SURYA ROSHNI LTD. & ORS. VS.

THE STATE OF MADHYA PRADESH EPF,

RPFC AND ORS

(2019 LLR 339 (SC))

INTRODUCTION

What kind of incentive, allowances or benefits are to be included in the basic wage have for
long been a grey area in the employment law’s jurisprudence. The judgement dated 28
February 2019 was given by a two judges bench of Hon’ble Justices Arun Mishra and Navin
Sinha of the Hon’ble Supreme Court vide judgement The Court herein has made his stand
clear on the scope of ‘basic wages’ and allowances liable for PF contributions.

In brief, Apex Court in this case set forth that an allowance/payment may be excluded from
salary if it is not paid across the board to all employees in a given category, or is paid
specially to those who availed the opportunity. The court held that special allowances which
form part of an employee's basic wages are subject to such contributions.

FACTS AND THE PARTIES

In this case the Apex Court opined a common verdict on five separate appeals coming from
the High Courts of Calcutta, Madhya Pradesh and Madras. The appeals pertained to the same
question of law i.e. whether the special allowances paid by an employer to its employees
form part of their basic wages and are thus subject to PF contributions..

The parties to the case were

i. RPFC, West Bengal (A1) Vs. Vivekananda Vidyamandir(R1)

ii. Surya Roshni (A2) Ltd. Vs. EPFO (R2),
iii. U-Flex Ltd.(A3) Vs. EPFO (R3)
iv. Montage Enterprise Pvt. Ltd. (A4) Vs. EPFO (R4) and
v. The management of Saint Gobain Glass Ltd. (A5) Vs. RPFC.(R5)

R1 is an unaided school giving special allowance “as incentive” to teaching and non-teaching
staff. Authorities under Employees’ Provident Fund and Miscellaneous Provisions Act,
1952 held it to be included in basic wage for deduction of provident fund. The division bench
in a previous appeal (13.01.2005) held–special allowance was a part of dearness allowance
liable to deduction. Thereafter in 16, January 2007 another division bench held– special
allowance was not linked to Consumer price Index and thereby not falls into basic wage
definition, so not liable to deduction.

A2 was paying basic wage and various other incentive and variable dearness allowance, etc.
The special allowances were exclusive of basic wage, so deduction for Provident Fund not
carved out for the same. Authorities under the Act held excluded only washing allowance
whereas HC partly allowing the writ petition excluded lunch as well.

A3 and A4 other establishments covered under the Act were not deducting Provident Fund
contribution on house rent allowance, and other special allowance, by excluding it from basic
wage. The authority under the Act held that the allowances had to be taken into account as
basic wage for deduction. The High Court dismissed both writ and the review petition filed
by the appellant.

In this case, the A5 received a ‘show cause’ notice from the PF authorities calling for records
maintained to determine if the conveyance, education, medical allowances, food concessions,
special holidays, night shift incentives, etc. formed part of the salary for PF contribution
purposes. A writ filed by A5 with the High Court was dismissed. A Writ Appeal was
then opted against the same and which has been transferred to this Court at the request of the
petitioner.

BACKGROUND

The bench clarified and set out the relevant provisions for the controversies before it. As per
the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 (the EPF Act)
Sections states1 that contributions are required to be made by the employer at 12 percent of

i. basic wages2,

1
Section 6: Contributions and matters which may be provided for in Schemes.
The contribution which shall be paid by the employer to the Fund shall be ten percent. Of the basic wages,
dearness allowance and retaining allowance, if any, for the time being payable to each of the employees whether
employed by him directly or by or through a contractor, and the employees’ contribution shall be equal to the
contribution payable by the employer in respect of him and may, if any employee so desires, be an amount
exceeding ten percent of his basic wages, dearness allowance and retaining allowance if any, subject to the
condition that the employer shall not be under an obligation to pay any contribution over and above his
contribution payable under this section
 ii. Dearness allowance (DA) and
iii. Retaining allowance.

Dearness allowance for this purpose would include cash value of food concessions
(collectively referred to as PF wages).

Also EPF Act applies to all employees, including contract workers, who:

 earn a basic wage of up to Rs15,000; and

 have never been members of the statutory fund or have been members but have
withdrawn all of their accumulations in accordance with the act.

IMPORTANT CASE LAWS

Bridge & Roof Co. (India) Ltd. v. Union of India

It was pointed out in this case that all that is the price for labour and arises out of employment
contract be included in basic wages, as the definition of “basic wages” contains exceptions I
clause ii, The exceptions clearly shows that the price of the labour is also included in it.

Muir Mills Co. Ltd., Kanpur Vs. Its Workmen

It was considered that any variable earning which may vary from individual to individual
according to their efficiency and diligence will stand excluded from the term “basic wages”

Manipal Academy of Higher Education vs. Provident Fund Commissioner,

The judgement in this case was also passed by relying on the Bridge Roof Case. The court
herein reiterated the principle of universality, stating that

a. “where the wage is universally, necessarily and ordinarily paid to all, across the board
such emoluments are basic wages;

2
Section 2 (b): “Basic Wages” means all emoluments which are earned by an employee while on duty or
(on leave or on holidays with wages in either cash or in accordance with the terms of the contract of
employment and which are paid or payable in cash to him, but does not include
(i) The cash value of any food concession;
(ii) Any dearness allowance (that is to say, all cash payments by whatever name called paid to an
employee on account of a rise in the cost of living), house-rent allowance, overtime
allowance, bonus, commission or any other similar allowance payable to the employee in
respect of his employment or of work done in such employment.
(iii) Any presents made by the employer;
 b. where the payment is available to be specially paid to those who avail of the
opportunity is not basic wages; and
c. conversely, any payment by way of special incentive or work is not basic wages.”

ISSUE OF LAW

Whether special allowances paid by an establishment to its employees would fall within the
expression “basic wages” under Section 2(b)(ii) r/w Section 6 of the Employees’
Provident Fund and Miscellaneous Provisions Act, 1952 (hereinafter Act) for
computation of deduction towards Provident Fund.

Contentions of the Employers

The broader contentions given by the petitioners were:-

i. A1 submitted that The special allowance paid was a camouflaged dearness allowance,
which is subject to PF contributions an d that S-2 (b) defines dearness allowance as all
cash payments paid to an employee on account of rise in cost of living irrespective of
nomenclature.
ii. Basic wages includes only those emoluments which are earned in accordance with the
terms of contract and not discretionary allowances earned otherwise (Relying on
Bridge and Roof Co. (India) Ltd. vs. Union of India3).
iii. The common submission was that the term “basic wages” has exceptions and cannot
include what would not be earned ordinarily as per contract of employment.

CONTENTIONS OF THE PF AUTHORITIES

i. The act is social welfare legislation intended to protect the less fortunate sections of
society and therefore should be interpreted in a manner that seeks to advance the
purpose of the legislation.
ii. It was contended thay the special allowance paid was a camouflaged dearness
allowance, which is subject to PF contributions. It also argued that similar to a
dearness allowance, the special allowance was subject to increment contributions on a
timescale basis.
iii. Relying on the Bridge and roof case it was submitted that what is warned by all must
be included in basic wages for deduction of PF. It further argued in order to exclude

3
(1963) 3 SCR 978.
 any incentive wage from basic a direct nexus and linkage should be there with the
quantum of extra output.

RULING OF THE COURT

The Court held that to show that the amount is beyond basic wages, it must be shown that the
workman concerned had done some extra work to become eligible to get this extra amount of
work which lead to increase in output from the otherwise prescribed.

The bench observed that “no material has been placed by the establishments to demonstrate
that the allowances in question being paid to its employees were either variable or were
linked to any incentive for production resulting in greater output by an employee and that the
allowances in question were not paid across the board to all employees in a particular
category or were being paid especially to those who avail the opportunity”.

It also set forth that the Act is a beneficial social welfare legislation and must be interpreted
as such. To exclude an allowance from the ambit of basic wages, it must be demonstrated that
the same is either

(a) variable;
(b) linked to any incentive for production resulting in greater output by an employee; or
(c) paid especially to those who avail the opportunity; and (d) that the allowance in
question is not paid across the board to all employees, in a particular category.

The test to determine whether any was to e excluded from basic wages is that payment must
have a direct access and linkage to the payment of such allowance and not be common to all.
The Court thus opined, the crucial test is one of universality. Therefore Apex Court upheld
the universality principle laid down in the Bridge and Roof Case to state that “only such
allowances not payable by all concerns or may not be earned by all employees of the concern
that would stand excluded from deduction.”

The ‘presents’ by the employer to an employee by way of reward or not under any scheme of
“inam” does not fall within the definition of the term ‘basic wages’.

Last but not least Court set forth that any payment by way of a special incentive or work is
not basic wages.
COMMENTS

1. The position of the law remains as it was before the judgement. All what is done is
that provisions of the Act have been reproduced, principles reiterated in the matters of
Bridge and Roof Company (India) Limited V. Union of India, 1962-II L.L.J. 490 and
the principles reiterated in the matter of Manipal Academy of Higher Education Vs.
Provident Fund Commissioner have been referred. Also because the judgement in this
case has only interpreted the position of law that was pre-given in the statute,
therefore the implications could be applied retrospectively.
2. Also the need of the hour requires that a comprehensive policy should be drafted to
guide the Provident Fund authorities in matters of specific Wage Structures. The
bench has missed the opportunity to settle the controversies on various allowances,
once and for all. But it opted to remain silent. Had the Court
given a detailed order concerning the same, anxieties among employers, lacunae to
violate the law would have been diminished to a great extent.
3. In my opinion the creation of straight jacket lower limit value of Rs. 15,000 over and
above which is to PF contributed has no rational decidendi. The legislature should
also deep delve into the socio-economic conditions and make comprehensive category
to understand the implications for example if the employee is the only member
earning of the family or not, whether he is below poverty line or not, etc.

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