REPORTABLE

 IN THE  SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1464 OF 2019 ARISING OUT OF SLP(CIVIL) NO. 12812 of 2015

Employees' State Insurance Corporation Appellant(s)

VS.

Venus Alloy Pvt. Ltd. Respondent(s)

JUDGMENT

Dinesh Maheshwari., J

Leave granted.

2. The short question calling for determination in this appeal by special leave

against  the judgment dated 17.02.2014 passed by the High Court  of  Madhya

Pradesh, Bench at Indore in Miscellaneous Appeal No. 1213 of 2006 is as to

whether the Directors of respondent-Company, who are receiving remuneration,

come within the purview of “employee” under sub-section (9) of Section 2 of the

Employees' State Insurance Act, 1948 ('the ESI Act')?  

3. Put in brief,  the relevant background aspects of the matter are that the

respondent-Company  had  been  covered  under  the  ESI  Act  and  had  been

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depositing the amount of contribution with reference to the wages paid to some

of  its  employees.  However,  in  an  inspection  carried  out  by  the  Appellant-

Employees' State Insurance Corporation ('the Corporation'), it was observed that

the  respondent-Company  had  not  made  the  contribution  in  respect  of  the

remuneration paid to the Directors. There had been exchange of communications

in regard to the liability of the respondent–Company and ultimately, by the order

dated 06.04.2005, the Deputy Director of the appellant-Corporation called upon

the respondent to make payment of contribution in relation to the remuneration

paid  to  the  Directors.  Such  a  demand  was  questioned  by  the  respondent-

Company by way of an application under Section 75 of the ESI Act (Case No.

171  of  2005)  that  was  considered  and  decided  by  the  Employees  State

Insurance Court at Indore ('the ESI Court') by its order dated 24.12.2005.

4. The ESI Court noted that both the parties had not adduced any evidence

and sought disposal of the case only on the basis of  arguments.  The parties

referred  to  a  few  citations  but  in  essence,  both  the  parties  relied  upon  the

decision of this Court in the case of Employees' State Insurance Corporation

Vs. Apex Engineering Pvt. Ltd., as reported in 1997 (77) F.L.R. 8781.  The ESI

Court  observed  that  in  the  said  case,  the  Managing  Director  was  found

performing some particular work but there was no illustration that the provisions

of the ESI Act were applicable on the amount received by the Directors; and

rather took the view that the illustrations produced by the respondent-Company

1 Equivalent citation (1998) 1 SCC 86                                

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were to the effect that Directors do not fall under the category of the employees.

The ESI Court,  therefore,  declared the aforesaid order dated 06.04.2005 void

and unfair, while observing as under:-

“5....I viewed the above judicial illustration produced in case.  The  illustration  on  which  both  parties  put  their faith according to their view, has been adjudicated by Hon’ble  Supreme Court.  It  seems by  its  perusal  that managing director performs some particular works. The provisions of ESI Act are applicable on the payment that is made to him for those particular and additional works. There is no dispute in relation to the amount receiving by managing director in this case but there is dispute in relation to the amount receiving by directors. There has no judicial principle been established in any of judicial illustration produced in the case that the provisions of ESI Act are applicable on the amount receiving by the directors on the other hand judicial illustration produced by the plaintiff reveals that neither amount receiving by the directors fall under the category of pay nor directors fall under the category of employee. Hence in the right (sic) of  above  judicial  illustration  the  order  dated 06.04.05  passed  by  defendant  is  proved  void  and unfair.”

5. In the appeal preferred by the appellant-Corporation under Section 82 of

the ESI Act  against  the aforesaid  order  dated 24.12.2005,  the High Court  of

Madhya Pradesh at Indore Bench, while relying on the decision of the Bombay

High Court in the case of Sakal Papers Private Limited Vs. Employees' State

Insurance Corporation reported in  MHLJ 1995 Vol.  2 Page 69 and another

decision of the Bombay High Court in the case of Employees' State Insurance

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Corporation Vs. Apex Engineering Pvt. Ltd. reported in  MHLR 1990 Vol. 2

Page 850, concluded that the Directors of the respondent establishment do not

come within the purview of the “employees”, as defined under sub-section (9) of

Section  2  of  the  ESI  Act  and  dismissed  the  appeal  with  the  following

observations:-

“10.  On due consideration of the aforesaid and in view of the law laid down by the Bombay High Court, I am of the  view  that  the  Directors  of  the  respondent establishment does not come within the purview of the employee as defined under section 2(9) of the ESI Act. The learned court has not committed any legal error in setting aside the order dated 06.04.2005”

6. Assailing  the  judgment  aforesaid,  learned  counsel  for  the  appellant-

Corporation, while strongly relying on the decision of this Court in  Employees'

State Insurance Corporation Vs. Apex Engineering Pvt. Ltd.: (1998) 1 SCC

86,  has  argued  that  if  remuneration is  paid  to a  person who satisfies  the

definition of "employee" as per Section 2(9) of the ESI Act for discharge of the

work assigned to him, such remuneration would be covered under the definition

of  "wages"  as  per  Section  2  (22)  of  the  ESI  Act  and,  therefore,  necessary

contribution for  that employee is to be paid.  Learned counsel  has also relied

upon  the  decision  in  Saraswath  Films  Vs.  Regional  Director,  Employees’

State Insurance Corporation, Trichur: 2010(11) SCC 553.  Per contra, learned

Counsel for the respondent has duly supported the judgment impugned with the

submissions that the facts of the present case are different from the facts in the

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case of  Apex Engineering (supra), inasmuch as therein, one of the Directors of

the company was entrusted with the work of Managing Director on remuneration

of Rs. 1,000/- per month and in view of this remuneration, he had to discharge

extra duties,  apart  from his function as an ordinary Director.  According to the

learned  counsel,  the  said  Managing  Director  fell  within  the  definition  of

"employee"  under  Section  2(9)  of  the  ESI  Act  but  in  the  present  case,  the

Directors  of  the  respondent-Company were  not  employed for  wages  in  or  in

connection with the work of factory or establishment and hence, they do not fall

within the essential ingredients of Section 2(9) of the ESI Act.

7. Having given anxious consideration to the rival submissions and having

examined the record with reference to the law applicable, we are clearly of the

view that the impugned orders cannot be sustained and the application filed by

the  respondent-Company  under  Section  75  of  the  ESI  Act  deserves  to  be

dismissed.  

8. For determination of the  question involved, appropriate it would be to take  

note of the exhaustive definition of “employee” as contained in sub-section (9) of  

Section 2 of the ESI Act that reads as under:-

"2(9).  "employee" means any  person employed from wages in or in connection with the work of a factory or establishment to which this Act applies and-  

(i) who is directly employed by the principal employer, on  any  work  of,  or  incidental  or  preliminary  to  or connected  with  the  work  of,  the  factory  or

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establishment,  whether  such  work  is  done  by  the employee in the factory or establishment or elsewhere; or  

(ii)  who  is  employed  by  or  through  an  immediate employer,  on  the  premises  of  the  factory  or establishment or under the supervision of the principal employer or his agent on work which is ordinarily part of the  work  of  the  factory  or  establishment  or  which  is preliminary to the work carried on in or incidental to the purposes of the factory or establishment; or  

(iii) whose services are temporarily lent or let on hire to the  principal  employer  by  the  person  with  whom the person whose services are so lent or let on hire has entered into a contract of service;  

and includes any person employed for wages on any work connected with the administration of the factory or establishment or any part, department or branch thereof or  with  the  purchase  of  raw  materials  for,  or  the distribution  or  sale  of  the  products  of,  the  factory  or establishment,  or  any person engaged as apprentice, not being an apprentice engaged under the Apprentices Act,  1961  (52  of  1961),  [and  includes  such  person engaged  as  apprentice  whose  training  period  is extended to any length of time]2 but does not include-  

(a)  any  member  of  the  Indian  naval,  military  or  air forces; or  

(b) any person so employed whose wages (excluding remuneration for overtime work) exceed such wages as may be prescribed by the Central Government a month:

Provided  that  an  employee  whose  wages (excluding  remuneration  for  overtime  work)  exceed such  wages  as  may  be  prescribed  by  the  Central Government  at  any  time  after  (and  not  before)  the beginning of the contribution period, shall continue to be an employee until the end of that period;"

2 Note: the expressions in parenthesis were substituted by Act No. 18 of 2010 w.e.f. 01.06.2010 in place  of the expressions "or under the standing orders of the establishment".

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9. The expression “wages” is defined in sub-section (22) of Section 2 of the

ESI Act in the following terms:-

"2(22). "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 pension fund or provident fund, or under this Act;  

(b)  any  travelling  allowances  or  the  value  of  any travelling concession;  

(c)  any  sum paid  to  the  person  employed  to  defray special expenses entailed on him by the nature of his employment; or  

(d) any gratuity payable on discharge;"  

10. This Court, in the case of Saraswath Films (supra),  has expounded on the

amplitude  of  the  definition  of  "employee",  as  contained  in  sub-section  (9)  of

Section 2 of the ESI Act in the following:-

“6. From the provision in Section 2(9) it is clear that the definition  is  wide  and  of  comprehensive  nature.  It includes  any  person  employed  for  wages  in  or  in connection with work of the establishment to which the Act applies and also includes any person employed by or through immediate employer on the premises of the establishment  or  under  the  principal  employer  or  his agent of work which is ordinarily a part of the work of establishment or which is preliminary to work carried on in or incidental to the purpose of the establishment. In

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clause  (iii)  the  position  is  further  clarified;  a  person whose services are temporarily lent or let on hire to the principal employer by the person with whom the person whose services are so lent or let on hire has entered into  a  contract  of  service  is  also  brought  within  the purview  of  the  statute.  On  a  plain  reading  of  the definitions of the expressions "principal employer" and "immediate employer" the position is manifest that the appellant  is  the  principal  employer  of  the  security guards  in  the  case.  It  may  be  that  their  immediate employer is the security agency with whom there has been a contract either by the lessor or the lessee of the cinema hall for purpose of the service. On a fair reading of relevant statutory provisions and keeping in view the object  and  purpose  for  which  the  legislation  was enacted it  is clear to us that in this case the security guards  come  within  the  purview  of  the  expression "employee" as defined in Section 2(9) of the Act. “

11. In  the  case  of  Apex  Engineering (supra),  the  Board  of  Directors  of

respondent-Company resolved to elect one of its Directors as Managing Director

of  the  Company  and  to  grant  him  annual  remuneration  of  Rs.  12,000/-  for

rendering services as Managing Director. The question was as to whether the

said Managing Director was an "employee" within the meaning of Section 2(9) of

the  ESI  Act?  Though  the  High  Court  and  the  ESI  Court  had  answered  this

question against the Corporation, but this Court allowed the appeal and,  inter

alia,  held  that  the  Managing  Director,  even  when  to  be  treated  as  principal

employer, could also be an employee and could carry such dual capacity.  This

Court said,-  

“8. But even assuming that the High Court was right that  Shri  Dhanwate  could  be  said  to  be  principal employer there is nothing in the Act to indicate that a

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managing director being the principal employer cannot also be an employee. In other words he can have dual capacity….”

This Court also approved the interpretation of relevant provisions of the

ESI Act by the Karnataka High Court  in the following:-  

“13. A Division Bench of the Karnataka High Court in the case of Regional Director, ESI Corpn. v. Margarine & Refined Oils Co. (P) Ltd. [1984 Lab IC 844; (1983) 2 LLN 918 (Kant)] took the view which has commanded (sic commended) to us in the present proceedings.  It was held by the High Court that the Managing Director of  a  private  limited  company  was  an  employee  as defined by Section 2 sub-section (9) of the Act.  In this connection it  was observed by the High Court  that  a company is a legal person and a corporate entity and as such it can employ one of its directors as Managing Director.   The  Managing  Director  of  the  company covered  by  the  Act  becomes  an  employee  of  the company within the meaning of Section 2(9) of the Act and the remuneration paid to him for the functions he discharges  as  Managing  Director  would  amount  to wages as defined under Section 2(22) of the Act for the purpose  of  calculating  employees’  contribution.   The aforesaid decision of the High Court correctly interprets the relevant provisions of the Act.”

After a survey of the other cited decisions, this Court held as under:-   

“19. As a result of the aforesaid discussion it must be held that the Division Bench of  the High Court in the impugned judgment had erred in taking the view, on the facts  of  the  present  case,  that  Shri  Dhanwate  as Managing  Director  of  the  company  was  not  an employee within the meaning of Section 2 sub-section (9) of the Act.  On the other hand it must be held that he

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was an employee of the company and as such could be added to the list of the remaining 19 employees so as to make a total of 20 for covering the establishment under Section  2  sub-section  (12)  of  the  Act  which  defines “factory”  to  mean,  “  any  premises  including  the precincts thereof-

(a)........., or

(b)  whereon twenty or more persons are employed or were employed for wages on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on without the aid of power or is ordinarily so carried on”.   

12. We are clearly of the view that what has been observed and held by this

Court  in  Apex Engineering (supra),  in  relation to  the  Managing Director  of  a

Company, applies with greater force in relation to a Director of the Company, if he

is paid the remuneration for discharge of the duties entrusted to him.   

13. It  is  noticed  that  in  the  present  case,  the  appellant-Corporation  in  its

impugned order dated 06.04.2005 specifically asserted that the Directors of the

Company were paid remuneration at the rate of Rs. 3,000/- p.m. and they were

falling  within  the  definition  of  "employee"  under  the  ESI  Act  and  hence,

contribution was payable  in regard to the amount  paid to them.  Interestingly,

even while seeking to challenge the aforesaid order dated 06.04.2005 by way of

proceedings under Section 75 of the ESI Act, the respondent-Company chose

not to lead any evidence before the Court.  Hence, there was nothing on record

to displace the facts asserted on behalf of the appellant-Corporation in its order

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dated  06.04.2005;  rather  the  factual  assertions  in  the  said  order  remained

uncontroverted.  The  order  dated  06.04.2005  had  been  questioned  by  the

respondent-Company only on the contention that the Directors  do  not fall  within

the category of "employee" but no attempt was made to show as to how and why

the remuneration paid to its Directors would not fall within the purview of "wages"

as per the meaning assigned by sub-section (22) of Section 2 of the ESI Act?

14. The ESI Court cursorily attempted to distinguish the decision of this Court

in  Apex  Engineering (supra)  only  with  reference to  the  fact  that  therein,  the

amount was being received by the Managing Director.  The High Court, on the

other hand, overlooked the said decision of  this Court  and relied only on the

decisions  of  the  Bombay  High  Court  though  the  propositions  in  the  referred

decisions of the Bombay High Court stood effectively overruled by the decision in

Apex Engineering (supra) where this Court held in no uncertain terms that the

High Court  was in error  in  taking the view that  the Managing Director  of  the

Company was not an employee within the meaning of Section 2 (9) of the ESI

Act.   The said decision directly applies to the present  case and we have no

hesitation in concluding that the High Court in the present case has been in error

in  assuming  that  the  Director  of  a  Company,  who  had  been  receiving

remuneration for  discharge of  duties assigned to him,  may not  fall  within the

definition of an employee for the purpose of the ESI Act. There had been no

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reason to interfere with the order dated 06.04.2005 as issued by the appellant-

Corporation.

15. In view of above, this appeal is allowed; the impugned orders are set-aside

and the application filed by the respondent-Company under Section 75 of the ESI

Act is dismissed.

...............................................J.             (ABHAY MANOHAR SAPRE)

      ..............................................J. (DINESH MAHESHWARI)   1

New Delhi  Dated: 5th February, 2019.

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