Circular dated 30 November 2012 of EPFO Department on Inclusion of Allowances in Wages for PF Contribution
UPDATE - As per circular No 7 (1) 2012/RCs Review Meeting/21224, dated 18 December 2012 issued by the Central PF Commissioner, the 30th November Circular has been placed in abeyance with immediate effect until further orders. In the event the Circular dated 30 November 2012 is revived, the information contained below may prove highly useful for all.
The Employees Provident Fund Organisation (in short ‘EPFO’) has come out with a Circular No. 7(1) 2012/RCs Review Meeting/345 dated 30th November, 2012 laying down guidelines for Quasi-judicial proceedings u/s 7A of the Provident Fund Act in India. Among the various issues addressed therein, the circular addresses the rampant practice of splitting basic wages by employers to reduce the contribution payable under Provident Fund Act. So basic wages are split to numerable other allowances on which Provident Fund need not be paid.
The clarification at Clause 12 of the said Circular titled ‘Splitting of Wage’s says that basic wages “encompasses all the payments except the specified exclusions. All such allowances which are ordinarily, necessarily and uniformly paid to the employees are to be treated as part of the basic wages.”
As per the Circular all ‘Allowances’ paid to employees across the board as a part of their wages should be included while ascertaining ‘Basic Wages’ for calculating contribution under Provident Fund Act . However if any ‘commission like allowance’ is paid to an employee, then that can be excluded while ascertaining ‘Basic Wages’ for calculating contribution under Provident Fund Act .
However, the circular does not define what constitutes as ‘commission or ‘commission like allowance’ nor does it specify any criterion for identifying those allowances which are to be excluded while determining contribution under Provident Fund Act in India.
Previous Circulars on similar subject matter
- The Circular dated 30th Nov, 2012 doesn’t come as a surprise since the EPFO through an inter-office circular No. Coord. /4(6)2003/Clarification/Vol.II/ dated 21.06.2011 addressed to all Addl. CPFCs, Zones and all RPFC, In-charge RO/SRO had forwarded the entire text of the judgment given by a Division bench of the M.P. High Court bench at Gwalior in Montage Enterprises Pvt. Ltd. v/s Employees Provident Fund Indore & Anr., WP/1857/2011.
- The judgment laid down a principle for treatment of certain allowances like Conveyance/Transportation allowance, Special Allowance etc. as “Basic Wages” for the purpose of Provident Fund liabilities if the same are being paid uniformly, necessarily and ordinarily to all employees. The Circular directed all concerned to take cognizance of the judgment and use the ratio of the judgment to ascertain liabilities of the employer under the Provident Fund Act .
Analysis of the Judgment
- The Petitioner Company was paying wages to its employees under the following heads;
Executive: Basic + Variable Dearness Allowance (VDA) + Special Allowance
Non-Executive: Basic + Variable Dearness Allowance (VDA) + Conveyance Allowance
- The Company was paying Contributions under Provident Fund Act only on Basic + VDA and not including HRA, Special Allowance, Management Allowance
- The Assistant Provident Fund Commissioner (APFC) observed that the Company was splitting wages payable to the workers and paying wages to its workers in the guise of allowances to avoid enhanced liability under the Provident Fund Act. Hence APFC initiated proceedings under Section 7A of Provident Fund Act for determination of Provident Fund dues against the Company for the period from April, 2002 to January, 2007
- The Authority held that since Special Allowance is being paid to the workers as a part of the monthly salary and in order to reduce the provident fund liability, the management had separated it from the basic wages.
- The Authority also held that other allowances were part of the basic wages for the purpose of provident fund contribution.
- The Company moved in appeal before the Employees’ Provident Fund Appellate Tribunal, New Delhi, the appeal was rejected. The appeal was preferred to the Gwalior Bench of M.P. High Court.
- In the said judgment the High Court relied heavily on the judgment of the Apex Court in Manipal Academy of Higher Education V/s Provident Fund Commissioner, (2008) 5 SCC 428 & M/s. Bridge and Roofs Co. Ltd. V/s Union of India & Ors., wherein the principle of universality was applied for determining the basic wages.
- The basic principles as laid down in Bridge Roof’s case, reiterated by the Manipal case based on a combined reading of Sections 2(b) and 6 were as follows:
(a) Where the wage is universally, necessarily and ordinarily paid to all across the board such emoluments are basic wages.
(b) Where the payment is available to be specially paid to those who avail of the opportunity is not basic wages. By way of example it was held that overtime allowance, though it is generally in force in all concerns is not earned by all employees of a concern. It is also earned in accordance with the terms of the contract of employment but because it may not be earned by all employees of a concern, it is excluded from basic wages.
(c) Conversely, any payment by way of a special incentive or work is not basic wages.
- The High Court reasoned that since transport/conveyance allowance is being paid to the entire non-executive category employee, conveyance allowance could be included in basic wages because it is universally, necessarily and ordinarily paid to all across the board.
Present status of the aforesaid M.P. High Court judgment in Montage Enterprises Pvt. Ltd. v/s Employees Provident Fund Indore & Anr., WP/1857/2011
- Petitioner in the aforesaid matter, Montage Enterprises Pvt. Ltd., went in for a Review Petition before the Gwalior bench of the M.P. High Court, against the previous order by the Division bench, vide RP 82/2011, which was dismissed by an order dated 22/11/2011.
- Montage Enterprises Pvt. Ltd. has now approached the Supreme Court vide Special Leave Petition (Civil) 11438-11439 of 2012 against the orders of the Gwailor Bench of the M.P. High Court in the Writ Petition & Review Petition.
- Supreme Court vide an order dated 02/04/2012 ordered the said matter to be joined with Special Leave Petition (Civil) Nos. 8781-8782 of 2012, Surya Roshni Ltd. v/s EPFO & Ors.
- KINDLY NOTE: The matter Special Leave Petition (Civil) Nos. 8781-8782 of 2012, Surya Roshni Ltd. v/s EPFO, has been instituted against the order dated 24/03/2011 in WPC No.1891/2011 and dated 22/11/2011 in RP No.117/2011 of the same Gwalior Bench of the M.P. High Court. Orders by the High Court were very similar to the orders in case of Montage Enterprises Pvt. Ltd.
- Further another matter Special Leave Petition (Civil) Nos. 11440-11441 of 2012, Uflex Ltd. v/s EPFO & Ors has also been joined to the SLP (C) 8781-8782 of 2012, Surya Roshni Ltd. v/s EPFO & Ors. All the three matters are being jointly heard by the Supreme Court.
- In SLP (C) 8781-8782 of 2012, Surya Roshni Ltd. v/s EPFO, the Supreme Court vide an order dated 13/07/2012 directed the petitioners to deposit 60% of the amount demanded by EPFO and has granted stay on the High Court judgment. In the same matter Supreme Court vide its latest order dated 01/11/2012 has directed the Respondents file counter affidavit latest by 07/12/12, failing which the court would pass appropriate orders. The next date of the matter is 04/01/2013.
Madras High Court Judgment
- EPFO on 29th June, 2011 came out with another inter-office circular No. Coord./4(6)2003/clarification/Vol. II/ wherein the entire text of the judgment given by a single judge of the Madras High Court was forwarded to all Addl. CPFCs, Zones and all RPFC, In-charge RO/SRO.
- The judgment was a combined judgment in respect of W.P Nos 15823, 22480, 25442 & 25443 of 2010, 3427/2010, 19751/2010; 970, 3986, 1853 and 2098 of 2011 in the matter of Reynolds Pens India Pvt. Ltd., Hinduja Foundaries Ltd., Saint-Gobain Glass India Pvt. Ltd. & other petitioners Vs. RPFCs & others.
- The High Court dealt with a common question in the above petitions that various allowances paid by the petitioners to their employees under different heads such as Conveyance, Educational Allowances, Food concession, Medical, Special Holidays, Night Shift Incentives, City Compensatory Allowances etc. were amounting to wages within the meaning of the terms ‘Basic Wages’ as per Section 2(b) of the Provident Fund Act covered for deduction towards the Provident Fund.
Present status of the matters before the Madras High Court
Most of the Petitioners in the above mentioned judgment have preferred Writ Appeals before Division bench in the Madras High Court against the order of the Single Judge. All the said Writ Appeals are currently pending. On search carried out at the website of the Madras High Court we have not been able to locate any stay order on the judgment of the Single Judge.
Punjab & Haryana High Court
- We would also like to bring it your notice judgment dated 01.02.2011 by the Punjab & Haryana High Court in Asstt. Provident Fund Commissioner (APFC) v/s G4S Security Services (India) Pvt. Ltd. & Anr., CWP 15443 of 2009 (O & M), 2011 LLR 316. The said judgment refuted the claim of Asstt. Provident Fund Commissioner regarding essentiality of consideration of rates of minimum wages for calculation of Contribution under the Provident Fund Act .
- The APFC had claimed that it is the minimum wage, the definition of which is provided under the Minimum Wages Act which is to be taken into consideration for determining contributions under the Provident Fund Act (as contemplated by EPFO in its Circular No. Coord/4(6)2003/Clarification/Vol-II/7394 dated 23.05.2011, which was passed in continuation of a previous circular no. Coord./4(6)2003/Clarification/13633 dated 06.06.2008). However, the Court opined that definition of ‘basic wages’ under Provident Fund Act has an appended exclusion clause in which the various allowances which are quite broad in nature have been provided so as to enable the employer to determine its liability to make the contribution under Provident Fund Act . The Minimum Wages Act on the other hand provides for a definition of wage which is distinct from that of the ‘basic wage’ as per Provident Fund Act and that definition of wage includes within its ambit House Rent Allowance but excludes certain other allowances which are being detailed therein. The APFC filed an Letters Patent Appeal before the Punjab & Haryana High Court registered under LPA No. 1139 of 20111 (O & M), wherein the judgment of the Single Judge was upheld by a Division Bench. As per the latest information available on the website of the Supreme Court it appears that APFC has gone in for an appeal to the Supreme Court under Diary No. 31676/2011. However, as per information available the Supreme Court has not stayed the orders of the Punjab & Haryana High Court. In the judgment of the Punjab & Haryana High Court in CWP 15443 of 2009 (O & M) at Para 9 & 12 the Court has clearly opined that certain allowances such HRA, Washing Allowance and Conveyance Allowance etc. are not to be considered while calculating contribution to PF. Hence, the judgment of the Punjab & Haryana High Court has practically negated the contention raised by the EPFO through Circular No. Coord/4(6)2003/Clarification/Vol-II/7394 dated 23.05.2011, which was passed in continuation of a previous circular no. Coord./4(6)2003/Clarification/13633 dated 06.06.2008. The current circular dated 30 Nov, 2012 is nothing but another attempt by the EPFO to cover all allowances for calculation of PF Contributions and in the light of the subsistence of the judgment by the Punjab & Haryana High Court in CWP 15443 of 2009 (O & M) & LPA No. 1139 of 20111 (O & M), grossly erroneous.
Effect of the said previous inter-office circulars vis-à-vis the Judgments and the present Circular
- Provident undF Officials may start compelling employers to pay contribution under Provident Fund Act on not only Basic + VDA but also allowances such as conveyance allowance, special allowance any other allowance which is universally, necessarily and ordinarily paid to all across the board, failing which proceedings u/s 7A of the Provident Fund Act may be initiated.
The way forward
- Adhering to the Circular: Although the matters referred above are subjudice, the EPFO emboldened by Circular dated 30th Nov, 2012 may start insisting on payment contribution on allowances as well, which are paid across the board.
If a Company wants to play absolutely safe and negate the risk of facing litigation in the court, the Company can act on the Ciircular dated 30th Nov, 2012 and start paying Provident Fund Contribution on; Basic + all other allowances which are universally, necessarily and ordinarily paid to all employees across the board. However, once contributions are made by including all allowances, the Company shall be prevented from going back to the earlier provision of calculating Provident Fund Contribution only on Basic+DA, even if the said Circular is later held invalid by the Courts.
Therefore another option available is that during the intervening period the Company may calculate Provident Fund Contributions on all allowances paid across the board and deposit it in a separate bank account. If the judgment of the Court is in tune with the Circular then the company may transfer the Provident Fund contributions from the bank account and deposit with the EPFO. However, if the judgment of the Court is against the Circular, the Company can transfer only such amount of contribution as being previously paid (or as per principles laid down by the Court) and return excess amounts to the employees. The only liability that the company will incur in both these scenarios would be the damages and penal interest payable for delay in payment of Provident Fund Contribution, which may probably be waived in the light of pending litigation.
- Propriety of the Circular: Judgments of the Gwalior bench of M.P. High Court have been challenged in the Supreme Court, which are specifically on the same matter as contemplated in the said Circular dated 30th Nov, 2012. Irrespective of the same the EPFO has come out with the Circular dated 30th Nov, 2012. Under this context we assume that employers may approach respective High Courts or Supreme Court to seek a stay on the application of the said Circular till the pendency of the matters at the Supreme Court.
- Approaching the litigating Petitioner in the Supreme Court:Companies may also approach the Petitioners in the above mentioned matters before the Supreme Court, bringing it to their notice the present Circular by the EPFO and urging them to expedite the matters and bring finality to the issues at hand.
Addresses of the Petitioners;
1. Surya Roshni Ltd.
2nd Floor, Padma Tower – I
8, Rajendra Place
New Delhi – 110008
Harayana – 124507
2. Montage Enterprises Pvt. Ltd.
29-A, Malanpur Industrial Area
Bhind, Madhya Pradesh.
C-53, Sashi Garden,
Mayur Vihar, Phase –I,
Near Pocket – V Gurudwara
Delhi – 110091
3. Uflex Ltd.
A – 108, Sector – IV,
NOIDA-201 301 (U.P.)
305, Third Floor, Bhanot Corner,
Pamposh Enclave, Greater Kailash – I,
NEW DELHI-110 048
- Joining in as an Intervenor to the matters at Supreme Court: If a Company decides not to pay contribution on all allowances, then the Provident Fund Dept. may issue letter to the Company. The Company may reply to such letter by pointing out the matters already subjudice before the Supreme Court on the said subject matter on the basis of which no further action should be initiated. However, even after that if Provident Fund Dept. decides to initiate proceedings against that company, the company can join in as an Intervening Party to the aforesaid matters and seek stay on the proceedings initiated by the Provident Fund Dept.
- Approaching Provident Fund Dept. directly: Companies may approach Provident Fund Dept. directly seeking clarification on the applicability of the said Circular date 30th Nov, 2012, especially in the light of the several matters subjudice before the Supreme Court & High Court. A draft of such letter is annexed hereto.
- Approaching business associations: Companies should approach their respective business associations such as FICCI, ASSOCHAM, MCCIA, NASSCOM to go before the Supreme Court join into the aforesaid subjudice matters at the Supreme Court as an Intervener and seek stay on the said Circular dated 30th Nov, 2012. A draft of such letter is annexed hereto.
NOTE: All the above mentioned strategies are general in nature and choosing any of the same is entirely the prerogative of individual establishments keeping in mind circumstances that may be specific to the establishment.