Case: Shubham Knit Wear Private Limited, Mumbai Vs. The Regional Provident Fund Commissioner, Mumbai &amp; Others

2. The Appellant was incorporated under the Companies Act, 1956 on 20 January 1984. The Appellant engages inter alia in the manufacture, distribution, export and supply of ready made garments. The Second Respondent was engaged in the manufacture and sale of hosiery products including undergarments and was, at the material time, a registered proprietor in India of the Trade Mark, Victor. On 1 May 1984, an agreement was entered into by the Appellant with the Second Respondent. By the provisions of the agreement, called a licence agreement by the parties, the Second Respondent granted to the Appellant, a licence as a registered user to thee right to use the Trade Mark Victor within the territories of the Maharashtra and Madhya Pradesh. The use of the Trade Mark was to be confined to articles listed out in Schedule B to the agreement which covered four designs of Mens undergarments. In pursuance of the registered user agreement, the Second Respondent was empowered to ensure that the goods manufactured by the Appellant fulfilled the standard of quality associated with the Trade Mark of the Second Respondent. The Second Respondent was empowered by the terms of the agreement to provide specifications of the plant and machinery to be purchased by the Appellant to conform to the process and technical advice specified by the Second Respondent and to allow the Second Respondent to inspect the manufacturing operation. Under the terms of the agreement, the Appellant agreed to pay a royalty of Rs. 1.50 per dozen in consideration of the Second Respondent imparting technical knowhow and permitting the use of the mark. In order to facilitate supervision of the quality of the goods manufactured by the Appellant, the Second Respondent had granted to the Appellant a licence to use the space situated on the premises of the Second Respondent at Lower Parel. Expenses on advertisements and publicity were to be shared by the parties. The agreement was terminable with three months notice3. The agreement between the Appellant and the Second Respondent was confined to one product – mens undergarments – incorporating four designs. Apart from the aforesaid products, both the Appellant and the Second Respondent manufactured a range of products to which the agreement did not extend. At the material time, the Appellant was also engaged in the manufacture of garments under the trade name Shabnam. According to the Appellant, the purchase of raw material both by the Appellant and by the Second Respondent was carried out independently. The Second Respondent manufactured, marketed and distributed products manufactured under the Trade Mark, Victor in various other parts of India other than the States of Maharashtra and Madhya Pradesh which did not form part of the registered user agreement. The agreement between the Appellant and the Second Respondent did not, in other words, cover the entire scope of operation or the range activities carried out by the Appellant and the Second Respondent4. The Second Respondent has an establishment which is already covered by the provisions of the Employees Provident Funds and Miscellaneous Provisions Act, 1952, to which a Code – MH/1084 had been assigned. According to the Appellant, Section 16 of the Act, as it existed on 20 January 1984, granted infancy protection to an industry which was newly established. Section 16(1)(b) as it stood at the material time, was to the following effect:16. Act not to apply to certain establishments(1) This Act shall not apply(b) to any other establishment employing fifty, or more persons or twenty or more, but less than fifty persons until the expiry of three years in the case of the former and five years in the case of the latter, from the date on which the establishment is, or has been set upSection 16 came to be amended with effect from 1 August 1988 by Act 33 of 1988 as a result whereof, clause (d) ofn (1) dealt with infancy protection to an establishment that was newly set up. Section 16(1)(d) as amended read as follows:16. Act not to apply to certain establishments(1) This Act shall not apply(d) to any other establishment newly set up, until the expiry of a period of three years from the date on which such establishment is, or has been set upAs a result of the amendment, the infancy protection under clause (d) was confined to a period of three years from the date on which the establishment was set up. Section 16(1)(d), it may now be noted, has been deleted with retrospective effect from 22 September 1997 by Act 10 of 19985. Upon incorporation on 20 January 1984, the Appellant obtained registration from diverse regulatory authorities and under various enactments, both Central and State that held the field including among them: (i) The Directorate of Industries, Maharashtra State, as a Small Scale Unit; (ii) A factory licence under the Factories Act, 1948; (iii) Registration under the Central Sales Tax Act, 1959 and under the Central Sales Tax (Regulation and Turnover Rules, 1957; (iv) Registration under the Employees State Insurance Act, 1948; (v) Municipal permission under the Mumbai Municipal Corporation Act, 1888; and (vi) Permission under the Maharashtra Labour Welfare Fund. The Second Respondent on its part, has a separate registration, permit and licences. The Appellant has a separate electric connection. The machinery at the premises of the Appellant was purchased, procured and installed by the Appellant and paid for by the Appellant between 20 January 1984 and 31 March 1985 at an investment of Rs.. The plea of the Appellant is that the two establishments, at all material times, maintained separate stores and carried out their purchases independently. The Appellant maintained a separate set of employees and a separate muster roll. The conditions of service of the employees of the Appellant are stated to have been distinct from those governing the employees of the Second Respondent. The employees of one of the two organizations could not be transferred to the other. The management of the Appellant and of the Second Respondent respectively exerted no control, supervision or authority over the 8 staff of the other. Since both the Appellant and the Second Respondent were incorporated separately, each maintained a separate Profit and Loss Account andt in respect of their own operations. Both the Appellant and the Second Respondent were assessed separately for the purposes of Sales Tax and Income Tax. In other words, the case as has been set up before the Court by the Appellant is that save and except the registered user agreement under which the Appellant had a nonexclusive licence to use the Trade Mark of the Second Respondent in the territories of the State of Maharashtra and Madhya Pradesh in respect of one specified product comprising of four designs against the payment of royalty, both sets of Companies maintained their independent existence. According to the Appellant, the provisions of the registered user agreement which empowered the Second Respondent to exercise supervision over the quality of the product manufactured by the Appellant were in order to ensure that the distinctiveness of the Trade Mark forming the subject matter of the agreement was not diluted. Apart from the product that was covered by the registered user agreement, the Appellant manufactured other goods. There was, according to the Appellant, therefore, no commonality of ownership or management and both the Companies were independent in finance, administration and human resources6. In January 1989, the Provident Fund Inspector visited the establishment of the Appellant and according to the Appellant, advised it that the provisions of the Act were applicable to the Appellant since the infancy protection was not available to an establishment which had completed three years of existence. The Appellant, it has been stated, computed and paid Provident Fund dues with effect from 1 August 1988. By a letter dated 28 July 1989, the Regional Provident Fund Commissioner (RPFC) directed the Second Respondent to seek compliance under the provisions of the Act in respect of the employees of the Appellant with effect from 1 May 1984. A copy of the letter having been endorsed to the Appellant, a response was submitted on 22 August 1989 by the Appellant stating that at all material times, it was completely independent of the Second Respondent. The Appellant sought the allotment of an employees code so as to enable it to independently comply with the provisions of the Act. While adverting to the registered user agreement, the Appellant reiterated its case that there was no commonality of ownership and no financial or other connection between the Appellant and the Second Respondent. The Second Respondent by a letter dated 21 August 1989, similarly informed the First Respondent that it could not be called upon to pay the contribution in respect of the employees of the Appellant. On 27 December 1989, the First Respondent called upon the Appellant to seek compliance under the provisions of the Act in respect of the employees code allotted to the Second Respondent. On 11 January 1990, the Assistant Provident Fund Commissioner informed the Second Respondent that in continuation of the original Code (MH 1391) allotted to the Second Respondent, a) was being allotted to the Appellant herein, on the basis that the Appellant was a branch of the Second Respondent. Accordingly, the Second Respondent was informed that the said Branch/Head Office will be treated as one along with your main establishment7. Eventually, an enquiry under Section 7A of the Act was instituted by the First Respondent in the course of which, the Appellant filed several documents, among them, being the Registration Certificate under the Bombay Sales Tax Act, SSI Certificates, Factory licence, Central Sales Tax Registration, Municipal storage licence, Income Tax and Sales Tax assessments, financial statements for the years93 allegedly showing the products manufactured both under the licence and directly. The contention of the Appellant was that it was an independent, separate and distinct establishment. The Appellant claimed that it was neither producing goods for the benefit of the Second Respondent, nor did its existence depend on the Second Respondent. The licence granted by the Second Respondent was confined to only one product comprising of four designs, out of a range of products manufactured and distributed by the Appellant all over India. Moreover, it was submitted that the income from the licensed product was miniscule as compared to the sales of the products of the Appellant marketed under its Trade Mark Shabnam. The Appellant, it was submitted, was independently registered under various statutory provisions and there was no commonality of ownership or management. The administrative affairs of the Appellant were managed independently of the Second Respondent8. The First Respondent passed an order on 24 May 1993 rejecting the submissions of the Appellant. The First Respondent held that the establishment of the Appellant was a part of the main establishment of the Second Respondent and that accordingly, the provisions of the Act would be applicable to the Appellant from the date of its inception in terms of Section 2A of the Act. The First Respondent held that the establishment was not entitled to infancy protection. Thereupon by an order dated 21 October 1993, the dues payable by the Appellant were quantified at Rs.52,372.659. The Appellant instituted a Writ Petition under Article 226 of the Constitution before this Court. The petition came to be dismissed by a judgment and order of the Learned Single Judge dated 19 February 1997. The Learned Single Judge held that complete control was handed over by the Second Respondent to the Petitioner, the RPFC was entitled to treat the Petitioner as a part of the Second Respondent. An adverse inference was drawn since the Second Respondent had not been served with the proceedings.

Reasoning:
Similarly, the material produced by the Appellant showed that gents undergarments manufactured under licence for that year constituted approximately 2227 dozen valued at Rs. 1.5 lakhs while similar products of the Appellant which were not under licence were to the extent of 4438 dozen valued at Rs. 5.18 lakhs. Apart from this, there is absolutely no evidence of functional integrality. The closure of the unit of the Appellant would not result in the closure of the unit of the Second Respondent or vice versa. There is no commonality of ownership, management or of the workforce19. In these circumstances, the finding of the Learned Single Judge in affirming the order passed by the First Respondent is clearly in error. The decision of the First Respondent was clearly contrary to the law as interpreted in the judgment of the Supreme Court in Dharamsi Morarji (supra) and the judgments of this Court to which a reference has been made earlierSimilarly, the material produced by the Appellant showed that gents undergarments manufactured under licence for that year constituted approximately 2227 dozen valued at Rs. 1.5 lakhs while similar products of the Appellant which were not under licence were to the extent of 4438 dozen valued at Rs. 5.18 lakhs. Apart from this, there is absolutely no evidence of functional integrality. The closure of the unit of the Appellant would not result in the closure of the unit of the Second Respondent or vice versa. There is no commonality of ownership, management or of the workforce19. In these circumstances, the finding of the Learned Single Judge in affirming the order passed by the First Respondent is clearly in error. The decision of the First Respondent was clearly contrary to the law as interpreted in the judgment of the Supreme Court in Dharamsi Morarji (supra) and the judgments of this Court to which a reference has been made