Madras High Court

The Assistant Director vs M/S.Firstsource Solutions Ltd on 31 March, 2022

                                                                   C.M.A.Nos.475 & 2925 of 2021

                                  IN THE HIGH COURT OF JUDICATURE AT MADRAS
                                              DATED : 31.03.2022
                                                   CORAM:

                                   THE HONOURABLE MS.JUSTICE P.T.ASHA

                                     C.M.A.Nos.475 & 2925 of 2021 &
                                     C.M.P.Nos.3044 & 16747 of 2021
                  1.The Assistant Director
                    Insurance No.VI
                    Employees State Insurance Corporation,
                    143, Sterling Road, Chennai - 600 034.

                  2.The Deputy Director
                    Insurance No.VI
                    Employees State Insurance Corporation,
                    143, Sterling Road, Chennai - 600 034.

                  3.Recovery Officer,
                    Employees State Insurance Corporation,
                    143, Sterling Road, Chennai - 600 034.
                                                   ...Appellants in C.M.A.No.475 of 2021

                  1.The Assistant Director
                    Insurance No.VI
                    Employees State Insurance Corporation,
                    143, Sterling Road, Chennai - 600 034.

                  2.The Deputy Director
                    Insurance No.VI
                    Employees State Insurance Corporation,
                    143, Sterling Road, Chennai - 600 034.
                                                  ...Appellants in C.M.A.No.2925 of 2021
                                                     Vs.
                  M/s.Firstsource Solutions Ltd.,
                  4th & 5th Floor: Block No.3,
                  Tek Meadows,
                  51, Old Mahabalipuram Road (OMR)
                  Sholinganallur, Chennai - 600 119.
                                                               ...Respondents in both the

CMAs

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Common Prayer: Civil Miscellaneous Appeals filed under Section 82

(2) of the E.S.I. Act., praying to set aside the order of the Employees

Insurance Court (Principal Labour Court, Chennai) dated 30.01.2019

made in E.I.O.P.Nos.15 of 2009 and 14 of 2009.


                                      For Petitioners   :   Mr.G.Narmadha

                                      For Respondent :      Mr.C.Mohan
                                                            for M/s.King & Patridge

                                                                  ...in both the CMAs

                                             COMMON JUDGMENT

The Employees State Insurance Corporation is the appellant in

both the appeals.

2. The C.M.A.No.2925 of 2021 is filed challenging the order

passed in E.I.O.P.No.14 of 2009 allowing the petition filed by the

respondent herein under Section 75 of the E.S.I.Act holding that the

respondent is not liable to pay the ESI contribution towards amount

paid by them to the 'Keying Associates' as data entry charges, for a

declaration that the order dated 17.12.2008 of the appellant /

Corporation as null and void, for a direction to the appellant to refund

the amount remitted by the respondent / Company pursuant to the

impugned order dated 17.12.2008 and for a permanent injunction

restraining the appellant / Corporation from recovering any money

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from the petitioner in terms of the order dated 17.12.2007.

3. C.M.A.No.475 of 2021 has been filed challenging the order

passed in E.I.O.P.No.15 of 2009 for a declaration that the respondent /

Company is not liable to pay interest on the alleged contribution

amount, for a declaration that the order of the appellant / Corporation

dated 16.01.2009 is null and void, for a direction to the respondent /

Corporation to refund the amount remitted by the respondent /

Company Pursuant to the above order and for an injunction restraining

the appellant / Corporation from recovery any money.

4. The facts which are common in both the appeals is extracted

in brief as follows;

The respondent / Company which is a Global BPO providing end

to end services predominantly to health care and publishing

companies. The respondent would contend that in order to achieve this

task, apart from the employees on their rolls, they also entered into

arrangements with certain entities designed as 'Keying Associates'.

These Associates were required to fulfil the designated task for which

they were paid data entry charges. These 'Keying Associates' are

independent contractors and not on the rolls of the respondent /

Company.

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5. In the month of May, 2006, an Inspector from the appellant /

Corporation had inspected the respondent / Corporation. However, no

inspection report was furnished by the said Inspector to the appellant /

Corporation. On 11.09.2007, the appellant / Corporation had issued

two C-18 Adhoc notices calling upon the respondent / Company to pay

a sum of Rs.1,31,028/- and Rs.51,88,918/- being the contribution

payable on the data entry charges that had been reflected in the

balance sheet of the respondent / Company for the period 2002 - 2003

to 2004 - 2005.

6. The C18 notice relating to the sum of Rs.1,31,028/- was

closed after the said sum was paid. Insofar as payment of contribution

for the data entry charges, a detailed reply dated 20.02.2008 was

submitted by the respondent / Company at the hearing held on

21.02.2008. The reply was recorded by the appellant / Corporation. In

the reply, the respondent / Company had stated that the 'Keying

Associates' were independent entities and they fall outside the ambit

and scope of the Employees State Insurance Act (herein after, for the

sake of brevity, referred to as the E.S.I. Act).

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7. The respondent / Company had also brought to the notice of

the Corporation that some of the 'Keying Associates' has independent

ESI Codes in their name and the appellant / Corporation would submit

that they had paid all these 'Keying Associates' a sum of nearly

Rs.3,20,21,915/- and were not liable to pay contribution in relation to

the above amount. The primary objection of the respondent /

Company was that they did not have any control or supervision over

the work executed by the employees engaged by the 'Keying

Associates'. The 'Keying Associates' was allotted the work by the

respondent / Company, giving them a time schedule and it is not the

control of the respondent / Company as to how the 'Keying Associates'

achieves the target or how many persons the 'Keying Associates'

engage to achieve the same. In short, there was no direct supervision

on the persons engaged by the 'Keying Associates' to enter the data.

8. Despite such a detailed response which was substantiated with

judgements the appellant / Corporation has passed an order dated

17.12.2008 treating the 'Keying Associates' as being in the direct

employment of the respondent / Company and arrived at a

contribution of Rs.11,76,457/- for the period from 01.03.2002 to

31.03.2005 payable by the respondent / Company. This amount was

arrived at after excluding the amounts paid to 'Keying Associates' who

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have independent codes. This amount was a sum of Rs.2,81,17,108/-

for the remaining amount namely Rs.5,17,12,401/-, a deduction of

65% towards establishment costs, other over heads, taxes and share

of profits was allowed by the appellant / Corporation and a sum of

Rs.1,80,99,340/- was fixed as the contribution. The said sum was

deposited by the respondent / Company without prejudice to their

rights to question and challenge the order dated 17.12.2008.

Therefore, the respondent / Company had moved E.I.O.P. before the

E.S.I Tribunal (Principal Labour Court, Chennai).

9. The respondent / Company had challenged the order primarily

on the following grounds;

(a) The impugned order has been made without notice to the

respondent / Company and without affording them an opportunity to

present their case;

(b) the rate of interest fixed is contrary to the established

principles of law and was fixed in a capricious fashion. The respondent

/ Company therefore sought for the reliefs as stated supra.

10. The challenge was both to the main demand as well as the

demand for payment of interest. E.I.O.P.No.14 of 2009 challenged the

order dated 11.09.2007 seeking payment of a sum of Rs.51,88,918/-

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and E.I.O.P.No.15 of 2009 was filed challenging the levy of interest for

a sum of Rs.1,69,410/- and contributions of a sum of Rs.11,76,457/-

in all totalling and a sum of Rs.13,46,117/-. The main defense put

forward by the respondent / Company was that the 'Keying Associates'

was not their direct employees and the persons whom these 'Keying

Associates' engaged to do the designated work did not come under the

supervision and control of the respondent / Company, since their only

duty was to finish the task assigned to them.

11. The appellant / Corporation had countered the above claim

by filing the written statement, in which they have stated that after the

Inspector of the appellant / Corporation had visited the Company on

21.08.2006, he had followed it with Inspections on 13.09.2006 and

09.10.2006. Records for the period from 01.03.2002 to 31.08.2006

including the accounts / ledgers and for the period from 04/2002 to

03/2005 were produced for verification. During the Inspection, the

Inspector has noticed that a sum of Rs.7,98,29,509/- was booked

under the head of data entry charges for which no supporting

documents had been given. He had submitted a report to the regional

Office, on the basis of which a show cause notice was sent to the

respondent / Corporation in form C-18 (Adhoc) dated 11.09.2007

proposing contribution on data entry charges to the sum of

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Rs.51,88,918/-. The appellant / Corporation had fixed a personal

hearing on 29.10.2007 followed by several personal hearings the last

of which was on 03.12.2008 and after hearing them finally the

respondent has passed the order impugned in the proceedings.

12. The appellant observed that the respondent was providing

services predominantly to the health care and public houses. The

assistance of hundreds of workmen were engaged to achieve the end.

The respondent / Company enters into contract with the 'Keying

Associates' for completing the task within a stipulated period. The

indemnity is issued in favour of the respondent / Company by these

'Keying Associates'. The appellant / Corporation would therefore state

that principles of natural justice has been fully complied with and

allegations to the contrary were wrong.

13. The respondent / Company had produced some documents

without giving the details of the job work assistance such as their

name, address and ESI Code numbers. The respondent / Company had

direct supervision over the performance of the workman engaged by

the 'Keying Associates'. The appellant / Corporation referred to several

judgements and submitted that the levy of contributions as arrived at

was just and did not require any revision.

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14. The Tribunal after considering the entire gamut of the

dispute between the appellant / Corporation and the respondent /

Company came to the conclusion that the persons who were engaged

by the 'Keying Associates' of the respondent / Company did not come

under the direct control of the respondent / Company. The respondent

has only entered into an arrangement with the 'Keying Associates'

offering them a package which the 'Keying Associates' were required

to complete for which an amount is paid to the 'Keying Associates'.

The respondent / Company had no knowledge about the workers,

whom the 'Keying Associates' had engaged and therefore they were

not liable to pay the contribution. Aggrieved by this order, the

appellant / Corporation is before this Court.

15. The learned counsel appearing on behalf of the appellant /

Corporation primarily rests her arguments on the ground that the

respondent / Company has direct supervision on the workers engaged

by the 'Keying Associates'. She would submit that at the time of the

inspection, the appellant / Corporation had provided the Inspector with

the registers and on inspecting the same, he had found huge amounts

against data entry charges. The respondent / Company had disputed

that they were liable to pay ESI Contributions for these amounts. She

would further submit that the respondent / Company had failed to

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furnish the relevant records which has been referred to by the

appellant / Corporation in their letter dated 11.09.2007. Thereafter,

the respondent / Company vide their letter dated 20.02.2008 had

submitted a detailed explanation running into several pages setting out

as to why the amounts were not payable. The appellant after

considering the same had passed the order under Section 45 - A of the

Act. This order was challenged by the respondent and the learned

Judge of the Principal Labour Court has allowed the petition by a non-

speaking order which is challenged before this Court.

16. The learned counsel for appellant had relied upon the

judgement of the Division Bench of the Kerala High Court in Ins

Appeal No.63 of 2009 (The Regional Director Vs. Thankamma

Baby), wherein she would place reliance upon the observations in

paragraphs 17 and 18 therein which are extracted hereunder;

"17. A reading of the impugned orders would show that, merely accepting the version of PW1 the court below accepted the case of the respondent establishments and concluded that there is no control or supervision of the respondent establishments or their agents when the assembling works are carried on at the premises of the contractors/home workers. None of the alleged contractors/home workers were examined before the court below in order prove the vouchers, receipts, agreements,

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etc., and the court below merely accepted the version of PW1 and held that, the mere right to reject the end product is not sufficient to conclude that there is supervision and as such the persons employed by the outside agencies to carry out the assembling works of umbrellas cannot be treated as 'employees' as per Section 2(9) of the ESI Act. Consequently, the payments made to them cannot be treated as 'wages' as per Section 2(22) of the said Act.

18. The fact that, without the assistance of outside agencies, the respondent establishments will not be able to make umbrellas in their own factory for meeting the market demand is not in dispute. The evidence of PW1 would also indicate that the respondent establishments get major part of assembling of umbrellas done through contractors/home workers. The evidence of DW1, the concerned Insurance Inspector would also indicate that, similar activity is being undertaken in the premises of the respondent establishments. When, the definition of 'employee' in Section 2(9) of the ESI Act has been cast deliberately in the widest terms in order to cover every possibility so as not to exclude even distant categories of men employed either in the primary work or cognate activities, the burden is heavily on the shoulders of the respondent establishments to prove with cogent and convincing materials that, the workers employed by the contractors or home workers engaged to carry out the assembling works of umbrellas fall outside the purview of

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'employees' as defined under Section 2(9) of the ESI Act, and that, the payments made to them cannot be treated as 'wages' as defined under Section 2(22) of the said Act. Since the reasoning of the court below in the impugned orders is not supported by any such materials, we find no reasons to sustain the said judgments."

17. Per contra, Mr.C.Mohan, learned counsel appearing for the

respondent / Company would at the outset submit that the very appeal

is not maintainable as no substantial question of law has been made

out by the appellant / Corporation. He would further argue that even

the substantial question of law that has been framed by this Court may

not be a substantial question of law.

18. He would submit that the first substantial question of law

raised is no longer res integra in the light of the judgement of the

Hon'ble Supreme Court in the case of Kashmir Singh Vs. Harman

Singh and another in C.A.No.1036 of 2002 dated 03.03.2008 in

which the Hon'ble Supreme Court had observed that as a general rule,

the High Court should not interfere with the concurrent findings of the

Courts below but this is not an absolute rule and in well recognized

exceptions, this rule can be ignored like for example., (i) if the Courts

below had ignored material evidence or acted on no evidence; (ii)

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Courts have drawn wrong inferences from the proved facts by applying

the law erroneously and (iii) The Courts have wrongly cast the burden

of proof. He would submit that however none of these three

contingencies would apply in the instant case.

19. He would submit that the arguments advanced that the

respondent / Company had not provided the documents sought for is

an absolutely false statement. The respondent / Company had

furnished the statement of account and they had also produced the

copies of the agreement letter. In fact in the Processing form it was

also explained that the respondent / Company had not received the

Inspection report and the C18 claim was raised only on the basis of

balance sheet figure. He would submit that therefore, the learned

Judge had taken note of the above.

20. Mr.C.Mohan, learned counsel for the respondent / Company

would further submit that once the Inspection report had not been

provided, the entire proceedings had to be set at naught. In support of

the above argument, he had relied upon judgement of this Court in the

case of Regional Director, ESI Corporation Vs. Skiltek Engineers

reported in MANU/TN/8847/2007, where this Court had held that

under Section 45(A)(1) the Inspection report had to be furnished and

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if the said mandatory provision is not followed and the respondent /

Establishment denied an opportunity of being heard, the proceedings

had to definitely be set aside. He would further contend that the

respondent / Company has no eyeball to eyeball contact with the

workers engaged by the 'Keying Associates'. In respect of this

argument, he would rely upon judgement of the Hon'ble Supreme

Court in 1992 (1) SCC 441 (C.E.S.C. Limited and others Vs.

Subhash Chandra Bose and others) with particular reference to

paragraphs 13, 14 and 19 therein, which are extracted hereunder;

"13. In whatever manner the word 'employee' under Section 2(9) be construed, liberally or restrictedly, the construction cannot go to the extent of ruling out the function and role of the immediate employer or obliterating the distance between the principal employer and the immediate employer. In some situations he is the cut-off.

He is the one who stumbles in the way of direct nexus being established, unless statutorily fictioned, between the employee and the principal employer. He is the one who in a given situation is the principal employer to the employee, directly employed under him. If the work by the employee is conducted under the immediate gaze or overseeing of the principal employer, or his agent, subject to other conditions as envisaged being fulfilled, he would be an employee for the purpose of section 2(9). Thus besides the question afore-posed with regard to supervision of the principal employer the subsidiary question is whether

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instantly the contractual supervision exercised by the immediate employer (the electrical contractors) over his employee was exercised, on the terms of the contract, towards fulfilling a selfobligation or in discharge of duty as an agent of the principal employer.

14. P.M Patel's case can also be no help to interpret the word 'supervision' herein. The word as such is not found employed in Section 2(1) of The Employees Provident Fund and Miscellaneous Provisions Act, 1952 but found used in the text of the judgment. It appears to have been used as a means to establish connection between the employer and the employee having regard to the nature of work performed. But what has been done in Patel's case cannot ipso facto be imported in the instant case since the word 'supervision' in the textual context requires independent construction. In the ordinary dictionary sense "to supervise" means to direct or over-see the performance or operation of an activity and to over-see it, watch over and direct. It is work under eye and gaze of someone who can immediately direct a corrective and tender advice. In the textual sense 'supervision' of the principal employer or his agent is on 'work' at the places envisaged and the word 'work' can neither be construed so broadly to be the final act of acceptance or rejection of work, nor so narrowly so as to be supervision at all times and at each and every step of the work. A harmonious construction alone would help carry out the purpose of the Act. which would mean moderating the two extremes.

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When the employee' is put to work under the eye and gaze of the principal employer, or his agent, where he can be watched secretly, accidently, or occasionally, while the work is in progress, so as to scrutinise the quality thereof and to detect faults therein, as also put to timely remedial measures by directions given, finally leading to the satisfactory completion and acceptance of the work, that would in our view be supervision for the purposes of Section 2(9) of the Act. It is the consistency of vigil, the proverbial 'a stitch in time saves nine'. The standards of vigil would of course depend on the facts of each case. Now this function, the principal employer, no doubt can delegate to his agent who in the eye of law is his second self, i.e., a substitute of the principal employer. The immediate employer, instantly, the electrical contractors, can by statutorily compulsion never be the agent of the principal employer. If such a relationship is permitted to be established it would not only obliterate the distinction between the two, but would violate the provisions of the Act as well as the contractual principle that a contractor and a contractee cannot be the same person. The E.S.I.C. claims establishment of such agency on the terms of the contract, a relationship express or implied. But, as is evident, the creation or deduction of such relationship throws one towards the statutory scheme of keeping distinct the concept of the principle and immediate employer, because of diverse and distinct roles. The defini- tion is well drawn in Halsbury's Laws of England (Hailsham Edition) Vol. 1 at page 193 as follows:

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"An agent is to be distinguished on the one hand from a servant, and on the other from an independent contractor. A servant acts under the direct control and supervision of his master and is bound to conform to all reasona- ble orders given to him in this course of his work; an independent contractor, on the other hand, is entirely independent of any control or interference and merely undertakes to produce a specified result, employing his own means to produce that result. An agent, though bound to exercise his authority in accordance with all lawful instructions which may be given to him from time to time by his princi- pal, is not subject to its exercise to the direct control and supervision of the princi- pal".

And this statement of law was used with approval by this Court in AIR 1977 SC 1677 titled as The .Superintendent of post Offices etc. etc. v. P.K. Rajamma."

21. He would also rely upon the Full Bench judgement of this

Court reported in 2007(3) LLN pg 934 (Employees' State

Insurance Corporation Vs. Bethall Engineering Company)

wherein the Full Bench of this Court has referred to the judgement of

the Division Bench reported in 1997 (2) L.L.N. Pg. 909 with

particular reference to paragraphs 11, 12 and 21. The learned counsel

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has cited the judgements of other High Courts as well in support of the

contention that there was no direct supervision by the respondent /

Company. He has relied on the following judgements;

(a) Judgement of the Kerala High Court reported in 2000 (1)

LLN pg. 616, (Tata Tea Ltd., Bangalore Vs. Employees' State

Insurance Corporation, Bangalore)

(b) Judgement of the Bombay High Court reported in 2005 (1)

LLN pg.1106 (Anu Marble, Mining Private Ltd., Vs. Regional

Directors, Employees State Insurance Corporation, Mumbai)

and

LLN Pg.691 (World Wide Traders & Others Vs. Regional

Director, Employees State Insurance Corporation, Bangalore)

and other judgements in support of the above contention regarding

supervisory role played by the respondent / Company.

22. In the judgement of the Hon'ble Supreme Court reported in

2010 (11) SCC 537 (The Managing Director, Hassan

Cooperative Milk Producer's Society Union Limited Vs. The

Assistant Regional Director, Employees State Insurance

Corporation). The learned counsel would refer to paragraph 15

therein where the Hon'ble Supreme Court has observed that "merely

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being employed in connection with the work of the establishment, in

itself, does not entitle a person to be an employee", he must not only

be employed in connection with the work of the establishment but also

be shown to be employed in one or the other of the three categories

mentioned in Section 2(9) of the E.S.I.Act. He would therefore submit

that the Tribunal has rightly come to the conclusion that the

respondent / Company had no control or supervision for the

employees of the 'Keying Associates' and therefore is not liable to pay

the contribution.

23. Heard both sides.

24. The entire issue revolves around the question as to whether

the respondent / Company has any control or supervision over the

workers who are engaged by the 'Keying Associates' for completing

the work entrusted by the respondent / Company to this 'Keying

Associates'. From the records, it is seen that the respondent /

Company assigns work to 'Keying Associates', who in turn engages

workers to complete the task. The principal employer namely the

respondent / Company is only concerned that the work be finished

within stipulated time. They are in no way concerned with the manner

in which the 'Keying Associates' achieves the target. Some of the

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'Keying Associates' are independently assessed and are making the

contributions. It is also argued by the appellant / Corporation that they

have only covered those of the 'Keying Associates' who are not

covered under the Act.

25. Therefore, even at the outset, the respondent / Corporation

has not taken a uniform view. They have omitted the 'Keying

Associates' who are already registered under the E.S.I.Act thereby

admitting that the workers engaged by these 'Keying Associates' have

no contact and are not under the supervision of the respondent /

Company. On the other hand, the workers of 'Keying Associates' who

are not registered under the Act are considered to be the employees of

the respondent / Company. The respondent / Company has clearly

stated that they have no direct supervision for these workers.

26. In the judgement reported in 1992 (1) SCC page 441

(cited supra), the Hon'ble Supreme Court has construed the word

'employee' under Section 2(9) of the E.S.I.Act as follows:

"If the work by the employee is conducted under the immediate gaze or overseeing of the principal employer, or his agent, subject to other conditions as envisaged being fulfilled, he would be an employee for the purpose of section 2(9). Thus besides the question afore-posed with

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regard to supervision of the principal employer the subsidiary question is whether instantly the contractual supervision exercised by the immediate employer (the electrical contractors) over his employee was exercised, on the terms of the contract, towards fulfilling a selfobligation or in discharge of duty as an agent of the principal employer."

27. The learned Judges have further discussed the term 'agent'

and 'principal' and have held that in that case, the agreement between

the principal employer and the agent, nowhere amalgamated the

identity of the electrical contractor with that of the principal namely

the petitioner before the Hon'ble Supreme Court by undertaking to

provide adequate supervision for the purposes of the Act on behalf of

the C.E.S.C. The Full Bench of this Court in the judgement reported in

2007 (3) L.L.N 934 (cited supra) was called upon to answer the

following issue:

"Whether the right of the principal employer to reject or

accept work on completion, on scrutinizing compliance

with job requirements, as accomplished by a contractor,

the immediate employer, through his employees, is in

itself an effective and meaningful "supervision" as

envisaged under Section 2(9) of the Employees State

Insurance Act, 1948."

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After discussing the plethora of cases relating to supervision, the

learned Judges has observed as follows;

"It is thus clear from the dicta of the Supreme Court

that where the job work is entrusted to a third party

contractor and such third party contractor has engaged

independent workers, the fact that the principal employer

has power to reject the end product manufactured by the

contractor, does not constitute an element of supervision

within the meaning of Section 2(9) of the Act. The

judgment of the Division Bench in Poonam Easwardas,

Proprietrix, Kaleel Corporation v. Employees' State

Insurance Corporation (supra) relied upon by the appellant

Corporation is concerned with the direct employees of the

establishment and has no application to the facts of the

instant case which is about the contract employees."