Labor Cess Inapplicable To Material Supply And Consultancy Charges: Jharkhand High Court

The Jharkhand High Court has ruled that Labor Cess should not be imposed on the supply of materials and consultancy charges for a contract that is different from civil works contracts. This decision came after the State appealed against a ruling made by a Single Judge Bench on June 13, 2022. The Single Judge Bench had stated that Labor Cess is not applicable to the supply of materials and consultancy charges for a contract that is distinct from civil works contracts.The State argued that the Single Judge Bench should not have taken up the case under Article 226 of the Indian Constitution, as there was an alternative option available under Section 11 of the Building and Other Construction Workers Welfare Cess Act, 1996 (Cess Act), along with Section 14 of the Building and Other Construction Workers Welfare Cess Rules, 1998. However, the Jharkhand High Court agreed with the Single Judge's conclusion that two separate contracts existed and rejected the State's appeal.The State-appellants contended that the writ petition filed under Article 226 of the Constitution of India could not have been entertained by the Single Judge, as an alternative remedy was available under Section 11 of the Building and Other Construction Workers Welfare Cess Act, 1996, along with Section 14 of the Building and Other Construction Workers Welfare Cess Rules, 1998.According to the State's representative, the deduction of Labour Cess needed to cover the entire project's cost, encompassing supply, consultancy charges, and engineering. This led the appellant and Jharkhand Urja Sancharan Nigmal Limited (JUSNL) to rightfully deduct the Cess amount from the contractor-writ petitioner's bills.The respondent-writ petitioner had a singular contract with JUSNL, covering material supply, erection, and commissioning of SubStations. Thus, the State's representative argued that the entire work should be treated as a unified construction, comprising consultancy charges, material supply, and engineering.The State-appellants asserted that the contract should not have been divided in this scenario. They considered the objection raised by the Principal Accountant General (Audit), Jharkhand, and decided to deduct the amount from the contractor-writ petitioner's bills based on the overall construction cost, including supply, consultancy, and engineering. The actions of JUSNL were deemed correct by the State's representative. The Single Judge's ruling was criticized for not considering these aspects in granting directions in paragraph 30 of the order.The Senior Counsel representing the writ petitioner-respondent argued that the respondent JUSNL had contracted with the petitioner-respondent for constructing Electric Grid Sub Stations in Jharkhand. This construction involved multiple elements such as material supply, equipment, consultancy services, and transmission line erection. Separate agreements were in place for material supply and Grid Sub Station erection, with differing payment terms. As per the Building and Other Construction Workers Welfare Cess Act, 1996, Cess could only be applied to the construction and erection component, excluding material supply and consultancy.The respondents were accused of wrongly deducting Cess from material supply and consultancy components, beyond the construction and erection portion. The Single Judge acknowledged this error and directed the refund. The Senior Counsel relied on the Supreme Court's judgment in Uttar Pradesh Power Transmission Corporation Ltd. & Another vs. CG Power and Industrial Solutions Limited & Another (2021) SCC OnLine SC 383.Verdict of the Single JudgeThe Single Judge conducted a thorough analysis of the agreement and contract, determining that it was necessary for the parties to establish two distinct contracts. The first contract pertained to the supply of equipment, materials, including spares, as well as the associated tasks of loading, transportation, delivery at the site, transit insurance, unloading, storage, and on-site handling. The second contract was focused on electrical and civil works.It was deemed essential that the price bids for both contracts be itemized to ensure clarity in the figures for material and equipment supply, as well as for the provision of services. This detailed breakdown was crucial for the proper awarding of the contract.The Single Judge also identified that separate agreements had been executed between the parties for each of the distinct contracts. Specifically, LoA No.16 dated 21.02.2019 pertained to the supply of materials, while LoA No.20 dated 21.02.2019 was specific to erection and civil works.Further examination revealed the existence of a purchase order and a work order concerning the comprehensive task of designing, engineering, material supply, equipment provision, erection, testing, and commissioning of a Grid Sub-Station at Bahragora, Jamua, and Chandankyari on a turnkey basis. The purchase order, identified as P.O. No.02 C.E.(T)/J.U.S.N.L. dated...

Labor Cess Inapplicable To Material Supply And Consultancy Charges: Jharkhand High Court

Bhavya Singh

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