Special Allowances When to be Treated as Basic Wages and when not for PF

We know that Allowances would be basic wages where a payment is universally, necessarily and ordinarily paid to all employees across the board. 

Refer - Regional Provident Fund Commissioner (II), West Bengal & Anr. v Vivekananda Vidya Mandir & Ors, 2005

Refer - 

Allowances will not be basic wages where

(i) a payment is available only to those who avail of the opportunity, and

(ii) where a payment is linked to a special incentive or extra work

Special allowances which formed part of the employees' basic wages are subject to Provident Fund contributions on the premise that 

(a) they are not variable in nature; 

(b) they were not linked to an incentive to perform extra work; and 

(c) they are paid across the board to all employees in a particular category

The Hon'ble Madras High Court had pronounced in the case of  SPI Technologies India Pvt. Ltd.vs.
Assistant Provident Fund Commissioner, Pondicherry W.P. No. 33759/2019 and W.M.P. No.  34246/2019 and W.M.P. No. 1609/2020, Dt/–1-10-2020  that 

Special allowances will not be basic wages where 

(i) a payment is available only to those who avail of the opportunity, &

(ii) where a payment is linked to a special incentive or extra work

Also expressed Identification of beneficiaries is also an important factor for assessment of EPF contributions by EPF Authority

Please find the below exhibit take away from SPI Technologies India Pvt. Ltd.vs.Assistant Provident Fund Commissioner, Pondicherry & judgement copy

Key Takeaway Points

• Special allowances will not be basic wages where (i) a payment is available only to those who avail of the opportunity, and (ii) where a payment is linked to a special incentive or extra work.
• Special allowances which formed part of the employees' basic wages are subject to Provident Fund contributions on the premise that (a) they are not variable in nature; (b) they were not linked to an incentive to perform extra work; and (c) they are paid across the board to all employees in a particular category.
• Identification of beneficiaries is also an important factor for assessment of EPF contributions by EPF Authority.
• EPF contributions are to be assessed in terms of para 26 and 26-A of the Employees' Provident Fund Scheme considering prescribed limitation of wages and not on the amounts exceeding limitation of wages.

Order Copy 

1. Heard Mr. S. Ravindran, Learned Senior Counsel appearing for the Petitioner and Mrs. V.J. Latha, Learned Standing Counsel appearing for the Respondent and perused the materials placed on record, apart from the pleadings of the parties.

2. The Provident Fund dues for the period from March 2010 to December 2012 calculated on the wages of the employees of the Petitioner had been remitted by the Petitioner with the Respondent along with periodical returns in Forms 3A and 6A in terms of para 35 and 36 of the Employees Provident Funds Scheme, 1952 (hereinafter referred to as the 'Scheme' for short). However, the Enforcement Officer, who subsequently inspected the records of the Petitioner, was of the view that certain allowances paid by the Petitioner to its employees had not been included while computing their wages for determining the amount of contribution towards Provident Fund. An enquiry under Section 7A of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (hereinafter referred to as the 'Act' for short), was initiated and the Respondent by Order No. TBM/SRO/PCY/PC/582/Comp/2013 dated 19.07.2013 determined that the sum of Rs. 2,92,66,601 was liable to be paid by the Petitioner towards Provident Fund dues. The appeal in EPFA No. 198 of 2017 preferred by the Petitioner under Section 7~I of the Act before the Appellate Authority, viz ., Central Government Industrial Tribunal cum Labour Court, Chennai, was dismissed by order dated 19.06.2019 confirming the order passed by the Respondent. Aggrieved thereby, the Petitioner has filed this Writ Petition challenging the same.

3. The Appellate Authority has relied on the decision of the Hon'ble Supreme Court of India in Surya Roshni Ltd. v. Employees Provident Fund (Order dated 28.02.2019 in Civil Appeal Nos. 3965~3966 of 2013 etc., batch) in upholding the claim of the Respondent for inclusion of certain allowances as basic wages for the purpose of determining the amount of Provident Fund payable. In the said decision, it has been highlighted that for the purpose of computation of deduction towards Provident Fund under Section 6 read with Section 2(b)(ii) of the Act, the dictionary meaning of the term ‘basic wage' as interpreted in Kiccha Sugar Company Limited through General Manager v. Tarai Chini Mill Majdoor Union, Uttarakhand , (2014) 4 SCC 37 has to be taken into consideration and the principles laid down in the previous judgments in Bridge and Roof (India) Ltd . v. Union of India , AIR 1963 SC 1474 and Manipal Academy of Higher Education v. Provident Fund Commissioner , (2008) 5 SC 428, have been approved as to what constitutes basic wages, as follows:—

1. where a payment is universally, necessarily and ordinarily paid to all employees across the board, it constitutes basic wages;
2. where a payment is available only to those who avail of the opportunity, it does not constitute basic wages; and
3. where a payment is linked to a special incentive or extra work, it does not constitute basic wages.

This would mean that the special allowances which formed part of the employees- basic wages are subject to Provident Fund contributions on the premise:

(a) that they are not variable in nature;

(b) that they were not linked to an incentive to perform extra work; and

(c) that they are paid across the board to all employees in a particular category 

In other words, it has been clarified that special allowances (and other similar allowances) which form part of an employee's wages are considered basic wages and are subject to Provident Fund contributions, and special incentive or production bonus that have a direct link with an employee's output fall outside the scope of basic wages.

4. Learned Senior Counsel appearing for the Petitioner fairly submits that there are no qualms at this stage regarding the aforesaid position of law governing the rights of the parties, but what is sought to be ventilated now is that two crucial aspects have not been taken into account while determining the amount of liability of the Petitioner, which are as follows:—

(i) Though it is true that there were 5150 employees on the rolls of the Petitioner during the relevant period, 4371 employees have subsequently left the services after final settlement of their dues and only 779 employees continue to be in service. It is brought to notice that inasmuch as the present whereabouts of the employees who have left the service are not traceable by the Petitioner and they would have already withdrawn the Provident Fund contributions earlier made to their respective accounts, it would not be necessary for requiring the Petitioner to pay the differential amount due in respect of them.

(ii) It has been pointed out that even in respect of 4371 employees, who have left service, 1112 employees were drawing monthly wages exceeding Rs. 6,500 and insofar as the remaining 779 continuing employees are concerned, 275 employees were drawing monthly wages exceeding Rs. 6,500 and as such, in respect of those 1387 (1112+275) employees, their basic wages has to be restricted to Rs. 6,500 for the purpose of calculation of contribution towards Provident Fund dues in terms of para 26 and 26~A of the Scheme.

It is submitted that such mandatory exercise has not been made by the Respondent though entire amount, which the Petitioner has been called upon to pay, have already been remitted pursuant to the orders passed by the Appellate Authority in the appeal and by this Court in this Writ Petition in that regard. Reliance is placed on the decision of the Hon'ble Supreme Court of India in Builders Association of India v. Union of India , (Order dated 02.05.2016 in CC No. 8035 of 2016 and the decision of this Court in N. Krishnan v. Employees Provident Fund Appellate Tribunal , (Order dated 24.1.2019 in W.P. (MD) No. 13788 of 2011) to buttress the contention that the employees for whom the Provident Fund is recovered from the Petitioner would have to be ascertained and it would have to be ensured that the amount due to each of them has been credited to their respective accounts as per the code number allocated by the Respondent. The decision of the Bombay High Court in Shri Kaushik Chatterjee v. Assistant Provident Fund Commissioner, Nagur (Order dated 23.03.2018 in W.P. No. 1674 of 2016) has been cited to explain that a whooping figure of Rs. 351,11,41,170 remains undistributed to the beneficiaries of the Provident Fund throughout the country at that point of time. In this backdrop, it is persuaded that it has become imperative to remit the matter to the Appellate Authority to find out the exact amount that the Petitioner would be liable towards contribution for Provident Fund in respect of each of the 5150 employees, who had worked during the relevant period.

5. Learned Standing Counsel appearing for the Respondent, while accepting that the aforesaid exercise of ascertaining the amount of contribution towards Provident Fund for each of the employees of the Petitioner during the relevant period had not been carried out, contends that it was the Petitioner who has failed to submit revised Forms 3A and 6A showing the actual amounts due to each employees after the inclusion of allowances and emphasizes that the Petitioner cannot be absolved of the liability to pay the statutory liability even if whereabouts of some of those persons cannot be traced now. The decisions of the Hon'ble Supreme Court of India in Employees-State Insurance Corporation v. Hotel Kalpaka International , (1993) 2 SCC 9 and Regional Director, E.S.I. Corporation v. Kerala State Drugs & Pharmaceuticals Ltd., (1995) Supp 3 SCC 148 in respect of pari materia provisions of the Employees State Insurance Act, 1948, are referred in support thereof.

6. Having regard to the aforesaid submissions made by the Learned Counsel for both sides, the following orders are passed:—

(i) The impugned order dated 19.06.2019 in EPFA No. 198 of 2017 passed by the Appellate Authority is set aside and the matter is remitted to the Appellate Authority for the limited purpose to ascertain the exact amount payable towards contribution of Provident Fund for each of the employees of the Petitioner during the relevant period, irrespective of whether they continue or have left service. 

(ii) The appeal in EPFA No. 198 of 2017 shall stand re-opened and shall be listed for hearing before the Appellate Authority on 03.12.2020, and the Petitioner and the Respondent shall appear on that date and continue to attend the subsequent hearings to which it is adjourned till its eventual conclusion. 

(iii) It shall be the obligation of the Petitioner to submit revised Forms 3A and 6A showing the actual amount of contribution payable in respect of each employee (with working-sheet showing details) along with available details of the employees who have left its service. 

(iv) The Appellate Authority shall afford full opportunity of hearing to all parties concerned following the prescribed procedure in consonance with the principles of natural justice and shall pass reasoned orders dealing with each of the contentions raised by the parties in this regard on merits and in accordance with law.

(v) After final order is passed in EPFA No. 198 of 2017 by the Appellate Authority, the Respondent shall take necessary measures to inform the concerned employees of the Petitioner by public notice and/or other appropriate means to collected their entitled dues in the prescribed manner. 

(vi) The amount invested in the Fixed Deposit Account No. 6914822657 in the name of the Registrar-General of this Court pursuant to the order dated 30.07.2020 passed by this Court, with accrued interest shall be forthwith transferred to the name of the Presiding Officer, Central Government Industrial Tribunal-cum-Labour Court, Chennai and the original receipt shall be handed over to the Central Government Industrial Tribunal-cum-Labour Court, Chennai under written acknowledgment. 

(vii) The amounts that have been remitted by the Petitioner pursuant to the interim orders of the Appellate Authority and this Court shall continue to remain invested in the interest fetching deposits till the matter is finally decided by the Appellate Authority who shall at that time also pass necessary orders for the extent of amount that the Respondent would be entitled to appropriate from those amounts deposited and for the refund of remaining amount to the Petitioner, if any. 

(viii) It is also clarified here that the dates on which the amounts had been deposited by the Petitioner shall be treated as if payment has been made to the Respondent towards the contribution of Provident Fund dues so that there shall not be any further liability on the Petitioner to bear interest for those deposited amounts after those respective dates on which they had been made.

7. In the result, the Writ Petition is ordered on the aforesaid terms. Consequently, the connected Miscellaneous Petitions are closed. No costs.