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    To foster entrepreneurship and promoting innovation, the “Startup India” initiative was launched by the Prime Minister of India, Shri Narendra Modi on January 16, 2016 at Vigyan Bhavan, New Delhi. As part of the event, a Startup India Action Plan was released. Subsequently many steps were taken by various ministries/ regulators in this direction to implement the plan. The Action Plan proposes a 19-point action list which will enable setting up of incubation centres, easier patent filing, tax exemption on profits, setting up a Rs.10,000 crore corpus fund, ease of setting-up of business, a faster exit mechanism, among others.


    The initiative of the Government of India is to build a strong eco-system for nurturing innovation in order to accelerate economic growth and generate employment opportunities.


    In this article the author has made an attempt to summarise the concept, benefits under various laws and way forward for the Start Up entities in India


    1.1      Legal Framework:


    The DIPP1 has issued Notification2 to define the concept of Startup entities. The criteria fixed by this notification (including its amendments from time to time) are adopted by all the government department(s)/ regulator(s) etc., for various purposes.


    1.2      Criteria for Startup entities


    An entity3  shall be considered as a ‘startup’-


    1. Up to five years from the date of its incorporation/registration,
    2. If its turnover4 for any of the financial years has not exceeded Rupees 25 crore , and


    1. It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property;6


    Provided that any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered a ‘startup’;


    Provided further that in order to obtain tax benefits a startup so identified under the above definition shall be required to obtain a certificate of an eligible business from the Inter-Ministerial Board of Certification (“IMB) 7


    Present IMB consists of:


    1. Shri Shailendra Singh, Joint Secretary, DIPP
      1. Alka Sharma, Director/Scientist ‘F’, Department of Biotechnology, an

    c)Shri H.K. Mittal, Head, Innovation/Entrepreneurship& National Science& Technology Entrepreneurship Development Board, Department of Science & Technology


    1.3 The process of recognition as a ‘startup’


    Through mobile app/portal of the DIPP 8. Startups will be required to submit a simple application with any of following documents:


    1. a recommendation (with regard to innovative nature of business), in a format specified by DIPP, from any Incubator established in a postgraduate college in India; or


    1. a letter of support by any incubator which is funded (in relation to the project) from Government of India or any State Government as part of any specified scheme to promote innovation; or
    2. a recommendation (with regard to innovative nature of business), in a format specified by Department of Industrial Policy and Promotion, from any Incubator recognized by Government of India; or


    1. a letter of funding of not less than 20 per cent in equity by any Incubation Fund/Angel Fund/Private Equity Fund/Accelerator/Angel Network duly registered with SEBI that endorses innovative nature of the business. Department of Industrial Policy and Promotion may include any such fund in a negative list for such reasons as it may deem fit; or


    1. a letter of funding by Government of India or any State Government as part of any specified scheme to promote innovation; or


    1. a patent filed and published in the Journal by the Indian Patent Office in areas affiliated with the nature of business being promoted.


    1.4  Penalty in case of false information:


    If on subsequent verification, such recognition is found to be obtained without uploading the document or uploading any other document or a forged document, the concerned applicant shall be liable to a fine which shall be fifty per cent of paid up capital of the startup but shall not be less than Rupees 25,000.

    Benefits/ supportive measures taken under various laws:


    2.1      Foreign Exchange Management Act, 1999 (“FEMA”)


    1. Opening of FC/EEFC Account


    1. RBI9 has permitted Indian Startups:


    1. having an overseas subsidiary, to open a foreign currency account with a bank outside India for the purpose of crediting to the account the foreign exchange earnings out of exports/sales made by the said startup or its overseas subsidiary. The balances held in such accounts, to the extent they represent exports from India, shall be repatriated to India within the period prescribed for realization of exports


    1. to open EEFC10 account maintained in India with the Authorised Dealers for crediting the payments received in foreign exchange arising out of sales/ export made by the startup or its overseas subsidiaries


    1. RBI has expressed to carry slew of following measures to support the Startup initiatives of GOI


    1. Enabling start-up enterprises, irrespective of the sector in which they are engaged, to receive foreign venture capital investment and also explicitly enabling transfer of shares from Foreign Venture Capital Investors to other residents or non-residents;


    1. Permitting, in case of transfer of ownership of a start-up enterprises, receipt of the consideration amount on a deferred basis as also enabling escrow arrangement or indemnity arrangement up to a period of 18 months;


    1. Enabling online submission of A2 forms for outward remittances on the basis of the form alone or with document(s) upload/submission, depending on the nature of remittance; and


    1. Simplifying the process for dealing with delayed reporting of FDI related transaction by building a penalty structure into the regulations itself.


    1. Issue of shares without cash payment through sweat equity or against any legitimate payment owed by the company remittance of which does not require any permission under FEMA


    2.2     Income Tax Laws:


    1. Insertion of new section 54EE for exempting Capital Gain on long term capital asset and invested in eligible units of AIF


    1. A new section has been inserted to permit the exemption of long term capital gain arising out of transfer of capital asset if the investment is made in specified units of Alternative Investment Funds (AIF) on or after 1st April, 2016, within 6 months of transfer of capital asset.


    1. The exemption is restricted on proportion basis of investment Vs Sale proceeds received
    2. The maximum amount that can be invested is restricted to Rs. 50 Lakhs
    3. The benefits is restricted for investment made upto 31/03/2019
    1. Insertion of new sub-section 5 under section 54GB


    1. A new sub-section has been inserted to permit exemption of long-term capital gain arising out of transfer of capital asset if the investment is made in specified units of Alternative Investment Funds (AIF) on or after 1st April, 2016, within 6 months of transfer of capital asset.
    2. In both the cases the word “Specified Units” means investment into equity shares of eligible startup unit as defined herein above.


    • Exemption of tax on difference between the allotment price and FMV under section 56 (2) (viib) of the Act


    1. A new explanation has been added under section 56 (2) (viib) of Act, to exempt the difference between Issue price and Fair Market Value, from being considered as taxable income under Other Sources. Due to this amendment the Startup entity can issue shares to residents at premium than the Fair Market Value, without any tax burden11


    1. Exemption of tax on Profits of the entity for 3 years u/s 80-IAC of the Act


    1. A new section has been added after section 80-IAB of Act, to exempt the tax on 100% profits of Startup entity
    2. The benefit is applicable for profits earned from the fiscal year 2016-17
    3. The maximum period of tax benefit is given for 3 consecutive financial years out of 5 years of incorporation/ registration of startup entity. The entity has option to choose the beginning period of exemption


    1. Exemption is subject to non- distribution of dividend by the Startup.
    2. The startup entity shall fulfill the eligibility criteria listed by DIPP, and should have been incorporated between 01-04-2016 and 31-03-2019


    1. However the startup entity has to pay MAT/AMT12 under section 115JB/115JC, as the case may be, of the Act.


    1. Further, existing capital gains exemption for investment in newly formed manufacturing Micro, Small and Medium Enterprises (MSMEs) by individuals shall be extended to all Startups.


    1. For Startups, investment in computer or computer software (used in core business activity) to qualify as purchase of “new assets”.

    2.3      Labour laws:


    The Union Government has simplified the legal compliance under various labour laws, as detailed below:


    1. Engaging Apprentices 13


    The entity is permitted to recruit apprentices in a band of 2.5% - 10% of total strength (including contractual workers). The Startup entity is eased from inspection based on the following criteria:



    Particulars of Inspection



    1st Year

    Inspection is completely dispensed with based on the self-certification



    2nd - 5th Year

    Inspection only when very credible and verifiable complaint of violation


    has been filed in writing  and the approval has been obtained from


    concerned Apprenticeship Adviser



    6th Year onwards

    As per Apprentices Act, 1961




    1. Relaxation under various other Labour Laws


    Sl. No.


    Name of the Law


    Referred as


    Implementing Agency







    (Central / State)
















    The Industrial Disputes Act, 1947


    ID Act












    The Trade Unions Act, 1926


    TU Act












    The  Building  and  Construction  Workers’


    BOCW Act





    (Regulation of Employment and Conditions of







    Service) Act, 1996











    Central and State



    The Industrial Employment (Standing Orders) Act,


    SO Act











    The Inter State Migrant Workmen (Regulation of


    ISMW Act





    Employment and Conditions of Service) Act, 1979














    The Payment of Gratuity Act, 1972


    Gratuity Act












    The Contract Labour (Regulation and Abolition)


    CLRO Act





    Act, 1970







    The  Employees’  Provident  Fund  and


    EPF Act





    Miscellaneous Provisions Act, 1952







    The Employees’ State Insurance Act, 1948


    ESI Act










    The Startup entity is eased from inspection based on the following criteria:






    Particulars of Inspection of state level authority





    1st Year

    Inspection under BOCW, ISMW Act, Gratuity Act, CLRO, is completely



    dispensed with based on the online self-certification





    2nd - 3rd Year

    Inspection under the aforesaid laws, only when very credible and



    verifiable complaint of violation has been filed in writing and the approval



    has been obtained from at least one level senior to the inspecting officer






    As per respective law


    4  Year onwards







    Compliance pertaining to 6 labour and 3 environmental laws will be allowed to be self-certified through the Startup mobile app.


    Startups classified as White Category as defined by the Central Pollution Control Board will be allowed self- certification under environmental laws, with only random checks proposed.


    2.4       Fast Track exit under Insolvency and Bankruptcy Code, 201614


    As per Section 55 to 58, the startup entity is eligible for fast track corporation insolvency resolution process and the exit process may be completed within 90 days of commencement date of process unless otherwise sought for extension by the entity etc.


    2.5      Government Support for establishing Incubation Centres


    1. AIM/ATL, NITI Aayog


    As per the Atal Innovation Mission/ Atal Tinkering Labs, NITI Aayog, Government of India, the Central Government has issued guidelines in May, 2016 for extending the support for establishing incubation centres/ tinkering labs at various places in India




    As per the NIDHI, NSTEDB, Government of India, the Central Government has issued guidelines in April, 2016 for extending the support for 20 student start up entities with a maximum amount of Rs. 10.00 Lakhs each, which will be given as ignition grant/award, subject to the conditions stated therein.

    2.6     Establishment of Fund of Funds with a corpus of Rs.10,000 crore


    Government to set up a Fund with an initial corpus of Rs.2,500 crore and a total corpus of Rs.10,000 crore over a period of 4 years.


    Such Fund will not invest into Startups directly, but shall participate in the capital of SEBI registered Venture Funds.


    The Venture Fund may obtain up to a maximum of 50% of the fund size from the Fund of Funds, provided it has already raised the balance 50% of the stated fund size. Such Fund will be managed by a Board with private professionals drawn from industry bodies, academia, and successful Startups.


    2.7       Relaxation of norms for procurement from Startup entities


    Ministry of Micro, Small and Medium Enterprises has issued a policy circular No. 1(2)(1)/2016-MA, dated 10th March, 2016 to all central ministries, central PSUs, departments etc., to convey that in case of procurement of goods on prior experience basis is relaxed in case of procurement of goods from startup entities subject to certain conditions stated therein.




    By initiating so many measures, the Union Government expects that the India becomes major player for home grown start ups and the mission of Make-in India, skill india etc., can be achieved. The Action Plan has certainly addressed key concerns, like simplifying the process to obtain certain regulatory registrations and approvals by rolling out the proposed Mobile App and Portal, enabling faster exits from a regulatory perspective, providing funding support and credit guarantee for Startups, and permitting certain specified tax benefits.


    In this bulletin, we bring to our readers, certain important and significant judicial precedents pronounced by various high courts which would determine the future course of Transfer Pricing litigation. We wish the readers shall be benefited from the following judgments.


    1. Pr CIT v Ameriprise India (P)Ltd –Delhi High Court


    The Court upheld Tribunal’s order considering foreign exchange gain/loss arising out of revenue transactions(i.e. ITES services) as an item of operating revenue/cost.


    1. Toluna India Pvt Ltd – Delhi High Court


    HC upholds ITAT’s exclusion of 4 comparables viz. Infosys Technologies Ltd, KALS Information Systems Ltd, Tata Elxsi Ltd and Wipro Ltd for assessee providing software development and marketing support services to AE for AY 2008-09 and 2009-10; Notes that ITAT, while directing AO to exclude these comparables, had followed order passed in assessee’s own case for AY 2007-08 and such order did not appear to have been challenged by Revenue; On merits, HC holds that “given the scale of operations of the above entities, their exclusion from the list of comparables for the purposes of determination of ALP appears justified”; Accordingly, HC holds that no substantial question of law arises and dismisses Revenue’s appeal.


    1. Yum Restaurants(India) Pvt Ltd v ITO – Delhi High Court


    The Court held that the TPO was incorrect in presuming the existence of an international transaction between the assessee and its AEs, on the basis that the assessee allegedly made a contribution towards AMP expenditure to its wholly owned Indian subsidiary on behalf of its AEs and the fact that the assessee had incurred a loss in the relevant segment and therefore concluding that it was not adequately compensated by the AEs for the creation of marketing intangibles. The Court held that there would be a need for a detailed examination of the operating agreement between the assessee, its Indian subsidiary and the AEs to ascertain if any part of the AMP expenses was for the purpose of creating marketing intangibles for the AE of the assessee and only after an international transaction between the assessee and its AE in relation to AMP expenses was shown to exist, could the question of determining ALP of such international transactions arise.


    1. CIT v Thyssen Krupp IndustriesIndia (P)Ltd – Bombay High Court


    The Court held that where a substantial part of revenue of a comparable company in execution of turnkey projects arose out of executing projects of public sector undertakings, it could not be considered to be comparable to assessee-company providing turnkey services to its AE as contracts between Public Sector undertakings were not driven by profit motive alone but other consideration also weigh in such as discharge of social obligations etc.



    1. CIT v Goldstar Jewellery Design Pvt Ltd – Bombay High Court


    The Court held that the TPO was unjustified in applying the base of capital employed under the TNMM method without segregating the capital employed in respect of AE and Non-AE transactions. Further, it held that where the assessee entered into both international as well as domestic transactions, the Tribunal was justified in restricting the adjustment only to international transactions.


    1. CIT v ITC Infotech India Ltd – Calcutta High Court


    The Court held that where in respect of marketing and administrative services provided to third party customers, the assessee adopted a revenue sharing model whereby it kept 75 percent of the revenue and paid 25 percent to its subsidiaries who provided support services for transactions where the customers directly contracted with either the assessee or its subsidiaries, the TPO was incorrect in determining the remuneration to subsidiaries at 15 percent, where the customers directly contracted with the assessee, since there was no difference in the functions performed by either the assessee or its subsidiaries as compared to cases where customers directly contracted with the subsidiaries.


    1. Honda Cars India Ltd v DCIT – Delhi High Court


    The Court held that where the Petitioner was not a foreign company and the TPO did not propose any variation to income returned by petitioner, neither of two conditions of section 144C of the Act were satisfied and therefore the petitioner was not an ‘eligible assessee’. Consequently, the Assessing Officer was not competent to pass draft assessment order under section 144C(1) of the Act and therefore the said draft assessment order was quashed.


    1. International Air Transport Association – Bombay High Court


    The Court set aside the final assessment order passed under section 143(3) of the Act without passing a draft assessment order as mandated by Section 144C(1) of the Act which applied to the assessee. It observed that the DRP did not entertain the assessee’s objections absent the draft assessment order and therefore the rights made available to the assessee under section 144C of the Act were rendered futile by directly passing final order under section 143(3) of the Act.


    Concluding Remarks:


    Irrespective of the fact that most of the issues in Transfer Pricing are attaining finality through the judgements of the Tribunals, there are still certain conflicting views on various issues which are being cleared by the High Courts. However, the Tribunals and the Transfer Pricing Officers have been following their respective views stating that some of these High Court Judgements are not Jurisdictional High Courts pronouncements.




    Chapter X of Finance Act, 2016 provides for the scheme. The Scheme come into force on 1st July, 2016. The declaration may make declaration on or before 31st December, 2016.


    The declarant (as defined in the scheme) has to file a declaration in relation to ‘tax arrear’or ‘specified tax’ in respect of which appeal is pending.


    Tax Arrear means the amount of tax, interest or penalty determined under the Income Tax Act or Wealth Tax Act in respect of which appeal is pending before CIT(A) or CIT(W) as on the 29th February, 2016.


    Specified Tax means tax determined in consequence of or is validated by an amendment made with retrospective effect in Income Tax Act, 1961 or Wealth Tax Act,1957 and relates to a period prior to the date on which the Act amending the Income Tax Act or Wealth Tax Act, as the case may be, received the assent of the President.


    Salient Features of the Scheme:


    Declaration is to be filed before the Designated Authority in Form 1 and shall be signed by the declarant or any person competent to verify the return of income on his behalf in accordance with the provisions of section 140 of the Income Tax Act, 1961. Form 2 has to be filed along with Form 1 stating that the declarant has agreed to waive his/her rights towards appeals and other related matter on opting to this scheme.


    As per section 204(1) of Chapter X of the Finance Act, 2016 the designated authority shall within a period of 60 days from the date of receipt of declaration determine the amount payable by the declarant in accordance with the provisions of the schemevide Form 3.


    The declarant shall pay sum determined by the designated authority within in 30 days of date of receipt of the certificate and intimate the fact of such payment to the designated authority along with the proofvide Form 4.


    On verification of the payment challan and other related documents, the authorities shall issue an order vide Form 5, if disclosed amount is ‘tax arrear’and Form 6, if disclosed amount is ‘specified tax’. Such order shall be the order of full and final settlement of tax amounts and shall guard the declarant from all other prosecutions and related issues.


    Every order passed under section 204(1) determining the sum payable under the scheme shall be conclusive as to the matters stated there in and no matter covered by such order shall be re- opened in any proceeding under the Income Tax Act or Wealth Tax Act or under any law for the time being in force or as the case may be under any agreement, whether for protection of investment or otherwise, entered in to by India with any other country or territory outside India.



    Immunity (benefit):


    In case of Tax Arrear-


    1. If disputed tax up to Rs 10 Lakh– Immunity from100% penalty;


    1. If disputed tax exceeds Rs10Lakh–Immunity to the extent of 75% of minimum penalty;


    1. If appeal pending related penalty– Immunity to the extent of 75% of minimum penalty.


    In case of Specified Tax-


    1. 100% Immunity form payment of interest and penalty.




    Disputed Tax means tax determined under the Income Tax Act or Wealth Tax Act which is disputed by the assessee or the declarant.


    Immunity from instituting any proceedings in respect of any offence under the Income Tax Act or Wealth Tax Act as the case may be.


    Any amount paid in pursuance to declaration shall not be refundable under any circumstances.


    Non- applicability of Scheme:


    Section 205 of the Finance Act, 2016 provides that the scheme shall not be applicable in the cases relating to:

    1. Assessment made pursuant to search;
    2. Assessment made pursuant to survey conducted by the department;


    1. Assessment in respect of which prosecution proceedings have been instituted on or before the date of filing the declaration;


    1. Tax liability relating to undisclosed income from a source located outside India or undisclosed asset located outside India;


    1. Assessment or reassessment made on the basis of information received by the Government of India under the agreement for exchange of information with any other country;


    1. In the case of a person in respect of whom an order of detention has been passed under Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 and the order has not been revoked or set aside by the competent Court;


    1. In case of a person in respect of whom prosecution has been instituted on or before filing of declaration or such person has been convicted of any offence punishable under the provisions of Indian Penal Code, The Unlawful Activities (Prevention) Act, 1967, The Narcotic Drugs and Psychotropic Substances Act, 1985, The Prevention of Corruption Act, 1988 or for enforcement of any civil liability;


    1. In case of a person notified u/s. 3 of The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.


    Withdrawal of Litigation:


    In accordance with Section 200(2) of the Act, where a declaration has been filed in respect of tax arrears appeal pending before CIT(A) or CWT(A), as the case may be, relating to disputed income or disputed wealth shall be deemed to have been withdrawn.


    In a case relating to specified tax, the assessee is required to firstly withdraw such appeal or writ pending before any appellate authority or the court and has to furnish proof of such withdrawal along with the declaration to be filed. In a case where the assessee has initiated any proceedings for arbitration, conciliation or mediation or has given any notice thereof under any law, he has to withdraw such proceedings or notice or claim, and proof of such withdrawal has to be submitted along with the declaration to be made. The assessee has also to make a declaration waiving his right to seek or pursue any remedy or any claim in relation to the specified tax which may be available to him under any law for the time being in force.


    It has also been provided in sub-section (6) of Section 200 that no Appellate Authority or Arbitrator, conciliator or mediator shall proceed to decide any issue relating to specified tax mentioned in the declaration and in respect of which an order has been passed by the Designated Authority or the sum payable under the scheme has been determined.


    Effect of False Declaration:


    Section 200(5) of the Act, provides that where any material particular furnished in the declaration is found to be false or the declarant violates any of the conditions of the scheme or the declarant acts in a manner which is not in accordance with the undertaking given by him under sub-section (4) of Section 200, it shall be presumed that as if the declaration was never made under the scheme and all the consequences under the Income-tax Act or Wealth-tax Act, as the case may be, will follow and appeal or other proceedings shall be deemed to have been revived.




















    Form of Declaration












    Undertaking for waiving of all rights, remedies etc.,












    Certification of Intimation of amount of tax arrear or specified tax by the designated authority












    Intimation of Payment of amount specified in Form 3












    Order of full and final settlement of Tax Arrear












    Order of full and final settlement of Specified Tax


    July – 2016 (Volume-24)

    Key Topics Covered:

    • International Taxation
    • FEMA
    • Audit
    • Indirect Tax
    • Companies Act, 2013
    • Labour Laws

    This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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    In the recent past there has been constant conflict between the employers and the Employees Provident Fund Organisation (EPFO)enforcement authorities on the issue of ‘basic wages’ on which contributions are required to be made. In this paper an attempt is made to collate the information on the subject based on the various judgements of the High Courts and Supreme Court to create a perspective on the subject for future guidance and to initiate corrective measures to avoid possible litigation with the EPFO.


    Para 29 of the Employees’ Provident Funds Scheme, 1952 deals with the contributions payable by the employer. In accordance with the said para, the employer shall contribute twelve per cent of the basic wages, dearness allowance (including the cash value of any food concession) and retaining allowance (if any)payable to each employee to whom the Scheme applies.


    The EPF&MP Act has defined ‘Basic Wages’ as all emoluments which are earned by an employee while on duty or on leave or on holiday with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include –


    • The cash value of any food concession;


    • Any dearness allowance ( that is to say, all cash payment by whatever name called paid to an employee on account of a rise in the cost of living ), house rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;


    • Any presents made by the employer.


    Most of the new economy establishments are devising a salary structure with Basic Salary, HRA and other allowances without the component of Dearness Allowance and contributions towards provident fund are being paid on the basic salary only on the assumption that all other allowances fall under the exclusion category as per the above definition.


    There has been conflict between the employers and EPF Organisation and hence these matters reached various Hon’ble High Courts in the country and some of the matters are pending before the Apex Court for its final verdict. Review of some important judgements are mentioned hereunder to understand the views of the judiciary in the matter.


    The Hon’ble Madhya Pradesh High Court Division Bench in the matter of Montage Enterprises Pvt Ltd Vs EPFO, Indore [2011 LLR 867] held that the conveyance allowance and Special Allowance will fall within the definition of ‘Basic Wages’. The rationale taken by the Hon’ble bench is that the Conveyance Allowance and Special Allowance is paid to all non-executive category of employees and it is not a case that some of the employees are not getting the same. It is a settled law that if such wages are paid universally, necessarily and ordinarily to all across the board, the same will fall under the definition of basic wages.


    In the year 2005,the Hon’ble Calcutta High Court Division Bench in the matter of RPFC (II), WB Vs.

    Vivekanadnda Vidya Mandir [2005 LLR 339] held that contributions are payable on Special Allowance

    when it is revised from time to time and the company has not adopted the system of payment of

    Dearness Allowance. The detailed view of the court in the matter is as under:


    In order to exclude any allowance from the purview of Section 6 which provides for liability to pay contribution based on basic wages, such allowance should fall under Clause (i), (ii) and (iii) of Section 2 (b) which enumerate allowances which are not included in the definition of ‘basic wages’. In the instant case the special allowance paid by the employer was not a retaining allowance, neither cash payment for food concession, nor over time allowance, house rent, bonus, commission, nor a present by employer and it did not satisfy any of the ingredients of Clauses (i) to (iii). Considering that the said allowance was paid in terms of contract of employment and was upwardly revised every 2 years and there is no system of payment of dearness allowance, it was held to be dearness allowance though described differently (Special Allowance) and therefore has to be treated as a part of pay and hence order passed by PF Authority that special allowance was subject to liability of contributions under section 6 of the Act is upheld.


    In the year 2004, the Hon’ble High Court of Gujarat in the matter of Gujarat Cypromet Ltd Vs APFC [2004 III CLR 485] also held that the contribution to Provident Fund made on basic wages includes all emoluments earned by the employee and allowances like lunch allowance, medical allowance, conveyance allowance etc., except those which are specifically excluded by the legislature, such as house rent allowance which is clearly excluded from the definition of basic wages by virtue of Section 2(b).


    It could be seen from the above the judiciary has interpreted the term ‘basic wages’ to include all allowances which are not specifically excluded. This interpretation has major cost implications to industry.


    The establishments have been engaging employees through contractors and agencies to meet the non-core activities of the industry such as Security, House Keeping etc., In addition to this, during the last one decade, the establishments started engaging manpower through outsourcing agencies to meet the work requirements without having long term liability. The number of such employees have increased substantially in the recent past. Most of these employees are paid applicable minimum wages. The outsourcing agencies in general bifurcate the minimum wages as basic wages, house rent allowance and conveyance allowance etc.,


    The E P F authorities have come to the view that the employers are bifurcating the minimum wages with a view to avoid payment of provident fund contributions and this led to litigation across India. The Hon’ble High Court of Andhra Pradesh issued a stay order on the circular issued by the PF Department on this issue. The Division Bench of Punjab & Haryana held that the definition of wages under Minimum Wages Act is inapplicable to that of basic wages under EPF Act.


    The decisions of the Hon’ble High Courts, which are discussed above and similar other matters are pending before the Hon’ble Supreme Court of India for disposal. We have to await the decision of the Apex Court on these matters.



    The courts have also held that certain category of payments does not fall under the ambit of basic wages and does not attract provident fund contributions. They are:-


    The Supreme Court held that the Production Bonus / Incentive when paid in a sliding scale with due regard to the production made by each workman then no contribution is payable. Similarly if the production bonus is paid on an average to all workmen on the basis of extra production made by them, then also, no contribution need be paid. [Daily Pratap Vs RPFC 1999 I LLJ 1]


    The Madras, Delhi and Gujarat High Courts held in various matters that the ad-hoc allowance and ad-hoc payments made to employees does not form part of ‘basic wages’ and hence no contributions are payable.


    The Hon’ble High Court of Bombay held that payment made in lieu of notice for terminating the contract of employment of a permanent employee does not constitute ‘basic wages’ and hence no contributions are payable. The Gujarat High Court in the matter of Swastik Textile Engineers Vs V M Rathod [2008 II LLJ 533] held that the back wages awarded by Court cannot be regarded as ‘basic wages’ payable to the employee and it is in the form of damages or compensation and hence provident fund contributions are not required to be paid.


    The Supreme Court held that Leave Encashment should not be taken as part of ‘basic wages’ and hence no provident fund contributions are payable.


    The Hon’ble High Court of Madras in the matter of Wipro Ltd Vs PO Employees PFAT [[2007 LLR 624] held that the canteen subsidy is not equivalent to cash value of food concession and hence provident fund contributions are not payable on canteen subsidy.


    With effect from 1.9.2014, employees drawing basic wages, dearness allowance and retaining allowance of Rs. 15,000/- or below are liable to be covered under the provident fund scheme. Once covered employee will continue to get covered even though his wages exceed Rs. 15,000/- per month. The Supreme Court in the matter of Marathwada Gramin Bank Karamchari Sanghatana Vs Management of Bank [2011 LLR 1130] held that employers need not pay provident fund contributions higher than the prescribed limited under the Act and Scheme that is now Rs. 15,000/-.


    Most of the new generation organisations are following the concept of cost to the company of the employee and the compensation package is decided on annualised basis. As the organisations are deciding the cost to the company, it has all the freedom to bifurcate the mutually agreed compensation package. Say for example the annual CTC is Rs. 2.90 Lacs, the monthly wages can be defined as Basic: Rs. 15,000/-, HRA 40% of the Basic Salary ie Rs. 6000/- and the employer Provident Fund contribution as Rs. 1800/-. Thus the monthly cost to the company is Rs. 22,800/- and annual cost is Rs. 2, 73, 600/-. In view of the recent amendment to the Payment of Bonus Act, the employee with basic wages of Rs. 15,000/-will also be covered under the Act. Hence the employee will be entitled to at least 8.33% of the basic wages earned in the financial year which translates to one month basic wage of Rs. 15,000/-. Thus the annual cost to the company will be Rs. 2, 88, 600/-.


    When the CTC offered to an employee is higher than the Rs. 2.9 lacs per annum, other allowances such as conveyance allowance, medical reimbursement etc., may be introduced.



    In case of employees whose monthly wages are minimum wages, it would be advisable to bifurcate the minimum wage as basic wages and house rent allowance only. For example if the minimum wage is Rs. 10,010/- per month the same may be bifurcated as Rs. 7150/- as basic wage and 40 percent of basic wage as HRA ie Rs. 2860/-. The cost to the company per annum would be Rs. 1, 43, 272/- which includes statutory minimum bonus of 8.33%, 12% of PF and 4.75% of ESI contributions.


    If the monthly wages are above minimum wage and below Rs. 22,800/- per month, that is the annual cost to the company is between Rs.1.45 lacs and Rs. 2.9 lacs, the applicable minimum may be taken as basic and the balance wage be bifurcated as HRA, Conveyance Allowance, Washing Allowance and Medical Reimbursement etc.,


    In the above mentioned cost to the company, the liability that may arise on account of Payment of Gratuity Act is not included.


    Of late the highly reputed and law abiding employers are also finding it difficult to convince the provident fund enforcement authorities the method followed by them in finalising the compensation package of the employees during the 7A proceedings and the matters are going against them. This has led to large scale litigation in the Tribunal and also depositing a part of the amount determined in the 7 A proceedings by the Qasi Judicial Authority by the company. The cost of litigation has also become substantial besides monitoring the maters under litigation which may become major liability on the company at a later date.


    In view of the above analysis, it is suggested that organisations may consider to restructure the salaries of the employees, as suggested above, to ensure litigation free statutory compliance under Provident Fund Act, Payment of Bonus Act and the Minimum Wages Act.



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