Supreme Court clarifies the definition of ‘establishment’ for EPF Act exemption: Shree Vishal Printers vs. RPFC (2019)

Date of the Judgment: 12 September 2019

Citation: (2019) INSC 917

Judges: Sanjay Kishan Kaul, J., K.M. Joseph, J.

Can a company avoid its obligations under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act) by creating separate entities? The Supreme Court of India recently examined this question, focusing on whether different companies could be considered a single ‘establishment’ for the purpose of EPF exemptions. The court had to determine if these companies were functionally integrated, and thus, part of the same establishment, or separate entities entitled to exemptions under the EPF Act. This judgment, authored by Justice Sanjay Kishan Kaul, with Justice K.M. Joseph concurring, clarifies the scope of ‘establishment’ under the EPF Act.

Case Background

The case involves three companies: M/s. Shree Vishal Printers Limited (SVPL), M/s. Times Publishing House Limited (TPHL), and Bennett, Coleman & Company Limited (BCCL), Jaipur. BCCL, Mumbai, is the parent company of BCCL, Jaipur. SVPL and TPHL, both separate legal entities, claimed exemption from the EPF Act, arguing they were new establishments. The Regional Provident Fund Commissioner (RPFC) rejected their claims, stating they were effectively part of the same establishment as BCCL, Mumbai. The RPFC argued that these entities were not independent, but were functionally integrated with BCCL, Mumbai, and thus not eligible for exemption. The companies appealed the RPFC’s decision. The case went through multiple forums, including the Employees’ Provident Fund Appellate Tribunal, the High Court, and finally, the Supreme Court.

Timeline:

Course of Proceedings

The Regional Provident Fund Commissioner (RPFC) initiated proceedings against the three establishments after they claimed exemption under Section 16(1)(d) of the EPF Act. The RPFC, after conducting hearings, passed a common order on 4.10.1990, denying the exemption to all three entities. The RPFC concluded that the establishments were not new and were functionally integrated with BCCL, Mumbai. The companies then appealed to the Employees’ Provident Fund Appellate Tribunal, which also dismissed their appeals on 10.10.1997. Subsequently, the companies filed writ petitions before the High Court, which were dismissed by a single judge on 20.12.2006. The Division Bench of the High Court also upheld the single judge’s decision on 11.4.2008. Aggrieved by these decisions, the companies appealed to the Supreme Court.

Legal Framework

The core legal provision at the heart of this case is Section 16(1)(d) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, which states:

“16. Act not to apply to certain establishments. – (1) This Act shall not apply-
….….….….….….
(d) to any other establishment newly set up, until the expiry of a period of three years from the date on which such establishment is, or has been, set up.”

The explanation to this section clarifies that a change in location does not qualify an establishment as ‘newly set up.’ The Court also considered Section 2A of the EPF Act, which was inserted by Act 46 of 1960, w.e.f. 31.12.1960:

“2A. Establishment to include all departments and branches. – For the removal of doubts, it is hereby declared that where an establishment consists of different departments or has branches, whether situate in the same place or in different places, all such departments or branches shall be treated as parts of the same establishment.”

Since the EPF Act does not define “establishment,” the courts have often referred to the Industrial Disputes Act, 1947 (ID Act) for guidance. The court also referred to Section 25E(iii) of the ID Act in the context of the definition of “establishment”.

Arguments

Arguments by the Appellants (SVPL, TPHL, and BCCL, Jaipur):

• Separate Legal Entities: The appellants argued that they were separate legal entities, registered under the Companies Act, 1956, with no common directors or shareholders, and no cross-shareholding.
• Distinct Financial Operations: They maintained separate balance sheets, profit and loss accounts, and had independent employees with no inter-company transfers.
• Non-Exclusivity Clause (SVPL): SVPL highlighted a clause in their agreement with BCCL, Mumbai, stating they were free to undertake printing contracts with other parties.
• Outsourcing Model: The appellants argued that their business model was based on outsourcing, where one company provides services to another, and this does not imply they are part of the same establishment.
• BCCL Jaipur as a separate entity: The appellants contended that the RPFC incorrectly connected them to BCCL, Jaipur, instead of BCCL, Mumbai, for the purpose of denying exemption.

Arguments by the Respondent (RPFC):

• Functional Interdependence: The RPFC argued that the companies were functionally interdependent. TPHL provided office space and staff to BCCL, Mumbai. SVPL printed newspapers exclusively for BCCL, Mumbai.
• Common Office Space: The RPFC pointed out that all three companies operated from the same building, albeit on different floors, and that the office of TPHL was open for the use of BCCL, Mumbai employees.
• Control by BCCL, Mumbai: The RPFC emphasized that BCCL, Mumbai’s manager, Mr. Sunil Gupta, signed documents relating to both TPHL and SVPL, and that BCCL, Mumbai issued orders on the letterhead of SVPL.
• Agreement between TPHL and BCCL, Mumbai: The RPFC highlighted that the agreement between TPHL and BCCL, Mumbai, showed that TPHL was providing space and staff for the benefit of BCCL, Mumbai, and bearing the expenses of the establishment.
• BCCL, Jaipur as a branch of BCCL, Mumbai: The RPFC emphasized that BCCL, Jaipur, is not a separate legal entity, but a branch of the parent company BCCL, Mumbai, and thus, the connection to BCCL, Jaipur, is also a connection to BCCL, Mumbai.

[TABLE] of Submissions:

Innovativeness of the Argument: The appellants attempted to use the outsourcing model as a defense, arguing that providing services to another company does not equate to being part of the same establishment. This was a novel approach, but the court noted that the outsourcing model was not prevalent at the time the agreements were made.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the three establishments, namely, M/s. Shree Vishal Printers Limited, M/s. Times Publishing House Limited, and BCCL, Jaipur, could be considered as separate establishments entitled to exemption under Section 16(1)(d) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, or whether they should be treated as part of the same establishment as BCCL, Mumbai.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court relied on the following authorities:

Cases:

• Associated Cement Companies Limited, Chaibassa Cement Works, Jhinkpani v. Workmen [AIR 1960 SC 56] (Supreme Court of India): This case laid down the tests for determining whether two units form part of the same establishment, including unity of ownership, management, finance, labor, employment, and functional integrality.
• Management of Pratap Press, New Delhi v. Secretary, Delhi Press Workers’ Union, Delhi & Its Workmen [AIR 1960 SC 1213] (Supreme Court of India): This case applied the tests from Associated Cement to a newspaper publication, emphasizing functional integrality as the most important test.
• L.N. Gadodia & Sons and Anr. v. Regional Provident Fund Commissioner [(2011) 13 SCC 517] (Supreme Court of India): This case dealt with the EPF Act and whether sister concerns could be treated as separate establishments, reiterating the tests from Associated Cement and Pratap Press.
• Regl. Provident Fund Commr. v.. Dharamsi Morarji Chemical Co. Ltd. [(1998) 2 SCC 446] (Supreme Court of India): This case held that two units were independent due to separate registration, workers, and financial records.
• Regl. Provident Fund Commr. v. Raj’ s Continental Exports (P) Ltd. [(2007) 4 SCC 239] (Supreme Court of India): This case followed Dharamsi Morarji, holding two entities separate due to distinct registrations and operations.
• Rajasthan Prem Krishan Goods Transport Co.v. Regl. Provident Fund Commr. [(1996) 9 SCC 454] (Supreme Court of India): This case held two entities to be part of the same establishment due to common partners, business place, and management.
• Regl. Provident Fund Commr., v. Naraini Udyog [(1996) 5 SCC 522] (Supreme Court of India): This case held two entities to be one establishment due to common family ownership, head office, and accounting.

Legal Provisions:

• Section 16(1)(d) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952: This section provides for exemption to newly set up establishments for a period of three years.
• Section 2A of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952: This section clarifies that all departments and branches of an establishment are to be treated as parts of the same establishment.
• Section 25E(iii) of the Industrial Disputes Act, 1947: This section was referred to in the context of the definition of “establishment”.

[TABLE] of Authorities and their Treatment:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Court relied heavily on the principles laid down in Associated Cement Company [AIR 1960 SC 56]* and Management of Pratap Press [AIR 1960 SC 1213]*, emphasizing the test of functional integrality. The Court distinguished the cases of Dharamsi Morarji [(1998) 2 SCC 446]* and Raj’s Continental Exports [(2007) 4 SCC 239]*, noting that those cases involved truly independent entities with separate operations, which was not the case here. The Court used L.N. Gadodia & Sons [(2011) 13 SCC 517]* to reiterate the tests laid down in Associated Cement Company and Management of Pratap Press. The cases of Rajasthan Prem Krishan Goods Transport Co. [(1996) 9 SCC 454]* and Naraini Udyog [(1996) 5 SCC 522]* were used to show that common partners, management, family ownership and head office indicate a single establishment.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the principle of “functional integrality,” meaning that the entities were so interdependent that they could not reasonably exist without each other. The court emphasized the fact that TPHL provided office space and staff to BCCL, Mumbai, and SVPL printed newspapers exclusively for BCCL, Mumbai. The court also noted that BCCL, Mumbai’s manager signed documents for both TPHL and SVPL, and that BCCL, Mumbai issued orders on the letterhead of SVPL. These factors indicated a high degree of control and integration, leading the court to conclude that all three entities were part of the same establishment. The Court also considered the nature of the agreement between TPHL and BCCL, Mumbai, which showed that TPHL was providing space and staff for the benefit of BCCL, Mumbai, and bearing the expenses of the establishment. The Court also noted that the outsourcing model was not prevalent during the relevant time period.

Sentiment Analysis of Reasons Given by Supreme Court:

Fact:Law Ratio:

The Court’s reasoning was primarily based on the factual circumstances of the case, which showed a high degree of functional integration and control. The legal principles were used to interpret and apply the facts to the relevant provisions of the EPF Act.

Logical Reasoning:

The Court considered the argument of the appellants that they were separate legal entities with distinct financial operations, but rejected it on the ground that functional integrality was more important. The court also considered the argument of the appellants that their business model was based on outsourcing, but rejected it on the ground that the outsourcing model was not prevalent during the relevant time period. The Court held that the very nature of the working of SVPL and the other two entities showed the functional integrality test to be satisfied.

The Court quoted from the judgment:

“We believe that the very nature of the working of SVPL and the other two entities show the functional integrality test to be satisfied.”

“Each one of the facts by itself may not be conclusive, but taken as a whole, there can be no other conclusion, than the one arrived at by the RPFC.”

“The said Act being a beneficial legislation, the object of excluding the infancy period of five years (later reduced to three years) from the rigours of the Act, was only to provide to new establishments, a period to establish their business, and not to permit different kinds of routes to be created to evade the liability under the said Act.”

The Court did not find any dissenting opinions in this case. The bench comprised of two judges, both of whom agreed on the final decision.

The court’s decision has implications for future cases, as it emphasizes the importance of functional integrality in determining whether multiple entities should be considered a single establishment under the EPF Act. The Court rejected the argument that separate legal entities with distinct financial operations would qualify for exemption if they were functionally integrated.

Key Takeaways

• Functional Integrality is Key: The most important factor in determining whether multiple entities are part of the same establishment is their functional interdependence.
• Separate Legal Entities Not Sufficient: Simply being separate legal entities with distinct financial operations is not enough to qualify for exemption under the EPF Act if there is functional integration.
• Control Matters: The degree of control exerted by one entity over another is a significant factor in determining whether they are part of the same establishment.
• Outsourcing Argument Rejected: The argument that outsourcing services means separate establishments was rejected by the Court.
• Beneficial Legislation: The EPF Act is a beneficial legislation, and the exemption is intended for genuine new establishments, not to circumvent the law.
• Implications for Future Cases: The judgment clarifies that the concept of ‘establishment’ under the EPF Act extends beyond legal entities to include functionally integrated units.

Directions

The Supreme Court did not give any specific directions other than dismissing the appeals and imposing costs on the appellants. The liability of each of these establishments would be co-extensive with BCCL, Mumbai.

Development of Law

The ratio decidendi of this case is that the test of functional integrality is paramount in determining whether multiple entities are part of the same establishment for the purpose of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. The Court reaffirmed the principles laid down in the Associated Cement Company and Management of Pratap Press cases. This judgment clarifies that the concept of ‘establishment’ under the EPF Act extends beyond legal entities to include functionally integrated units. The Court rejected the argument that separate legal entities with distinct financial operations would qualify for exemption if they were functionally integrated.

Conclusion

The Supreme Court dismissed the appeals of M/s. Shree Vishal Printers Limited, M/s. Times Publishing House Limited, and BCCL, Jaipur, holding that they were not separate establishments entitled to exemption under Section 16(1)(d) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. The Court found that these entities were functionally integrated with BCCL, Mumbai, and therefore, were part of the same establishment. The judgmentclarifies that the concept of ‘establishment’ under the EPF Act extends beyond legal entities to include functionally integrated units. The Court emphasized that the EPF Act is a beneficial legislation, and the exemption is intended for genuine new establishments, not to circumvent the law. This judgment provides a clear guideline for determining whether multiple entities should be considered a single establishment for the purposes of EPF exemptions, emphasizing the importance of functional integrality over separate legal existence.