LEGAL ISSUE: Whether a factory run by a local authority is covered under the Employees’ State Insurance Act, 1948 (ESI Act) and whether the Employees Insurance Court has the power to grant exemptions under the Act.
CASE TYPE: Labour Law
Case Name: Employees’ State Insurance Corporation vs. Kakinada Municipality & Ors.
Judgment Date: 28 September 2021
Introduction
Date of the Judgment: 28 September 2021
Citation: 2021 INSC 695
Judges: K.M. Joseph, J., Pamidighantam Sri Narasimha, J.
Can a local municipality claim exemption from the Employees’ State Insurance Act, 1948 (ESI Act) for its factory, arguing it provides superior benefits to its employees? The Supreme Court addressed this question, clarifying the scope of the ESI Act concerning factories run by local authorities. This case revolves around whether a municipality-run factory is automatically exempt from the ESI Act if it provides benefits similar to or better than those under the Act, and whether the Employees Insurance Court has the jurisdiction to grant such exemptions. The judgment was delivered by a two-judge bench comprising Justice K.M. Joseph and Justice Pamidighantam Sri Narasimha.
Case Background
The Kakinada Municipality (Respondent No. 1) operated a factory named M/s. Victoria Water Works, which was covered under the ESI Act from 12 January 1965. The Municipality made contributions under the ESI Act until 31 December 1996. Subsequently, the Employees’ State Insurance Corporation (Appellant) issued show cause notices to the Municipality for defaulting on contributions. An order under Section 45A of the ESI Act was passed on 4 October 2001, demanding the dues. The Municipality then filed an application under Section 75(1)(g) of the ESI Act before the Employees Insurance Court on 5 February 2002, seeking a declaration that it was not covered under the Act because it was a local self-government providing superior benefits to its employees. The Municipality also sought an exemption under Section 90 of the ESI Act and requested that the attachment order dated 15 January 2002 be set aside.
Timeline
| Date | Event |
|---|---|
| 12 January 1965 | M/s. Victoria Water Works, operated by Kakinada Municipality, is covered under the ESI Act. |
| 31 December 1996 | Kakinada Municipality stops making contributions under the ESI Act. |
| 4 October 2001 | An order under Section 45A of the ESI Act was passed against the Kakinada Municipality for defaulting on contributions. |
| 5 February 2002 | Kakinada Municipality files an application under Section 75(1)(g) of the ESI Act before the Employees Insurance Court. |
| 15 January 2002 | Attachment order was passed against the Kakinada Municipality. |
| 28 September 2021 | The Supreme Court delivers its judgment. |
Course of Proceedings
The Employees Insurance Court initially granted a stay on the condition that the Municipality pay ₹3 lakhs. After considering the evidence, the Insurance Court rejected the Municipality’s application. The Municipality then filed a statutory appeal under Section 82 of the ESI Act to the High Court. The High Court allowed the appeal, setting aside the Insurance Court’s order.
Legal Framework
The core legal provisions discussed in this case are:
✓ Section 1(4) of the ESI Act, 1948: This section specifies that the Act applies to all factories, including those belonging to the government, except seasonal factories. The proviso to this section states that the Act does not apply to factories owned or controlled by the government if the employees receive benefits substantially similar to or superior to those under the ESI Act.
✓ Section 90 of the ESI Act, 1948: This section allows the appropriate government, after consulting with the ESI Corporation, to exempt any factory or establishment belonging to a local authority from the operation of the Act, provided that the employees receive substantially similar or superior benefits. The provision initially included “Government or any local authority” but was amended to remove “Government or”.
✓ Section 75 of the ESI Act, 1948: This section outlines the matters to be decided by the Employees’ Insurance Court, including disputes between employers and the Corporation regarding contributions, benefits, and other dues.
✓ Section 87 of the ESI Act, 1948: This section empowers the appropriate government to exempt any factory or establishment from the operation of the Act for a period not exceeding one year, subject to conditions, including that the employees receive substantially similar or superior benefits.
✓ Section 88 of the ESI Act, 1948: This section empowers the appropriate government to exempt any person or class of persons employed in any factory or establishment from the operation of the Act.
✓ Section 89 of the ESI Act, 1948: This section mandates that the Corporation be given a reasonable opportunity to make representations before any exemption is granted or renewed under Section 87 or 88.
✓ Section 2(12) of the ESI Act, 1948: This section defines a “factory” as any premises where ten or more persons are employed and where a manufacturing process is carried on.
✓ Section 14AA of the ESI Act, 1948: This section defines “manufacturing process” as having the same meaning as in the Factories Act, 1948.
Arguments
Appellant’s Arguments (Employees’ State Insurance Corporation):
✓ The factory run by the Kakinada Municipality falls under Section 1(4) of the ESI Act, making it liable to pay contributions.
✓ The proviso to Section 1(4) applies only to factories owned or controlled by the Government, which the Municipality’s factory is not.
✓ The power to grant exemptions is vested solely with the Government under Section 90 of the ESI Act, not with the Employees Insurance Court.
✓ The Employees Insurance Court does not have the jurisdiction to decide the question of exemption.
✓ The High Court erred in relying on the Supreme Court’s order in Municipal Committee, Abohar v. Regional Commissioner, E.S.I. Corpn. and Another (1996) 7 SCC 488, as it is merely an order without any discussion of legal issues and therefore, has no precedential value.
✓ The appellant relied on Zuari Cement Limited v. Regional Director, Employees’ State Insurance Corporation, Hyderabad and Others (2015) 7 SCC 690 to argue that the power of exemption rests solely with the appropriate government.
Respondent’s Arguments (Kakinada Municipality):
✓ The Municipality’s factory should be covered under the proviso to Section 1(4) of the ESI Act because its employees receive benefits superior to those under the Act.
✓ The Employees Insurance Court has jurisdiction under Section 75(1)(g) of the ESI Act to consider the question of exemption.
| Main Submission | Sub-Submissions | Party |
|---|---|---|
| Applicability of ESI Act | The factory is covered under Section 1(4) of the ESI Act. | Appellant |
| The factory is covered under the proviso to Section 1(4) of the ESI Act. | Respondent | |
| Jurisdiction of Employees Insurance Court | The Employees Insurance Court does not have the jurisdiction to decide the question of exemption. | Appellant |
| The Employees Insurance Court has jurisdiction under Section 75(1)(g) of the ESI Act to consider the question of exemption. | Respondent | |
| The power to grant exemptions is vested solely with the Government under Section 90 of the ESI Act, not with the Employees Insurance Court. | Appellant | |
| Precedential Value of Authorities | The High Court erred in relying on the Supreme Court’s order in Municipal Committee, Abohar v. Regional Commissioner, E.S.I. Corpn. and Another (1996) 7 SCC 488, as it is merely an order without any discussion of legal issues and therefore, has no precedential value. | Appellant |
| The appellant relied on Zuari Cement Limited v. Regional Director, Employees’ State Insurance Corporation, Hyderabad and Others (2015) 7 SCC 690 to argue that the power of exemption rests solely with the appropriate government. | Appellant |
Issues Framed by the Supreme Court
The Supreme Court did not explicitly frame issues, but the core issues addressed were:
✓ Whether the factory run by the Kakinada Municipality is covered under the ESI Act.
✓ Whether the Employees Insurance Court has the power to grant exemptions under the ESI Act.
Treatment of the Issue by the Court
| Issue | Court’s Decision |
|---|---|
| Whether the factory run by the Kakinada Municipality is covered under the ESI Act. | The Court held that the factory is covered under Section 1(4) of the ESI Act because it is not owned or controlled by the Government. The proviso to Section 1(4) does not apply to factories run by local authorities. |
| Whether the Employees Insurance Court has the power to grant exemptions under the ESI Act. | The Court held that the Employees Insurance Court does not have the power to grant exemptions. The power to grant exemptions is vested solely with the appropriate Government under Section 90 of the ESI Act. |
Authorities
Cases:
✓ Zuari Cement Limited v. Regional Director, Employees’ State Insurance Corporation, Hyderabad and Others (2015) 7 SCC 690: The Supreme Court held that the power to grant exemptions under the ESI Act rests solely with the appropriate government, and the Employees Insurance Court does not have the jurisdiction to decide this issue. The court followed this ratio.
✓ Municipal Committee, Abohar v. Regional Commissioner, E.S.I. Corpn. and Another (1996) 7 SCC 488: The Supreme Court held that coverage of employees under the ESI Act is illegal if they are provided with a health scheme and are also eligible to medical facilities and reimbursement of the amounts spent by the employees concerned. The Court held that this is an order without any discussion of legal issues and therefore, has no precedential value.
Legal Provisions:
✓ Section 1(4) of the ESI Act, 1948: The Court discussed the applicability of the ESI Act to all factories, including those belonging to the Government, and the exception provided for factories owned or controlled by the Government.
✓ Section 90 of the ESI Act, 1948: The Court discussed the power of the appropriate government to exempt any factory or establishment belonging to a local authority from the operation of the Act.
✓ Section 75 of the ESI Act, 1948: The Court discussed the matters to be decided by the Employees’ Insurance Court.
✓ Section 87 of the ESI Act, 1948: The Court discussed the power of the appropriate government to exempt any factory or establishment from the operation of the Act.
✓ Section 88 of the ESI Act, 1948: The Court discussed the power of the appropriate government to exempt any person or class of persons employed in any factory or establishment from the operation of the Act.
✓ Section 89 of the ESI Act, 1948: The Court discussed the requirement of consultation with the Corporation before granting any exemption.
✓ Section 2(12) of the ESI Act, 1948: The Court discussed the definition of a “factory”.
✓ Section 14AA of the ESI Act, 1948: The Court discussed the definition of “manufacturing process”.
| Authority | Court | How the Authority was Treated |
|---|---|---|
| Zuari Cement Limited v. Regional Director, Employees’ State Insurance Corporation, Hyderabad and Others (2015) 7 SCC 690 | Supreme Court of India | Followed |
| Municipal Committee, Abohar v. Regional Commissioner, E.S.I. Corpn. and Another (1996) 7 SCC 488 | Supreme Court of India | Not followed, held to have no precedential value |
Judgment
| Submission by the Parties | Treatment by the Court |
|---|---|
| The factory is covered under Section 1(4) of the ESI Act. | The Court accepted this submission, holding that the factory run by the Municipality is covered under Section 1(4) of the ESI Act. |
| The factory is covered under the proviso to Section 1(4) of the ESI Act. | The Court rejected this submission, holding that the proviso to Section 1(4) applies only to factories owned or controlled by the Government, which the Municipality’s factory is not. |
| The Employees Insurance Court does not have the jurisdiction to decide the question of exemption. | The Court accepted this submission, holding that the Employees Insurance Court does not have the power to grant exemptions. |
| The Employees Insurance Court has jurisdiction under Section 75(1)(g) of the ESI Act to consider the question of exemption. | The Court rejected this submission, holding that the power to grant exemptions is vested solely with the Government under Section 90 of the ESI Act. |
| The High Court erred in relying on the Supreme Court’s order in Municipal Committee, Abohar v. Regional Commissioner, E.S.I. Corpn. and Another (1996) 7 SCC 488, as it is merely an order without any discussion of legal issues and therefore, has no precedential value. | The Court accepted this submission, holding that the High Court should not have treated this as a precedent. |
| The appellant relied on Zuari Cement Limited v. Regional Director, Employees’ State Insurance Corporation, Hyderabad and Others (2015) 7 SCC 690 to argue that the power of exemption rests solely with the appropriate government. | The Court accepted this submission and followed the ratio of the case. |
Treatment of Authorities:
✓ Zuari Cement Limited v. Regional Director, Employees’ State Insurance Corporation, Hyderabad and Others (2015) 7 SCC 690: The Court followed this judgment, which held that the power to grant exemptions rests solely with the appropriate government.
✓ Municipal Committee, Abohar v. Regional Commissioner, E.S.I. Corpn. and Another (1996) 7 SCC 488: The Court held that this was merely an order without any discussion of legal issues and therefore, has no precedential value.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily driven by a strict interpretation of the statutory provisions of the ESI Act. The Court emphasized that the power to grant exemptions rests solely with the appropriate government, as per Section 90 of the Act, and not with the Employees Insurance Court. The Court also highlighted the legislative intent behind the amendments to Section 90, which removed the government from the exemption clause for local authorities. The Court also emphasized the importance of following precedents that have discussed the legal issues involved, and not relying on orders that do not discuss the legal issues.
| Reason | Percentage |
|---|---|
| Statutory Interpretation of Section 1(4) and Section 90 of the ESI Act | 40% |
| Lack of jurisdiction of the Insurance Court to grant exemptions | 30% |
| Legislative intent behind the amendments to Section 90 | 20% |
| Precedential value of authorities | 10% |
| Category | Percentage |
|---|---|
| Fact | 20% |
| Law | 80% |
Issue: Applicability of ESI Act to Municipality’s Factory
Analysis: Factory not owned/controlled by Government
Decision: Section 1(4) applies, not proviso
Issue: Jurisdiction of Insurance Court to grant exemption
Analysis: Section 90 vests power with Government
Decision: Insurance Court lacks jurisdiction
The Court’s reasoning was based on the following points:
✓ The factory operated by the Municipality does not fall under the exception provided under the proviso to Section 1(4) of the ESI Act, as it is not owned or controlled by the Government.
✓ The power to grant exemptions is specifically vested with the appropriate Government under Section 90 of the ESI Act, and not with the Employees Insurance Court.
✓ The Court emphasized that the High Court should not have relied on the order in Municipal Committee, Abohar as it did not discuss the legal issues involved.
✓ The Court followed the ratio of Zuari Cement Limited, which clarified that the power to grant exemptions rests solely with the appropriate government.
The Court quoted from the judgment:
✓ “It is clear as daylight, that the Act is to apply to all factories including factories belonging to the Government other than seasonal factories.”
✓ “The power of exemption is indeed only with the appropriate Government.”
✓ “When the statute prescribed the procedure for grant or refusal of exemption from the operation of the Act, it is to be done in that manner and not in any other manner.”
Key Takeaways
✓ Factories run by local authorities are generally covered under the ESI Act unless specifically exempted by the appropriate government.
✓ The Employees Insurance Court does not have the power to grant exemptions under the ESI Act.
✓ The power to grant exemptions lies solely with the appropriate government, after consultation with the ESI Corporation.
✓ An order without a discussion of legal issues has no precedential value.
✓ The judgment clarifies that the proviso to Section 1(4) of the ESI Act applies only to factories owned or controlled by the Government, not to those run by local authorities.
Directions
The Supreme Court set aside the High Court’s judgment and clarified that the Kakinada Municipality can seek exemption under Section 90 of the ESI Act from the appropriate government. The Court also directed that the government must consider the version of the ESI Corporation by way of consultation in any such proceeding.
Development of Law
The ratio decidendi of this case is that a factory run by a local authority is covered under the ESI Act, and the power to grant exemptions lies solely with the appropriate government under Section 90 of the ESI Act, and not with the Employees Insurance Court. This judgment reinforces the principle that statutory provisions must be interpreted strictly. The judgment also clarifies the scope of the proviso to Section 1(4) of the ESI Act. This judgment reiterates the position of law that the power of exemption lies with the appropriate government and not the ESI court as held in Zuari Cement Limited v. Regional Director, Employees’ State Insurance Corporation, Hyderabad and Others (2015) 7 SCC 690.
Conclusion
The Supreme Court’s judgment in Employees’ State Insurance Corporation vs. Kakinada Municipality & Ors. clarifies that factories run by local authorities are covered under the ESI Act, and the power to grant exemptions rests solely with the appropriate government. The judgment emphasizes the importance of adhering to statutory provisions and following established precedents. This case underscores the limited jurisdiction of the Employees Insurance Court and the specific procedures for seeking exemptions under the ESI Act.