House Ernakulam Vs. Regional Director, ESI  INSC 172 (29 April 1999)
S.Saghir Ahmad, K.T.Thomas Thomas,J.
House is a Co-operative Society engaged in manufacturing and selling handloom
fabrics. It disburses to its employees, besides the normal wages, special
amounts under two counts. One is incentive bonu and the other is sal
commission. Thereupon, the Employees State Insurance Corporation (for sort the
Corporation) deman from the Handloom House additional contribution towards
insurance fund on the premise that such extra benefits given to the employees
fall within the ambit of wages under the Employe e s State Insurance Act 1948
(for short the Act). When the Handloom House challenged the said demand before
the Employees Insurance
Court it was held
that such benefits do not form part of wages and hence the demand is
unsustainable. The Corporation filed statutory appeal before the High Court of Kerala
and a Division Bench thereof quashed the judgment of the Insurance Court and permitted the Corporation to
proceed with the demand.
Handloom House, having lost even a motion for review of the said judgment, has
filed this appeal by special leave.
first thought that appellant cannot re-canvass against settled position since
this court had held on earlier occasions that wages as defined i n Section
2(22) of the Act would include, among others, incentive allowances and
production bonus paid to the employees (Harihar Polyfibres vs. Regional
Director, ESIC [1984(4) SCC 324]; Regional Director, ESIC vs.Enfield
India Ltd. (1997 (11) SCC 752.
T.L. Viswanatha Iyer, learned Senior Counsel made an endeavour to distinguish
the said decisions from the instant case on the premise that incentive bonus
and sale commission paid to the employees of the appellant society are paid at
intervals exceeding two months and, therefor e, they cannot form part of their
wages as defined in the clause.
Woollens Ltd. vs. ESIC [1994 Suppl (3) SCC 219] a two judge bench of this court
considered whether production bonus paid to the workmen would fall within wages
as defined in the Act. The employer in that case projected a particular term in
the agreement (between workmen and the employer, which provides for payment of
such bonus) that bonus is to be paid at the end of each quarter, and contended
on its strength that it would not be wages. However, this court highlighted
another term of the same agreement which stated that an employee can claim
advances against such bonus and also the fact that the employees were availing
themselves of such advances. On the basis of such clauses in the agreement
learned Judges observed thus :
mere term in the agreement that the payment of bonus would be made at the end
of the quarter, therefore, does not make the bonus, a payment other than
remuneration for the labour put in during the said quarter. Hence the
stipulation in the agreement that the payment of the bonus would be made at the
end of the quarter is not material for deciding the question whether the
payments would be covered by the first part of the definition or not.
definition of wages in section 2(22) of the Act reads thus:- Wages means all
remuneration paid or payable, in cash to an employee, if the terms of the
contract of employment, express or implied, were fulfilled and includes any
payment to an employee in respect of any period of authorised leave, lock-out,
strike which is not illegal or lay-off and other additional remuneration, if
any, paid at intervals not exceeding two months, but does not include (a) any
contribution paid by the employer to any person fund or provident fund, or
under this Act;
travelling allowance or the value of any travelling concession;
sum paid to the person employed to defray special expenses entailed on him by
the nature of his employment.
main body of the definition encompasses within its fold three kinds of payments
made to the employees. First is, all remuneration paid or payable in cash on fulfilment
of the terms of employment. The second is any payment made to an employee in
respect of any period of authorised leave etc. The third is other additional
remuneration paid at intervals not exceeding two months It is contended that if
incentive bonus and sales commission would fall within the scope of the first
category mentioned above it is immaterial that the payment is made at intervals
or in a lump. But that aspect is no more res integra in the light of the
decision in Harihar Polyfibres vs Regional Director, ESIC [1984 (4) SCC 484].
In that case a two judge bench (Chinnappa Reddy and AN Sen JJ) dealt with the
decision of a Full Bench of the High Court of Andhra Pradesh which held thus:
word other appear ing at the commencement of the third part of the definition
of wages under Section 2 (22) indicates that it must be remuneration or
additional remuneration other than the remuneration which is referred to in the
earlier part of the definition viz., all remuneration paid or payable, in cash
to an employee, if the terms of the contract of employment, express or implied,
were fulfilled and incentive bonus in the present scheme is certainly
additional remuneration. It must be emphasised at this stage that under the
third part of the definition of wages it is actual factum of payment which
counts because the word used is ppaid as distinguished from ppaid or payable.
The moment you get any additional remuneration other than the remuneration
payable under the contract of employment and if this additional remuneration is
paid at intervals not exceeding two months, it becomes wages by virtue of the
third part of the definition of wages.
court approved the said statement of law as correct by observing that we
express our respectful agreement with what has been said by the High Court of
Andhra Pradesh in the above extracted passage.
only question to be determined in this case is whether incentive bonus and
sales commission would fall within the ambit of the aforesaid third category of
remuneration or not.
clear that any additional remuneration paid at intervals exceeding two months
has been excluded by specific terms, from the purview of the definition. What
is the rationale for excluding such remuneration paid at intervals exceeding
two months from the scope of wages? Though we did not get any clue from the
Statement of Objects and Reasons for the Bill (which became Employees State
Insurance (Amendment) Act 1951), the rationale could be discerned as
inter-linked with the definition clause wage period in Section 2(23). It reads
period in relation to an employee means the period in respect of which wages
are ordinarily payable to him whether in terms of the contract of employment,
express or implied or otherwise." Section 40 of the Act casts liability on
the Principal Employer to pay the contribution to the Corporation, whether it
is of employers or of employees contribution. Of course the Principal Employer
is allowed to recover that part of employers contribution by making deduction
from his wages. Section 39(4) of the Act states:
contributions payable in respect of each wage period shall ordinarily fall due
on the last day of the wage period, and where an employee is employed for part
of the wage period or is employed under two or more employers during the same
wage period, the contributions shall fall due on such days as may be specified
in the regulations.
employer shall have the permission to dodge the payment of contribution on the
premise that annual payments have to be worked out. Normally, the wage period is
one month, but the Parliament would have thought that such wage period may be
extended a little more, but no employer shall make it longer than two months.
This could be the reason for fixing a period of two months as the maximum
period for counting additional remuneration as to make it part of wages under
a question of fact in each case whether sales commission and incentive bonus
are payable at intervals not exceeding two months. The Insurance Court has, in this case, found that such
payments were not made within a period of two months and are, therefore, not
includible as wages. But the High Court did not say anything about that factual
position. The question whether incentive bonus and sales commission would fall
within the aforesaid third category of wages as defined in Section 2(22) of Act
has to be considered by the High Court afresh in the light of the observations
made above the High Court for disposal of the writ petition We do so, and for
that purpose we set aside the impugned judgment.
is thus allowed.