Supreme court; Doctrine of piercing corporate veil should be applied in restrictive manner

 Thus, on relying upon the aforesaid decisions,
the doctrine of piercing the veil allows the Court to
disregard the separate legal personality of a company and
impose liability upon the persons exercising real control
over the said company. However, this principle has been
and should be applied in a restrictive manner, that is,
only in scenarios wherein it is evident that the company
was a mere camouflage or sham deliberately created by the
persons exercising control over the said company for the
purpose of avoiding liability. The intent of piercing the
veil must be such that would seek to remedy a wrong done
by the persons controlling the company. The application
would thus depend upon the peculiar facts and
circumstances of each case.(Para no 70)
R E P O R T A B L E
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 10264-10266 OF 2013
BALWANT RAI SALUJA & ANR. .. APPELLANT(S)
VERSUS
AIR INDIA LTD. & ORS. .. RESPONDENT(S)
Citation;AIR2015SC3775
Read original judgment here; click here

1. In view of the difference of opinion by two
learned Judges, and by referral order dated 13.11.2013 of
this Court, these Civil Appeals are placed before us for
our consideration and decision. The question before this
bench is whether the workmen engaged in statutory
canteens, through a contractor, could be treated as
employees of the principal establishment.
2. At the outset, it requires to be noticed that
the learned Judges differed in their opinion regarding
the liability of the principal employer running statutory
canteens and further regarding the status of the workmen
engaged thereof. The learned Judges differed on the
Page 2
aspect of supervision and control which was exercised by
the Air India Ltd. (for short, “the Air India”)-
respondent No. 1, and the Hotel Corporations of India
Ltd. (for short, “the HCI”)-respondent No. 2, over the
said workmen employed in these canteens. The learned
Judges also had varying interpretations regarding the
status of the HCI as a sham and camouflage subsidiary by
the Air India created mainly to deprive the legitimate
statutory and fundamental rights of the concerned workmen
and the necessity to pierce the veil to ascertain their
relation with the principal employer.
3. The Two Judge bench has expressed contrasting
opinions on the prevalence of an employer–employee
relationship between the principal employer and the
workers in the said canteen facility, based on, inter
alia, issues surrounding the economic dependence of the
subsidiary role in management and maintenance of the
canteen premises, representation of workers, modes of
appointment and termination as well as resolving
disciplinary issues among workmen. The Bench also
differed on the issue pertaining to whether such workmen
should be treated as employees of the principal employer
Page 3
only for the purposes of the Factories Act, 1948 (for
short, “the Act, 1948”) or for other purposes as well.
FACTS :
4. The present set of appeals came before a two-
Judge Bench of this Court against a judgment and order
dated 02.05.2011 of a Division Bench of the High Court of
Delhi in LPA Nos. 388, 390 and 391 of 2010. The present
dispute finds origin in an industrial dispute which arose
between the Appellants-workmen herein of the statutory
canteen and Respondent No. 1-herein. The said industrial
dispute was referred by the Central Government, by its
order dated 23.10.1996 to the Central Government
Industrial Tribunal cum Labour Court (for short “the
CGIT”). The question referred was whether the workmen as
employed by Respondent No. 3-herein, to provide canteen
services at the establishment of Respondent No. 1-herein,
could be treated as deemed employees of the said
Respondent No. 1. Vide order dated 05.05.2004, the CGIT
held that the workmen were employees of the Respondent
No.1-Air India and therefore their claim was justified.
Furthermore, the termination of services of the workmen
during the pendency of the dispute was held to be
Page 4
illegal.
5. By judgment and order dated 08.04.2010, the
learned Single Judge of the High Court of Delhi set aside
and quashed the CGIT’s award and held that the said
workmen would not be entitled to be treated as or deemed
to be the employees of the Air India. The Division Bench
of the High Court of Delhi vide impugned order dated
02.04.2011 found no error in the order passed by the
learned Single Judge of the High Court. The appeal was
dismissed by the Division Bench confirming the order of
the learned Single Judge who observed that the
responsibility to run the canteen was absolutely with the
HCI and that the Air India and the HCI shared an entirely
contractual relationship. Therefore, the claim of the
appellants to be treated as employees of the Air India
and to be regularized was rejected by the learned Single
Judge.
6. In the present set of appeals, the appellants
are workers who claim to be the deemed employees of the
management of Air India on the grounds, inter alia, that
they work in a canteen established on the premises of the
respondent No. 1-Air India and that too, for the benefit
Page 5
of the employees of the said respondent. It is urged that
since the canteen is maintained as a consequence of a
statutory obligation under Section 46 of the Act, 1948,
and that since by virtue of notification dated
21.01.1991, Rules 65-70 of the Delhi Factory Rules, 1950
(for short, “the Rules, 1950”) have become applicable to
the respondent No. 1, the said workers should be held to
be the employees of the management of the corporation, on
which such statutory obligation is placed, that is, Air
India.
7. Respondent No. 1 is a company incorporated under
the Companies Act, 1956 and is owned by the Government of
India. The primary object of the said respondent is to
provide international air transport/travel services. It
has Ground Services Department at Indira Gandhi
International Airport, Delhi. The Labour Department vide
its notification dated 20.01.1991 under sub-rule (1) of
Rule 65 of the Rules, 1950, has enlisted the said M/s.
Air India Ground Services Department, thereby making
Rules 65 to 70, of the Rules, 1950 applicable to the
same.
8. Respondent No. 2-HCI is also a company
Page 6
incorporated under the Companies Act, 1956 and is a
separate legal entity from the Air India. As per the
Memorandum of Association of Respondent No. 2, the same
is a wholly-owned subsidiary of the Air India. The main
objects of the said respondent, inter alia, are to
establish refreshment rooms, canteens, etc. for the sale
of food, beverages, etc.
9. Respondent No. 2 has various units and
Respondent No. 3, being Chefair Flight Catering (for
short, “the Chefair”), provides flight catering services
to various airlines, including Air India. It is this
Chefair unit of HCI that operates and runs the canteen.
It requires to be noticed that the appellants-workmen are
engaged on a casual or temporary basis by the respondent
Nos. 2 and 3 to render canteen services on the premises
of respondent No.1 - Air India.
ISSUE :
10. The main issue for consideration before this
Court in the present reference is “whether workers,
engaged on a casual or temporary basis by a contractor
(HCI) to operate and run a statutory canteen, under the
provisions of the Act, 1948, on the premises of a factory
Page 7
– Air India, can be said to be the workmen of the said
factory or corporation”.
SUBMISSIONS :
11. Shri Jayant Bhushan, learned Senior Counsel for
the appellants-workmen has two alternative submissions;
firstly, that in the event of a statutory requirement to
provide for a canteen or any other facility, the
employees of the said facility would automatically become
employees of the principal employer, irrespective of the
existence of any intermediary that may have been employed
to run that facility. Secondly, the test of sufficient
control by the principal employer over the operation of
the canteen and consequently over the appellants-workmen,
should prevail. Therefore, the Court should pierce the
veil and take note of the fact that the contractor was a
mere camouflage, and the principal employer was in real
control of the canteen and its workmen. Reference is made
to the following cases in support of his submissions-
Saraspur Mills Co. Ltd. v. Ramanlal Chimanlal, (1974) 3
SCC 66; Hussainbhai v. Alath Factory Thezhilali Union,
(1978) 4 SCC 257; M.M.R. Khan v. Union of India, 1990
Supp SCC 191; and Parimal Chandra Raha v. LIC, 1995 Supp
Page 8
(2) SCC 611.
12. Shri Jayant Bhushan also submits that the issue
raised in these appeals is squarely covered by the
observations made by the Constitution Bench in the case
of Steel Authority of India Ltd. v. National Union
Waterfront Workers, (2001) 7 SCC 1.
13. While supporting the judgment in the Steel
Authority of India’s case (supra), Shri C.U. Singh,
learned Senior Counsel for Respondent No. 1- Air India
would contend that the issue that came up for
consideration before the Constitution Bench is entirely
different and, therefore, the said decision has no
bearing on the facts and the question of law raised in
the present set of appeals.
14. Shri C.U. Singh would then refer to the various
case laws cited by the learned counsel for the appellants
to show that they are not only distinguishable on facts,
but are inapplicable to the facts of the present case. He
would also refer to the three-Judge Bench decision of
this Court in the case of Indian Petrochemicals Corpn.
Ltd. v. Shramik Sena, (1999) 6 SCC 439, and then would
submit that the proposition of law enunciated in the
Page 9
Indian Petrochemicals case (supra) is followed by this
Court in Hari Shankar Sharma v. Artificial Limbs Mfg.
Corpn., (2002) 1 SCC 337; Workmen v. Coates of India
Ltd., (2004) 3 SCC 547; Haldia Refinery Canteen Employees
Union v. Indian Oil Corpn. Ltd., (2005) 5 SCC 51; and
Karnataka v. KGSD Canteen Employees’ Welfare Assn.,
(2006) 1 SCC 567.
15. In so far as the second submission of the
learned counsel for the appellants is concerned, Shri
C.U. Singh would submit that it is not the test of
sufficient control, but the test of effective and
absolute control which would be relevant, and that if the
said test, in the given facts is applied, the appellants
would fail to establish the employer and employee
relationship. In aid of his submissions, he refers to
Bengal Nagpur Cotton Mills v. Bharat Lal, (2011) 1 SCC
635; International Airport Authority of India v.
International Air Cargo Workers’ Union, (2009) 13 SCC
374; and National Aluminium Co. Ltd. v. Ananta Kishore
Rout & Ors., (2014) 6 SCC 756.
RELEVANT PROVISIONS :
Page 10
16. To appreciate the point of view of the parties
to the present lis, it is necessary to notice the
relevant provisions.
17. Section 46 of the Act, 1948 statutorily places
an obligation on the occupier of a factory to provide and
maintain a canteen in the factory where more than two
hundred and fifty workers are employed. There is nothing
in the said provision which provides for the mode in
which the factory must set up a canteen. It appears to be
left to the discretion of the concerned factory to either
discharge the said obligation of setting up a canteen
either by way of direct involvement or through a
contractor or any other third party. The provision reads
as under:
“46. Canteens.-(1) The State Government may make
rules requiring that in any specified factory
wherein more than two hundred and fifty workers
are ordinarily employed, a canteen or canteens
shall be provided and maintained by the occupier
for the use of the workers.
(2) Without prejudice in the generality of the
foregoing power, such rules may provide for -
(a) the date by which such canteen shall be
provided;
Page 11
(b) the standard in respect of construction,
accommodation, furniture and other equipment of
the canteen;
(c) the foodstuffs to be served therein and the
charges which may be made therefor;
(d) the constitution of a managing committee for
the canteen and representation of the workers in
the management of the canteen;
(dd) the items of expenditure in the running of
the canteen which are not to be taken into
account in fixing the cost of foodstuffs and
which shall be borne by the employer;
(e) the delegation to Chief Inspector subject to
such conditions as may be prescribed, of the
power to make rules under clause (c).”
18. By virtue of Notification No. 27(12)89-
CIF/Lab/464 dated 21.01.1991, rules 65 to 70 of the
Rules, 1950 were made applicable to M/s. Air India Ground
Services Department. The rules impose obligations upon
the occupier of the factory as regards providing for and
maintaining the said canteen.
19. Rules 65 to 70 of the Rules, 1950 are in
furtherance of the duty prescribed on the State
Government to run statutory canteens as per Section 46 of
the Act, 1948. Rule 65, inter alia, provides for an
official notification and approval of the occupier
Page 12
canteen facility as well as additional guidelines
regarding the construction, accommodation, hygiene,
ventilation, sanitation and other maintenance works. Rule
66 prescribes for setting up a dining hall, with adequate
space and furniture along with reservation of dining
space for women employees. Rule 67 enumerates the
requisite equipment such as utensils, furniture, uniforms
for the canteen staff and other equipment to be purchased
and maintained in a hygienic manner. Rule 68 prescribes
that the prices to be charged on foodstuffs and other
items will be on a non-profit basis, as approved by the
Canteen Managing Committee. Rule 69 illustrates the
procedure for handling the auditing of accounts, under
the supervision of the Canteen Managing Committee as well
as Inspector of Factories. Lastly, Rule 70 enumerates the
consultative role of the Managing Committee regarding,
inter alia, the quality and quantity of foodstuffs
served, arrangement of menus, duration for meals, etc. It
also prescribes that such a Committee must have equal
representation of persons nominated by the occupier and
elected members by the workers of the factory. The
Manager is entrusted with determining and supervising the
procedure for conducting such elections and dissolving
Page 13
the Committee at the expiry of its two year statutory
term.
DISCUSSION :
20. Before we deal with the issue that arises for
consideration, it would be necessary to consider the
applicability of the Constitution Bench decision in the
Steel Authority of India case (supra). Learned counsel
refers to paragraphs 106 and 107 of the said judgment to
contend that the observations made therein is the
expression of the Court on the question of law and since
it is the decision of the Constitution Bench, the same
would be binding on this Court. To appreciate the
submission of the learned counsel, we notice the
aforesaid paragraphs:
“106. We have gone through the decisions of this
Court in VST Industries case (2001) 1 SCC 298,
G.B. Pant University case (2000) 7 SCC 109 and
M. Aslam case (2001) 1 SCC 720. All of them
relate to statutory liability to maintain the
canteen by the principal employer in the
factory/establishment. That is why in those
cases, as in Saraspur Mills case (1974) 3 SCC 66
the contract labour working in the canteen were
treated as workers of the principal employer.
Page 14
These cases stand on a different footing and it
is not possible to deduce from them the broad
principle of law that on the contract labour
system being abolished under sub-section (1) of
Section 10 of the CLRA Act the contract labour
working in the establishment of the principal
employer have to be absorbed as regular
employees of the establishment.
107. An analysis of the cases, discussed above,
shows that they fall in three classes: (i) where
contract labour is engaged in or in connection
with the work of an establishment and employment
of contract labour is prohibited either because
the industrial adjudicator/court ordered
abolition of contract labourer because the
appropriate Government issued notification under
Section 10(1) of the CLRA Act, no automatic
absorption of the contract labour working in the
establishment was ordered; (ii) where the
contract was found to be a sham and nominal,
rather a camouflage, in which case the contract
labour working in the establishment of the
principal employer were held, in fact and in
reality, the employees of the principal employer
himself. Indeed, such cases do not relate to
abolition of contract labour but present
instances wherein the Court pierced the veil and
declared the correct position as a fact at the
stage after employment of contract labour stood
prohibited; (iii) where in discharge of a
statutory obligation of maintaining a canteen in
Page 15
an establishment the principal employer availed
the services of a contractor the courts have
held that the contract labour would indeed be
the employees of the principal employer.”
21. By placing his fingers on Clause (iii) of
paragraph 107, the learned counsel would contend that the
said observation is the ratio of the Court’s decision
and, therefore, it is binding on all other Courts. We do
not agree. The Constitution Bench in Steel Authority of
India’s case (supra) was primarily concerned with the
meaning of the expression “appropriate Government” in
Section 2(1)(a) of the Contract Labour (Regulation and
Abolition) Act, 1970 and in Section 2(a) of the
Industrial Disputes Act, 1947 and the other issue was
automatic absorption of the contract labour in the
establishment of the principal employer as a consequence
of an abolition notification issued under Section 10(1)
of the Contract Labour (Regulation and Abolition) Act.
The Court while over-ruling the judgment in Air India
Statutory Corporation vs. United Labour Union (1997) 9
SCC 377, prospectively, held that neither Section 10 of
the Contract Labour (Regulation and Abolition) Act nor
any other provision in the Act, whether expressly or by
Page 16
necessary implication, provides for automatic absorption
of contract labour on issue of notification under the
said section, prohibiting contract labour and
consequently the principal employer is not required to
absorb the contract labour working in the concerned
establishment.
In the aforesaid decision, firstly, the issue whether
contract labourers working in statutory canteen(s) would
fall within the meaning of expression “workmen” under the
Act, 1948 and therefore they are employees of the
principal employer and secondly, whether the principal
employer to fulfil its obligation under Section 46 of the
Act, 1948 engages a contractor, the employees of the
contractor can claim regularisation and extension of the
service conditions extended to the employees of the
principal employer did not remotely arise for
consideration of the Court.
Secondly, in our considered view, the observations
made by the Constitution Bench in paragraph 107 of the
Judgment by no stretch of imagination can be considered
‘the law declared’ by the Court. We say so for the
reason, the Court after noticing several decisions which
Page 17
were brought to its notice, has summarised the view
expressed in those decision in three categories. The
categorisation so made cannot be said the declaration of
law made by the Court which would be binding on all the
Courts within the territory of India as envisaged under
Article 141 of the Constitution of India. This Court in
the case of The Commissioner of Income Tax v. Sun
Engineering Works (P) Ltd., (1992) 4 SCC 363, has
observed:
“39. It is neither desirable nor
permissible to pick out a word or a sentence
from the judgment of this Court divorced from
the context of the question under consideration
and treat it to be complete ‘law’ declared by
this Court. The Judgment must be read as a
whole and the observations from the judgment
have to be considered in the light of the
questions which were before this Court. A
decision of this Court takes its colour from the
questions involved in the case in which it was
rendered and while applying the decision to the
later case, the Courts must carefully try to
ascertain the true principle laid down by the
decision of this Court and not pick out words or
sentences from the judgment, divorced from the
context of the questions under consideration by
this Court, to support their reasonings”
Page 18
22. Further, this Court in Punjab Land Development
and Reclamation Corporation Ltd., Chandigarh v. Presiding
Officer, Labour Court, Chandigarh and Ors., (1990) 3 SCC
682, observed as follows:
“44. An analysis of judicial precedent, ratio
decidendi and the ambit of earlier and later
decisions is to be found in the House of Lords’
decision in F.A. & A.B. Ltd. v. Lupton
(Inspector of Taxes), Lord Simon concerned with
the decisions in Griffiths v. J.P. Harrison
(Watford) Ltd. and Finsbury Securities Ltd. v.
Inland Revenue Commissioner with their
interrelationship and with the question whether
Lupton’s case fell with-in the precedent
established by the one or the other case, said:
(AC p. 658)
‘...what constitutes binding precedent is
the ratio decidendi of a case, and this is
almost always to be ascertained by an
analysis of the material facts of the case
—that is, generally, those facts which the
tribunal whose decision is in question
itself holds, expressly or implicitly, to
be material.’ ”
23. It is stated therein that a judicial decision is
the abstraction of the principle from the facts and
Page 19
arguments of the case. It was further observed in the
Punjab Land Development case (supra), that:
“53. Lord Halsbury’s dicta in Quinn v. Leatham,
1901 AC 495: (AC p. 506)
“...every judgment must be read as
applicable to the particular facts proved,
or assumed to be proved, since the
generality of the expressions which may be
found there are not intended to be
expositions of the whole law, but governed
and qualified by the particular facts of
the case in which such expressions are to
be found. The other is that a case is only
an authority for what it actually
decides.”
This Court held in State of Orissa v. Sudhansu
Sekhar Misra (1968) 2 SCR 154, that a decision
is only an authority for what it actually
decides. What is of the essence in a decision is
its ratio and not other observation found
therein nor what logically follows from the
various observations made in it. ...”
24. A Constitution Bench of this Court in the case
of State of Punjab v. Baladev Singh, (1999) 6 SCC 172,
held that a judgment has to be considered in the context
in which it was rendered and that a decision is an
authority for what it decides and it is not everything
Page 20
said therein constitutes a precedent.
25. In our view, the binding nature of a decision
would extend to only observations on points raised and
decided by the Court and neither on aspects which it has
not decided nor had occasion to express its opinion upon.
The observation made in a prior decision on a legal
question which arose in a manner not requiring any
decision and which was to an extent unnecessary, ought to
be considered merely as an obiter dictum. We are further
of the view that a ratio of the judgment or the principle
upon which the question before the Court is decided must
be considered as binding to be applied as an appropriate
precedent.
26. The Constitution Bench in Steel Authority of
India’s case (supra), decided on the limited issue
surrounding the absorption of contract workers into the
principal establishment pursuant to a notification issued
by the appropriate Government under Section 10 of the
Contract Labour (Abolition and Regulation) Act, 1970. The
conclusion in paragraph 125 of Steel Authority of India’s
case (supra), inter alia, states that on issuance of a
notification under Section 10(1) of Contract Labour
Page 21
(Abolition and Regulation) Act, 1970 passed by the
appropriate Government would not entail the automatic
absorption of contract workers operating in the
establishment and the principal employer will not be
burdened with any liability thereof. The issue
surrounding workmen employed in statutory canteens and
the liability of principal employer was neither argued
nor subject of dispute in the Steel Authority of India’s
case (supra). Therefore, in our considered view the
decision on which reliance was placed by learned counsel
does not assist him in the facts of the present case.
27. The Act, 1948 is a social legislation and it
provides for the health, safety, welfare, working hours,
leave and other benefits for workers employed in
factories and it also provides for the improvement of
working conditions within the factory premises. Section 2
of the Act, 1948 is the interpretation clause. Apart from
others, it provides the definition of worker under
Section 2(l) of the Act, 1948, to mean a person employed,
directly or through any other agency, whether for wages
or not, in any manufacturing or cleaning process. Section
46 of the Act, 1948 requires the establishment of
Page 22
canteens in factories employing more than two hundred and
fifty workers. The State Government have been given power
under the Section to make Rules requiring that such
canteens to be provided in the factory under Sub Section
(2), the items for which rules are to be framed have been
specified. The Sub Section also contemplates the
delegation by the State Government the power to the Chief
Inspector to make rules in respect of the food to be
served in such canteens and their charges. In exercise of
rules making power, the Delhi State has framed and
notified the Rules, 1950, in which rules 65 to 70 are
incorporated to give effect to the purpose of Section 46
of the Act, 1948.
28. The question before us is “when the company is
admittedly required to run the canteen in compliance of
the statutory obligation under Section 46 of the Act,
1948, whether the canteen employees employed by the
contractor are to be treated as the employees of the
company only for the purpose of Act 1948 or for all the
other purposes.”
29. Before we advert to the aforesaid issue raised
and canvassed, we intend to notice some of the decisions
Page 23
of this Court where a similar issue was raised and
answered. In Indian Petrochemicals case (supra), a three
Judge Bench of this Court has stated the law on the point
by holding that the employees of the statutory canteens
are covered within the definition of ‘workmen’ under the
Act, 1948 and not for all other purposes. The Court went
on to observe that the Act, 1948 does not govern the
rights of employees with reference to recruitment,
seniority, promotion, retirement benefits etc. They are
governed by other statutes, rules, contracts or policies.
30. The aforesaid viewpoint is reiterated by this
Court in the case of Haldia Refinery Canteen Employees
Union and others v. Indian Oil Corporation Ltd. and ors.,
(2005) 5 SCC 51 and in Hari Shankar Sharma v. Artificial
Limbs Manufacturing Corporation, (2002) 1 SCC 337. As
observed by the Constitution Bench of this Court in the
case of Union of India v. Raghubir Singh, 178 ITR 548
(SC), the pronouncement of law by a Division Bench of the
Supreme Court is binding on a Division Bench of the same
or a smaller number of Judges and in order that such
decision is binding, it is not necessary that it should
be a decision rendered by a Full Court or a Constitution
Bench of the Supreme Court. The Indian Petrochemical’s
Page 24
case (supra) is decided by a three-Judge Bench of this
Court and the facts and the legal issues raised in the
present appeals are the same or similar as in Indian
Petrochemicals case (supra), and since we are not
persuaded to take a different view in the matter, the
observations made therein is binding on us.
31. This Court in the Indian Petrochemical case
(supra), while explaining the decision in Parimal Chandra
Raha’s case (supra), has stated that in Raha’s case, the
Supreme Court did not specifically hold that the deemed
employment of the workers is for all purposes nor did it
specifically hold that it is only for the purposes of the
Act, 1948. However, a reading of the judgment in its
entirety makes it clear that the deemed employment is
only for the purpose of the Act, 1948. Therefore, it has
to be held that the workmen of a statutory canteen would
be the workmen of the establishment for the purpose of
the Act, 1948 only and not for all other purposes. To
arrive at this conclusion, the Court has followed the
view expressed by this Court in M.M.R Khan’s case (supra)
and Reserve Bank of India v. Workmen, (1996) 3 SCC 267.
32. The proposition of law in the Indian
Page 25
Petrochemicals case (supra) has been reiterated in the
Hari Shankar Sharma’s case (supra). This Court stated
that:
“6. The observations in Parimal Chandra Raha
case relied on by the appellants which might
have supported the submission of the appellants
have been explained by a larger Bench in Indian
Petrochemicals Corpn. Ltd. v. Shramik Sena where
it was held, after considering the provisions of
the Factories Act and the previous decisions on
the issue, that the workmen of a statutory
canteen would be the workmen of the
establishment only for the purpose of the
Factories Act and not for all other purposes
unless it was otherwise proved that the
establishment exercised complete administrative
control over the employees serving in the
canteen.”
33. The aforesaid principle has also been applied in
Haldia’s case (supra); KGSD Canteen case (supra); Indian
Overseas Bank v. I.O.B. Staff Canteen Workers’ Union &
Anr., (2000) 4 SCC 245; and Barat Fritz Werner Ltd. v.
State of Karnataka, 2001 (4) SCC 498.
34. The Coates of India Ltd.’s case (supra) was
regarding a dispute over the status of the appellantworkmen
therein who were hired by a contractor to work in
Page 26
a canteen run on the premises of the respondent company.
This Court observed that merely some requirement under
the Act, 1948 of providing a canteen in the industrial
establishment is by itself not conclusive of the question
or sufficient to determine the status of the persons
employed in the canteen. The Industrial Court and the
learned Single Judge of the High Court held in favour of
the workmen. However, the Division Bench of the High
Court held in favour of the respondent-company therein.
This Court took note of the relevant finding of fact by
the learned Single Judge therein and upheld the
conclusion of the Division Bench of the High Court, that
the workmen were employed only by the contractor to run
the canteen, and they were not employees of the
respondent Company. The Court went on to observe that
since the canteen employees were not directly appointed
by the Company nor had they ever moved the Company for
leave or other benefits enjoyed by the regular employees
of the Company, and further that the canteen employees
got their wages from the respective contractors and,
therefore, they are not employees of the Company.
35. The Haldia case (supra) was similar to the facts
Page 27
of the present case. In that case, the appellant-workmen
were working in the statutory canteen run by the
respondent through a contractor in its factory. It was
contended therein that the factory of the respondent
where the workmen were employed was governed by the
provisions of the Act, 1948 and the canteen where the
said workmen were employed would be a statutory canteen
and the same was maintained for the benefit of the
workmen employed in the factory. It was alleged therein
that the respondent had direct control over the said
workmen and the contractor had no control over the
management, administration and functioning of the said
canteen. Therefore, writ applications were filed seeking
issuance of mandamus to the respondent to absorb the
appellants in the service of the respondent therein and
to regularize them as such. This Court then made a
detailed reference to the Parimal Chandra Raha case
(supra), the MMR Khan case (supra) and the Indian
Petrochemicals case (supra). The Court then extensively
referred to the terms and conditions of the contract
between the canteen contractor and the respondent to
ascertain whether there was any control of the respondent
company therein over the workers in the canteen, and if
Page 28
so what was the nature of the said control. It was
observed as follows:
“14. No doubt, the respondent management does
exercise effective control over the contractor
on certain matters in regard to the running of
the canteen but such control is being exercised
to ensure that the canteen is run in an
efficient manner and to provide wholesome and
healthy food to the workmen of the
establishment. This, however, does not mean that
the employees working in the canteen have become
the employees of the management.
15. A free hand has been given to the contractor
with regard to the engagement of the employees
working in the canteen. There is no clause in
the agreement stipulating that the canteen
contractor unlike in the case of Indian
Petrochemicals Corpn. Ltd. shall retain and
engage compulsorily the employees who were
already working in the canteen under the
previous contractor. There is no stipulation of
the contract that the employees working in the
canteen at the time of the commencement of the
contract must be retained by the contractor. The
management unlike in Indian Petrochemicals
Corpn. Ltd. case is not reimbursing the wages of
the workmen engaged in the canteen. Rather the
contractor has been made liable to pay provident
fund contribution, leave salary, medical
benefits to his employees and to observe
Page 29
statutory working hours. The contractor has also
been made responsible for the proper maintenance
of registers, records and accounts so far as
compliance with any statutory
provisions/obligations is concerned. A duty has
been cast on the contractor to keep proper
records pertaining to payment of wages, etc. and
also for depositing the provident fund
contributions with the authorities concerned.
The contractor has been made liable to defend,
indemnify and hold harmless the employer from
any liability or penalty which may be imposed by
the Central, State or local authorities by
reason of any violation by the contractor of
such laws, regulations and also from all claims,
suits or proceedings that may be brought against
the management arising under or incidental to or
by reason of the work provided/assigned under
the contract brought by the employees of the
contractor, third party or by the Central or
State Government authorities.”
36. As regards the nature of control exercised by
the management over the workmen employed by the
contractor to work in the said canteen, it was observed
by this Court in the Haldia case (supra) that the control
was of a supervisory nature and that there was no control
over disciplinary action or dismissal. Such control was
held not to be determinative of the alleged fact that the
Page 30
workmen were under the control of the management. This
Court observed as follows:
“16. The management has kept with it the right
to test, interview or otherwise assess or
determine the quality of the employees/workers
with regard to their level of skills, knowledge,
proficiency, capability, etc. so as to ensure
that the employees/workers are competent and
qualified and suitable for efficient performance
of the work covered under the contract. This
control has been kept by the management to keep
a check over the quality of service provided to
its employees. It has nothing to do with either
the appointment or taking disciplinary action or
dismissal or removal from service of the workmen
working in the canteen. Only because the
management exercises such control does not mean
that the employees working in the canteen are
the employees of the management. Such
supervisory control is being exercised by the
management to ensure that the workers employed
are well qualified and capable of rendering
proper service to the employees of the
management.”
37. The last case that we intend to refer on this
point is that of KGSD Canteen case (supra), wherein this
Court was required to answer the question as to whether
the employees of the canteen are employees of the State
Page 31
or whether their services should be directed to be
regularized or not. However, in the said case, the State
had no statutory compulsion to run and maintain any
canteen for its employees. This Court made reference to
numerous cases on this issue, inter alia, the Saraspur
Mills case (supra), the Parimal Chandra Raha case
(supra), the MMR Khan case (supra), the Indian
Petrochemicals case (supra), the Constitution Bench
decision in the Steel Authority of India case (supra),
the Hari Shankar Sharma case (supra), and the Haldia case
(supra).
38. We conclude that the question as regards the
status of workmen hired by a contractor to work in a
statutory canteen established under the provisions of the
Act, 1948 has been well settled by a catena of decisions
of this Court. This Court is in agreement with the
principle laid down in the Indian Petrochemicals case
(supra) wherein it was held that the workmen of a
statutory canteen would be the workmen of the
establishment for the purpose of the Act, 1948 only and
not for all other purposes. We add that the statutory
obligation created under Section 46 of the Act, 1948,
Page 32
although establishes certain liability of the principal
employer towards the workers employed in the given
canteen facility, this must be restricted only to the
Act, 1948 and it does not govern the rights of employees
with reference to appointment, seniority, promotion,
dismissal, disciplinary actions, retirement benefits,
etc., which are the subject matter of various other
legislations, policies, etc. Therefore, we cannot accept
the submission of Shri Jayant Bhushan, learned counsel
that the employees of the statutory Canteen ipso-facto
become the employees of the principal employer.
39. We may now refer to the various decisions, cited
by learned counsel, Shri Jayant Bhushan.
40. The Saraspur Mills case (supra) came before this
Court as a result of a dispute under the Bombay
Industrial Relations Act, 1946. In that case, the
appellant-Company was responsible for maintaining the
canteen under the provisions of Section 46 of the Act,
1948 and the rules made thereunder. The appellant-therein
had handed over the task of running the said canteen to a
cooperative society. The society employed the respondentworkmen
in the canteen. One of the issues that came up
Page 33
for consideration before this Court was that, whether the
employees of the said cooperative society could be said
to be the employees of the appellant-company. The case of
the workmen was that the appellant-company was running
the canteen to fulfill its statutory obligations and thus
the running of the said canteen would be part of the
undertaking of the appellant although the appellant did
not run itself the canteen but handed over the premises
to the co-operative society to run it for the use and
welfare of the Company’s employees and to discharge its
legal obligation. The appellant-company had resisted the
claim by contending that the workmen had never been
employed by it but by the co-operative society which was
its licensee. This Court after referring to the amended
definition of employee and employer in Section 3(13) and
3(14) of Bombay Industrial Relation Act, 1946 and the
definition of `Worker’ under the Act, 1948, and also
referring to earlier decision in Basti Sugar Mills Ltd.
v. Ram Ujagar and Ors., (1964) 2 SCR 838, held that since
under Act, 1948, it was the duty of the appellant-company
to run and maintain the canteen for use of its employees,
the ratio of the decision in Ahmedabad Mfg. and Calico
Printing Co. Ltd., v. Their Workmen (1953) II LLJ 647
Page 34
would be fully applicable in which the very same
provision of the Act, 1948 were considered and confirmed
the finding of the Industrial Court.
41. It would be relevant to note that the primary
reasoning of the Court in the Saraspur Mills case (supra)
to hold that the workers of the canteen run by a
cooperative society to be the employees of the appellantcompany
therein, was in view of the amended definition of
“employer” and “employee” as found under the Bombay
Industrial Relations Act, 1946 and definition of
`Workmen’ under the Act, 1948. Since no such expansive
definition finds mention neither in the Act, 1948 nor in
the facts of the present case, it would not be proper to
place reliance on the given case as a precedent herein.
42. In the Hussainbhai case (supra), the dispute
arose between workmen hired by a contractor to make ropes
within the factory premises on one hand, and the
petitioner who was the factory owner manufacturing ropes
who had engaged such contractor, on the other hand. The
issue therein pertained to whether such workmen would be
that of the contactor or the petitioner. In the said
case, the Court went into the concept of employerPage
35
employee relationship from the point of view of economic
realities. It was observed, by a three-Judge Bench, that:
“5. The true test may, with brevity, be
indicated once again. Where a worker or group of
workers labours to produce goods or services and
these goods or services are for the business of
another, that other is, in fact, the employer.
He has economic control over the workers’
subsistence, skill, and continued employment. If
he, for any reason, chokes off, the worker is,
virtually, laid off. The presence of
intermediate contractors with whom alone the
workers have immediate or direct relationship ex
contractu is of no consequence when, on lifting
the veil or looking at the conspectus of factors
governing employment, we discern the naked
truth, though draped in different perfect paper
arrangement, that the real employer is the
Management, not the immediate contractor. ...”
43. The Hussainbhai case (supra) did not deal with
the Act, 1948, much less any statutory obligation
thereunder. The case proceeded on the test of employeremployee
relationship to ascertain the actual employer.
The Court gave due weight and consideration to the
concept of ‘economic control’ in this regard. It may only
be appropriate for the Court in the present case to refer
to this judgment as regards determining the employerPage
36
employee relationship.
44. The case of M.M.R. Khan (supra), also came up
for consideration before a three-Judge Bench of this
Court. It related to the workers employed in canteens run
in the different railway establishments. The relief
claimed was that the workers concerned should be treated
as railway employees and should be extended all service
benefits which are available to the said railway
employees. The Court was concerned, in the said case,
with three types of canteens:- (i) Statutory Canteens;
(ii) Non-Statutory, Recognized Canteens; and (iii) Non-
Statutory, Non-Recognized Canteens. As regards statutory
canteens, the Court noticed that under Section 46 of the
Act, 1948, the occupier of a factory was not only obliged
to provide for and maintain a canteen where more than 250
workers are employed, but was also obliged to abide by
the rules which the concerned Government may make,
including the rules for constitution of a managing
committee for running the canteen and for representation
of the workers in the management of the canteen. In other
words, the whole working and functioning of the canteen
has to conform to the statutory rules made in that
Page 37
behalf.
45. It would be relevant to notice the facts noted
by this Court in the MMR Khan’s case (supra). This Court
had made an explicit reference to the relevant provisions
of the Railway Establishment Manual and the
Administrative Instructions on Departmental Canteens in
Offices and Industrial Establishments of the Government
as issued by the Department of Personnel and Training,
Ministry of Personnel, Public Grievances and Pensions of
the Government of India, which dealt with the canteens
and had express provisions thereunder that were integral
to the final decision of this Court. The issue that arose
before the Court was whether the employees of the
statutory canteen could be said to be the employees of
the railway administration as well. This Court observed
that:
“25. Since in terms of the Rules made by the
State Governments under Section 46 of the Act,
it is obligatory on the railway administration
to provide a canteen, and the canteens in
question have been established pursuant to the
said provision there is no difficulty in holding
that the canteens are incidental to or connected
with the manufacturing process or the subject of
Page 38
the manufacturing process. The provision of the
canteen is deemed by the statute as a necessary
concomitant of the manufacturing activity.
Paragraph 2829 of the Railway Establishment
Manual recognizes the obligation on the railway
Administration created by the Act and as pointed
out earlier paragraph 2834 makes provision for
meeting the cost of the canteens. Paragraph 2832
acknowledges that although the railway
administration may employ anyone such as a staff
committee or a co-operative society for the
management of the canteens, the legal
responsibility for the proper management rests
not with such agency but solely with the railway
administration. If the management of the canteen
is handed over to a consumer cooperative society
the bye-laws of such society have to be amended
suitably to provide for an overall control by
the railway administration.
26. In fact as has been pointed out earlier the
Administrative Instructions on departmental
canteens in terms state that even those canteens
which are not governed by the said Act have to
be under a complete administrative control of
the concerned department and the recruitment,
service conditions and the disciplinary
proceedings to be taken against the employees
have to be taken according to the rules made in
that behalf by the said department. In the
circumstances, even where the employees are
Page 39
appointed by the staff committee/cooperative
society it will have to be held that their
appointment is made by the department through
the agency of the committee/society as the case
may be. ...”
46. We are in agreement with the view expressed in
MMR Khan case (supra). We further observe that the
reasoning of the Court, as noticed hereinabove, was based
on the Railway Establishment Rules and the relevant
Administrative instructions issued by the Government of
India. By virtue of the aforesaid Rules and
Administrative instructions, it was made mandatory that
the complete administrative control of the canteen be
given to the Railway Administration. Such mandatory
obligations are not present in the instant case. In light
of the same, the given case cannot be said to be a
precedent on the general proposition as regards the
status of employees of a statutory canteen established
under the Act, 1948.
47. We have already referred to the decision of this
Court in Parimal Chandra Raha case (supra), and,
therefore, we are not referring to the said decision once
over again. However, we add that in the Parimal Chandra
Raha case (supra), this Court made a general observation
Page 40
that under the provisions of the Act, 1948, it is
statutorily obligatory on the employer to provide and
maintain a canteen for the use of his employees. As a
consequence, the Court stated that, the canteen would
become a part of the principal establishment and,
therefore, the workers employed in such canteen would be
the employees of the said establishment. This Court went
on to observe that the canteen was a part of the
establishment of the Corporation, that the contractors
engaged were only a veil between the Corporation and the
canteen workers and therefore, the canteen workers were
the employees of the Corporation. This Court, while
arriving at the said conclusion laid emphasis on the
contract between the corporation and the contractor,
whereby it was shown that the terms of the said contract
were in the nature of directions to the contractor about
the manner in which the canteen should be run and the
canteen services should be rendered to the employees.
Furthermore, it was found that majority of the workers
had been working in the said canteen continuously for a
long time, whereas the intermediaries were changed on
numerous occasions.
Page 41
48. In light of the above discussion, in our view,
the case laws on which the reliance is placed by learned
counsel would not assist him to drive home the point
canvassed.
49. To ascertain whether the workers of the
Contractor can be treated as the employees of the factory
or company on whose premises they run the said statutory
canteen, this Court must apply the test of complete
administrative control. Furthermore, it would be
necessary to show that there exists an employer-employee
relationship between the factory and the workmen working
in the canteen. In this regard, the following cases would
be relevant to be noticed.
50. This Court would first refer to the relevant
pronouncements by various English Courts in order to
analyze their approach regarding employer-employee
relationship. In the case of Ready Mix Concrete (South
East) Ltd v. Minister of Pensions and National
Insurance, [1968] 2 QB 497, McKenna J. laid down three
conditions for the existence of a contract of service. As
provided at p.515 in the Ready Mix Concrete case (supra),
the conditions are as follows:
Page 42
“(i) The servant agrees that, in consideration
of a wage or other remuneration, he will provide
his own work and skill in the performance of
some service for his master; (ii) he agrees,
expressly or impliedly, that in the performance
of that service he will be subject to the
other's control in a sufficient degree to make
that other master; (iii) the other provisions of
the contract are consistent with its being a
contract of service.”
51. In the Ready Mix Concrete case (supra), McKenna
J. further elaborated upon the above-quoted conditions.
As regards the first, he stated that there must be wages
or remuneration; else there is no consideration and
therefore no contract of any kind. As regards the second
condition, he stated that control would include the power
of deciding the thing to be done, the way in which it
shall be done, the means to be employed in doing it, the
time when and the place where it shall be done.
Furthermore, to establish a master-servant relationship,
such control must be existent in a sufficient degree.
52. McKenna J. further referred to Lord Thankerton's
“four indicia” of a contract of service said in Short v.
Page 43
J. and W. Henderson Ltd. (1946) 62 TLR 427. The J. and W.
Henderson case (supra) at p.429, observes as follows:
“(a) The master's power of selection of his
servant; (b) the payment of wages or other
remuneration; (c) the master's right to control
the method of doing the work; and (d) the
master's right of suspension or dismissal.”
53. A recent decision by the Queen’s Bench, in JGE
v. The Trustees of Portsmouth Roman Catholic Diocesan
Trust, [2012] EWCA Civ 938, Lord Justice Ward, while
discussing the hallmarks of the employer-employee
relationship, observed that an employee works under the
supervision and direction of his employer, whereas an
independent contractor is his own master bound by his
contract but not by his employer's orders. Lord Justice
Ward followed the observations made by McKenna J. in the
Ready Mix Concrete case (supra) as mentioned above. The
JGE case (supra), further noted that ‘control’ was an
important factor in determining an employer-employee
relationship. It was held, after referring to numerous
judicial decisions, that there was no single test to
determine such a relationship. Therefore what would be
needed to be done is to marshal various tests, which
Page 44
should cumulatively point either towards an employeremployee
relationship or away from one.
54. The case of Short v. J. and W. Henderson Ltd.,
as cited in the Ready Mix Concrete case (supra) and in
the JGE case (supra), was also referred to in the four-
Judge Bench decision of this Court in Dhrangadhra
Chemical Works Ltd. v. State of Saurashtra, AIR 1957 SC
274. In the Dhrangadhra Chemical Works case (supra), it
was observed that the prima facie test for the
determination of the relationship between master and
servant is the existence of the right in the master to
supervise and control the work done by the servant not
only in the matter of directing what work the servant is
to do but also the manner in which he shall do his work.
55. In Ram Singh v. Union Territory, Chandigarh,
(2004) 1 SCC 126, as regards the concept of control in an
employer-employee relationship, observed as follows:
“15. In determining the relationship of employer
and employee, no doubt, “control” is one of the
important tests but is not to be taken as the
sole test. In determining the relationship of
employer and employee, all other relevant facts
and circumstances are required to be considered
Page 45
including the terms and conditions of the
contract. It is necessary to take a multiple
pragmatic approach weighing up all the factors
for and against an employment instead of going
by the sole “test of control”. An integrated
approach is needed. “Integration” test is one of
the relevant tests. It is applied by examining
whether the person was fully integrated into the
employer’s concern or remained apart from and
independent of it. The other factors which may
be relevant are — who has the power to select
and dismiss, to pay remuneration, deduct
insurance contributions, organize the work,
supply tools and materials and what are the
“mutual obligations” between them. (See
Industrial Law, 3rd Edn., by I.T. Smith and J.C.
Wood, at pp. 8 to 10.)”
56. In the case of Bengal Nagpur Cotton Mills case
(supra), this Court observed that:
“9. In this case, the industrial adjudicator has
granted relief to the first respondent in view
of its finding that he should be deemed to be a
direct employee of the appellant. The question
for consideration is whether the said finding
was justified.
10. It is now well settled that if the
industrial adjudicator finds that the contract
between the principal employer and the
contractor to be a sham, nominal or merely a
Page 46
camouflage to deny employment benefits to the
employee and that there was in fact a direct
employment, it can grant relief to the employee
by holding that the workman is the direct
employee of the principal employer. Two of the
well-recognized tests to find out whether the
contract labourers are the direct employees of
the principal employer are: (i) whether the
principal employer pays the salary instead of
the contractor; and (ii) whether the principal
employer controls and supervises the work of the
employee. In this case, the Industrial Court
answered both questions in the affirmative and
as a consequence held that the first respondent
is a direct employee of the appellant.”
57. Further, the above case made reference to the
case of the International Airport Authority of India case
(supra) wherein the expression “control and supervision”
in the context of contract labour was explained by this
Court. The relevant part of the International Airport
Authority of India case (supra), as quoted in Bengal
Nagpur Cotton Mills case (supra) is as follows:
“38. ... if the contract is for supply of
labour, necessarily, the labour supplied by the
contractor will work under the directions,
supervision and control of the principal
employer but that would not make the worker a
Page 47
direct employee of the principal employer, if
the salary is paid by a contractor, if the right
to regulate the employment is with the
contractor, and the ultimate supervision and
control lies with the contractor.
39. The principal employer only controls and
directs the work to be done by a contract
labour, when such labour is
assigned/allotted/sent to him. But it is the
contractor as employer, who chooses whether the
worker is to be assigned/ allotted to the
principal employer or used otherwise. In short,
worker being the employee of the contractor, the
ultimate supervision and control lies with the
contractor as he decides where the employee will
work and how long he will work and subject to
what conditions. Only when the contractor
assigns/sends the worker to work under the
principal employer, the worker works under the
supervision and control of the principal
employer but that is secondary control. The
primary control is with the contractor.”
58. A recent decision concerned with the employeremployee
relationship was that of the NALCO case (supra).
In this case, the appellant had established two schools
for the benefit of the wards of its employees. The Writ
Petitions were filed by the employees of each school for
a declaration that they be treated as the employees of
Page 48
the appellant-company on grounds of, inter alia, real
control and supervision by the latter. This Court, while
answering the issue canvassed was of the opinion that the
proper approach would be to ascertain whether there was
complete control and supervision by the appellanttherein.
In this regard, reference was made to the case
of Dhrangadhra Chemical Works case (supra) wherein this
Court had observed that:
“14. The principle which emerges from these
authorities is that the prima facie test for the
determination of the relationship between master
and servant is the existence of the right in the
master to supervise and control the work done by
the servant not only in the matter of directing
what work the servant is to do but also the
manner in which he shall do his work, or to
borrow the words of Lord Uthwatt at p.23 in
Mersey Docks and Harbour Board v. Coggins &
Griffith (Liverpool) Ltd., (1952) SCR 696 “The
proper test is whether or not the hirer had
authority to control the manner of execution of
the act in question”.”
59. The NALCO case (supra) further made reference to
the case of Workmen of Nilgiri Coop. Mkt. Society Ltd. v.
State of T.N., (2004) 3 SCC 514, wherein this Court had
observed as follows:
Page 49
“37. The control test and the organization test,
therefore, are not the only factors which can be
said to be decisive. With a view to elicit the
answer, the Court is required to consider
several factors which would have a bearing on
the result: (a) who is the appointing authority;
(b) who is the paymaster; (c) who can dismiss;
(d) how long alternative service lasts; (e) the
extent of control and supervision; (f) the
nature of the job e.g. whether it is
professional or skilled work; (g) nature of
establishment; (h) the right to reject.
38. With a view to find out reasonable solution
in a problematic case of this nature, what is
needed is an integrated approach meaning thereby
integration of the relevant tests wherefor it
may be necessary to examine as to whether the
workman concerned was fully integrated into the
employer’s concern meaning thereby independent
of the concern although attached therewith to
some extent.”
60. It was concluded by this Court in the NALCO case
(supra) that there may have been some element of control
with NALCO because its officials were nominated to the
Managing Committee of the said schools. However, it was
observed that the above-said fact was only to ensure that
the schools run smoothly and properly. In this regard,
the Court observed as follows:
Page 50
“30. ... However, this kind of “remote control”
would not make NALCO the employer of these
workers. This only shows that since NALCO is
shouldering and meeting financial deficits, it
wants to ensure that the money is spent for the
rightful purposes.”
61. Thus, it can be concluded that the relevant
factors to be taken into consideration to establish an
employer-employee relationship would include, inter alia,
(i) who appoints the workers; (ii) who pays the
salary/remuneration; (iii) who has the authority to
dismiss; (iv) who can take disciplinary action; (v)
whether there is continuity of service; and (vi) extent
of control and supervision, i.e. whether there exists
complete control and supervision. As regards, extent of
control and supervision, we have already taken note of
the observations in Bengal Nagpur Cotton Mills case
(supra), the International Airport Authority of India
case (supra) and the NALCO case (supra).
62. In the present set of appeals, it is an admitted
fact that the HCI is a wholly owned subsidiary of the Air
India. It has been urged by the learned counsel for the
appellants that this Court should pierce the veil and
Page 51
declare that the HCI is a sham and a camouflage.
Therefore, the liability regarding the appellants herein
would fall upon the Air India, not the HCI. In this
regard, it would be pertinent to elaborate upon the
concept of a subsidiary company and the principle of
lifting the corporate veil.
63. The Companies Act in India and all over the
world have statutorily recognized subsidiary company as a
separate legal entity. Section 2(47) of the Companies
Act, 1956 (for short “the Act, 1956”) defines ‘subsidiary
company’ or ‘subsidiary’, to mean a subsidiary company
within the meaning of Section 4 of the Act, 1956. For
the purpose of the Act, 1956, a company shall be, subject
to the provisions of sub-section (3) of Section 4, of the
Act, 1956, deemed to be subsidiary of another. Clause (1)
of Section 4 of the Act, 1956 further imposes certain
preconditions for a company to be a subsidiary of
another. The other such company must exercise control
over the composition of the Board of Directors of the
subsidiary company, and have a controlling interest of
over 50% of the equity shares and voting rights of the
given subsidiary company.
Page 52
64. In a concurring judgment by K.S.P.
Radhakrishnan, J., in the case of Vodafone International
Holdings BV v. Union of India, (2012) 6 SCC 613, the
following was observed:
“Holding company and subsidiary company
....
257. The legal relationship between a holding
company and WOS is that they are two distinct
legal persons and the holding company does not
own the assets of the subsidiary and, in law,
the management of the business of the subsidiary
also vests in its Board of Directors. ...
258. Holding company, of course, if the
subsidiary is a WOS, may appoint or remove any
Director if it so desires by a resolution in the
general body meeting of the subsidiary. Holding
companies and subsidiaries can be considered as
single economic entity and consolidated balance
sheet is the accounting relationship between the
holding company and subsidiary company, which
shows the status of the entire business
enterprises. Shares of stock in the subsidiary
company are held as assets on the books of the
parent company and can be issued as collateral
for additional debt financing. Holding company
and subsidiary company are, however, considered
as separate legal entities, and subsidiary is
allowed decentralized management. Each
subsidiary can reform its own management
Page 53
personnel and holding company may also provide
expert, efficient and competent services for the
benefit of the subsidiaries.”
65. The Vodafone case (supra), further made
reference to a decision of the US Supreme Court in United
States v. Bestfoods [141 L Ed 2d 43: 524 US 51 (1998)].
In that case, the US Supreme Court explained that as a
general principle of corporate law a parent corporation
is not liable for the acts of its subsidiary. The US
Supreme Court went on to explain that corporate veil can
be pierced and the parent company can be held liable for
the conduct of its subsidiary, only if it is shown that
the corporal form is misused to accomplish certain
wrongful purposes, and further that the parent company is
directly a participant in the wrong complained of. Mere
ownership, parental control, management, etc. of a
subsidiary was held not to be sufficient to pierce the
status of their relationship and, to hold parent company
liable.
66. The doctrine of ‘piercing the corporate veil’
stands as an exception to the principle that a company is
a legal entity separate and distinct from its
shareholders with its own legal rights and obligations.
Page 54
It seeks to disregard the separate personality of the
company and attribute the acts of the company to those
who are allegedly in direct control of its operation. The
starting point of this doctrine was discussed in the
celebrated case of Salomon v. A Salomon & Co Ltd., [1897]
AC 22. Lord Halsbury LC (paragraphs 31–33), negating the
applicability of this doctrine to the facts of the case,
stated that:
“...a company must be treated like any other
independent person with its rights and
liabilities legally appropriate to itself ...,
whatever may have been the ideas or schemes of
those who brought it into existence.”
67. Most of the cases subsequent to the Salomon case
(supra), attributed the doctrine of piercing the veil to
the fact that the company was a ‘sham’ or a ‘façade’.
However, there was yet to be any clarity on applicability
of the said doctrine.
68. In recent times, the law has been crystallized
around the six principles formulated by Munby J. in Ben
Hashem v. Ali Shayif, [2008] EWHC 2380 (Fam). The six
principles, as found at paragraphs 159– 164 of the case
are as follows- (i) ownership and control of a company
Page 55
were not enough to justify piercing the corporate veil;
(ii) the Court cannot pierce the corporate veil, even in
the absence of third party interests in the company,
merely because it is thought to be necessary in the
interests of justice; (iii) the corporate veil can be
pierced only if there is some impropriety; (iv) the
impropriety in question must be linked to the use of the
company structure to avoid or conceal liability; (v) to
justify piercing the corporate veil, there must be both
control of the company by the wrongdoer(s) and
impropriety, that is use or misuse of the company by them
as a device or facade to conceal their wrongdoing; and
(vi) the company may be a ‘façade’ even though it was not
originally incorporated with any deceptive intent,
provided that it is being used for the purpose of
deception at the time of the relevant transactions. The
Court would, however, pierce the corporate veil only so
far as it was necessary in order to provide a remedy for
the particular wrong which those controlling the company
had done.
69. The principles laid down by the Ben Hashem case
(supra) have been reiterated by UK Supreme Court by Lord
Page 56
Neuberger in Prest v. Petrodel Resources Limited and
others, [2013] UKSC 34, at paragraph 64. Lord Sumption,
in the Prest case (supra), finally observed as follows:
“35. I conclude that there is a limited
principle of English law which applies when a
person is under an existing legal obligation or
liability or subject to an existing legal
restriction which he deliberately evades or
whose enforcement he deliberately frustrates by
interposing a company under his control. The
Court may then pierce the corporate veil for the
purpose, and only for the purpose, of depriving
the company or its controller of the advantage
that they would otherwise have obtained by the
company's separate legal personality. The
principle is properly described as a limited
one, because in almost every case where the test
is satisfied, the facts will in practice
disclose a legal relationship between the
company and its controller which will make it
unnecessary to pierce the corporate veil.”
70. The position of law regarding this principle in
India has been enumerated in various decisions. A
Constitution Bench of this Court in Life Insurance
Corporation of India v. Escorts Ltd. & Ors., (1986) 1 SCC
264, while discussing the doctrine of corporate veil,
held that:
Page 57
“90. ... Generally and broadly speaking, we may
say that the corporate veil may be lifted where
a statute itself contemplates lifting the veil,
or fraud or improper conduct is intended to be
prevented, or a taxing statute or a beneficent
statute is sought to be evaded or where
associated companies are inextricably connected
as to be, in reality, part of one concern. It is
neither necessary nor desirable to enumerate the
classes of cases where lifting the veil is
permissible, since that must necessarily depend
on the relevant statutory or other provisions,
the object sought to be achieved, the impugned
conduct, the involvement of the element of the
public interest, the effect on parties who may
be affected etc.”
71. Thus, on relying upon the aforesaid decisions,
the doctrine of piercing the veil allows the Court to
disregard the separate legal personality of a company and
impose liability upon the persons exercising real control
over the said company. However, this principle has been
and should be applied in a restrictive manner, that is,
only in scenarios wherein it is evident that the company
was a mere camouflage or sham deliberately created by the
persons exercising control over the said company for the
purpose of avoiding liability. The intent of piercing the
Page 58
veil must be such that would seek to remedy a wrong done
by the persons controlling the company. The application
would thus depend upon the peculiar facts and
circumstances of each case.
72. Having considered the relevant judicial
decisions and the well established and settled
principles, it would be appropriate to revert back to the
controversy as found in the present factual matrix.
73. In the present reference, this Court is required
to ascertain whether workmen, engaged on a casual or
temporary basis by a contractor to operate and run a
statutory canteen on the premises of a factory or
corporation, can be said to be the workmen of the said
factory or corporation.
74. It has been noticed above that workmen hired by
a contractor to work in a statutory canteen established
under the provisions of the Act, 1948 would be the said
workmen of the given factory or corporation, but for the
purpose of the Act, 1948 only and not for all other
purposes. Therefore, the appellants-workmen, in the
present case, in light of the settled principle of law,
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would be workmen of the Air India, but only for the
purposes of the Act, 1948. Solely by virtue of this
deemed status under the Act, 1948, the said workers would
not be able to claim regularization in their employment
from the Air India. As has been observed in the Indian
Petrochemicals case (supra), the Act, 1948 does not
govern the rights of employees with reference to
recruitment, seniority, promotion, retirement benefits,
etc. These are governed by other statutes, rules,
contracts or policies.
75. To ascertain whether the appellants-herein would
be entitled to other benefits and rights such as
regularization, this Court would have to apply the test
of employer-employee relationship as noticed hereinabove.
For the said purpose, it would be necessary to refer to
the Memorandum of Association and the Articles of
Association of the HCI to look into the nature of the
activities it undertakes. The objects of the HCI, as
provided under its Memorandum of Association, inter alia,
include the following:
(i) To carry on the business of hotel, motel,
restaurant, café, tavern, flight kitchen,
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refreshment room and boarding and lodging, housekeepers,
licensed victuallers, etc.;
(ii) To provide lodging and boarding and other
facilities to the public;
(iii) To purchase, erect, take on lease or otherwise
acquire, equip and manage hotels;
(iv) To establish shops, kitchens, refreshment
rooms, canteens and depots for the sale of various
food and beverages.
76. The objects incidental or ancillary to the main
objects include, inter alia:
“...
(5) To carry on any business by means of
operating hotels etc. or other activity which
would tend to promote or assist Air-India’s
business as an international air carrier.
...”
77. It can be noticed from the above, that the
primary objects of the HCI have no direct relation with
the Air India. It is only one of the many incidental or
ancillary objects of the HCI that make a direct reference
to assisting Air India. The argument that the HCI runs
the canteen solely for Air India’s purpose and benefit
Page 61
could not succeed in this light. The HCI has several
primary objects, which include the running of hotels,
motels, etc., in addition to establishing shops,
kitchens, canteens and refreshment rooms. The Air India
only finds mention under HCI’s ancillary objects. It
cannot be said that the Memorandum of Association of the
HCI provides that HCI functions only for Air India. Nor
can it be said that the fundamental activity of the HCI
is to run and operate the said statutory canteen for the
Air India.
78. As regards HCI’s Articles of Association, it is
stated therein that the HCI shall be a wholly-owned
subsidiary of the Air India and that its share capital
shall be held by the Air India and/or its nominees.
Furthermore, the said Articles included provisions
whereby Air India controls the composition of the Board
of Directors of the HCI, including the power to remove
any such director or even the Chairman of the Board.
Further, Air India has the right to issue directions to
the HCI, which the latter is bound to comply with. In
this regard, it may be contended that the Air India has
effective and absolute control over the HCI and that
Page 62
therefore latter is merely a veil between the appellantsworkmen
and Air India. We do not agree with this
contention.
79. In support of the above we find that nothing has
been brought before this Court to show that such
provisions in the Articles of Association are either bad
in law or would impose some liability upon the Air India,
in terms of calling the appellants to be its own workers.
In our view, the said Articles are not impermissible in
law. It is our considered opinion that the doctrine of
piercing the veil cannot be applied in the given factual
scenario. Despite being a wholly owned subsidiary of the
Air India, Respondent No. 1 and Respondent No. 2 are
distinct legal entities. The management of business of
the HCI is under its own Board of Directors. The issue
relating to the appointment of the Board of Directors of
the HCI by the Air India would be a consequence of
statutory obligations of a wholly owned subsidiary under
the Act, 1956.
80. The present facts would not be a fit case to
pierce the veil, which as enumerated above, must be
exercised sparingly by the Courts. Further, for piercing
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the veil of incorporation, mere ownership and control is
not a sufficient ground. It should be established that
the control and impropriety by the Air India resulted in
depriving the Appellants-workmen herein of their legal
rights. As regards the question of impropriety, the
Division Bench of the High Court of Delhi in the impugned
order dated 02.05.2011, noted that there has been no
advertence on merit, in respect of the workmen’s rights
qua HCI, and the claim to the said right may still be
open to the workmen as per law against the HCI. Thus, it
cannot be concluded that the controller ‘Air India’ has
avoided any obligation which the workmen may be legally
entitled to. Further, on perusal of the Memorandum of
Association and Articles of Association of the HCI, it
cannot be said that the Air India intended to create HCI
as a mere façade for the purpose of avoiding liability
towards the Appellants-workmen herein.
81. Therefore, the only consideration before this
Court is the nature of control that the Air India may
have over the HCI, and whether such control may be called
effective and absolute control. Such control over the HCI
would be required to be established to show that the
Page 64
appellants-workmen were in fact the employees of the Air
India.
82. It may be noticed again that the NALCO case
(supra) dealt with a similar issue. In that case, the
Court had observed that the day-to-day functioning of the
school as setup by the appellant therein was not under
NALCO, but under a managing committee therein. Further,
the said Managing Committee was a separate and distinct
legal entity from NALCO, and was solely responsible for
recruitment, disciplinary action, termination, etc. of
its staff. The Court therefore had held that the
respondents therein could not be said to be employed by
NALCO. In the present case, HCI is a separate legal
entity incorporated under the Act, 1956 and is carrying
out the activity of operating and running of the given
canteen. The said Articles of Association of the HCI, in
no way give control of running the said canteen to the
Air India. The functions of appointment, dismissal,
disciplinary action, etc. of the canteen staff, are
retained with the HCI. Thus, the exercise of control by
the HCI clearly indicated that the said respondent No. 2
is not a sham or camouflage created by respondent No. 1
Page 65
to avoid certain statutory liabilities.
83. Reference was also made by the learned counsel
for the Appellants to certain documents such as minutes
of meetings, etc. to show that the Air India was
exercising control over the HCI in matters relating to
transfer of workmen in the canteen, rates of subsidies,
items on the menu, uniforms of the canteen staff, etc.
On a perusal of the said documents, it is found that the
said matters were, again, in the nature of supervision.
In fact, most of these were as a consequence of the
obligations imposed under the Rules, 1950. Air India,
being the entity bearing the financial burden, would give
suggestions on the running of the canteen. Furthermore,
in light of complaints, issues or even suggestions raised
by its own employees who would avail the said canteen
services, Air India would put forth recommendations or
requests to ensure the redressal of said complaints or
grievances. As regards discussions over uniforms, prices,
subsidies, etc., it may be noted that the same are
obligations under the Rules, 1950 as applicable to Air
India.
84. In our considered view, and in light of the
Page 66
principles applied in the Haldia case (supra), such
control would have nothing to do with either the
appointment, dismissal or removal from service, or the
taking of disciplinary action against the workmen working
in the canteen. The mere fact that the Air India has a
certain degree of control over the HCI, does not mean
that the employees working in the canteen are the Air
India’s employees. The Air India exercises control that
is in the nature of supervision. Being the primary
shareholder in the HCI and shouldering certain financial
burdens such as providing with the subsidies as required
by law, the Air India would be entitled to have an
opinion or a say in ensuring effective utilization of
resources, monetary or otherwise. The said supervision or
control would appear to be merely to ensure due
maintenance of standards and quality in the said canteen.
85. Therefore, in our considered view and in light
of the above, the appellants-workmen could not be said to
be under the effective and absolute control of Air India.
The Air India merely has control of supervision over the
working of the given statutory canteen. Issues regarding
appointment of the said workmen, their dismissal, payment
Page 67
of their salaries, etc. are within the control of the
HCI. It cannot be then said that the appellants are the
workmen of Air India and therefore are entitled to
regularization of their services.
86. It would be pertinent to mention, at this stage,
that there is no parity in the nature of work, mode of
appointment, experience, qualifications, etc., between
the regular employees of the Air India and the workers of
the given canteen. Therefore, the appellants-workmen
cannot be placed at the same footing as the Air India’s
regular employees, and thereby claim the same benefits as
bestowed upon the latter. It would also be gainsaid to
note the fact that the appellants-herein made no claim or
prayer against either of the other respondents, that is,
the HCI or the Chefair.
87. In terms of the above, the reference is answered
as follows :
The workers engaged by a contractor to work in
the statutory canteen of a factory would be the workers
of the said factory, but only for the purposes of the
Act, 1948, and not for other purposes, and further for
the said workers, to be called the employees of the
Page 68
factory for all purposes, they would need to satisfy the
test of employer-employee relationship and it must be
shown that the employer exercises absolute and effective
control over the said workers.
88. In view of the above, while answering the
referral order, we dismiss these appeals. No order as to
costs.
Ordered accordingly.
....................J.
[ H.L. DATTU ]
....................J.
[ R.K. AGRAWAL ]
....................J.
[ ARUN MISHRA ]
NEW DELHI,
AUGUST 25, 2014.

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