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    Registration And Recognition Of The Trade Unions

    Trade Union Act was amended in the year 2001 which came into effect from 9th January 2002 and there has been a change in the requirements for registration of a trade union.

    According to the new provisions of the Act, no trade union of workmen shall be registered unless at least 10% or 100 of the workmen, whichever is less, further subject to minimum of seven workmen, engaged or employed in the establishment or industry with which it is connected are members of such Trade Union on the date of making the application.

    The application for registration should accompany the details of members such as (1) Name (2) occupation (3) address of place of work of the member.

    After making the application and before the registration, if 50% or more workmen withdrawn from the membership, the Union cannot be registered.

    Registered Trade Union of workmen shall at all times continue to have not less than 10% or 100 of the workmen, whichever is less, subject to minimum of seven, engaged or employed in an establishment or industry with which it is connected, as its members.

    Thus whenever the Labour Department conducts the verification of membership among the registered trade unions, it is the responsibility of the Registrar of Trade Unions to cancel the registration of a Trade Union which has membership of less than 10% or 100 of the workmen as the case may be.

    The Act has also prohibited persons holding an office of profit and also the council of ministers to be the executive and or office bearers of a Trade Union. An office of profit means a position that brings to the person holding it some financial gain or advantage or benefit and the quantum of such gain or remuneration is immaterial.

    The Act also disqualifies a member of the union to be the office-bearer or executive of the union if he has been convicted by a Court in India of any offence involving moral turpitude and sentenced to imprisonment. Such person can only become an executive or office bearer of a union only after completion of 5 years period after his release.

    The Madras High Court (2010) in the matter of M LakshmananVs ICICI Bank Employees Union held that conviction and sentence imposed on an employee of the Bank under section 138 of Negotiable Instruments Act can be considered as an offence involving moral turpitude and there by not entitled to hold the post of General Secretary of the Union.

    The Trade Union members or the office bearers do not enjoy any immunity if they indulge in acts which constitute misconduct. Leadership has no right to indulge in acts which are oppose to law and they are liable for punishment under general law as well.


    The Madras High Court in the matter of Indian Bank Vs Federation of Indian Bank Employees held that all workmen, guilty of wrongfully restraining any person belonging to the management or wrongfully confining him during a gherao are guilty under Section 339 or 340 of Indian Penal Code and have committed cognizable offences, for which they are liable to be arrested without warrant and punishable under Section 120A of IPC and is not saved by Section 17 of the Trade Union Act.

    The Supreme Court in the matter of UshaBrecoMazdoorSanghVsUshaBreco Ltd [Air 2009 994] held that a union leader has no immunity from misconduct since he is also bound to be disciplined.

    The management has every right to debar the entry of a trade union leader who is preaching violence either among the workmen or against the management. The Bombay High Court in the matter of Pudumjee Pulp & Paper Mills KamgarSanghVsPudumjee Pulp & Paper Mills [2008 LLR 860] confirmed this proposition.

    The free ingress and egress of men and materials is a fundamental right of the owner of the property and hence the Unions or the workmen have no right to obstruct such movement to conduct its business. The Rajasthan High Court in the matter of Ajmer District Forest Department Asst Employees Union Vs State of Rajasthan [2006 LLR 283] held that a Trade Union has no right to cause obstruction to ingress or egress by staging demonstration since for redressal of grievances, they have the forum as under the law.

    The union office bearers are workmen first and the role and responsibility of the management of the union is next to his primary duty of performing the work at the factory. Hence all the rules, regulations and responsibilities of a workman are applicable to them as well. The Himachal Pradesh High Court in the matter of Mohan Meakins Ltd Vs President Mohan Meakins Staff Union [2012 LLR 1040] held that the President of the Union cannot avoid transfer and he is required to report to duty at the new place of work. The Trade Union Act has not given any authority or powers to the executive or the office bearer of a trade union to conduct trade union activities while on duty within the premises of the factory. The trade union activities are to be conducted outside the working hours and not during the working hours. The Andhra Pradesh High Court in the matter of Singareni Collieries Vs Industrial Tribunal [2012 LLR 1162] held that Trade Union activities are not justified while on duty.

    The only differentiation between a workman and the executive or office bearer of a trade union has been made in the Industrial Disputes Act under certain circumstances for a limited number of trade union office bearers, who are known as ‘protected workman’. The Industrial Disputes Act has provided protection from discharge or dismissal of the executive or other office bearer of a registered trade union who are declared as protected workman. During the pendency of an industrial dispute before conciliation or tribunal or labour court, the employer should not discharge or dismissal a protected workmen without permission from authority before whom the dispute is pending.

    However, an office bearer or an executive of a registered trade union will not become a protected workman automatically. The registered trade union has to follow the procedure laid down under the Act. In accordance with the ID Rules, every registered trade union is required to submit the list of name of the executive or office bearers of the union who should be considered as protected workman on or before 30th April every year. Within fifteen days of receipt of the request from the union, the employer has to communicate the approved list of protected workman and it shall be valid for a period of twelve months from the date of communication. The number of protected workman shall be one percent of the workmen strength subject to a minimum of five and maximum of one hundred. Where there are more than one registered trade union in an industrial establishment, the protected workman for each of the registered trade union shall be in accordance with the membership of that union.


    It has been the most common experience of the managements that soon after the registration of a trade union, most of the leaders will come up with a plan to hoist a flag in or near the factory premises. The Kerala High Court in the matter of Kerafibertex International P Ltd VsKerafibertex Employees Association [2009 LLR 985] held that Trade Unions have no right to hoist flags in the property of the Management. If the flag is hoisted outside the property of the Management, then the flag is said to have hoisted in a public place where the District Collector and the police will have authority not to permit such unauthorized activities.


    The Trade Union Act 1926, deals only with the registration of Trade Unions. The Act has not provided any provisions with regard to the recognition of a trade union or declaring a trade union as a sole bargaining agent. However some State Governments such as Madhya Pradesh, Maharastra and West Bengal made certain amendments to recognize the union as a sole bargaining agent. In the State of Andhra Pradesh and Telangana there is no such provision and hence the recognition of the union is based on the acceptance of the code of discipline by the registered trade unions and verification of membership by the Labour Department.


    At the central level, the 16th session of the Indian Labour Conference held at Nainital in May 1958 adopted the following set of criteria under the Code of Discipline for the recognition of trade unions:


    1. Where there is more than one union, a union claiming recognition should have been functioning for

    at least one year after registration. Where there is only one union, this condition would not apply.

    1. The membership of the union should cover at least 15 per cent of the workers in the establishment

    concerned. Membership would be counted only those who had paid their subscriptions for atleast

    three months during the period of six months immediately preceding the reckoning.

    1. A union may claim to be recognized as a representative union for an industry in a local area if it has a

    membership of at least 25 percent of the workers of that industry in that area.

    1. When a union has been recognized, there should be no change in its position for a period of two years.
    2. In case of several unions in an industry or establishment, the one with the largest membership should be recognized.
    3. A representative union for an industry in an area should have the right to represent the workers in all the establishments in the industry, but if a union of workers in a particular establishment has a membership of 50 percent or more of the workers of that establishment, it should have the right to deal with matters of purely local interests, such as, for instance, the handling of grievances pertaining to its own members. All other workers who are not members of that union might either operate through the representative union for the industry or seek redress directly.
    4. In the case of trade union federations not affiliated with any of the four central labour organizations, the question of recognition would have to be dealt with separately.

    8.         Only unions which observed the Code of Discipline would be entitled to recognition.

    In accordance with the code of discipline the verification of membership of all the registered trade unions in an establishment is being conducted by the Labour Department authorities and the trade union which has the highest membership is declared as the recognized union for a period of two years.

    In accordance with the provisions of the Act, in an industrial establishment, there can be many registered trade unions. The Supreme Court has time and again examined the matter and held that the rights and privileges vested in a non-recognized association are limited to espousing the grievances of individual members relating to their service conditions and representing them in domestic or departmental enquiries held by the employer and not proceeding before the conciliation officer, labour court, industrial tribunal or arbitrator. There is no right in the non-recognized union to participate in discussions relating to general issues concerning all workmen. [Chairman SBI Vs All Orissa S B Officers Association, AIR 2002 SC 2279]

    Once there is a representative union, which in the present case, is the Labour Union, it is difficult to see the role of the Workers’ Union. If there are number of trade unions registered under the Trade Union Act, not entitled to be registered as “representative unions” and they raise disputes, industrial peace would be a far cry. [National Engg Industries Ltd Vs State of Rajasthan AIR 2000 SC 469].

    Today most of the industrial establishment has multiplicity of the unions and hence the management should in their own interest provide the rightful place to the recognized union and should not encourage minority or unrecognized unions. Dealing with unrecognized unions will create more unions and the entire process of employee relations will be more complex and difficult to achieve the organizational objectives.

    This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

    Internal Financial Controls - A Paradigm Shift In The Reporting Requirements Under CARO


    High-profile corporate disasters in the US made governments, regulators and corporations grasp afresh the significance of internal controls. These disasters were largely attributed to the failure to implement internal controls.Numerous terms are used by globally recognised control frameworks and market regulators - "Internal Control for Financial Reporting" (ICFR) mostly in the US after the Sarbanes Oxley (SOX) Act and "Internal Control" (IC) mostly outside the US.

    IC is defined in the three globally recognised frameworks: the Internal Control - Integrated Framework (COSO Framework) developed in the US in 1992, by the Committee of Sponsoring Organisations of the Commission ("COSO") of the Treadway Commission; the Turnbull Guidance for Directors on the UK's Combined Code on Corporate Governance, issued in 1999 by the Institute of Chartered Accountants of England and Wales; and the Board Guidance on Criteria of Control (CoCo) issued in 1995 by the Canadian Institute of Chartered Accountants (CICA). These frameworks not only define internal controls but also break down the controls into components and objectives and elucidate the basis of monitoring, testing, assessment and evaluation of controls. These frameworks serve only as guidance for boards, managements and auditors and have gained global prominence; and advocate a wide approach to internal control, covering objectives such as improving business effectiveness, consideration of significant risks in operations, safeguarding of assets, compliance and financial reporting. The Companies Act 2013 (the Act) created a new term - "Internal Financial Control" (IFC).

    Section 143(3)(i) of the CompaniesAct 2013 now requires statutory auditors to state in his /her reportwhether acompany hasadequate internal financial controls systems in place and the operating effectiveness of such controls. This requirement is in addition to the existing audit opinion on financial statements. Originally this requirement was applicable to the financial year ending 31 March 2015, due to lack of guidance this requirement was postponed tothe year ending 31 March,2016 by virtue of insertion of Rule 10A of Companies (Audit and Auditors) Rules, 2014.The auditor can report such ICFR for the year ending 31 March, 2015 on a voluntary basis. This requirement is applicable to all companies including One Person Company and Small Company. Consequently reporting requirement pertaining to internal control under the Companies (Auditor’s Report) Order, 2015(CARO) was retained by Ministry of Corporate Affairs (MCA) for certain areas.

    In clause (e), sub-section (5) of Section 134 of the Act, IFC to include policies and procedures adopted by the company for ensuring orderly and efficient conduct of it business, accuracy and completeness of the accounting records and timely preparation of reliable financial information.

    The absence of standards will make certification of the adequacy and operational effectiveness of a company's IFC by the auditors difficult. Even the Companies (Auditor's Report) Order (CARO), 2003, which statutory auditors have been following, required auditors to comment upon the adequacy of the internal control system, only with reference to the purchase of inventory and fixed assets and for the sale of goods and services and not specifically on the operating effectiveness of such controls. It is precisely for


    this reason that the US Securities Exchange Commission (SEC) used the term ICFR in its Rules for Section 404 of the SOX Act. ICFR is specific. It addresses only a subset of internal controls of the COSO Framework pertaining to financial reporting objectives and deliberately leaves out elements that relate to the effectiveness and efficiency of a company's operations and a company's compliance with applicable laws and regulations except financial reporting.

    For companies to maintain the effective IFC necessary criteria has been provided in the ICAI “Guidance Note on Audit of Internal Financial Controls over Financial Reporting” (guidance note). Definition of the term ICFR has been reproduced in the guidance note from the US Auditing Standard (AS) 5 – An audit of Internal Control Over Financial Reportingand it is integrated with an Audit ofFinancial Statements issued by PCAOB – A process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles. A Company’s internal financial control over financial reporting includes those policies and procedures (i) pertains to maintenance of records that, in detail, accurately and fairly reflect the transaction and disposition of the asset of the company; (ii) provide reasonable assurance that transaction are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company and (iii) provide reasonable assurance regarding the prevention or timely detection of unauthorised acquisition, use, or disposition of the company’s assets that could have material effect on the financial statements.

    Criteria to be considered for developing, establishing and reporting on IFC

    As such theguidance note does not provide any particular framework for IFC instead it states that a benchmark system internal control, based on suitable criteria, is essential to enable the management and auditors to assess and state the adequacy and compliance of the system of internal controls. The guidance note explains that for auditor’s reporting, the term IFC is restricted within the context of the audit of financial statement and relates to internal control over financial reporting (ICFR) and this is in line with the international practice.

    Necessary criteria for IFC over financial reporting for the companies has been provided in “ Internal Control Components” of Standards on Auditing (SA) 315 “ Identifying and Assessing the Risks of Material Misstatement through Understanding the entity and environment” issued by ICAI. SA 315 explains the five components of any internal control as they relate to a financial statement audit. The five components are:

    Control environment

    Entity risk assessment process

    Control activities

    Information system and communication Monitoring of controls


    Management ’s responsibility

    The 2013 Act has radically expanded the scope of internal controls to be considered by the management of companies to cover all aspects of the operations of the company.

    Boards of directors of the listedcompanies are required to affirm in the Directors' Responsibility Statements in Annual Reports that IFC systems in the companies are adequate and operationally effective as required under Section 134(5)(e) of the 2013 Act.

    Rule 8(5)(viii) of the Companies (Accounts) Rules,2014 requires the Board of Directors report of all companies to state the details in respect of adequacy of internal financial controls with reference to the financial statements.

    The inclusion of the matters relating to internal financial controls in the directors’ responsibility statement is in addition to the requirement for the directors to state that they have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the 2013 Act, for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities.

    Auditor’s responsibility

    The auditor's objective in an audit of internal financial controls over financial reporting is to express an opinion on the effectiveness of the company's internal financial controls over financial reporting and the procedures in respect thereof are carried out along with an audit of the financial statements.

    The auditor must plan and perform the audit to obtain sufficient appropriate evidence to obtain reasonable assurance about whether material weakness exists as of the date specified in management's assessment. Company's internal controls cannot be considered effective if one or more material weakness exists. A material weakness in internal financial controls may exist even when the financial statements are not materially misstated. SA 200 - Overall objectives of the Independence Auditor and the Conduct of an Audit in Accordance with Standards on Auditing, issued by ICAI, states that the auditor’s opinion on the financial statements does not assure the future viability of the entity nor the efficiency or effectiveness with which the management conducted the affairs of the entity.

    Globally, auditor’s reporting on internal controls is together with the reporting on the financial statements and such internal controls reported upon relate to only internal controls over financial reporting. For example, in USA, Section 404 of the Sarbanes Oxley Act of 2002, prescribes that the registered public accounting firm (auditor) of the specified class of issuers (companies) shall, in addition to the attestation of the financial statements, also attest the internal controls over financial reporting. The Companies Act, 2013 specifies the auditor’s reporting on internal financial controls only in the context of audit of financial statements. Consistent with the practice prevailing internationally, the term ‘internal financial controls’ stated in Clause (i) of Sub- section 3 of Section 143 would relate to ‘internal financial controls over financial reporting’ in accordance with the objectives of an audit stated in SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with


    Standards on Auditing”, issued by ICAI.Further, Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 requires the Board of Directors’ report of all the companies to state the details in respect of adequacy of internal financial controls with reference to the “financial statements” only.

    Audit of IFC

    The guidance note provides procedures that would need to be considered by the auditor for planning, performing and reporting in an audit of IFC under section 143(3)(i) of 2013 Act. The guidance note specifically states that since the audit of IFC is in connection with financial reporting, the concept of materiality will be applicable even in such audits. In planning the audit of internal financial controls over financial reporting, the auditor should use the same materiality considerations he or she would use in planning the audit of the company's annual financial statements as provided in SA 320 “Materiality in Planning and Performing an Audit”, issued by ICAI.

    Audit procedures mentioned in the guidance note have been framed for an auditor; these procedures could also be used by the companies to perform a self – evaluation. Following steps are included in the audit procedures.

    Planning Step 1


    Design and
    Step 2

    Step 3



    Step 4


    Planning– The planning stage involves identification of significant account balances, disclosures items, identification and understanding significant flow of transactions, identification of Risk of Material Misstatement, and identification of controls. The auditor is required to establish an overall audit strategy which sets the scope, timing and direction of the audit, and that guides the development of the audit plan.

    Design and Implementation- The auditor should test the design effectiveness of controls by determining whether the company’s control, if they are operated as prescribed by persons posessing the necessary authority and competence to perform the controls effectively, satisfy the company’s control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements in the financial statements. The auditors should obtain understanding of the entity’s flow of transactions and identify controls that are relevant to the audit and gain an understanding of those controls.

    Operating effectiveness - Testing operating effectiveness involves planning and nature, timing and extent of procedures to be performed, assessing findings and concluding on operating effectiveness. Operating effectiveness of a control is tested by determining whether the control is operating as designed and whether the person performing the control possesses the necessary authority and competence to perform the control effectively. In some instances, when the auditor is testing controls, the walkthrough procedures may be used to obtain evidence about the operating effectiveness of a control. In performing a walkthrough, the auditor generally follows a single transaction from its origination through the procedures or steps in the process to the transaction’s ultimate recording in the general ledger or its sub-ledgers.


    Reporting - Where there are deficiencies that, individually or in combination, result in one or more material weakness, the auditor should evaluate the need to express a modified opinion (qualified or adverse on the company’s IFC) unless there is a restriction on the scope of the engagement in which case the auditors should either disclaim the opinion or withdraw from the engagement. As per the guidance note, auditors will have to issue a qualified or an adverse opinion on ICFR if ‘material weaknesses’ in the company’s ICFR are identified as part of their audit.

    The auditor shall modify the opinion in the auditor’s report on internal financial controls over financial reporting when: (i) The auditor concludes that, based on the audit evidence obtained, the internal financial controls over financial reporting is designed, implemented or operated in such a way that it is unable to prevent, or detect and correct material misstatements in the financial statements on a timely basis; or the control is missing; or (ii) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the internal financial controls over financial reporting is adequate and / or operating effectively to provide reasonable assurance that it is designed, implemented or operated in such a way that it is able to prevent, or detect and correct material misstatements in the financial statements on a timely basis.

    IFC reporting on Consolidated Financial Statements (CFS)

    Section 129(4) of the 2013 Act states the provisions of the 2013 Act applies to the preparation, adoption and audit of the financial statement of a holding company shall, mutatis mutandis, apply to the CFS. With regard to the consolidated financial statements, the financial reporting process would include understanding the procedures for:

    1. I) Identification of subsidiaries, associates and joint ventures that would form part of the consolidation process;
    2. Identification of inter-company transactions for elimination and elimination of any unrealized profits on such transactions;
    • Identification and quantification of minority interest;
    1. Ensuring consistency of accounting policies amongst the consolidating entities; e) ensuring

    consistency of the classification of account balances amongst the consolidating entities;

    1. Recording recurring and non-recurring adjustments to the annual and quarterly consolidated

    financial statements; and

    1. Ensuring appropriate disclosures in the consolidated financial statements.

    I FC reporting on interim financial statements

    Auditor reporting on IFC is a requirement specified in the 2013 Act, and therefore will apply only in a case of reportingon financial statements prepared under the 2013 Act and reported under section 143 of the 2013 Act.Accordingly, reporting on IFC will not be applicable with respect to interim financial statements, such as quarterly or half yearly financial statements, unless such reporting is required under any other law or regulations.

    Integrated Audit - Combined audit of internal financial controls over financial reporting and financial statements

    (1) Corporates and auditors in India will need to come to terms with the concept of a combined or an integrated audit, which includes an audit of internal control over financial reporting and financial statements.In a combined audit of internal financial controls over financial reporting and financial statements, the auditor should design his or her testing of controls to accomplish the objectives of both audits simultaneously. In a combined audit of internal controls over financial reporting and financial statements, the auditor expresses opinion on the following aspects:

    (i)        Opinion on internal control over financial reporting, which requires:

    Evaluating and opining on management’s assessment of the effectiveness of internal financial controls (In Japan based on the requirements of the Financial Instruments and Exchange Act). Evaluating and opining on the effectiveness of internal controls over financial reporting (In USA based on the requirements of Section 404 of the Sarbanes – Oxley Act).

    (ii) Opinion on the financial statements.

    (2) While the objectives of the audit of internal controls over financial reporting and audit of financial statements are not identical, the auditor plans and performs the work to achieve the objectives of both the audits in an integrated manner. Therefore, in a combined audit of internal financial controls over financial reporting and financial statements, the auditor should design his or her testing of controls to accomplish the objectives of both audits simultaneously

    (3)       In such an audit, the auditor plans and conducts the audit:

    • To obtain sufficient evidence to support the auditor's opinion on the internal financial controls as of the year-end, and

    • To obtain sufficient evidence to support the auditor's control risk assessments for purposes of the audit of the financial statements

    Specified date for reporting on the adequacy and operating effectiveness of IFC

    Another aspect which required clarification was whether the comments in the auditor’s report should describe the existence and effective operation of ICFR during the period under reporting of the financial statements or as at the balance sheet date. Section 143(3)(i) of the 2013 Act does not specify whether the auditor’s report should state if IFC existed and operated effectively during the period under reporting of the financial statements or at the balance sheet date up to which the financial statements are prepared.The guidance note clarifies that auditors will have to report whether a company has an adequate ICFR system in place and whether the same was operating effectively as at the balance sheet date of 31 March 2016. In practice, this will mean that when forming its audit opinion on ICFR, the auditor will surely test transactions during the financial year ending 31 March 2016 and not just as at the balance sheet date, though the extent of testing at or near the balance sheet date may be higher.If control issues

    or deficiencies are identified during the interim period and are remediated before the balance sheet date, then the auditor may still be able to express an unqualified opinion on the ICFR. For example, if deficiencies are discovered, the management may have the opportunity to correct and address these deficiencies by implementing new controls before the reporting date. However, sufficient time will need to be allowed to evaluate and test controls, which will again depend on the nature of the control and how frequently it operates. This will be a matter of professional judgment.

    Comparison with International practice

    It is interesting to note that the guidance note has similarities with PCAOB Auditing Standard No. 5, which is applied by auditors in the context of SOX reporting in the US. For example, various paragraphs from the US auditing standard have been inserted within the guidance note, including definitions such as significant deficiency and material weakness related to internal controls. Also, in India, auditors are not required to report on the management’s assertion of effectiveness on IFC. Reporting under the act will be an independent assessment and assertion by the auditor on the adequacy and effectiveness of the entity’s ICFR.

    The guidance note is a fairly comprehensive document , with detailed guidance in several areas related to ICFR, such as the internal control components, entity-level controls, information technology controls, understanding and documentation of process flows, including flow charts, use of service organisations and sampling. Both the management and auditors will have to quickly familiarise themselves with and decipher the details of this guidance note in order to gear up for the year-end reporting on IFC.

    Flowchart Illustrating Typical Flow of Audit of Internal Financial Controls Over Financial Reporting

    Assess and Manage Risk

    Manage Audit Engagement











    Identify and



    Identify risk of



    controls which

    addresses risk












    balance and




    flow of






    of mater

















    design &




    Assess audit impact and plan

    other suitable procedures




    Assess the design

    of controls


    Assess the


    n of controls








    Plan operative effectiveness
















    Plan,nature, timing

    and extent of

    testing operative


    Perform operative



    Assess findings

    and conclude on



    Form opinion on



















    Assess impact on audit


    Form audit opinion on

    financial statements













    Prepare and Control Audit Documentation



    Continuous Focus on Audit Quality


    This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

    Foreign Trade Policy Vs Customs Law - A Case Study

    We all know that Foreign Trade Policy (for brevity ‘FTP’) is laid down with an intention to encourage the exports and regulate the imports. Apart from such administration of the export and import of goods and services, it also formulates various export incentive schemes to encourage the exports and make India’s presence visible in global trade.

    The export incentive schemes or exemptions from import duties will generally come with the conditions to be fulfilled for enjoying such incentives or exemptions. Such conditions might be laid down both by the FTP and the relevant statutes as detailed in the following example.

    An importer is exempted from the customs duty on import of raw material on a condition that the finished goods manufactured by using such free imported material are exported within a stipulated time. Here, such exemption from import duty might come with conditions to be satisfied in both FTP or Customs law or any one of them.

    The point of consideration is in this article is ‘whether satisfaction of conditions laid down by the FTP would absolve the assessee from satisfying the conditions laid down in the Customs law to avail the benefits of the scheme’? In other words, does a customs authority can deny the exemption from the import duty under Customs Law since the assessee has failed to satisfy the conditions laid down in such exemption notification despite of the fact that he has satisfied the conditions laid out in the FTP.

    In order to answer such a question, we should touch upon certain basic concepts in the FTP. It is a much known fact that FTP can only formulate the schemes, however the said policy cannot issue exemption notification in relevant statutes like Customs law (as in the above example). That is to say the scheme should be complimented with an exemption notification in the relevant statute separately to avail such benefit laid down by the schemes.

    So, from the above, it is evident that FTP can only formulate the schemes but cannot issue exemption notifications in the relevant statutes and the responsibility to lay down such exemption notification rests with Department of Revenue. Now, let us proceed to answer the question raised in the article by taking


    the ratio of recent Supreme Court judgment in the case of Pennar Industries Limited (for brevity ‘Pennar’/’Assessee’).

    In the Pennar case, they have imported hot rolled non-alloy steel wide coils against advance license issued under the Duty Exemption Entitlement Scheme (for brevity ‘DEES’). At the time of importation, Pennar has not paid customs duty in light of the exemption under Notification No 30/1997 – Cus, dated 01.04. 1997 which provides exemption to the actual users from the customs duty at the time of import subject to a condition of export of finished goods manufactured using such free imported material.



    Pennar has manufactured the finished goods using such duty free raw material but could not export since the quality of the finished goods was not fit for exports. Hence, they have not exported the said finished goods and cleared such goods for home consumption. When the Director General of Foreign Trade (for brevity ‘DGFT’) has raised query pertaining to the fulfillment of export obligations, Pennar has represented that the said quantity cannot be exported and requested to change the product to be exported and also allow the export obligation to be fulfilled even the said exports was done through supporting exporters (exports made by arranging with other manufacturers or traders to meet export obligation). DGFT has accepted the submissions of Pennar and change the product to be exported and allowed support exports to be deemed as exports done by Pennar. The assessee has met the export obligations vide such permission given by DGFT and was under an impression that the export obligation has been discharged as per the DEES.

    However, the customs authorities has demanded the customs duty which is not paid since the assessee has failed to comply with the conditions of Notification No 30/1997-Cus dated 01.04. 1997. The grounds of customs authorities were that, the said Notification does not allow any other material to be exported and the actual user of the raw material has to export the finished goods. Both the conditions have not been met by Pennar since the goods exported are not the one which is specified in the Notification and the exports were not actually made by the actual user of the subject imported material since they have been made by support exporters. Since, the conditions have been violated a notice demanding the customs duty on the imported raw material was issued. The assessee has stated that since the DGFT has accepted the exports made by the other persons as exports of the assessee, there cannot be any demand under customs. The supporting exports or 3rd party exports is an accepted concept under DGFT but not under customs especially when the exemption notification specifies that the actual user of raw material has to export and the adjudicating authority has confirmed the demand.

    Pennar has approached the tribunal wherein it was held that when DGFT has amended the license to accommodate the products to be exported and support exports, the same amounts to fulfillment of export obligations as per license and hence there cannot be any demand of customs duty and brushed away the order of the adjudicating authority. The authorities have gone for appeal against such order of Tribunal before the Honorable Supreme Court.

    The Honorable Supreme court after due considerations made by both the parties has held that when the conditions specified in Notification No 30/1997-Cus has not met, there cannot be any exemption despite of the fact DGFT has amended the terms on which the license is issued. The apex court after taking the ratio laid by the coordinate bench (of apex court) in the case of Sheshank Sea Foods Private Limited vs Union of India & Ors wherein it was held that there is nothing in EXIM policy which prohibits the power of customs to investigate into the matters even the subject belongs of EXIM policy. By adopting such ratio, the apex court has held that the assessee is required to pay customs duty since it has failed to satisfy the conditions laid down vide the Notification No 30/1997-Cus despite of the fact that the assessee has fulfilled the modified conditions given by DGFT.

    From the above judgment, it is clear that despite the conditions laid down vide the license has been satisfied, the conditions enshrined in the Customs exemption notification has also to be satisfied. However, the apex court when delivering the above judgment has recommended the Central Government to make necessary amendments to overcome such situations where DGFT has relaxed the conditions, the supporting notification in the statutes should also envisage the same and cannot be in contradiction as after all such notifications under Customs Law are issue to implement and to give effect to the benefits under the foreign trade policy. Hope the DGFT/Department of Revenue comes with necessary amendments to meet the eventualities to avoid unnecessary hardships for bonafide assessees.

    This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

    Recent Changes In FDI Regulations

    In continuation of its thrust on liberalising the economy, bringing more funds into India and creating employment, the Central Government has announced key amendments in the FDI policy. The amendments have been announced by Press Release dated 12th November, 2015 followed by Press Note No. 12/2015, dated 24th November, 2015

    To further boost this entire investment environment and to bring in foreign investments in the country, the Government has brought in FDI related Reforms and liberalisation touching upon 15 major Sectors of the Economy. The salient measures are:

    Limited Liability Partnerships, downstream investment and approval conditions. Investment by companies owned and controlled by Non-Resident Indians (NRIs) Establishment and transfer of ownership and control of Indian companies

    Agriculture and Animal Husbandry

    • Plantation
    • Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities
    • Defence
    • Broadcasting Sector

    Civil Aviation

    • Increase of sectoral cap
    • Construction development sector
    • Cash and Carry Wholesale Trading / Wholesale Trading (including sourcing from MSEs)
    • Single Brand Retail Trading and Duty free shops
    • Banking-Private Sector; and
    • Manufacturing Sector

    The Crux of these reforms is to further ease, rationalise and simplify the process of foreign investments in the country and to put more and more FDI proposals on automatic route instead of Government route where time and energy of the investors is wasted. It is one more proof of minimum government and maximum governance. Further refining of foreign investments in key Sectors like Construction where 50 million houses for poor are to be built. Opening up the manufacturing Sector for wholesale, retail and E - Commerce so that the Industries are motivated to Make In India and sell it to the customers here instead of importing from other countries. The proposed reforms also enhance the limit of Foreign Investment Promotion Board (FIPB) from current Rupees Three thousand crores to Five thousand crores. The proposal also contains many other long pending corrections including those being felt by the limited liability partnerships as well as NRI owned Companies who seem motivated to invest in India. Few other proposals seek to enhance the sectoral Caps so that foreign investors do not have to face fragmented ownership issues and get motivated to deploy their resources and technology with full force.

    With this round of Reforms, the Government has demonstrated that India is unstoppable on the path of Economic Development. Prime Minister has reiterated that Economic Wellbeing of the people of India is the main Task before him. It is also clear that India is a Country which is more than ready to integrate with the Global Economy because it feels that the Fruits of Development will reach to the common man only if there is Development. Above all every citizen in all nooks and corners must have a stake.

    Details of these changes are given in the following paragraphs.

    1. Radical Changes in FDI Regime in Construction Development Sector

    Following changes have been made in the FDI policy on Construction Development sector:

    1. Conditions of area restriction of floor area of 20,000 sq. mtrs in construction development projects and minimum capitalization of US $ 5 million to be brought in within the period of six months of the commencement of business, have been removed.
    2. Each phase of the construction development project would be considered as a separate project for the purposes of FDI policy.

    iii. A foreign investor will be permitted to exit and repatriate foreign investment before the completion of project under automatic route, provided that a lock-in-period of three years, calculated with reference to each tranche of foreign investment has been completed. Further, transfer of stake from one non-resident to another non-resident, without repatriation of investment will neither be subject to any lock-in period nor to any government approval. Nonetheless, exit is permitted at any time if project or trunk infrastructure is completed before the lock-in period.

    1. FDI is not permitted in an entity which is engaged or proposes to engage in real estate business, construction of farm houses and trading in transferable development rights (TDRs). Real Estate Business will mean as 'dealing in land and immovable property with a view to earning profit therefrom and does not include development of townships, construction of residential/ commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships. Further, earning of rent/ income on lease of the property, not amounting to transfer, will not amount to real estate business.'
    2. Condition of lock-in period will not apply to Hotels &Tourist Resorts, Hospitals, Special Economic Zones (SEZs), Educational Institutions, Old Age Homes and investment by NRIs.
    3. 100% FDI under automatic route is permitted in completed projects for operation and management of townships, malls/ shopping complexes and business centres. Consequent to foreign investment, transfer of ownership and/or control of the investee company from residents to non-residents is also permitted. However, there would be a lock-in-period of three years, calculated with reference to each tranche of FDI, and transfer of immovable property or part thereof is not permitted during this period.

    vii.      "Transfer", in relation to FDI policy on the sector, includes,‑

    (a)      the sale, exchange or relinquishment of the asset ; or

    (b)      the extinguishment of any rights therein ; or

    (c)       the compulsory acquisition thereof under any law ; or

    any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or

    any transaction, by acquiring shares in a company or by way of any agreement or any arrangement or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of, any immovable property.



    • Foreign Investment in Defence Sector up to 49% Under Automatic Route

    As per extant FDI policy in the Defence Sector, foreign investment up to 49% is permitted under Government approval route. Foreign investment above 49% is also permitted, subject to approval of Cabinet Committee on Security (CCS) on case to case basis, wherever the investment is likely to result in access to modern and 'state-of-art' technology in the country. Portfolio investment and investment by FVCIs is restricted to 24% only. In this regard, the following changes have inter-alia been brought in the FDI policy on this sector:

    1. Foreign investment up to 49% will be under automatic route.
    2. Portfolio investment and investment by FVCIs will be allowed up to permitted automatic route level of 49%.

    Proposals for foreign investment in excess of 49% will be considered by Foreign Investment Promotion Board (FIPB).

    1. In case of infusion of fresh foreign investment within the permitted automatic route level, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, Government approval will be required.
    2. New Sectoral Caps & Entry Routes in Broadcasting Sector FDI policy on Broadcasting sector has also been amended. New sectoral caps and entry routes are as under:


    • Teleports(setting up of up-linking H U Bs/Teleports);
    • Direct to Home (DTH);
    • Cable Networks (Multi System operators (MSOs) operating at National or State or District level and undertaking upgradation of networks towards digitalization and addressability);
    • Mobile TV;
    • Headend-in-the Sky Broadcasting Service(H ITS) Cable Networks (Other MSOs not undertaking upgradation of networks towards digitalization and addressability and Local Cable Operators (LCOs)) Broadcasting Content Services Terrestrial Broadcasting FM (FM Radio),

  Up-linking of 'News & Current Affairs' TV Channels Up-linking of Non-'News & Current Affairs' TV Channels 100%


    Down-linking of TV Channels                             Automatic route

    4. Full Fungibility of Foreign Investment Permitted in Banking- Private Sector

    Government has decided to introduce full fungibility of foreign investment in Banking-Private sector. Accordingly, FIIs/FPIs/QFIs, following due procedure, can now invest up to sectoral limit of 74%, provided that there is no change of control and management of the investee company

    5. 100% Foreign Investment Permitted in Coffee/Rubber/Cardamom/Palm Oil & Olive Oil Plantations

    As per the present FDI policy on the Plantation sector, only tea plantation is open to foreign investment. In line with this sector, the government has decided to open certain other plantation activities namely; coffee, rubber, cardamom , palm oil tree and olive oil tree plantations also for 100% foreign investment. Foreign investment in the plantation sector would henceforth be under automatic route.

    1. Investment by Companies/Trusts/Partnerships Owned & Controlled by NRIs on Non-Repatriation Basis to be Treated as Domestic Investment

    Non-Resident Indians (NRIs) have special dispensation for investment in construction development and civil aviation sector. Further, investment made by Non-Resident Indians under schedule 4 of FEMA (Transfer or issue of Security by Persons Resident Outside India) Regulations is deemed to be domestic investment at par with the investment made by residents. In order to attract larger investments, which are possible through incorporated entities only, the special dispensation of NRIs has now been also extended to companies, trusts and partnership firms, which are incorporated outside India and are owned and controlled by NRIs. Henceforth, such entities owned and controlled by NRIs will be treated at par with NRIs for investment in India.


    1. Permitting Manufacturers to Undertake Wholesale and/or Retail, Including Through E-Commerce Without Government Approval


    It has been decided that a manufacturer will be permitted to sell its product through wholesale and/or retail, including through e-commerce without Government approval.

    1. Review of FDI Policy Conditionalities for Single Brand Retail Trading and Permitting 100% FDI in Duty Free Shops


    (i) Extant FDI policy on SBRT mandates that sourcing of 30% of the value of goods purchased would be reckoned from the date of receipt of FDI. It has now been decided that sourcing requirement has to be reckoned from the opening of first store. Further, it is seen that in certain high technology segments, it is not possible for retail entity to comply with the sourcing norms. To provide opportunity to such single brand entities, it has been decided that in case of 'state-of-art' and 'cutting-edge technology' sourcing norms can be relaxed subject to Government approval.

    (ii) FDI policy on the SBRT provides that, retail trading, in any form, by means of e-commerce, would not be permissible. It has been decided that an entity which has been granted permission to undertake SBRT will be permitted to undertake e-commerce activities.

    (iii) It has been clarified that Indian brands are equally eligible for undertaking SBRT. It has been decided that certain conditions of the FDI policy on the sector namely; products to be sold under the same brand internationally and investment by non-resident entity/ entities as the brand owner or under legally tenable agreement with the brand owner, will not be made applicable in case of FDI in Indian brands.

    (iv) An Indian manufacturer is permitted to sell its own branded products in any manner i.e. wholesale, retail, including through e-commerce platforms. For the purposes of FDI Policy Indian manufacturer would be the investee company, which is the owner of the Indian brand and which manufactures in India, in terms of value, at least 70% of its products in house, and sources, at most 30% from Indian manufacturers. Further Indian brands should be owned and controlled by resident Indian citizens and/or companies, which are owned and controlled by resident Indian citizens.

    Opening of Duty Free Shops for 100% FDI under Automatic Route

    100% FDI is now permitted under automatic route in Duty Free Shops located and operated in the Customs bonded areas.

    9. Permitting Same Entity to Carry Out Both Wholesale and Single Brand Retail Trading

    As per the FDI policy, in wholesale cash & carry activities, 100% foreign investment is permitted under the automatic route. FDI policy on this sector further provides that a wholesale/cash & carry trader cannot open retail shops to sell to the consumer directly. It has now been decided that a single entity will be permitted to undertake both the activities of single brand retail trading (SBRT) and wholesale with the condition that conditions of FDI policy on wholesale/ cash & carry and SBRT have to be complied by both the business arms separately.

    1. 100% FDI in LLPs Permitted Under Automatic Route

    FDI policy on Limited Liability Partnerships (LLP) has been amended to provide that investments in LLPs will not require Government approval. 100% FDI is now permitted under the automatic route in LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions. Further, the terms 'ownership and 'control' with reference to LLPs have also been defined.

    Downstream Investment

    It has been decided that in line with companies, an LLP having foreign investment will be permitted to make downstream investment in another company or LLP in sectors in which 100% FDI is allowed under the automatic route and there are no FDI-linked performance conditions. Further, for the purposes of FDI policy, the term 'internal accruals' has also been defined.

    1. Opening up of FDI in Regional Air Transport Service

    As per the present FDI policy, foreign investment up to 49% is allowed in Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline (SOP). It has now been decided that Regional Air Transport Service (RSOP) is will also be eligible for foreign investment up to 49% under automatic route.

    1. Enhancing Foreign Equity Caps in Non-Scheduled Air Transport, Ground Handling Services, Satellites- establishment and operation and Credit Information Companies

    Foreign Equity caps of certain sectors viz. Non-Scheduled Air Transport Service, Ground Handling Services, Satellites- establishment and operation and Credit Information Companies have now been increased from 74% to 100%. Further, sectors other than Satellites- establishment and operation have been placed under the automatic route.

    1. Companies without Operations Not to Require Government Approval for FDI for Undertaking Automatic Route Sector Activities

    Approval requirements in respect of companies under operation have also been relaxed. It has now been decided that for infusion of foreign investment into an Indian company which does not have any operations and also does not have any downstream investments, Government approval would not be required, for undertaking activities which are under automatic route and without FDI-linked performance conditions, regardless of the amount or extent of foreign investment.

    1. Establishment and Transfer of Ownership and Control of Indian Companies

    As per the FDI policy establishment and ownership or control of the Indian company in sectors/activities with caps requires Government approval. This provision has now been amended to provide that approval of the Government will be required if the company concerned is operating in sectors/ activities which are under Government approval route rather than capped sectors. Further no approval of the Government is required for investment in automatic route sectors by way of swap of shares.

    1. Simplification of Conditionalities


    Certain conditions of FDI policy on Agriculture and Animal Husbandry, and Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities have been simplified.

    16. Raising the Threshold Limit for Approval by Foreign Investment Promotion Board

    As per the FDI policy Foreign Investment Promotion Board (FIPB) considers proposals having total foreign equity inflow up to Rs. 3000 crore and proposals above Rs. 3000 crore are placed for consideration of Cabinet Committee on Economic Affairs (CCEA). In order to achieve faster approvals on most of the proposals, it has been decided that the threshold limit for FIPB approval may be increased to 5000 crore.

    Above amendments to the FDI Policy are meant to liberalise and simplify the FDI policy so as to provide ease of doing business in the country leading to larger FDI inflows contributing to growth of investment, incomes and employment.

    This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

    ID Act - Do We Need Permission From Government To Retrench?

    Most of the Industrial Establishments are not required to take permission from Government to retrench or closing down of the establishment as per the provisions of the Industrial Disputes Act. Yet many of us express our inability in this regard referring the ID Act. Similarly the other block in our minds is about a workman working two hundred forty days. Does the two hundred forty days working give permanent employment status to a workman in an industrial establishment? Certainly not. In this paper, an attempt has been made to place the subject in context alongside supporting judicial pronouncements and to bring out some of the salient features of the Industrial Disputes Act in this regard.

    Chapter V-A and V-B of Industrial Disputes Act deals with the procedure to be followed with regard to the workmen who are in continuous service for one year in the industrial establishment for lay-off, retrenchment and closure. If a workman worked for two hundred forty days in the preceding twelve months, it is deemed that he or she is in continuous service for one year. Thus the concept of two hundred forty days working is to determine continuous service of a workman and providing necessary safe guards to the workmen working in certain industrial establishments.

    Let us look at the issue of termination of employment of an industrial workman covered under ID Act and applicability of ‘Chapter V-A & V-B’ of the Act.

    Chapter V-A and V-B of ID Act deals with the procedure and compensation payable for lay- off, retrenchment and closure. Interestingly these chapters are applicable only to a certain category of industrial establishments and other categories of industrial establishments are not covered under these chapters. It is applicable only to Factories, Mines and Plantations. That is to say irrespective of the number of employees employed in other industrial establishments, such as hospitals, hotels, retail sector, IT and ITES, shops and establishments etc., they are not covered under the provisions of these chapters even though they are covered under ID Act.

    Even within the factories, the industrial establishments which are of a seasonal character or in which work is performed intermittently are not covered under these chapters. In India, most of the agro based industries such as cotton, tobacco, jute, silk and woolen textiles, sugarcane and vegetable oil industries are seasonal industries, as they are based on agricultural raw material. This industry is very significant in our country as it contributes 14% to the total industrial production and provides employment to 35 million people. The Supreme Court in the matter between Haryana Seeds Development Corporation Vs Presiding Officer (1997 LLR 806) held that termination of the workers in a seasonal establishment will not amount to retrenchment.

    Thus, the application of Chapter V-A & V-B is restricted to non seasonal factories, mines and plantations employing 100 or more workman on an average in the preceding twelve months. Some State Governments such as Utter Pradesh, Rajasthan, and Andhra Pradesh amended the ID Act such that Chapter V-B is applicable only to industrial establishments that employ 300 or more workmen.


    There has been a debate on the computation of number of workmen in an industrial establishment. It has been held by the Hon’ble Bombay High Court in the matter of Dyes and Chemicals Workers Union Vs Bombay Oil Industries Limited 2001 LLR 602 that only persons fulfilling the criteria as per the definition of ‘workman’ will be included for computing the number of employees under section 25K of the Industrial Disputes Act. That is to say, the persons discharging supervisory and management functions are excluded for the purpose of computation of number of workmen employed. The other question that arose was as to whether workmen engaged through contractors or workmen engaged as badili or casual should be included for the purpose of computation of number of workmen of the industrial establishment or not. The Bombay High Court in the matter of Maharashtra General Kamgar Union Vs Indian Gum Industries 2000 (86) FLR 533 held that neither contract labour nor the mathodhi workers will be taken into account to determine the strength of the workmen for seeking closure of an establishment. Thus for determination of strength of workmen of an industrial establishment, only the workmen who are on the rolls of the establishment should be taken into account.

    From the above discussion, it is obvious that the application of the provisions of Chapter V-A & V-B and ‘retrenchment’ are applicable only to a small section of major industrial establishments and are not applicable to most of the medium and small factories and other industrial establishments. Therefore, it is for us to plan and organize our work and manpower deployment rather than lamenting for changes in the Act and looking to the Government.

    The Industrial Disputes Act has excluded the below mentioned categories of ‘terminations’ from the definition of retrenchment.

    1. Termination of the service of the workman as a result of the non-renewal of contract of employment.
    2. Termination of the service of a workman on the ground of continued ill health.

    While endorsing that the terminations in the above category do not fall under ‘retrenchment’ under the ID Act, the courts have further extended it to include other categories as well, some of which are as under. The Supreme Court in the matter between Punjab State Electricity Board Vs Darbara Singh (2006 LLR 68 SC) confirmed that non-renewal of contract of service will not fall under the provisions of retrenchment. Where engagement of a workman was for a specific period, as such his termination will be excluded from the provisions of section 2(oo)(bb) of ID Act and no retrenchment compensation will be payable on his termination even when he was worked for 240 days.

    It has also been held that the termination of a trainee does not fall under the definition of retrenchment. The Delhi High Court in the matter of R. Kartik Ramachandran Vs Presiding Officer, Labour Court (2006 LLR 358) held that compliance of section 25 F of the I D Act will not be necessary on termination of a trainee.

    When it comes to casual workmen, the Supreme Court in the matter between Batala Coop Sugar Mills Ltd Vs Sowaran Singh (2005 LLR 1211 SC) held that a casual workman on daily wages for a specific period and for specific work, will not fall under the ambit of retrenchment.


    Project based employment termination at the end of the project also does not fall under the category of retrenchment. The Punjab & Haryana High Court (2010 LLR 482) held that even when the workman working on a project was not given contractual appointment, his termination would not be retrenchment when the contract comes to an end.

    From the above reading it is amply clear that it is the requirement of management to perform the function of forecasting, assessing manpower requirements and inducting manpower in different categories to meet specific requirements of the industrial establishment from time to time. The Industrial Disputes Act has given ample scope to the industrial organizations to do this. Hence, HR professionals have a major role to play in categorizing the manpower requirements and planning to take them as per those requirements.

    The other exclusion mentioned above is that of termination of service of a workman on the ground of continued ill health. The Delhi High Court (2007 LLR 303) in the matter of J B Kumar Vs Brijesh Sethi held that termination for continued ill-health of an employee is excluded from retrenchment. However, it is held that discharge for continuous ill health must be supported with sufficient evidence. (Somasundaram Vs Labour Court, Coimbatore, 2010 LLR 919 Mad HC)

    It is commonly stated by most of the Managements as well as HR Professionals that termination of an employee is not possible once he has completed two hundred forty days of work in an organization in view of the provisions of the Industrial Disputes Act. On the other hand, trade union representatives time and again demand and insist that the workman should be taken on the permanent rolls of the company as he or she has worked for more than two hundred forty days. There are also a number of occasions where managements have voluntarily decided to take these employees on its rolls.

    It is not true to state that when a workman works for two hundred forty days he automatically gains the status of a permanent workman. The Industrial Disputes Act laid down certain procedures that are to be followed for termination of a workman who has worked in an industrial establishment for two hundred forty days or more. However, these procedures have no universal application to all the industrial establishments covered under the Act.

    The act never conferred the status of permanency simply because a workman worked for 240 days or more in the preceding twelve months. The Supreme Court in the case between Hindustan Aeronautics Ltd Vs Dan Bahadur Singh (AIR 2006 SC 2733) held that the completion of 240 days’ work does not confer right for regularization and again the same was reiterated in the matter of Gangadhar Pillai Vs Siemens Ltd (2007 1 SCC 533).

    Thus it is very clear that all terminations do not fall under the category of retrenchment and all industrial establishments are not covered under Chapters V-A & V-B. Similarly, working in an establishment for two hundred forty days does not confer permanent status to a workman. Hence it is our duty to understand the applicability of various provisions of the Act and take decisions accordingly.

    This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.