Uttar Pradesh Power Transmission Corporation Ltd. & Anr. v. CG Power and Industrial Solutions Limited & Anr.
Background
UPPTCL engaged CG Power (formerly Crompton Greaves) to build a 765/400 kV power substation in Unnao, splitting the work into four separate contracts: supply of equipment, erection/commissioning, civil works, and operation & maintenance. Years later, a government audit (CAG) flagged that UPPTCL had failed to deduct "labour cess" (a welfare levy on construction costs under the Building and Other Construction Workers' Welfare Cess Act) from the supply contract specifically, even though it had already been paid on the civil-works contract. UPPTCL then tried to recover about Rs. 2.6 crore by withholding payments and threatening to encash CG Power's bank guarantee, without ever actually assessing the cess through the legally prescribed process; the Allahabad High Court struck down UPPTCL's demand letters, and UPPTCL appealed to the Supreme Court.
Decision Breakdown
The Supreme Court held that the labour cess under the Cess Act and BOCW Act applies only to genuine "building or other construction work," and that a pure supply contract for equipment and materials, which does not involve construction or deploy construction workers, falls outside the Act's definition of "contractor" and is not subject to the cess. The Court also held that even if cess had been properly due, UPPTCL could not simply recover it by unilaterally withholding bills or invoking a bank guarantee; the law requires a formal assessment and levy process, and recovery must follow the specific procedure laid down in the Cess Act and Rules. The Court further held that a CAG audit observation alone cannot be treated as conclusive proof of liability, since CAG reports are themselves subject to parliamentary scrutiny and are not binding findings. The appeal was dismissed and the High Court's order quashing UPPTCL's demand was upheld.
Lesson Learnt
A government statutory cess can only be levied and recovered through the exact procedure the law prescribes, an auditor's objection is not a substitute for a proper assessment, and even in a composite project, each distinct type of contract (such as supply versus construction) must be examined on its own terms to see whether a given levy actually applies to it.