Yogeshwar Dayal, C.J and M. Jagannadha Rao, J.:— The appellant, Karachi Bakery, has filed this writ appeal against the judgment of the learned single Judge dismissing the writ petition and in accepting the correctness of the orders of the Regional Provident Commissioner (hereinafter called ‘the P.F Commissioner), by applying the provisions of the Employees' Provident Fund & Misc. Provisions Act, 1952 (hereinafter called ‘the Act), for the period 1-4-77 to 31-3-79 and levying a contribution and administration charges of Rs. 20,384-25.

2. The view of the PF Commissioner was that if the appellant was having 6 regular and 5 part-time employees (in all 11), and if the appellant had entered into contracts with Devandas Bakery and Ram Bakery for supplying certain Bakery products to the appellant the employees of the said two firms-who are 18 in number-should be treated as employees of the appellant-firm inasmuch as the said contracts are in connection with the business of the said firm and fell within S. 2(f) of the Act. At the relevant time, the Act was applicable to establishments having twenty or more employees. The appellant is a Bakery in Hyderabad doing wholesale and retail business. There was an inspection by the inspector in respect of the appellant-firm on 19-10-77 and a notice was issued on 27-1-78 alloting a Code No. AP/5452. By that notice, the appellant was asked to comply with the provisions of the Act in respect of all eligible employees by remitting-under the various schemes-the contribution and administrative charges. The appellant was also directed to submit monthly/yearly statements with effect from 1-4-77. The appellant sent a reply dated 2-2-78 contending that the provisions of the Act did not apply because the employees of Devandas Bakery and Ram Bakery cannot be treated as the employees of the appellant. The respondent issued a further notice dt. 15-2-78 requesting the appellant to comply with the scheme and on the ground that the appellant committed default, a show-cause notice was issued (served on 5-8-78) and an inquiry was started on 11-8-78. The inquiry went on till 7-5-79. During the inquiry, the appellant produced the agreements dt. 1-1-76 entered into by it with the above said two firms, its accounts income-tax particulars etc. No notices were however given by the authority to the Devandas Bakery or Ram Bakery to produce their books of account or other particulars. The impugned order was then passed on 21-7-79 holding that the above said two firms having entered into a contract with the appellant, the employees of the said two firms who are 18 in number should be treated as the appellant's employees. If that is done, the total number of employees-including the 6 full-time and 5 part time employees of the appellant, would come to 29 and then the Act would become applicable. It was stated by the PF Commissioner in his order that in view of the definition of Employees in S. 2(f) of the Act.

“It is a matter of operation of the law, having nothing to do with otherwise independent character of the units”.

3. He observed that after perusing (i) the two agreements dt. 1-1-76 entered into between the appellant on the one hand and each of the aforesaid two firms: (ii) the Trading Account, Profit and Loss Account and Statement of Affairs as on 31-3-78 and (iii) the entire circumstances of the case:

“it is very clear……that the agreement executed is anything but a contract and if so the employees working under these contractors are ‘Employees’ and hence covered within the meaning of S. 2(f) of the Act, since the aforesaid employees are working in or in connection with the works of the establishment viz., Karachi Bakery and their wages are paid indirectly through the contractors.”

4. He held that Ram Bakery and Devandas Bakery are only contractors covered by S. 2(f), that as per the agreements executed, they are to get labour charges for the services rendered which charges they did, in fact, receive. He held that it is not a matter of grouping or clubbing the employees, but

“It is a matter of operation of law” and held that the conditions in S. 2(f) were satisfied, and that the appellant was therefore liable to contribute Rs. 20,384,25 towards Contribution and Administrative charges.

5. The learned single Judge in the judgment under appeal, proceeded on a similar interpretation of S. 2(f) of the Act, She stated that Devandas and Ram Bakeries supply bakery products to the appellant pursuant to the agreements dt. 1-1-76, that the Regional Provident Fund Commissioner found that the said two concerns are ‘not independent units’ but contractors employed by the appellant for manufacturing bakery products out of material supplied by the appellant. According to the learned Judge, the appellant Supervises the operations so as to maintain the quality required and the ‘labour charges’ are paid by the appellant. According to her, the PF Commissioner found that the above said firms did not supply any products to any other establishments.

6. After setting out as above in the statement of facts the learned single Judge referred to S. 2(f) of the Act and observed that the said two firms manufacture bakery products out of material supplied by the appellant pursunt to the contracts; the appellant pays ‘labour charges’ the appellant exerciises controlover the quality of the items manufactured and over the speedy execution or rejection of the same’. The appellant's books showed a deduction of Rs. 1,28,179,95 plus Rs. 21,380/- towards deduction on account of ‘wages’ that the amount represented ‘labour charges’ for the employees indirectly paid by the principal employer. She also observed ‘the contractors do not supply any products to any other concerns’. The learned Judge then held that S. 1(3)(b) and S. 2(f) were atrracted and concluded:

“I have no doubt in my mind that the persons employed by these two concerns are employed by a contractor in or in connection with the work of the petitioners establishment”.

and as such, the persons actually working in those two concerns are also the employees of the appellants establishment. On that basis the writ petition was dismissed.

7. In this appeal, the following contentions are raised by Sri K. Pratap Reddi:

(I) The learned single Judge has mistaken some of the facts which were referred to in the submission of the Asst. Provident Fund Commissioner Sri K.N Puranik, (who argued for the department before the PF Commissioner) to be the findings arrived at by the PF Commissioner. The facts so assumed as found, have to be therefore eliminated from consideration.

(II) On the facts actually found by the Regional Provident Fund Commissioner and should have been found by the learned single Judge, the approach to S. 2(f) is vitiated by an error of law apparent on the face of the record in treating supply of finished products under a written contract as a ‘labour contract’ and in proceeding to apply S. 2(f) merely because there is a ‘contract’ connecting the appellant and the two firms. The Commissioner as well as the learned single Judge did not make any distinction between a contractor who procures labour falling under S. 2(f) and an independent contractor who employs labour as his own employees. The latter, according to counsel, does not fall under S. 2(f).

8. Point I:— So far as the first contention is concerned, the same appears to us to be true in several respects. In fact, it was in this context only that we have taken considerable care to set out the findings of the P.F Commissioner and of the learned single Judge, in great detail. We have gone through the orders of the PF Commissioner carefully and we find that initially he has set out the contentions of the petitioner's counsel, Sri P. Sambasiva Rao and then the contentions of Sri K.N Puranik the Assistant Provident Fund Commissioner. After setting them out at length, for about 7 to 8 pages, the PF Commissioner starts the actual discussion with the fallowing words:

“I have carefully heard the parties hereunto. I agree with the learned Advocate of the petitioners……Having perused the deeds of agreements………”

9. The findings of feet, if any, upon which the order of the PF Commissioner is based must in our view be those which are referred to in the paragraphs following the above said paragraph. If we scrutinies these subsequent paragraphs of the P.F Commissioner's order, there are atleast three important aspects upon which he did not give any finding but the learned single Judge, in our view assumed wrongly that such findings were given. This mistake has occurred in referring to the facts from the paras relating to the contentions of Mr. K.N Puranik before the P.F Commissioner.

10. Firstly, there is no finding by the PF Commissioner that the employees employed by the said two firms are not taking up the work of any other outsiders. Secondly, there is no finding that the said two units are ‘not independent units’. On the other hand, the PF Commissioner observed in this part of the order as follows:

“It is a matter of operation of law, having nothing to do with otherwise independent, character of the units”.

11. Thirdly, the learned Judge stated that ‘under the agreement’ the appellant exercises control over the quality of the items manufactured and over speedy execution or rejection of the same. We do not find any term regarding this aspect in the contracts dated 1-1-76 executed between the appellant on the one hand and the two firms referred to earlier. In fact, there is no such finding given by the PF Commissioner.

12. It must therefore, be held that the learned Judge's observations to the effect that the employees of these two other firms are not taking-up any other work of other persons, that the said two units are not independent units and that the appellant exercises control over the quality of the items manufactured and over the speedy execution or rejection of the same are not based on any such findings arrived at by the PF Commissioner.

13. Even assuming that part of the PF Commissioner's order which sets out the arguments of Sri Puranik are to be treated as findings, they must in our view, be treated as based on no evidence since no such material was before the PF Commissioner nor could these be substantiated by the respondents' counsel before us with inference to the record before the PF Commissioner. We find accordingly on the first point.

14. Point II:—Coming to the second submission of the appellant's counsel the point is whether the decision of the PF Commissioner and of the learned single Judge on their interpretation of S. 2(f) is correct in law or not. As stated under the first point above, the PF Commissioner observed that ‘it is a matter of operation of law’ and the matter has ‘nothing to do with otherwise independent character of the units’. He proceeded to state that “the agreement executed is anything but a contract and if so, the employees working under these contractors are ‘Employees, and hence covered within the meaning of S. 2(f) of the Act since the said contract-employees are working in or in connection with the work of the establishment viz., Karachi Bakery and their wages are paid indirectly through the contractors”.

15. Before adverting to the wrong understanding by the PF Commissioner of the difference between ‘wages’ and ‘labour charges’ as used in the appellants accounts we shall deal with the provisions of S. 2(f) of the Act, in so far as they are material. We shall refer to S. 2(f) as they stood at the relevant time in 1979:

“S. 2(f): “Employee” means any person who is employed for wages in any kind of work manual or otherwise in or in connection with the work of an establishment and who gets his wages directly or indirectly from the employer, and includes any person employed by or through a contractor in or in connection with the work of the establishment”.

16. Applying the definition of ‘employee’ in S. 2(f) to the facts of the case if the employees of Devandas Bakery and Ram Bakery could be said to be employed for wages in any kind of work, manual or otherwise, in or in connection with the work of the Karachi Bakery and if those employees get their wages directly or indirectly from the Karachi Bakery-whether they are employed by or through a contractor in or in connection with the work of the Karachi Bakery, they could be treated as ‘employees’ of Karachi Bakery. We are here only repeating the provisions of S. 2(f).

17. In our view, the words ‘whether they are employed by or through a contractor in or in connection with the work of the establishment’, postulate that such persons must be employed by or through a contractor as ‘contract labour’. In other words, the contract for purposes of S. 2(f) between the establishment and the contractor must be a contract by which a contractor agrees and brings labour to be employed by the establishment. The contractor for purposes of S. 2(f) is purely a labour-contractor and not an independent contractor who contracts to deliver a finished product to the establishment and who for purposes of manufacture of such a finished product, engages labour for his own purposes. In the latter case, the contractor cannot be treated as one who is employed to get labour for and on behalf of the principal establishment but will be an independent contractor who alone exclusively controls and supervises the work of his employees and directs what work is to be done and how it is to be done. In our view, the PF Commissioner as well as the learned single Judge erred in not differentiating between a contractor who is engaged to bring labour for and on behalf of the establishment and one who merely contracts to manufacture and deliver a finished product by employing his own labour.

18. The above distinction has been very clearly brought out in several decisions of the Supreme Court. We deem it sufficient to start with one of the very recent rulings of the Supreme Court where almost all the relevant rulings have been referred and considered elaborately.

19. P.M Patel & Sons v. Union of India (1) (1986) 1 SCC 32 : A.I.R 1987 S.C 447 the question arose squarely under the Employees Provident Fund & Misc. Provisions Act (Act 19/52). On the facts of the case the Court was dealing with a home worker rolling beedies at home and held that he was an employee of the establishment. It was observed that the definition of the word ‘employee’ was wide as defined in S. 2(f) and a home-worker is involved in an activity connected with the work of the factory engaged in the task of rolling beedies. The words ‘in connection with’ cannot be confined to work performed in the factory itself as a part of the total process of the manufacture. On facts, it was noticed that these workers receive the raw material from the factory, roll the beedies at home and deliver the same to the manufacturer directly subject to the right of rejection of the manufacturer and this is evidence of the requisite degree of control and supervision for treating the manufacturer as the employer.

20. The above Supreme Court case was, no doubt, a case where the home-workers were employed directly by the manufacturer. But, while dealing with such a class of persons, Pathak, J. (as he then was) categorized employees into three categories: (a) firstly those who are engaged directly by an employer, (b) secondly those who are employed through the agency of a contractor, the said contractor being a purely labour-contractor who contracts to bring the labour to be engaged by or on behalf of the employer, in such a case the contractor brings about a relationship of master and servant between the employer and the labour whom he has brought together (c) thirdly, those labour who are engaged by a contractor who is not an ordinary labour-contractor but is an independent contractor himself is the master for the employees he engages. In the last type of case, the contractor is a separate and independent entity. The learned Judge referred to Chintaman Rao v. State of Madhya Pradesh (2) A.I.R 1958 S.C 388 as a case where the contractors known a Sattedars, with whom manufacturers contracted for the supply of beedies were regarded as independent contractors and therefore the coolies employed by the Sattedars could not be treated as employees of the manufacturers for purposes of the Factories Act. The Supreme Court referred also to Orissa Cement Ltd. v. Union of India (3) AIR 1962 SC 1402 and D.C Dewan Mohiddeen Saheb v. Industrial Tribunal, Madras (4) AIR 1966 SC 370 as cases where the distinction between ‘labour employed by the manufacturer and that employed by ‘an independent contractor’ was brought about. The law, according to the Supreme Court, took a major shift’ in Silver Jubilee Tailoring Home v. Chief Inspector of Shops and Establishment (5) (1974) 3 SCC 498 : AIR 1974 SC 37 wherein Mathew, J. reviewed the entire case-law and pointed out that the test of ‘control’ was no longer an exclusive test. There could be no magic formula for all cases and in fact, the court must ‘perform a balancing operation’ weighing up the factors which point in one direction and balancing them against those pointing in the opposite direction. The ‘control’ test is not always decisive. The degree of control would be different, in different types of work. A right of rejection could be treated as an element of control. Pathak, J. (as he then was) then referred to Mangalore Ganesh Beedi works v. Union of India (6) (1974) 4 SCC 43 : AIR 1974 SC 1832 which case dealt with the validity of the Beedi and Cigar Workers (Conditions of Employment), Act 1966. There the Constitution Bench of the Supreme Court observed:

“When the manufacturer engages labour through the contractor, the labour is engaged on behalf of the manufacturer, and the latter has therefore liable to such contract labour. It is only when the contractor engages labour for or on his own behalf and supplies the finished product in relation to such labour and the manufacturer will not be responsible for implementing the provisions of the Act with regard to such labour employed by the contractor”.

21. From the aforesaid observations of the Supreme Court, it is clear that unless there is material that the labour engaged by Devendas Bakery and Ram Bakery is engaged for and on behalf of Karachi Bakery, it cannot be said that they are labour employed through a contractor within S. 2(f) of the Act.

22. In the present case, the agreements dated 1-1-76 are agreements by the appellant with the two other firms for supply of bakery products. Of course, the raw material is supplied by the appellant. There is no clause permitting supervision or control of the work. There is no clause in the deed nor any evidence that the two firms do not accept work from anybody else. There is no clause even that the appellants will pay the labour charges of the employees of the two firms. No right of rejection is incorporated vis-a-vis employees of the two firms. The PF Commissioner while agreeing that the Devandas Bakery and Ram Bakery are independent units (a fact which was noted to the contrary by the learned single Judge) manufacturing finished products for Karachi Bakery under the agreements dated 1-1-76, thought that because there was a contract which was in connection with the appellant's work, the employees of the said contractors should have to be treated as the employees of the appellant. The distinction between a contractor who merely employs labour for and on behalf of an employer and a contractor who employs his own labour to manufacture and deliver a finished product, to another establishment has been totally over-looked by the Commissioner, Such a distinction was noticed not only in the two other cases above referred to but also in Dharangaphra Chemical Works Ltd. v. State of Saurashtra (7) AIR 1957 SC 264 where the entire case-law relating to independent contractors has been discussed by the Supreme Court. This case was followed recently in Workmen, Food Corporation of India v. Food Corporation of India (8) (1985) 2 SCC 136 : AIR 1985 SC 670.

23. Learned counsel for the respondent, Sri I.A Naidu, argued that the burden of proof to prove that the employees of Devandas Bakery and Ram Bakery are not the employees of the appellant, lay on the appellant. This contention, in our view, reverses the real onus in law. If an authority wants to contend that employees not directly employed by an employer should also be treated as employees of that employer, the burden of proof lies on the authority to establish the said fact.

24. It is then argued that the appellant has a right of rejection including right of control and supervision as observed by the learned single Judge. This contention has to be rejected in the light of our decision on the first point, for the P.F Commissioner did not actually give any finding that the agreement contained a term as to the control and supervision of the work of these employees including a right of rejection. The right of rejection, in our view, must be qua the employees and not qua the contractor where the contractor has engaged the employees not for the employer but for himself or for his own work of manufacturing a product. In the latter case the employer might reject the product produced by the contractor and not pay him for the finished product but so far as the employees of the contractor are concerned, the right of rejection of the produce vests solely with their immediate employer who is an independent contractor. This contention has therefore no force.

25. Reliance is then placed for the respondent on the decision of the Supreme Court in Royal Talkies, Hyderabad v. E.S.I Corporation (9) (1978) 4 SCC 204 : AIR 1978 S.C 1478, which is a case arising under the Employees State Insurance Act, 1948. The definition of employee in S. 2(9) of the “Act as it stood then is not pari materia with S. 2(f) of the Act under consideration. That was a case of employees of a canteen which was being run in the premises of a theater as an accessory or amenity or adjust thereof. While holding that the employees of the canteen are also to be covered for insurance by the proprietor of the theater, the Supreme Court relied upon the definition of employee in S. 2(9) of the Act which is totally different from S. 2(f). Further, that Act is intended, as is clear from its preamble, to provide amenities to cover sickness, maternity and ‘employment injury’ and cover the employees engaged in connection with work ‘carried on in or incidental to the purpose of the factory or establishment’ as in S. 2(9)(ii). These words are not there in the Employees Provident Fund Act. It is true that S. 2(9)(i) of the Employees State Insurance Act uses the words ‘any work of or incidental or preliminary to or connected with the work of the factory or establishment’ but those words occurring in Clause (i) of Sec. 2(9) deal with labour directly engaged. Apart from the clear differences in the language employed by the two Acts, the purposes of the Act are also different. In the Employees State Insurance Act the purpose is to provide insurance coverage but the purpose under the Employees Provident Fund Act is to provide Provident Fund coverage. The above decision is therefore distinguishable.

26. Coming to the question of wages paid to the employees of these two other firms, there appears to us to be some ‘confusion’ between the words ‘wages’ used in S. 2(f) and labour charges as shown in the accounts. So far as the employees directly employed by the appellant are concerned, the words used in the accounts (as extracted in the order of the PF Commissioner) are ‘wages’, falling under S. 2(f). So far as the employees of the two other firms are concerned, the word used is ‘labour charges’ which is treated as expenditure allowable as a deduction for purposes of income-tax. In fact, there is no material and it is nobody's case, that the appellant is paying the wages to the employees of the two other firms, treating them as its own servants.

27. Thus, on the basis of the facts, as found by the PF Commissioner, it is clear that the two other firms were treated as independent units and so treated, the employees of these independent units engaging their own labour for their purposes of manufacture of separate products, cannot be brought under S. 2(f) of the Act. It is true the contracts dated 1-1-1976 provide for supply of material e.g, maida but that fact has not been seriously relied upon by the PF Commissioner as an important factor. Lastly, it is argued that the findings arrived at by the PF Commissioner as confirmed by the learned single Judge are findings of fact and that they cannot be interfered with under Art. 226 of the Constitution of India. This submission has to fail in view of our findings on the first point, namely, that the learned single Judge treated certain facts which were part of the submissions of Mr. K.N Puranik (the Asst. P.F Commissioner) before the Regional Provident Fund Commissioner as facts found by the latter. As no such facts were found by the Commissioner, the assumption of fact made by the learned single Judge are bad as they are non-existant. We are therefore free to reach the impugned order of the PF Commissioner and test its validity. The P.F Commissioner, in fact, treated the matter expressly as a question of law based on S. 2(f). The error of law committed by him, which in fact led to an error of jurisdiction was that he treated the employees of the two ‘independent units’ or independent contractors as contract-labour or labour employed by the contractor for and on behalf of the appellant. This being contrary to the principles as laid down by the Supreme Court, we quash the impugned order of the P.F Commissioner for, if the employees of the two other independent firms have to be excluded, the total number of employees employed by the appellant for the period 1-4-1977 to 31-3-1979 will be admittedly below 20, as per the law at that time and the Act cannot apply.

28. The judgment in the writ petition is set aside, the writ appeal is allowed.

29. The writ petition is allowed and the impugned order of the Regional Provident Fund Commissioner dated 21-7-1979 is quashed. There will be no order as to costs.