M/S. Orissa Cement Ltd vs Union Of India

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Petition No. 17 of 1961

Decision Date: 14 March, 1962

Coram: Bhuvneshwar P. Sinha, N. Rajagopala Ayyangar, J.R. Mudholkar, Venkatarama Aiyar

In the matter of M/S. Orissa Cement Ltd versus Union of India, a judgment was delivered on 14 March 1962 by the Supreme Court of India. The bench that heard the case comprised Chief Justice Bhuvneshwar P. Sinha, Justice N. Rajagopala Ayyangar, Justice J.R. Mudholkar, Justice T.L. Venkatarama Aiyyar, and Justice Subbarao K. Ayyangar. The decision is reported in the 1962 All India Reporter at page 1402 and in the Supreme Court Reporter Supplement, volume 3, page 837. The petitioner was M/S. Orissa Cement Ltd, and the respondent was the Union of India. The dispute centered on provisions of the Provident Funds Act, 1952 (XIX of 1952), particularly sections 5, 6, and 7, and on the Employees’ Provident Fund Scheme as set out in paragraphs 30, 31, 32, and 73A of the Scheme. Under the Scheme, paragraph 2(f)(iii) originally defined “Excluded Employees” as those employed by or through a contractor. Sections 6 and paragraphs 30 to 32 of the Scheme required the employer to contribute twelve and one half percent of basic wages and dearness allowance to the Provident Fund, with the contribution shared equally between employer and employee; the employer was to deduct the employee’s share from wages. Paragraph 26 stipulated that any employee, other than an excluded employee, who completed one year of continuous service in a factory or other establishment would become a member of the Fund. By Notification S.R.O. 351 dated 15 January 1958, the definition in paragraph 2(f)(iii) was amended to include all employees employed by a contractor who were directly connected with any manufacturing process in a factory or establishment, thereby granting them the benefits of the Act. A subsequent Notification G.R.E. 1457 dated 2 December 1960 repeated this amendment and introduced a new paragraph 73A, effectively removing the distinction between contractors’ workers directly involved in manufacturing and those who were not, and extending Scheme benefits to all such workers.

The petitioner challenged the validity of the two notifications on the ground that they imposed unreasonable restrictions and did not fall within the scope of article 19(6) of the Constitution, alleging that they infringed the freedom of trade, business and profession protected by article 19(1)(g). The petition was filed under article 32 of the Constitution for enforcement of fundamental rights. Counsel for the petitioner argued that the amendments forced employers to bear a share of the Provident Fund contribution for contract labour in a manner that was arbitrary and discriminatory, asserting that section 6(1) of the Act intended the employer’s liability to be limited to a moiety of the Fund and that the Scheme, while appropriate for directly employed workmen, could not be validly extended to contract labour because paragraph 32 was inapplicable in that context. The petitioner further contended that the combined operation of paragraphs 30 and 32 resulted in an unfair and harsh burden on employers who engaged contract labour, creating a distinction between those who employed direct labour and those who used contract labour. The Court held that the notifications were unconstitutional and void, reasoning that the Scheme’s extension to contract labour did not satisfy the requirement of reasonableness under article 19(6) and therefore could not be sustained as a valid restriction on the liberty guaranteed by article 19(1)(g).

In this case the Court held that the two notifications issued on 15 January 1958 and on 21 December 1960 were unconstitutional and therefore void. Section 6(1) of the Employees’ Provident Funds Act makes the employer liable only for one‑half of the provident fund contribution. While the 1952 scheme was properly crafted to achieve that purpose for workmen who were directly employed, the combined operation of paragraphs 30 and 32 caused the scheme to collapse when it was applied to contract labour, because paragraph 32 does not apply to such workers. The Court observed that the scheme operated in an unfair and harsh manner on persons who employed contract labour and created a discrimination between employers who used contract labour and those who employed labour directly. Consequently the scheme could not be regarded as reasonable and did not fall within the protection afforded by Article 19(6); it therefore had to be struck down.

The original jurisdiction concerned Petition No 17 of 1961, filed under Article 32 of the Constitution for the enforcement of fundamental rights. Counsel for the petitioners was appointed, while counsel for the respondent represented the Government. The judgment was delivered on 14 March 1962 by Justice Venkatarama Aiyar. The first petitioner was a company engaged in cement manufacturing in the State of Orissa, and petitioners 2 and 3 were two of its directors. They challenged the validity of two notifications dated 15 January 1958 and 2 December 1960, issued by the Central Government under section 7(1) of the Employees’ Provident Funds Act, 1952 (hereinafter “the Act”). The Court first set out the statutory provisions relevant to the dispute.

The Act was enacted to provide for the institution of provident funds for employees in factories and other establishments. Section 5 of the Act, which governs the scheme, reads: “5. Employees' Provident Fund Schemes.-(1) The Central Government may, by notification in the Official Gazette, frame a Scheme to be called the employees' Provident Fund Scheme for the establishment of provident funds under this act for employees or for any class of employees and specify the establishments or class of establishments to which the said Scheme shall apply and there shall be established, as soon as may be after the framing of the Scheme, a Fund in accordance with the provisions of this Act and the Scheme. (2) A Scheme framed under sub‑section (1) may provide that any of its provisions shall take effect either prospectively or retrospectively on such date as may be specified in this behalf in the Scheme.” Section 6(1), which deals with the employer’s contribution to the fund, states: “6(1) The contribution which shall be paid by the employer to the Fund shall be six and a quarter per cent. of the basic wages, dearness allowance and retaining allowance (if any) for the time being payable to each of”.

In the scheme, the contribution required from each employee was stipulated to be equal to the contribution payable by the employer on that employee’s behalf and, if the employee so desired and if the scheme allowed, could be an amount not exceeding eight and one‑third per cent of his basic wages, dearness allowance and any retaining allowance. The scheme further provided that whenever a contribution amount involved a fraction of a rupee, the scheme could prescribe rounding that fraction to the nearest rupee, half a rupee or a quarter of a rupee. Under section 7, the Central Government was empowered to add to, amend or vary any scheme made under the Act by publishing a notification in the Official Gazette. Section 14 prescribed penalties for any breach of the Act’s provisions or for any default in complying with them. Exercising the powers conferred by section 5 of the Act, the Central Government issued, on 2 September 1952, the Employees’ Provident Funds Scheme, 1952. Paragraph 2(f)(iii) of that scheme defined “Excluded Employees” as those employed by or through a contractor. Paragraph 3 stated that the provident‑fund balance crediting an employee vested in the authorities constituted under the scheme. Paragraph 26 required every employee working in a factory or establishment, except an excluded employee, to become a member of the fund after completing one year of continuous service; the paragraph added a proviso that an employee who had actually worked for not less than 240 days would be deemed to have completed the one‑year continuous service. Paragraphs 30 to 32 set out the rules for contributions: paragraph 30 directed the employer, in the first instance, to pay both the employer’s contribution and, on the employee’s behalf, the employee’s contribution; paragraph 31 declared that, notwithstanding any contrary contract, the employer could not deduct the employer’s contribution from the employee’s wages or recover it from the employee in any other manner; paragraph 32(1) provided that the amount of the employee’s contribution paid by the employer was, despite any provisions of the scheme, any law then in force, or any contrary contract, to be recoverable only by deduction from the employee’s wages and not by any other means, subject to the condition that such deduction could be made only from the wage paid for the period or part of the period to which the contribution related, and further provided that the employer was entitled to recover the employee’s share from a wage other than that paid for the period for which the contribution had been paid or was payable.

The Scheme provides that a contribution is payable when an employee, at the time of joining the employer, makes a false written declaration that he is not already a member of the Fund. The Scheme further allows that if no deduction was made because of an accidental mistake or a clerical error, the deduction may be effected from later wages, but only with the written consent of the Inspector. Moreover, when a member’s wages are paid on a daily, weekly or fortnightly basis, the deductions made must be summed to show the amount that would have been deducted on a monthly basis. Any sum that an employer deducts from an employee’s wages under the Scheme is deemed to have been entrusted to the employer for the purpose of paying the contribution for which it was deducted.

The combined effect of section 6 and paragraphs 30 to 32 of the Scheme is that the contribution to the Provident Fund is fixed at twelve and a half per cent of the basic wages and dearness allowance. This contribution is to be shared equally by employer and employee, but the employer initially pays the whole amount. The employer then recovers the employee’s share by deducting it from the employee’s wages. Such a deduction is possible only when the employer is the person who actually pays the wages. Consequently, employees who are employed by or through a contractor were placed in the category of “excluded persons” under paragraph 26, meaning that the Scheme did not apply to them. Because the contractor, not the principal employer, pays the wages of those workers, the principal employer does not have the opportunity to make the required deduction.

It was observed that many employers, in order to avoid their contribution obligations under the Act, increasingly employed workmen through contractors. To counter this avoidance, the Government amended the Scheme so that the benefits of the Act would extend to employees hired through contractors. A notification issued on 15 January 1958 (S.R.O. No. 331) substituted the existing wording of paragraph 2(f)(iii) with a new provision stating that an employee employed by a contractor in any operation not directly connected with a manufacturing process in the factory or establishment would be covered, and an explanation clarified that the principal employer shall be responsible for complying with the Act and the Scheme in respect of such an employee. The effect of this amendment was to bring into the ambit of the Act all employees employed by contractors who were directly connected with the manufacturing process in the factory or establishment.

Subsequently, on 11 May 1959 paragraph 26 was amended accordingly to give effect to the January 1958 notification. This amendment aligned the definition of excluded persons with the newly expanded coverage, ensuring that employees employed through contractors and involved in the manufacturing process were now entitled to the benefits provided under the Act and the Scheme.

The Court recorded that the notification dated 15 January 1958 was later considered insufficient to meet the purposes of the legislation. Consequently, invoking the authority granted by section 7(1) of the Act, the Government issued a new notification numbered G.S.R. 1467 on 2 December 1960. This later notification repealed paragraph 2(f)(ii) as it then existed and introduced a fresh paragraph 73A, which read: “Where an employee is employed by, or through, a contractor in, or in connection with, the work of an establishment, the principal employer shall be responsible for complying with the provisions of the Act and this Scheme in relation to such employee.” The Court observed that this amendment eliminated the distinction created by the 1958 amendment between contract workers who were directly engaged in the manufacturing process of a factory or establishment and those who were not so engaged. As a result, all contract workers, irrespective of their connection to the manufacturing process, became eligible for the benefits under the Scheme.

The authorities established under the Act subsequently issued notices to the first petitioner, bringing the changes introduced by the two notifications to its attention and directing the petitioner to comply with the new provisions. The management of the petitioner responded by highlighting practical difficulties in implementing the directives, particularly with regard to workers supplied by contractors. A prolonged exchange of letters ensued, which culminated in the respondents threatening to initiate penal proceedings under section 14 of the Act. In response to these developments, the petitioners filed the present petition challenging the constitutionality of the notifications dated 15 January 1958 and 2 December 1960. They argued that the notifications imposed a heavy burden on their business, could not be justified as a reasonable restriction under article 19(6) of the Constitution, and therefore ought to be struck down as an infringement of article 19(1)(g). The respondents, for their part, contended that the notifications represented benevolent legislation enacted in the public interest and fell within the protection of article 19(6). The Court noted that there could be no doubt that the impugned notifications were devised with public welfare in mind. The Scheme framed under the 1952 Act granted provident‑fund benefits only to workers directly employed by factories or establishments, while a large segment of workers performing similar duties but employed through contractors were excluded. This exclusion amounted to discrimination without justification, which the two notifications sought to rectify. The petitioners did not dispute that the purpose of the notifications fell within the ambit of article 19(6); rather, they contended that the means employed to achieve that purpose were unreasonable, and consequently, the Scheme should be held to violate article 19(1)(g). The Court further observed that when the Government decided to extend provident‑fund benefits to workers employed through contractors, instead of drafting provisions suited to their status as contractor‑employees, it simply extended to them the provisions which had been framed in

In the present matter the petitioners argued that the 1952 Scheme was framed with reference to workmen who were directly employed, and that it made no distinction between those workers and workmen who performed the same duties but were employed through contractors. They contended that this failure to differentiate resulted in consequences that were as unjust as they were unforeseen, and that, on that basis, the Scheme could not be said to fall within the constitutional saving provision of Article 19(6). To ascertain whether this objection was well founded, the Court examined the difference between contract labour and direct labour to the extent that the distinction affected the operation of the Scheme.

The Court observed that when a principal employer engages contract labour, there is no contractual relationship between the principal employer and the workers who actually perform the work. The contractor alone engages those workers and pays their wages, leaving the principal employer without any direct relationship with the employees. The petitioners maintained that the statutory duty imposed on an employer to contribute each month to the provident fund an amount equal to six and a quarter per cent of the employee’s wages and dearness allowance could not be performed by a principal employer, because the principal employer would not know the wage rates agreed between the contractor and his employees. They further argued that, since the factory or establishment does not keep muster rolls for workmen employed through contractors, the principal employer would be unable to determine whether a particular workman was a casual labourer or whether he satisfied the conditions of Paragraph 26, which requires continuous service for the prescribed period before a workman becomes eligible for benefits under the Scheme.

While acknowledging that the difficulties raised by the petitioners were not without merit, the Court held that they were insufficient to defeat the Scheme. It noted that these problems could have been removed had the Scheme provided that contractors were required to submit a written statement to the principal employer containing the necessary details of the workmen and their wages. Even in the absence of such a provision, the Court said, there is no reason why the principal employer could not require the contractor, at the time of entering into the agreement, to furnish those particulars in order to protect his own interests.

The Court also rejected the contention that the principal employer would be unable to ascertain whether a particular workman was a casual labourer or was entitled to benefits under Paragraph 26. Under that paragraph, a workman becomes eligible for the Scheme only when he has worked continuously for not less than 240 days in the same factory or establishment, a fact that the principal employer can readily verify.

A more serious objection raised by the petitioners concerned the right granted to the principal employer under Paragraph 32, which the petitioners claimed was ineffective when dealing with contract labour. The Court recalled that under Paragraph 30 the whole amount of the provident fund, calculated at twelve and a half per cent of the wages and dearness allowance, is to be paid initially by the employer, and Paragraph 32 requires the employer to deduct the employee’s share of the contribution from the employee’s wages. The petitioners argued that this arrangement created an inequitable situation for a principal employer who engages contract labour, because the contractor, and not the principal employer, actually pays the wages of the contract workers, while the statutory obligation to pay the entire provident fund, including the employee’s share, falls on the principal employer.

The Court observed that under the scheme the wages and dearness allowance were required to be paid first by the employer, and that under Paragraph 32 the employer was required to deduct from those wages the employee’s one‑half share of the provident‑fund contribution. The Court noted that this provision presupposed that the same entity that was responsible for paying the provident fund under Paragraph 30 was also the entity that paid the wages to the workmen under Paragraph 32. The Court explained that this presumption did not hold true in cases of contract labour, because the contractor, and not the principal employer, actually paid the wages of the workmen employed through the contractor, while the statutory obligation to contribute to the provident fund remained imposed on the principal employer. The petitioners contended that the scheme operated “with an evil eye and an unequal hand” against an employer who engaged contract labour, since the whole amount of the provident‑fund contribution, including the employee’s share, was imposed on the principal employer without granting him the corresponding right to recover that share by deducting it from the wages he paid. The respondents answered that the principal employer could, by an agreement with the contractor, deduct from the amounts payable to the contractor the sums contributed by the principal employer on account of the employees, and could also sue the contractor for recovery of those sums under Section 69 of the Contract Act. The Court, however, observed that Paragraph 32 expressly required the employer to deduct the employee’s contribution from the employee’s wages “and not otherwise”, and that the scheme did not impose any duty on the contractor to remit to the principal employer the amounts the contractor had paid on the employee’s behalf. The Court further held that the legislature’s intention, as expressed in Article 6(1) of the Act, was to make the employer liable only for one‑half of the provident‑fund contribution, and that while the 1952 scheme was designed to achieve that intention for directly employed workmen through the combined operation of Paragraphs 30 and 32, the scheme failed when applied to contract labour because Paragraph 32 could not be applied. Consequently, the Court found that the scheme operated unfairly and harshly on persons employing contract labour and created discrimination between employers of contract labour and employers of direct labour. The Court concluded that the scheme could not be regarded as reasonable and therefore did not fall within the protection guaranteed by Article 19(6). Accordingly, the Court declared the notifications dated 15 January 1958 and 2 December 1960 to be unconstitutional and void, awarded costs to the petitioners, and allowed the petition.