India – Delhi High Court Upholds Constitutional Validity of Provident Fund Contribution for International Workers

Background

• In October 2008, Government of India (“GOI”) made fundamental changes in the Employees’ Provident Fund Scheme, 1952 (“EPFS”) and Employees’ Pension Scheme, 1995 (“EPS”) by bringing International Workers (“IWs”) under the purview of Indian social security regime. Consequently, foreign nationals working in organisations covered under the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (the “EPF Act”) were required to contribute towards PF. Enabling provisions for such IWs were introduced under Para 83 (EPFS) and Para 43A (EPS).
• However, certain foreign employees were exempted from PF contributions in India subject to specified conditions. Such employees have been defined as ‘excluded employees’ under the EPFS.
• The GOI amended Para 83 of EPFS to expand the definition by adding a new clause. Foreign employees deputed from a country with which India has entered into a bilateral comprehensive economic agreement prior to 1 October 2008 will qualify as an excluded employee.
• With respect to the withdrawal, GOI amended the refund clause by a notification dated 5 October 2012. According to the amended clause, IWs who are covered under a Social Security Agreement (“SSA”) between India and any other country can withdraw their accumulated PF balance under EPFS on ceasing to be an employee in an establishment covered under EPF Act.
• In view of the special provisions introduced for IWs, petitions were filed in various High Courts challenging the constitutional validity of Para 83 in relation to IWs.
• The Bombay High Court² had dismissed the petition and held that the provision relating to IWs are constitutionally valid. The court held that the IWs form a separate and distinct class themselves.
• On the contrary, the Karnataka High Court³ struck down the provisions of Para 83 of EPFS and para 43A of EPS and held these provisions to be unconstitutional and arbitrary.
• Recently, the Delhi High Court upheld the provisions of Para 83 of EPFS on the grounds that the classification of IWs is reasonable and based on intelligible differentia.

Facts of the Case

• Spice Jet Ltd (the “Petitioner”) had filed writ petition before the Delhi High Court, challenging the constitutional validity of Para 83 of EPFS. It contended that Para 83 is discriminatory as it violates Article 14 of the Constitution of India, imposes unreasonable withdrawal conditions and is ultra-vires the EPF Act which does not discriminate between Indian employees and foreign employees.
• Further, the Petitioner also challenged the summons issued under section 7A of the EPF Act requiring it to appear before PF Authorities and produce evidence and relevant records for determination of PF dues relating to IWs.

Petitioner’s Contentions

• IWs are required to contribute to PF irrespective of the quantum of their pay while Indian employees are mandated to contribute to PF only if their pay is below INR 15,000 per month.
• The definition of employee⁴ as per the EPF Act does not distinguish between an Indian employee and a foreign employee. However, Para 83 of EPFS creates a separate class that is irrational and not based on intelligible differentia. Accordingly, it violates Article 14 of the Constitution of India which is also applicable to foreign employees.
• Para 69 of EPFS is arbitrary as it permits foreign employees to withdraw PF only after they attain the age of 58 years while they generally work in India for two to five years.
• The EPF Act does not make any distinction between an Indian employee and a foreign employee, while Para 83 of EPFS makes such distinction.
• The summons and demand notice issued under section 7A are to be quashed as they are issued under the impugned notifications and are unlawful.
• The Petitioner also placed reliance on the Karnataka High Court judgment and Supreme Court judgments while seeking the writ petition to be allowed and quashing of the summons and demand notice.

EPFO / GOI's Contentions

• The challenge to Para 83 does not bear any merit as IWs are a class apart and contribute to PF only for a short duration unlike Indian employees who contribute to PF throughout their employment. Hence, IWs do not suffer the same economic duress of contributing to PF as Indian employees.
• Foreign employees have been members of PF since the inception of the scheme in 1952. However, while introducing the provisions in 2008, the GOI recognized that foreign employees are economically distinct from Indian employees as they contribute to PF for a relatively shorter duration.
• Para 83 of the EPFS puts temporarily employed foreign employees at par with Indians temporarily employed in foreign countries with whom India has an SSA. However, application of the EPFS to foreign employees with whom India does not have an SSA or bilateral agreement, has been made mandatory without any limit as a social security measure.           
• Difference in the salary limit is based on reasonable differentia that foreign employees come to India for shorter durations, whereas Indian employees serve the Indian establishments until they retire.
• The period for which the foreign employees serve the Indian establishments is the basis of classification and is thus not violative of Article 14 of the Constitution of India.
• Notice was issued to the Petitioner as statutory returns as per EPFS were not submitted. Any procedural errors in the notices are curable and do not invalidate the underlying legal obligation.

High Court’s Decision

The High Court carefully considered the contentions by both the parties and perused the material on record. The court adjudicated on the argument of unreasonable classification by placing reliance on a Supreme Court judgment, wherein it was held that:

• The State has the power to classify people for legitimate purposes and every classification in some degree is likely to produce some inequality, but mere inequality is not enough. Article 14 of the Constitution of India can be said to be violated only if equal protection is denied to two persons belonging to the same class / category. For challenging any act on part of the State, it is to be shown that there is no reasonable basis for differentiation between the two sets of persons.
• To pass the test of permissible classification, two tests must be satisfied, the classification is founded on an intelligible differentia, and the differential must have a rational relation to the object sought to be achieved. The difference needs to be a reasonable classification and need not be grave but real and substantial.
• Based on the said criteria, the High Court examined if the classification of IWs is reasonable and has some intelligible differentia.

The High Court held that the rationale based on the economic duress caused to Indian employees who are mandated to contribute to the PF is absent in case of foreign employees owing to their short period of employment.

• In case all Indian employees irrespective of their pay are mandated to contribute to PF they will be subject to harsh economic duress as they will be required to contribute to PF throughout their employment which is generally longer as compared with the length of foreign employees working in an Indian establishment.
• Insertion of Para 83 also has an object to provide for social security.
• For the above reasons, the High Court held that Para 83 satisfies the test of permissible classification and the same is reasonable and not in violative of Article 14 of the Constitution of India.
• Para 83 of the EPFS was introduced to implement India’s international treaty obligations. Entering into an international treaty is a sovereign prerogative and if such provision is stuck down, it will amount to taking away the legal basis for entering into and applying the SSA.
• Accordingly, the High Court also upheld the validity of Para 69 of the EPFS as it could not find any good ground to strike down such provision.
• The Delhi High Court diverged from the view taken by the Karnataka High Court³ stating that the classification based on the economic duress faced by Indian employees, which is absent in case of foreign employees was not pleaded and considered in the said judgment.
• Thus, the High Court held that the provisions of Para 83 of EPFS are constitutional and also upheld the summons issued.

Contacts