CAG Report Can't Be Basis For Recovery Of Cess Without Statutory Adjudication : Supreme Court

The Supreme Court has held that there cannot be a recovery of cess solely on the basis of the report of the Comptroller and Auditor General (CAG) without any statutory adjudication process.

A division bench comprising Justice UU Lalit and Justice Indira Banerjee upheld a judgment of Allahabad High Court which had quashed the orders issued by the Uttar Pradesh Power Transmission Corporation Ltd (UPPTCL) directing a contractor to remit Labour Cess amounting to Rs.2,60,68,814/-.

The UPPTCL had issued the orders purportedly under Sections 3 sub-section (1) and (2) of the Building and Other Construction Workers' Welfare Cess Act, 1996.

The contractor, CG Power and Industrial Solutions Ltd, approached the Allahabad High Court challenging the UPPTCL demand for cess arguing that the contracts in question did not involve any construction work and therefore do not attract cess under the BOCWWC Act. While there were other contracts with UPPTCL involving construction work, the subject contracts did not involve any construction work, the contractor contended.

Prior to the UPPTCL's demand for cess, there was an audit inspection by the Audit Officer under the Senior Accountant General during the period from 4th June 2016 to 9th June 2016. In the Audit Report, the Accountant General pointed out the lapse on the part of UPPTCL, in not deducting labour cess from the bills of the contractor. Following that, the UPPTCL wrote to the contractor, informing it about the CAG audit, and asking it to remit the cess amount.

The High Court accepted the submission of the contractor that in the absence of levy and assessment under the Cess Act 1996 and the Rules made thereunder, the letters of the UPPTCL were not sustainable in law. Cess could only be recovered in the manner stipulated in the Cess Act and the Rules framed thereunder. The High Court observed that if cess were leviable under the Cess Act, it would be necessary for the concerned authorities to undertake the exercise of assessment and levy of cess under the Cess Act of 1996 as amended,before the same could be realized from a contractor. The High Court found that in the absence of any order for levy and assessment under the Cess Act of 1996 recovery could not be made pursuant to an audit objection of CAG.

Supreme Court approves High Court findings

The Supreme Court rejected the appeal filed by the UPPTCL against the High Court judgment.

The top court noted that Cess under the Cess Act read with BOCW Act is leviable in respect of building and other construction works. The condition precedent for imposition of cess under the Cess Act is the construction, repair,demolition or maintenance of and/or in relation to a building or any otherwork of construction, transmission towers, in relation inter alia to generation, transmission and distribution of power, electric lines, pipelines etc. Mere installation and/or erection of pipelines, equipments for generation or transmission or distribution of power, electric wires,transmission towers etc. which do not involve construction work are not amenable to Cess under the Cess Act.

The Court further noted that a contractor who enters into a pure Supply Contract is statutorily exempted from levy under the BOCW Act. The Contract in question is a Supply Contract.

It noted that the levy was solely based on the CAG objection. In the absence of an adjudication under the Act, such a levy is impermissible.

"...UPPTCL demanded and partly realized cess on the supply Contract, solely on the basis of report of the CAG. In our considered view, in the absence of any adjudication, it was impermissible for UPPTCL to issue the impugned communication to realize cess solely on the basis of the report of the CAG", the judgment authored by Justice Banerjee stated.

"UPPTCL has changed its stand only after the CAG report. Cess in respect of of the First Contract has been deducted only in view of the audit objection raised by the Office of Comptroller and Auditor General (CAG)"

The Court also held that the mere existence of an alternate remedy in the form of arbitration was not a bar to exercise writ jurisdiction as the impugned acts were patently illegal.

"In this case, the action of UPPTCL in forcibly extracting building cess from the Respondent No.1 in respect of the first contract, solely on the basis of the CAG report, is in excess of power conferred on UPPTCL by law or in terms of the contract. In other words, UPPTCL has no power and authority and or jurisdiction to realize labour cess under the Cess Act in respect of the first contract by withholding dues in respect of other contracts and/or invoking a performance guarantee. There is no legal infirmity in the finding of the High Court that UPPTCL acted in excess of power by its acts impugned, when there was admittedly no assessment or levy of cess under the Cess Act.

Even otherwise, the Cess Act and/or statutory rules framed thereunder prescribe the mode and manner of recovery of outstanding cess under the Cess Act. It is well settled that when statute requires a thing to be done in a particular manner, it is to be done in that manner alone. UPPTCL could not have taken recourse to the methods adopted by it. The impugned communications have rightly been set aside"

Case Details

Case Title : Uttar Pradesh Power Transmission Corporation Ltd and another vs CG Power and Industrial Solutions Ltd and another

Coram  : Justices UU Lalit and Indira Banerjee

Citation : LL 2021 SC 270

Click here to read/download the judgment