D. C. Dewan Mohideen Sahib And Sons vs The Industrial Tribunal, Madras

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

Court: supreme-court

Case Number: Civil Appeals Nos. 721 and 791 of 1963

Decision Date: 6 April 1964

Coram: K.N. Wanchoo, P.B. Gajendragadkar, K.C. Das Gupta

D. C. Dewan Mohideen Sahib and Sons filed a petition against the Industrial Tribunal of Madras, and the matter was decided by the Supreme Court of India on the sixth day of April, 1964. The judgment was written by Justice K. N. Wanchoo, and the bench hearing the case comprised Justice K. N. Wanchoo, Chief Justice P. B. Gajendragadkar, and Justice K. C. Das Gupta. The parties were identified in the records as the petitioner D. C. Dewan Mohideen Sahib and Sons and the respondent the Industrial Tribunal, Madras. The official citation of the decision is reported in the 1966 Annual Report of Indian Reports at page 370 and in the 1964 Supreme Court Reporter (7) at page 646, with additional citator references recorded in later reports. The case was concerned with the determination of the nature of the relationship between an employer and an employee in the context of an industrial dispute, and the court noted that the relationship depends upon the circumstances of each individual case.

The factual background presented to the Tribunal involved a dispute between the appellants, who owned bidi manufacturing concerns, and a group of workers who performed the rolling of bidi cigarettes. The appellants contended that these workers were not their direct employees but were instead employed by independent contractors who supplied the labour. The Tribunal, after examining the evidence, observed that the operating method was that the contractors received raw tobacco leaves from the appellants, hired workers to manufacture the bidis, and then collected the finished bidis from the workers to deliver them back to the appellants. In practice, the workers removed the tobacco leaves from their packaging at home, cut the leaves, and performed the actual rolling of the bidis in facilities described as the contractors’ factories. The contractors did not maintain any attendance register for these workers, imposed no fixed working hours, and did not require the workers to be present at the workplace every day. On some occasions the workers informed the contractors of their intended absence, while on other occasions they did not, and the contractors reported that they were unable to take disciplinary action against workers who were absent without leave. Compensation for the workers was calculated on a piece‑rate basis after the finished bidis were delivered to the appellants. The commercial arrangement was that the appellants paid a specified sum to the contractors for the manufactured bidis, deducting the cost of the tobacco and the leaves already fixed. The contractors, in turn, paid the workers for their rolling work, and retained any balance as their commission for the overall process. The Tribunal found that there was no sale of either the raw materials or the finished products because the agreement stipulated that any unrolled raw material must be returned to the appellants, and the contractors were expressly prohibited from selling the raw material to any third party. Moreover, the finished bidis could be delivered only to the appellants who had supplied the raw material, and the price of both the raw material and the finished product was fixed by the appellants and remained unchanged regardless of market fluctuations. Based on these findings, the Tribunal concluded that the bidi rollers were in fact employees of the appellants and not employees of the so‑called contractors.

The Court observed that the individuals described as contractors were in fact nothing more than employees or branch managers of the appellants. Following this observation, the appellants instituted writ petitions in the High Court. The High Court determined that neither the bidi rollers nor the intermediaries were employees of the appellants and consequently granted the writ petitions. The workmen then appealed this decision, and the appellate court reversed the High Court’s order, reinstating the tribunal’s original finding. The matter was again taken up on appeal by certificate, and the appellate court held that, based on the facts, its earlier conclusion was correct; it affirmed that the tribunal had properly concluded that the intermediaries were merely branch managers appointed by the management and that an employer‑employee relationship existed between the appellants and the bidi rollers. The Court referred to several earlier decisions for guidance, including Dharangadhara Chemical Works Ltd. v. State of Saurashtra, Shri Chintsman Rao v. State of Madhya Pradesh, Shri Birdhichand Sharma v. First Civil Judge Nagpur, Shankar Balaji Waje v. State of Maharashtra, and Bikusu Yamasa Kashtriya (P) Ltd. v. Union of India. The present judgment arose from Civil Appeals Nos. 721 and 791 of 1963, filed by special leave from the Madras High Court judgment dated 16 February 1962 in Writ Appeals Nos. 16 and 15 of 1959. Counsel for the appellants appeared in both appeals, and counsel for the second respondent appeared in both as well. The judgment, delivered on 6 April 1964 by Justice Wanchoo, addressed a common question presented by the two appeals. The appellants were owners of two bidi manufacturing concerns. The Government of Madras had referred a dispute involving the appellants and their workmen that concerned three separate issues; however, the present appeals focused solely on the question of whether a reduction of two annas in the wages of workers employed through the appellants’ agents was justified and what relief the workers were entitled to. The appellants’ position before the tribunal was that the workers in question were not their workmen, and consequently there was no employer‑employee relationship, rendering the reference incompetent and precluding any industrial dispute. They argued that the workers were employed by independent contractors. After hearing evidence from both sides, the tribunal found that the method of manufacturing bidis in the appellants’ concerns involved contractors receiving leaves and tobacco from the appellants, employing workmen to manufacture the bidis, and then taking the finished bidis back from the workmen to deliver them to the appellants.

The tribunal observed that the workers took the tobacco leaves to their homes and cut them there, but the actual rolling of bidis—filling the leaves with tobacco—occurred in facilities identified as contractors’ factories. The contractors did not keep an attendance register for the workers, and there was no requirement that the workers arrive at fixed hours. The workers were not obligated to report for work each day; on some occasions they informed the contractors of their intended absence, while on other occasions they did not. The contractors testified that they could take no disciplinary action against workers who were absent without leave. Wages were paid to the workers on a piece‑rate basis.

According to the tribunal’s findings, once the bidis were delivered to the appellants, the appellants made payment for them. The operative system was that the appellants fixed the price of the tobacco and leaves and supplied these raw materials to the contractors, who in turn delivered them to the workers for the rolling process. On the following day, the contractors collected the manufactured bidis and presented them to the appellants. The appellants then paid a price for the finished bidis after deducting the cost of the tobacco and leaves that had previously been fixed. The remaining amount was paid to the contractors, who subsequently paid the workers their piece‑rate wages. Any surplus after the workers’ wages were settled constituted the contractors’ commission for performing the work.

The tribunal noted that written agreements existed between the appellants and the contractors that followed this pattern, although none of those agreements had been reproduced in the official record. The arrangement resembled a sale of leaves and tobacco by the appellants to the contractors, followed by a resale of the rolled bidis by the contractors back to the appellants. However, the tribunal held that, under the terms of the agreement, there was no actual sale of either the raw materials or the finished products. The agreement stipulated that if bidis were not rolled, the raw materials had to be returned to the appellants, and the contractors were expressly prohibited from selling the raw materials to any other party. Moreover, after the bidis were manufactured, they could be delivered only to the appellants who had supplied the raw materials, and the prices for both raw materials and finished bidis remained fixed and did not vary with market rates.

Based on these findings, the tribunal concluded that the system was not a genuine sale‑resale arrangement but rather a scheme devised to evade the regulations imposed by the Factories Act. The tribunal further observed that the contractors typically received a remuneration of only two annas per thousand bidis for their involvement. A clause in the agreement stated that the appellants would have no responsibility for the workers who rolled the bidis, placing the entire responsibility on the contractors. The tribunal opined that this clause, along with other provisions, had been deliberately inserted by the appellants to escape the statutory duties and obligations that would otherwise arise under the Factories Act or the Madras Shops and Establishments Act.

In the tribunal’s view, the appellants had arranged the bidi‑manufacturing process specifically to avoid the statutory duties and obligations that would arise under the Factories Act and the Madras Shops and Establishments Act. After examining the entire record, the tribunal concluded that the system of producing bidis through the individuals described as “contractors” was nothing more than a disguise created by the appellants. The tribunal observed that these contractors were indigent persons who performed no distinct duties and discharged no special functions. The raw tobacco and bidi leaves were supplied by the appellants, and the workmen used those raw materials to produce finished bidis; the contractors’ only role consisted of taking the raw materials to the workmen and then collecting the finished product. Accordingly, the tribunal held that the so‑called contractors were not independent contractors but were in reality employees or acted as branch managers of the various factories owned by the appellants, with their remuneration dependent on the quantity of work produced. From this finding, the tribunal inferred that the bidi rollers were employees of the appellants and not of the contractors, who themselves were essentially employees or branch managers of the appellants. The tribunal further determined that the reduction of wages by two annas per thousand bidis was unjustified and that the workmen were entitled to retain their former rates of pay; consequently, the tribunal ordered that the wage reduction be set aside and the original wages be restored.

The appellants subsequently filed two writ petitions in the High Court, contending that the tribunal’s finding—that the contractors and the workmen employed by those contractors were in fact workmen of the appellants—was erroneous. Before the High Court, a sample agreement was produced, which set out several substantive conditions. First, the proprietor was required to supply the tobacco and bidi leaves. Second, the intermediary was required to acquire premises of his own and obtain the licence necessary to carry on the rolling of bidis there. Third, the agreement limited the number of bidi rollers working on the intermediary’s premises to no more than nine at any given time. Fourth, the intermediary was obligated to meet all incidental expenses of rolling, including the cost of thread and the remuneration payable to the bidi rollers. Fifth, for each batch of one thousand bidis rolled and delivered by the intermediary to the proprietor, the proprietor would pay the stipulated amount after deducting the cost of the tobacco and bidi leaves supplied. Sixth, the intermediary was expressly prohibited from entering into a similar engagement with any other industrial concern. Seventh, the price of the raw materials and the price to be paid for each thousand bidis rolled and delivered were to be fixed at the discretion of the proprietor. In addition, the contract stipulated that it could be terminated upon breach of any condition and expressly declared that the proprietors had no connection with, and assumed no responsibility for, the bidi workers, who therefore had to look to the intermediary for payment for their work.

In this case the Court observed that the learned Single Judge, after reviewing the contractual terms and the evidence that had been placed on record, concluded that neither the bidi rollers nor the intermediary could be regarded as employees of the appellants. Because the rollers and the intermediary were not employees, the Judge held that no industrial dispute as defined by section 2(k) of the Industrial Disputes Act could exist between the appellants and the bidi rollers. Accordingly, the petitions were allowed and the award made by the tribunal was set aside.

Subsequently two workmen filed appeals against that decision. The appellate court examined the same contract and the findings of the tribunal and reached the view that the persons described as contractors were in reality agents of the appellants, and that the appellants did not suffer an absolute lack of control over the workers who actually rolled the bidis. The appellate court also noted that the intermediaries appeared to be impecunious, and the evidence indicated that they could hardly afford to maintain factories of their own. Further evidence showed that the appellants handled all matters relating to the workers, while the intermediary functioned only as a nominal figure, a cipher, with the true control remaining in the hands of the appellants.

On this basis the appellate court held that the appellants were the genuine employers of the workmen, and that the so‑called intermediaries or independent contractors—some of whom had previously been employees—were merely agents of the appellants. The court agreed with the tribunal’s earlier conclusion that the intermediaries were essentially branch managers appointed by management, and that an employer‑employee relationship existed between the appellants and the bidi rollers. Therefore, the appeals were allowed and the tribunal’s original order was restored.

The appellants then approached this Court on certificates issued by the High Court. The Court noted that the question of whether a master‑servant relationship exists between an employer and an employee has been considered in several earlier decisions. In Dharangadhara Chemical Works Limited v. State of Saurashtra the Court had held that determining whether a person is a workman depends on whether the person was employed by the employer and whether a master‑servant relationship subsisted. It was established that a prima‑facie test for such a relationship is the employer’s right not only to prescribe the work to be done but also to control the manner of its performance; the extent of that control varies across industries and cannot be precisely defined. Consequently, the correct approach is to examine, in light of the nature of the work, whether the employer exercised sufficient control and supervision. The Court further observed that the determination of whether the parties stand in an employer‑employee relationship is a factual question that must be decided on the specific circumstances of each case.

In the earlier case the Court explained that determining whether a relation is that of master and servant or of independent contractor is a pure question of fact that must be decided by examining the circumstances of each individual case. That decision arose in a dispute concerning a class of professional labourers known as agarias, and the question was whether they should be regarded as workmen or as independent contractors. The factual findings recorded that the agarias performed their work together with members of their own families and that they were free to hire additional labour on their own initiative. No fixed hours of work were prescribed for them, and the employer did not keep muster rolls nor did it control the timing of their work. Likewise, there were no regulations governing leave or holidays, and the agarias were at liberty to leave the factory after making the necessary arrangements for the manufacture of salt. Although several characteristics normally associated with a contract of service were absent, the industrial tribunal concluded that, on the whole, the agarias possessed the status of workmen rather than that of independent contractors. The tribunal based this conclusion on the observation that the master exercised supervision and control over the entire manufacturing process, from the initial stage to the final stage. On review, this Court affirmed the tribunal’s view after re‑examining the facts. The next authority cited was Shri Chintaman Rao v. State of Madhya Pradesh, a case involving bidi manufacturing in which the issue was whether individuals called sattedars and the persons working under them qualified as workmen. The findings showed that the sattedars undertook to supply bidis either by producing them in their own factories or by assigning the work to third parties, receiving payment from the management after delivery and approval. Applying the principles laid down in Dharangadhara Chemical Works Limited’s decision, the Court observed that the sattedars were not subject to the control of the factory management and were free to manufacture bidis at any place they chose. Consequently, the Court held that the sattedars were independent contractors and that the workers employed by them could not be considered as workers of the management. A distinctive feature of that case was that none of the workers under the sattedars were employed in the management’s factories; the bidis could be produced anywhere, and the sattedars were even authorized to distribute tobacco to the workers for use in their homes. Following this, the case of Shri Birdhichand Sharma v. First Civil Judge, Nagpur was considered, which also concerned bidi manufacture. In that matter the factual record established that the workers who rolled the bidis were required to work within the factory premises and were not permitted to work from their homes. Their attendance was taken in the factory, and although they were not obliged to remain for the entire shift, they could not re‑enter after midday without being supplied with tobacco, and they could be dismissed after an eight‑day absence. They were paid on a piece‑rate basis according to the amount of work completed, and any bidis that failed to meet the required standard could be rejected. Based on these facts the Court held that the workers were indeed workmen within the meaning of the Factories Act and not independent contractors. The Court further emphasized that the degree and nature of control exercised by an employer varies across different industries and cannot be precisely defined; in simple operations that do not demand continuous supervision, control may be exercised at the end of the day through mechanisms such as the rejection of substandard products.

The workmen were required to be present inside the factory during the prescribed factory hours, although they were not obliged to remain for the entire shift. They could leave and return at will, but if they arrived after midday they were not supplied with tobacco and therefore were not permitted to work, even though the factory remained open until 7 p.m. The employer retained the authority to terminate their service when a workman was absent for a total period of eight days. Their wages were calculated on a piece‑rate basis, reflecting the quantity of bidis actually produced, and any bidi that failed to meet the prescribed standard could be rejected. Based on these facts, the Court held that the individuals were workmen within the meaning of the Factories Act and consequently were not independent contractors. Because payment depended on the number of acceptable bidis produced, the employer retained the ability to influence the workers’ performance through the quality‑control mechanism. The possibility of removal after eight days of absence further emphasized the subordinate position of the workmen relative to the employer. The practice of withholding tobacco for late arrivals acted as an additional means of regulating attendance and ensuring compliance with the factory’s operating schedule.

The Court observed that the degree and type of control exercised over workers varies from industry to industry and cannot be precisely defined in a universal manner. In operations that are simple and do not require continuous supervision, control may be exercised at the end of each day by rejecting bidis that do not meet the required standard. The Court cited the decision reported in (1)[1957] S.C.R. 152 and (2)[1961] 3 S.C.R. 161 as authority for the proposition that such employer supervision suffices to characterize the workers as employees rather than independent contractors. Accordingly, the nature and extent of control necessary to render a person a servant of the employer depends on the particular facts of each case. The Court emphasized that the assessment of control must consider the actual practices in the workplace rather than relying on a rigid formula. In industries where tasks are complex and require constant supervision, the degree of control may be more extensive, whereas simple operations may rely on periodic checks. Thus, the presence of a supervisory mechanism, even if exercised only at the end of the working day, can be sufficient to establish an employer‑employee relationship. The Court therefore concluded that control is a matter of fact specific to each case.

The Court then turned to the case of Shankar Balaji Waje v. State of Maharashtra, which also involved bidi manufacturing. In that matter, the majority held that the earlier decision in Shri Birdhichand Sharma’s case was distinguishable and that the appellant did not fall within the definition of “worker” under the Factories Act. Nevertheless, the Court noted that the reasoning in Shankar Balaji Waje followed earlier judgments, especially the decision in Dharangadhara Chemical Works Limited, which set criteria for distinguishing an employee from an independent contractor. The Court reiterated that the test for employee status involves examining the contractual terms, the actual working conditions, and the degree of subordination imposed by the employer. In Shankar Balaji Waje’s case, the majority found that the contractual arrangement did not create a relationship of employment under the Act. However, the Court noted that this conclusion was reached after applying the established criteria derived from earlier jurisprudence, particularly the principles set out in Dharangadhara Chemical Works Limited. The Court therefore stressed that the determination must be made on a case‑by‑case basis, taking into account all relevant circumstances surrounding the work arrangement. Such an approach prevents the mechanical application of a single rule to diverse industrial settings.

The Court also referred to the decision in Bhikusa Yamasa Kashtriya (P) Limited v. Union of India, another bidi manufacturing case, where the main issue was the constitutionality of section 85 of the Factories Act. The Court upheld the constitutionality of section 85 and also affirmed the validity of the related state notification issued under that provision. The case also examined how section 79 of the Factories Act should be applied in matters relating to leave for workers. The difficulty that arose in Shankar Balaji Waje’s case about how to calculate leave was explained by reference to the earlier Shri Birdhichand Sharma decision. These authorities guide the determination of whether the workers engaged through the so‑called independent contractors are, in fact, employees of the appellants. Both the tribunal and the appellate court concluded that the so‑called independent contractors. The affirmation of the constitutionality of section 85 reinforced the legislative framework governing factories and validated the regulatory scheme adopted by the State of Maharashtra. By upholding section 79’s provisions on leave, the Court clarified that statutory leave entitlements must be calculated in accordance with the Act’s requirements, even in industries with atypical work patterns. These rulings collectively guide the assessment of whether individuals engaged through intermediaries are, in fact, employees of the principal industrial establishments. Consequently, the tribunal’s finding that the so‑called independent contractors were merely agents or branch managers of the appellants was accepted without dissent.

The Court noted that the persons described in the proceedings as independent contractors were in reality merely agents or branch managers of the appellants. It found no reason to disagree with the view adopted by the tribunal and confirmed by the appellate court on the facts of the cases before them. While the Court was aware of the opinion expressed by the learned Single Judge, who had held that, based on the agreements and the facts found, the so‑called intermediaries were independent contractors, the Court nonetheless preferred the position taken by the appellate court. The appellate judgment, correctly cited, referenced earlier authorities—including the decisions reported in [1957] S.C.R. 152, [1961] 3 S.C.R. 161, (1962) Supp 1 I S.C.R. 249 and [1964] 1 S.C.R. 860—and observed that the alleged independent contractors were indigent persons who were, in every respect, subject to the control of the appellants. In the Court’s opinion, there was little doubt that the arrangement had been devised to evade the provisions of the Factories Act. Moreover, the terms of the agreements placed on record left no room for any genuine independence on the part of the so‑called independent contractors. The appellate court further pointed out that these contractors were impecunious individuals who could scarcely afford to own factories of their own, and that several of them were in fact former employees of the appellants. The contract, as described, was essentially one‑sided: the proprietor could at his discretion supply raw materials or withhold them, while the contractor possessed no right to demand the supply of such materials. Additionally, the contractor was expressly restricted from employing more than nine persons in his so‑called factory. The purported sale of raw materials to the contractor and the subsequent resale of manufactured bidis were merely a camouflage, evident from the fact that the contractor never actually paid for the raw materials. Instead, when the finished bidis were delivered to the appellants, the amount corresponding to the alleged sale of raw materials was simply deducted from the price fixed for the bidis. In practical terms, the contractor received tobacco and leaves and was paid a certain sum to cover the wages of the workers he employed and his own minor troubles. Consequently, the Court saw no difficulty in holding that the contractor was, in reality, an employee or agent of the appellants, as the appellate court had held, and that, in that capacity, he employed workers to roll bidis on the appellants’ behalf. The work was distributed among a number of such contractors, each instructed not to employ more than nine persons at a single location so as to avoid the regulatory requirements of the Factories Act. Although the Court did not pursue that particular aspect in the present appeals, it was clear that the workers engaged by the so‑called contractors were in fact the workmen of the appellants, employed through their agents.

The Court observed that the individuals who performed the bidi‑rolling work were described by the appellants as independent contractors, yet the appellants also referred to them as their servants. It was contended by the appellants that even the agents of the appellants exercised no control over the bidi workers. Evidence, however, demonstrated that the workers were allowed to take the dried tobacco leaves home for the purpose of cutting them into the proper shape and size required for the next day’s production. The essential activity of filling the cut leaves with tobacco—that is, the actual rolling of bidis—could be performed only within the premises designated as the factory of the so‑named independent contractor. No tobacco was ever supplied to the workers for taking home to roll bidis at their leisure; the workers were required to be present at the contractor’s factory to carry out the rolling process.

The Court referred to its earlier judgment in Shri Birdhichand Sharma’s case(1), noting that the nature of bidi‑rolling is sufficiently simple that continuous supervision is not indispensable. In that earlier case, supervision was effected through a system of rejecting defective bidis at the close of each day. In the present matters, the Court noted that the complete terms of the agreements between the appellants and the independent contractors were not on record, and consequently it could not be conclusively stated that there was an absolute absence of supervision or control. Moreover, it was implausible that a contractor would accept bidis that failed to meet the established standard, because such a practice is contrary to the customary trade practices evident in numerous bidi‑manufacturing cases cited by the Court. Accordingly, the Court declined to accept a claim that the workers operated entirely without any supervision.

Considering the foregoing, the Court expressed the opinion that a master‑servant relationship existed between the appellants and the workmen employed through the so‑called independent contractors. The Court noted that, as the appellate tribunal had pointed out, whenever a dispute arose concerning bidi manufacture, the workers sought redress from the appellants. In one instance, a manager of an appellant wrote to the labour officer indicating that the factory was prepared to raise the workers’ wages from Rs 1 14⁄‑ to Rs 2 per thousand bidis. In another similar instance, a letter demonstrated that any adjustment—whether an increase or a decrease—in the wages of workers employed under the independent contractors was decided by the appellants themselves. This pattern of conduct, the Court held, was inconsistent with the appellants’ contention that the workers were not their employees and that no contractual privity existed between them. Consequently, the Court concluded that, based on the facts established in these cases, the appellate tribunal’s finding that the workers were employees of the appellants was correct.

The Court observed that the tribunal’s finding was correct that the persons who acted as intermediaries were in reality only branch managers who had been appointed by the management of the appellants. Accordingly, the Court held that an employer‑employee relationship existed directly between the appellants and the workers who rolled bidis, and that the intermediaries did not break that relationship. On the basis of this conclusion, the Court determined that the appeals could not succeed. Consequently, the appeals were dismissed and the appellants were ordered to pay the costs, specifically one set of hearing costs. The final order recorded the dismissal of the appeal and reproduced the citation of the earlier decision as (1)[1961] 3 S.C.R. 161.