EMPLOYEES’ STATE INSURANCE CORPORATION versus VENUS ALLOY PVT. LTD. on 5 February 2019

[2019] 3 S.C.R. 673

EMPLOYEES’ STATE INSURANCE CORPORATION

v.

VENUS ALLOY PVT. LTD.

(Civil Appeal No. 1464 of 2019)

FEBRUARY 05, 2019

[ABHAY MANOHAR SAPRE ANDDINESH MAHESHWARI, JJ.]

Employees’ State Insurance Act, 1948 – ss.2(9), 75 and 82 –Respondent-Company, covered under the ESI Act had beendepositing the amount of contribution with reference to the wagespaid to some of its employees, however, did not make the contributionin respect of the remuneration paid to the Directors – By order dated06.04.2005, the Deputy Director of the appellant-Corporation calledupon the respondent to make payment of contribution in relation tothe remuneration paid to the Directors – Challenged by therespondent u/s.75 – ESI Court declared the said order as void – Inappeal by the appellant, the High Court concluded that the Directorsof the respondent establishment do not come within the purview ofthe “employees”, as defined u/sub-sec. (9) of s.2 of the ESI Act anddismissed the appeal – Held: Appellant in order dated 06.04.2005asserted that the Directors of the Company were paid remuneration@ Rs. 3,000/- p.m. and they were falling within the definition of“employee” under the ESI Act and hence, contribution was payablein regard to the amount paid to them – However, while challengingthe said order, the respondent chose not to lead any evidence beforethe Court – Hence, there was nothing on record to displace thefacts asserted on behalf of the appellant in its order dated06.04.2005, rather the factual assertions in the said order remaineduncontroverted – High Court in the present case has been in errorin assuming that the Director of a Company, who had been receivingremuneration for discharge of duties assigned to him, may not fallwithin the definition of an employee for the purpose of the ESI Act – No reason to interfere with the order dated 06.04.2005 issued bythe appellant – Impugned order set-aside and the application filedby the respondent-Company u/s.75 of the ESI Act is dismissed.

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674SUPREME COURT REPORTS

AAllowing the appeal, the Court

Held: 1.1 In the present case, the appellant-Corporationin its impugned order dated 06.04.2005 specifically asserted thatthe Directors of the Company were paid remuneration at the rateof Rs. 3,000/- p.m. and they were falling within the definition ofB“employee” under the Employees’ State Insurance Act, 1948 andhence, contribution was payable in regard to the amount paid tothem. Interestingly, even while seeking to challenge the aforesaidorder dated 06.04.2005 by way of proceedings under Section 75of the ESI Act, the respondent-Company chose not to lead anyevidence before the Court. Hence, there was nothing on recordCto displace the facts asserted on behalf of the appellant-Corporation in its order dated 06.04.2005; rather the factualassertions in the said order remained uncontroverted. The orderdated 06.04.2005 had been questioned by the respondent onlyon the contention that the Directors do not fall within theDcategory of “employee” but no attempt was made to show as tohow and why the remuneration paid to its Directors would not fallwithin the purview of “wages” as per the meaning assigned bysub-section (22) of Section 2 of the ESI Act? [Para 13][682-C-E]

1.2 The High Court in the present case has been in errorEin assuming that the Director of a Company, who had beenreceiving remuneration for discharge of duties assigned to him,may not fall within the definition of an employee for the purposeof the ESI Act. There had been no reason to interfere with theorder dated 06.04.2005 as issued by the appellant. The applicationfiled by the respondent under Section 75 of the ESI Act isFdismissed. [Paras 14, 15][682-H; 683-A-B]

Employees’ State Insurance Corporation v. ApexEngineering Pvt. Ltd. (1998) 1 SCC 86 : [1997] 5 Suppl.SCR 57 – held applicable.

GSakal Papers Private Limited v. Employees’ StateInsurance Corporation MHLJ 1995 Vol. 2 Page 69;Employees’ State Insurance Corporation v. ApexEngineering Pvt. Ltd. MHLR 1990 Vol. 2 Page 850;Saraswath Films v. Regional Director, Employees’ StateInsurance Corporation, Trichur (2010) 11 SCC 553 –Hreferred to.

EMPLOYEES’ STATE INSURANCE CORPORATION v. VENUSALLOY PVT. LTD.

Case Law Reference

[1997] 5 Suppl. SCR 57held applicablePara 6

(2010) 11 SCC 553referred toPara 6

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1464of 2019.

From the Judgment and Order dated 17.02.2014 of the High Courtof Madhya Pradesh Bench, Indore in Civil Miscellaneous Appeal No.1213 of 2006.

Mahesh Srivastava, Vaibhav Manu Srivastava, P. N. Puri, Advs.for the Appellant.

Dushyant Parashar, Adv. for the Respondent.

The Judgment of the Court was delivered by DINESH MAHESHWARI, J. 1. Leave granted.

2. The short question calling for determination in this appeal byspecial leave against the judgment dated 17.02.2014 passed by the HighCourt of Madhya Pradesh, Bench at Indore in Miscellaneous AppealNo. 1213 of 2006 is as to whether the Directors of respondent-Company,who are receiving remuneration, come within the purview of “employee”under sub-section (9) of Section 2 of the Employees’ State InsuranceAct, 1948 (‘the ESI Act’)?

3. Put in brief, the relevant background aspects of the matter arethat the respondent-Company had been covered under the ESI Act andhad been depositing the amount of contribution with reference to thewages paid to some of its employees. However, in an inspection carriedout by the Appellant-Employees’ State Insurance Corporation (‘theCorporation’), it was observed that the respondent-Company had notmade the contribution in respect of the remuneration paid to the Directors.There had been exchange of communications in regard to the liability ofthe respondent–Company and ultimately, by the order dated 06.04.2005,the Deputy Director of the appellant-Corporation called upon therespondent to make payment of contribution in relation to the remunerationpaid to the Directors. Such a demand was questioned by the respondent-Company by way of an application under Section 75 of the ESI Act(Case No. 171 of 2005) that was considered and decided by the A

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AEmployees State Insurance Court at Indore (‘the ESI Court’) by itsorder dated 24.12.2005.

4. The ESI Court noted that both the parties had not adduced anyevidence and sought disposal of the case only on the basis of arguments.The parties referred to a few citations but in essence, both the partiesBrelied upon the decision of this Court in the case of Employees’ StateInsurance Corporation Vs. Apex Engineering Pvt. Ltd., as reportedin 1997 (77) F.L.R. 878[1]. The ESI Court observed that in the saidcase, the Managing Director was found performing some particular workbut there was no illustration that the provisions of the ESI Act wereapplicable on the amount received by the Directors; and rather took theCview that the illustrations produced by the respondent-Company were tothe effect that Directors do not fall under the category of the employees.The ESI Court, therefore, declared the aforesaid order dated 06.04.2005void and unfair, while observing as under:-

“5....I viewed the above judicial illustration produced in case.DThe illustration on which both parties put their faith accordingto their view, has been adjudicated by Hon’ble Supreme Court.It seems by its perusal that managing director performs someparticular works. The provisions of ESI Act are applicableon the payment that is made to him for those particular andEadditional works. There is no dispute in relation to the amountreceiving by managing director in this case but there is disputein relation to the amount receiving by directors. There has nojudicial principle been established in any of judicialillustration produced in the case that the provisions of ESIAct are applicable on the amount receiving by the directorsFon the other hand judicial illustration produced by theplaintiff reveals that neither amount receiving by the directorsfall under the category of pay nor directors fall under thecategory of employee. Hence in the right (sic) of above judicialillustration the order dated 06.04.05 passed by defendant isGproved void and unfair.”

5. In the appeal preferred by the appellant-Corporation underSection 82 of the ESI Act against the aforesaid order dated 24.12.2005,the High Court of Madhya Pradesh at Indore Bench, while relying on 1 Equivalent citation (1998) 1 SCC 86H

the decision of the Bombay High Court in the case of Sakal PapersPrivate Limited Vs. Employees’ State Insurance Corporation reportedin MHLJ 1995 Vol. 2 Page 69 and another decision of the BombayHigh Court in the case of Employees’ State Insurance CorporationVs. Apex Engineering Pvt. Ltd. reported in MHLR 1990 Vol. 2 Page850, concluded that the Directors of the respondent establishment donot come within the purview of the “employees”, as defined under sub-section (9) of Section 2 of the ESI Act and dismissed the appeal with thefollowing observations:- “10. On due consideration of the aforesaid and in view ofthe law laid down by the Bombay High Court, I am of theview that the Directors of the respondent establishment doesnot come within the purview of the employee as defined undersection 2(9) of the ESI Act. The learned court has notcommitted any legal error in setting aside the order dated06.04.2005”

6. Assailing the judgment aforesaid, learned counsel for theappellant-Corporation, while strongly relying on the decision of this Courtin Employees’ State Insurance Corporation Vs. Apex EngineeringPvt. Ltd.: (1998) 1 SCC 86, has argued that if remuneration is paid toa person who satisfies the definition of “employee” as per Section 2(9)of the ESI Act for discharge of the work assigned to him, suchremuneration would be covered under the definition of “wages” as perSection 2 (22) of the ESI Act and, therefore, necessary contribution forthat employee is to be paid. Learned counsel has also relied upon thedecision in Saraswath Films Vs. Regional Director, Employees’ StateInsurance Corporation, Trichur: 2010(11) SCC 553. Per contra,learned Counsel for the respondent has duly supported the judgmentimpugned with the submissions that the facts of the present case aredifferent from the facts in the case of Apex Engineering (supra),inasmuch as therein, one of the Directors of the company was entrustedwith the work of Managing Director on remuneration of Rs. 1,000/- permonth and in view of this remuneration, he had to discharge extra duties,apart from his function as an ordinary Director. According to the learnedcounsel, the said Managing Director fell within the definition of“employee” under Section 2(9) of the ESI Act but in the present case,the Directors of the respondent-Company were not employed for wagesin or in connection with the work of factory or establishment and hence, A

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Athey do not fall within the essential ingredients of Section 2(9) of the ESIAct.

7. Having given anxious consideration to the rival submissionsand having examined the record with reference to the law applicable,we are clearly of the view that the impugned orders cannot be sustainedBand the application filed by the respondent-Company under Section 75of the ESI Act deserves to be dismissed.

8. For determination of the question involved, appropriate it wouldbe to take note of the exhaustive definition of “employee” as containedin sub-section (9) of Section 2 of the ESI Act that reads as under:- C

“2(9). “employee” means any person employed from wagesin or in connection with the work of a factory or establishmentto which this Act applies and-

(i) who is directly employed by the principal employer, on anywork of, or incidental or preliminary to or connected withthe work of, the factory or establishment, whether such workis done by the employee in the factory or establishment orelsewhere; or D

(ii) who is employed by or through an immediate employer, onthe premises of the factory or establishment or under thesupervision of the principal employer or his agent on workwhich is ordinarily part of the work of the factory orestablishment or which is preliminary to the work carried onin or incidental to the purposes of the factory orestablishment; or E

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(iii) whose services are temporarily lent or let on hire to theprincipal employer by the person with whom the person whoseservices are so lent or let on hire has entered into a contractof service; and includes any person employed for wages on any workconnected with the administration of the factory orestablishment or any part, department or branch thereof orwith the purchase of raw materials for, or the distribution orsale of the products of, the factory or establishment, or anyperson engaged as apprentice, not being an apprenticeengaged under the Apprentices Act, 1961 (52 of 1961), [and G

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EMPLOYEES’ STATE INSURANCE CORPORATION v. VENUSALLOY PVT. LTD. [DINESH MAHESHWARI, J.]

includes such person engaged as apprentice whose trainingperiod is extended to any length of time][2] but does not include- (a) any member of the Indian naval, military or air forces; or(b) any person so employed whose wages (excludingremuneration for overtime work) exceed such wages as maybe prescribed by the Central Government a month:

Provided that an employee whose wages (excludingremuneration for overtime work) exceed such wages as maybe prescribed by the Central Government at any time after(and not before) the beginning of the contribution period,shall continue to be an employee until the end of that period;”

9. The expression “wages” is defined in sub-section (22) of Section2 of the ESI Act in the following terms:- “2(22). “wages” means all remuneration paid or payable incash to an employee, if the terms of the contract ofemployment, express or implied, were fulfilled and includesany payment to an employee in respect of any period ofauthorised leave, lock-out, strike which is not illegal or lay-off and other additional remuneration, if any, paid at intervalsnot exceeding two months, but does not include- (a) any contribution paid by the employer to any pension fundor provident fund, or under this Act; (b) any travelling allowances or the value of any travellingconcession;

(c) any sum paid to the person employed to defray specialexpenses entailed on him by the nature of his employment; or (d) any gratuity payable on discharge;”

10. This Court, in the case of Saraswath Films (supra), hasexpounded on the amplitude of the definition of “employee”, as containedin sub-section (9) of Section 2 of the ESI Act in the following:- “6. From the provision in Section 2(9) it is clear that thedefinition is wide and of comprehensive nature. It includes 2 Note: the expressions in parenthesis were substituted by Act No. 18 of 2010 w.e.f.01.06.2010 in place of the expressions “or under the standing orders of theestablishment”.

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Aany person employed for wages in or in connection with workof the establishment to which the Act applies and also includesany person employed by or through immediate employer onthe premises of the establishment or under the principalemployer or his agent of work which is ordinarily a part ofthe work of establishment or which is preliminary to workBcarried on in or incidental to the purpose of the establishment.In clause (iii) the position is further clarified; a person whoseservices are temporarily lent or let on hire to the principalemployer by the person with whom the person whose servicesare so lent or let on hire has entered into a contract of serviceCis also brought within the purview of the statute. On a plainreading of the definitions of the expressions “principalemployer” and “immediate employer” the position is manifestthat the appellant is the principal employer of the securityguards in the case. It may be that their immediate employer isthe security agency with whom there has been a contract eitherDby the lessor or the lessee of the cinema hall for purpose ofthe service. On a fair reading of relevant statutory provisionsand keeping in view the object and purpose for which thelegislation was enacted it is clear to us that in this case thesecurity guards come within the purview of the expressionE“employee” as defined in Section 2(9) of the Act. “

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11. In the case of Apex Engineering (supra), the Board ofDirectors of respondent-Company resolved to elect one of its Directorsas Managing Director of the Company and to grant him annualremuneration of Rs. 12,000/- for rendering services as Managing Director.

FThe question was as to whether the said Managing Director was an“employee” within the meaning of Section 2(9) of the ESI Act? Thoughthe High Court and the ESI Court had answered this question againstthe Corporation, but this Court allowed the appeal and, inter alia, heldthat the Managing Director, even when to be treated as principalemployer, could also be an employee and could carry such dual capacity.GThis Court said,- “8. But even assuming that the High Court was right thatShri Dhanwate could be said to be principal employer thereis nothing in the Act to indicate that a managing director beingthe principal employer cannot also be an employee. In otherHwords he can have dual capacity….”

EMPLOYEES’ STATE INSURANCE CORPORATION v. VENUSALLOY PVT. LTD. [DINESH MAHESHWARI, J.]

This Court also approved the interpretation of relevant provisionsof the ESI Act by the Karnataka High Court in the following:- “13.A Division Bench of the Karnataka High Court inthe case of Regional Director, ESI Corpn. v. Margarine &Refined Oils Co. (P) Ltd. [1984 Lab IC 844; (1983) 2 LLN918 (Kant)] took the view which has commanded (siccommended) to us in the present proceedings. It was held bythe High Court that the Managing Director of a private limitedcompany was an employee as defined by Section 2 sub-section(9) of the Act. In this connection it was observed by the HighCourt that a company is a legal person and a corporate entityand as such it can employ one of its directors as ManagingDirector. The Managing Director of the company covered bythe Act becomes an employee of the company within themeaning of Section 2(9) of the Act and the remuneration paidto him for the functions he discharges as Managing Directorwould amount to wages as defined under Section 2(22) ofthe Act for the purpose of calculating employees’ contribution.The aforesaid decision of the High Court correctly interpretsthe relevant provisions of the Act.”

After a survey of the other cited decisions, this Court held asunder:-

After a survey of the other cited decisions, this Court held asunder:- “19.As a result of the aforesaid discussion it must beheld that the Division Bench of the High Court in the impugnedjudgment had erred in taking the view, on the facts of thepresent case, that Shri Dhanwate as Managing Director ofthe company was not an employee within the meaning ofSection 2 sub-section (9) of the Act. On the other hand itmust be held that he was an employee of the company and assuch could be added to the list of the remaining 19 employeesso as to make a total of 20 for covering the establishmentunder Section 2 sub-section (12) of the Act which defines“factory” to mean, “ any premises including the precinctsthereof- (a)........., or (b) whereon twenty or more persons are employedor were employed for wages on any day of the preceding A

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Atwelve months, and in any part of which a manufacturingprocess is being carried on without the aid of power or isordinarily so carried on”.

12. We are clearly of the view that what has been observed andheld by this Court in Apex Engineering (supra), in relation to theBManaging Director of a Company, applies with greater force in relationto a Director of the Company, if he is paid the remuneration for dischargeof the duties entrusted to him.

13. It is noticed that in the present case, the appellant-Corporationin its impugned order dated 06.04.2005 specifically asserted that theCDirectors of the Company were paid remuneration at the rate of Rs.3,000/- p.m. and they were falling within the definition of “employee”under the ESI Act and hence, contribution was payable in regard to theamount paid to them. Interestingly, even while seeking to challenge theaforesaid order dated 06.04.2005 by way of proceedings under Section75 of the ESI Act, the respondent-Company chose not to lead anyDevidence before the Court. Hence, there was nothing on record todisplace the facts asserted on behalf of the appellant-Corporation in itsorder dated 06.04.2005; rather the factual assertions in the said orderremained uncontroverted. The order dated 06.04.2005 had beenquestioned by the respondent-Company only on the contention that theEDirectors do not fall within the category of “employee” but no attemptwas made to show as to how and why the remuneration paid to itsDirectors would not fall within the purview of “wages” as per the meaningassigned by sub-section (22) of Section 2 of the ESI Act?

14. The ESI Court cursorily attempted to distinguish the decisionFof this Court in Apex Engineering (supra) only with reference to thefact that therein, the amount was being received by the Managing Director.The High Court, on the other hand, overlooked the said decision of thisCourt and relied only on the decisions of the Bombay High Court thoughthe propositions in the referred decisions of the Bombay High Courtstood effectively overruled by the decision in Apex Engineering (supra)Gwhere this Court held in no uncertain terms that the High Court was inerror in taking the view that the Managing Director of the Companywas not an employee within the meaning of Section 2 (9) of the ESI Act.The said decision directly applies to the present case and we have nohesitation in concluding that the High Court in the present case has beenHin error in assuming that the Director of a Company, who had been receiving remuneration for discharge of duties assigned to him, may notfall within the definition of an employee for the purpose of the ESI Act.There had been no reason to interfere with the order dated 06.04.2005as issued by the appellant-Corporation.

15. In view of above, this appeal is allowed; the impugned ordersare set-aside and the application filed by the respondent-Company underSection 75 of the ESI Act is dismissed.

Divya Pandey

Appeal allowed.

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