Holding

Incentive bonus and sales commission are not wages unless paid at intervals not exceeding two months; in this case they were not, so they are excluded from the definition of wages.

Summary

Handloom House, a co‑operative society, paid its employees incentive bonuses and sales commissions in addition to regular wages. The Employees State Insurance Corporation (ESIC) claimed that these payments were "wages" under Section 2(22) of the Employees State Insurance Act, 1948 and demanded additional contributions. The Insurance Court held the payments were not wages; the Kerala High Court reversed that decision, allowing ESIC to collect contributions. On appeal, the Supreme Court held that only "other additional remuneration" paid at intervals not exceeding two months falls within the definition of wages, and the factual finding that the bonuses and commissions were paid at longer intervals meant they were excluded. Consequently, the Supreme Court set aside the High Court judgment and remanded the matter for fresh consideration, allowing the appeal.

Issues considered

Whether incentive bonus and sales commission constitute "wages" within the meaning of Section 2(22) of the Employees State Insurance Act, 1948.
Whether the interval of payment (not exceeding two months) is satisfied for such additional remuneration.
Whether the Kerala High Court erred in quashing the Insurance Court's finding.

Legislation cited

Employees' State Insurance Act, 1948s. 2(22), s. 2(23), s. 39(4), s. 40

Subjects

Employees State Insurance Actdefinition of wagesincentive bonussales commissionwage periodstatutory appealco‑operative society

Judgment

- HANDLOOM HOUSE ERNAKULAM
v.
REGIONAL DIRECTOR, ESI
A

APRIL 29, 1999

[S. SAGHIR AHMAD AND K.T. THOMAS, JJ.] B

Employees State Insurance Act, 1948-Sections 2(22), 2(23), 39(4),
40-Wages-Ambit of-Held, the definition of wages encompasses within its
fold three kinds of payments, namely, all remuneration paid or payable in
cash on fulfilment of the terms of employment, secondly, any payment made c
to an employee in respect of any period of authorised leave and thirdly, other
additional remuneration paid at intervals not exceeding two months-Any
additional remuneration paid at intervals exceeding two months has been
excluded by specific terms, from the purview ofdefinition of wages-Incentive
bonus and sales commission-Inclusion of, as wages-Held, such payments
~
D
being 'other additional remuneration' can be covered by the definition of
wages only if paid at intervals not exceeding two months-It is a question
of fact in each case whether sales commission and incentive bonus are
payable at intervals not exceeding two months-Jn the present case, the
Insurance Court having found that such payments were not made within a
period of two months and therefore not inc/udible as wages-High Court not E
saying anything about that factual position while quashing the judgment of
the Insurance Court-Hence, case remanded back to the High Court for fresh
consideration of such question-Employees State Insurance (Amendment)
Act, I95I-Statement of Objects and Reasons.

Appellant, a Co-operative society was engaged in manufacturing and F
selling handloom fabrics. It disbursed to its employees, besides the normal
wages, special amount, namely, incentive bonus and sales commission. The
.. respondent, Employees State Insurance Corporation, demanded from the
appellant, additional contribution towards insurance fund on the premise that
such extra benefits given to the employees fall within the ambit of wages
G
under the Employees State Insurance Act, 1948. The said demand was
challenged by the appellant society before the Employees Insurance Court
which held that such benefits did not form part of wages thereby holding that
the demand was unsustainable. The respondent Corporation filed statutory
appeal before the High Court which quashed the judgment of the Insurance
Court and permitted the respondent Corporation to proceed with the demand. H
943
944 SUPREME COURT REPORTS [1999] 2 S.C.R.

A motion for review of the said judgement was also lost by the appellant society.
Hence the present appeal.

On behalf of the respondent, it was contended that if incentive bonus
and sales commission would fall within the scope of the first category of the
definition of wages, it was immaterial that the payment was made at intervals
B or in a lump.

Allowing the appeal, this Court

HELD : 1. The main body of the definition of wages envisaged in
C Section 2(22) of the Employees State Insurance Act, 1948 encompasses
within its fold three kinds of payments made to the employees. First is, all
remuneration paid or payable in cash on fulfilment of the terms of employment
The second is any payment made to an employee in respect of any period of
authorised leave etc. The third is other additional remuneration paid at
intervals 'not exceeding two months'. The only issue to be determined in this
D case is, whether incentive· bonus and sales commission would fall within the
ambit of the aforesaid third category of remuneration or not. It is clear that
any additional remuneration paid at intervals exceeding two months has been
excluded by specific terms, from the purview of the definition of wages.
Normally, the wage period is one month, but Parliament would have thought
E that such 'wage period' my be extended a little more, but no employer shall
make it longer than two months. It is a question of fact in each case whether
sales commission and incentive bonus are payable at intervals not exceeding
two months. The Insurance Court has, in this case, found that such payments
were not made within a period of two months and are, therefore, not includible
as wages. But the High Court did not say anything about that factual
F position. The question whether incentive bonus and sales commission would
fall within the aforesaid third category of 'wages' as defined in Section 2(22)
of the Act has to be considered by the High Court afresh in the light of the
above observations. [946-H; 947-A-G-H; 948-E-G]

G Harihar Polyjibres v. Regional Director, ESIC, [1984] 4 SCC 484,
relied upon.

Madella Woollens Ltd. v. ESJC, [1994] Suppl. 3 SCC 219, referred to. '
Regional Director, ESJC v. Enfield India Ltd., [1997) 11 SCC 752,
H cited.
HANDLOOM HOUSE ERNAKULAM v. REGIONAL DIRECTOR, ES! [THOMAS, J.] 945
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2521 of A
1999.

From the Judgment and Order dated 6.10.97 of the Kerala High Court
in M.F.A. No. 315 of 1990.

T.L.V. Iyer, S. Balakrishnan, Subramonium Prasad and S.K. Jain for the B
Appellant.

V.J. Francis for the Respondent.

The Judgment of the Court was delivered by
c
THOMAS, J. Leave granted.

Handloom House is a Co-operative Society engaged in manufacturing
and selling handloom fabrics. It disburses to its employees, besides the
normal wages, special amounts under two counts. One is 'incentive bonus'
and the other is 'sales commission.' Thereupon, the Employees State Insurance. D
Corporation (for short 'the Corporation') demanded from the Handloom House
additional contribution towards insurance fund on the premise that such extra
benefits given to the employees fall within the ambit of 'wages' under the
Employees State Insurance Act 1948 (for short 'the Act'). When the Handloom
House challenged the said demand before the Employees Insurance Court it E
was held that such benefits do not form part of wages and hence the demand
is unsustainable. The Corporation filed statutory appeal before the High
Court of Kerala and a Division Bench thereof quashed the judgment of the
Insurance Court and permitted the Corporation to proceed with the demand.

The Handloom House, having lost even a motion for review of the said F
judgment, has filed this appeal by special leave.

It was first thought that appellant cannot re-canvass against settled
position since this court had held on earlier occasions that 'wages' as defined
in Section 2(22) of the Act would include, among others, incentive allowances
and production bonus paid to the employees Harihar Polyfibres v. Regional G
Director, ESIC [1984] 4 SCC 324 and Regional Director, ESIC v. Enfield India
Ltd, [1997] 11 sec 752.

Sri T.L. Viswanatha Iyer, learned .Senior Counsel made an endeavour to
distinguish the said decisions from the instant case on the premise that
incentive bonus and sale commission paid to the employees of the appellant H
,.
946 . SUPREME COURT REPORTS [1999] 2 S.C.R.

A society are paid at intervals 'exceeding two months' and, therefore, they
cannot form part of their wages as defined in the clause.

In Model/a Woollens Ltd v. ESIC, [1994] Suppl. 3 SCC 219 a two judge
bench of this court considered whether production bonus paid to the workmen
would fall within 'wages' as defined in the Act. The employer in that case
B projected a particular term in the agreement (between workmen and the '
employer, which provides for payment of such bonus) that bonus is to be
paid at the end of each quarter, and contended on its strength that it would
not be wages. However, this court highlighted another term of the same
agreement which stated that an employee can claim advances against such
C bonus and also the fact that the employees were availing themselves of such
advances. On the basis of such clauses in the agreement learned Judges
observed thus :

"The mere term in the agreement that the payment of bonus would be
made at the end· of the quarter, therefore, does not make the bonus,
a payment other than remuneration for the labour put in during the
D
said quarter. Hence the stipulation in the agreement that the payment
of the bonus would be made at the end of the quarter is not material
for deciding the question whether the payments would be covered by
the first part of the definition or not."

The definition of "wages" in section 2(22) of the Act reads thus:-
E
"Wages" means all remuneration paid or payable, in cash to an employee,
if the terms of the contract of employment, express or implied, were fulfilled
and includes any payment to an employee in respect of any period of authorised
leave, lock-out, strike which is not illegal or lay-off and other additional
F remuneration, if any, paid at intervals not exceeding two months, but does not
include-

(a) any contribution paid by the employer to any person fund or
provident fund, or under this Act;

(b) any travelling allowance or the value of any travelling concession;
G
(a) any sum paid to the person employed to defray special expenses
entailed on him by the nature of his employment.

The main body of the definition encompasses within its fold three kinds
of payments made to the employees. First is, all remuneration paid or payable
H in cash on fulfilment of the terms of employment. The second is any payment
HANDLOOM HOUSE ERNAKULAM v. REGIONAL DIRECTOR, ESI [THOMAS, J.) 947

.--
made to an employee in respect of any period of authorised leave etc. The A
third is 'other additional remuneration paid at intervals "not exceeding two
months" .

It is contended that if incentive bonus and sales commission would fall
within the scope of the first category mentioned above it is immaterial that
the payment is made at intervals or in a lump. But that aspect is no more res B
integra in the light of the decision in Harihar Polyjibres v. Regional Director,
ESIC, [1984] 4 SCC 484. In that case a two judge bench (Chinnappa Reddy
and AN Sen JJ) dealt with the decision of a Full Bench of the High Court of
Andhra Pradesh which held thus:
c
The word 'other' appearing at the commencement of the third part
of the definition of wages under Section 2 (22) indicates that it must
be remuneration or additional remuneration other than the remuneration
which is referred to in the earlier part of the defii:iition viz., all
remuneration paid or payable, in cash to an employee, if the terms of
the contract of employment, express or implied, were fulfilled and D
incentive bonus in the present scheme is certainly additional
remuneration. It must be emphasised at this stage that under the third
part of the definition of "wages" it is actual factum of payment which
counts because the word used is 'paid' as distinguished from 'paid'
or payable. The moment you get any additional remuneration other E
than the remuneration payable under the contract of employment and
if this additional remuneration is paid at intervals not exceeding two
months, it becomes "wages" by virtue of the third part of the definition
of "wages."

This court approved the said statement of law as correct by observing F
that "we express our respectful agreement with what has been said by the
High Court of Andhra Pradesh in the above extracted passage."

So the only question to be determined in this case is whether incentive
bonus and sales commission would fall within the ambit of the aforesaid third

-
G
category of remuneration or not. It is clear that any additional remuneration
paid at intervals exceeding two months has been excluded by specific terms,
T
from the purview of the definition. What is the rationale for excluding such
remuneration paid at intervals exceeding two months from the scope of
"wages"? Though we did not get any clue from the Statement of Objects and
Reasons for the Bill (which became Employees State Insurance (Amendment) H
948 SUPREME COURT REPORTS [1999] 2 S.C.R.

A Act 1951 ), the rationale could be discerned as inter-linked with the definition
clause "wage period" in Section 2(23). It reads thus: -
"wage period" in relation to an employee means the period in re.spect
of which wages are ordinarily payable to him whether in terms of the
contract of employment, express or implied or otherwise."
B
Section 40 of the Act casts liability on the Principal Employer to pay
the contribution to the Corporation, whether it is of empl.oyer's or of employee's
contribution. Of course the Principal Employer is allowed to recover that part
of 'employer's contribution' by making deduction from his wages. Section
C 39(4) of the Act states:

"The contributions payable in respect of each wage period shall
ordinarily fall due on the last day of the wage period, and where an
employee is employed for part of the wage period or is employed
under two or more employers during the same wage period, the
D contributions shall fall due on such days as may be specified in the
regulations."

No employer shall have the perm1ss10n to dodge the payment of
contribution on the premise that annual payments have to be worked out.
E Normally, the wage period is one month, but the Parliament would have
thought that such "wage period" may be extended a little more, but no
employer shall make it longer than two months. This could be the reason for
fixing a period of two months as the maximum period for counting additional
remuneration as to make it part of "wages" under the Act.

F It is a question of fact in each case whether sales commission and
incentive bonus are payable at intervals not exceeding two months. The
Insurance Court has, in this case, found that such payments were not made
within a period of two months and are, therefore, not includible as wages. But
the High Court did not say anything about that factual position. The question
G whether incentive bonus and sales commission would fall within the aforesaid
third category of "wages" as defined in Section 2(22) of Act has to be
considered by the High Court afresh in the light of the observations made
·above and after deciding the preliminary question whether the finding made
by the Insurance Court on that aspect can be upheld or not.
-
H So the course open to us is to remit the case to the High Court for
HANDLOOM HOUSE ERNAKULAM v. REGIONAL DIRECTOR, ESI [THOMAS, J.] 949
disposal of the writ petition afresh in the light of the observations made A
above. We do so, and for that purpose we set aside the impugned judgment.

Appeal is thus allowed.

M.P. Appeal allowed.
B