Employees’ State Insurance Corporation vs. Nagar Nigam: Workshop Classification under ESIC Act

In a significant ruling, the Supreme Court of India delivered a judgement in the case of Employees’ State Insurance Corporation vs. Nagar Nigam. The case revolved around the classification of the workshop operated by Nagar Nigam under the ESIC Act. The Court analyzed whether the workshop qualified as a ‘factory’ under the Act of 1948, shedding light on the obligations of municipal bodies towards statutory contributions. Let’s delve into the key points of this crucial legal battle between the Employees’ State Insurance Corporation and Nagar Nigam.

Facts

• The appellant-Corporation directed the Recovery Officer to recover damages from Nagar Nigam under Section 85B of the Act of 1948.
• Nagar Nigam requested for adjournments during the hearing process.
• Nagar Nigam filed a Writ Petition challenging the recovery notice and seeking a direction to restrain the Corporation from realizing the amount.
• Recovery notice was issued to Nagar Nigam for payment as determined under Section 85B of the Act of 1948.
• Nagar Nigam chose not to appear before the Authorized Officer and requested time to respond.
• The order dated 25 October, 2021, was appealed by the Corporation through special leave to the Supreme Court.
• The Single Judge of the High Court held that the employees of the Municipal Corporation are not covered under the Employees’ State Insurance Act, 1948.
• The recovery notice issued by the Corporation was quashed, and the amount already collected was directed to be refunded to the Municipal Corporation.
• The Corporation argued that the Municipal Corporation operates a Central Workshop, which falls under the definition of a ‘factory’ as per the Act of 1948.
• Recovery certificates were issued to the Municipal Corporation for non-payment of mandatory contributions under the Act.
• The Municipal Corporation stopped making statutory contributions in 1978 without any justification.
• The Authorized Officer issued a notice for payment, but the Municipal Corporation did not respond, leading to recovery actions being taken by the Corporation.
• Damages under Section 85B of the Act of 1948 were also considered due to non-timely payments by the Municipal Corporation.
• The writ petition was allowed by the High Court, quashing the recovery notice and ordering the refund of the collected amount.

Also Read: Dismissal of Writ Petitions by Supreme Court in Mr. R.S. Madireddy v. Talace India Pvt Ltd. Case

Issue

• The core issues for consideration are whether the workshop of the Nagar Nigam engaged in manufacturing process while carrying out repairs with more than 20 workmen, and whether it qualifies as a ‘factory’ under the Act of 1948.
• The issue of whether a municipality’s workshop performing machinery repairs is considered a ‘factory’ was extensively examined by the court in the Kakinada Municipality case.
• Similar to the current case, the Municipality was covered under the Act of 1948 since 1965 and made statutory contributions until 1996.
• Subsequently, the Municipality ceased making contributions leading to issuance of orders and notices demanding overdue payments under the Act of 1948.

Also Read: Shivraj Reddy & Brothers Partnership Firm v. S. Raghuraj Reddy: Case on Firm Dissolution and Rendition of Accounts

Arguments

• The respondent-Nagar Nigam failed to utilize the statutory remedy of filing an appeal to the Employees’ Insurance Court under Section 75 of the Act of 1948.
• The respondent-Nagar Nigam did not question the recovery certificate determining the damages, therefore, it was not entitled to challenge the subsequent recovery notice.
• In the proceedings for recovery of contribution, there was no plea taken that the workshop of the respondent-Nagar Nigam is not covered by the definition of ‘factory’ or that no manufacturing process is carried out in the workshop.
• Compliance with the contribution payments was voluntarily made by the respondent-Nagar Nigam till 1978, after which it stopped without informing the appellant-Corporation.
• The judgment in the case of Employers’ State Insurance Corporation v. Kakinada Municipality and Others was cited, stating that a factory belonging to a local authority is liable to pay contribution unless exempted by the Government.
• If the respondent-Nagar Nigam wanted exemption from the Act of 1948, it should have applied to the appropriate Government for an exemption order before seeking exemption from making contribution payments.
• The respondent-Nagar Nigam did not defend proceedings for paying contributions for a specific period and also did not participate in the determination of damages under section 85B of the Act of 1948.
• While the damages were determined by the appellant-Corporation, the only aspect challenged in the writ petition was the consequential recovery notice.
• The workshop of the respondent-Nagar Nigam did not qualify as a ‘factory’ under the Act of 1948 as no manufacturing process was being carried out.
• Employees of the Nagar Nigam were already receiving amenities and facilities, including medical assistance, and were occasionally involved in equipment repairs, not manufacturing.
• The recovery notice issued to the employees was deemed unsustainable in the eyes of the law and rightly quashed by the learned Single Judge of the High Court.

Also Read: Kailash Chand v. Mukat Lal: Landmark Case on Hindu Succession Rights

Analysis

• The Insurance Court rejected the application filed by the local body under Section 75(1)(g) of the Act of 1948 challenging the speaking order under Section 45A.
• The order of the Insurance Court was challenged by filing a statutory appeal to the High Court under Section 82 of the Act of 1948.
• The Act of 1948 was found to apply to all factories including those belonging to the Government, except seasonal factories.
• The proviso to Section 1(4) exempts factories belonging to the Government from the Act, subject to specific conditions.
• No indication was found that the local authority sought or was granted exemption under Section 90 of the Act of 1948.
• A factory under the control of the Government is exempt from the Act unless the Government exercises the power of exemption under Section 90.
• The factory of the local authority must be compliant with the provisions of the Act unless exempted by the Government.
• The High Court allowed the appeal regarding the recovery of statutory contribution under Section 40 of the Act of 1948.
• The legislative exercise of creating exemptions for factories belonging to the Government or local authority cannot be overlooked.
• The Authorized Officer had issued notices to the local authority to show cause for the recovery of statutory contribution.
• The Act applies to all factories, including those belonging to the Government, except seasonal factories as per Section 1(4).
• A factory is defined as premises where ten or more persons are employed and a manufacturing process is carried on, excluding mines and railway running sheds under Section 2(12).
• The term ‘manufacturing process’ is defined in accordance with the Factories Act, 1948 under Section 2(14-AA).
• Repairing machinery is considered a job that falls under the definition of ‘Factory’ as per E.S.I. Act.
• J.P. Lights India was engaged in repairing machinery, which was covered under the definition of ‘Factory’.
• The Regional Director of E.S.I. Corporation, Bangalore was involved in the case.
• The judgement established that repairing machinery qualifies as a job that is included in the definition of ‘Factory’.
• High Court should not have interfered in the matter using writ jurisdiction.
• Nagar Nigam should have been directed to approach the Insurance Court under Section 75(1)(g) of the Act of 1948.
• The recovery notice dated 3 February, 2009 should not have been interfered with by the High Court.
• The Single Judge erred in entertaining the writ petition and interfering with the recovery notice.

Decision

• The observations made in the judgment will not prejudice Nagar Nigam’s rights to seek exemption under Section 90 of the Act of 1948.
• Any pending applications will be considered disposed of.
• As a result, the appeal is allowed, and the impugned order is quashed and set aside.
• No costs are incurred.

Case Title: THE EMPLOYEES STATE INSURANCE CORPORATION LTD. Vs. NAGAR NIGAM ALLAHABAD (2024 INSC 441)

Case Number: C.A. No.-001833-001833 – 2024

Click here to read/download original judgement