The Employees Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”) provides for institution of provident funds, pensions funds and deposit-linked insurance schemes for employees in factories and other establishments. It also provides for appointment of Provident Fund commissioners to initiate inquiries for assessment under section 7A of the EPF Act in case of a shortfall in the contributions remitted by employers. Section 7A provides for determination of money due from employers after quantification which is recovered in accordance with the procedure prescribed under the Act. The proceedings are quasi-judicial and the Employees’ Provident Fund Organization (“EPFO”) exercises powers of a civil court under the Civil Procedure Code. The commissioner is expected to act in a reasonable and fair manner though, in practice, there is scope for abuse of statutory powers and EPFO has initiated inquiries mechanically, and without due regard to all relevant considerations. Further, in instances of default in deposit of contributions, the commissioners have wide powers to recover money, which include attachment of bank accounts.
Given the absence of effective enforcement and inconsistent application of relevant provisions across the country, on February 14, 2020, EPFO issued a circular setting out guidelines for initiation of inquiries under section 7A. It noted that often, in many cases, inquiries are initiated for “insufficient and untenable reasons and even without ascertaining sufficient grounds which leads to general resentment amongst employers, on one hand, and prolonged pendency of such inquiries on the other.”
This newsletter examines the scope of this critical provision and related jurisprudence.
2. The Circular’s Mandate
Aiming to provide respite to employers, the EPFO prescribed strict conditions for its officers to start an inquiry for determining pending dues. A high-level overview and key guiding principles are below.
- inquiries can be initiated only for statutory reasons i.e., to determine the application of the EPF Act or determine dues;
- there must be a prima-facie case which is a precondition of initiating the process and the assessing officer has to provide sufficient reason and basis for initiating the inquiry;
- EPFO has to provide an inspection report and the officer also has to establish connection between the evidence of default on record corresponding with the period spanning the inquiry;
- the scope has to be limited to the issues identified at the stage of initiation;
- it is mandatory that all the reasons for initiating inquiry are in writing and a copy of all the documents are supplied to the parties along with the notice. A mere complaint will be insufficient to initiate the inquiry;
- prior to commencing an inquiry, the assessing officer must record the time period of the inquiry and avoid prolonged proceedings. This will ensure the duration does not become vexatious.
Non-compliances like failure to submit returns or produce records, non-cooperation in inspections cannot be reasons for issuing a section 7A notice and, consequently, cannot form basis for initiating proceedings thereunder.
3. Recent relevant jurisprudence
Apart from the conditions applicable to the manner of conducting inquiries, it is necessary the orders are passes and uploaded rapidly, more so when the pandemic has enabled a fairly effective e-court system. In other words, both procedural and substantive aspects have to be considered and given due weight in actual proceedings. The following two cases are important in this regard.
3.1 Civicon Case: Here, it is noteworthy to highlight the case of Civicon Engineering Contracting vs. Central Board of Trustees at Delhi High Court where Civicon moved the court seeking a copy of the order passed by the EPFO in proceedings under sections 7B and 14Q of the EPF Act. They submitted that despite multiple visits and requests, they were not provided a copy of the order. The EPFO countered by saying Civicon already had the order and this was a tactic to overcome limitation objections. After hearing the parties, the court held that
- the orders passed by such departments should be readily available to enable parties to avail their subsequent legal remedies;
- during the pandemic, all courts and tribunals across the country were making orders available electronically and EPFO cannot be an exception;
- given not a single order had been uploaded on the EPFO website since June 2019, the court directed the central PF commissioner to pass immediate practice directions on uploading all orders which should include the manner of passing them, timelines for uploading and communicating to parties etc.
Accordingly, through its order dated January 19, 2021 EPFO issued instructions covering different facets, and directed as follows:
- All quasi-judicial proceedings under the EPF Act for which functionality has been created in e-proceedings portal must be conducted through it. If this is not possible due to functional or technical reasons, the concerned Zonal Officers must be informed.
- The aforesaid circular of February 14, 2020 prohibits initiation of fishing and roving inquiries and it underscored (again) that such proceedings are impermissible in law. Adjudicating authorities must record reasons about existence of a prima facie case before commencing any proceeding under the EPF Act.
- Notices must be sent via speed post, with proof of delivery. And, a copy must be sent to the e-mail address mentioned in the official returns.
- When proceedings are adjourned, the parties must be informed about the next date of hearing; and daily order sheet plus next date of hearing should be uploaded on the compliance e-proceeding portal so that all parties can access it.
- When a case is reserved for orders, the adjudicating officer must fix a date of pronouncement, preferably within the next 15 days and notify the parties through the e-mail address submitted in official returns.
- Where it is necessary to proceed ex-parte, the adjudicating officer must closely scrutinize the aspect regarding service and record satisfaction prior to proceeding.
- All final orders must be properly authenticated with the date, signatures of the adjudicating officers and an official stamp, the last of which must be in accordance with State Emblem of India (Regulation of Use) Rules, 2007.
- Final orders must be dispatched through speed post with proof of delivery, with a copy by e-mail to the address submitted in official returns. A copy must also be uploaded on the Compliance e-proceedings portal within the next three days of the pronouncement.
While the foregoing practice directions relate to procedural aspects, the following, relatively recent case examined certain substantive elements of an inquiry.
3.2 Era Infra Engineering Case: In Central Board of Trustees (EPFO) v. Era Infra Engineering Limited and Anr., the Delhi High Court adjudicated upon the discharge of powers by the PF Commissioner under section 7A. In this case, while conducting the inspection of Era, it emerged that some contracted workers were not receiving the statutory benefit which led to issue of a 7A notice. In its report, the enquiry officer took the position that the liabilities of the amount paid to contractors arose as Era was the principal employer and, in that capacity, it failed to seek and ensure compliance from contractors for its eligible workforce. While Era denied the allegations, but no notice was issued to the contractors to verify the facts. The finding was Era was liable to pay provident fund for employees connected with its work who got their wages through that work, directly or indirectly. Era contested the order before the appellate tribunal, which set aside the original order. Subsequently, EPFO appealed against this decision and moved Delhi High Court.
There were two primary issues whether (a) Era was liable to pay for the contractors and sub-contractors; and (b) the contractors and sub-contractors should have been impleaded and heard in 7A proceedings. The court relied on earlier cases and concluded (a) EPF Act is a social welfare legislation, which should be read as a whole in consonance with its objective. Since the contractors and sub-contractors worked for Era in connection with its work, they are covered; (b) the commissioner is obligated to collect evidence by impleading parties, is authorized to enforce physical attendance and examine any person.
To determine the contribution payable under the EPF Act, it is imperative an employer- employee relationship is established. The commissioner has to determine concrete differences in the payment of contributions and other dues by identifying employees and, in order to do so and come to a reasoned finding, he must collect all the evidence first. The court held that for any imposing liability on any company it is incumbent upon the commissioner to (a) ensure that all information has been collected and summons are issued to third parties with relevant records; and (b) utilize powers to ascertain dues else any liability that may be fastened can be set aside. The court also held that since the EPF Act is a welfare legislation, matters should be resolved in favor of persons for whose benefit the statute is enacted, including indirect workers engaged through contractors, provided they are engaged in connection with the work of the company. Eventually, the court set aside the two previous orders and remanded the matter to the adjudicating authority to decide afresh after summoning contractors and sub-contractors.
The tussle between industry and regulators is real. Judiciary has intervened to set aside decisions that are not aligned with the directives passed. Increasingly, the trend and objective is to ensure that 7A proceedings are not used to harass establishments; rather, to keep them effective. This has been boosted further by Delhi High Court who has clarified that prior to affixing liability on an employer, the commissioner must ensure that it has covered all avenues of data gathering, including summons to third parties in possession of relevant records. Yet, there is a gap between theory, expectation and reality. And, often employers are issued notices, without adequate information at hand which leads to harassment and cost for the industry in defending frivolous and protracted proceedings.
It is, therefore, absolutely critical that employers are aware and cognizant of their substantive rights combined with the process of how section 7A proceedings ought to be conducted. Where they are not, it is critical to highlight the deviations.
 The section is quite wide and provides (a) the competent authorities who can decide disputes regarding the Act and determination of amount from any employer; (b) before finalizing an order, the employer must be given a reasonable opportunity to present his case; (c) if an ex-parte order is passed against an employer, he can apply for setting aside the order within 3 months provided it is possible to establish some reasonable cause existed which prevented appearance during the inquiry
 WP 9530/2020
 No. C-I/3 (28) 2016/7A & 14B/1189
 WP (C) 4083/ 2015 – 2022 SCC OnLine Del 1643