India: ESI Contributions Not Payable on Conveyance Allowance
The Supreme Court of India has held that all kinds of travelling/conveyance allowances are excluded from the definition of wages under the and should not be taken into consideration for computing.
On 8 March 2021, the Supreme Court of India, in the case of the Employees State Insurance Corporation vs. Texmo Industries (SLP (C) No. 811/2021), held that conveyance allowance or travelling allowance does not fall under the definition of ‘wages’ under the Employees’ State Insurance Act, 1948 (“ESI Act”) and should not be taken into consideration for computing Employees’ State Insurance contributions (“ESI Contributions”).
(The ESI Act is a social security legislation, wherein both the employer and the employee are required to contribute a certain percentage of the employee’s wages, on a monthly basis, to a government-controlled fund).
In this case, a dispute arose between M/s Texmo Industries and the Employees State Insurance Corporation (ESIC) with respect to the computation of ESI Contributions in relation to its employees. The petitioner vide an order dated 6 July 2016, instructed the respondent to include conveyance allowance as part of wages for computing ESI Contributions. Aggrieved by the above order of petitioner, the respondent approached the ESIC Court, Coimbatore. The ESIC Court upheld the contentions of the respondent.
Subsequently, the petitioner filed an appeal before the High Court of Madras against the judgment of the ESIC Court dated 31 July 2020.
After reviewing the facts and circumstances of the case, the High Court held that wages under Section 2(22) of the ESI Act includes remunerative payments, but does not include any compensatory payments. The definition of wages expressly excludes:
- any travelling allowance or the value of any travelling concession;
- any sum paid to the employee to defray special expenses entailed on her/him by the nature of her/his employment.
The High Court stated that the ESIC Court rightly held that a conveyance allowance is in the nature of travelling allowance, the object of which is to enable the employee to reach her/his place of work and to defray costs incurred during travel from her/his place of residence to her/his place of work. The High Court also opined that if instead of paying the conveyance allowance, the employer provides free transport to the employee, the monetary value of it should also be excluded from the computation of his/her wages. Aggrieved by the decision of High Court dated 8 October 2020, a special leave petition was filed before the Supreme Court.
In light of the above, the Supreme Court dismissed the petition and held that the definition of wages under the ESI Act excludes travelling allowance and since travelling allowance is not defined under the ESI Act or the Industrial Disputes Act, 1947, the meaning of the same has to be construed as per its ordinary meaning.
The Supreme Court further observed that if the intention of the legislation was to exclude only the occasional long-distance travel from one city to another from the definition of wages, it would have specifically provided so. Therefore, the expression ‘travel’ is used interchangeably with the expression ‘commute’ which means “to travel regularly by bus, train, car etc. between one’s place of work and home” and that there is no such difference between conveyance allowance and travelling allowance to justify the stand of the petitioner.
The Apex Court opined that travelling allowance includes conveyance allowance and the use of the expression “any travelling allowance” in Section 2(22)(b) of the ESI Act, makes it clear that all kinds of travelling allowances are excluded from the definition of wages.
The ESIC vide a circular dated 8 November 2021, acknowledged the decision of the Supreme Court and instructed all its regional and sub regional offices to strictly comply with it.
Key Action Points for Human Resources and In-house Counsel
Employers should revisit their internal computation records for evaluating the ESI Contributions payable with respect to their employees. Employers must ensure that travelling/conveyance allowances are not taken into consideration while computing ESI contributions for their employees.