Kerala High Court
Management Of Kuttukkaran Engine ... vs Employees' State Insurance ... on 8 September, 1997
Equivalent citations: (1999)IIILLJ31KER
JUDGMENT Mohamed Shafi, J.
1. The appellant in both these appeals is the same partnership firm. They challenge the separate orders dated July 29, 1996, passed by the Employees' Insurance Court, Palakkad, in I. C. Nos. 74 of 1994 and 77 of 1994 in these appeals. M. F. A. No. 1517 of 1996 is filed challenging the order passed in I. C. No. 74 of 1994 and M. F. A. No. 1537 of 1996 is filed challenging the order passed in I. C. No.77 of 1994. Since the issues involved in both these appeals are identical, they are heard and disposed of by this common judgment.
2. The respondent-Employees' State Insurance Corporation demanded from the appellant for Employees' State Insurance contribution of Rs. 2,607 on the amount of Rs. 35,947 which was booked in the account books of the appellant under the head "Productivity incentive" for the period from April 1990 to March 1992. The appellant challenged that order before the Employees' Insurance Court, Alappuzha, in I. C. No. 92 of 1993.
3. The respondent-Employees' State Insurance Corporation also demanded for Employees' State Insurance contribution of Rs. 3,198 on the amount of Rs. 57,900 which was booked in the account books under the head "Production incentive bonus" for the period from April, 1992, to December, 1992. The appellant challenged that order before the Employees' Insurance Court, Alappuzha, in I. C. No. 34 of 1993.
4. On account of the subsequent redefinition of the territorial jurisdiction of the Employees' Insurance Courts in the State, those cases were transferred to the Employees' Insurance Court, Palakkad, and I. C. No. 92 of 1993 was renumbered as I.C. No. 74 of 1994 and I.C. No. 34 of 1993, was renumbered as I. C. No. 77 of 1994 before the Employees' Insurance Court, Palakkad.
5. Negativing the contention of the appellant that the payments involved in these cases were only presentation or gifts not coming within the definition of "wages" under the Employees' State Insurance Act and holding that those payments will come within the latter part of the definition of "wages" in Section 2(22) of the Employees' State Insurance Act, the Employees' Insurance Court dismissed the applications by separate orders of even date. Those orders are under challenge in these appeals.
6. The fact that the appellant is engaged in the business of engine re-building and re-conditioning is not disputed. According to the appellant, the amounts paid by them to all its employees including the manager involved in these cases are only by way of presentation or gift, though wrongly described as production incentive bonus and productivity incentive in the account books. They also contended that those payments are voluntary payments made by the appellant on the increase in the monthly turnover and it is not on the basis of any settlement or contract of service entered into between the appellant and the employees. They have also contended that this voluntary payment can be withdrawn at any time and does not amount to remuneration or wages within the meaning of Section 2(22) of the Employees' State Insurance Act. The respondent contended that the payments involved in these cases cannot be considered as presentation or gift, but they are payments towards production incentive bonus which comes within the ambit of Section 2(22) of the Employees' State Insurance Act.
7. The appellant has contended that during the months in which the monthly turnover exceeded Rs. 1.25 lakhs every employee including the manager was paid at the rate of Rs. 100 each as presentation or gift and no such payment will be made during the months in which the turnover is less than Rs. 1.25 lakhs. They have also contended that a target was fixed on the basis of the income of the previous year in every month and after deducting the total expenses from the monthly turnover and by dividing that figure by the total mandays, the resultant figure is multiplied by 26 and if the figure exceeded the target amount 2 per cent will be given as gift to all the employees including the manager. According to them, the rate may vary from month to month depending upon the turnover and the amount thus paid to all the employees will be the same in a particular month.
8. It is the definite case of the appellant that these payments are only a gesture of goodwill and the same can be withdrawn at any time and there is absolutely no contract or agreement between the appellant and the employees for the payment of the above amounts. They have contended that apart from the normal work during the working hours, no over-time work is done by the employees for payment of these amounts and remuneration is paid to the employees for the overtime work, if any, done by them. Therefore, according to them, the payments made by them to the employees in these cases have absolutely no connection or nexus with the wages or other additional remuneration as contemplated in Section 2(22) of the Employees' State Insurance Act and wrong description of the amounts paid by them in these cases to the employees in their books of account is of no consequence. Therefore, the appellant contended that the demand for Employees' State Insurance contribution on these amounts is absolutely unsustainable.
9. The respondent-Employees' State Insurance Corporation has contended that these payments are offered by the employer to the employees if more work is turned out. Counsel for the respondent submitted that these payments are indirect incentive to increase the turnover within the same frame work and to extract additional work from the employees. According to him, there is an implied contract between the employer and the employees in these cases to the effect that if they worked more, so much of amount will be given to the employees and if they worked more within the same frame work and attained a higher turnover they will be paid the amounts. Unless and until they worked more and attained more turnover, these collective incentive will not be paid. Therefore, he vehemently argued that these payments are additional remuneration paid by the appellant to the employees coming-within the ambit of the third part of Section 2(22) of the Employees' State Insurance Act.
10. The Employees' Insurance Court, after elaborately considering the rival contentions raised by the appellant and the respondent and various rulings of the Supreme Court and other High Courts, arrived at the conclusion that the payments made by the appellant to the employees in these cases, whether as production incentive bonus or presentation or gift, fell within the latter part of the definition of wages given in Section 2(22) of the Employees' State Insurance Act, though it is not paid to the employees under the terms of the contract of employment, and as such did not come within the ambit of wages as defined in the first part of Section 2(22) of the Employees' State Insurance Act.
11. Counsel for the appellant vehemently submitted that the Insurance Court did not consider the facts and circumstances of the case and the evidence on record and also the principles laid down by the Supreme Court as well as the various High Courts in the decisions referred to in extenso in the impugned order. He argued that the principles laid down by the Supreme Court in Braithwaite and Co. (India) Ltd. v. Employees' State Insurance Corporation, (1968-I-LLJ-550), are applicable to the facts of this case, though the Employees' Insurance Court has discarded that judgment on the ground that in that reported decision the Supreme Court dealt with the provisions of Section 2(22) of the Employees' State Insurance Act, as it stood prior to the amendment by Act No. 44 of 1966, which came into force with effect from January 28, 1968, and held that the payments made by the employer to the employees under the scheme is covered by the definition of "wages" under the Act. In that decision, the Supreme Court has observed as follows:
"The mere fact that a reward for work offered by the employer is accepted by the employee after he has successfully satisfied the requirement laid down by the employer for earning reward cannot mean that this payment becomes a part of contract of employment. In fact, in this case, there was no question of offer by the appellant and acceptance by the employees as a condition of their service. The employees were already working in accordance with the terms of their contract of employment when the employer decided to make this extra payment if the employees did successfully what they were already expected to do under that contract It cannot, therefore, be held that his payment of inam ever became even an implied term of the contract of employment of the employees of the appellant."
12. In the decision in Carborundum Universal Ltd. v. Employees' State Insurance Corporation, (1976-I-LLJ-17) a Division Bench of this Court held that the payment of incentive bonus under a settlement is wages and contribution under the Employees' State Insurance Scheme is payable on that amount. In that judgment, the Division Bench observed as follows at p. 18 :
"Everything that is paid in cash to an employee may not be remuneration. There may be cash payments made by the employer which payments the employee may not be entitled to insist upon. Just as there is an obligation on the employer to pay, there must be a right in the employee to demand as of right. Then only it would become remuneration payable. To put it in other words, it must be payable under the contract of employment. Where the management introduces a scheme to pay some incentive to workmen, if it is as a result of a settlement binding on both parties, necessarily the terms of the settlement become terms of the contract of employment between the parties. If, on the other hand, it is introduced under a scheme under which it is open to the employer to withdraw it, alter, vary or modify it without reference to the employees and without their consent or without any binding settlement, it is a payment for which the assent is unilateral and, therefore, cannot be said to be a payment made in accordance with the terms of the employment. Consequently, it would not be wages within the meaning of Section 2(22)."
13. In that case, payment of incentive bonus was made by the employer to the employees on the basis of a settlement binding upon both the parties and the employer had no right to withdraw the payment unilaterally and this Court held that the payment of incentive bonus was wages coming within the meaning of Section 2(22) of the Act and as such contribution under the Employees' State Insurance Act is payable on that amount.
14. In the decision in N. G. E. F. Ltd. v. Deputy Regional Director, ESI Corporation, 1980 Lab IC 431, a Full Bench of the Karnataka High Court held that the amounts paid under a scheme for incentive payment settled between the management and workmen are wages under Section 2(22) of the Employees' State Insurance Act. In that case, the management introduced an incentive scheme for the benefit of its employees and as per the terms of the scheme it has been making incentive payments to its employees. It was found that the scheme was introduced as per the memorandum of settlement entered into between the management and the employees and, therefore, that payment was in the nature of wages as defined in the Employees' State Insurance Act and the management was, therefore, liable to pay contribution on that amount. In that decision, the Court has observed as follows :
"Therefore, the clear implication of the second part of the definition is that any additional remuneration paid otherwise than under the terms of the contract should also be treated as wages for purposes of the Act provided that payment is made by way of remuneration, i.e., a recompense for service rendered and not any ex-gratia payment : and paid at periodical intervals not exceeding two months. If any additional remuneration paid satisfies these two conditions, Section 2(22) declares it to be 'wages' though paid de-hors the terms of the contract.
It is true that the word 'remuneration' is found both in the first and second parts of the definition. But the condition attached to such payment in the first part cannot legitimately be extended to the second part. The other 'additional remuneration' referred to in the second part of the definition is only qualified by the condition attached thereto (that is, paid at intervals not exceeding two months)."
15. In the decision in Harihar Polyfiberes v. Regional Director, ESI Corporation, (1984-II-LLJ-475), the Supreme Court has held that the term "wages" in Section 2(22) of the Employees' State Insurance Act, includes house rent allowance, night shift allowance, heat, gas and dust allowance and incentive allowance. In that decision the Supreme Court has observed as follows at p. 476:
"Therefore, wages as defined includes remuneration paid or payable under the terms of the contract of employment, express or implied but further extends to other additional remuneration, if any, paid at intervals not exceeding two months, though outside the terms of employment. Thus, remuneration paid under the terms of the contract of the employment (express or implied) or otherwise if paid at intervals not exceeding two months is wages. The interposition of the clause 'and includes any payment to an employee in respect of any period of authorised leave, lock-out, strike which is not illegal or lay off between the first clause, 'all remuneration paid or payable in cash to an employee, if the terms of the contract of employment, express or implied, was fulfilled and the third clause, 'other additional remuneration, if any, paid at intervals not exceeding two months,' makes it abundantly clear that while 'remuneration' under the first clause has to be under a contract of employment, express or implied, 'remuneration' under the third clause need not be under the contract of employment but may be any 'additional remuneration' outside the contract of employment. So, there appears to our mind no reason to exclude 'house rent allowance', 'night shift allowance', 'incentive allowance' and 'heat, gas and dust allowance' from the definition of "wages'."
16. In the decision in Regional Director, ESI Corporation v. Bata Shoe Co. (P.) Ltd., 1986 68 FJR 13, the Supreme Court has held that bonus paid in the nature of ex-gratia payment payable one month after the end of each quarter is not includible in "wages" as defined under Section 2(22) of the Employees' State Insurance Act. In that case, the question that came up for consideration before the Supreme Court was whether the bonus that was being paid by the Bata Shoe Company to its employees in terms of the settlement entered into between the management and the employees is in the nature of remuneration coming within the ambit of "additional remuneration" as envisaged in Section 2(22) of the Employees' State Insurance Act. In that context, the Supreme Court has observed as follows at page 16:
"It is plain from what has gone before that the bonus paid by the respondent to its employees is in the nature of ex-gratia payment or, as has been described in one of the settlements, it is paid as a gesture of goodwill on the part of the respondent. It is nothing else. Indeed, learned counsel for the parties were agreed before the High Court that the bonus in question was neither in the nature of production bonus nor incentive bonus nor customary bonus nor any statutory bonus. It cannot be regarded as part of the contract of employment. Although the provisions relating to it were included in the Standing Orders and Rules, they were subsequently excluded from them. In our opinion, therefore, the bonus paid or payable by the respondent to its employees under the successive settlements and agreements made between them cannot be regarded as remuneration paid or payable to the employees in fulfilment of the terms of the contract of employment."
17. In the decision in S. T. Reddiar and Sons v. ESI Corporation, (1989-II-LLJ-285), a Division Bench of this Court held that ex-gratia payments made to the temporary workers for printing text books ahead of the time schedule once in the year 1975 and again in 1976 will not partake of the character of wages. In that decision, this Court has observed as follows at p. 287 :
"The expression 'remuneration payable' naturally means remuneration which is due and the payment of which will be legally enforceable. It is the element of obligation which is important. In a case where an amount in excess of the remuneration due is paid or is payable except under the terms of a contract of employment, whether express or implied--that excess amount will not be wages... In the light of the decision of the Supreme Court in Braithwaite's case, (supra) as also the decision of this Court in Carborundum Universal's case, (supra) we are not persuaded to hold that any reward paid voluntarily by an employer as an incentive to its workmen or any other payment of a gratuitous nature otherwise than under the obligation--either statutory or contractual--and unrelated to the contract of employment will be wages as defined in the Act. The only exception may perhaps be cases of additional remuneration paid at intervals not exceeding two months... .. In this view, additional remuneration even beyond the terms of the contract of employment can be treated as wages only if such remuneration is paid at intervals of not more than two months. Gratuitous payment effected once in a year cannot fall within the definition of wages under Section 2(22) of the Act."
18. In the decision in Wellman (India) Pvt. Ltd. v. ESI Corporation, (1994-I-LLJ-545) the Supreme Court has held that the payments made by the employer under quarterly attendance bonus as per the scheme incorporated in the settlement reached before the Conciliation Officer becomes part of additional remuneration as stated in Section 2(22) of the Employees' State Insurance Act. In para 15 of the judgment, the Apex Court has observed as follows at p. 550 :
"As pointed out above, the attendance bonus payable to the employees is under the terms of the settlement which has become a part of the contract of employment. Hence, the said bonus will fall within the first part of the definition of 'wages' under Section 2(22) of the Act which covers all remuneration paid or payable in cash to an employee if the terms of the contract of employment, express or implied, were fulfilled. It is, therefore, really not necessary for us to consider whether it will be 'other additional remuneration' and if so whether further it will be excluded from the definition of 'wages', because it is not payable within a period of two months from the date it is due. However, if it is necessary to express our view on the point, according to us, the expression 'other additional remuneration, if any, paid...' implies that the said remuneration is not payable under any contract of employment, express or implied. This is so because while the first part of the definition refers to remuneration under the contract of employment, the second part does not refer to remuneration under any such contract. Secondly, the definition is inclusive and includes only such payments outside the contract as are mentioned in its second part and none other. Thirdly, the expression 'if any, paid' after the words 'other additional remuneration' will be inconsistent if the remuneration is payable under the contract of employment since such payment is not dependent on the will of the employer but on the fulfilment of the terms of the contract. Lastly, the second part of the definition includes only such contractual payments as are specifically mentioned therein and the exclusionary part does not include the attendance bonus like the present which is payable as stated above under a contract. Hence, the expression 'other additional remuneration, if any, paid' not only does not refer to remuneration payable under any contract but refers to such remuneration which is payable at the will of the employer. Every remuneration that is payable under the contract would, therefore, fall under the first part of the definition."
19. It is clear from the principles laid down in the above decisions that even if additional remuneration is paid by the employer to the employee at the will of the employer without any agreement or contractual obligation, styled as gift or inam at intervals not exceeding two months, it will partake of the character of wages under Section 2(22) of the Employees' State Insurance Act and mere ex gratia payments or gifts or inams paid at the will of the employer as a gesture of goodwill will not come within the ambit of "wages" under Section 2(22) of the Employees' State Insurance Act.
20. In this case, the definite contention of the appellant is that the payments made by them to the employees are only presentation or gift equally paid to all the employees in the months in which the total turnover exceeded the target. The respondent has no case that the payments are made under the terms of any agreement or contract of employment with the employees. Therefore, the payment does not come within the ambit of wages in the first part of Section 2(22) of the Act. Even though payments are made at intervals not exceeding two months, they do not partake of the character of remuneration so as to bring it within the ambit of the third part of the definition of "wages" under Section 2(22) of the Act. It is the admitted case that during the months in which the turnover does not exceed the target, no payment is made by the appellant to the employees. The account books, viz., exhibits A-1 to A-4, ledgers and vouchers produced before the Insurance Court show that in certain months payments are not made. Though payments are made consecutively for several months when the total turnover in those months exceeded the target, in the absence of sufficient material to establish that those payments were made as remuneration and not as ex gratia as a gesture of goodwill, it is not possible to accept the contention of the respondent that those payments are additional remuneration as contemplated in the third part of the definition of "wages" under Section 2(22) of the Act. Therefore the payments made by the appellant to the employees in these cases voluntarily of a gratuitous nature being ex gratia payment as presentation or gift in a gesture of goodwill for achievement of the target fixed for each month within the same frame work cannot be held to be additional remuneration as contemplated in the definition of "wages" under Section 2(22) of the Act so as to claim the Employees' State Insurance contribution on those amounts. Hence, the Employees' Insurance Court is not at all justified in holding that the payments made as productivity incentive or presentation or gift will fall within the latter part of the definition of "wages" under Section 2(22) of the Employees' State Insurance Act and that finding has to be set aside.
21. We find that the payments made by the appellant in these cases as presentation or gift to the employees do not come within the ambit of "wages" as defined in Section 2(22) of the Employees' State Insurance Act and as such the appellant is not liable to pay Employees' State Insurance contribution on those amounts.
22. In view of what is stated above, the appeals are allowed. The impugned orders passed by the Employees' Insurance Court and the demand notices, viz., No. 54-0675-74-INS III, dated September 14, 1993, and No. 54-4060-667 INS IV, dated March 2, 1993, issued by the respondent claiming the Employees' State Insurance contribution are set aside.