of such construction workers. Further, Section 3(2) of the Cess Act authorises the state or central government to deduct this cess at the source, i.e. at the time of signing the concession agreement itself. Section 3(3) of the Cess Act, read with the 1998 Rules, requires the cess so deducted to be transferred to the State Welfare Boards within a period of thirty days.

From the foregoing provisions, it is evident that the entire scheme of the Cess Act and the rules framed thereunder is premised on the prior existence of an operational State Welfare Boards capable of receiving and utilising the cess funds. The legislation envisions the presence of adequate functional State Welfare Boards as a necessary precondition for enforceability and levy of the welfare Cess.

Answering a similar question to the one before the court, the Supreme Court in Dewan Chand Builders v. Union of India (2011), had observed that in Delhi, the Cess Act became operative only in 2002 when relevant rules were notified, and the Delhi Welfare Board was constituted.

However, an ambiguity arose when in the case of A. Prabhakara Reddy v. State of Madhya Pradesh (2015), the Supreme Court held that cess could be levied even if actual benefits to workers had not yet commenced. Although in the facts of the 2015 case, the state welfare board was constituted, it was relied upon by the respondents to argue that the levy does not depend on mechanism for enforcement of the BOCW Act and once the statute has been notified, the Cess could legally be levied and collected irrespective of the actual flow of benefits to the workers.

The Judgement

The division bench of the apex court noted that the very purpose of the Cess Act is to augment the resources of Welfare Boards constituted under the BOCW Act. If no such Boards existed, there was no legal entity to which the cess could be transferred.

The judgment noted that until the constitution of the State Welfare boards, there was a complete absence of assessing officers, cess collectors, and mechanisms for deposit and utilisation. In such a scenario, the inclusion of the cess amount in the bidding documents by the Appellants would have resulted in their unjust enrichment.

The Court further reasoned that Rule 4(3) of the 1998 Rules, which permits deduction at source by government agencies, must be read together with Rule 5 of the 1998 Rules requiring transfer of amounts to the Welfare Board. If no Board existed, even deductions made under Rule 4(3) of the 1998 Rules could not be deposited with the State Welfare Boards. Therefore, operational implementation of the entire framework was a condition precedent for the enforceability of the levy.

Applying these principles to the question before it, the Court concluded that implementation of cess in various States post the conclusion of the contracts is a “subsequent legislation” and that the contractors were entitled to reimbursement of cess deductions on the projects. The Court distinguished A. Prabhakara Reddy v. State of Madhya Pradesh on the ground that, in the present case, the State Welfare Boards had not been constituted at all however, in Prabhakara Reddy, although the Welfare Board had been duly constituted, statutory benefits did not reach the workers because they had not been registered with the Board. Thus, the factual matrix in the present case reflected a more fundamental failure of statutory compliance.

In practical terms, the ruling establishes that the relevant date for cess liability is not the date of enactment of the 1996 laws but the date on which a particular State actually operationalised them by constituting State Welfare Boards.

Significance and Conclusion

The decision in Prakash Atlanta v. NHAI is a landmark pronouncement that brings much-needed clarity on the effective implementation of the Building and Other Construction Workers’ Welfare Cess and its classification as “subsequent legislation” in public infrastructure contracts. The ruling assumes particular significance for contracts executed between 1996, i.e. when the BOCW and Cess Acts were enacted and the period around 2008–2010, i.e. when most States finally constituted their Welfare Boards under the BOCW Act. The Supreme Court has authoritatively clarified that the Worker Welfare Cess, levied at the rate of one per cent of the project cost, cannot be treated as an existing statutory liability unless the relevant State Welfare Board was constituted and operational on the date of bidding or signing of the contract.

In practical terms, the judgment enables contractors to shift the financial burden of the cess to the concession-granting authority under the “subsequent legislation” clause, where the statutory machinery was not in place at the relevant time. This has far-reaching implications, particularly because infrastructure contracts are typically long-term arrangements with concession periods of 20–25 years. As a result, a large number of contracts executed during the 1996–2010 period continue to remain in force today, and disputes concerning cess deductions are still active.

The ruling also holds significance for the special statutes providing for the levy and collection of the cess or duty for any particular purpose, since the same cannot be levied or collected unless an adequate mechanism for the fulfilment of the concerned objective is established by the central or state governments.