The Supreme Court has upheld a series of arbitral awards directing reimbursement of Building and Other Construction Workers (BOCW) cess deducted from payments made to contractors executing national highway projects, holding that the BOCW Act, 1996 and the Building and Other Construction Workers’ Welfare Cess Act, 1996 could be treated as “subsequent legislation” under NHAI contracts where the statutory machinery for levy and utilisation of cess was not operational at the relevant time.
The appeals arose from multiple highway construction contracts awarded by the National Highways Authority of India (NHAI) across different States, including Uttar Pradesh, Jharkhand and Bihar. Under the contracts, bidders were required to factor in the cost of existing taxes and levies as on the bid submission date, while any additional financial burden arising from “subsequent legislation” was contractually reimbursable.
Although the BOCW Act and the Cess Act had formally come into force in 1995-96, the contractors contended that, in practical terms, the statutory framework remained dormant for several years due to the failure of State Governments to constitute Welfare Boards, appoint cess-collecting authorities, frame rules, or create mechanisms for assessment, collection and utilisation of the cess. It was argued that effective enforcement began only years later, after bids had been submitted and contracts awarded.
NHAI resisted the claims, contending that once the Acts came into force, they could not be treated as “subsequent legislation”. It was argued that the liability to pay cess existed from the date of enactment, irrespective of administrative delays in implementation, and that contractors were expected to factor such statutory liabilities into their bids.
The arbitral tribunals rejected NHAI’s stand, holding that a legislation which exists only on paper, without operational machinery, cannot be treated as an enforceable levy. The tribunals found that in the absence of functional Welfare Boards and notified authorities, there was no legal or practical obligation on contractors to pay cess at the time bids were submitted. Accordingly, they held that the later operationalisation of the Acts constituted “subsequent legislation” within the meaning of the contract, entitling contractors to reimbursement.
Challenges to the arbitral awards under Sections 34 and 37 of the Arbitration and Conciliation Act were dismissed by the High Courts, prompting NHAI to approach the Supreme Court.
Affirming the awards, the Bench of Justice Sanjay Kumar and Justice Alok Aradhe noted that the BOCW Act and the Cess Act were enacted with a specific welfare objective but remained largely unimplemented for years and became operational only after sustained judicial intervention. Referring to its earlier monitoring orders, including in National Campaign Committee for Central Legislation on Construction Labour (NCC-CL) v. Union of India, (2018) 5 SCC 607, the Court observed that the failure of States and Union Territories to constitute Welfare Boards or appoint competent authorities had rendered the statutory framework ineffective in practice.
For the levy of cess to be constitutionally and legally valid, there must exist a functional mechanism for the collection, administration and utilisation of the funds for the intended purpose.
The Court observed that mere enactment of the statutes was insufficient to trigger enforceability. In several States, Welfare Boards were constituted years later, rules were framed belatedly, and cess-collecting authorities were appointed long after bids were finalised. Until that point, the levy was incapable of implementation and enforcement. The Court noted that:
“The Cess Act could not have been given effect in a vacuum before constitution of Welfare Boards under the BOCW Act, as augmenting of ‘Welfare Board resources’ cannot arise even before such Boards came into existence.”
Rejecting NHAI’s argument that statutory force alone was determinative, the Court held that effective implementation, not formal enactment, was the relevant benchmark for contractual purposes. It emphasised that enforcing cess during a period when no welfare machinery existed would strip the levy of its essential character and potentially render it an impermissible tax.
The Bench further held that the arbitral tribunals had adopted a plausible and legally sustainable interpretation of the contract and statutory framework. It reiterated that courts exercising jurisdiction under Sections 34 and 37 cannot re-appreciate evidence or substitute their own interpretation.
The Supreme Court also rejected NHAI’s attempt to rely on a uniform date of implementation across States, noting that the factual matrix differed depending on when each State operationalised the statutory machinery. It held that entitlement to reimbursement had to be examined contract-wise and State-wise, based on evidence of actual implementation timelines.
Accordingly, the Supreme Court dismissed the appeals filed by NHAI against the High Court orders affirming arbitral awards in favour of Gammon-Atlanta (JV), PCL Suncon (JV), NKG Infrastructure Ltd., Hindustan Construction Co. Ltd. and DIC-NCC (JV). However, allowing the appeal filed by Prakash Atlanta (JV), the Court held that neither the executing court nor the appellate court was justified in holding it liable to pay cess under the BOCW Act and the Cess Act in respect of a contract entered into in 2001 and terminated in 2008, based on the Government of Uttar Pradesh’s notification issued in 2009. The Court accordingly set aside the impugned orders in that case and directed NHAI to release the amount adjusted from payments due to Prakash Atlanta (JV).
Appearances
Petitioners- Ms. Aishwarya Bhati, A.S.G. Ms. Neetica Sharma, Adv. Mr. Naman Saraswat, Adv. Ms. Manisha Chava, Adv. Mr. Ram Money, Adv. Mr. A.P. Singh, Adv. Mr. Vikas Soni, Adv. Mr. Tavinder Sidhu, Adv. M/s. M.V. Kini & Associates, AOR Mr. Nakul Dewan, Sr. Adv. Mr. Chirag M. Shroff, AOR Mr. Dhananjay Kataria, Adv. Mr. Chanchal Kumar Ganguli, AOR Mr. Manish Bishnoi, Adv. Ms. Gunjan Sinha Jain, Adv. Ms. Muskaan Gopal, Adv.
Respondents- Mr. V. Giri, Sr. Adv. Mr. Mahesh Agarwal, Adv. Mr. Victor Das, Adv. Mr. Vipul Singh, Adv. Ms. Shruti Arora, Adv. Ms. Nidhi Sri, Adv. Ms. Aishwarya Mishra, Adv. Mr. E.C. Agrawala, AOR, Mr. Chirag M. Shroff, AOR Mr. K. Parameshwar, Sr. Adv. Mr. M.V. Mukunda, Adv. Mr. N. Sai Kaushal, Adv. Mr. Nishanth Patil, AOR Mr. R. Sathish, AOR Mr. Rajesh Kumar, Adv. Mr. K.K. Mohan Das, Adv. Mr. Mathan Joseph, Adv. Mrs. S. Geetha, Adv. Mr. Chanchal Kumar Ganguli, AOR Mr. Manish Bishnoi, Adv. Ms. Gunjan Sinha Jain, Adv. Ms. Muskaan Gopal, Adv. Mr. Arjun Raghavendra M., Adv. Mr. Dhaval Deshpande, Adv. Mr. Amir Arsiwala, AOR Mr. Divyansh Jain, Adv. Mr. Stephin George, Adv. Mr. Akanksha Jain, Adv. Mr. Apoorv Saini, Adv. Mr. Subhasish Bhowmick, AOR Mr. Deepak Kumar, Adv.
