In a significant ruling affecting infrastructure contracts across India, the Supreme Court has held that construction contractors cannot be burdened with labour welfare cess for periods when the welfare laws were not actually implemented on the ground. The verdict came in a batch of appeals involving Prakash Atlanta (JV), National Highways Authority of India (NHAI), and several other contractors, dealing with the levy of cess under the Building and Other Construction Workers (BOCW) laws.
The judgment clarifies a long-standing dispute over whether contractors can be made liable for cess merely because the law existed on paper, even when welfare boards and collection mechanisms were not operational.
Background of the Case
The dispute arose from multiple highway construction contracts awarded by NHAI across different states between 2001 and 2009. These contracts contained clauses requiring compliance with labour laws, including the BOCW Act and the BOCW Welfare Cess Act.
Years later, NHAI began deducting 1% cess from contractors’ bills, claiming it was payable under these laws. Contractors objected, arguing that:
- Welfare Boards were not constituted at the relevant time
- No mechanism existed to collect or deposit cess
- State governments had not enforced the Acts when contracts were executed
In several cases, arbitral tribunals ruled in favour of contractors, directing NHAI to refund the deducted amounts. NHAI challenged these awards up to the Supreme Court.
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Court’s Observations
The Supreme Court closely examined the structure and purpose of the BOCW Act and the Welfare Cess Act. The Bench noted that although the laws were passed in the mid-1990s, their actual implementation was delayed by years due to inaction by States and the Centre.
“The Acts remained largely on paper for a long time due to absence of Welfare Boards and collection machinery,” the Court observed.
The judges pointed out that cess under the law was meant to fund welfare boards. Without such boards in place, there was no legal or practical way to collect or use the money.
Importantly, the Court remarked that:
- Levy of cess without a functioning Welfare Board would defeat the purpose of the law
- Mere existence of legislation does not amount to enforceability
- Contractors cannot be penalised for administrative failure of governments
The Bench also rejected NHAI’s argument that cess should apply automatically from the date the Acts were enacted.
“The law cannot operate in a vacuum. Collection of cess presupposes the existence of statutory machinery,” the court said in substance.
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On 'Subsequent Legislation' Clause
Most contracts contained a clause allowing compensation if new laws increased costs after the bid date.
The Court agreed with arbitral tribunals that:
- Implementation of BOCW laws through state notifications amounted to “subsequent legislation”
- Contractors could not have factored cess into bids when no enforcement mechanism existed
- Deduction of cess years later violated contractual fairness
The Court also noted that NHAI itself did not deduct cess at the time of execution, which weakened its case.
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Decision of the Court
The Supreme Court dismissed all appeals filed by NHAI and upheld the arbitral awards in favour of contractors.
It ruled that:
- Cess could not be retrospectively imposed
- Contractors were entitled to reimbursement where deductions were made
- Arbitral awards were legally sound and did not violate public policy
- Courts cannot interfere with well-reasoned arbitral findings
The judgment effectively closes the door on similar claims by government agencies for past cess recovery where welfare machinery was absent.
Case Title: Prakash Atlanta (JV) v. National Highways Authority of India & Ors.
Case No.: Civil Appeal Nos. 4513, 5301–5304, 5412 & 5416 of 2025
Decision Date: 20-Jan-2026
