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    Interns Digest 2016

    Key Topics Covered:

    • Professional Tax Act 1987
    • Companies Act, 2013
    • General
    • Income Tax Act, 1961
    • Project Finance
    • Audit
    • Companies Act Updates
    • FEMA Updates

    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.

    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.

    Tags: ,

    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.








    Contributed by CS DVK Phanindar









    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to




    2013, amended

    Amendment Bill











    Section 123


    Substitution  of  sub-section  (3)of  Section  123  to  allow

    Welcome  amendment,  as  it



    Declaration of Dividend


    declaration and payment of interim dividend, during the

    allows  a  new  criteria  for





    period from closure of financial year till date of Annual

    declaration of Interim Dividend,





    General Meeting for a financial year, and out of the profits of

    and  clarity  on  the  rate  of





    the said year; or from the surplus in the profit and loss

    dividend  in  the  absence  of





    account; or out of profits generated in the financial year till






    the quarter preceding the date of declaration of the interim












    In addition to the above, the substitution also prescribes the






    rate at which the interim dividend can be declared, in case of






    loss is incurred during the financial year.










    Section  129  -Financial


    Substitution of sub-section (3) of section 129, in connection

    Amendment/inclusion to





    with preparation of Consolidated Financial Statements in the

    remove ambiguity.





    same form and manner as that of its own in accordance with






    applicable accounting standards, for associate companies






    also in addition to subsidiary.










    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to




    2013, amended

    Amendment Bill












    Section – 130 –



    Amendment to sub-section (1) of Section  130, so as to

    Welcome amendment, as there






    provide that in addition to authorities already specified in the

    is  a  increased  scope  of



    on Court’s






    section, any other person concerned shall be given notice

    authorities, to whom notice as



    Orders (Section notified




    before passing an order for re-opening of accounts.

    to re-opening of accounts is to



    w i t h  e f f e c t  f r o m








    be given by the Tribunal; and








    Insertion of a new sub-section (3) to provide that no order







    also  giving  the  periods  for








    shall be made for re-opening of books of account relating to a

    which order can be given by








    period  earlier  than  eight  financial  years  immediately

    Tribunal,  for  re-opening  of








    preceding the current financial year, unless there is a specific









    direction under section 128(5) [i.e., maintenance of books of









    accounts] from the Central Government for longer period.










    Section 132- Constitution


    Amendment (reduction) of the minimum penalty that can be

    Welcome amendment.



    of  National




    levied by way of an order by NFRA on CA Firms, if professional








    or other misconduct is proved from Rs. 10 Lakhs to Rs.5 Lakhs.




    (NFRA). (Section yet to






    be notified)

















    Section 134



    Substitution of sub- section (1)of section 134, with a new

    Welcome amendment as the




    &  Board


    section, thereby removing the requirement that the CEO signing

    proposed amendments reduce








    the financials shall be a Director, and accordingly, a CEO shall

    the reporting requirements in








    now sign financial statements irrespective of whether he is a

    the Board Report.








    director or not.









    Amendments to sub-section (3) of section 134 seeks to modify









    the disclosure requirements with respect to (a) removal of the









    requirement of attaching the extract of annual return to the









    Board report, and just mentioning the web-address, if any,









    where the extract of annual return is placed is to be mentioned













    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to




    2013, amended

    Amendment Bill















    (b)amendment to clause (p) of the sub-section relating to







    statement  on  annual  performance  of  the  Board,  its







    committees and independent directors by the companies to







    which the provision is applicable(c)mentioning only the salient







    features of the Remuneration and nomination policy (Section







    178) and CSR policy( Section 135) in the Board Report, and







    providing the web-address where  the complete policy is














    Insertion of a new section 3A, which empowers the Central







    Government to prescribeabridged Board's report for small







    company and one person company.












    Section - 135 – Corporate


    Amendment to sub-section (1) of section 135,with regard to

    Amendment  to




    Social Responsibility.


    the period for which the criteria for applicability of CSR to a



    ambiguity  and

    ease  of





    Company (i.e., Turnover, Net worth & Net Profit) are to be seen










    from “any financialyear” to “immediately preceding financial



















    Insertion of a proviso to sub-section (1) regarding composition







    of CSRcommittee with two or more directors, by a company







    which is not required to appointindependent director under







    section 149.







    Amendment of Clause (a)  in sub-section (3) with regard to







    areas in which CSR activity can be undertaken "as specified in







    Schedule VII", the words and figures "in areas or subject,







    specified in Schedule VII", thereby providing more scope in







    the CSR activities.












    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to




    2013, amended

    Amendment Bill















    Amendment to the explanation given in sub-section (5) earlier







    with regard to “Average Net profit”, now changed to “Net







    profit”, and further to empower the CentralGovernment to







    prescribe sums which shall not be included for calculating 'net







    profit' of a Company for the purpose of section 135.










    Section  - 136 – Right of


    Amendment to sub-section (1) of section 136 by inserting a new

    Welcome amendment.




    to  copies  of


    proviso to provide that copies of audited financial statements




    a u d i t e d

    f i n a n c i a l


    and other documents can be sent at shorter notice if 95 % of






    members entitled to vote at the meeting agree for the same;







    and  accordingly  aligning  the  existing  provisos,  after  the














    Substituting the existing 4th proviso to Sub-section (1) with new







    proviso,   to rationalise the requirements with respect to







    financial statements of foreign subsidiaries of a listed company







    subject to conditions.







    Insertion of a proviso to Sub-section (2) thereby companies







    having subsidiaries to provide financials of the subsidiary for







    inspection by the member who asks for it.











    Section  –  137  –  Copy


    Insertion of a new proviso after the existing 4th proviso to sub-

    Welcome amendment.


    section (1)   so as to enable filing of unaudited financial









    tobe filed with


    statements by listed companies, of their foreign subsidiaries







    which is not required to get its accounts audited, under the laws







    of the country of incorporation.  The filing of unaudited







    financial statements are to be accompanied by a declaration by







    the listed company, to the above effect.











    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to




    2013, amended



    Amendment Bill
















    S e c t i o n

    1 3 9


    Omission  of  the  first  proviso  to  sub-section  (1),  i.e.,

    Welcome amendment.



    Appointment of Auditors


    ratification of the appointment of auditors by the members at









    every AGM.













    S e c t i o n

    1 4 0



    Amendment to sub-section (3) of section 140 to reduce the



    penalty/penalty  criteria,  withrespect  to  failure  to  file










    auditor and giving of



    resignation form (ADT-3) by auditor to the Registrar concerned








    and also to the Comptroller and Auditor General (CAG) for the









    applicable companies, from  the existing  “Rs.50,000/-“ to









    “Rs.50,000/-or  the remuneration of auditors whichever is






















    Section – 141 - Eligibility,


    Insertion of an explanation to clause (d) of sub-section (3) of

    Amendment to remove


    section 141, to clarify the meaning of relative with reference to


    Qualifications and



    eligibility for appointment of auditors.




    disqualifications of

















    Substitution of the existing clause (i) of sub-section (3) along

















    with explanation, for harmonisation with section 144 in respect









    of providing of certain non-audit services to holding or









    subsidiary company of a company.













    Section 143 - Powers and


    Amendment to sub-section (1) of section 143 of the Act to

    Amendment to remove


    include   associate  companies  in  addition  to  subsidiary




    duties  of

    auditors  and




    companies with respect to right of auditors to have access to




    auditing standards.








    accounts and records for the purpose of consolidation.

















    Amendment to clause (i) of sub-section (3) to provide that









    auditors shall report on internal financial control systems









    relating to financial statements.









    Amendment to sub-section (14) to replace the term “cost









    accountant in practice” with “cost accountant”.




    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to




    2013, amended

    Amendment Bill











    Section 148 - Central


    Amendment to substitute the words 'cost accountant in

    Amendment to remove



    Government to specify


    practice' with the words 'cost accountant' in sub-section (3)




    audit of items of cost in




    & (5) of Section 148 and also to substitute the words 'Institute




    respect of certain


    of Cost and Works Accountants of India' with the words










    'Institute of Cost Accountants of India',in the explanation to











    Sub-section (3) of Section 148.










    Section 149 -


    Amendment to Sub-section (3) of Section 149, relating to the

    Welcome  Amendment  to





    requirement of resident director, the amendment proposed

    remove ambiguity and ease of





    requires that “every company shall have at least one director






    who stays in India for a total period of not less than 182 days






    during the financial year”instead of the existing requirement






    of “shall have at least one director who has stayed in India for






    a total period of not less than 182 days in the previous






    calendar year.”






    Further the amendment proposes that in case of a newly






    incorporated company the requirement under this sub-section






    shall apply proportionately at the end of the financial year in






    which it is incorporated.






    Amendment to clauses in sub-section (6) of Section 149, to






    specify limits with respect to pecuniary relationship of a






    director with respect to eligibility of a director to be appointed






    as an independent director. It also seeks to specify the scope of






    restriction on pecuniary relationship entered into by a relative.