National Iron And Steel Co. Ltd vs Their Workmen

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 208 of 1969

Decision Date: 21 August 1962

Coram: J.R. Mudholkar, P.B. Gajendragadkar, K.C. Das Gupta

In this case the Supreme Court of India heard an appeal titled National Iron And Steel Co. Ltd versus Their Workmen, decided on 21 August 1962. The judgment was authored by Justice J. R. Mudholkar and was delivered by a bench comprising Justice J. R. Mudholkar, Justice P. B. Gajendragadkar and Justice K. C. Das Gupta. The petitioner was National Iron and Steel Co. Ltd and the respondent was the body of workmen identified as “Their Workmen.” The decision was reported in the 1963 volume of the All India Reporter at page 325 and in the Supreme Court Reports (3rd series) at page 660. Citator information indicates a reference to RF 1972 SC 2148 (22) and the principal statutory provision concerned was an industrial dispute relating to incentive‑bonus schemes, the tribunal’s power to vary such schemes, and the rates applicable to piece‑rate workmen.

The appellant operated a large steel mill that contained a number of distinct departments, which were organized under three principal headings. By mutual agreement between the mill’s management and the workmen, each department operated under its own set of production targets and incentive‑bonus arrangements. These arrangements had been in force for a considerable period, and the parties had generally adhered to the differing schemes that applied to their respective categories of employees. The management’s role in establishing the schemes was understood to be discretionary, but once a scheme was implemented it created binding obligations on both sides.

Workmen represented by respondent No. 2 contended that the existing incentive‑bonus scheme failed to include certain categories of employees, specifically the clerical staff, the watch‑and‑ward personnel and the workers employed in the shopping department. They further sought a revision of the production targets, requesting that the targets be restored to the levels that had prevailed in 1948. Because the parties were unable to settle the dispute through direct negotiations, the Government referred the matter to the Industrial Tribunal for adjudication. The Tribunal, in its award, ordered a revision of the production targets in several departments. It also granted an extension of the incentive‑bonus scheme to the clerical, watch‑and‑ward, and shopping‑department staff, specifying particular rates for those extensions. However, the Tribunal rejected the workmen’s request for a uniform revision of bonus rates in the indirect‑productive department and also declined the appeal for a uniform bonus rate across all categories of workmen.

The appellant subsequently sought special leave to appeal the Tribunal’s award before this Court. The principal issues raised on appeal were whether the Industrial Tribunal possessed the jurisdiction to both refix production targets and vary the rates of incentive bonus, and whether piece‑rate workmen were entitled to receive an incentive bonus. The appellant further complained that the Tribunal had refused its request to appoint technical assessors who could provide expert opinions on the complex matters involved, and it alleged that the Tribunal had proceeded without adequate data to determine appropriate production targets. The Court held that, in technical matters, it is always advisable for a tribunal to obtain assistance from individuals who possess specialized knowledge of the subject, and that the tribunal should not deny itself the opportunity to acquire such material. While the initiation of an incentive‑bonus scheme remains a management function, once such a scheme is established the Industrial Tribunal has the authority to vary it, including the rates of bonus. Nevertheless, the Court cautioned that any interference with an existing scheme must not be undertaken lightly, and that the Tribunal is

The Court explained that the Tribunal possessed the power to examine whether an incentive‑bonus scheme was erroneous, unrealistic or unreasonable. After reviewing the relevant material, if the Tribunal found that the production targets fixed by the scheme were set too high, it was authorized to lower those targets. However, the Tribunal was also required to ensure that any revised targets were not set so low as to be ineffective. The Court further held that workers employed on a piece‑rate basis were entitled to receive a higher rate of pay for any output that exceeded the established norm. In determining that higher rate, the Tribunal had to take care that there was no glaring disparity between the total earnings of an average piece‑rate worker and those of a time‑rate worker performing the same work over the same period.

The judgment in this civil appellate jurisdiction was recorded as Civil Appeal No. 208 of 1969. The appeal challenged an award dated 19 August 1960 issued by the Third Industrial Tribunal, West Bengal, in Case No. VIII‑119 of 1958. Counsel for the appellant included A V Viswanatha Sastri, S K‑Bose and Sardar Bahadur, while D N Mukherjee represented respondent No 1, and Janardan Sharma together with B P Maheshwari represented respondent No 2. The decision was delivered by Justice Mudholkar on 21 August 1962. The central issue before the Court was the question of production bonus. The appellant, a company operating a steel mill at Belur, organized its facilities into three categories: direct productive departments, indirect productive departments and non‑productive departments. The non‑productive category comprised the general office, accounts department, establishment department, time office, stores, shipping department, drawing and design department, laboratory, progress and planning department, civil construction department, watch and ward department, medical department and welfare department. The direct productive category contained five departments: the steel foundry, electric furnaces, rolling mills, bolt and nuts shop, and machine shops. The indirect productive category consisted of the refractory attached to the electric furnaces, the mill general attached to the rolling mills, roll turning attached to the rolling mills, yard mazdoors attached to the rolling mills, and the civil, electric and mechanical maintenance departments. It was undisputed that each productive department had its own production target that served as the basis for paying a production bonus in addition to regular wages. The existing targets had been fixed in 1948 for the electric furnaces and rolling mills, in December 1956 for the steel foundry, and in January 1959 for the bolt and nut workshop. According to the appellant, these targets were periodically revised in consultation with, and with the concurrence of, the workmen’s representatives of the respective departments, whenever improvements such as new techniques, additional plant and machinery, or other enhancements warranted a change. Workers in three indirect productive departments—the refractory attached to the electric furnace, the mill general attached to the rolling mills, and the roll turning attached to the rolling mills—received a production bonus calculated at seventy‑five percent of the average production‑bonus rate earned by the corresponding direct productive department to which they were linked.

The Court observed that the three indirect productive departments—refractory attached to the electric furnace, “mill general” attached to the rolling mills, and roll turning attached to the rolling mills—received a production bonus equal to seventy‑five percent of the average bonus earned by the direct productive department to which each was linked. The Yard Mazdoors, who were also attached to the rolling mills, were paid on the basis of an arbitration award that continued to exist between the workmen and the company. In the civil maintenance, electric maintenance and mechanical maintenance departments, the workmen were paid a production bonus at the rate of seventy‑five percent of the average amount calculated on the basis of the bonuses paid to workmen in all of the productive departments taken together. In the steel foundry department, the production target had been set at twenty pounds per man per day until the end of 1956. Near the close of 1956 the appellant entered into direct negotiations with the representatives of the workers of that department and, because of additions to plant and machinery, provision of extra facilities and working space, and improvement in production techniques that substantially increased the department’s capacity, the parties agreed to raise the target to twenty‑five pounds per man per day. The value of the machinery and plant added to the steel foundry department alone was about rupees two lakh; subsequently electric cranes worth approximately rupees four point five lakh were installed for use by that department and the electric furnace department. Since December 1956 further machinery additions amounting to about rupees three lakh had been made to the steel foundry department. The appellant stated that the workmen had, for the most part, worked without protest against the targets as they were revised from time to time. However, nine months after the revised targets became effective, the second respondent, one of the two unions representing the workmen, lodged a protest against the increase of the steel‑foundry target from twenty to twenty‑five pounds. The appellant explained that different incentive‑bonus schemes had been adopted in different departments because the bonus was directly linked to production targets, which were fixed through direct negotiations with the workmen’s representatives, such as the increase in the steel‑foundry target at the end of 1956. The first respondent, the other union, did not raise any objection to the targets and did not join the second respondent in the proceedings before the Tribunal.

The Government of West Bengal, having concluded that an industrial dispute existed between the appellant and its workmen concerning the payment of incentive bonuses, referred the matter to the Third Industrial Tribunal under section ten of the Industrial Disputes Act, 1947. Both unions filed written statements before the Tribunal. Subsequently, disputes involving the same question and three associate companies were also referred to the same Tribunal, but the Court indicated that it was not concerned with those other disputes and would consider only the dispute in which the appellant, National Iron and Steel Co. Ltd., was a party.

In the dispute that involved the National Iron & Steel Co. Ltd., the second respondent presented a concise summary of the relief it sought on behalf of the workmen. The summary stated that the existing incentive bonus scheme should be amended so that it covered every category of workmen who were presently excluded, and that any inconsistencies or irregularities within the current scheme should be eliminated. In addition, the second respondent urged that the production targets be recalibrated and restored to the levels that had been in force in 1948. The first respondent did not challenge the standards of performance or the production levels that existed in the various departments of the company. Its principal demand was that the incentive‑bonus arrangement be extended uniformly to all productive departments, without distinguishing between workers it described as directly productive and those it termed indirectly productive.

The second respondent further contended that workers in the indirectly productive departments should receive incentive bonuses at the same rate that applied to workers in the productive department to which those indirect departments were attached. It also proposed that employees in the maintenance, civil‑maintenance and siding‑maintenance departments be paid a bonus equal to one‑half of the aggregate rate obtained by adding the rates paid to all workers in the productive departments of the company as well as those employed by its associate companies. Regarding workers in non‑productive departments, the second respondent sought a bonus equal to one‑quarter of that same aggregate rate. Moreover, it requested that four employees serving in the shipping department be paid at the rate afforded to the workmen of the rolling‑mills department, and that three chemists employed in the laboratory receive the same rate as the workmen in the electric‑furnace department.

Finally, the second respondent advocated that the incentive bonus be calculated on the basis of the basic wages and dearness allowance earned by the workmen, and also on the total earnings that included remuneration for days designated as non‑productive. The appellant denied the existence of any anomalies in the incentive schemes across its departments. It maintained that the formulation of such schemes was solely a managerial function and that the company bore no legal or moral duty to extend them to all categories of workmen. Consequently, the appellant regarded the first respondent’s claim for revision of targets and removal of anomalies as wholly unfounded. The appellant also justified its classification of departments into direct productive, indirect productive and non‑productive on the ground that this classification conformed to prevailing industry practice.

In the matter before the Tribunal, the management explained that employees who work in the productive departments receive the full incentive bonus that is normally payable for the work they perform. The management further stated that it does not employ workers who are classified as direct‑productive in any of the indirect‑productive departments. It added that workmen who are employed in the maintenance department are paid a bonus that equals seventy‑five percent of the average bonus paid to workers in the productive departments. According to the management, the production bonus is paid only to those workmen who are directly engaged in production work and in maintenance, and that workers in non‑productive departments are excluded from the existing bonus scheme. The management also denied the claim made on behalf of four clerks in the shipping department and three chemists in the laboratory.

After all parties had filed their statements, the appellant urged that the Tribunal frame specific issues for determination. The Tribunal declined to frame such issues. By a subsequent order, the Tribunal limited its adjudication to the points raised in sub‑paragraphs 1, 2(b) and 2(c) of paragraph 18 of the written statement filed by NISCO Karmachari Sanghs (respondent No 1) and to the points raised in the prayer portion of paragraph 25 of the written statement of Belur Iron & Steel Workers’ Union (respondent No 2). The Tribunal first addressed the question of revising production targets. It held that the target in the steel‑foundry department, which had been raised in December 1956 from twenty pounds to twenty‑five pounds, should be reduced to twenty‑three pounds. Regarding the electric‑furnace department, the rolling‑mills, the bolt‑and‑nut shop and the machine shop, the Tribunal decided that the appropriate target should be fifty percent of the productive capacity or efficiency of the workmen in each respective department.

The Tribunal rejected the workmen’s request for removal of the alleged anomalies in the existing bonus scheme. Concerning the workmen’s claim for extending the scheme to clerical and watch‑ward staff, the Tribunal held that an incentive production bonus should be paid to workers in non‑productive departments at a rate of twelve and a half per cent of the total rate obtained by adding the rates applicable to all productive departments. This reduced rate reflects the fact that workers in non‑productive departments are not directly involved in production but only indirectly connected. The calculation of this bonus, the Tribunal clarified, would be based solely on basic pay and would exclude dearness allowance. The Tribunal further applied this rule to the four workers in the shipping department and the three chemists in the laboratory. Regarding workmen employed in indirect‑productive departments, the Tribunal found no reason to alter the existing arrangement, observing that the present rate of seventy‑five per cent of the bonus paid to productive‑department workers was fair and reasonable. Accordingly, the Tribunal rejected the claim that the rates of production bonus should be uniform across all categories of workmen.

The appellant argued before the Tribunal that the rates of production bonus for workmen, whether employed in direct or indirect productive departments, need not be uniform. One of the contentions raised on behalf of the appellant and reflected in the statement of the case was that the introduction of an incentive bonus and fixing of production targets constitute a managerial function. The appellant also maintained that the determination of production hours is likewise a management decision beyond the jurisdiction of the Tribunal. The Supreme Court has held in Titaghur Paper Mills Co. Ltd. v. Its Workmen (1) [1959] Supp. 2 S.C.R. 1012 that while the decision to introduce an incentive bonus scheme is a managerial function. Once such a scheme is introduced, the right to claim the bonus becomes a condition of service for the workmen. Therefore, the Industrial Tribunal has jurisdiction to vary the scheme enforced by the employer, including the rates of bonus. The Court also pointed out that payment of an incentive bonus represents additional remuneration to workmen that depends not on extra profits but on extra production. It therefore serves as an incentive for the workmen to exceed standard performance. Consequently, where management has introduced a scheme for granting such a bonus, the Tribunal may vary the terms of the scheme if the circumstances of the case justify such variation. In view of the decision in that case, Mr. Vishwanatha Sastri conceded that the Tribunal had jurisdiction to refix both the targets and the rates of the incentive bonus. This jurisdiction exists provided the Tribunal finds that the targets are excessively high or that the rates are wholly disproportionate to the additional performance rendered by the workmen. The appellant’s principal grievance on this point was that the Tribunal possessed no material before it for reducing the targets in the steel foundry department from twenty‑five pounds per capita per day to twenty‑three pounds. He further contended that the Tribunal’s view that the targets for the other direct productive departments should be fifty per cent of the unit’s capacity or of the workmen’s efficiency would produce startling results. He also drew the Court’s attention to an application made by the appellant during the proceedings before the Tribunal for the appointment of assessors to give opinions on various technical matters. Those opinions were to be considered in preparing an incentive‑bonus scheme for workmen employed in the appellant’s different departments. No order was passed on this application by the Tribunal, even though, when reminded of its omission, the Tribunal promised to make an order later. Consequently, the Court observed that there was no adequate data to determine what reasonable and proper targets would be from the viewpoint of both the employer and the employees. The Court also noted the absence of data to fix reasonable rates of the incentive bonus. The Tribunal would have done well to bear in

In considering technical questions, the Court observed that it is always advisable to obtain assistance from persons who possess knowledge of the subject matter. While the ultimate authority to decide lay with the Tribunal, the Court emphasized that any decision must be based on adequate material. Accordingly, the Tribunal should not have refused itself the opportunity to secure the appropriate information. On that sole ground, the Court held that the Tribunal’s award concerning the determination of targets and the rates of incentive bonus for the various departments must be set aside. Regarding the revision of the daily target in the steel‑foundry department to twenty‑five pounds, the Court noted that the Tribunal possessed hardly any material. The Tribunal had ignored the important fact that the original target of twenty pounds had been increased to twenty‑five pounds by the appellant after discussion with the workmen concerned and with their consent. The Court further reminded that, although the Tribunal has the power to vary an existing scheme and consequently the targets included in it, such power cannot be exercised lightly. The primary responsibility for fixing and, ordinarily, revising the targets rests with management, which, in exercising that function, must consult the workmen. Where consultation has taken place and the revised targets result from an agreement between management and the workmen, there must be sound reasons for the revision.

The Court then turned to the Tribunal’s orders affecting the ‘other productive departments.’ It observed that the Tribunal had fixed the targets in those departments at fifty percent of the total productive capacity per month in the mills, or at fifty percent of the efficiency of the workmen employed. The Tribunal also directed that the incentive bonus be calculated at the existing rate on the amount of production that exceeded those revised targets. On its face, the Court found that these targets were set at a very low level, which would cause half or more of a workman’s total earnings to be paid as incentive bonus without any increase in actual production. Consequently, the scheme, instead of encouraging higher output, would act as a disincentive. The Court explained that increasing the proportion of returns to the worker is intended to stimulate greater production, whereas plans that provide a decreasing ratio of returns or a declining wage curve are based on the principle that higher output results not only from the workers’ effort but also from improvements in working conditions for which management is responsible, and therefore management should ‘share’ in the gains...... Bearing these observations in mind, the Court noted that, ordinarily, the rate of incentive bonus is linked to the target, and that if the target originally fixed by the employer is very high, the existing incentive bonus payable may be regarded as…

In the present matter the Court observed that the question of whether the incentive‑bonus targets were truly fixed at a high level must be decided by the Tribunal. The Tribunal, however, had issued a direction that the incentive bonus should continue to be paid to the workmen in the relevant department at the existing rates even though the targets had been reduced by half. The Court held that such a direction was not proper. On behalf of the workmen counsel alleged that the existing targets were fixed so high that the workers would have to work excessively in order to earn the incentive bonus. This allegation, the Court said, required examination by the Tribunal. Since the scheme of incentive bonus already operates in most departments of the company, the Tribunal possessed jurisdiction to consider whether the present scheme was onerous, unrealistic, unreasonable or otherwise unsatisfactory. Nevertheless, the Court reiterated that the Tribunal should not interfere with the scheme unless it reached a definitive conclusion that the targets were set so high that an average workman, exercising ordinary efficiency, could earn only his basic daily wage and nothing more. To facilitate its task, the Tribunal was advised to obtain the necessary information from assessors and from other persons familiar with the operations in each department. After considering all relevant material, if the Tribunal found that the targets were indeed too high or not reasonably attainable, it would be within its competence to refix them. However, while refixing the targets, the Tribunal must ensure that they are not set so low that the majority of an employee’s total earnings would consist of the incentive bonus. In revising the management‑prepared scheme, the Tribunal therefore has to balance two opposing considerations: on the one hand it must protect the interests of the workmen and prevent what may fairly be described as “sweating,” and on the other hand it must ensure that the revised targets do not encourage laziness or cause production to fall to an unprofitable level. The Court further observed that where the targets had been mutually agreed between employer and employees, and where the incentive‑bonus scheme had been in operation for a considerable period without any complaint from the workmen that the scheme was onerous, this circumstance should be taken into account when a request for revision of targets is made long after the scheme has been established. The Tribunal must also keep in mind the impact of improved techniques or the installation of better machinery on production levels. The Court noted that the Tribunal had not addressed any of these matters and described the manner in which the Tribunal dealt with the issue as wholly unsatisfactory. While acknowledging the difficulty inherent in fixing appropriate targets, the Court suggested that the Tribunal’s task would be eased if it could obtain material that would enable it to ascertain the actual production capacities and the effects of technological and procedural improvements.

In the matter before the Tribunal, the Court observed that it was necessary to know how much each department produced on average before the original incentive‑bonus scheme was started, and also before any new techniques or better machinery were introduced. The Court said that, based on the material that had been placed before it, the Tribunal should decide whether the earlier level of production could safely be used as the target for the workers. The appellant argued that the use of improved techniques and the installation of new machines had allowed the workmen to produce more output in the same amount of time. The Court noted that this claim of the appellant required careful examination and that expert evidence would be valuable in assessing the effect of the innovations. If the Tribunal were to find that the rise in production was entirely due to the new techniques and machinery and that the workers’ workload had not been increased, the Court said there would be a basis for raising the old targets in a proportionate manner. However, the Court warned that a problem would arise if the workers’ workload had actually increased. In such a situation, the Tribunal had to remember that workmen are human beings, not machines, and that they can become tired when required to work at a faster pace than before. The Court explained that performing repetitive mechanical tasks for long periods can cause both physical fatigue and mental strain, leading to boredom and muscular exhaustion. Consequently, when the workload had increased, the Court directed that any revised target should be set reasonably below the level at which such adverse effects are likely to occur. The Court added that its comments did not list every possible consideration, and that the Tribunal was free to take into account any other relevant factors when determining the appropriate targets.

The Court then turned to the question of whether the incentive‑bonus scheme should be extended to the clerical staff and the watch‑and‑ward personnel. It referred to the decision in Burn & Co., Ltd. v. Their workmen (1), where it was held that, from an economic standpoint, the clerical and subordinate staff in an industry contribute to its production just as the manual workers do, and therefore there was no justification for excluding them completely from the benefits of an incentive‑bonus scheme. The Court also noted an earlier authority, the Titaghur Paper Mills case (2), which had stated that the introduction of an incentive bonus is a matter for the management and that a tribunal should not impose a bonus scheme on the employer. Addressing this contention, the Court observed that, in the present case, the company had already introduced the incentive‑bonus scheme for the majority of its workmen, and the only request now was to extend that benefit to the remaining categories of employees. The Court recorded that Mr. Viswanatha Sastri had not challenged the correctness of the earlier view expressed in Burn & Co.’s case, and that his principal grievance concerned the direction in the award that would extend the incentive‑bonus scheme to the clerical and watch‑and‑ward departments, which he feared might result in a substantially higher bonus entitlement for those workers.

In relation to the direction contained in the award that extended the incentive‑bonus scheme to the clerical, watch‑and‑ward departments, the Court observed that, if the direction were implemented, those workmen would effectively receive a bonus equal to one hundred percent of their normal earnings, or possibly an even larger amount. The Court noted that the industry comprised five productive departments and five indirect‑productive departments. Assuming a rate of one hundred for each productive department, the rate for each of the five indirect‑productive departments would be seventy‑five. Adding the rates of all ten departments would yield a total of eight hundred seventy‑five, and twelve and one‑half per cent of that total would be approximately one hundred and ten. The Court accepted the submission of counsel that this calculation did not reflect the Tribunal’s intention. According to that submission, the Tribunal intended to compute an average rate for all productive and indirect‑productive departments and then apply twelve per cent of that average as a bonus to the workers employed in the non‑productive departments. The Court agreed that, however, the wording employed by the Tribunal produced the absurd result that non‑productive workmen would receive a larger incentive bonus than those employed in the productive departments.

Before concluding that the incentive‑bonus scheme should be extended to the clerical, watch‑and‑ward workmen, the Court directed that the Tribunal should first determine whether a sufficient case existed for granting such a bonus to those categories of workers. The Court recalled that, in Burn & Co. Ltd. v. Their Workmen (1), one of the reasons for extending the scheme to clerical staff was the increase in their workload that followed a rise in overall production. Accordingly, the Tribunal should examine whether the increase in production had also led to an increase in the workload of the non‑productive workmen. If the Tribunal found that their workload had indeed increased, the Court indicated that those workers could be entitled to the incentive bonus. The Court further pointed out that, in Burn & Co. Ltd. (1), the Tribunal did not specify a particular bonus rate for clerical and subordinate staff; instead, it directed the company to extend the scheme to those workers and to determine the applicable rates and conditions. The Court affirmed that it had implicitly approved that direction. Emphasising the principle that the determination of targets, rates and other conditions of an incentive‑bonus scheme is a managerial function, the Court affirmed that the approach taken by the Tribunal in Burn & Co. Ltd. (1) was proper. Finally, the Court noted that another issue remained, namely the contention raised by Mr. Viswanatha Sastri that no incentive‑bonus entitlement should arise for piece‑rate workers. He argued that a piece‑rate worker who produces more already earns a higher amount, and therefore no further bonus should be payable.

The Court considered an argument presented by counsel that a piece‑rate worker who produces more receives only the piece‑rate amount, so nothing further is owed to him. The Court disagreed with that contention and held that even for piece‑rate employees a normal production level exists, and any output beyond that norm must be compensated at a higher rate, reflecting the additional effort. The Court observed that this practice is followed in England and other industrialised nations such as the United States, and there is no reason why it should not be adopted in India, where conditions exist. The Court further explained that determining the appropriate enhanced rate would necessarily require the assistance of assessors together with the company and the workmen themselves, ensuring that all relevant interests were represented in the calculation. However, the Court warned that prescribing a higher rate for production above the norm should not create a glaring disparity between the actual earnings of an average piece‑rate worker and those of a time‑rate worker. The Court added that such fairness between categories is essential to maintain industrial harmony and avoid discord among the workforce. Accordingly, the Court set aside the award to the extent that it fixed production targets for the various departments, fixed the rate of incentive bonus for both time‑rate and piece‑rate workers. It also extended the incentive scheme to non‑productive departments, thereby removing those erroneous provisions from the original award. The Court emphasized that any increase in rates must be calibrated carefully to avoid creating resentment among workers. The Court remitted the dispute to the Tribunal for fresh adjudication after appointing assessors to ensure an impartial re‑examination. It directed the Tribunal to consider all material placed before it by the parties and to render a new award consistent with these observations. The Tribunal, once equipped with assessors, was expected to examine the evidence afresh and balance the interests of management and labour. The remainder of the award was left undisturbed and no order as to costs was made in the appeal.