Dismissed

The Deputy Director, v. Madhavi Cold Storage Limited

Telangana HC14 Oct 2015CMA/871/2008

Case brief

AI extract

What is this about?

This appeal by the ESI Corporation challenged an order dismissing a demand for contributions on omitted wages and construction costs. The High Court held that lifters/coolies were not employees of the cold storage unit, and construction work did not amount to a manufacturing process under the Act.

What did the court decide?

The Civil Miscellaneous Appeal is dismissed. There shall be no order as to costs.

The Deputy Director, Vs Madhavi Cold… — Contract and Commercial Disputes | Telangana HC (2015)

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THE HON’BLE SRI JUSTICE M.SEETHARAMA MURTI

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C.M.A.No.871 of 2008

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JUDGMENT:

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This appeal under Section 82(2) of the Employees State Insurance Act, 1948 (‘the Act’ for brevity) by the Deputy Director, ESI Corporation i.e., unsuccessful 1^st respondent is directed against the order dated 09.11.2006 of the learned Presiding Officer of the Labour Court, Guntur passed in ESI.No.12 of 1999.

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2. I have heard the submissions of the learned counsel for the appellant and the learned counsel for the 1^st respondent. Respondents 2 and 3 are stated to be not necessary parties. I have perused the material record.

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3. The parties shall hereinafter be referred to as the appellant and the 1^st respondent establishment for convenience and clarity.

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4. The facts that lead to the filing of this appeal by the appellant and the cases of the parties, in brief, are as follows:

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4.1 The case of the 1^st respondent establishment is this:

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The 1^st respondent establishment is represented by its Managing Director. The establishment was started in the year 1994 i.e., from 1994-95. The nature of business is keeping dry chillies (red) in cold storage. Necessary licenses from various Government departments were obtained for the said business. The 1^st respondent establishment was employing required employees and the number of employees was less than 10 from the inception. Thereafter out of necessity more employees were employed. However, at no point of time the total number of employees crossed the statutory limit. In the interests of its employees, the 1^st respondent establishment had started making contribution to the Corporation right from the beginning and it is regular in paying the contributions as the scheme is a social security scheme under the legislation. Normally chilly crop will be harvested from May to July and the chillies will be stored up to November. Thus the

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establishment of the 1^st respondent is a seasonal one and does not come under the purview of the Act just like cotton ginning mills which are also seasonal. Normally in cold storages dry crop produces like chillies, tamarind and vegetables will be stored. But in places like Guntur where chilly is the major crop, chillies are only being stored in almost all the cold storages. The 1^st respondent establishment provides services to the ryots who are willing to store their end products with a view to get higher prices. The ryots pay rent for storing their products in the cold storage. The ryots bear the entire expenditure for getting their produce from their respective places to the cold storage and again carrying their produce from cold storage to the destinations including buyers’ destinations. Thus, the 1^st respondent establishment is no way connected with the muta coolie payments though it incidentally pays the same to muta maistry. The entire construction of the 1^st respondent establishment was not completed by the time the business was started. As such, while carrying on the business, the construction work was continued. The entries in the account books clearly reflect the said facts. Apart from the construction work expenditure and the amounts paid to coolies for loading and unloading on behalf of the ryots, the balance expenditure out of the total expenditure is in the shape of wages paid to the employees of the 1^st respondent establishment. The 1^st respondent establishment is paying entire contribution regularly to the Corporation. There are no dues to be paid. While so, the 1^st respondent establishment had received an order dated 22.04.1998 under Section 45(A) of the Act demanding payment of Rs.1,39,749/- and interest at Rs.30,156/- for the period from 4/96 to 3/97. The said payment was demanded to be made within 15 days. The said notice refers to a show cause notice said to have been issued to the 1^st respondent establishment to appear on 03.04.1998. However, no such notice was ever received by the 1^st respondent establishment. Thus, the 1^st respondent establishment was denied an opportunity of hearing and also submitting its objections in respect of the demand in the notice. The said notice is barred by limitation. The demand in the notice is illegal. The procedure contemplated under law and the principles of natural justice were not followed before issuing the said notice. Hence the said notice is liable to be set aside.

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4.2 The case of the appellant is this:

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The Inspector of the Corporation visited the factory of the 1^st respondent establishment on 01.09.1997. Having verified the records including the general

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ledgers for the period from 01.04.1994 to 31.03.1997, it was noticed that the establishment of the 1^st respondent had failed to pay insurance and contributions on the omitted wages for the period from 01.04.1994 to 31.03.1997. The notice was issued after following the due process of law. The establishment of the 1^st respondent is not a seasonal one. In view of their activity, their establishment would not fall under the excluded factories. The amounts were being paid to muta maistry and loading and unloading coolies by the establishment of the 1^st respondent and they are the wages paid indirectly. Hence, the establishment of the 1^st respondent is liable to pay the contributions for these amounts. The order was passed after giving due opportunity.

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4.3 Taking into consideration the above pleadings, the Labour Court had framed the following issues.

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1. Whether the petitioner is liable to pay the amounts demanded in the Demand Notice dated 22.04.1998?

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2. To what relief?

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4.4 At the time of enquiry, PWs1 to 3 were examined and exhibits P1 to P5 were marked on the side of the 1^st respondent establishment. On behalf of the appellant, RWs1 and 2 were examined and exhibits R1 to R5 were marked.

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4.5 On merits, the Court below had allowed the application of the 1^st respondent establishment and it was held that the 1^st respondent establishment is not liable to pay any amount to the Corporation for the period from 4/96 to 3/97 towards contributions.

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4.6 Feeling aggrieved, the appellant had preferred this appeal.

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5. The learned counsel for the appellant would contend as follows:

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The learned Judge of the Labour Court had failed to properly appreciate the oral and documentary evidence in the context of the facts of the case. The 1^st respondent establishment is liable to pay the contributions as demanded in the notice dated 22.04.1998. The 1^st respondent has failed to submit explanation to the notice in Form C-18 under exhibit R4. The labour Court ought to have seen that the 1^st respondent establishment is admittedly amenable for coverage under the provisions

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of the Act from 01.03.1999 and it was allotted code No.52-12208-03. The 1^st respondent establishment is bound to comply with all the provisions of the Act. The Labour Court ought to have seen that the Inspector concerned had inspected the factory on 01.09.1997 and had verified the records including the general ledgers also besides other records before coming to the conclusion in regard to non compliance with the provisions of the Act. On furnishing a report by the Inspector under exhibit R1, the appellant Corporation had issued the notice in form C-18 under exhibit R4 demanding the amount of Rs.1,39,749/- towards contribution for the period from 4/94 to 3/97 fixing a date of hearing on 03.04.1998. The 1^st respondent establishment had failed to avail the opportunity of hearing. Hence, the final order under exhibit R5 which was impugned in the petition was passed. Having not raised objections when a notice under Form C-18 under exhibit R4 was served, the 1^st respondent establishment is not entitled to question the final order under exhibit R5. The 1^st respondent establishment is making payments to muta coolies who were employed directly or indirectly for the purpose or in connection with the activity and incidental to the work of the 1^st respondent establishment. Hence, the said persons are employees within the meaning of the provision of Section 2(9) of the Act. The 1^st respondent establishment is the principal employer and is, therefore, liable to comply and pay the contributions in the first instance as per Section 40 of the Act. The labour Court failed to give a finding as to whether the coolies engaged for the purpose of the 1^st respondent establishment are employees within the meaning of the provision of Section 2(9) of the Act when admittedly wages are being paid by the 1^st respondent establishment. In the absence of finding whether they are employees or not, the Tribunal ought not to have held that no contributions are payable by the 1^st respondent establishment. The Tribunal erred in relying upon the evidence of PWs2 and 3 who are the alleged muta maistries and who had deposed that they are not having working hours and that they not only work for the 1^st respondent establishment but also for other cold storage units etcetera. In-fact, no coolie or employee was examined to prove the said fact. Though it was unsafe to rely upon the evidence of PWs2 and 3, the labour Court had erroneously relied upon their evidence. The Labour Court erred in holding that the coolies are being paid wages by the ryots or by the owner on the instructions of the ryots and the same are deductable from the hire charges and, therefore, it is not a case of immediate or ultimate employer – employee relationship. Admittedly, no ryot was examined. The

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conclusions of the labour Court are erroneous. The Labour court did not follow the correct legal position.

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5 .1 Having thus challenged the impugned order, the learned counsel for the appellant had submitted that the following are the substantial questions involved in this appeal.

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a. Whether the coolies/employees engaged by the 1^st respondent for the purpose of or in connection with or incidental to the work of the 1^st respondent factory viz., loading and unloading process, are the employees within the definition of Section 2(9) of the ESI Act particularly when admittedly their wages are paid by the 1^st respondent only as being the principal employer?

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b. Whether the lower Tribunal erred in holding that the coolies who worked for the 1^st respondent Factory cannot be treated as workmen of the 1^st respondent without giving any finding whether they are employees or not and without satisfying the requirements of Section 2(9) of the ESI Act?

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c. Whether the lower tribunal erred in setting aside the demand raised by the Corporation under Ex.R4 and R5 without there being any cogent evidence adduced by the 1^st respondent by establishing its specific pleading according to law?

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[Reproduced verbatim]

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6. On the other hand, the learned counsel for the 1^st respondent establishment had supported the orders of the Labour Court in all respects and had contended as follows:

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Admittedly, the 1^st respondent establishment was amenable for coverage under the provisions of the Act only from 01.03.1999 and not before and it is regular in payments of the contributions without any arrears and that no contributions are due and payable for the period from 4/94 to 3/97 and that no prior notice under exhibit R4 as alleged was served. Therefore, the principles of natural justice and the provisions of law which provided a procedure are not followed before issuing exhibit R5 demand notice/order, which is impugned. The said notice/order is arbitrary, illegal, invalid and inoperative. The labour Court considered the facts accurately and the evidence in the right perspective. The questions of law sought to be raised as substantial questions are not involved. The well reasoned findings of the Labour

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Court do not call for any interference. The appeal is devoid of merit and is liable to be dismissed.

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7. Now the points for determination are:

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1. Whether the 1^st respondent establishment is liable to pay the amounts demanded in the demand notice dated 22.04.1998? Whether the said demand notice is not legally valid as contended by the 1^st respondent establishment?

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2. Whether the order impugned is unsustainable under facts and in law?

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8. POINTS:

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8.1 I have carefully gone through the pleadings and analytically examined the evidence brought on record. The Corporation demanded contributions under three heads. (1) The loading and unloading charges paid to the coolies (2) Labour charges for construction of additional building and (3) The cost of construction of additional building which amounts to manufacturing process. The Managing Director of the 1^st respondent establishment filed his affidavit in lieu of examination in chief and had reiterated the pleaded case of the 1^st respondent establishment. According to his version, the construction activity was simultaneously continued as by the date of starting the business the construction was not completed and that while carrying on the business the construction activity was also taken up and that the ryots paid the amounts to the coolies for loading and unloading the produce from their vehicles. However, he had admitted that the Inspector prepared the observation list under exhibit R2. PWs2 and 3 are muta maistries and according to their versions, they worked not only for the 1^st respondent establishment but also for other cold storage units in the locality and that they charged piece meal rate from farmers or from the cold storage establishments on the word of the farmers soon after the completion of the work and that they have no working hours. RWs1 and 2 supported the case of the Corporation and had stated that an amount of Rs.25 lakhs was shown as expenditure towards building maintenance, machinery and repairs and payment of wages to coolies during the period for which the demand was made.

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8.2 Dealing with the aspect of loading and unloading charges paid to the coolies, the contention of the 1^st respondent establishment is that the wages to the coolies and muta maistries were paid by the ryots and that even when such wages were

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paid to the muta maistries, the same were not paid from the monies of the 1^st respondent establishment but they were paid on behalf of the ryots who had stored their produce in the cold storage unit of the 1^st respondent establishment. However, the learned counsel for the appellant had forcefully contended that the Labour Court erred in accepting the said contention of the 1^st respondent establishment and placed reliance on the decisions in Rajakamal Transport and another v. Employees’ State Insurance Corporation, Hyderabad regarding loading and unloading charges. The facts and the ratio in the decision are as follows: -‘The appellants who are carriers of goods had contended that the Hamalies engaged by them for loading and unloading of the goods, the transport of which was undertaken by them, were not their employees as per the provisions of the ESI Act as no regular salary was paid to the Hamalies by them nor were there any hours of work for the said Hamalies. However, the appellants’ regular business is transportation of goods entrusted to them as carriers. When the goods were brought to the warehouses of the appellants, admittedly the appellants have to get the same unloaded and loaded through their Hamalies. Therefore, the appellants have control over the activities of loading and unloading. However, instead of paying the charges themselves, the appellants collected the charges as a part of consideration for transportation of goods from the customers and paid the same to the Hamalies. Therefore, the Surpeme Court having regard to the facts had held that what is important is that the Hamalies worked in connection with the work of the establishment and that the loading and unloading of the work is done at the appellants’ direction and control.’ In the well considered view of this Court, the ratio in the decision is not applicable to the facts of the present case as the facts of the present case disclose that the ryots who bring their produce to the 1^st respondent establishment for stocking in the cold storage engage their own transport and again collect their produce from the cold storage as and when required and re-transport the same to the place of the buyer or other necessary destination. While running the cold storage admittedly the 1^st respondent establishment does not undertake the work of transportation of the produce from the place of ryots to the cold storage establishment of the 1^st respondent and from the cold storage of the 1^st respondent establishment to the place of the ryot or the buyer of the produce from the ryot. Per contra, the learned counsel for the 1^st respondent establishment had relied upon a decision in Employees’ State Insurance Corporation v. Premier Clay Products. The facts of

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the case show that the respondent had hired some godown coolies for loading and unloading of its goods and that the work itself was of sporadic nature and that the coolies were available for work to others and in-fact on the very day the coolies worked for several others who engaged them. In the said circumstances, it was held that the said coolies cannot even be called as casual workmen. Therefore, while dismissing the appeal of the Corporation, the Supreme Court had held that no contribution is payable by the 1^st respondent to the Corporation on their behalf. In the case on hand also, there is evidence brought on record to safely conclude that the ryots were engaging the coolies and maistries and that they are paying the wages either directly or indirectly or through the 1^st respondent establishment and the coolies and muta maistries are working not only for the 1^st respondent establishment but also for other similar establishments in the locality and that the Hamalies are not working in connection with the work of the 1^st respondent establishment, which is cold storage of chillies etcetera. It is also the evidence of PWs2 and 3 that they charged piece meal rate i.e., for carrying each bag and that they collected money either from the ryots or from the owner on the instructions of the ryots. Therefore, the evidence brought on record is supportive of the fact that the charges are being paid to the coolies directly by the ryots or for convenience at times the wages are being paid by the 1^st respondent on behalf of the ryots and the same are being adjusted at the time of payment of the hire charges payable by the owner. Therefore, the Labour Court was justified in holding that there is no immediate employer or ultimate employer – employee relationship. Therefore, it is not a case of immediate employer or ultimate employer but the employer is always the ryot who brings the produce to the cold storage on his own or hired transport and takes them back to the place of his choice and that the coolies and mastries are not regular workmen of the 1^st respondent establishment.

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8.3 Dealing next with the labour charges at the time of construction of additional building and the cost of construction of additional building which according to the Corporation amounts to manufacturing process, what is to be noted is that admittedly even before completing the construction work in entirety the 1^st respondent establishment had commenced its business and carried on construction activity along with its business. For construction activity, according to the 1^st respondent establishment the contractor was engaged and the contractors had paid the wages

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to the construction workers and, therefore, it is the responsibility of the contractors to pay the contribution to the Corporation in respect of the labour engaged by them and that there is every likelihood that the contractors might have paid the contributions to the Corporation and the construction of additional building while carrying on its business does not amount to manufacturing process as defined under Section 2(14 AA) of the Act. In fact the said contentions were accepted by the Labour Court. The learned counsel for the appellant forcefully contended that the labour Court erred in accepting the contentions of the 1^st respondent establishment and in recording findings contrary to the definition of manufacturing process under Section 2(14 AA) of the Act. He placed reliance on the following decisions. (1) Managing Director, Hassan Co-operative Milk Producer’s Society Union Ltd., v. Assistant Regional Director, Employees’ State Insurance Corporation and (2) Regional Director, Employees State Insurance Corporation, Hyderabad v. Bharat Cement Pipe Industries, Nirmal in support of the contention that construction of additional building while carrying on the business by the 1^st respondent establishment amounts to manufacturing process.

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8.4 The provision of Section 2(14) of the Act reads as under:

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‘Insured person’ means a person who is or was an employee in respect of whom contributions are or were payable under this Act and who is, by reason thereof, entitled to any of the benefits provided by this Act.

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Section 2(14AA) reads as under:

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‘Manufacturing process’ shall have the meaning assigned to it in the Factories Act, 1948’

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Under the Factories Act, manufacturing process is defined as under:

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"manufacturing process" means any process for-

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(i) making, altering, repairing, ornamenting, finishing, packing, oiling, washing, cleaning, breaking up, demolishing or otherwise treating or adopting any article or substance with a view to its use, sale, transport, delivery or disposal; or

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(ii) pumping oil, water, sewage, or any other substance; or

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(iii) generating, transforming or transmitting power; or

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(iv) composing types for printing, printing by letter press, lithography, photogravure or other similar process or book-binding; or

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(v) constructing, reconstructing,, repairing, refitting, finishing or breaking up ships or vessels; or

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(vi) preserving or storing any article in cold storage;

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The basis for demand is exhibit R3. Exhibit R2 is the form C-10. The basis for preparation of the statutory form is ledger book of the 1^st respondent establishment. Exhibits R2 and R3 are the observations slips of RW1, the Inspector. The case of the appellant is that the total expenses incurred by the 1^st respondent establishment during the period from 01.04.1994 to 31.03.1997 is more than Rs.25,00,000/-. According to the evidence of RW1, from 01.04.1994 to 31.03.1997, towards labour charges paid to construction coolies, building repairs and maintenance, security guard charges, difference in wages, salaries and MBs remuneration, an amount of Rs.13,94,240/- was incurred. The amounts referred to by the appellant would show the cost of building materials, cost of repairs of machinery etcetera. The evidence brought on record would show that the 1^st respondent establishment gave the work of maintenance of plant and machinery to a contractor and also the construction work to a contractor and, therefore, as rightly contended the contractors might have paid contributions to the Corporation for the workers engaged by them for maintenance of machinery and construction work respectively. The Officers of the Corporation did not make any enquiries and they did not produce any evidence to show that the contractors did not pay any contributions. Further construction workers will be engaged through a maistry. There will be change of coolies from day to day. The same coolies may not work everyday for construction purpose. Though cold storage is a manufacturing process, the construction of buildings and repairs intended for use of the 1^st respondent establishment, as rightly contended, do not fall within the ambit and sweep of manufacturing process. Even assuming that construction work in the instant case is a manufacturing process, unless it is established that it is a case of immediate employer or ultimate employer – employee relationship, the 1^st respondent establishment cannot be saddled with any responsibility to pay the contribution in respect of construction workers and workers engaged for maintenance of the machinery of the establishment. It is not in dispute that admittedly, the 1^st respondent establishment is under the coverage of the provisions of the Act from 01.03.1999. Viewed thus, this Court finds that the Labour Court was justified in holding that no contributions are payable even on this score.