Quality Inn Southern Star Vs. The Regional Director, Employees State Insurance
Corporati  Insc 1207 (3 December 2007)
Arijit Pasayat & P. Sathasivam
APPEAL No. 1250 OF 2001 Dr. ARIJIT PASAYAT, J.
Challenge in this appeal is to the judgment of the learned Single Judge of the
Karnataka High Court dismissing the appeal filed by the appellant. Challenge
was to the order of the Employees' State Insurance Court (in short 'ESI Court') in ESI application No.123/89. The
appeal was filed under Section 82(2) of the Employees' State Insurance Act,
1948 (in short the 'Act'). Order passed by the ESI Court was on the petition filed under Section 75 of the Act.
Background facts are as follows:
show-cause notice was issued by the respondent on the report of the ESI
Inspector on 9.1.1981 calling upon the appellant to contribute premium for the
period November, 1986 to November, 1987 in respect of service charges collected
by it. Not being satisfied with the explanation offered, order was passed under
Section 45-A of the Act determining amount of contribution payable. The order
was challenged by the appellant by an application under Section 75 of the Act.
This application was contested by the respondent and the ESI Court on consideration of the evidence
brought before it and it came to hold that the order under Section 45-A of the
Act suffered from no infirmity.
According to the appellant, the basic question was whether the service charge
collected by the hotel management from the customers and distributed amongst
the employees amounted to "wages" within the meaning of Section 2(22)
of the Act. According to the appellant this did not constitute wages. The
respondent contended that the appellant runs a three-star hotel and the establishment
is covered under the Act. Undisputedly, 10% of the total bill amount is
compulsorily collected as services charges and is included in the bills. The
service charges so collected are distributed amongst the employees of the
appellant quarterly. The collection of service charges is essentially what is
called as "tips" and paid at the option of customers. The ESI Court
held that looking at the nature of the service charges, these are not directly
paid by the customers to the employees but form part of the bills which the
customers are obliged to pay without any option and this amount so collected is
paid or distributed to the employees equally once in three months. According to
the ESI Court the appellant had total control and
power of distribution of the amount and this is distinguishable from
"tips". This was treated in any event covered by the expression
"additional reimbursement". The High Court in appeal upheld the view.
Learned counsel for the appellant submitted that the payments were distributed
equally amongst all the employees periodically, once in three months. It was
submitted that by a circular it was clarified that service charges were outside
the scope of wage as defined. Reference was made to a decision of this Court in
The Rambagh Palace Hotel, Jaipur v. The Rajasthan Hotel Workers' Union, Jaipur (1976 (4) SCC 817).
High Court distinguished the same holding that it related to "tips"
and there was no consideration of the aspect whether it was covered by the
was pointed out that the judgment of the High Court was delivered on 29.7.1999.
Subsequently, the memorandum was issued by the Corporation bearing
No.P-1/13/97-Ins.IV dated 6.11.2002 clearly stating that service charges of the
nature involved in the present dispute do not form part of the wages. It is
also pointed out that the Madras High Court in a decision in Sathianathan N.
& Sons Pvt. Ltd. and Ors. v. E.S.I. Corporation and Anr. (2002-II LLJ 1002)
on 6.2.2002 took a different view.
Learned counsel for the respondent on the other hand supported orders of the ESI Court and the High Court.
Section 2(22) defines wages as:
means all remuneration paid or payable, in cash to an employees or implied,
were fulfilled and includes (any payment to an employee in respect of any
period of authorized leave, lockout, strike which is not illegal or layoff and)
other additional remuneration, if any (paid at intervals not exceeding two
months), but does not include
contribution paid by the employer to any pension fund or provident fund, or
under this act:
traveling allowance or the value of any traveling concession;
sum paid to the person employed to defray special expenses entailed on him by
the nature employment; or
gratuity payable on discharge"
circular referred to by the learned counsel for the appellant reads as follows:
Service charges cannot be included in "wages" for the following
The Memorandum issued by the ESIC corporation number P11113/97-Ins.IV dated
6.11.2000 clearly states in paragraph 13 that:
Charges are collected by management of the hotel on behalf of their employees
in lieu of direct tips and the same is paid to their employees . at a later
collected as 'service charges' will nott constitute wages under S 2(22) of the
ESI Act. In the case of ESIC v M/s Rambagh Palace Hotel, Jaipur. The High Court
of Jaipur has held that 'service charges' are not wages under Section 2(22) of
the ESI Act. This verdict of the High Court of Jaipur was accepted in the ESIC
and Hence no contribution is payable on 'service charges'. (Earlier
instructions were issued vide letter No. P. 12/11/4/79 Ins. Desk I
introduction to the memorandum dated 6.11.2000 states that it has been issued
is necessary that the instructions issued by this office from time to time are
not only consolidated but certain more items are included not only to clear the
doubts of the what constitutes part of wage under Section 2(22) Some of the
instructions were issued long back rather -as back as in 1967 and certain
instructions are not even available in some of thee regions and it is difficult
to keep a track on the old instructions. Keeping in view the above aspects and consolidated
instructions including some more items are as under:"
the present case, the amounts received by the employees were not in the nature
of "wages", as they were not given to the employees under the terms
of the contract of employment, either express or implied. The appointment
letters expressly state that employees are not entitled to any other
remuneration. Thus the distribution of service charges is expressly excluded
from the wages."
view of the above-said office memorandum and the view taken by the Madras High
Court in Sathianathan's case (supra) the orders of the ESI Court and the High Court cannot be
maintained and are accordingly set aside.
The appeal is allowed without any order as to costs.