Physical Research Laboratory v K.G. Sharma (1997)

Nine-tenths of what students know about "industry" comes from Bangalore Water Supply, and the triple test there is so generously worded that it is easy to conclude that nothing is left outside s. 2(j). This case is the corrective.

It is a decision that applies the Bangalore Water Supply guidelines faithfully — it reproduces them at length — and still holds that the institution before it is not an industry. The reason is the second limb of those guidelines, the one candidates forget: the activity must bear a resemblance to trade or business, and an activity that produces neither goods nor services for anybody outside the institution does not.

It is also the case in which the Court says plainly that the Bangalore Water Supply propositions are not exhaustive, particularly on what counts as a sovereign function, and reads the later decisions in Chief Conservator of Forests v Jagannath Maruthi Kondhare and Sub-Divisional Inspector of Post, Vaikam v Theyyam Joseph alongside them. For any question asking whether the Bangalore Water Supply test has been diluted, this is the authority to cite.

The respondent, K.G. Sharma, was appointed by the Physical Research Laboratory (PRL) as a Scientific Glass Blower on 25 October 1948. He continued to work as such until 11 May 1976, when he was transferred to Photography Documentation Services, on a post that was non-technical and administrative. On 31 December 1978 he attained the age of 58, and was retired from service with effect from 1 January 1979.

Aggrieved at being retired at 58 rather than 60, he first moved the High Court of Gujarat by writ petition, and thereafter filed a complaint before the Labour Commissioner, on the basis of which a reference was made to the Labour Court at Ahmedabad.

The undisputed facts about PRL, as placed before the Court by the learned Attorney General for the appellant, were these. PRL is a public trust registered under the Bombay Public Trusts Act 1950. It is a research institute, established by Dr Vikram Sarabhai for research in space and allied science. It is financed mainly by the Central Government through provision in the Union Budget, and nominally by the Government of Gujarat, the Karmakshetra Education Foundation and the Ahmedabad Education Society. It is virtually an institute falling under the Government of India's Department of Space. It conducts advanced research in (1) astronomy and astrophysics, (2) planetary atmosphere and aeronomy, (3) earth science and solar system studies, and (4) theoretical physics. The research is done by eminent scientists resolving problems of fundamental sciences on their own; the institution carries on no trade or business directly or indirectly; and the knowledge acquired is not sold but is used for the benefit of the Government.

The Labour Court rejected the contention that PRL was not an industry. It did so although it recorded a finding that PRL is purely a research institute and that the research work carried on by it is not connected with production, supply or distribution of goods or services. It took that view following Bangalore Water Supply & Sewerage Board v A. Rajappa, on the footing that PRL carries on, in an organised and systematic manner, the activity of research in its laboratory by active co-operation between itself and its employees, and that the discoveries and inventions made would be eligible for sale. It also followed a decision of the Gujarat High Court under the Trade Unions Act, which had held that in view of Bangalore Water Supply it was not open to doubt that PRL's employees would come within the definition of "workmen" under the Industrial Disputes Act.

On the merits, the Labour Court held that a man who had worked on a technical post from 1948 to 1976 could not be treated as an administrative employee merely because towards the fag end of his career he was moved to an administrative post; he was entitled to continue to the age of 60; the retirement order was bad; and, since he had by then crossed 60, back wages for those two years were ordered in place of reinstatement.

PRL came to the Supreme Court directly against the award, the Gujarat High Court having already taken the view that PRL is an industry, and different High Courts and Tribunals having expressed conflicting views on whether research institutes run by the Government are industries. On 1 February 1993 its counsel stated that, irrespective of the decision on merits, the Court should decide whether a research institute of the type of PRL can be said to be an industry, and the Court directed that the matter be finally disposed of at the notice stage.

The Court set out the guidelines in full. In summary, and in their own terms: where there is (i) systematic activity, (ii) organised by co-operation between employer and employee, (iii) for the production and/or distribution of goods and services calculated to satisfy human wants and wishes, prima facie there is an industry; "absence of profit motive or gainful objective is irrelevant, be the venture in the public, joint, private or other sector"; the focus is functional, the decisive test being the nature of the activity with emphasis on employer-employee relations; and philanthropy animating an undertaking does not take a trade or business out of s. 2(j).

The second limb is the one on which this case turns. Although s. 2(j) uses words of the widest amplitude, "their meaning cannot be magnified to overreach itself"; "undertaking", "service", "calling" and the like suffer a contextual and associational shrinkage, so that organised activity which is not trade or business may still be industry only where the nature of the activity, on the employer-employee basis, bears resemblance to what we find in trade or business. The third limb brings professions, clubs, educational institutions, co-operatives, research institutes and charitable projects within s. 2(j) if they satisfy the triple test, while exempting genuinely eleemosynary undertakings. The fourth is the dominant nature test, with the rider that only sovereign functions strictly understood are exempt, not welfare activities or economic adventures of government or statutory bodies, and that severable industrial units within a sovereign department may still be industries.

The Court then entered two cautions before applying the guidelines. First, they were formulated because the Court had found the definition vague and "rather clumsy, vapourous and tall-and-dwarf"; the wider words were construed on the principle of noscitur a sociis, and qualify as industry only if analogous to trade or business. Secondly, "an activity undertaken by the Government cannot be regarded as 'industry' if it is done in discharge of its sovereign function", and in any event "the aforesaid principles are not exhaustive either as regards what can be said to be sovereign function or as regards the other aspects dealt with by the court".

In Chief Conservator of Forests v Jagannath Maruthi Kondhare the Court had rejected the contention that, sovereignty vesting in the people, the concept of sovereign functions covers all welfare activities — such a view would erode the ratio of Bangalore Water Supply — and had observed that the dichotomy of sovereign and non-sovereign function does not really exist, everything depending on the nature of the power and the manner of its exercise. After referring to the three traditional sovereign functions — legislative power, the administration of laws and the exercise of judicial power — and to a Gujarat High Court decision holding famine and drought relief works not to be an industry, the Court had observed that "what really follows from this judgment is that apart from the aforesaid three functions there may be some others functions also regarding which a view could be taken that the same too is a sovereign function".

In Sub-Divisional Inspector of Post, Vaikam v Theyyam Joseph the Court had held that "The welfare measures partake the character of sovereign function", that providing telecommunication service is an essential part of the sovereign functions of the State as a welfare State, and that the establishment was therefore not an industry; that view had also been influenced by the fact that the method of recruitment and the conditions of service of the employees were governed by statutory rules and the employees were civil servants. The lesson the Court drew was that in applying the traditional test approved in Bangalore Water Supply, "the change in the concept of sovereign function of a constitutional government has to be kept in mind". On that footing it was contended for PRL that its research work should be regarded as a sovereign or governmental function.

The Court set out the earlier passage in terms. "Does research involve collaboration between employer and employee ? It does." The employer is the institution and the employees are the scientists, para-scientists and other personnel; scientific research is undoubtedly a service; its discoveries are valuable contributions to the wealth of nations and may be sold for a heavy price in the industrial and other markets; technological inventions and innovations may be patented and sold; research benefits industry; and a research institute may therefore be regarded as an organisation propelled by systematic activity modelled on co-operation between employer and employee, yielding inventions and useful solutions that benefit individual industries and the nation in terms of goods, services and wealth. The conclusion there was: "It follows that research institutes, albeit run without profit-motive, are industries."

The distinction the Court drew is factual, and it is the heart of the case. PRL is engaged in pure research. The purpose of that research is to acquire knowledge about the formation and evolution of the universe, "but the knowledge thus acquired is not intended for sale". The Labour Court had itself recorded a categorical finding that the research work is not connected with production, supply or distribution of material goods or services. The material further disclosed that PRL conducts research not for the benefit or use of others; "Though the results of the research work done by it are occasionally published they have never been sold"; and "There is no material to show that the knowledge so acquired by PRL is marketable or has any commercial value." It had not been shown how the knowledge acquired, or the results occasionally published, would be useful to persons other than those engaged in that type of study. The object of the research activity is to obtain knowledge for the benefit of the Department of Space; its object is not to render service to others, nor does it in fact do so except indirectly.

From that the conclusion followed. Nobody suggested that PRL is engaged in business, trade or manufacture; and neither the nature of its organisation nor the nature and character of its activity made it an undertaking analogous to business or trade. "It is not engaged in a commercial industrial activity and it cannot be described as an economic venture or a commercial enterprise as it is not its object to produce and distribute services which would satisfy wants and needs of the consumer community." Rather, "It is more an institution discharging Governmental functions and a domestic enterprise than a commercial enterprise."

"We are, therefore, of the opinion that PRL is not an industry even though it is carrying on the activity of research in a systematic manner with the help of its employees as it lacks that element which would make it an organisation carrying on an activity which can be said to be analogous to the carrying on of a trade or business because it is not producing and distributing services which are intended or meant for satisfying human wants and needs, as ordinarily understood."

The appeal was allowed and the award of the Labour Court at Ahmedabad set aside. In the facts and circumstances, there was no order as to costs.

The Bangalore Water Supply triple test is not satisfied by systematic activity and employer-employee co-operation alone. The third element — production or distribution of goods or services calculated to satisfy human wants and wishes — must be independently made out, and the wider words of s. 2(j) carry a contextual shrinkage requiring the activity to be analogous to trade or business. A pure research institution functioning under a government department, whose knowledge is acquired for that department, is not marketable, has not been sold, and is not rendered as a service to others, therefore falls outside s. 2(j), notwithstanding the general observation in Bangalore Water Supply that research institutes run without profit motive are industries. The guidelines in that case are not exhaustive, and the concept of sovereign function must be read in the light of the changed character of a constitutional welfare government.