2011 (9) TMI 944 - HC - Indian Laws

Exempted establishments not liable for PF contributions for contractors with separate code numbers

The Madurai District Central Versus Employees' Provident Fund and ORS

The court held that the petitioner, as an exempted establishment under the Act, is not liable to pay Provident Fund contributions for contractors with ... - ISSUES PRESENTED AND CONSIDERED 1. Whether an establishment exempted under section 17 of the Employees Provident Fund & Miscellaneous Provisions Act, 1952 can be held liable as 'principal employer' for provident fund contributions of employees of independent contractors who possess separate code numbers under the Act. 2. Whether an executory order directing recovery of contribution from the petitioner can be challenged after an adjudicatory order under section 7-A has attained finality. 3. The scope and application of clause 30 of the Employees' Provident Fund Scheme, 1952 concerning the liability of a principal employer to recover and deposit contributions where contractors are unregistered or otherwise obliged. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Liability of an exempted establishment for contractors with independent code numbers Legal framework: Section 17 (exemption) of the Act relieves an exempted establishment from the operation of the scheme; clause 30 of the Employees' Provident Fund Scheme, 1952 prescribes duties of a principal employer to recover employer's and employee's shares and deposit them with the Provident Fund Commissioner. Precedent Treatment: The Court considered a Division Bench judgment holding that where a principal employer is exempted under section 17 and contractors have not obtained exemption, contractors remain within the scheme and must obtain separate code numbers and make their own deposits; that authority treats exempted principal employers as outside the scheme such that contractors with independent codes are independent employers. Interpretation and reasoning: The Court found that an exempted establishment is not within the net of the scheme and therefore the employees of independent contractors cannot be treated as employees of the principal employer. Where a contractor has been registered under the Act and allotted an independent code number, the contractor is to be treated as an 'independent employer' and the principal employer (exempted establishment) is not liable to pay contributions of that contractor's employees. The Court distinguished the liability applicable to unregistered contractors (see Issue 3) from that applicable to registered contractors with independent codes. Ratio vs. Obiter: Ratio - An exempted establishment cannot be treated as principal employer for purposes of contractors who are registered under the Act with independent code numbers; such contractors are independently liable to make contributions. Obiter - Observations about the broader policy of the scheme ancillary to this conclusion. Conclusions: The Court quashed the part of the section 7-A order and the executory order insofar as they fixed liability of the petitioner for contributions payable by contractors who possess independent code numbers, and permitted execution of the adjudicatory order directly against those contractors. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Challenge to executory order after finality of adjudicatory order Legal framework: Section 7-A of the Act permits adjudication of liability and executory steps for recovery; the distinction between an adjudicatory order and subsequent executory directions is material. Precedent Treatment: The respondents argued that an executory order cannot be challenged once the adjudicatory order has attained finality; the Court engaged with that contention in light of the specific statutory and factual matrix. Interpretation and reasoning: The Court held that the petitioner was not precluded from challenging the impugned portion of the section 7-A order (not merely the executory step), because the adjudicatory order itself had been challenged before the Court and the question of whether the petitioner could properly be treated as liable for contractors with independent codes was live. The existence of a final adjudication does not immunize from challenge an order that incorrectly fastens liability on an entity outside the scope of the Act (here, an exempted establishment) where the adjudicatory conclusion conflicts with statutory exemptions and the scheme's provisions. Ratio vs. Obiter: Ratio - Finality of an adjudicatory order does not bar judicial review where the order improperly imposes liability inconsistent with statutory exemption and the scheme's provisions; parties may challenge both adjudicatory and executory aspects where the adjudication itself is faulted. Obiter - Remarks on procedural bar if only executory steps were challenged without raising substantive illegality. Conclusions: The Court entertained and allowed challenge to the impugned portions of the section 7-A order as to contractors with independent codes; the executory order insofar as it sought recovery from the petitioner for those contractors was quashed. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Application of clause 30 of the Scheme to unregistered contractors and admitted liability Legal framework: Clause 30 of the Employees' Provident Fund Scheme, 1952 places a duty on the principal employer to recover employer and employee share and deposit with the Provident Fund Commissioner; the Act and Scheme envisage differing consequences for registered vs. unregistered contractors and exempted principal employers. Precedent Treatment: The Court relied on accepted interpretations distinguishing liability where contractors are unregistered (liability may fall upon the principal employer) versus where contractors have independent registration/codes (contractors are independently liable). Interpretation and reasoning: The Court accepted the uncontroverted concession that for one contractor (without dispute) the principal employer must recover and deposit contribution under clause 30; that liability is distinct from the contested liabilities of the two contractors that possessed independent code numbers. The admitted duty under clause 30 applies to recovery of contributions (employer and employee shares) by the principal employer where appropriate; it does not, however, convert employees of an independent registered contractor into employees of an exempted principal employer. Ratio vs. Obiter: Ratio - Clause 30 imposes a recovery duty on principal employers in appropriate circumstances (e.g., unregistered contractors), and such admitted liabilities will be upheld; it does not override the separation whereby registered contractors with independent codes remain independently liable. Obiter - Explanatory remarks on the interplay between clause 30 and section 17. Conclusions: The Court upheld recovery of contribution from the petitioner qua the particular contractor for which the petitioner conceded liability under clause 30 and directed deposit within a specified time; the clause 30 duty did not extend to contractors having their own code numbers. OVERALL CONCLUSION AND RELIEF The Court partly allowed the writ petition: it quashed the impugned portion of the section 7-A order and related executory order insofar as they fixed liability of the petitioner for contributions of contractors registered with independent code numbers, and upheld the order insofar as it imposed liability on the petitioner for the contractor for whom the petitioner conceded responsibility under clause 30; the respondents remain free to execute the section 7-A order against the registered contractors independently.