Analysis of SC Judgement holding Allowances as part of Basic Salary for PF contribution purpose!!

"Is the recent SC judgement holding allowances as part of basic wages for the purpose of determination of PF contribution, contradictory with the stand of the Law makers and implementors?"

In its recent judgement in the case of "RPFC vs. Vivekananda Vidyamandir and others & Surya Roshni Ltd & Ors. vs. The State of Madhya Pradesh EPF RPFC and Ors."  2019 LLR 339 (SC), the Hon'ble Supreme Court have held that allowances other than those of the undermentioned types are to be considered as part of the basic wages u/s 2(b) of the EPF & MP Act, 1952, for the purpose of determination of PF Contribution:

• Allowances which are variable in nature;
• Allowances which are linked to any incentive for production resulting in greater output by an employee;
• Allowances which are not paid across the board to all employees in a particular category; or
• Allowances which are paid especially to those who avail the opportunity.

Accordingly, the allowances like special allowances, conveyance/traveling allowances, education allowances, and other similar allowances in the cases of the respective petitioners, have been held as part of the basic wages, liable for deduction of PF contribution.

In arriving at the conclusion, the Hon'ble Supreme Court have relied upon its earlier judgements in the cases of 'Bridge & Roof Company (India) Ltd' & 'Manipal Academy of Higher Education', wherein it has been categorically held by the Hon'ble Supreme Court that those allowances which are "universally, necessarily and ordinarily paid to all across the board" are to be considered as basic wages, i.e. only those allowances which are paid universally to all the employees in all the establishments, uniformly, across the board, without any discretion, and not just in some establishments on case to case basis, are to be considered as part of basic wages, and not all the allowances.

However, it appears that the present bench of the Hon'ble Supreme Court have interpreted the said expression "universally, necessarily and ordinarily paid to all across the board" in the context of individual establishments only and not in the context of the entire industry as a whole. Thus, in view of the principle of natural justice and fair play and far reaching implications of disturbing the already well settled position in this regards, a review and reconsideration of the said judgement of the Hon'ble Supreme Court is desirable and warranted.

Legislative Provisions as per the Governing EPF & MP Act, 1952

In order to have proper appreciation and understanding of the issue under consideration, it will be desirable and worthwhile to consider and analyse the relevant provisions of the governing EPF & MP Act, 1952, in this regards.

Section 2(b) of the EPF & MP Act, 1952 reads as under:

"Section 2(b) "basic wages" means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include -

(i) the cash value of any food concession;

(ii) any dearness allowance (that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living), house-rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;

(iii) any presents made by the employer;"

"Section 6: Contributions and matters which may be provided for in Schemes.

The contribution which shall be paid by the employer to the Fund shall be ten percent. Of the basic wages, dearness allowance and retaining allowance, if any, for the time being payable to each of the employees whether employed by him directly or by or through a contractor, and the employees' contribution shall be equal to the contribution payable by the employer in respect of him and may, if any employee so desires, be an amount exceeding ten percent of his basic wages, dearness allowance and retaining allowance if any, subject to the condition that the employer shall not be under an obligation to pay any contribution over and above his contribution payable under this section:

Provided that in its application to any establishment or class of establishments which the Central Government, after making such inquiry as it deems fit, may, by notification in the Official Gazette specify, this section shall be subject to the modification that for the words "ten percent", at both the places where they occur, the words "12 percent" shall be substituted:

Provided further that where the amount of any contribution payable under this Act involves a fraction of a rupee, the Scheme may provide for rounding off of such fraction to the nearest rupee, half of a rupee, or the quarter of a rupee.

Explanation I - For the purposes of this section, dearness allowance shall be deemed to include also the cash value of any food concession allowed to the employee.

Explanation II - For the purposes of this section, "retaining allowance" means allowance payable for the time being to an employee of any factory or other establishment during any period in which the establishment is not working, for retaining his services."

Stand of the Law Making Body i.e. Ministry of Labour & Employment & the Regulatory Body EPFO, before the said SC Judgement on this issue:

Circulars, Notifications & RTI Response issued by the Regulatory Body EPFO:

For ready reference, the important and significant circulars and notifications issued by the Regulatory Body CPFC concerning the issue of interpretation of basic wages u/s 2(b) of EPF & MP Act, 1952, for the purpose of determination of provident fund contribution u/s 6 of the Act, having a direct bearing on the subject matter under consideration are discussed here, as under:

(i) Official Response of EPFO - Head Office, Ministry of Labour & Employment, Govt. of India, New Delhi, bearing F.No. C.IV/1(63)10/RTI/948, in October 2010, in response to one RTI :

In its official response to one RTI, the EPFO - Head Office, Ministry of Labour & Employment, Govt. of India, New Delhi, bearing F.No. C.IV/1(63)10/RTI/948, in October 2010, has categorically clarified that the under mentioned allowances are outside the purview of 'basic wages' u/s 2(b) of the Act, and as such don't attract payment of PF contribution, viz.

1. House Rent Allowance;
2. Education Allowance;
3. Conveyance Allowance;
4. Washing Allowance;
5. City Allowance;
6. Leave Travel Allowance;
7. Night Shift Allowance;
8. Special Allowance.

It is a matter of fact that the Hon'ble Supreme Court, during the course of appellate pleadings, in the captioned judgement of "Surya Roshni Ltd. & Ors. vs. The State of Madhya Pradesh EPF RPFC and Ors.  2019 LLR 339 (SC), had not been made privy to the above categorical clarification/response to an RTI, by the Regulatory Body EPFO, Ministry of Labour & Employment, Govt. of India, New Delhi, confirming the non-deduction of PF contribution on above allowances by the Establishments. The EPFO was also a party in the said SC judgement and as such it was duty bound to apprise the Hon'ble Supreme Court about its said clarification/response to an RTI.

Therefore, in view of the above categorical clarification, the stand of the Regulatory Body EPFO, Ministry of Labour & Employment, Govt. of India, New Delhi, concerning the non-deduction of PF contribution on above mentioned allowances, has always been very clear and unambiguous, and as such the establishments, not deducting PF contribution on such allowances, can't be considered as defaulters, with retrospective effect after the above SC Judgement.

(ii) Circular No. C-III/110001/4/3(72)14/Circular/Hqrs/6693 dated 6.8.2014 regarding "Inspection of establishments splitting wages to reduce PF liability."

In the said circular, the regulatory body CPFC, while interpreting the definition of "basic wages"  as per section 2(b) of the Act, to include all emoluments which are earned by an employee while on duty but excludes the cash value of food concession, dearness allowance, HRA, overtime allowance, bonus, commission or any other similar allowance payable to the employee and any presents given by the employer to his employees, has apprehended that the employers split the total wages payable to their employees into several allowances in such a way that the said allowances are covered under the category of exclusions provided u/s 2(b) of the Act and thereby encouraging the subterfuge of splitting of wages to reduce the PF liability, upto 50% of total wages. 

In order to curb this, CPFC has directed for the inspection of all those establishments where PF contribution has been deducted on fifty percent or less of total wages.

Thus, in the above circular, the regulatory body CPFC has itself acknowledged that deduction of PF contribution on more than 50% of the total wages is a sufficient compliance by the establishments so as to do away with the requirement of their inspection by PF authorities. In other words, the Regulatory Body CPFC has itself acknowledged that the establishments deducting PF contribution on more than 50% of the total wages of their employees are not indulging in any subterfuge of splitting of wages to reduce the PF liability.

(iii) Recent Deliberations between the High Level Committee comprising participation from the Ministry of Labour & Employment, Govt. of India and the Regulatory Body CPFC :

In very recent deliberations between the Secretary, Ministry of Labour & Employment, Govt. of India & the Regulatory Body EPFO, the new definition of "wages" has been proposed by the Ministry vide its office memo bearing F.No. S-35012/10/2017-SS.II dated 7.2.2018 and comments from all the stakeholders have been invited.

The newly proposed definition of "wages", reads as under:

"Wages" means all remuneration paid or payable in cash to an employee, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment of work in such employment, and includes any, -

1. basic wages,
2. dearness allowance and
3. retaining allowance (if any);

but does not include-

1. any bonus, commission or any similar allowance payable to the employee in respect of his employment of work done in such employment;
2. house rent allowance;
3. The value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages b a general or special order of the appropriate Government;
4. any contribution paid by the employer to any pension of provident fund, and the interest which may have accrued thereon;
5. any travelling allowance or the value of any travelling concession;
6. any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment; or
7. any retrenchment compensation or any gratuity or other retirement benefit payable to the employee or any ex-gratia payment made to him on the termination of employment;
8. any overtime allowance; and
1. cash value of any food grains;

Provided that for calculating the wage under this clause, if any payments made by the employer to the employee under clauses (a) to (i) exceeds one half of the all remuneration calculated under this clause, the amount which exceeds such one-half shall be deemed as remuneration and shall accordingly be added to all remuneration under this clause."

Thus, it is duly evident from above that the governing Regulatory Ministry i.e. the Ministry of Labour & Employment has itself proposed the exclusion of travelling allowance and any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment as per clauses (e) and (f) of the newly proposed section 2(b) of the Act, from the purview of 'wages' for the purpose of determination of PF contribution, among other  exclusions.

More importantly, the proviso to the newly proposed section is also in complete alignment with the earlier CPFC's circular no. C-III/110001/4/3(72)14/Circular/Hqrs/6693 dated 6.8.2014, as it stipulates a threshold compliance limit of deduction of pf contribution on 50% of the total wages.

The regulatory body EPFO vide its office memo bearing F.No. C-I/1(81)2017/Wages/1801 dated 8.2.2018 has duly accepted the said newly proposed definition of wages for the purpose of determination of PF contribution.

Justification for Non Applicability of the captioned judgement of Hon'ble Supreme Court in the case of "Surya Roshni Ltd.& Ors. vs. The State of Madhya Pradesh EPF RPFC and Ors.  2019 LLR 339 (SC), to the Establishments deducting and contributing PF contribution on more than the 50% of Total Wages: 

It is a matter of fact that the Hon'ble Supreme Court, during the course of appellate pleadings, in the captioned judgement of "Surya Roshni Ltd. & Ors. vs. The State of Madhya Pradesh EPF RPFC and Ors.  2019 LLR 339 (SC), had not been made privy to the above CPFC Circular No. bearing F.No. C-I/1(81)2017/Wages/1801 dated 8.2.2018 and the Labour Ministry's office memo bearing F.No. S-35012/10/2017-SS.II dated 7.2.2018 proposing a new definition of "wages" for the purpose of determination of PF contribution, although both the circulars/office memos had been issued before the date of pronouncement of the said judgement by the Hon'ble Supreme Court, i.e. 28.2.2019, and as such the Hon'ble Supreme Court had no occasion, whatsoever, to consider the acceptable stand of the Law Making Body i.e. the Labour Ministry & the Regulatory Body EPFO/CPFC, that the establishments deducting PF contribution on more than 50% of the total wages of their employees are not indulging in any subterfuge of splitting of wages to reduce the PF liability.

Need of the Hour: Avoidance of High Handed Approach by EPFO Deptt & Officers, after the said SC Judgement:

The above RTI Response and Circulars issued by the Governing & Regulatory Bodies viz. the Labour Ministry, the EPFO & the CPFC, makes its duly evident that the stand of these governing and regulatory bodies, concerning the non-deduction of PF contribution on allowances, has always been very clear and unambiguous.

However, unfortunately, the EPFO field officers are resorting to the outright and blatant misuse of the captioned judgement of the Supreme Court, to put undue pressure on Factories, Shops & Establishments for PF collections for meeting out their budgetary targets for improving service records, and even for their vested and malafide interests.

It is a cardinal principal of Law that the Circulars/Notifications issued by the Law Enforcing/Regulatory Bodies are binding on them and they cannot deviate from their own circulars and notifications.

In view of above, it is requested that suitable instructions may be given to the EPFO Deptt and its Officers to avoid the high handed approach especially with the bonafide and genuine Establishments, who are contributing atleast 50% of total wages of their employees as PF contribution with the EPFO, in order to achieve the Governments' objective of "ease of doing business" in real and effective sense.

SO FRIENDS NEXT TIME YOU ARE IN RECEIPT OF NOTICE U/S 7A OF EPF & MP ACT, 1952, ASKING TO DEPOSIT PF CONTRIBUTION ON EACH AND EVERY ALLOWANCE, PAID BY YOU TO YOUR EMPLOYEES, DON'T SUCCUMB TO THEIR UNLAWFUL PRESSURE TACTICS AND CONFRONT THEM WITH THE ABOVE STATED LEGAL AND FACTUAL PROPOSITIONS�