Karnataka High Court
M/S A.S.B Motors vs The Regional Director on 12 October, 2018
Author: B M Shyam Prasad
Bench: B.M. Shyam Prasad
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 12TH DAY OF OCTOBER 2018
BEFORE
THE HON'BLE MR. JUSTICE B.M. SHYAM PRASAD
MISCELLANEOUS FIRST APPEAL NO.6038 OF 2010
C/W
MISCELLANEOUS FIRST APPEAL NO.1888 OF 2011(ESI-GEN)
IN M.F.A. NO.6038/2010:
BETWEEN:
M/S A.S.B. MOTORS
10/15, G.T. COMPLEX
SUNKADAKATTE, MAGADI ROAD
VISWANEEDAM P.O.
BANGALORE - 560 091.
REPRESENTED BY ITS:
PROPRIETOR MR. BHAGIRATHA.
... APPELLANT
(BY SRI. K.R. ANAND, ADVOCATE)
AND:
THE REGIONAL DIRECTOR
ESI CORPORATION
NO.10, BINNYFIELDS
BINNYPET, BANGALORE - 560 023.
... RESPONDENT
(BY SRI. K. KRISHNAPPA, ADVOCATE)
THIS MISCELLANEOUS FIRST APPEAL IS FILED UNDER
SECTION 82(2) OF EMPLOYEES STATE INSURANCE ACT,
2
AGAINST THE ORDER DATED 14.6.2010 PASSED IN ESI
APPLICATION NO.44 OF 2007 ON THE FILE OF EMPLOYEES
STATE INSURANCE COURT, BANGALORE, DISMISSING THE
APPLICATION FILED UNDER SECTION 75 OF EMPLOYEES
STATE INSURANCE ACT.
IN M.F.A. NO.1888/2011:
BETWEEN:
M/S A.S.B. MOTORS
10/15, G.T. COMPLEX
SUNKADAKATTE, MAGADI ROAD
VISWANEEDAM P.O.
BANGALORE - 560 091.
REPRESENTED BY ITS:
PROPRIETOR MR. BHAGIRATHA.
... APPELLANT
(BY SRI. K.R. ANAND, ADVOCATE)
AND:
THE REGIONAL DIRECTOR
ESI CORPORATION
NO.10, BINNYFIELDS
BINNYPET, BANGALORE - 560 023.
... RESPONDENT
(BY SRI. K. KRISHNAPPA, ADVOCATE)
THIS MISCELLANEOUS FIRST APPEAL IS FILED UNDER
SECTION 82(2) OF E.S.I. ACT AGAINST THE ORDER
DATED:14.05.2010 PASSED IN ESI APPLICATION NO.43 OF 2007
ON THE FILE OF E.S.I. COURT, BANGALORE, PARTLY
ALLOWING THE APPLICATION FILED UNDER SECTION 75 OF
EMPLOYEES STATE INSURANCE ACT.
THESE APPEALS COMING ON FOR FINAL HEARING THIS
DAY, THE COURT DELIVERED THE FOLLOWING:
3
JUDGMENT
These connected appeals are filed under Section 82 of the Employees State Insurance Act, 1948 (for short, the 'ESI Act') impugning the common order dated 14.5.2010 in ESI Application Nos.44 and 43 of 2007 on the file of the Employees' State Insurance Court at Bengaluru (for short, 'ESI Court') and the Notice/s and the order called in question in such applications. The appellant filed these applications in Application Nos.43 and 44 of 2007 under Sections 75 and 76 of the ESI Act calling in question the Notices dated 9.1.2007/30.4.2007 in Form C-18 under the ESI Act and the subsequent order dated 1.8.2007, passed under Section 45A of the ESI Act.
2. A summation of the facts as narrated by the appellant is as follows: The appellant was an establishment carrying on the business of sale of two- wheelers manufactured by different manufacturers. 4 The appellant commenced its business activity in the year 1998 in a premises secured by the appellant under a lease deed. The appellant did not avail separate electricity service for the purposes of its business and was using common electricity service availed for the building that comprised of different tenements in the ground and first floors only for lighting and the like. The appellant came to be provisionally covered under the ESI Act with effect from 1.11.2003.
3. The Insurance Inspector attached to the respondent - Corporation inspected the records with the appellant in its business premises on 21/22.3.2006. The Insurance Inspector, during such inspection, scrutinized the Attendance and Wage Register and the Books of Accounts maintained by the appellant. Upon scrutiny of such Registers and Books of Account, the Inspector of Insurance filed an Inspection Report dated 22.3.2006 enclosing a Final Date of Coverage Report (for 5 short, 'FDC Report). The Insurance Inspector, in his Report and FDC Report, concluded that in the absence of the Books of Accounts and vouchers for the period upto 2000, he was unable to form any opinion on advancing (preponement of) coverage under the ESI Act prior to December 1999, but the Insurance Inspector recommended advancing such coverage of the appellant's establishment from 1.11.2003 to 1.12.1999. The Insurance Inspector made this recommendation after observing that the appellant's establishment had employed ten persons as on 1.12.1999. Further, the Insurance Inspector recorded that the appellant did not produce the Books of Accounts for the period prior to 2000 and records in respect of the Security Staff and Maintenance employed for the period between April 2002 to March 2004. The Insurance Inspector also opined that the appellant was a 'factory' as contemplated under Section 2(12) of the ESI Act without recording the reasons therefor; in other words, the 6 Insurance Inspector did not record in his Inspection Report the presence of any equipment used in servicing two-wheelers in the appellant's premises.
4. The Inspection Report was followed by the impugned Notice/s. The first of the impugned notices dated 9.1.2007 was issued demanding a sum of Rs.94,842/- as 'Short Payment' in the contribution for the period between December 1999 to October 2003 based on the Insurance Inspector's recommendation for preponement of ESI coverage. The second of the notices dated 30.4.2007 was for this 'Short Payment' in the Contribution and interest chargeable under Section 39(5) of the ESI Act. The appellant failed to show cause against the notice and to pay the notified arrears of contributions (it is also part of the record that the appellant did not attend the personal hearing scheduled on 1.3.2007). Thereafter, the impugned Order dated 1.8.2007 under Section 45-A of the ESI Act ensued 7 which required the appellant to pay a sum of Rs.45,769/- as contribution for the period between April 2002 to March 2004. This sum of Rs.45,769/- was determined vide order dated 1.8.2007 on the basis of the expenses allegedly incurred by the appellant as regards the security and maintenance staff purportedly employed by the appellant.
5. The appellant preferred applications before the ESI Court under Sections 75 and 76 of the ESI Act impugning the aforesaid Notices and the Order dated 1.8.2007 under Section 45-A of the ESI Act. In support of this challenge, the appellant, examined Shridhar R, who was working as an Accountant with the appellant, as AW.1 and marked different documents as Exhibits A.1 to A.9. On the other hand, the respondent- Corporation examined as RW1, the Insurance Inspector, who inspected the appellant's business premises and filed the Inspection Report. The respondent - 8 Corporation produced different documents as R.1 to R.8. These documents included Inspection Report, Statement/s, and FDC Report.
6. The ESI Court formulated different questions/issues for its consideration: these issues/questions included whether the advancing ESI coverage from 1.11.2003 to 1.12.1999 was justified, whether the Demand Notice/s for 'Short Payment' was bad in law and whether the appellant was liable to pay the contributions as per the impugned Order dated 1.8.2007 under Section 45-A of the ESI Act. The ESI Court, by its common Order dated 14.5.2010, rejected the appellant's challenge to the impugned Notices as well as the Order dated 1.8.2007 holding, amongst others, that the evidence placed on record clearly demonstrated that the appellant was an establishment which was engaged in 'manufacturing process' viz., servicing of two-wheelers, in addition to conducting 9 sales of the two-wheelers and that the applicant had employed ten employees even as of the month of December 1999. As such, advancing the ESI coverage from 1.11.2003 to 1.12.1999 was justified and so was the demand as per the Notice/s dated 9.1.2007 and 30.4.2007. However, insofar as the Order dated 1.8.2007 under Section 45A of the ESI Act calling upon the appellant to pay a sum of Rs.45,769/- on the basis of the assessed expenditure of Rs.7,04,135/-, the ESI Court, after re-assessing the expenditure incurred by the appellant, modified the order dated 1.8.2007 concluding that the appellant had to pay a sum of Rs.11,018/ - on the re-assessed expenditure of Rs.1,69,510/-.
7. The ESI Court upheld the respondent -
Corporation's reliance on the registration obtained by the appellant for operating as a "SSI Unit" from the Directorate of Industries and Commerce and the 10 registration obtained by the appellant as a 'Shop' under the Shops and Commercial Establishments Act, 1961. The ESI Court held that the appellant, which had obtained such registrations for the purposes of sales and service of two-wheelers, had failed to explain the nature of activities undertaken from the date of inception in March 1998. Further, the ESI Court also drew adverse inference against the appellant for its failure to explain the nature of its business from the date of its inception holding that it was under an obligation to place on record necessary material to establish that it was only involved in sales and not in services of two wheelers from the date of its inception. The ESI court also relied upon the testimony of the Insurance Inspector as R.W1.
8. The ESI Court, in the aforesaid circumstances, concluded that the appellant was engaged in 'manufacturing process' employing ten and 11 more persons from December 1999, and therefore, the appellant was 'a Factory' as contemplated under the ESI Act. The ESI Court, because of this finding as regards the appellant being a 'factory' upheld the demand as per the impugned Notices. Further, the ESI Court re- assessed the expenditure incurred by the appellant towards office maintenance, cleaning and security staff at Rs.1,69,510/- for the relevant period and directed the appellant to pay Rs.11,018/- as contribution.
9. These appeals were admitted by this Court on 9.1.2005 on the following substantial questions of law:
The substantial question of law framed in MFA No.6038 of 2010. This appeal is filed challenging the common order dated 14.5.2010 rejecting the appellant's challenge to the impugned Notices dated 9.1.2007 and 30.4.2007 referred supra. The substantial question framed is:12
"Whether the Employees State Insurance Court (for short 'ESI Court') has committed a serious error in holding that the appellant is a factory within the purview of section 2(12) of the ESI Act by ignoring the materials or evidence placed on record".
The substantial question of law framed in MFA No. 1888 of 2011. This appeal is filed against the common order dated 14.5.2010 by the ESI Court rejecting the appellant's challenge to the order dated 1.8.2007 passed under section 45-A of the ESI Act. The substantial question framed is:
"Whether the ESI Court has committed a serious error in preponing the coverage of the appellant establishment under the provisions of the ESI Act with effect from 2003 to 1.12.1999 and thus, the ESI Court has committed a serious illegality."
10. The learned counsel for the appellant canvassed against the finding that the appellant is a 'Factory' within the purview of section 2(12) of the ESI Act and contented that respondent- Corporation 13 committed a serious error in preponing the coverage of the appellant under the provisions of the ESI Act with effect from 1.11.2003 to 1.12.1999 urging the following:.
i) The respondent-Corporation, which had advanced the ESI coverage with effect from 1.12. 1999 on the ground that the appellant was a 'factory' engaged in manufacturing process (servicing of two -wheelers) based on the inspection report (and annexed FCD report), was obliged in law to establish that fact. But, the respondent-Corporation had failed in discharging this obligation.
ii) The preponement of ESI coverage as aforesaid and the impugned demand is only in the premise that the appellant is a 'factory' engaged in 'manufacturing process' viz. service of the two wheelers, and if the same is not established, the preponement of the ESI coverage will be a serious irregularity 14
iii) There is no material on record which indeed establishes that the appellant was engaged in the business of servicing of two wheelers prior to 1.12.1999 or even thereafter. The ESI Court could not have concluded that appellant was engaged in servicing two-
wheelers merely because the appellant had secured registration, both as a SSI unit and a Shop, for sales and service of two wheelers.
iv) The appellant is only engaged in the business of sales of two wheelers and is not engaged in the business of service of two wheelers. If indeed the appellant is not engaged in the business of service of two wheelers, and the appellant is only engaged in the business of sales of two wheelers with less than 20 persons on its Rolls, the appellant would not be covered under the ESI much less with effect from 1.12.1999.
11. The learned counsel for the respondent- Corporation, refuting the submissions by the learned 15 counsel for the appellant and supporting the impugned Notice/s and Orders, contended that the appellant was provisionally covered under the ESI Act with effect from 1.11.2003, because the appellant was engaged in 'manufacturing process' as contemplated under the ESI Act viz. servicing of two-wheelers. The learned counsel further submitted that it is also not in dispute that the appellant had on its Rolls of Employment more than 10 persons with effect from 1.12.1999. The learned counsel emphasized that if the appellant does not dispute the provisional coverage under the ESI Act with effect from 1.11.2003, which is because the appellant was engaged in 'manufacturing process' (service of two- wheelers), the appellant cannot dispute preponement of ESI coverage with effect from 1.12.1999.
12. The learned counsel for the appellant, in response, contended that the appellant is registered as 'Shop' under the Shops and Commercial 16 Establishments Act 1961, and a Shop that is registered under this enactment would be a 'factory' for the purposes of the ESI Act if it employed more than 20 persons during the relevant period because of the Notification issued in that regard by the Government. It is for these reasons that the appellant was provisionally covered under the ESI Act. The learned counsel relied upon a Notification dated 5.1.1985 issued by the Government in this regard. Further, the learned counsel, while reiterating the submissions first made, argued that the respondent-Corporation, which had advanced the coverage with effect from 1.12.1999 on the ground that the appellant was a 'factory' engaged in manufacturing process (servicing of two -wheelers) based on the Inspection Report (and annexed FCD report) - and being obliged in law to establish this alleged fact, had failed to establish the same with any cogent evidence. Nevertheless, the ESI Court rejected the applications filed by the appellant. Therefore, the 17 impugned Common order dated 14.5.2010 by the ESI Court as well as the impugned Notice/s and Order dated 1.8.2007 are liable to be set aside.
13. The recommendation for preponement of ESI coverage (and the ensuing impugned Notices and orders) is in the premise that the appellant, simultaneously with its business of sales of two- wheelers, was engaged in service of two-wheelers and that that the appellant had on its Rolls of Employment more than 10 persons since 1.12.1999. The appellant does not dispute that it had on its Rolls more than 10 persons as of that date. However, the appellant disputes that the appellant was also engaged in the business of service of two-wheelers. In fact, the entire controversy is because of this dispute.
14. The respondent - Corporation contends that the appellant's premises is a 'factory' under the ESI Act because the appellant is engaged in 'manufacturing 18 process' as envisaged under Section 2 (14AA) of the ESI Act and the appellant had employed more than 10 persons in its premises as required under Section 2(12) of the ESI Act. According to Section 2(14AA) the ESI Act, 'manufacturing process' would be all those processes that would come within the scope of 'manufacturing processes' as defined under Section 2(K) of the Factories Act, 1948. The definition of 'manufacturing process' under the Section 2(K) of the Factories Act, 1948 is an inclusive list of activities that would come within the scope of 'manufacturing processes'.
15. It is rightly undisputed by the learned counsel for the appellant that servicing of two-wheelers would come within the definition of the 'manufacturing process' as defined under the Factories Act, 1948 and referred to in the ESI Act. It is also rightly undisputed by the learned counsel that the appellant's premises would be 'a factory' as contemplated under Section 2(K) 19 of the Factories Act read with Section 2(12) of the ESI Act if 10 or more persons are employed in the premises and engaged in servicing two wheelers and using power. However, the controversy, as noted earlier, is on the disputed factual assertion that the appellant was engaged in the business of service of two-wheelers.
16. The answer to the substantial questions framed in these appeals and referred to supra would lie in the following points that arise are for consideration:
(i) is the respondent - Corporation obliged in law to establish its reason that the appellant was engaged in 'manufacturing process' viz., servicing of two-wheelers,
(ii) could it be said that the appellant was engaged in servicing two-wheelers solely because it had obtained registration as "SSI Unit" and "Shop1" for sale and service of two wheelers, and (iii) could it be said that the respondent - Corporation, in the facts and circumstance, has discharged such burden.1
Under the Shops and Commercial Establishments Act, 1961 20
17. The respondent-Corporation initiated the proceedings for advancing (preponing) the coverage on the ground that the appellant was engaged in servicing of two-wheelers employing more than 10 persons and was therefore a 'Factory'' subject to ESI coverage. The general rule is that the burden of proof as to any particular fact lies on that person who asserts the same, unless it is otherwise provided by the law that the proof of such fact lies on any particular person2. The respondents corporation, therefore, has to establish the assertion as regards the factory. The respondent - Corporation has relied upon the Inspection Report and testimony of the Insurance Inspector in addition to the registration obtained for the purposes of sale and service of two wheelers. The Inspection Report only states that the appellants premises was a 'factory' without mentioning any other details. The respondent- Corporation is unable to point 2 Section 103 of the Evidence Act, 1872 21 out any law that enables a presumption as regards the contents of the Inspection Report or the testimony of the Insurance Inspector. Therefore, the respondent- Corporation has to establish the fact that the appellant was indeed engaged in service of two-wheelers by placing cogent evidence on record to establish the contents of the Insurance Report. The respondent - Corporation must discharge its burden before any adverse inference could have been drawn.
18. An useful reference can be made in this regard to the decision of the Hon'ble Apex Court in Hotel New Nalanda vs. Regional Director, Employees' State Insurance Corporation3. In view of the decision of the Hon'ble Apex Court in afore said case, the Insurance Inspector's Report, when an establishment disputes the finding recorded in such Report, cannot be taken as conclusive piece of evidence by itself. Further, no recourse to presumptions could 3 (2009) 14 SCC page 558 22 be had to fill up what is not stated in such report. Paragraphs 17 - 20 of this decision are as follows:
"17. The High Court did not even advert to the reasons given by the Insurance Court for not accepting the Corporation's case on that issue. The Insurance Court had rightly pointed out that the inspection report did not state the process or the work that was called `the manufacturing process'. It did not even say that the refrigerator and the grinder were used in connection with cooking food in the establishment.
18. For holding an establishment to be a `factory' within the meaning of section 2(12) of the Act it must first be established that some work or process is carried on in any part of the establishment that amounts to `manufacturing process' as defined under section 2(k) of the Factories Act, 1948. In case the number of persons employed in the establishment is less than twenty but more than ten then it must further be established that the manufacturing 23 process in the establishment is being carried on with the aid of power.
19. Further, the use of power in the manufacturing process should be direct and proximate. The expression `manufacturing process being carried on with the aid of power' in section 2(12) of the Act does not mean a very indirect application of power such as use of electric bulbs for providing light in the work-area.
20. Unless the links are established, that is to say, it is shown that some process or work is carried on in the establishment which qualifies as `manufacturing process' within the meaning of section 2(k) of the Factories Act and the manufacturing process is carried on with the aid of power, the mere presence of a refrigerator and a grinder there, even though connected to the main power line may not necessarily lead to the inference that the establishment is a factory as defined under section 2(12) of the Act."24
19. The Inspection Report is completely shorn of the details as regards the appellant's nature of business and the Inspection Report is of no help to the respondent- Corporation to establish its assertion that the appellant was engaged in servicing two-wheelers.
20. The other facet of the respondent -
Corporation's case is that the appellant was engaged in service of two-wheelers and therefore it has obtained Certificates of Registration to operate as a SSI unit conducting sale and services of two-wheelers. Further, because the appellant is engaged in both sales and services of two - wheelers, a similar Certificate of Registration is also obtained under the Shops and Commercial Establishments Act, 1961. Merely because registrations have been obtained by the appellant for the purposes of sale, as well as service of, two- wheelers, it cannot be said that the appellant was engaged in both the activities.
25
21. It should, normally, be permissible for an entity, in anticipation of starting (or expanding) its business, to obtain registration for multiple businesses, but actually engage only in one of such multiple businesses for certain reasons and constraints. In the absence of any expressed stipulation in law that it shall be presumed that the entity, which secures registration for two or more businesses, is engaged in these businesses even if it was engaged in one of such businesses, no presumption in that regard can flow merely because an entity has obtained registration for multiple business. The learned counsel is unable to show any such law. Therefore, the Certificates of registration obtained by the appellant for the purposes of sales and services of two-wheelers, by themselves would not be a conclusive evidence. The ESI Court should have considered the significance of such Certificates of Registration in conjunction with the other attendant circumstances of the case. 26
22. Further, the Inspection Report (and the FCD Report) does not record that the Insurance Inspector found any equipment used for conduct of service of two-wheelers or any other material to establish conduct of such activity. If indeed the appellant was engaged in service of two-wheelers, the same ought to have figured in the Inspection Report/FCD Report. The Insurance Inspector, who does not record in his Inspection Report the existence of equipment that would be necessary for conducting service of two-wheelers, is also not convincing in his testimony about the appellant being engaged in service of two-wheelers or the power utilised by the appellant in its premises.
23. The Insurance Inspector admits in his cross- examination that there were different tenements in the building from which the appellant conducted its business (which is also the premises which was inspected by him) and he is evasive in his answers about the electricity services availed by the appellant, 27 utilization thereof and the presence of service equipment in the appellant's premises. The admissions by the Insurance Inspector and his evasive testimony coupled with failure to record about the existence of equipment does not help the respondent- Corporation in discharging its burden as required in law.
24. Further, if during the inspection the Insurance Inspector has scrutinized Books of Accounts as well as different Registers, which established the strength of the employees, it is difficult to accept that he could not have scrutinised the other records like Receipt Books/ Cash Registers/ Registers maintained as regards the vehicles serviced. If such records were scrutinised, the same would have categorically established that the appellant was indeed servicing two-wheelers. The respondent-Corporation is also not able to establish from the entries in the Books of Accounts the transactions for service of vehicles. 28
25. Thus, the respondent - Corporation is not able to discharge its burden either from the Books of Accounts or Registers inspected or the contents of the Inspection Report-FCD Report or from the oral testimony of its Insurance Inspector. The appellant has also explained its provisional coverage under the ESI Act with reference to the Notification dated 5.1.1985 issued by the Government.
26. The ESI Court has erroneously concluded that the appellant was engaged in services of two- wheelers and a 'factory' under the ESI Act because the appellant had obtained registration both for sales and service of two-wheelers. Further, the ESI Court erred in failing to consider that the respondent-corporation had failed to place any cogent evidence to establish that the appellant was engaged in both sales and services of two-wheelers and in drawing adverse inference against the appellant.
29
27. For the aforesaid reasons, the first of the questions framed by this Court when the appeals were admitted viz., whether the ESI Court has committed a serious error in holding that the appellant is a 'factory' within the purview of Section 2(12) of the ESI Act, is answered in affirmative and held that the respondent- Corporation has failed to establish that the appellant was a 'factory' within the purview of the ESI Act. Consequentially, the other question framed viz., whether there is any error in preponing the ESI coverage of the appellant under the provisions of the ESI Act with effect from 2003 to 1.12.1999, is also answered in the affirmative and held that the preponement of coverage and the demand vide dated 1.08. 2007 untenable and impermissible in law.
28. Therefore, the appeals are allowed. The impugned Notices dated 9.1.2007 and 30.4.2007; the Order dated 1.8.2007 under Section 45-A of the ESI Act; 30 and the impugned common order dated 14.5.2010 by the ESI Court are set-aside.
No costs.
SD/-
JUDGE nv