1. business and industrial
2. construction

CESS OR STRESS? UNDERSTANDING THE ISSUES SURROUNDING THE BUILDING AND OTHER
CONSTRUCTION WORKERS’
By: Ranjit Prakash, Arun Mani and Anshuman Pande*
ABSTRACT:
This article seeks to examine the problems regarding the implementation of the Building and Other Construction
Workers' (Regulation of Employment and Conditions of Service) Act, 1996 (the "BOCW Act") [1] and the Building and
Other Construction Workers' Welfare Cess Act, 1996 (the "BOCW Cess Act").[2] A number of issues regarding the
implementation of the BOCW Act and the BOCW Cess Act (collectively termed as the "Acts") have arisen in recent
times, particularly regarding their application to the projects and infrastructure space. Some of the issues have been
adjudicated upon, while some are as yet sub judice. Moreover, there have been conflicting interpretations relating
certain important provisions of the Acts, some of which are sought to be addressed in this article.
COVERAGE AND SCHEME OF THE ACTS:
The BOCW Act is stated to be a social welfare legislation that aim to benefit workers engaged in "building and
construction" activities across the country. The preamble of the BOCW Act explicates the said purpose:
"An Act to regulate the employment and conditions of service of building and other construction workers and to
provide for their safety, health and welfare measures and for other matters connected therewith or incidental thereto."
It may thus be seen that the ambit of the BOCW Act is wide, particularly in a country where the infrastructure and
construction sectors have seen significant growth and employ a large number of people which were hitherto
unregulated. Welfare Boards were to be set up state-wide under the BOCW Act with a view towards carrying out
welfare measures for the building and construction workers across the state. Moreover, the BOCW Act also
envisaged comprehensive health, welfare and safety measures to be applicable to a building and construction site
and which were to be implemented by the ‘employer' as defined in the BOCW Act.[3] The object of the BOCW Act as
well as its framework is analogous to other labour law legislations, but in particular, the BOCW Act is similar to the
Contract Labour (Regulation and Abolition) Act, 1970 ("CLRA") and the Factories Act, 1948 ("FA48"). Indeed, at a
practical level, it is noticed that many state-level labour and industrial authorities utilize concepts from the CLRA and
the FA48, especially for provisions that may overlap.[4]
The BOCW Cess Act has been framed as a complementary legislation to the BOCW Act and for the purpose of
"augmenting the resources" of the Welfare Boards set up under the BOCW Act. The BOCW Cess Act envisages the
levy of a cess of a minimum of 1% of the "cost of construction", to be paid by the ‘employer' to the state authorities.[5]
The cess so recovered is to be used for carrying out the statutory functions of the various state-level Welfare Boards.
Finally, rules have been framed for operationalising and setting out the procedures to be followed under the Acts.
Rules have been framed by the central government for both Acts;[6] however, states are free to promulgate their own
rules and many states have proceeded to draft their state-level rules closely aligned to the rules framed by the central
government.
MEANING OF THE TERM ‘EMPLOYER'[7]
The definition of the term ‘employer' has been provided under Section 2(i) of the BOCW Act and states as follows:
"(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."
(Underlining supplied)
For the private projects and infrastructure sector, the underlined portion, taken together implies that the ‘employer'
means an owner of an establishment and includes a contractor. This confusion is further compounded if the definition
of a ‘contractor' is observed under Section 2(g) of the BOCW Act:
"(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."
(Underlining supplied)
Taken together, therefore, an ‘employer' under the BOCW Act may include either one or more of the following:
- the owner (usually the project proponent); and/or
- the contractor, using or supplying building workers; and/or
- the sub-contractor of the contractor, using or supplying building workers.
Pertinent to mention herein is the fact that the role of the ‘employer' is important under the Acts. Among other things,
the ‘employer' is responsible for the following (inter-connected) actions:
(i) registration of the site under the BOCW Act, to enable it to engage building workers;[8]
(ii) overall compliance with the provisions of health, safety and welfare measures stipulated under the Acts and the
various rules thereunder; and
(iii) payment of cess under the Cess Act.
Since the definition of an ‘employer' under the BOCW Act can mean either the owner, contractor or a sub-contractor,
the two scenarios that may emerge therefore is:
(a) either any one of the three may register themselves as an ‘employer' under the BOCW Act (in the case of
infrastructure projects, it may practically be the owner due to its overall control over the project); or
(b) both the owner as well as the contractors (including sub-contractors) may register themselves as ‘employer' under
the BOCW Act, based on the number of the building workers and the respective scope of works.
The latter scenario appears to be the one favoured by most labour authorities and even the various High Courts since
it ensures that the coverage of the stipulations is broad-based, particularly with respect to the cess and penalties for
non-compliances are collective. To this end, the Hon'ble High Court of Delhi, in the case of Builders Association of
India & Ors. v. Union of India & Ors.[9] held that:
"There appears to be a definitive scheme in the definition itself. A range of choices has been made available to the
government for levying cess and the intention is not to confine it only to the owner of a building or the person
expending for the construction. The idea is to seek to levy and collect the cess from the contractor or the owner as
the case may be. It is not possible to accept the [..] submission that both the contractor and the owner would be taxed
vis-à-vis the same construction activity."
(Emphasis supplied)
For the sector, there may also be some merits in the latter scenario, particularly in the turnkey projects space wherein
the owner usually employs lesser building and construction workers than its turnkey contractor/sub-contractors and it
may make more sense for the person actually carrying out construction activities to be liable under the Acts.
However, practical difficulties have arisen due to the imposition of the cess under the BOCW Cess Act over the
‘employer' as defined under the BOCW Act. Since the cess is leviable over the ‘cost of construction' i.e. all
expenditures incurred by the ‘employer'[10] (an aspect which would be examined in detail further), the authorities
would have to calculate the ‘cost of construction' for each particular ‘employer' registered under the BOCW Act to
calculate the corresponding amounts of cess. This shall be difficult in contracts wherein a turnkey contractor
manages the entire works on-site on behalf of the owner (in which case, the cost of construction shall substantially
overlap) or, correspondingly, where a sub-contractor manages a portion of the works on behalf of a larger contractor.
The owner or even the turnkey contractor may predominantly be in a supervisory capacity and employ only a few
building workers but may still be obligated to pay a larger amount of cess than other subcontractors. Regarding the
health, safety and welfare obligations under the BOCW Act and the rules framed thereunder, such measures are
inter-linked between parties on project sites and in a case of a large number of contractors and sub-contractors, it is
difficult to demarcate and hold one contractor/sub-contractor responsible for the compliances. The solution for the
owner and the contractors to avoid inter-se disputes can be to make provisions in the contracts to demarcate such
obligations. However, this would still leave the question of "which party shall be liable qua the authorities in case of
non-payment of cess and non-compliance with the BOCW Act?" In case of multiple employers registered with the
authorities, differentiation of obligations, it is reiterated, shall have to be crucial and shall not be helped with parties
trying to downplay their own obligations and amplifying the obligations of the others - particularly since noncompliances may lead to criminal and civil penalties under the Acts.
In an infrastructure project, the project proponent, turnkey contractor and/or other contractors have differentiated
responsibilities and scope of works. The ambiguities in the BOCW Act, in the opinion of the authors, arise from
categorizing all of the said entities as ‘employer' and thereafter, making the ‘employer' solely responsible for all of the
obligations under the Acts - obligations which are practically diverse and usually "passed down" vide "back-to-back"
arrangements amongst all the entities involved in the project. It shall be the job of the authorities to distinguish
obligations and the ‘cost of construction' from the contracts and thereafter demarcate liabilities. This, in turn, may lead
to allegations of misapplication and miscalculation of the ‘cost of construction.'
Therefore, it is the opinion of the authors that scenario (a), wherein only the owner of the project registers itself as an
‘employer', appears to be a more practical proposition to overcome such ambiguities. Since all activities on-site are
being carried out for the owner, the owner shall be in the most desirable vantage point to supervise and ensure
compliances of the BOCW Act and the most authoritative ‘cost of construction' for the cess shall be, in any case, the
‘cost of construction' from the owner's perspective. In other words, the "first point of responsibility" would be that of
the owner. In a sense, this scenario is akin to the concept of one "principle employer" under the CLRA. Under the
CLRA, the "principal employer" registers the site with the labour authorities and verifies the registration of the
‘contractor.' The CLRA envisages that the health, welfare and payment obligations vis-à-vis the contract labour shall
be primarily that of the ‘contractor'[11] but also makes the "principal employer" liable to "step-in" into the shoes of the
contractor in-case the ‘contractor' fails to carry out such obligations. This approach is attractive from the point of view
of practicality and convenience - while the ‘contractor' under the CLRA has the primary liability of ensuring the welfare
of his employees and has exhaustive registration requirements, the "principal employer" is the overall site in-charge
(by virtue of the registration of the site by the "principal employer") and is also enjoined to supervise compliance by
the contractor and to make good any failures arising out of the contractors' default.[12] The "principal employer" shall
ensure adherence by contractors by providing appropriate compliance obligations in the contracts.
In fact, it is argued that this aspect of the CLRA is already becoming a part of the BOCW Act as explicated by the
Hon'ble High Court of Punjab & Haryana in Adani Agri Logistics Ltd. v. State of Haryana.[13]In the aforesaid decision,
the Court had stated that the owner cannot be excluded from the coverage of the BOCW Cess Act and the cess shall
be recoverable from the owner, in case no other party pays the same. The owner was held to be free to recover the
amount from the contractor, vide inter-se arrangements. In fact, in the said case, the Hon'ble Court even went so far
as to justify the above stand by stating that the "role of the owner was akin to the role of principal employer under the
scheme of the Contract Labour (Regulation and Abolition) Act, 1970." States like Punjab have already added the term
‘principal employer' in its rules framed under the BOCW Act[14] and more states may follow.[15]
CONNOTATIONS TO THE TERM ‘COST OF CONSTRUCTION'
Section 3(1) of the BOCW Cess Act states as follows:
"(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 Services) 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."
Moreover, Rule 3 of the Building and Other Construction Workers Welfare Cess Rules, 1998 states as under:
"3. Levy of cess. - For the purpose of levy of cess under sub-section (1) of section 3 of the Act, cost of construction
shall include all expenditure incurred by an employer in connection with the building or other construction work but
shall not include- cost of land;
- any compensation paid or payable to a worker or his kin under the Workmen's Compensation Act, 1923."
Relying on the above-mentioned definitions, a Division (two-judge) Bench of the Hon'ble High Court of Madhya
Pradesh pronounced judgments in two similar writ petitions namely M/s G.V.P.R. Engineers Limited v. State of
Madhya Pradesh & Others and M/s Technical Associates Limited v. The Assistant Labour Commissioner, Jabalpur &
Others.[16] The judgments were similar in their ruling and based on similar facts. For construction of various projects
in Madhya Pradesh, the civil/erection contractors for electrical works entered into turnkey agreements with the
owners. The turnkey agreements, in the price clauses, differentiated between the prices of civil works and supply
works. The owners of the said contractors were public sector enterprises. The owners deducted, from the bills
submitted by the contractors, the building and construction cess on the entire contract price (i.e. the price including
both the service and supply portions). The said contractors contended that the cess was deductable only on the
service portion of the contract price and not on the supply portion. The owners and the state government disagreed.
The High Court, holding in favour of the employers, opined as under:
"A joint reading of the above quoted Section 3 and Rule 3 shows that cess levied not less than one per cent of the
cost of construction incurred by the petitioners as employers is payable by them. The cost of construction cannot
be divided in parts, as argued by the petitioners, into supply portion and erection portion. Even the cost for
supply portion is incurred by the petitioners and cannot be separated from the total cost incurred (in the price clause
of the contract). The cess is on the total cost of construction. The definition of cost of construction in Rule 3
excludes only cost of land and any compensation paid or payable to worker or his kin under the Workmen's
Compensation Act, 1923. The expression "expenditure" in Rule 3 does not obviously include cost of land even so it is
specifically excluded in the proviso to the Rule. If the intention of the Cess Act and Cess Rules was to exclude
the cost of supply part, it would have been referred in Rule 3 where exceptions are provided."
(Emphases supplied)
In essence, the High Court held that ‘cost of construction' would include costs incurred by the contractors for both the
service as well as the supply portions. In fact, all scope of works not specifically excluded by Rule 3 of the BOCW
Cess Act would be included in the ‘cost of construction.' The High Court appears to have been guided by a plethora
of decisions of the Hon'ble Supreme Court as well as other High Courts which have conclusively stated that labour
legislations, which have social welfare as their purpose, have to be interpreted in broad terms and interpretations that
shall result in greater inflows of the cess should be encouraged.[17] It may be pertinent to add herein that the practice
of splitting infrastructure contracts into service and supply contracts is a well-entrenched one in India. In fact,
contracts may be further split into "off-shore" and "on-shore" contracts for services and supplies, usually with
"umbrella agreements" for tying in the contracts.
It is the respectful opinion of the authors that the ratio decidendi of the Hon'ble High Court of Madhya Pradesh
overlooks certain important points:
(i) Section 2(d) of the BOCW Act provides the definition of "building and other construction work" (which was also
noted by the High Court). The said section is reproduced below:
"2(d) "building or other construction work" means the construction, alteration, repairs, maintenance or
demolition, of or, in relation to buildings, streets, roads, railways, tramways, airfields, irrigation, drainage,
embankment and navigation works, flood control works (including storm water drainage works), generation,
transmission and distribution of power, water works (including channels for distribution of water), oil and gas
installations, electric lines, wireless, radio, television, telephone, telegraph and overseas communications, dams,
canals, reservoirs, watercourses, tunnels, bridges, viaducts, aqueducts, pipelines, towers, cooling towers,
transmission towers and such other work as may be specified in this behalf by the appropriate Government, by
notification but does not include any building or other construction work to which the provisions of the Factories Act,
1948 or the Mines Act, 1952 apply."
(Emphasis supplied)
Pertinent to note that the emphasized portion specifically uses terms like ‘construction', ‘alteration', ‘repairs',
‘maintenance' or ‘demolition' and does not include terms even ejudsem generis to supply. The focus of the BOCW
Act and even the rules framed thereunder, is entirely upon the welfare measures for workers engaged in such
activities and arguably, there are no measures specific to workers engaged purely in supply activities. This invariably
leads to the interpretation that the scope of the definition of "building or other construction work" was only restricted to
erection and construction services (and their cognates like demolition) and did not include other services like supply.
(ii) Usually, in large infrastructure projects, portions of services and supplies may be carried out "off-shore", i.e.
manufacturing and fabrication may be carried out overseas and thereafter, imported into India. This is especially
pertinent to supplies. By holding that ‘cost of construction' includes all costs incurred by the employer, the cess would
also be incurred on such off-shore costs. Since the stated intention of the BOCW Cess Act is the augmentation of the
funds of the Welfare Boards set up for domestic workers who work for the sector in India, it is debatable whether
levying cess on the off-shore element was envisaged under the BOCW Cess Act.
(iii) Finally, the applicability of the BOCW Act (and by extension, the BOCW Cess Act) was over sites that had ten
(10) or more workers (whether hired directly or through contractors) employed in "building or other construction
works" (Section 1(4) of the BOCW Act). Personnel involved in supply for construction projects are mostly ‘off-site' (in
transportation, warehousing etc), with only a minimal involvement of ‘on-site' personnel - generally in unloading the
supplies on-site. It may be argued that the impact of the said decision may be to include even personnel engaged in
manufacturing and transporting the supplies - which class of workers are not covered under the Acts and indeed,
shall not be allowed to benefits from the state-level Welfare Boards.[18]
CONCLUSION
The biggest difficulty in comparing the Acts to legislations like the CLRA and the FA48 is that the latter legislations
are well-entrenched and backed by a catena of precedents explaining most ambiguities therein. The Acts, on the
other hand, remained virtual ‘dead letters' from 1996 to the latter part of the first decade when the provisions of the
Acts started being implemented by various states. Even now, most infrastructure contracts do not provide for the inter
se arrangements relating to cess payable by a project and such factors lead to ambiguities and may increase the
scope for disputes.
The authors anticipate that greater clarity will follow with greater implementation of the Acts. However, there are
ambiguities in the Acts - two of which have been highlighted above. There is a need for the legislature or the Hon'ble
Supreme Court of India to clarify the same expeditiously for better implementation of the Acts and for the sector to
attain clarity on the issues.
REFERENCES
* Ranjit Prakash is a Partner at HSA Advocates and heads its Project Advisory and Alternate Dispute Resolution
practice. Arun Mani is a Senior Associate and Anshuman Pande is an Associate at the firm - both are part of the
firms Project Advisory group. The authors would like to acknowledge the contributions of Prakhar Bhardwaj of the
National Law University, Jodhpur. They can be contacted at mail@hsalegal.com
[1] Act number 27 of 1996
[2] Act number 28 of 1996
[3] The ambiguities surrounding the meaning of the term ‘employer' has been examined subsequently in this article.
[4] It may be noted that the Hon'ble High Court of Orissa in the matter of Sterlite Energy Limited v. State of Orissa &
Ors. [reported at 2011 III LLJ 349 (DB)] has held that the provisions of the Factories Act, 1948 and the BOCW Act do
not over-lap, holding that the BOCW Act applies to factories under construction while the Factories act, 1948 is
generally applicable to completed factories. However, we understand that similar issues are being agitated before the
Hon'ble High Court of Chhattisgarh in matter number WP (T) 7484/2010 [titled KSK Mahanadi v. State of
Chhattisgarh & Ors.] and the matter is currently sub judice. Unusually, the Hon'ble Supreme Court of India vide its
1999 judgment in the matter of Lal Mohammad v Indian Railway Construction [reported at (1999) 1 SCC 596] held
that construction of a railway line of 54 km length constituted a "factory" under the FA48. It is assumed that since the
facts in the said matter occurred prior to 1996, hence the BOCW Act was not cited or discussed by the Hon'ble Court,
even though it was in force. The authors are of the respectful opinion that, with the coming into force of the BOCW
Act, the said ratio may be distinguishable on facts.
[5] Section 3(1) of the BOCW Cess Act read with Rule 3 of the Building and Other Construction Workers Welfare
Cess Rules, 1998. Please note that under Section 2(d) of the BOCW Cess Act, all terms which have not been defined
in the said act are to have the meaning under the BOCW Act. The issues with respect to the term "cost of
construction" have been examined subsequently.
[6] Refer to the Building and Other Construction Workers' (Regulation of Employment and Conditions of Service)
Central Rules, 1998 and the Building and Other Construction Workers Welfare Cess Rules, 1998.
[7] The definitions of "building worker" (Section 2(e) of the BOCW Act) and ‘establishment' (Section 2(j) of the BOCW
Act), although important for a holistic understanding of the BOCW Act, have not been discussed, being beyond the
scope of this article.
[8] Section 7 of the BOCW Act.
[9] Reported at (139) 2007 DLT 578 (DB)
[10] Rule 3 of the Building and Other Construction Workers Welfare Cess Rules, 1998.
[11] Like the BOCW Act, the definition of a ‘contractor' under Section 2(c) of the CLRA includes a sub-contractor.
[12] Qua the contractor, the principal employer is entitled to recover all expenses arising out of the principal employer
making good the defaults - refer to Ss. 20 and 21 of the CLRA.
[13] Reported at 2010 LLR 762.
[14] Punjab Building and Other Construction Workers' (Regulation of Employment and Conditions of Service) Rules,
2008.
[15] It may be added herein that under the Building and Other Construction Workers' (Regulation of Employment and
Conditions of Service) Central Rules, 1998, the form for registration of a building and construction site (Form I) is to
be stamped and signed by a "principal employer" thus leading to a conclusion that scenario (a) was actually
envisaged under the BOCW Act. However, there is no separate definition of a "principal employer" in the BOCW Act
itself.
[16] Writ Petitions 7303/2011 and 3956/2009 respectively. We understand that the said decision of the Hon'ble High
Court may soon be challenged in the Hon'ble Supreme Court of India. However, until such time as the decision is
confirmed or reversed, the decision is binding in the state of Madhya Pradesh.
[17] Workmen v. American Express Banking Corporation [reported at AIR 1986 SC 458]. The said case was also
quoted with approval in the Sterlite case (supra, n.4).
[18] Arguably, the sourcing of supplies from registered manufacturing units shall imply that the workers engaged in
manufacturing would have, in any case, been covered under other extant industrial and labour legislations.
Source: http://www.legal500.com/c/india/developments/23798