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CASE NO.: Appeal (civil)  1250 of 2001

PETITIONER: M/s Quality Inn Southern Star

RESPONDENT: The Regional Director, Employees State Insurance Corporation

DATE OF JUDGMENT: 03/12/2007

BENCH: Dr. ARIJIT PASAYAT & P. SATHASIVAM

JUDGMENT: J U D G M E N T

CIVIL APPEAL No. 1250 OF 2001

Dr. ARIJIT PASAYAT, J.

1.      Challenge in this appeal is to the judgment of the learned  Single Judge of the Karnataka High Court dismissing the  appeal filed by the appellant.  Challenge was to the order of  the Employees’ State Insurance Court (in short ’ESI Court’) in  ESI application No.123/89.  The appeal was filed under  Section 82(2) of the Employees’ State Insurance Act, 1948 (in  short the ’Act’).  Order passed by the ESI Court was on the  petition filed under Section 75 of the Act.  2.      Background facts are as follows:         A show-cause notice was issued by the respondent on the  report of the ESI Inspector on 9.1.1981 calling upon the  appellant to contribute premium for the period November,  1986 to November, 1987 in respect of service charges collected  by it.  Not being satisfied with the explanation offered, order  was passed under Section 45-A of the Act determining amount  of contribution payable.  The order was challenged by the  appellant by an application under Section 75 of the Act.  This  application was contested by the respondent and the ESI  Court on consideration of the evidence brought before it and it  came to hold that the order under Section 45-A of the Act  suffered from no infirmity.

3.      According to the appellant, the basic question was  whether the service charge collected by the hotel management  from the customers and distributed amongst the employees  amounted to "wages" within the meaning of Section 2(22) of  the Act.  According to the appellant this did not constitute  wages.  The respondent contended that the appellant runs a  three-star hotel and the establishment is covered under the  Act. Undisputedly, 10% of the total bill amount is compulsorily  collected as services charges and is included in the bills. The  service charges so collected are distributed amongst the  employees of the appellant quarterly.  The collection of service  charges is essentially what is called as "tips" and paid at the  option of customers.  The ESI Court held that looking at the  nature of the service charges, these are not directly paid by  the customers to the employees but form part of the bills  which the customers are obliged to pay without any option  and this amount so collected is paid or distributed to the  employees equally once in three months.  According to the ESI  Court the appellant had total control and power of distribution

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of the amount and this is distinguishable from "tips".  This  was treated in any event covered by the expression "additional  reimbursement". The High Court in appeal upheld the view.   

4.      Learned counsel for the appellant submitted that the  payments were distributed equally amongst all the employees  periodically, once in three months.  It was submitted that by a  circular it was clarified that service charges were outside the  scope of wage as defined.  Reference was made to a decision of  this Court in The Rambagh Palace Hotel, Jaipur v. The  Rajasthan Hotel Workers’ Union, Jaipur (1976 (4) SCC 817).   The High Court distinguished the same holding that it related  to "tips" and there was no consideration of the aspect whether  it was covered by the expression "reimbursement".          

5.      It was pointed out that the judgment of the High Court  was delivered on 29.7.1999. Subsequently, the memorandum  was issued by the Corporation bearing No.P-1/13/97-Ins.IV  dated 6.11.2002 clearly stating that service charges of the  nature involved in the present dispute do not form part of the  wages. It is also pointed out that the Madras High Court in a  decision in Sathianathan N. & Sons Pvt. Ltd. and Ors. v.    E.S.I. Corporation and Anr.  (2002-II LLJ 1002) on 6.2.2002  took a different view.       

6.      Learned counsel for the respondent on the other hand  supported orders of the ESI Court and the High Court.

7.      Section 2(22) defines wages as:

"Wages means all remuneration paid or  payable, in cash to an employees or implied,  were fulfilled and includes (any payment to an  employee in respect of any period of authorized  leave, lockout, strike which is not illegal or  layoff and) other additional remuneration, if  any (paid at intervals not exceeding two  months), but does not include

(a) any contribution paid by the employer to  any pension fund or provident fund, or under  this act:

(b) any traveling allowance or the value of any  traveling concession; (c) any sum paid to the person employed to  defray special expenses entailed on him by the  nature employment; or (d) any gratuity payable on discharge"

        8.      The circular referred to by the learned counsel for the  appellant reads as follows:

"E      Service charges cannot be included in  "wages" for the following reasons-

(a) The Memorandum issued by the ESIC  corporation number P11113/97-Ins.IV dated  6.11.2000 clearly states in paragraph 13 that:

"Service Charges are collected by  management of the hotel on behalf of their  employees in lieu of direct tips and the same  is paid to their employees . at a later date.

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Such amount collected as ’service charges’  will nott constitute wages under S 2(22) of  the ESI Act. In the case of ESIC v M/s  Rambagh Palace Hotel, Jaipur. The High  Court of Jaipur has held that ’service  charges’ are not wages under Section 2(22) of  the ESI Act. This verdict of the High Court of  Jaipur was accepted in the ESIC and Hence  no contribution is payable on ’service  charges’. (Earlier instructions were issued  vide letter No. P. 12/11/4/79 Ins. Desk I  dtd.18.9.79)"

9.      The introduction to the memorandum dated 6.11.2000  states that it has been issued because:

"it is necessary that the instructions  issued by this office from time to time are not  only consolidated but certain more items are  included not only to clear the doubts of the  what constitutes part of wage under Section  2(22) Some of the instructions were issued  long back rather -as back as in 1967 and  certain instructions are not even available in  some of thee regions and it is difficult to keep a  track on the old instructions. Keeping in view  the above aspects and consolidated  instructions including some more items are as  under:"

(b) In the present case, the amounts received  by the employees were not in the nature of  "wages", as they were not given to the  employees under the terms of the contract of  employment, either express or implied. The  appointment letters expressly state that  employees are not entitled to any other  remuneration. Thus the distribution of service  charges is expressly excluded from the wages."  

10.     In view of the above-said office memorandum and the  view taken by the Madras High Court in Sathianathan’s case  (supra) the orders of the ESI Court and the High Court cannot  be maintained and are accordingly set aside.   

11.     The appeal is allowed without any order as to costs.