Landmark Supreme Court Ruling on Calculation of Provident Fund Contributions By Employers

Delep Goswami, FCS
Advocate
​Supreme Court of India

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​Anirrud Goswami
Advocate,
Goswami & Goswami,
New Delhi

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Published by Taxmann.com on March 20, 2019


Supreme Court's Ruling on what constitutes 'Basic Wage' and what constitutes 'Special Allowance' (published by Taxmann)
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In a landmark judgment dated 28th February, 2019 in the case of Regional Provident Fund Commissioner (II) West Bengal v. Vivekananda Vidyamandir [2019] 103 taxmann.com 18, the Hon'ble Supreme Court of India has held that where allowances paid by an establishment to its employees were essentially a part of the basic wage "camouflaged as an allowance" so as to avoid deduction and contribution to provident fund (PF) amount of employees, the order of the authority under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (in short "EPF Act") that special allowancewas to be included in "basic wage" under section 2(b)(ii), read with section 6 of the EPF Act for computation of deduction towards provident fund was upheld.

In the aforesaid judgment, the Supreme Court was hearing several civil appeals/transferred cases on the aforesaid important question of law and disposed them of by a common order dated 28th February, 2019 as aforesaid.

Brief Facts of some of the civil appeals before the Apex Court

In titled as Regional PF Commissioner (II) (supra), the Respondent was an unaided school which was giving special allowance by way of incentive to teaching and non-teaching staff pursuant to an agreement between the staff and the management. The incentive was reviewed from time-to-time upon enhancement of the tuition fees of the students. The authority under the EPF Act held that the special allowance was to be included in "basic wage" for deduction of provident fund. The Single Judge set aside the said order. The Division Bench, after examining the salary structure allowed the appeal on 13.01.2005 holding that the special allowance as a part of the dearness allowance was liable to deduction. However, the order was recalled on 16.01.2007 at the behest of the Respondent as none had appeared on its behalf. The subsequent Division Bench dismissed the appeal holding that the special allowance was not linked to the consumer price index, and, therefore, would not fall within the definition of "basic wage" and, thus, was not liable to deduction.

In Civil Appeal Nos. 3965-66 of 2013, the Appellant was paying basic wage plus variable dearness allowance (VDA) plus house rent allowance (HRA) plus travel allowance plus washing allowance plus canteen allowance plus lunch incentive. The special allowances were not included in the "basic wage" and, hence, deduction for provident fund was not made from the same. The authority under the EPF Act held that only washing allowance was to be excluded from the basic wage. The High Court partially allowed the writ petition by excluding lunch incentive from basic wage. A review petition against the same by the Appellant was dismissed, resulting in filing of appeal in the Supreme Court of India.

In Civil Appeal Nos.3969-70 of 2013, it was stated that the appellant was not deducting provident fund contribution on house rent allowance, special allowance, management allowance and conveyance allowance by excluding it from "basic wage". The authority under the EPF Act held that the allowances had to be taken into account as basic wages for deduction. The High Court dismissed the writ petition and the review petition filed by the Appellant, resulting in filing of appeal in the Supreme Court of India.

What are the parameters of 'Basic Wage' vis-à-vis the object of the EPF Act?

During the course of arguments, it was stressed upon that the EPF Act is a social beneficial welfare legislation meant for protection of the weaker sections of the society, i.e., the workmen, and is, therefore, required to be interpreted in a manner to sub-serve and advance the purpose of the legislation. As per section 6 of the EPF Act, the employer is liable to pay contribution to the provident fund on basic wages, dearness allowance and retaining allowance (if any). To exclude any incentive wage from basic wage, it should have a direct nexus and linkage with the amount of extra output. On behalf of the Appellant-Regional PF Commissioner (supra), it was submitted that the special allowance paid to the teaching and non-teaching staff of the Respondent-school was nothing but camouflaged dearness allowance liable to deduction as part of basic wage. Section 2(b)(ii) defined dearness allowance as all cash payment by whatever name called paid to an employee on account of a rise in the cost of living. The allowance shall, therefore, fall within the term dearness allowance, irrespective of the nomenclature, it being paid to all employees on account of rise in the cost of living. The special allowance had all the indices of a dearness allowance. A bare perusal of the breakup of the different ingredients of the salary noticed in the order of the Division Bench of the High Court made it apparent that it formed part of the component of pay falling within dearness allowance. The special allowance was also subject to increment on a time scale. Reliance was placed on an earlier decision of the Supreme Court in re: Bridge and Roof Co. (India) Ltd. v. Union of India [1963] 3 SCR 978 and it was submitted that whatever is payable by all concerns or earned by all permanent employees had to be included in basic wage for the purpose of deduction u/s. 6 of the EPF Act. It is 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. It is only when a worker produces beyond the base standard, what he earns would not be a basic wage, but a production bonus or incentive wage which would then fall outside the purview of basic wage u/s. 2(b) of the Act. Since the special allowance was earned by all teaching and non-teaching staff of the Respondent-school, it had to be included for the purpose of deduction u/s. 6 of the Act, as the special allowance was, in the present case, part of the salary breakup payable to all employees and did not have any nexus with extra output produced by the employees and, thus, it fell within the definition of "basic wage".

On behalf of other appellants it was submitted that the basic wages defined u/s. 2(b) of the Act contains exceptions and will not include what would ordinarily not be earned in accordance with the terms of the contract of employment. It is only those emoluments earned by an employee in accordance with the terms of employment which would qualify as basic wages and discretionary allowance not earned in accordance with the terms of employment would not be covered by basic wage. The statute itself excludes certain allowances from the term basic wages. The exclusion of dearness allowance in section 2(b)(ii) is an exception, but that exception has been corrected by including dearness allowance in section 6 for the purpose of contribution. For example, "attendance incentive" was not paid in terms of the contract of employment and was not legally enforceable by an employee. It would, therefore, not fall within "basic wage" as it was not paid to all employees of the concern. Likewise, transport/conveyance allowance was in the nature of reimbursement to an employee and such payments are not made universally, ordinarily and necessarily to all employees and, therefore, will not fall within the definition of "basic wage". But, to hold that conveyance allowance paid to all employees of the establishment without any proof in respect thereof, was unsustainable.

Observations Made by the Supreme Court of India

The Court noted that basic wage would not ipso-facto take within its ambit the salary breakup structure to hold it liable for provident fund deductions when it was paid as special incentive or production bonus to more meritorious workmen who put in extra output, which had a direct nexus and linkage with the output by the eligible workmen. When a worker produces beyond the base or stand, what he earns is not "basic wage" and thus, this incentive wage will fall outside the purview of "basic wage".

Reference was also made to an earlier decision of the Supreme Court in the case of Muir Mills Col.Ltd. Kanpur v. Its Workmen AIR 1960-SC-985 wherein it was observed that "basic wage" never includes the additional emoluments which some workmen may earn, on the basis of a system of bonuses related to the production. The quantum of earning in such bonuses varies from individual to individual according to their efficiency and diligence: it will vary sometimes from season-to-season with the variations of working conditions in the factory or other place where the work is done; it will vary also with variations in the rate of supplies of raw materials or in the assistance obtainable from machinery. This very element of variation excludes this part of workmen's emoluments from the connotation of "basic wage".

In Manipal Academy of Higher Education v. PF Commissioner [2008] 5 SCC 428, relying upon Bridge Roof"s case (supra), the Supreme Court had observed that:

"10. The basic principles as laid down in Bridge Roof's case (supra) on a combined reading of sections 2(b) and 6 are as follows :-

(a) Where the wage is universally, necessarily and ordinarily paid to all across the broad, such emoluments are basic wages.

(b) Where the payment is available to be specially paid to those who avail of the opportunity is not basic wages. By way of example, it was held that overtime allowance, though it is generally in force in all concerns is not earned by all employees of a concern. It is also earned in accordance with the terms of the contract of employment, but because it may not be earned by all employees of a concern, it is excluded from basic wages.

(c) Conversely, any payment by way of a special incentive or work is not basic wages."

For 'Extra Allowances' to be excluded from 'Basic Wage', they must be linked to extra output produced by concerned employees

The Court noted that the term "basic wage" has not been defined under the EPF Act and when an expression is not defined, one can take into account the definition given to such an expression in a Statute, as also the dictionary meaning. In the aforesaid judgment dated 28.2.2019, the Supreme Court was of the opinion that those wages which are universally, necessarily and ordinary paid to all employees across the board are "basic wages". Where the payment is available to those who avail of the opportunity more than others, the amount paid for that cannot be included in the basic wage. For example, overtime allowance, though it is generally enforced across the board, but not earned by all employees equally. Overtime wages or for that matter, leave encashment may be available to each workman, but it may vary from one workman to other. The extra bonus depends upon the extra hour of work done by the workman, whereas leave encashment shall depend upon the number of days of leave available to workman. Both are variable. In view of what was observed above, the Supreme Court was of the opinion that the amounts received as leave encashment and overtime wages are not fit to be included for calculating basic wage.

Supreme Court clarifies what are permissible deductions

Applying the aforesaid tests to the facts of the present appeals, the Supreme Court observed that no material had 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 availed the opportunity. In order that the amount goes beyond the basic wages, it has to be shown that the workman concerned had become eligible to get this extra amount beyond the normal work which he is otherwise required to put in.
The Court also observed that there was no data available on record to show the norms of work prescribed for those workmen during the relevant period and, therefore,due to this it was not possible to ascertain whether extra amounts paid to the workmen were in-fact-paid for the extra work which had exceeded the normal output prescribed for them. The Supreme Court noted that the wage structure and components of salary had been examined on facts, both by the authority and the appellate authority under the Act, who had arrived at a factual conclusion that the allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution accordingly to the provident fund account of the employees. The Supreme Court, therefore, held that there was no occasion to interfere with the concurrent conclusions of facts and, therefore, the appeals preferred by the establishments did not merit any interference and conversely, the Court allowed the appeals preferred by the Regional PF Commissioner.

Conclusion
The aforesaid Supreme Court's judgment has tremendous significance both for the employers as well as for employees. Though there has been lot of litigation and ambiguity surrounding what constitutes 'basic wage' for deduction of provident fund (which, at this point in time, is 12% for establishments having 20 or more employees and 10% for establishments with less than 10 employees), it is hoped that when the employers keep in mind the welfare of employees and the goodwill associated with taking good care of its employees, the reputation of such establishments would enhance in society. The basic objective of the EPF Act will get fulfilled only when the provisions of the Act are harmoniously considered, keeping in view the social welfare objective in mind.
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