Building & Construction Workers' Cesss Can't Be Collected From Developers If Welfare Boards Not Established : Supreme Court

In a major relief to the infrastructural developers, the Supreme Court on Tuesday (January 20) held that no cess can be collected from the developers under the Building and Other Construction Workers' Welfare Cess Act, 1996 until the establishment of the Welfare Boards for the construction workers under Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996.

“…the constitution of Welfare Boards is the sine qua non for giving effect to the BOCW Act and the Cess Act and the cess in connection therewith could not have been levied or collected before the constitution of such Welfare Boards.”, observed a bench of Justices Sanjay Kumar and Alok Aradhe, while dismissing the appeal filed by the National Highways Authority of India against the Delhi High Court's judgment, which had upheld the arbitral award directing NHAI to reimburse the cess deducted from the contractors' bills, even though the Welfare Boards under the BOCW Act had not yet been constituted.

The bench was dealing with a batch of civil appeals arising out of arbitral awards passed in favour of contractors executing highway projects for NHAI. The dispute centred on whether cess deducted by NHAI from contractors' bills could be justified under the contracts and whether the contractors were entitled to reimbursement.

Affirming the arbitral award which directed the NHAI to reimburse the cess amount deducted from the contractor's bill, the judgment authored by Justice Sanjay Kumar said that the BOCW Act is a welfare legislation intended to safeguard the rights and conditions of construction workers, while the Cess Act is complementary to it, providing the financial mechanism to fund the Welfare Boards. Without the constitution of Welfare Boards under Section 18 of the BOCW Act, there could be no meaningful collection or utilisation of cess.

The Court criticized the Central Government, the States and Union Territories for not implementing the BOCW Act stating that “it is the established position that no effective steps were taken either by the Central Government or by the Governments of the States/UTs in this country to implement the provisions of the BOCW Act and the Cess Act until they were prodded to do so..”

“In the absence of such machinery, the question of levying and collecting cess cannot logically arise.”, the court said, adding that “the failure to effectively implement the BOCW Act and the Cess Act has to be laid squarely at the door of the authorities, i.e., the Central Government and the Governments of the States/UTs concerned.”

The appeal was dismissed, directing the NHAI to release the amount that has been adjusted from the amounts payable by it to the contractor in relation to the arbitral award, along with interest payable thereon as per the said award.

Headnote

Arbitration — Setting aside of Award — Patent Illegality and Public Policy — Interpretation of Contract: The Supreme Court affirmed that the construction and interpretation of contractual terms are primarily within the jurisdiction of the arbitral tribunal - If an arbitrator adopts one of two plausible interpretations, the court cannot substitute its own view merely because an alternative view is possible - An award is not "patently illegal" or against "public policy" simply because of a mere contravention of law; it must violate fundamental principles of justice. [Paras 26, 29, 33, 59]

Labor Law — The Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 (BOCW Act) and The Building and Other Construction Workers' Welfare Cess Act, 1996 (Cess Act) — Implementation and Levy: Held, that although the BOCW Act and Cess Act were enacted in 1996, they remained "dormant" in various states until the necessary machinery, specifically the Welfare Boards under Section 18, was constituted - The constitution of Welfare Boards is a sine qua non (condition precedent) for the levy and collection of cess - While the registration of workers is not a prerequisite for collecting cess, the existence of a Board to receive and utilize the funds is essential. [Paras 36, 50, 59]

Contractual Interpretation — Subsequent Legislation Clause: In contracts where the bid was submitted before the actual implementation of the BOCW machinery in a specific State, the introduction of cess collection via subsequent State Notifications/Rules qualifies as "subsequent legislation." - Contractors could not have factored in the 1% cess component in their bids when no mechanism for collection existed at the time of submission (28 days prior to the bid deadline). [Relied on A. Prabhakara Reddy and Company vs. State of Madhya Pradesh and others (2016) 1 SCC 600; Paras 38, 51, 52]

Retrospective Application of Cess — Execution Proceedings: Noted that in the case of Prakash Atlanta (JV), the Court held that NHAI could not unilaterally deduct cess during execution proceedings for a contract that was terminated in 2008, based on a State notification issued in 2010 - Such a deduction was an "afterthought" and lacked contractual or statutory basis for retrospective application to a closed contract. [Paras 43, 54, 60]

Cause Title: M/S NATIONAL HIGHWAYS AUTHORITY OF INDIA VS. M/S GAMMON ATLANTA (JV) (AND CONNECTED MATTERS)

Citation : 2026 LiveLaw (SC) 71

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