Pipe Distributors v. Employees' State Insurance Corporation

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE HARUN-UL-RASHID TUESDAY, THE 29TH DAY OF JANUARY 2013/9TH MAGHA 1934 Ins.APP.No. 80 of 2010 ( ) -------------------------AGAINST THE JUDGMENT IN IC.13/2007 of EMPLOYEES' INSURANCE COURT, ALAPPUZHA DATED 25-06-2010 APPELLANT/APPLICANT: -------------------PIPE DISTRIBUTORS, 37/3464,DESHABHIMANI JUNCTION,N.H.ROAD KALOOR,COCHIN-682017,REP. BY ITS MG.PARTNER AJITH BHASKARAN. BY ADVS.SRI.A.V.XAVIER SRI.K.JOLLY JOHN RESPONDENT/RESPONDENT: ----------- EMPLOYEES STATE INSURANCE CORPORATION, PANCHADEEP BHAVAN,TRICHUR-680020 REP. BY ITS REGIONAL DIRECTOR. BY ADV. SRI.P.SANKARANKUTTY NAIR, SC, ESI CORPN THIS INSURANCE APPEAL HAVING BEEN FINALLY HEARD ON 29-01-2013, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ## **HARUN-UL-RASHID,J.** **-------------------------** INS.APPEAL **NO. 80 OF 2010 ------------------------DATED THIS THE 29TH DAY OF JANUARY, 2013** ## **JUDGMENT** The applicant in I.C.No.13/2007 is the appellant. The appeal is directed against the judgment dated 25/6/2010 in I.C.No.13/2007 on the file of the Employees' Insurance Court, Alappuzha. The Insurance Court declared that the applicant establishment is liable to be clubbed with M/s. S.B. Enterprises and M/s.Pipe Field and liable to be covered under the ESI Act treating them as a single establishment from 25/1/2005 provisionally and the applicant is bound to comply with the provisions of the ESI Act accordingly. Ext.P10 assessment order dated 24/1/2007 is set aside and the respondent in the insurance case is directed to initiate fresh assessment with notice to the applicant and shall pass fresh assessment order and/or issued other directions. Aggrieved by the impugned judgment the applicant preferred this appeal. 2. The insurance case was filed by the appellant/applicant **-2-** ## **Ins.Appeal No.80/2010** seeking a declaration that the applicant establishment is not liable to be covered under the ESI Act, that the applicant is not liable to comply with the provisions of the said Act and that the action of the respondent in clubbing of their establishment with other establishments, namely, M/s.S.B. Enterprises at Kozhikode and its branch at Vadakara is arbitrary and unsustainable. 3. The applicant, M/s. Pipe Distributors, is a registered partnership firm engaged in the business of distribution of pipes. According to the applicant establishment, it has no sufficient employment strength so as to cover it under the provisions of the ESI Act. The Insurance Inspector inspected the applicant establishment on 25/1/2005. Based on the inspection report the applicant establishment was brought under the coverage of the ESI Act with effect from 25/1/2005 provisionally and issued C-11 notice dated 16/2/2005. The respondent confirmed coverage and enforced the provisions of the ESI Act, assessed and demanded contribution. It is contended that clubbing of the three **-3-** ## **Ins.Appeal No.80/2010** establishments, namely, M/s.Pipe Distributors (applicant), M/s.S.B. Enterprises and M/s. Pipe Field, is arbitrary, illegal, that the said establishments are administered and managed separately, therefore these three establishments cannot be treated as single entity and cannot be assessed so as to demand contribution under the ESI Act. Respondent seriously opposed the contentions raised by the applicant establishment. It is stated that the Insurance Inspector conducted survey of the applicant establishment on 25/1/2005 and reported that the establishment was carrying on the business of distribution of pipes employing 38 persons for wages, hence is coverable under the ESI Act. The Insurance Inspector reported that as per the muster roll and wages register of M/s. Pipe Distributors there were seven employees employed there. It is reported that the applicant has engaged six drivers and six cleaners in the six lorries owned by them, which are used for transportation of pipes. It is further reported that the establishment has two branches, one at Calicut with employment strength of four and **-4-** ## **Ins.Appeal No.80/2010** another at Vadakara with employment strength of four. In the report it is stated that another establishment, M/s. S.B. Enterprises was also found working in the premises of M/s. Pipe Distributors. It is also stated that the applicant employed six headload workers and they were working exclusively for the applicant. It is further reported that altogether 38 employees are working in the establishment and out of that 37 are employees for whom there is coverage under the ESI Act. Based on the report of the Insurance Inspector, the respondent covered the establishment under the ESI Act from 25/1/2005. 4. The parties adduced oral and documentary evidence. PW1 and DW1 were examined and Exts.P1 to P13 series and D1 to D10 were marked. The insurance Court in the impugned judgment extracted the statement of facts prepared by the Insurance Inspector. The Inspector reported that the Managing Partner had signed the statement of facts prepared by him stating the details of the establishment. The statement of facts is marked as Ext.D1. The **-5-** ## **Ins.Appeal No.80/2010** Insurance Court noticed the fact that the statement of facts prepared by the Inspector was signed by the Managing Partner. The Insurance Court did not examine the contentions raised by both sides on the basis of the evidence adduced by them. The Insurance Court dismissed the application solely relying on the fact that the Managing Partner at the time of inspection has signed the statement of facts prepared by the Inspector. The court found that there are no reasons to doubt the veracity of averments in Ext.D1 statement of facts. Placing reliance on the statement of facts the Insurance Court accepted the report in which it is stated that 37 employees were coverable under the ESI Act. The court found that since there are 37 coverable employees, the action of the respondent in imposing coverage on the applicant establishment has to be declared as legal and proper. The court also found that the place of business of Pipe Distributors and S.B. Enterprises are one and the same, that partners are also closely related and that in view of the said fact also the action of the respondent in clubbing **-6-** ## **Ins.Appeal No.80/2010** M/s. S.B. Enterprises with M/s. Pipe Distributors cannot be found fault with. The court also found that it is manifest that Pipe Distributors and Pipe Field are partnership firms constituted with same family members and therefore the respondent is justified in clubbing the establishments at Kozhikode and Vadakara treating them as branches of M/s. Pipe Distributors and enforcing coverage accordingly. 5. The applicant establishment is a partnership firm consisting of two partners, namely, Ajith Bhaskaran and his mother Vanaja Bhaskaran. The partners of M/s. S.B. Enterprises are P.Bhaskaran and Sheena Bhaskaran. The partners are different. The partners of M/s. Pipe Field, another establishment situated in Kozhikode, are P. Bhaskaran, Vanaja Bhaskaran and Sheena Bhaskaran. The partners of M/s. Pipe Field are also partners of other two establishments. The applicant filed a rejoinder before the Insurance Court. Paragraph 7 of the rejoinder reads as follows: _“The contention that Sri Ajith Bhaskaran, Managing Partner of M/s. Pipe Distributors has_ **-7-** ## **Ins.Appeal No.80/2010** _confirmed engagement of 38 employees under his seal and signature in the statement of facts furnished by the inspector is misleading. It is true that the inspector has obtained signature of the applicant in the statement prepared by him. In fact the so called statement of facts is not true on the basis of the aforesaid statements and records. Mislead by the instructions of the E.S.I. Inspector, without knowing the contents in the statement and verifying its genuineness the applicant has put his signature in the statement prepared by the inspector. The so called statement may not be taken as a ground for coverage under the Act. The decision of this Hon'ble Court may be on the basis of the true facts and evidences adduced before this Hon'ble Court.”_ 6. The statement of facts prepared by the Insurance Inspector on 25/1/2005 and signed by appellant is reproduced in pages 5 to 7 of the judgment. It is submitted that the statement of facts extracted in the judgment does not reflect the real facts and therefore the applicant filed a rejoinder explaining the true facts that lead him to sign the so called statement of facts prepared by the Insurance Inspector. The case of the applicant is that the establishments, namely, M/s. S.B. Enterprises and M/s.Pipe Field are independent establishments which have nothing to do with the **-8-** ## **Ins.Appeal No.80/2010** appellant establishment. It is contended that different establishments constituted under different partnership firms doing business independently has nothing to do with the applicant establishment. It is pointed out that M/s. S.B. Enterprises is engaged in the wholesale business of pipes of different companies. It is also contended that three independent establishments are functioning in independent premises and that M/s. Pipes Distributors and M/s. S.B. Enterprises are situated in adjacent plots in separate buildings with different door numbers. It is pointed out that all the three establishments have separate statutory registrations in their respective door numbers and they maintained separate books of accounts, audited balance sheets and income tax registrations etc. The employees of the three establishments have separate statutory records. It is also contended that there are no common partners, no common management and that the Managing Partner of M/s. Pipe Distributors is not even a partner in the registered partnership M/s. Pipe Field. The applicant also **-9-** ## **Ins.Appeal No.80/2010** produced Ext.P11 series (a to h), Ext.P12 series (a to h) and Ext.P13 series (a to f). Ext.P11 series of documents are related to M/s. Pipe Distributors. The documents include partnership deed, pan card, certificates of registration under the KGST and CGST, registration certificate under the Kerala Shops and Commercial Establishment and balance sheet etc. Ext.P12 series relates to M/s. S.B. Enterprises and Ext.P13 M/s. Pipe Field. Exts.P12 and P13 series of documents are similar to Ext.P11 series of documents. In fact, the applicant adduced oral and documentary evidence to establish that three registered partnership firms are independent establishments and therefore these establishments cannot be clubbed together for the purpose of taking a decision of coverage under the Insurance Act. Ext.P14 is a copy of the communication dated 14/8/2008 of the ESI Corporation addressed to M/s. Pipe Field regarding the implementation of ESI Act and registration of employees. The said communication directed M/s. Pipe Field to comply with the provisions of the ESI Act. **-10-** ## **Ins.Appeal No.80/2010** 7. Learned counsel for the appellant relied on the decision reported in **Parthas Textiles v. Union of India and others (1991 (78) FJR 286)** in which this Court held as follows: _“(i) That the four firms were separate and independent by virtue of registration under the Partnership Act, 1932. This vital aspect was not dealt with in the order passed by the Union of India._ _(iii) That the statutory authorities like the Income Tax Department and the Sales Tax Department had treated the as four firms independent establishments.”_ 8. In the decision reported in **Evans Food Corporation** **v. Union of India and another (1994-II-LLJ 646)** this Court held that the question of unity of the two establishments must, therefore, be decided on the touchstone of its total functional unity. The undisputed facts show that Evans and Super are distinct by reason of the absence of common employment, distinct registrations under the Employees' State Insurance Act and tax laws, absence of any financial assistance such as loans and totally distinct partners. Following the decision reported in **P.Madhavan** **-11-** ## **Ins.Appeal No.80/2010** **Thmpi v. Regional Provident Fund Inspector ( 1978-II-LLJ467)** this Court held that the mere fact that the partners belong to the same family may be a reason for close scrutiny of the claim that the two units constitute separate establishments but by itself it does not unite the two establishments. This Court also held that Evans and Super are distinct and separate establishments and that they cannot be considered as one. 9. The learned counsel for the appellant also relied on the decisions reported in **ESIC v. Ved Prakash Gupta (2008-IIILLJ-626 (Delhi).** In that case the Delhi High Court held that in a circumstance where father and son are carrying on two different business in the same premises the test to apply whether the two business have been split up to overreach the law or not is to see not only the environmental proximity but even the functional unity. The Court also held that there is no law which prohibits a father and a son from carrying on business from the same premises. What has to be considered is whether there is a functional **-12-** ## **Ins.Appeal No.80/2010** integration or there is proximity in the businesses where from it can be gathered, lifting the veil, that the businesses are the faces of the same business. The learned counsel relied on the decision of this Court in **Vrindavan Hotels (P) Ltd. v. E.S.I. Corporation (2005 (3) KLT 577)** and the Supreme Court in **Associated Cement Companies Ltd. v. Their Workmen (1960 (1) LLJ 1).** **10.** The learned counsel for the respondent placing reliance on the decision reported in **Madona Textiles v. E.S.I. Corporation (2000 (2) KLT 741)** contended that tests to be applied for assessing employment strength for the purpose of coverage under the Act could be one of the geographical proximity, unity of ownership, management and control, unity of employment and conditions of service, functional integrity, general unity of purpose, common management and the like. The learned counsel submits that the purpose is to find out the true relationship between the parts, branches, units etc. and that if in spite of the apparent veil, they constitute one integrated whole, it can be said **-13-** ## **Ins.Appeal No.80/2010** that the establishments in question are actually one. 11. The Insurance Court did not consider the questions raised in the application on the basis of the evidence on record and the principles of law settled by the different courts. The Insurance Court without considering the materials on record upheld the coverage by clubbing the three establishments on the basis of Ext.D1 statement of facts and directed the Employees' Insurance Corporation to initiate fresh assessment proceedings with notice to the applicant and pass fresh assessment order. For the aforesaid reasons, this Court is of the view that the Employees Insurance Court shall reconsider the matter in the light of the materials produced and the contentions raised. There will be a direction to the Insurance Court to reconsider and dispose of the matter afresh. The parties are entitled to raise all the contentions. **HARUN-UL-RASHID, JUDGE.** **kcv.**