Delhi High Court
Delhi Metro Rail Corporation ... vs Gammon Rizzani (Jv) on 26 August, 2011
Author: Vikramajit Sen
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 8th July, 2011
% Date of decision: 26th August, 2011
+ FAO(OS) 674/2010, CM 21169/2010 & CM 1141/2011
DELHI METRO RAIL CORPORATION LIMITED .....Appellant
Through: Mr. Ankur Gupta, Advocate and
Mr. Tarun Johri, Advocate.
-versus-
SIMPLEX INFRASTRUCTURES LIMITED .....Respondent
Through: Mr. Naresh Markanda, Senior
Advocate with Mr. V.K. Sharma,
Advocate.
with
FAO(OS) 33/2011, CM 1147/2011 & CM 4369/2011
DELHI METRO RAIL CORPORATION LIMITED .....Appellant
Through: Mr. Ankur Gupta, Advocate and
Mr. Tarun Johri, Advocate.
-versus-
GAMMON RIZZANI (JV) .....Respondent
Through: Mr. George Thomas, Advocate and
Mr. Amit George, Advocate.
and
FAO (OS) 674/2010 Page 1 of 42
FAO(OS) 34/2011 & CM 1150/2011
DELHI METRO RAIL CORPORATION LIMITED .....Appellant
Through: Mr. Ankur Gupta, Advocate and
Mr. Tarun Johri, Advocate.
-versus-
GAMMON RIZZANI (JV) .....Respondent
Through: Mr. George Thomas, Advocate and
Mr. Amit George, Advocate.
CORAM:
HON'BLE MR. JUSTICE VIKRAMAJIT SEN
HON'BLE MR. JUSTICE SIDDHARTH MRIDUL
1. Whether reporters of local papers may be allowed to see
the judgment? Yes.
2. To be referred to the Reporter or not? Yes.
3. Whether the judgment should be reported in
the Digest? Yes.
SIDDHARTH MRIDUL, J.
1. The present three Appeals raise a common issue and are,
consequently, being disposed of by this common order.
2. The brief facts giving rise to FAO(OS) No.674/2010 are as
follows:-
(a) A contract was entered into between the parties on
28th December, 2000 for construction of a depot and
workshop at Shastri Park, Delhi.
(b) The salient features of the said contract dated 28th
December, 2000 prescribed `61,87,53,692/- as the
total contract price for execution and completion of
the work and for remedying the defects therein. The
stipulated date for completion of the work was 1st
November, 2002.
(c) Thereafter the work was finally completed by the
Respondent/Claimant on 29th January, 2006.
(d) Subsequently, disputes arose between the parties
for the reason that at the time of making the final
payment to the Respondent/Claimant an amount of
`57,19,257/- was deducted by the Appellant/Delhi
Metro Rail Corporation (DMRC) towards labour cess
and an amount to the tune of `4,08,074/- was
accordingly withheld.
(e) In response to the protest by the
Respondent/Claimant against the deductions, the
Appellant/DMRC vide letter dated 28th August, 2007
conveyed to the Respondent/Claimant that the
deductions were made in view of the statutory
provisions of the Building and Other Construction
Workers‟ Welfare Cess Act, 1996 (hereinafter
referred to as the „Cess Act‟) read with the Building
and Other Construction Workers‟ Welfare Cess
Rules, 1998 (hereinafter referred to as the „Cess
Rules‟) and the Building and Other Construction
Workers‟ (Regulation of Employment and Conditions
of Service) Act, 1996 (hereinafter referred to as the
„BOCW Act‟), which provide for deduction to be
made at 1% of the gross amount of work done.
(f) The Arbitral Tribunal ruled in favour of the
Respondent/Claimant holding that the
Appellant/DMRC was wrong in deducting a sum of
`57,19,257/- towards labour cess from the final bill
payment to be made to the Respondent/Claimant.
(g) The Appellant challenged the Award before the
Single Judge under Section 34 of the Arbitration and
Conciliation Act, 1996(hereinafter referred to as the
„A&C Act‟). The learned Single Judge upheld the
Award of the Arbitral Tribunal stating that the
Award had been correctly passed based on the
decision of the Division Bench Judgment of this
Court in Builders Association of India -vs- Union
of India, (2007) 139 DLT 578.
3. The facts as are relevant for the disposal of FAO(OS)
No.33/2011 and FAO(OS) No.34/2011 are as follows:-
(a) An agreement was entered into between the parties
on 28th April, 2001 for construction of Elevated
Structure (Viaduct) excluding stations on Tri Nagar
- Kohat Enclave Section of Rail Corridor for the
Delhi Metro Rail Transport Service Project of RC2B
- Lot 1, issued by the PCI - PBI - JARTS - TONICHI -
RITES.
(b) The salient features of the subject contract dated
28th April, 2001 provided `72,32,43,172.80 as the
total contract price for execution and completion of
the work and for remedying the defects therein. The
stipulated date for completion of the work was
agreed to be 14th January, 2003.
(c) Thereafter the work on the said project was finally
completed by the Respondent/Claimant on 31st
December, 2003. The final draft bill was submitted
by the Respondent/Claimant on 5th November, 2004,
pursuant to which a completion certificate was
issued by the Appellant/DMRC on 29th March, 2006.
(d) Subsequently, disputes arose between the parties
for the reason that at the time of clearing the final
payment of the Respondent/Claimant an amount of
`74,02,966/- was deducted by the Appellant/DMRC
towards labour cess.
(e) In response to the protest by the
Respondent/Claimant against the deductions, the
Appellant/DMRC vide letter dated 14th January, 2009
conveyed to the Respondent/Claimant that the
deductions were made in accordance with the
statutory guidelines provided by the Cess Act read
with the Cess Rules and the BOCW Act which
provide for deduction to be made at 1% of the gross
amount of work done.
(f) The Arbitral Tribunal unanimously ruled in favour of
the Respondent/Claimant holding that the
Appellant/DMRC was wrong in deducting a sum of
`74,02,966/- towards labour cess from the final bill
payment to be made to the Respondent/Claimant.
(g) The Appellant challenged the Award before the
learned Single Judge under Section 34 of the A&C
Act.
(h) Learned Single Judge upheld the Award of the
Arbitral Tribunal stating that the Award has been
correctly passed on the basis of the decision of the
Division Bench in Builders Association of India
(supra). Learned Single Judge further refused to
interfere with the Award pointing out that the
question in issue has already been dealt with by the
learned Single Judge in great detail while passing
the Judgment dated 7th September, 2011 in Delhi
Metro Rail Corporation Limited -vs- Simplex
Infrastructures Limited, OMP No. 29/2010 (resulting
in FAO (OS) 674/2010).
4. On behalf of the Appellant it has been argued that the
Cess Act and the Cess Rules were already in force in the whole
of India since 1996 and thus the labour cess was charged by the
DMRC on account of the provisions contained therein. The next
contention urged on behalf of Counsel for the Appellant was
that the definition of the „employer‟ provided in the BOCW Act
was vide enough and included the contractor (in the instant
case the Respondent).
5. On the other hand, it was argued on behalf of the
Respondent in FAO(OS) No.674/2010 that in view of the
decision of Division Bench in Builders Association of India
(supra) Circular of DMRC was upheld and, consequently, date
of the operation of the Cess Act and the Cess Rules in Delhi was
1st January 2002 and consequently the subject contract was not
subject to the Cess Act and the Cess Rules.
6. On behalf of the Respondent in FAO(OS) No.33/2011 and
FAO(OS) No.34/2011, it was, inter alia, argued that there was
no illegality in the Award and that the „contractor‟ referred to in
Section 2(1)(g) of the BOCW Act referred to a „contractor‟ in
singular and in the present case since there was a number of
contractors therefore only the owner of the project (in this case
DMRC) was the employer and, consequently, responsible for the
payment of the labour cess under the subject contract.
7. Before considering the relative merits of the rival
contentions, it would be necessary to consider the relevant
provisions of the Cess Act, BOCW Act and the Cess Rules.
(a) The relevant Sections of the Cess Act read as
follows:-
1. Short title, extent and commencement.- (1)
This Act may be called the Building and Other
Construction Workers‟ Welfare Act, 1996.
(2) It extends to the whole of India.
(3) It shall be deemed to have come into force
on the 3rd day of November, 1995.
2. Definitions.- In this Act, unless the context
otherwise requires,-
.......
.......
(d) words and expressions used herein but not
defined and defined in the Building and
Other Construction Workers (Regulation of
Employment and Conditions of Service) Act,
1996 shall have the meanings respectively
assigned to them in that Act.
3. Levy and collection of cess. - (1) There shall
be levied and collected a cess for the purposes of the
Building and Other Construction Workers
(Regulation of Employment and Conditions of
Service) Act, 1996, at such rate not exceeding two
per cent but not less than one per cent of the cost of
construction incurred by an employer, as the Central
Government may, by notification in the Official
Gazette, from time to time specify.
(2) The cess levied under sub-section (1) shall be
collected from every employer in such matter and at
such time, including deduction at source in
relation to a building or other construction work of a
Government or of a public sector undertaking or
advance collection through a local authority where
an approval of such building or other construction
work by such local authority is required, as may be
prescribed.
..............
14. Power to make rules.- (1) The Central
Government may, by notification in the Official
Gazette, make rules for carrying out the provisions of
this Act.
(2) Without prejudice to the generality of the
foregoing power, such rules may provide for all or
any of the following matters, namely:-
(a) the manner in which and the time within
which the cess shall be collected under sub-
section (2) of section3;
(b) the rate or rates of advance cess leviable
under sub-section (4) of section 3;
(c) the particulars of the returns to be
furnished, the officer or authority to whom
or to which such returns shall be furnished
and the matter and time of furnishing such
returns under sub-section(1) of section 4;
(d) the powers which may be exercised by the
officer or authority under section 7;
(e) the authority which may impose penalty
under section 9;
(f) the authority to which an appeal may be
filed under sub-section (1) of section 11 and
the time within which and the form and
manner in which such appeal may be filed;
(g) the fees which shall accompany an appeal
under sub-section(2) of section 11; and
(h) any other matter which has to be, or may
be, prescribed.
(3) Every rule made under this Act shall be laid, as
soon as may be after it is made, before each House of
Parliament, while it is in session for a total period of
thirty days which may be comprised in one session or
in two or more successive sessions, and if, before the
expiry of the session immediately following the
session or the successive sessions aforesaid, both
Houses agree in making any modification in the rule
or both Houses agree that the rule should not be
made, the rule shall thereafter have effect only in
such modified form or be of no effect, as the case
may; so, however, that any such modification or
annulment shall be without prejudice to the validity
of anything previously done under that rule.
(b) The relevant Sections of BOCW Act read as follows:
1. Short title, extent, commencement and
application. - (1) This Act may be called the
Building and Other Construction Workers
(Regulation of Employment and Conditions of
Service) Act, 1996.
(2) It extend to the whole of India.
(3) It shall be deemed to have come into force
on the 1st day of March, 1996.
(4) It applies to every establishment which
employs, or had employed on any day of the
preceding twelve months, ten or more building
workers in any building or other construction work.
Explanation.- For the purposes of this sub-section,
the building workers employed in different relays in a
day either by the employer or the contractor shall be
taken into account in computing the number of
building workers employed in the establishment.
2. Definitions.- (1) In this Act, unless the context
otherwise requires, -
(a) "appropriate Government" means,-
(i) in relation to an establishment (which
employs building workers either directly or
through a contractor) in respect of which
the appropriate Government under the
Industrial Disputes Act, 1947 (14 of 1947),
is the Central Government, the Central
Government;
(ii) in relation to any such establishment, being
a public sector undertaking, as the Central
Government may by notification specify
which employs building workers either
directly or through a contractor, the Central
Government;
Explanation.- For the purpose of sub-
clause (ii), "public sector undertaking"
means any corporation established by or
under any Central, State or Provincial Act
or a Government Company as defined in
section 617 of the Companies Act, 1956 (1
of 1956), which is owned, controlled or
managed by the Central Government;
(iii) in relation to any other establishment
which employs building workers either
directly or through a contractor, the
Government of the State in which that other
establishment is situate;
.................
.................
(g) "contractor" means a person who undertakes to
produce a given result for any establishment,
other than a mere supply of goods or articles of
manufacture, by the employment of building
workers or who supplies building workers for any
work of the establishment; and includes a sub-
contractor;
.................
(i) "employer", in relation to an establishment, means
the owner thereof, and includes,-
(i) in relation to a building or other
construction work carried on by or under
the authority of any department of the
Government, directly without any
contractor, the authority specified in this
behalf, or where no authority is specified,
the head of the department;
(ii) in relation to a building or other
construction work carried on by or on
behalf of a local authority or other
establishment, directly without any
contractor, the chief executive officer of
that authority or establishment;
(iii) in relation to a building or other
construction work carried on by or
through a contractor, or by the
employment of building workers
supplied by a contractor, the
contractor;
18. Constitution of State Welfare Boards.- (1)
Every State Government shall, with effect from such
date as it may, by notification, appoint, constitute a
Board to be known as the ....................(name of the
State) Building and other Construction Workers'
Welfare Board to exercise the powers conferred on,
and perform the functions assigned to it, under this
Act.
(2) The Board shall be a body corporate by the
name aforesaid, having perpetual succession and a
common seal and shall by the said name sue and be
sued.
(3) The Board shall consist of a Chairperson, a
person to be nominated by the Central Government
and such number of other members, not exceeding
fifteen, as may be appointed to it by the State
Government:
Provided that the Board shall include an equal
number of members representing the State
Government, the employers and the building workers
and that at least one member of the Board shall be a
woman.
(4) The terms and conditions of appointment and
the salaries and other allowances payable to the
chairperson and the other members of the Board,
and the manner of filling of casual vacancies of the
members of the Board, shall be such as may be
prescribed.
24. Building and Other Construction
Workers' Welfare Fund and its application.- (1)
There shall be constituted by a Board a fund to be
called the Building and Other Construction Workers'
Welfare Fund and there shall be credited thereto-
(a) any grants and loans made to the
Board by the Central Government
under section 23;
(b) all contributions made by the
beneficiaries;
(c) all sums received by the Board from
such other sources as may be decided
by the Central Government.
(2) The Fund shall be applied for meeting-
(a) expenses of the Board in the
discharge of its functions under
Section 22; and
(b) salaries, allowances and other
remuneration of the members,
officers and other employees of the
Board;
(c) expenses on objects and for purposes
authorised by this Act.
(3) No Board shall, in my financial year, incur
expenses towards salaries, allowances and other
remuneration to its members, officers and other
employees and for meeting the other administrative
expenses five per cent of its total expenses during
that financial year.
(c) The relevant Rules under the Cess Rules read as
follows:
1. Short title and commencement.- (1) These
rules may be called the Building and Other
Construction Workers‟ Welfare Cess Rules, 1998.
(2) They shall come into force on the date of their
publication in the Official Gazette.
____________________
1. Vide G.S.R. 149(E), dated 26th March, 1998,
published in the Gazette of India, Extra., Pt. II,
Sec. 3 (i), dated 26th march, 1998.
.....................
.....................
4. Time and manner of collection.- (1) The
cess levied under sub-section(1) of section 3 of the
Act shall be paid by an employer, within thirty days
of completion of the construction project or within
thirty days of the date on which assessment of cess
payable is finalized, whichever is earlier, to the cess
collector.
(2) Notwithstanding the provisions of sub-rule (1),
where the duration of the project or construction
work exceeds one year, cess shall be paid within
thirty days of completion of one year from the date of
commencement of work and every year thereafter at
the notified rates on the cost of construction incurred
during the relevant period.
(3) Notwithstanding the provisions of sub-
rule (1) and sub-rule (2), where the levy of cess
pertains to building and other construction
work of a Government or of a Public Sector
Undertaking, such Government or the Public
Sector Undertaking shall deduct or cause to be
deducted the cess payable at the notified rates
from the bills paid for such works.
(4) Notwithstanding the provisions of sub-rule (1)
and sub-rule (20, where the approval of a
construction work by a local authority is required,
every application for such approval shall be
accompanied by a crossed demand draft in favour of
the Board and payable at the station at which the
Board is located for an amount of cess payable at the
notified rates on the estimated cost of construction:
Provided that if the duration of the project is likely
to exceed one year, the demand draft may be for the
amount of cess payable on cost of construction
estimated to be incurred during one year from the
date of commencement and further payments of cess
due shall be made as per the provisions of sub-rule
(2).
(5) An employer may pay in advance an amount of
cess calculated on the basis of the estimated cost of
construction along with the notice of commencement
of work under section 46 of the Main Act by a
crossed demand draft in favour of the Board and
payable at the station at which the Board is located:
Provided that if the duration of the project is likely
to exceed one year, the demand draft may be for the
amount of cess payable on cost of construction
estimated to be during one year from the date of
such commencement and further payment of cess
due shall be made as per the provisions of sub-rule
(2).
(6) Advance cess paid under sub-rules (3), (4) and
(5), shall be adjusted in the final assessment made by
the Assessing Officer.
8. On a plain reading of the provisions extracted above the
following emerges:
(a) Simultaneous with the enactment of the BOCW Act,
the Parliament enacted the Cess Act as the means of
generating revenues for making the welfare provisions
contained in the former effective.
(b) The Cess Act came into force throughout the
country on the 3rd day of November, 1995. The Cess Act
provided for the levy of a cess for the purposes of the
BOCW Act at a rate not exceeding 2% but not less than
1% of the cost of construction incurred by the employer,
as the Central Government by notification in the Official
Gazette may specify. Vide Notification dated 26th
September, 1996 of the Ministry of Labour the cess under
the Cess Act was specified @ 1%. The Notification dated
26th September, 1996 of the Ministry of Labour reads as
follows:
"NOTIFICATION
New Delhi, the 26th September, 199
S.O.2899 - In exercise of powers conferred by sub-
section (1) of section 3 of the Building and Other
Construction Workers‟ Welfare Cess Act, 1996 (28 of
1996) and in supersession of the notification of the
Government of India in the Ministry of Labour No.
S.O. 1767 dated the 17th May, 1996 the Central
Government specifies a cess for the purposes of the
Building and Other Construction Workers
(Regulation of Employment and Other Conditions of
Service) Act, 1996 (27 of 1996) at the rate of 1 per
cent, of the cost of construction incurred by an
employer."
(c) It is further stipulated that the cess levied would be
collected from every employer including deductions at
source in relation to a building or other construction work
of a Government or of a public sector undertaking. The
Act permitted the Central Government to make rules for
carrying out provisions of the Cess Act.
(d) The BOCW Act was an Act to regulate the
employment and conditions of service of building and
other construction workers and to provide for the safety,
health and welfare measures and for other matters
connected therewith or incidental thereto. The BOCW Act
came into force throughout India on the 1st day of March,
1996. Under this Act a contractor was defined as a person
who inter alia undertook the employment of building
workers or supplied building workers for any work and
included a sub-contractor. The Act further defined an
employer as including the contractor in relation to a
building or other construction work carried on by or
through a contractor or by the employment of building
workers supplied by a contractor. The Act further
provided that every State Government may by notification
appoint and constitute a board known as the Welfare
Board to exercise the powers conferred on it. The Board
was in turn to constitute a fund to be called the Building
and Other Construction Workers Welfare Fund which was
to receive inter alia all sums from such other sources as
may be decided by the Central Government.
(e) The Cess Rules under the Cess Act came into force
vide their publication in the Official Gazette on the 26th
March, 1998. The Cess Rules provided that where the levy
of cess pertains to building and other construction works
of a Government or public sector undertaking such
Government or public sector undertaking shall deduct the
cess payable at the notified rate from the bills paid for
such work.
9. From a conspectus of the above, it is clear that the Cess
Act was made effective from the 3rd day of November, 1995. It is
further clear that the BOCW Act became effective and
operational from the 1st day of March, 1996 throughout the
territory of India and that the Cess Rules became effective from
the 26th day of March, 1998 in the said territories. In this behalf,
it is observed that it is consequently crystal clear that the
liability to levy cess under the Cess Act, which was a Central Act
in force throughout territory of India, was not dependent on the
constitution of the Welfare Boards contemplated therein. This
view is supported by the decision of Single Judge of the Madras
High Court in Writ Petition No.6174/2010 decided on 30th
March, 2010 reported as M.E.S. Builders' Association of
India -vs- Union of India, wherein the learned Single Judge
concluded that "merely because the State Government has not
constituted a board will not make the petitioner builders not to
pay cess as per the notified enactment", since the Cess Act was
brought into force with effect from 3rd November, 1995 and the
Act mandated under Section 3 for levy and collection of cess. It
is further clear that the cess was leviable on the cost of
construction incurred by the employer and that it was
deductable at source in the case of contractors from the bills
paid for building and construction works.
10. In view of the above, it is observed that it became
incumbent upon the Appellant to deduct the cess from the bills
of the Respondents @2% right from the day the said Act came
into force, that is 3rd November, 1995 and @1% from 26th
September, 1996 under the Notification extracted hereinabove.
In this view of the matter, both the Arbitral Tribunal and the
learned Single Judge fell into error in coming to the conclusion
that the Act came into force in Delhi in the year 2002, after the
contract entered into between the Appellant and the
Respondents in the year 2000 and 2001 respectively.
11. Before proceeding further, it shall be necessary to extract
the relevant portions of the decision of the Division Bench in
Builders Association of India (supra), for disposal of the
present Appeals. In Builders Association of India (supra) the
Division Bench observed:
"17. The principal contentions on behalf of the
petitioners were as follows:
a) The definition of the word "employer" in the
BOCW Act is too wide and can lead to confusion
since it mentions both the owner as well as the
contractor. There is no certainty whether it is owner
or the contractor who is required to pay the cess in a
particular situation. This needlessly leaves it to the
Assessing Officer to pick and choose depending on
who he wants to proceed against. Therefore, the
BOCW Act is bad for vagueness.
(b) The impost levied by the Cess Act is a compulsory
and involuntary exaction, made for a public purpose
without reference to any special benefit for the payer
of the cess. Therefore, it is in effect a tax. In this
context, reliance is placed on the decisions in Kewal
Kishan Puri v. State of Punjab, (1979) 3 SCR 1217
(Paras 7, 8 and 23), Om Prakash Aggarwal v. Giri Raj
Kishori (1987) 164 ITR 376(SC) and State of Uttar
Pradesh v. Vam Organic Chemicals Limited, AIR
2003 SC 4650.
(c) The Cess Act in fact provides for the levy of a tax
although it is termed as cess. No taxation is
permissible, in terms of Article 265 of the
Constitution, without the authority of law. In other
words, the power to make a legislation imposing a
tax has to be traced with reference to a specific entry
in the Lists in the Seventh Schedule to the
Constitution. The subject matter of the present
statute is fully covered by the Entry 49 in List II
(State list) pertaining to "taxes on lands and
buildings" and Therefore, the Parliament lacks
legislative competence to impose a tax on lands and
buildings.
(d) Consequently, recourse cannot be had to the
residual Entry 97 of List I to justify the legislative
competence of Parliament since the subject matter of
the Cess Act is fully covered by any entry in the State
List (List II). Reliance is placed on the judgments of
the Hon'ble Supreme Court in Union of India v. H.S.
Dhillon, (1972) 83 ITR 582(SC), Kunnathat Thathunni
Moopil Nair v. State of Kerala, (1961) 3 SCR 77,
Goodricke Group Limited v. State of West Bengal,
1995 (50) ECC 138 and State of West Bengal v.
Kesoram Industries, (2004) 266 ITR 721(SC) .
(e) The stand of the Union of India in its counter
affidavit that the subject matter of the BOCW Act is
covered by Entries 23 and 24 in List III (concurrent
list) is untenable. Those entries per se cannot save
the invalidity of statue since there is no
corresponding taxation entry in List III.
(f) The Circular 9.1.2006 issued by the DMRC is
invalid since even within the definition of the BOCW
Act it is the DMRC, as a principal employer which is
liable to pay the cess. DMRC has no authority in law
to pass on that liability to the contractor. Even under
Section 3(2), which requires deduction of 1% cess at
source from the bills signifying the cost of
construction, it is the DMRC which has to bear the
liability.
(g) Even in the context of Section 2(d) of the Cess Act
which states that unless the context otherwise
requires the definitions of the BOCW Act would
apply, the definition of cost of construction can only
mean the cost of construction to the employer since
that is the context in which the Cess Act has been
made. So interpreted, the word "employer" can only
mean the employer who owns the establishment and
any other interpretation other than the context would
lead to absurdity. Reliance is placed on (1994) 1 SCR
682, 1998 Cri LJ 2012 and (1981)131 ITR 597(SC).
(h) The cost of construction on which the 1% cess is
levied, invariably would include the profit element.
There cannot be a tax on profits in the garb of
imposition of a cess. That would render the
impugned statutes vulnerable to invalidation on
account of their being 'colourable' pieces of
legislation.
(i) Independent of the above grounds of attack, the
demand for cess is attacked on the ground that there
can never be a demand and collection of tax without
a prior assessment preceded by a show cause notice
and a quasi judicial inquiry. Reliance on this issue is
Bharti Kala Bhandar Limited v. Municipal
Committee, Dhaman Gaon, (1966) 59 ITR 73(SC) and
Municipal Council, Khurai v. Kamal Kumar, (1965) 2
SCR 653.
(j) Since the very nature of most employment in the
construction industry is casual and temporary, and
since the regulatory mechanism envisaged is wholly
inadequate to make it workable, the BOCW Act is a
bad law. It is pointed out that, in the context of
migrant labour, there is no centralized system of
registration whereby a labourer could carry his or
her registration irrespective of the State in which he
or she seeks employment. Further, given that the
cess sought to be collected is meant for the benefit of
workers, there must be a machinery to ensure that
such benefit reaches the workers. At present there is
no such machinery. It is further suggested that since
the Act itself is unworkable little purpose would be
served in collecting cess at this stage.
............................
.............................
Summary of conclusions
38. (i) The subject matter of the Cess Act is the
activity of building and construction, the object is to
augment the Welfare Fund under the BOCW Act and
the essential purpose is to benefit the building and
construction worker. The 'ultimate or incidental
results or consequences' might be that contractors
have to part with 1% of the bill amount towards the
cess. However, that does not detract from either the
'primary object' of the Cess Act or its 'essential
purpose.' Applying the Hingir Rampur tests, it has to
be held that the Cess Act cannot be construed to be a
tax at all.
(ii) It is accordingly held that the petitioners have
failed to show that the subject matter of the Cess Act
falls under any entry in List II or List III. Therefore
the subject matter of the Cess Act is within the
legislative competence of Parliament with reference
to Entry 97 of List I. This part of the discussion is
concluded by negativing the challenge by the
petitioners to the validity of the Cess Act on the
ground of lack of legislative competence.
(iii) The main object of the present statute being the
augmentation of revenues for the welfare of
construction workers, there is nothing arbitrary or
unreasonable in such a classification of construction
activities and the requirement of deduction of cess at
source towards settlement of bills of contractors
working for government departments and state
agencies. The submission is that classification is
discriminatory or arbitrary is without basis and is
rejected as such.
(iv) The fact that there is deduction of cess at source
without a prior assessment cannot render it illegal so
long as it remains adjustable against any final
liability that may be determined at the end of the
assessment.
(v) The circulars have correctly understood the law
and are consistent with the Rules. This is not a case
of excessive delegation to the state agency or the
DMRC.
(vi) While the criticism of the absence of an effective
centralized mechanism to reach the benefits of the
cess collected to the building and construction
worker may be justified, that does not impinge on the
validity of the levy of the cess itself."
12. The above decision, which was canvassed strongly on
behalf of the Respondent and was the basis for the decision of
the Arbitral Tribunal as well as the learned Single Judge,
decided the constitutional validity of the BOCW Act, the Cess
Act, the Cess Rules as well as the Delhi Building and Other
Construction Workers (Regulation of Employment and
Conditions of Service) Rules, 2002 (in short „Delhi Rules‟). The
challenge in this decision to the statute was by the contractors,
who had entered into construction contracts with public sector
undertakings. From a conspectus of the submissions made on
behalf of the contractors and the summary of conclusions in that
case, it is abundantly clear that issue regarding the coming into
operation of the Cess Act, the BOCW Act and the Cess Rules did
not come up for consideration and was not determined in the
said decision. The mention by the Division Bench of the BOCW
Act and the Cess Act not being notified for application in Delhi
till 2002 was in relation to the concern expressed by the Bench
in that decision at the delayed implementation of the welfare
enactments. This allusion to the BOCW Act and the Cess Act
was in the context of the Rules under Section 62 of the BOCW
Act having been brought into force in Delhi only on 10th January,
2002, and the consequential delay in setting up the
infrastructure and machinery and constituting the Board under
the Act and setting up the Welfare Fund as was mandated under
the said BOCW Act. Further, contrary to what was urged on
behalf of the Respondents, in its summary of conclusions, the
Division Bench came to conclusion that "the „ultimate or
incidental results or consequences„ might be that contractor
have to part with 1% of the bill amount towards the cess". It
further concluded that "there is nothing arbitrary or
unreasonable in such a classification of construction activities
and the requirement of deduction of cess at source towards
settlement of bills of contractors working for government
departments and state agencies". Thus, this Judgment reiterates
that the contractors in relation to a building or other
construction works of a Government or public sector
undertaking would be liable to have the cess deducted at the
notified rates from their bills paid for such works, and inferring
that the contractors, which included sub-contractors, fell
squarely within the definition of employer in relation to such
building or other construction works carried on by them.
13. In Gannon Dunkerley and Co. Ltd. -vs- State of
Madhya Pradesh, reported as 2009 (5) MPHT 258, a Single
Judge of the Madhya Pradesh High Court at Jabalpur, dealing
with the issue of interpretation of the expression „employer‟ in
the Cess Act and the Cess Rules, held that "the intention of the
Legislature is, therefore, not only to include the owner of the
establishment in the present case the Company but also the
Contractors who carries out the work of building or other
construction work and is an employer for the purpose of the
Construction Workers Act, 1996 and the Cess Act, 1996. Thus,
there is no escape for the contractors who have undertaken the
building and other construction work in the establishment
belonging to the Company".
14. In view of the above discussion, there is no force in the
submissions made on behalf of the Respondents, which found
support from the Arbitral Tribunal and the learned Single Judge
that the liability to pay cess was of the Appellant and not of the
Respondents.
15. It was then argued on behalf of the Respondents that the
contractor referred to in Section 2(1)(g) of the BOCW Act was
„contractor‟ in singular and in the present case since there were
number of contractors, therefore only the owner of the project,
in this case the Appellant, was responsible for payment of the
cess under the subject contract. There is no substance in this
submission for the reason that the definition of contractor in the
BOCW Act includes a sub contractor. Consequently, all the
contractors or their sub contractors, as may be, who employ or
supply building workers for any building or other construction
work carried on on behalf of the public sector undertakings, are
covered within the definition of employer within the meaning as
ascribed to it under the BOCW Act.
16. In Oil and Natural Gas Corporation Limited -vs- SAW
Pipes Limited, AIR 2003(SC) 2629, the Supreme Court had
occasion to consider whether a Court would have jurisdiction
under Section 34 of the A&C Act to set aside an award passed
by the Arbitral Tribunal which is patently illegal or in
contravention of the provisions of the Act or any other
substantive law governing the parties or is against the terms of
the contract. The Supreme Court observed:
"12. The question, therefore, which requires
consideration is-- whether the award could be set
aside, if the arbitral tribunal has not followed the
mandatory procedure prescribed under Sections 24,
28 or 31(3), which affects the rights of the parties"
Under Sub-section (1)(a) of Section 28 there is a
mandate to the arbitral tribunal to decide the dispute
in accordance with the substantive law for the time
being in force in India. Admittedly, substantive law
would include the Indian contract Act, the Transfer
of Property Act and other such laws in force.
Suppose, if the award is passed in violation of the
provisions of the Transfer of Property Act or in
violation of the Indian Contract Act, the question
would -- whether such award could be set aside?
Similarly, under Sub-section (3), arbitral tribunal is
directed to decide the dispute in accordance with the
terms of the contract and also after taking into
account the usage of the trade applicable to the
transaction. If arbitral tribunal ignores the terms of
the contract or usage of the trade applicable to the
transaction, whether the said award could be
interfered? Similarly, if the award is non-speaking
one and is in violation of Section 31(3), can such
award be set aside? IN our view, reading Section 34
conjointly with other provisions of the Act, it appeals
that the legislative intent could not be that if the
award is in contravention of the provisions of the Act,
still however, it couldn't be set aside by the Court. If
it is held that such award could not be interfered, it
would be contrary to basic concept of justice. If the
arbitral tribunal has not followed the mandatory
procedure prescribed under the Act, it would mean
that it has acted beyond its jurisdiction and thereby
the award would be patently illegal which could be
set aside under Section 34.
13. The aforesaid interpretation of the Clause (v)
would be in conformity with the settled principle of
law that the procedural law cannot fail to provide
relief when substantive law gives the right. Principle
is -- there cannot be any wrong without a remedy. In
M.V. Elisabeth and others v. Harwan Investment &
Trading Pvt. Ltd., 1993 Supp(2) SCC 433, this Court
observed that where substantive law demands justice
for the party aggrieved and the statute has not
provided the remedy, it is the duty of the Court to
devise procedure by drawing analogy from other
systems of law and practice. Similarly, in Dhanna Lal
v. Kalawatibai and others, (2002) 6 SCC 16, this
Court observed that wrong must not be left
unredeemed and right not left unenforced.
14. Result is - if the award is contrary to the
substantive provisions of law or the provisions of the
Act or against the terms of the contract, it would be
patently illegal, which could be interfered under
Section 34. However, such failure of procedure
should be patent affecting the rights of the parties.
WHAT MEANING COULD BE ASSIGNED TO THE
PHRASE 'PUBLIC POLICY OF INDIA'?
15. The next clause which requires interpretation is
Clause (ii) of Sub-section 2(b) of Section 34 which
inter alia provides that the Court may set aside
arbitral award if it is in conflict with the 'Public
Policy of India'. The phrase 'Public Policy of India' is
not defined under the Act. Hence, the said term is
required to be given meaning in context and also
considering the purpose of the section and scheme of
the Act. It has been repeatedly stated by various
authorities that the expression 'public policy' does
not admit of precise definition and may vary from
generation to generation and from time to time.
Hence, the concept 'public policy' is considered to be
vague, susceptible to narrow or wider meaning
depending upon the context in which it is used.
Lacking precedent the Court has to give its meaning
in the light and principles underlying the Arbitration
Act, Contract Act and Constitutional provisions.
22. The aforesaid submission of the learned senior
counsel requires to be accepted. From the judgments
discussed above, it can be held that the term 'public
policy of India' is required to be interpreted in the
context of the jurisdiction of the Court where the
validity of award is challenged before it becomes
final and executable. The concept of enforcement of
the award after it becomes final is different and the
jurisdiction of the Court at that stage could be
limited. Similar is the position with regard to the
execution of a decree. It is settled law as well as it is
provided under Code of civil Procedure that once the
decree has attained finality, in an execution
proceeding, it may be challenged only on limited
grounds such as the decree being without
jurisdiction or nullity. But in a case where the
judgment and decree is challenged before the
Appellate Court or the Court exercising revisional
jurisdiction, the jurisdiction of such Court would be
wider. therefore, in a case where the validity of
award is challenged there is no necessity of giving a
narrower meaning to the term 'public policy of India'.
On the contrary, wider meaning is required to be
given so that the 'patently illegal award' passed by
the arbitral tribunal could be set aside. If narrow
meaning as contended by the learned senior counsel
Mr. Dave is given, some of the provisions of the
Arbitration Act would become nugatory. Take for
illustration a case wherein there is a specific
provision in the contract that for delayed payment of
the amount due and payable, no interest would be
payable, still however, if the Arbitrator has passed an
award granting interest, it would be against the
terms of the contract and thereby against the
provision of Section 28(3) of the Act which
specifically provides that "arbitral tribunal shall
decide in accordance with the terms of the contract".
Further, where there is a specific usage of the trade
that if the payment this made beyond a period of one
month, then the party would be required to pay the
said amount with interest at the rate of 15 per cent.
Despite the evidence being produced on record for
such usage, if the arbitrator refuses to grant such
interest on the ground of equity, such award would
also be in violation of sub-sections (2) and (3) of
Section 28. Section 28(2) specifically provides that
arbitrator shall decide ex aequo et bono [according
to what is just and good] only if the parties have
expressly authorised him to do so. Similarly, if the
award is patently against the statutory provisions of
substantive law which is in force in India or is passed
without giving an opportunity of hearing to the
parties as provided under Section 24 or without
giving any reason in a case where parties have not
agreed that no reasons are to be recorded, it would
be against the statutory provisions. In all such cases,
the award is required to be set aside on the ground
of 'patent illegality'.
31. Therefore, in our view, the phrase 'Public Policy
of India' used in Section 34 in context is required to
be given a wider meaning. It can be stated that the
concept of public policy connotes some matter which
concerns public good and the public interest. What is
for public good or in public interest or what would be
injurious or harmful to the public good or public
interest has varied from time to time. However, the
award which is, on the face of it, patently in violation
of statutory provisions cannot be said to be in public
interest. Such award/judgment/decision is likely to
adversely affect the administration of justice. Hence,
in our view in addition to narrower meaning given to
the term 'public policy' in Renusagar's case (supra) it
is required to be held that the award could be set
aside if it is patently illegal. Result would be - award
could be set aside if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.
Illegality must go to the root of the matter and if
the illegality is of trivial nature it cannot be held that
award is against the public policy. Award could also
be set aside if it is so unfair and unreasonable that it
shocks the conscience of the Court. Such award is
opposed to public policy and is required to be
adjudged void."
17. From the reading of the above decision of the Supreme
Court, it is clear that under Sub-section 1(a) of Section 28 of
A&C Act there is a mandate to the Arbitral Tribunal to decide
the dispute in accordance with the substantive law in force in
India. Consequently, if the award is contrary to substantive
provisions of law, it would be patently illegal and could be
interfered with under Section 34 of the A&C Act. The Supreme
Court after defining the phrase „Public Policy of India‟, used in
Section 34, and requiring it to be of wider meaning, observed
that an award which is on the face of it patently in violation of
statutory provisions cannot be said to be in public interest and
can be set aside on the ground of being patently illegal.
18. The above statement of law was approved and reiterated
by the Supreme Court in McDermott International Inc. -vs-
Burn Standard Co. Ltd., (2006) 11 SCC 181; Centrotrade
Minerals & Metals Inc. -vs- Hindustan Copper Ltd., (2006)
11 SCC 245; Hindustan Zinc Ltd. -vs- Friends Coal
Carbonisation, (2006) 4 SCC 445; Delhi Development
Authority -vs- R.S. Sharma & Company, (2008) 13 SCC 80;
and Steel Authority of India Limited -vs- Gupta Brother
Steel Tubes Limited, (2009) 10 SCC 63.
19. From the above discussion, we observe that the Arbitral
Tribunal as well as the learned Single Judge erred in law while
allowing the claims of the Respondents and dismissing the
Objections respectively filed by the Appellant, and failed to
appreciate that the BOCW Act, the Cess Act and the Cess Rules
had come into operation on 1st March, 1996, 3rd November, 1995
& 26th March, 1998 respectively. Therefore, the finding of the
Arbitral Tribunal as well as the learned Single Judge to the
effect that they came into effect on 10th January 2002 in the
State of Delhi is contrary to the specific provisions of the above
enactments themselves. Consequently, the decision arrived at
by the Arbitral Tribunal was patently illegal and contrary to the
public policy of India and deserved to be interfered with in the
proceedings under Section 34 of the A&C Act. The Arbitral
Tribunal as well as the learned Single Judge further failed to
appreciate that the above enactments came into force prior to
the contracts entered into between the Appellant on the one
hand and Respondents on the other and, therefore, could not
have been termed as subsequent legislations. The Arbitral
Tribunal as well as the learned Single Judge also fell into error
insofar as a finding was reached that the aforesaid Acts were
brought into force by the Delhi Rules in 2002, which had no
relevance to the statutory levy and collection of the cess under
the mandate of the Cess Act. The Cess Act had statutory force
and came into effect throughout India on 3rd November, 1995
and any circular or notice issued by any Government or any
organization including the Appellant herein with respect to the
date of its enforcement would have no meaning, inasmuch as,
the Cess Act being a Central Act, the date of its enforceability
could not be postponed or determined by any State Government
or any other organization. Finally, the Arbitral Awards and the
impugned Orders are erroneous for the reason that they failed
to take into consideration the aspect that the Appellant was
liable to deduct at source cess at the notified rate from the bills
for building and other construction works of the Respondent
contractors from the date the Cess Act came into force i.e. 3rd
November, 1995.
20. For the above reasons, the Appeals are allowed and the
impugned Orders dated 7th September, 2010 in OMP
No.29/2010 and 23rd November, 2010 in OMP No.693/2010 and
OMP No.694/2010 respectively, are set aside. Further, in the
circumstances, the respective Arbitral Awards are also set aside
and the Registry is directed to refund to the Appellants, the
amounts deposited by the Appellant in pursuance to the Orders
of this Court dated 26th November, 2010 in FAO(OS)
No.674/2010 and 19th January, 2011 in FAO(OS) No.33/2011 and
FAO(OS) No.34/2011 respectively, with any interest that may
have accrued thereon.
No costs.
All pending applications stand disposed of.
SIDDHARTH MRIDUL, J.
VIKRAMAJIT SEN, J.
AUGUST 26, 2011
mk
