M/S QUALITY INN SOUTHERN STARversusTHE REGIONAL DIRECTOR, EMPLOYEES STATE INSURANCE CORPORATION

A                MIS QUALITY INN SOUTHERN STAR
                                     v.
           THE REGIONAL DIRECTOR, EMPLOYEES' STATE
                   INSURANCE CORPORATION

B                          DECEMBER 3, 2007

         [DR. ARIJIT PASA YAT AND P. SATHASIVAM, JJ.J


       Employees' State Insurance Act, 1948-s. 2(22)--Service charges
C collected by the management of the hotel from customers on behalf
  ofemployees in lieu ofdirect tips and later paid to their employees-
  Held: Does not constitute wages-Memorandum No. P-1113197-lns.
  IV dated 6.11.2002.
D       The question which arose for consideration in the instant matter
    was whether the service charges 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
    Employees' State Insurance Act, 1948.

E      The ESI Court held that the service charges were not directly
  paid by the customers to the employees but formed part of the bills
  which the customers were obliged to pay without any option and the
  amount so collected was paid or distributed to the employees equally
  once in three months; and that the appellant, running a three star
F hotel had total control and power of distribution of the amount and
  thus, was distinguishable from 'tips' and was covered by the
  expression 'additional reimbursement'. High Court upheld the order.
  Hence the present appeal.

        Allowing the appeal, the Court
G
         HELD: Subsequent to the judgment of the High Court, the
    Corporation issued an Office Memorandum bearing No.P-1113/97-
    Ins.IV dated 6.11.2002 which stated that the service charges
    collected by the management of the hotel on behalf of their
H                                  790
     "   M/SQUALITYINNSOUTHERNSTARv. REG.DIRECTOR, 791
            EMPLOYEES' STATEINSU. CORPN. [PASAYAT,J.]
1
         employees in lieu of direct tips which was paid to the employees at A
         a· later date does not constitute wages under section 2(22) of the
         Employees' State Insurance Act, 1948. In view of the memorandum
         issued and the view taken by the High Court in Sathianathan 's case,
         the orders of the ESI Court and the High Court cannot be maintained
         and are set aside. [Paras 5, 8 and 10]                               B
              Sathianathan N. and Sons Pvt. Ltd. and Ors. v. E.S.1 Corporation
         and Anr., (2002)-11 LLJ 1002, approved.
             The Rambagh Palace Hotel, Jaipur v. The Rajasthan Hotel
         Workers' Union, Jaipur, (1976] 4 SCC 817, referred to.                    c
             CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1250 of
         2001.

i            From the Judgment and final Order dated 29.7.1999 of the High
         Court of Kamataka at Bangalore in M.F .A 1497 of 1992.            D
               Shyam Divan, Akhil Pal Chhabra, Sudha Malla and Rajan Narain
         for the Appellant.
              C.S. Rajan, V.J. Francis and Anupam Mishra for the Respondent.
               DR. ARIJIT PASAYAT, J. 1. Challenge in this appeal is to the E
         judgment of the learned Single Judge of the Karnataka High Court
         dismissing the appeal filed by the appellant. Challenge was to t.li.e 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 F
         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
.i
         of the ESI Inspector on 9.1.1981 calling upon the appellant to contribute G
         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
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    792             SUPREME COURT REPORTS                    [2007] 12 S.C.R.

A 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
B 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.
C 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
D 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 ·
E of distribution 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
F 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
G 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
H the Corporation bearing No.P-1/13/97-Ins.IV dated 6.11.2002 clearly
     M/SQUALITYINNSOUTHERNSTARv. REG.DIRECTOR, 793
        EMPLOYEES' STATEINSU. CORPN. [PASAYAT,J.]
     stating that service charges of the nature involved in the present dispute A
     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.L Corporation and Anr., (2002-11 LLJ 1002) on 6.2.2002 took a
     different view.
          6. Learned counsel for the respondent on the other hand supported B
     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 C
            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
                                                                                    D
            (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 E
            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
-j
     reads as follows:                                                         F
            "E Service charges cannot be included in "wages" for the following
            reasons-
            (a) The Memorandum issued by the ESIC corporation number
            Pl 1113/97-Ins.IV dated 6.11.2000 clearly states in paragraph 13 G
            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. Such amount collected as
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     794             SUPREME COURT REPORTS                     [2007] 12 S.C.R.
                                                                                      ..
A            'service charges' will nott constitute wages under S 2(22) of the
             ESI Act. In the case of ESIC v. Mis 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
B            no contribution is payable on 'service charges'. (Earlier instructions
             were issued vide letter No. P. 12/11/4/79 Ins. Desk I <ltd 18.9.79)"
          9. The introduction to the memorandum dated 6.11.2000 states that
    it has been issued because:
c                 "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
D            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
E           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
F           wages."
       I 0. 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
G accordingly set aside.
           11. The appeal is allowed without any order as to costs.
    NJ.                                                        Appeal allowed.