Case Study: Kerala HC on Inclusion of Allowances in EPF Contributions

Case

Sree Sakthi Paper Mills Limited (Cella Space Limited) v. The Regional Provident Fund Commissioner
WP(C) No. 5972/2022

Court and Date

Hon’ble Mr. Justice N. Nagaresh
Kerala High Court
Date of Order: 10 January 2025

Relevant Law

• Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
  • Section 2(b): Defines Basic Wages.
  • Section 6: Specifies contribution on Basic Wages, DA, and Retaining Allowance.
  • Section 7A: Authorizes determination of dues by the Provident Fund Authority.
• EPF Scheme, 1952 – Paragraph 29: Requires contribution based on Basic Wages + DA + Retaining Allowance.

Background

• Sree Sakthi Paper Mills Ltd. (later Cella Space Ltd.) was engaged in the manufacture of craft paper and duplex boards.
• The company was wound up in July 2016, and workers were paid terminal dues based on a tripartite conciliation settlement.
• The EPF Department initiated proceedings under Section 7A for the period from March 2009 to April 2012 based on an Enforcement Officer’s report.
• The Officer alleged that PF contributions were being calculated on wages lower than the statutory minimum wages.
• The EPF Authority passed an order demanding ₹54,99,268, which was upheld by the EPF Appellate Tribunal.
• The company challenged this order in a writ petition before the Kerala High Court.

Legal Issue

Whether various allowances (conveyance, special, washing, incentive, High BF, etc.) paid uniformly to all employees are part of “Basic Wages” and thus attract PF contributions, and whether salary arrears are also liable for EPF deductions.

Key Legal Findings

• Definition of Basic Wages:
  • Section 2(b) excludes items like HRA, bonus, overtime, commission, and presents from Basic Wages.
• Test from Supreme Court (Bridge & Roof Co. Ltd. v. Union of India, 1963):
  • If a payment is universally, necessarily, and ordinarily paid to all employees, it is Basic Wages.
  • If a payment is linked to opportunity or performance, it is not Basic Wages.
• Findings by EPF Authority and Tribunal:
  • The company was paying only on Basic + DA.
  • Conveyance Allowance, Special Allowance, Washing Allowance, Incentives, High BF, Adhoc Allowance were being paid uniformly and generally to all employees, so they must be treated as Basic Wages and attract EPF contribution.
  • Salary arrears are part of wages and also attract EPF deductions.
• Exclusions: HRA and overtime were not included for PF.

Judgment

• The Kerala High Court upheld the Tribunal’s decision and dismissed the writ petition.
• Held that:
  • Uniformly paid allowances are part of Basic Wages and attract EPF.
  • Salary arrears also attract PF deduction.
  • There was no illegality in the Tribunal’s order.

Conclusion

The Kerala High Court reaffirmed that allowances paid universally and ordinarily to all employees cannot be excluded from PF contributions. Only special or conditional allowances given for specific circumstances are excluded. The employer’s plea that settlement-based allowances are excluded from Basic Wages was rejected.

Key Learning

• Allowances paid uniformly to all employees = Basic Wages → attract PF.
• Special/conditional allowances = not Basic Wages → no PF.
• Salary arrears also attract PF deduction.
• Settlements cannot exclude statutory obligations under the EPF Act.
• EPF Authorities can assess dues on all wage components paid universally to employees.

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