- 1 - HC-KAR NC: 2025:KHC:24417 MFA No. 3685 of 2016 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 7TH DAY OF JULY, 2025 BEFORE THE HON'BLE MR. JUSTICE RAMACHANDRA D. HUDDAR MISCELLANEOUS FIRST APPEAL NO. 3685 OF 2016 (ESI) BETWEEN: 1. EMPLOYEES STATE INSURANCE CORPORATION, 10, BINNYFIELDS BINNYPET, BANGALORE-560 023 2. THE RECOVERY OFFICER KARNATAKA REGION ESI CORPORATION, 10, BINNYFIELDS BINNYPET, BANGALORE-560 023 …APPELLANTS (BY SRI. N.S. NARASIMHA SWAMY, ADVOCATE) AND: M/S A.G. SONS INTERIORS PVT. LTD. NO.83/3, SAIT PALYA HENNUR MAIN ROAD LINGARAJAPURAM BANGALORE-560 084 REPRESENTED BY ITS MANAGING DIRECTOR MR. A.G. HOOVER …RESPONDENT (BY SMT. NITYA KALYANI, ADVOCATE) THIS MFA IS FILED U/S 82(2) OF EMPLOYEES STATE INSURANCE ACT AGAINST THE JUDGMENT DATED:29.03.2016 PASSED IN E.S.I.NO.51/2010 ON THE FILE OF THE EMPLOYEES Digitally signed by ANJALI M Location: High Court of Karnataka - 2 - HC-KAR NC: 2025:KHC:24417 MFA No. 3685 of 2016 STATE INSURANCE COURT, BENGALURU, PARTLY ALLOWING THE APPLICATION FILED U/SEC 75 OF THE ESI ACT, 1948. THIS APPEAL, COMING ON FOR FINAL HEARING, THIS DAY, JUDGMENT WAS DELIVERED THEREIN AS UNDER: CORAM: HON'BLE MR. JUSTICE RAMACHANDRA D. HUDDAR ORAL JUDGMENT This Misc.First appeal is filed by the Employees State Insurance Corporation under Section 82 (2) of ESI Act, 1948, challenging the judgment and order dated 29.03.2016 passed by the learned Judge of the Employees Insurance Court, Bengaluru in ESI Application No.51/2010. By the impugned order, the learned ESI Court allowed the application in part and modified the order dated 20.01.2010 passed by the Recovery Officer under Section 45(A) of the Act whereby, the original contribution amount of Rs.60,899/- determined by the Corporation was reduced to Rs.25,375/-. The Corporation, being aggrieved by such reduction has preferred this appeal mainly contending, that the modification is contrary to law, - 3 - HC-KAR NC: 2025:KHC:24417 MFA No. 3685 of 2016 unsustainable on facts and unsupported by any cogent justification. 2. The fact relevant for the purpose of this appeal are not in serious dispute. The respondent is a private limited company engaged in the business of interior design and furnishing, operating from Bengaluru. The respondent-establishment is covered under the Employees State Insurance Act, 1948 (in short `the Act'). During the course of routine enforcement and surveillance, an inspection was carried out by ESI Corporation on 29.5.2007. During the inspection, it was revealed that respondent had incurred expenses of Rs.15,61,500/- towards labour charges for the financial year 2005-2006, but had failed to pay contributions under the Act on the said amount. 3. Consequentially, corporation initiated proceedings against the respondent-company under Section 45-A of the Act, the provision that empowers the corporation to determine the contribution payable by an - 4 - HC-KAR NC: 2025:KHC:24417 MFA No. 3685 of 2016 employer by adopting a best judgment assessment when the employer fails to submit complete and accurate records. A show-cause notice was issued and respondent was afforded an opportunity of hearing. However, in the absence of substantial documentation, such as wage registers, muster rolls or statutory forms to rebut the inspection findings, the Corporation proceeded to pass an order dated 21.10.2010 under Section 45A, whereby, 60% of total labour charges were treated `wages' under Section 2(22) of the Act and contribution at the rate of 6.5% was levied thereon, amounting to Rs.60,899/-. 4. The respondent-Company challenged the said order before the learned ESI Court on the ground that, the amounts paid were to independent contractors and that the persons engaged for executing the work were not employees within meaning of Sec.2(9) of ESI Act. It was contended that, these individuals were professionals or firms such as M/s.Continetnal Builders and Developers and that there existed no employer-employee relationship - 5 - HC-KAR NC: 2025:KHC:24417 MFA No. 3685 of 2016 between the respondent-Company and such individuals. A further plea was taken that, the work in question was executed in a non-implemented area where the ESI scheme was not brought into force and hence, no statutory contribution would be levied. 5. The learned ESI Court, after examining the rival contentions and documents placed on record by both the parties, concluded that, the relationship between respondent and the workers was not one of direct employment and accordingly held, that the original assessment by the Corporation treating 60% of labour charges as wages was excessive. The learned Judge exercising discretion, treated only 25% of the labour charges as constituted 'wages' and directed contribution on that basis, thereby, reducing the payable amount to Rs.25,375/-. 6. Having heard the learned counsel for the appellant and the respondent and having perused the records, this Court finds that, the approach adopted by the - 6 - HC-KAR NC: 2025:KHC:24417 MFA No. 3685 of 2016 ESI Court is legally untenable and suffers from material irregularity which requires interference by this Court for the following reasons: The ESI Act is a beneficial social welfare legislation aimed at ensuring social security and health insurance for employees employed in factories and establishments to which the Act applies. The term `employee' as defined under section 2(9) of the Act is of wide amplitude and is not limited to persons directly employed by the principal employer. It includes persons engaged through immediate employers or contractors, provided that the work performed is in connection with the operations of the establishment and its supervision. 7. In the present case, though the respondent specifically contends that, the workers were engaged through contractors, but, has failed to discharge the burden of proof placed upon it. It is well settled that, the primary responsibility to maintain employment records rests with the employer. The respondent did not produce - 7 - HC-KAR NC: 2025:KHC:24417 MFA No. 3685 of 2016 muster rolls, salary slips, Form No.3, Form No.6, or other statutory registers to establish the independent nature of the work or the identity of the persons so engaged. Even the so called contractors, including M/s.Continental Builders and Developers were not examined as witnesses, nor was any contract documents placed on record to demonstrate that, they were independent entities bearing the obligations of employer. 8. It is further relevant to note that, the Corporation had relied upon job work bills marked as Ex.R7, which clearly indicated that, payments were made to individuals and not to the legal entities or companies. The nature of the work, the supervision exercised by the respondent, and the integration of such labour into the regular course of business of the respondent are strong indicators pointing towards the existence of employer- employee relationship at least for the purpose of statutory liability under the ESI Act. The best judgment assessment adopted by the corporation by treating 60% of labour - 8 - HC-KAR NC: 2025:KHC:24417 MFA No. 3685 of 2016 charges as wages is based on reasonable estimation and industry norms, especially in the face of non-cooperation by the employer. 9. The learned ESI court, however, failed to appreciate these aspects and reduced the assessable component arbitrarily to 25% without any empirical or judicial basis. Such a finding, unsupported by law or evidence cannot be sustained. The assumption that, only a one fourth of the labour charges represented wages ignores the statutory presumption attached to the determination of payment of contribution by the respondent-Company under Section 45A of the Act and undermines the very object of the Act. Under these circumstances, Courts must be cautious while interfering with such assessment unless there is overwhelming material to show arbitrariness or mala fides which is clearly absent in the present case. 10. The plea of the respondent that the work was executed in a non-implemented area also does not merit - 9 - HC-KAR NC: 2025:KHC:24417 MFA No. 3685 of 2016 acceptance. The respondent company has failed to produce any gazette notification, map which go to substantiate that, the area where the work was carried out fell outside the purview of ESI Scheme. In the absence of such evidence, this Court cannot accept a bald statement as sufficient to absolve the respondent of its liability under the Act. 11. In the light of the above findings, this Court is of the considered opinion that, the order dated 29.03.2016 passed by the ESI Court, Bengaluru, cannot be sustained and is liable to be set aside. The original order dated 20.01.2010 passed by the Corporation determining the contribution at Rs.60,899/- is found to be lawful, justified, and in consonance with the principles of ESI Act. 12. Resultantly, the following: ORDER (i) Apeal is allowed. (ii) Order passed by the ESI Court in ESI application No. 51/2010 dated 29.03.2016 - 10 - HC-KAR NC: 2025:KHC:24417 MFA No. 3685 of 2016 is hereby set aside, consequently the order so passed by the ESI dated 20.01.2010 under Section 45 of the Act is restored. (iii) The respondents shall be liable to pay contribution amount of Rs.60,899/- as determined by the Corporation forthwith. (iv) The Corporation is directed to adjust any payment already made or recovered and recover the balance if any, in accordance with law. Under the circumstances, costs made easy. Sd/- (RAMACHANDRA D. HUDDAR) JUDGE SK List No.: 1 Sl No.: 33