Calcutta High Court
Employees' State Insurance ... vs Duncan Gleneagles Hospital Ltd. And ... on 29 March, 2005
Equivalent citations: 2005(3)CHN116, (2005)IIILLJ174CAL
Author: D.K. Seth
Bench: D.K. Seth, Soumitra Pal
JUDGMENT D.K. Seth, J.
1. The question : The short question involved in this case is as to whether a diagnostic center attached to a hospital carries on manufacturing process as defined in the Factories Act, 1948 and as such is a factory within the meaning of the Employees' State Insurance Act, 1948 (ESI Act) in order to cover the persons employed in the diagnostic center under the Employees' State Insurance Scheme.
Facts :
2. The Employees' State Insurance Corporation through its letter dated 23rd November, 1998 (Annexure-A to the WP) required the respondent, Duncan Gleneagles Hospital Ltd., to submit its return. By another letter dated 4th of August, 1999 (Annexure-D to the WP) the appellant issued a show-cause notice for recovery of a sum of Rs. 4,78,228/- from the respondent/writ petitioner. The respondent/writ petitioner took the defence that the ESI Act does not apply in its establishment. By an order dated 16th of February, 2000 (Annexure-J to the WP) the appellant held that the respondent/writ petitioner was liable to pay the contribution under Section 15A of the ESI Act, the amount of Rs. 4,78,228/-together with interest of Rs. 31,520/- for the period 10/98 to 6/99. These notices and orders respectively were challenged and sought to be quashed by the respondent/writ petitioner through the writ petition being WP No. 992 of 2000. The learned Single Judge by a judgment and order dated 29th August , 2003 was pleased to allow the writ petition and quash the said notices and the orders contained in Annexures A, D and J respectively.
The decision by the learned Single Judge :
3. The learned Single Judge relying on the decision in Collector of Central Excise, Madras v. Kutty Flush Doors and Furniture Co. (P) Ltd., AIR 1988 SC 1164 and Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. Coco Fibres, AIR 1991 SC 378 was pleased to hold that through pathological tests nothing is manufactured nor anything is brought into existence, which by itself is a distinct commercial commodity capable of being sold or supplied; neither any new article is produced by the pathological laboratories recognized or known as such in the commercial parlance for sale or supply and distinguished the decision in Subodh S. Shah and Ors. v. Director, Food and Drugs, Food and Drugs Control Office, Ahmedabad and Anr., AIR 1997 Gujarat 83 holding that the activities carried on by a pathological laboratory located in the hospital is not a factory within the definition of Section 2(12) of the ESI Act and that the Circular dated 19th June, 1997 issued by the Headquarters of the ESI Corporation does not include pathological laboratories located in the hospitals.
Submission of the Appellant :
4. Mr. Molay Dhar, learned Counsel for the appellants, relying upon the definition of 'factory' in Section 2(12) of the ESI Act and 'manufacturing process' defined in Section 2(k) of the Factories Act read with Section 2(14AA) of the ESI Act and contended that the diagnostic center in a hospital carries on manufacturing process as was held in Subodh S. Shah (supra); Gateway Auto Services, a Partnership Firm, Bombay-1 v. Regional Director, Employees' State Insurance Corporation and Anr., 1981 Lab IC 49; Mohd. Shabir v. State of Maharashtra, 1979(1) SCC 568; CIT, Tamil Nadu-IV v. V.K. Ramachandran, 128 ITR 727; CIT v. Upasana Hospital, 225 ITR 845 (Ker); CIT v. M.L. Agarwalla, 258 ITR 102 (Gauhati) and CIT v. Air Survey Co. of India (P) Ltd., 232 ITR 707 (Cal). As such it is a factory defined under the ESI Act attracting the application of that Act.
Submission of the Respondent :
5. Mr. Arunava Ghosh, learned Counsel for the respondent/writ petitioner, on the other hand, contended that the provisions of the ESI Act were sought to be applied upon the respondents on the strength of an administrative instruction, which is not binding in law, as was held in Union of India v. Rakesh Kumar, 2001(2) SCC L & S 707 (para-19), since an administrative instruction has no statutory force and is unenforceable in Court as was laid down in J.R. Raghupathy v. State of A.P. and Ors., AIR 1988 SC 1681. According to him, the pathological tests do not involve any manufacturing process as defined in the Factories Act adopted by the ESI Act. He distinguished the decision in Collector of Central Excise, Madras v. Kutty Flush Doors and Furniture Co. (P) Ltd., AIR 1988 SC 1164 on the ground that in that decision manufacturing was considered but not the process, which is larger than manufacture. Distinguishing the decision in Coco Fibres (supra) relying on paragraph 3, Mr. Ghosh contended that in that decision manufacture was interpreted in common parlance in the absence of any definition on the concept that the process includes process to produce. He also relied on the decision in Assistant Commissioner of Commercial Taxes (Asst.), Dharwar and Ors. v. Dharmendra Trading Co., AIR 1988 SC 1247 and contended that the State cannot say that its own action is ultra vires, neither a subordinate can describe the superior's action as ultra vires as was sought to be contended in the affidavit-in-opposition by the appellants. Mr. Ghosh drew our attention to Annexure-G of the stay application at page 103 and pointed out that the Circular dated 14th of June, 1997 issued by the Headquarters of the ESI Corporation excluded pathological laboratories located in the hospitals in relation whereto affidavit-in-opposition was affirmed.
Executive Instruction : The proposition :
6. It is a settled proposition of law that by executive or administrative instructions an establishment cannot be brought within the purview of the Act unless the provisions of the Act make itself applicable to such an establishment. The application of the law cannot be extended through administrative instruction as was held in Rakesh Kumar (supra). Admittedly, administrative or executive instructions do not have any statutory force and unenforceable in Court as was held in J.R. Raghupathy (supra).
Pathological Laboratory attached to Hospitals : whether carries manufacturing process :
7. In the context, we may examine as to whether the pathological laboratory attached to a hospital carries on any manufacturing process. We may consider this question in the light of the Circular issued by the ESI Corporation Headquarters (Annexure-G, page 103 of the stay application). The entire approach of the appellants was based on the decision of the Gujarat High Court in Subodh S. Shah (supra). But that decision was given in the background of the necessity of obtaining a licence under the Drugs and Cosmetics Act, 1940. Whether the collection of blood was a drug requiring a licence under the said Act? Drug was defined in Section 3(b) of the 1940 Act. Blood when used for treatment or prevention of any disease or disorder in the human beings is definitely a drug. The activities of tapping, collecting, cross-matching and keeping in bottles by the pathologists were held to be manufacturing of blood or whole human blood. This decision has to be understood in the context in which it was rendered. This decision was founded on the definition of the word 'manufacture' in Section 2(f) of the 1940 Act, which runs as follows :
"2(f) 'manufacture' in relation to any drug [or cosmetic] includes any process or part of a process for making, altering, ornamenting, finishing, packing, labelling, breaking up or otherwise treating or adopting any drug with a view to its sale and distribution but does not include the compounding or dispensing [of any drug or the packing of any drug or cosmetic] in the ordinary course of retail business; and 'to manufacture' shall be construed accordingly."
7.1. This definition pre-supposes undertaking of the process with a view to sale and distribution. A pathological test carried on in a pathological laboratory attached to a hospital may not amount to manufacture of an article with a view of its sale and distribution. Inasmuch as it is a test, which is carried on for the purpose of diagnosing the disease of a patient. The entire process is in aid of detecting or determining the disease. The tests undertaken are not for sale or distribution. It is a kind of examination to determine or diagnose the disease. The object of this test is not aimed at producing anything with a view to its sale and distribution. Even if the process of examination may involve making, altering, ornamenting, finishing, packing, labelling, breaking up or otherwise treating or adopting, yet these are all byproduct and is a process of diagnosing the disease. It had no other use or commercial value. Having regard to the situation, we do not think that the decision in Subodh S. Shah (supra) would be a determining factor to bring a pathological laboratory within the scope of the ESI Act straightaway when it processes blood unless it is made for sale or distribution, the tests carried on may or may not amount to manufacturing of drugs. But that is neither here nor there. We are not supposed to express any opinion in regard thereto. The above discussion was only to examine as to whether the decision of the Gujarat High Court in Subodh S. Shah (supra) would be an authority to hold absolutely that a pathological laboratory attached to a hospital would be a factory within the meaning of the ESI Act. Similarly, the decisions in Mohd. Shabir (supra); V.K. Ramachandran (supra); Upasana Hospital (supra); M.L. Agarwalla (supra) and Air Survey Co. of India (P) Ltd. 232 ITR 707 (Cal) (supra) would not be of any help to us since these decisions were related to the question of manufacture in relation to fiscal matters, which are looked at altogether from a different angle.
7.2. We may, therefore, examine the question independent of those decisions having regard to the definitions given in the ESI Act in conjunction with the decisions in the field namely Gateway Auto Services (supra).
7.3. The word 'factory' has been defined in Section 2(12) of the ESI Act to mean :
"2(12) 'Factory' means any premises including the precincts thereof whereon twenty or more persons [are employed or were employed for wages] on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on with the aid of power or is ordinarily so carried on but does not include a mine subject to the operation of the [Mines Act, 1952] [or a railway running shed];
'Seasonal factory' means a factory which is exclusively engaged in one or more of the following manufacturing processes, namely, cotton ginning, cotton or jute pressing, decortication of groundnuts, the manufacture of coffee, indigo, lac, rubber, sugar (including gur) or tea or any manufacturing process which is incidental to or connected with any of the aforesaid process [and includes a factory which is engaged for a period not exceeding seven months in a year--
(a) in any process of blending, packing or repacking of tea or coffee; or
(b) in such other manufacturing process as the Central Government, may, by notification in the Official Gazette specify];
The expressions 'manufacturing process' and 'power' shall have the meaning respectively assigned to them in the Factories Act [1948];"
7.4. The definition of the word 'manufacturing process' was adopted from the Factories Act, which runs as follows :
"2(k) "manufacturing process" means any process for--
(i) making, altering, repairing, ornamenting, finishing, packing, oiling, washing, cleaning, breaking up, demolishing or otherwise treating or adopting any article or substance with a view to its use, sale, transport, delivery or disposal, or
(ii) pumping oil, water or sewage, or
(iii) generating, transforming or transmitting power; or
(iv) composing types for printing, printing by letter press, lithography, photogravure or other similar process or book binding;
(v) constructing, reconstructing, repairing, refitting, finishing or breaking up ships or vessels."
7.5. The definition of 'manufacturing process' includes otherwise treating or adopting any article or substance with a view to its use, sale, transport, delivery or disposal. The outcome of the test is recorded through various machineries electronically operated or otherwise. In some cases, these are recorded in special kind of papers or any photo plates or X-ray plates or certain kind of devices recording Ultra-sonographic tests. The process of these tests were not carried on either for making, altering, repairing, ornamenting, finishing or otherwise treating or adopting any article or substance, namely, the X-ray plates or the papers or the sonographic records with a view to its use, sale, transport, delivery or disposal. These articles or substances were used in aid of the process for the examination or the tests carried on. It is the report of the test, which is produced. It is the service of preparing the report or diagnosis is the services rendered. The process is not undertaken for the purpose of production of any article or substance in the form of developed X-ray films or sonographic records or anything else. If we interpret in such a manner, in that event, even printing floppies or writing disks or typing of papers in course of any business or commerce or any office or administration would also amount to undertaking of manufacturing process since floppies, disks, xerox and typing are undertaken for the use or disposal. But if the pathological laboratory undertakes tapping of blood and process the same and use the same for the purpose of sale or transfusion or otherwise use thereof, the same may be a manufacturing process. But the pathological tests would not amount to manufacturing process even though the production of the developed X-ray films or sonography reports may amount to manufacturing process otherwise in some other context. It has to be reconciled with the purpose and object for which it is being used or utilized. It is the ultimate product that will determine the issue the process adopted for study and research in order to diagnose would not be a manufacturing process.
7.6. But then the tapping of blood and selling of such blood and using of such blood, though may involve manufacturing process, yet if it is undertaken by a pathological laboratory attached to a hospital has been exempted by the Circular contained in Annexure-G (page 103 of the stay application) would not come within the purview of the ESI Act, so long it caters to the need of the patients treated in those hospitals. The Circular itself excludes the application of the provision to pathological laboratories located in the hospitals and meeting the requirements of its patients admitted.
7.7. The Circular (Annexure-G) has not been challenged by the appellants. The appellants cannot question the validity of this Circular. The State cannot say that its action in issuing the said Circular was ultra vires. The Circular having been issued by the Headquarters is binding on its subordinates and a regional office cannot question the vires thereof. It cannot describe its superior's action as ultra vires as was held in Dharmendra Trading Co. (supra). Therefore, so long the Circular contained in Annexure-G remains valid, the blood banks and pathological laboratories attached to a hospital would not come within the purview of the ESI Act until it is shown that the said pathological laboratory or blood bank caters to the need of outsiders other than the patients admitted in the hospital.
Conclusion :
8. In these circumstances, in our view, the pathological tests carried on by a laboratory attached to a hospital would not amount to a manufacturing process for the purpose of attracting the application of the ESI Act and blood bank catering to the needs of the patients admitted in the hospitals by such blood bank attached to a hospital would also not attract the application of the ESI Act. But as soon it is established that it caters to the needs of the outsiders other than the patients admitted in the hospital, the application of the ESI Act cannot be overruled.
Order :
9. In these circumstances, we modify the order of the learned Single Judge only to the extent as indicated above and the question may be decided by ESI Authority in accordance with law after giving opportunities to the parties in order to establish that the said pathological laboratory or blood bank caters to the need of the outsiders other than patients admitted in the hospitals.
9.1. In the result, the appeal, thus, succeeds in part and the order of the learned Single Judge appealed against is modified to the extent as indicated above.
10. The appeal is, thus, disposed of.
11. There will, however, be no order as to costs.
Soumitra Pal, J.
12. I agree.