Is Building Cess Really Applicable to Factories Before Manufacturing Starts?

This is Ramu working in the manufacturing industry (Cement). My query is that we have received notices from the Joint Commissioner of Labor to pay building cess on the construction value. The BOCW Act is not applicable to the Factories Act as well as the Mines Act, although there was a provision in the BOCW Act. However, labor department authorities are stating that before the commencement of the manufacturing process, it is not a factory; hence, you are liable to pay building cess. The machinery value is also included in the construction value as per their notice.

Is building cess applicable to the factory?

If applicable, should machinery value be included or not in the construction value?

Hi Ramu, the labor department is correct. Before the commencement of the manufacturing process, the BOCW Act is applicable. You need to pay cess on the total cost of construction activity. I think it includes machinery costs as well.

Chhattisgarh High Court Ruling

The Chhattisgarh High Court recently held that the moment the manufacturing process begins in an industry, the provisions of the Factories Act would be applicable. Therefore, the provisions of the BOCW Act would cease.

You can refer to Lanco Anpara Power Ltd vs. State of Uttar Pradesh and others for the judgment delivered on October 18, 2016.

Greetings and thanks for quoting the case of the Chhattisgarh High Court, which I learned about from your post. I need to study this case law. However, what I recollect now, and I have made comments somewhere on Lanco Anpara Power Ltd vs. State of Uttar Pradesh, is that the SC said that unfortunately, you cannot take the benefit of exclusion carved out under Section 2(1)(d) of the BOCW Act. Therefore, you have no option but to obtain a Registration Certificate under the BOCW Act and also to pay Cess, even though the construction work is carried out in a factory under the FA.

The SC, while coming to its conclusion, adopted a purposive interpretation of Section 2(1)(d) of the BOCW Act, giving primacy to the 'superior purpose' contained in the BOCW Act and the Welfare Cess Act. This purpose is the welfare of the unorganized labor class involved in construction activity. The Hon'ble SC further held that a literal interpretation, as desired by the construction companies, would result in a situation where the construction workers would be deprived of the benefits of both the BOCW Act and the Factories Act, which could not have been the legislative intent. But now I am reading something different on the net regarding the SC's aforementioned judgment.

There is a need to study both the judgments once again. Experts are requested to comment on both the judgments after due study.

PS. Praveen ji, are you an ex-Siemens guy?

On the basis of your posting, it is difficult to provide any opinion. Please consider the following points to assess your case:

1. Is your establishment currently operating as a factory?
2. Have you undertaken any expansion at a later date?

If your establishment is not required to pay cess, then Mr. Praveen Bhosle has highlighted certain aspects for you to consider. However, if your factory is newly constructed and has commenced production, you may be obligated to pay cess.

It is recommended that you refer to the following legal references:

A) Civil Appeal No. 6223 of 2016 of the Supreme Court in the case of Lanco Anpara Power Ltd vs. UP.

B) Order of the Chhattisgarh High Court, Bilaspur Bench in WPC 2636 of 2010 dated 16/02/2018.

Furthermore, your management may pursue legal action if there are substantial grounds to challenge the demand notice.

NB: The above two cases were mentioned in a query related to gratuity eligibility.

Kindly let me know if you need any further assistance.

Dear sir,

Yes, now it is a running factory. However, they are demanding cess for the construction value at the time (2009). If we undertake an expansion project, would building cess be applicable or not?

Ramu

On which date was the construction of the plant started and on which date did it end? Any greenfield construction falls under the B&OCW Act, and the cess levied for that period is justified.

The date on which the factory obtained a license for commercial production and the commencement of production shall be treated under the Factories Act.

As per the decision of the Chhattisgarh High Court, if you undertake an expansion project within the premises of a running factory, it would not attract the payment of cess under B&OCW.

Government Of Andhra Pradesh vs. Lakamsani Samba Siva Rao & Others on 6 August 2015

The Hon. Acting Chief Justice Shri. Dilip Bhosale and Hon. Justice S.V. Bhat presided over W.A. Nos. 1012 OF 2013 and related cases. Please review the judgment. Even the expansion of work within an existing factory is covered under the BOCW Act, and cess needs to be paid.

While delivering the judgment, Hon. ACJ termed it as beneficial legislation. Construction workers are not covered under the Factories Act. If they are not covered under the BOCW Act, they will not receive any benefits or coverage. This group represents the most vulnerable section of society. This was not the intention of the legislation. Therefore, workers need to be covered, and cess needs to be paid, even on machinery. It is worth reading.

Mr. Mohanty has given the correct opinion. Apart from Greenfield, it is applicable to running factories as written above.

Additional Information

The Act has been made effective retrospectively. Although the act was established a long time ago, rules were not framed initially. Since it has to be implemented by each state, rules were required. When the rules were published in the gazette, the state governments started levying cess retrospectively, despite their delay.

In short, even when all the work was completed 5-6 years ago, cess needs to be paid. This applies to both Greenfield projects and running factories. As BOCW implementation is recent, there are very few cases to refer to. Unless the Supreme Court creates a sufficient database of cases, the situation will continue with some cases in favor of owners and some against.