Professional Couriers v. Employees Provident Fund Appellate Tribunal, 2017 SCC OnLine Ker 10020

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2017 SCC OnLine Ker 10020 : 2017 LLR 1215 : (2017) 4 KLT 870 : (2017) 155
FLR 485 : (2017) 3 CLR 134
In the High Court of Kerala at Ernakulam

(BEFORE P.N. RAVINDRAN AND DAMA SESHADRI NAIDU, JJ.)
The Professional Couriers, Administrative Office : 5, T.P. Complex,

Bank Road, Kannur-670 001, Represented by its Franchisee
Sayed Navas V.P. .…. Appellant/Petitioner
By Advs. Sri. E.K. Nandakumar (Sr.)
Sri. P. Gopinath Menon
Sri. P. Benny Thomas
v.
1. Employees Provident Fund Appellate Tribunal Scope Minar, Core
II, 4th Floor, Laxmi Nagar District Centre, Laxmi Nagar, New
Delhi-110 092.
2. The Assistant Provident Fund Commissioner Employees
Provident Fund Organisation, Sub Regional Office, V.K.
Complex, Fort Road, Kannur-670 001 .…. Respondents
R2 by Adv. Sri. K.C. Santhosh Kumar, SC, EPF
R by Dr. Abraham P. Meachinkara, SC, EPF
Writ Appeal No. 1063 of 2016
Against The Order/Judgment in WP (C) 7905/2011 of High Court of Kerala Dated
11.03.2016
Decided on May 23, 2017
The Judgment of the Court was delivered by
DAMA SESHADRI NAIDU, J.
Introduction:
1. A courier service with its registered office at Mumbai contracts with a person in
Kerala to let him operate as its franchisee in one District. That franchise, in turn,
appoints agents in that district so that he could have a network of people to effecitvely
carry out the courier business. Those agents engage their workforce to assist them.
The relationship between the franchisee and the agents, on the one hand, and that
bewteen the franchisee and the workmen engaged by the agents, on the other, fall for
consideration in this case. In terms of the Employees Provident Funds and
Miscellaneous Provisions Act, 1952, should we treat the agents as the franchisee's
branches or units?
Facts:
2. The petitioner, Sayed Navas, is the proprietor of ‘the Professional Couriers’,
dealing in courier services. The cause-title in the writ petition and, now, in the writ
appeal, shows the proprietary concern, a non-juristic entity, as the petitioner. So we
refer to the petitioner as “the Professional Couriers” instead of “Sayed Navas”, the
original petitioner —a technicality that can be condoned.
3. The Professional Couriers is the franchisee of the eponymous franchiser, a private
limited company at Mumbai. Both the franchisee and the franchiser have entered into
the Ext.P1 agreement. Similarly, the franchisee, too, contracted with persons, his
agents, who have to operate on a commission basis. All the agents work independent
of one another. The agents are, it is asserted, neither the branches nor the
departments of the franchisee—just independent agents.
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4. On 7.11.2002, the Assistant Provident Fund Commissioner, the second

respondent, directed the franchisee to produce records of its establishment, including
“all branches.” Though the franchisee sought time to produce the documents asked
for, the Assistant Commissioner, besides refusing to grant time, passed an order on
2nd January 2003, holding that the Employees' Provident Funds and Miscellaneous
Provisions Act, 1952 (“the EPF Act) will apply to the franchisee's establishment. The
Assistant Commissioner found that the franchisee had employed more than 20 persons
as on 1.4.2001. He allotted a code number to the franchisee treating the agents as the
branches.
5. On the franchisee's objection, the Assistant Commissioner conducted an enquiry
under Section 7A of the Act to ascertain whether the Act applies. The franchisee,
through its pleadings in the Exts.P4 to P6, contended that it had engaged fewer than
20 persons (to be precise, seven) and that it has only one office, at Kannur. It also
contended that the agents would get fixed annual commission, and those agents
would arrange to carry on their business. The franchisee led evidence, both oral and
documentary. Eventually, on 22nd May 2007, the Assistant Commissioner ruled
through the Ext.P7 order that the franchisee's agents are, in fact, its branches and
that the establishment is amenable to the provident fund provisions.
6. Aggrieved, the franchisee appealed to the Employees' Provident Fund Appellate
Tribunal (“the Tribunal”), the first respondent. On merits, the Tribunal dismissed the
appeal through the Ext.P9 order. Further aggrieved, the franchisee filed W.P. (C) No.
7905 of 2011 before this Court. Through the judgment, dt.11.03.2016, a learned
Single Judge, too, dismissed the writ petition. Thus, all through, the findings are
concurrent. Eventually, the franchisee is before us in the writ appeal. Findings in W.P.
(C) No. 7905 of 2016:
7. From the terms of the agreements the franchisee has entered into with its, what
it calls, agents, the learned Single Judge has concluded that the employer and the
employee relationship stood established : the ultimate control—both financial and
administrative— stands vested with the franchisee.
8. Heard Sri. E.K. Nanda Kumar, the learned Senior Counsel, for the franchisee, and
Sri. K.C. Santhosh Kumar, the learned Standing Counsel, for the respondents, besides
perusing the record.
Issue:
9. Under Section 2(f) of the EPF Act, if any person, employed for wages, gets his
wages directly or indirectly from an establishment, he is the employee of that
establishment. He may have been employed through a contractor. Under Section 2-A
of the EPF Act, if an establishment comprises different departments or has branches,
all those departments or branches will be treated as parts of the same establishment.
A franchisee of a Courier Service has engaged agents in different parts of a district.
Those agents engaged their workmen. Should these workmen be treated as the
franchisee's employees?
Statutory Position:
10. The EPF Act provides for the institution of compulsory Provident Fund, Pension
Fund, and Deposit-Linked Insurance Fund for the benefit of the employees in factories
and other establishments. The Act applies (a) to every establishment which is a
factory engaged in any industry specified in Schedule I and in which twenty or more
persons are employed, and (b) to any other establishment employing twenty or more
persons or class of such establishments which the Central Government may, by
notification in the Official Gazette, specify in this behalf.
11. Even if an establishment engages fewer than 20 persons, the Central
Government may apply the Act to that establishment after giving not less than two
months' notice of its intention so to do, by notification in the Official Gazette. An
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establishment to which this Act applies, Section 1(5) clarifies, will continue to be
governed by this Act notwithstanding that the number of persons employed therein at
any time falls below twenty. The EPF Act covers the courier services, too.
12. The lexical provision, Section 2 of the EPF Act, in Clause (e) defines the
“employer.” The expression includes the person who, or the authority which, controls
the affairs of the establishment. And if the affairs are entrusted to a manager, a
managing director or a managing agent, that manager, managing director or
managing agent is the employer.
13. Clause (f) defines an “employee” to mean any person employed for wages in
any work, manual or otherwise, in or in connection with the work of an establishment,
and who gets his wages directly or indirectly from the employer. The employee can be
any person employed by or through a contractor in or in connection with the work of
the establishment. Section 17, among other things, deals with the “exempted
employee” and “exempted establishment.”
14. Indeed, Section 2-A of the EPF Act clarifies that if an establishment comprises
different departments or has branches, whether in the same place or in different
places, all those departments or branches will be treated as parts of the same
establishment. The Assistant Commissioner, here, concluded that the franchisee has
branches, but not agents.
Precedential Position:
15. In The Associated Cement Companies Ltd. v. Their Workmen1 the questions are
whether the cement factory and business of limestone quarrying were parts of one
establishment, and whether the workmen of the cement factory could claim
compensation for their lay-off caused by the strike in the limestone quarry. The
Supreme Court has held that the cement factory and limestone quarry constituted a
single establishment under the provisions of Clause (iii) of Section 25E of the
Industrial Disputes Act, 1947. So the workmen of the cement factory could not claim
compensation for their lay-off.
16. To determine whether there is only one establishment, the Court appreciated
the evidence produced before it and concluded that there was functional integrality :
the management was maintaining one common account; both the establishments had
one common management; inter-departmental transfers were allowed; and the very
workmen union gave notice to that common management.
17. The Court posed unto itself a question : if an industrial undertaking has parts,
branches, departments, units, at different locations, near or distant, what tests should
be applied for determining what constitutes ‘one establishment’? It has examined
propositions such as, geographical proximity; unity of ownership, management and
control; unity of employment and conditions of service; functional integrality; general
unity of purpose. Then, it accepted the impossibility of laying down any one test as an
absolute and invariable test for all cases. The real purpose of these tests, according to
the Supreme Court, is to find out the true relation between the parts, branches, units,
etc. If in their true relation “they constitute one integrated whole, we say that the
establishment is one; if on the contrary they do not constitute one integrated whole,
each unit is then a separate unit.” How the relation between the units subsists must
depend on the facts proved, having regard to the scheme and object of the statute.
18. In Management of Pratap Press v. Secretary, Delhi Press Workers' Union and Its
Workmen2 , the Supreme Court took a similar view as it did in The Associated Cement
Companies. It has observed that of all those tests the most important seems to be
that of functional “integrality” and the question of unity of finance and employment
and of labour. Unity of ownership exists ex hypothesi, the Court felt, where two units
belong to the same proprietor. As to what denotes “functional integrality”, the Court
has observed that it must be functional interdependence that one unit cannot exist
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conveniently and reasonably without the other. Incidentally, in both the decisions the
provisions of the Industrial Disputes Act, 1947, fell for consideration.
19. In Regional Provident Fund Commissioner v. Dharamsi Morarji Chemical Co.
Ltd.3 , the question is whether a new unit established by the management of an
existing company constitutes an infant industry to be exempted from the EPF Act. The
Court accepted that both the factories, the old and the new, were owned by a common
owner and had the common Board of Directors, too. That by itself, according to the
Supreme Court, cannot be sufficient unless “there is clear evidence to show that there
was interconnection between these two units and there was common supervisory,
financial, or managerial control.”
20. In Regional Director, ESI Corporation v. Baby Francis4 , the ESI Corporation
contended that the persons manufacturing and supplying parts of de-freezing
machinery manufactured by the respondent are doing the work for the respondent's
factory, and they should also be counted for fixing employment strength in the factory.
21. A Division Bench of this Court has held that employees employed by or through
a contract are also covered “if they are employed inside the factory premises or
working outside the premises, but under the contract or supervision of the principal
employer.” But, on facts, the Court has held that the respondent company's
purchasing the articles will not make the manufacturers of the articles the employees
of the company. On fact, the Court further observed that there is no supervision over
their work. The EI Court found that they are not employees of the factory; they are not
working inside the tin factory; there is no supervision or control over their work; nor
does the respondent have any disciplinary control over the employees supplying the
parts.
22. In Karachi Bakery v. Regional Provident Fund Commissioner5 the appellant was
engaged in bakery business. It contracted with two other bakery-firms for having the
bakery products supplied. The EPF authorities treated the employees of those two
supplying firms as the appellant's employees. A Division Bench of the High Court of
Andhra Pradesh (per M. Jagannadha Rao, as his Lordship then was) has examined
Section 2(f) of the Act : the words “whether they are employed by or through a
contractor in or in connection with the work of the establishment”, postulate that such
persons must be employed by or through a contractor as “contract labour’.
23. In other words, the contract for purposes of Section 2(f) between the
establishment and the contractor must be, the Court further observed, a contract by
which a contractor agrees and brings labour to be employed by the establishment. The
contractor for purposes of Section 2(f), Karachi Bakery emphasizes, is purely a labour
contractor and not an independent contractor who contracts to deliver a finished
product to the establishment and who for purposes of manufacture of such a finished
product, engages labour for his own purposes. In the latter case, the contractor cannot
be treated as one employed to get labour for and on behalf of the principal
establishment but will be an independent contractor who alone exclusively controls
and supervises the work of his employees and directs what work is to be done and how
it is to be done.
24. In Poona Bottling Co. Ltd. v. Union of India6 , the petitioners manufacture and
bottle soft drinks. They purchase essences from M/s. Parle under franchise
agreements. Thus, the petitioners are the franchisees of Parle, the franchiser. The
respondents demanded the petitioners to pay differential excise duty without claiming
exemption : the petitioners are not independent manufacturers.
25. A Division Bench of the Delhi High Court has held that the petitioners' working
under the same brand name cannot be indicative that they are manufacturing the soft
drinks for and on behalf of Parle. In other words, goods manufactured by franchisee
are not ‘manufactured’ on behalf of the franchiser. Drawing parallels between agency
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and franchise, the Court has further held that an agent is one who can deal with the
third parties on the principal's behalf; this is not so with a franchisee who cannot be
said to be functioning on behalf of the franchiser.
26. In Regional Provident Fund Commissioner v. Prabha Bevarages Pvt. Ltd.7 , the
High Court of Madras dealt with an identical question as did the Delhi High Court in
Parle Bevarages. Appreciating the dictum of both Parle Bevarages and Karachi Bakery,
a Division Bench of the Madras High Court has observed that a franchise agreement
should be read in consonance with the actual activities carried on by the franchisee.
Merely by undertaking to manufacture beverages by using the essence supplied by
Parle (Exports) Pvt. Ltd., the franchisee has not become an agent of its franchiser. Nor
can they both be treated as one unit, despite certain clauses in the franchise
agreement permitting the franchiser to supervise the franchisee to ensure the quality
of beverages.
27. In Regional Provident Fund Commissioner v. Raj's Continental Exports (Pvt.)
Ltd.8 , the respondent claimed infancy protection under the provisions of the EPF Act.
Its Managing Director also is the proprietor of Continental Exporters, another
manufacturing unit. The appellant authorities contended that the respondent is
nothing but a department of that Continental Exporters. On fact, the Supreme Court
has observed that the respondent was separately registered under the Factories Act
and the Central Sales Tax Act, as well as the Employees' State Insurance Act. Both the
units are found to be independent of each other. So the Court concluded that the
respondent is an independent unit.
28. The modern times are marked by the trend towards specialization, observes the
Delhi High Court in Kunj & Co. v. Regional Provident Fund Commissioner9 . Gone are
the days, according to it, when the farmers would not only till the land but also sow
the seeds, reap the harvest, carry the produce, and sell the same in the market.
Today's farmer may give the work of tilling to one, sowing to another, harvesting to a
third, and leave the sale to the other large chains specializing in stock
carriage/movement of such produce to the retail destination for sale. Merely because
the ultimate sale of the goods can be linked to the tilling of the land and the different
players are to form part of one chain, we cannot conclude that all activities come
under one establishment.
29. Admirably adumbrating the breaking barriers of trade and conceptual shifts in
businesses, the Delhi High Court has held on facts that, two entities—one selling the
product of the other—cannot be clubbed if they remain independent and so long as
one does not act as fagade to conceal or camouflage its inter-dependence on the
other.
30. On the other hand, the learned Standing Counsel has relied on certain other
decisions. Let us examine their ratio, too. In Hussainbhai v. Alath Factory Tozhilali
Union10 , the Supreme Court had the occasion to consider Sections 2(g) and 2(s) of the
Industrial Disputes Act. Factually, the petitioner, a rope-manufacturer, engaged
several workmen. But he took a plea that those workers were hired by contractors who
had executed agreements with the petitioner to supply labour. So goes the petitioner's
contention that they are not his workmen.
31. A three-Judge Bench of the Supreme Court, Comprising V.R. Krishna Iyer, D.A.
Desai, and O. Chinnappa Reddy, JJ, has eloquently observed that “Indian Justice,
beyond Atlantic liberalism, has a rule of law which runs to the aid of the rule of life.
And life, in conditions of poverty aplenty, is livelihood and livelihood is work with
wages.” Speaking for the Bench, Krishna Iyer J holds that “[r]aw societal realities, not
fine-spun legal niceties, not competitive market economics but complex protective
principles, shape the law when the weaker, working class sector needs succour for
livelihood through labour.” The conceptual confusion between the classical law of
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contracts and the special branch of law sensitive to exploitative situations, according
to their Lordships, accounts for the submission that the workmen did not belong to the
petitioner.
32. In the end, Hussainbhai holds that where a worker or group of workers labours
to produce goods or services and these goods or services are for the business of
another, that other is, in fact, the employer. He has economic control over the workers'
subsistence, skill, and continued employment. If he, for any reason, chokes off, the
worker is, virtually, laid off. It also holds that “[t]he presence of intermediate
contractors with whom alone the workers have immediate or direct relationship ex
contractu is of no consequence when, on lifting the veil or looking at the conspectus of
factors governing employment, we discern the naked truth, though sniped in different
perfect paper arrangement, that the real employer is the Management, not the
immediate contractor.”
33. Two companies carried on different business activities with the common
registered office, common Director, and common Managing Director. The question is
whether the two units are to be regarded as one establishment for the purpose of the
EPF Act. The Supreme Court in Gadodia & Sons v. Regional Provident Fund
Commissioner11 , has held that there is no absolute and invariable test to determine
whether they are one establishment. But to club the two concerns, we must find out
the true relation between the parts, branches, units, etc. Unity of ownership, unity of
management and control, unity of finance, unity of employment, and unity of
functional integrality are, perhaps, the factors to be determined.
34. On facts, Gadodia holds that the Directors of the two companies belong to the
same family; the Managing Director is common; and the two senior officers of the
establishments are common. At the time of inspection, the Enforcement Officer
noticed that the employees of the two companies were being swapped. Both have the
same registered address and a common gram number, as well as common telephone
numbers. The two companies are family concerns of the Gadodia family. So, the Court
has held that there is an integrity of management, finance, and the workforce in the
two private limited companies.
35. The learned Standing Counsel has also drawn our attention to the semantic
significance of the lexical expressions “branch”, “department”, and “unit.” Let us
examine.
36. The Black's Law Dictionary (9th Ed.) defines “branch” to mean 1. an offshoot,
lateral extension, or division of an institution. Eg:
1. The executive, legislative, and judicial branches of Government.
2. A line of familial descent stemming from a common ancestor. Also termed stock.
3. A license held by a ship's pilot.
37. The same Lexicon defines “department” thus : 1. A division of a greater whole;
a subdivision; eg. a legal department. 2. A country's division of territory, usu. for
governmental and administrative purposes, as in the division of a state into counties;
eg. France has regional departments similar to states. 3. A principal branch or division
of government; eg. legislative department; specifically a division of the executive
branch of the U.S. government, headed by a secretary who is a member of the
President's cabinet; eg. Department of Labor.
38. As to the meaning of “Unit” the Black's Law Dictionary lists its technical, not
lexical, meaning. Cambridge Advanced Learner's Dictionary (3rd Ed.) defines it as a
single thing or a separate part of something larger. Webster's New Explorer College
Dictionary (2003) defines “unit” as a single thing, person, or group that is a
constituent of a whole. What is the Relationship Between the Franchisee and the
Eleven Agents?
39. From the statutory stipulations, as have been precedentially analysed, we need
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to ascertain the relationship between the franchisee and the eleven persons, given the
“service agreements” they have entered into.
40. To put the issue in perspective, we must ascertain (1) whether the service
agreements are only a smokescreen to hide the employer-employee relationship; (2)
whether those eleven persons run the franchisee's branches or units; and (3) whether
the franchisee, on the one hand, and the eleven persons, on the other, enjoy between
themselves unity of ownership, unity of management and control, unity of finance,
unity of employment, unity of functional integrality and financial interdependence.
The Findings in W.P. (C) No. 7905 of 2011:
41. On the unity of management and control, the impugned judgment observes
that the franchisee has got the “ultimate control over the day-to-day affairs of the
service agents.” On the financial control, it is found that the franchisee meets the
service agents' entire business expenditure. The judgment finds that the service
agents use their agency charges to pay their employees' wages. The service agents, it
is found, are barred from doing any other business.
42. On further analysing the Ext.P1 agreement, the impugned judgement concludes
that the agreement unmistakably establishes employer and employee relationship
between the franchisee and the service agents.
Our Analysis:
43. Ext.P1, dealing with one of the eleven service agents, is styled as “Service
Agency Agreement.” It acknowledges that the franchisee is “unable to carry on/control
their business in the entire Kannur District”. So it wants to “appoint service agents to
act” on its behalf. The agent, looking after a designated area, gets “a fixed annual
agency commission of Rs. 3,12,000/- and an amount calculated at 5% of the total
courier charges through the Agency as Agency Commission” for running the Agency.
44. Indeed, as per Clause (4), the service agent must “deposit the entire sale
proceeds of the day without any dedication” to the franchisee's account; the franchisee
can “change, reduce, increase the area” allotted to the agent (Cl.5). The franchisee
should supply the business stationary to the agent (Cl.8); the agent must maintain up
to date all the records, which the franchisee can verify any time (Cls.12, 13 and 19);
the agent shall abide by “the circulars, instruction, etc.,” issued by the franchisor as
well as the franchisee (Cl.14); the agent should display the business logo as specified
by the franchisee (Cl.15); and the agent must not carry on the same business (courier
services) on his own or with others (Cl.16). So, the agent can carry on any other
business.
45. Further scanned, the Service Agreement reveals that the agent will “appoint
and maintain sufficient field and other staff at its own costs and risk,” to render timely
and effective services. Besides maintaining on a daily-basis all the records, among
other things, showing the pending documents/parcels, the agent will hand over the
undelivered documents/parcels to the franchisee if directed by it (Cl.20). The Service
Agreement compels the agent to abide by law in his doing the franchisee's bidding. If
the agent does anything illegal, including booking prohibited parcels, he alone will
take the consequences (Cl.21). Indeed, the agent can operate no bank account in the
franchisee's name (Cl.22).
46. Since the controversy concerns the employment—whether the franchisee has
adopted any devious devise to defeat the law or camouflaged its business affairs with
ulterior motives—it pays to extract Clause 23 of the Service Agreement:
23. The personnel employed by the Party of the Second Part for performing the
jobs under this Service Agency shall be the work men of the Party of the Second
Part and he/she would be employer for such personnel in respect liabilities due
under various laws. The payment of their salaries or other prerequisites would be
the sole responsibility of the Party of the Second Part. All stationary labour imposts
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if any applicable should be borne by the Party of the Second Part. The letter of
appointment shall be borne by the Party of the Second Part The letter of
appointment shall be issued to such employees only by the Party of the Second Part
on his official stationery which shall in no way indicate directly or in directly that
they are employees of the Party of the First Part organisation. There shall be no
nexus of any sort between the work men of the Party of the Second Part and the
Party of the first Part.
47. We may further notice that under Clause 29 either party may determine the
Service Agreement by giving to the other one month's notice. The agency terminated,
the franchisee will refund to the agent his security deposit after adjusting any amount
due from him.
The Order by the Primary Authority:
48. The Ext.P7 is the order passed by the Assistant Provident Fund Commissioner,
Sub-Regional Office, Kannur—the Primary Authority. The order repels the franchisee's
contention that the authority did not give it enough time. In fact, the Primary
Authority passed the order after giving ample opportunity to it. The order further
reveals that the authorities took up the “survey work” of the franchisee based on a
complaint by one Kerala Parcel Employees Sangh.
49. The authorities' conclusion that the so-called agents are nothing but the
franchisee's branches rests on this pivotal point : the franchisee's accountant, when
summoned, submitted records disclosing that the franchisee employed 34 persons as
on 1.4.2001. In fact, the franchisee was quick to explain away why its accountant
submitted the list of employees inclusive of those working under the agents. To be
precise, both Sayed Navas, the franchisee's owner, and Rakesh, the accountant,
deposed before the Primary Authority that the accountant “had been required by the
department to furnish combined list of employees employed by Sh. Sayed Navas and
various commission agents.” The accountant further deposed that he “had prepared
and submitted a combined list of employees after ascertaining the names from the
commission agents.” He has also deposed that he submitted the list without Mr. Sayed
Navas's knowledge, much less his consent.
50. Three service agents—Chandramohanan, Shaji Forte and Ansari—examined as
witnesses, deposed before the Primary Authority that they are service agents having
their own employees appointed by themselves. They pay those employees' wages from
the commissions they receive from the franchisee.
51. The Franchisee's P & L Account for the year 2002-03, on the expenditure side,
showed the salaries and allowances paid to the franchisee's employees and also the
agency charges. The break-up provided in the Ext.P7 order is this : The total service
charges collected - Rs. 73,41,478; salaries and allowances paid - Rs. 2,10,950/-; the
agency charges paid - Rs. 37,91,036/-.
52. From the above factual details, the Primary Authority has drawn his
conclusions, the cardinal ones of which are these : Given the agents' financial
dependency, the service agents' employees are “getting wages indirectly from Sh.
Navas, i.e., the employer of the establishment; so, there is “inter-dependability in
functioning the business of service agents with that of Sh. Navas.” The agents, treated
as branches, are “parts of the same establishment.”
The Denouement:
53. Regrettably, the evidence on record—both oral and documentary—does not lend
support to the conclusions drawn by the Primary Authority as affirmed concurrently by
the appellate authority and the learned Single Judge.
(a) A Word on Franchise:
54. Franchising is a relatively new business phenomenon still statutorily
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unoccupied, at least, in India. Indeed, gone are the days of conventional business.
Time and technology have given new impetus to commerce : it is borderless,
amorphous, and protean. Business is as much real as it is virtual. Any given business
may have various stages, and each stage may involve specialization. Producing, say,
an automobile under one roof, homogenously, by one business enterprise, is almost
passi. Each vital part may have its origin elsewhere; many parts outsourced, the car
may be produced by one manufacturer, whose expertise need not extend to every
manufacturing activity of the automobile making. Specialization is the mantra.
55. Much more diverse, innovative, and iconoclastic is franchising. McDonald may
have never set his foot here, but his business thrives here; so are Kentucky Fried
Chicken, Coca Cola, and Star Bucks, to name a few more. Accepted that India has no
law governing franchising, we may note that various stages of franchising are
governed by the laws like the Indian Contract Act, Specific Relief Act, laws of Taxation,
Labour and Insurance Laws, the Intellectual Property Laws, besides the governmental
regulations applying to specific sectors of goods and services.
56. Absent a statutory definition proper, the Finance Act 1999 in Chapter 5 defines
a franchise as “an agreement by which a franchisee is granted representational right to
sell or manufacture goods or to provide service or undertake any process identified
with the franchiser, whether or not a trademark, trade name, or logo, or any such
symbol, as the case may be, is involved.” This case, to our mind, squarely reflects this
definitional dynamics.
57. Lain Murray in The Franchising Handbook12 lists out the types of franchises : (i)
Job Franchise : it involves a one-man or one-woman owner/operator, often, though not
always, going to the customer in a van equipped with the tools of the trade or
products for sale. (ii) Management Franchise : it involves administering the
franchisor's businss by recruiting and training staff. A job franchise can expand into a
management franchise. (iii) Retailing Franchise : it has elements both of a job
franchise and of a management franchise, since the franchisee will almost certainly
serve customers from time to time and will usually also be required to employ staff.
Retailing is a special skill involving customer care, quality of service, stock control,
merchandising, promotion and advertising, pricing policy and so on. (iv) Investment
Franchise : it involves the franchisee investing in a large enterprise, such as a hotel,
and delegating the management to someone else.
58. As the trade practices reveal, there are direct franchising, master franchising,
and international franchising. In Direct Franchising the franchiser contracts with each
franchisee; International Franchising is not relevant here. In Master Franchising the
franchisor contracts with a franchisee who can be called a subfranchisor. Andrew J.
Sherman in Franchising & Licensing13 says that “a subfranchisor enters into what is
typically referred to as a regional development agreement or master franchise
agreement with the franchisor, pursuant to which the subfranchisor is granted certain
rights to develop a particular region. The regional development agreement is not in
itself a single-unit franchise agreement to operate any individual franchise units;rather
it grants the subfranchisor the right to award and grant franchises to individuals using
the franchisor's system and proprietary marks solely for the purpose of recruitment,
management, supervision, and support of individual franchisees. To the extent that
the subfranchisor itself develops units, then an individual franchise agreement for each
such unit must be executed.
59. We reckon, in this case, the franchiser at Mumbai entered into a master
franchise agreement with the franchisee or subfranchisor, who, then, entered into
“Service Agreements” with eleven others. He termed them agents. The nomenclature
apart, they too are carrying on the same business in different, exclusive parts of one
District—Kannur.
-----------------------------------------------------------------------------------------------------------------------------------------------------------
(b) The Fallacy of the Conclusions:

60. To ascertain whether the franchisee has branches or units and whether the
employees working in those establishments are its own employees in terms of
Sections 2(f) and 2A of the Act, the document to be examined is the Ext.P1. An
employee, engaged for wages in any work, must be getting his wages directly or
indirectly from the employer. The employee may have been employed through a
contractor as well. But the terms of the Ext.P1, extracted above, does not lead us to
conclude that the employees working in the eleven agencies meet the statutory
requirement : they work for the employer and are getting their wages directly or
indrectly from it. The agents themselves have deposed before the Primary Authority
that they are independent of the franchisee; they receive fixed annual commission and
also performance incentives.
61. The agents' remitting the entire proceeds to the franchisee does not, to our
mind, appear to be an unusual arrangement. Nor can it conclude that the agents are
franchisee's branches. If we examine the nature of courier service, it is essentially
network based. The postal services may have one solid, monolithic structure like the
Indian Postal Services or spread around with franchised agents coordinating—the
franchiser acting as the apex coordinator, as is the case here.
62. The authorities have latched onto the fact that the agents meet all their
expenditure from the commission they receive. And they pay the wages from that
commission. No hiding that fact. Does it amount to the franchisee paying the wages
indirectly? We are afraid, it does not.
63. Every employer must have a source of finance to pay his employees. Here the
employer, the agent, earns commission and pays his employees out of it—making
some profit in the bargain. The agent, as an employer, hires the employees, fixes their
wages and service conditions, and fires them if he wants to, subject to the statutory
limitations. Nowhere have we seen any role played by the franchisee vis-à-vis the
agent's employees, save the fact that the commission it pays is used to pay the wages
of the agent's employees. We reckon this singular factor does not amount to the
franchisee paying wages indirectly, nor does this arrangement meet the definitional
criterion of Section 2(f) of the Act.
64. Clause 18 of the Service Agreement is explicit that the agent shall appoint and
maintain sufficient field and other staff at his own costs and risk; the franchisee is only
concerned with the agent's timely and effective services. Further, Clause 23 also
emphasizes that the personnel employed by the agent shall be his workmen; the
payment of their salaries or other prerequisites would be the agent's sole
responsibility. The franchisee will have no nexus with the agent's employees, so
declares Clause 23.
65. True, the franchisee dictates its terms to the agent, but not to his employees.
The agent could walk out of the contract with one month's notice. To ensure uniformity
and timely services, the franchisee has imposed conditions, and those conditions
cannot be taken as measures of overweening administrative control. On the financial
front, the agent must maintain his affairs by having his bank account on his own
name; he cannot operate the franchisee's account even as an agent. There is no
functional integrality except the franchisor imposing a uniformity and expecting the
agent to comply with it.
66. In Associated Cements Companies, the Supreme Court has set these
parameters to ascertain whether an establishment is a branch or unit of another :
geographical proximity, unity of ownership, management and control, unity of
employment and conditions of service, functional integrality, and general unity of
purpose. In that case, the was maintaining one common account; both the
establishments had one common management; and inter-departmental transfers were
-----------------------------------------------------------------------------------------------------------------------------------------------------------
allowed. Here, for a courier service geographical proximity cannot be a determining

factor. There is no unity of ownership between the franchisee and its agents or
common management; nor does the franchisee control the agents' establishments.
The franchisee, as accepted by the Primary Authority, has no power to transfer the
agents' employees—no interdepartmental transfers, so to say.
67. Pratap Press, additionally, stresses on “unity of finance, and employment, and
of labour.” Employment and labour already covered, if we examine unity of finance, we
find no material to conclude that the franchisee and the agents enjoy any unity of
finance. Dharamsi Morarji Chemical stresses on “common supervisory, financial, or
managerial control.” We must say none of these controlling devises is found playing
any role between the franchisee and the agents.
68. Gadodia, on the other hand, has a thinly veiled arrangement to hide the two
establishments' unity of ownership, of management and control, of finance, of
employment, and of ownership—the functional integrality. The same family owns both
the concerns under one management, not to speak of the employee-swapping.
69. In Baby Francis, this Court highlighted the supervisory control. In Karachi
Bakery the Division Bench of the High Court of A.P., has distinguished between a
contractor supplying labour and the one supplying a finished product—only the former
falling within Section 2(f) of the Act.
70. In Hussainbhai, the Supreme Court has lifted the veil to ascertain the true
relationship between the petitioner and the workmen supplied by a contractor; the
workers perform under the petitioner's supervision. The Court has found that the
petitioner has “economic control over the workers' subsistence, skill, and continued
employment.” The contractor is a mere intermediary. Here, the agents do not supply
the workforce, nor do the workforce amenable to the franchisee's control or
supervision. They are entirely unconnected to the franchisee.
71. Given the business model of master franchise and the franchisee engaging
people as its agents to have an effective network of business, we cannot call those
agents mere contractors supplying labour. It is more than that. On facts, Poona
Bottling of Delhi High Court and Prabha Beverages of Madras High Court accord well
with the case on hand.
72. The Primary Authority too has laid much emphasis on the franchisee's
accounts : profit and loss account for 2002-03. As per the accounting procedure, the
franchisee has shown the commission as the expenditure. It has shown its employees'
salaries separately. We fail to understand how this arrangement leads to any
conclusion that the agents are the franchisee's branches.
73. The Primary Authority's final finding is that the agents cannot exist and
function without the franchisee. True. An industry may spawn many tertiary industries,
which supply to the principal industry and sustain themselves thus. Once the principal
industry ceases, the tertiary ones will perish or may diversify. It is not inter-
dependence; at best, a unilateral dependence—the latter cannot survive without the
former, but the converse cannot be true. This arrangement does not amount to unity
of ownership, management and control; unity of employment and conditions of
service; functional integrality; general unity of purpose. None whatsoever.
74. From the above discussion, we hold that the franchisee's workforce has not
crossed 20; its agents cannot be treated as its branches or units. We, therefore,
reverse the findings in the impugned judgment arising out of W.P. (C) No. 7905 of
2016. Consequently, we allow the Writ Appeal and set aside the Ext.P9 order of the
Appellate Authority, for the Ext.P7 order of the Primary Authority has already stood
merged with the Ext.P9 order.
75. No order on costs.
———
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1 AIR 1960 SC 56
2
AIR 1960 SC 1213
3
1998 (3) LLN 932
4 2008-II-LLJ-805 (Ker)
5
1999-III-LLJ (Supp) 151
6
1981 ELT 389 (Del.) 389
7 2012-III-LLJ-418 (Mad) 418
8 2007 (3) LLN 67
9
2010-III-LLJ-105 (Del)
10 (1978) 4 SCC 257 : AIR 1978 SC 1410
11 (2011) 13 SCC 517 : AIR 2012 SC 273
12
Lain Murray, The Franchise Handbook, (London, Kogan, 2006), 27
13 Andrew J. Sherman, Franchising & Licensing (New York, Amacom, 3rd Ed.) 127
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Professional Couriers v. Employees Provident Fund Appellate Tribunal, 2017 SCC OnLine Ker 10020

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Professional Couriers v. Employees Provident Fund Appellate Tribunal, 2017 SCC OnLine Ker 10020

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SCC Online Web Edition, © 2023 EBC Publishing Pvt. Ltd.

Page 1 Friday, September 29, 2023

In the High Court of Kerala at Ernakulam

The Professional Couriers, Administrative Office : 5, T.P. Complex,

4. On 7.11.2002, the Assistant Provident Fund Commissioner, the second

(b) The Fallacy of the Conclusions:

allowed. Here, for a courier service geographical proximity cannot be a determining

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