Does the Payment of Gratuity Act Apply to Employees Covered under CCS (Pension) Rules?

The Supreme Court in N. Manoharan & Ors. v. The Administrative Officer & Anr. (2026 INSC 143) addressed a significant question concerning the applicability of the Payment of Gratuity Act, 1972 (PG Act), to employees of the Heavy Water Plant (HWP), Department of Atomic Energy (DAE), Government of India.

The central issue was whether employees of HWP are “employees” within the meaning of Section 2(e) of the PG Act or whether they fall under the statutory exclusion applicable to persons holding posts under the Central Government and governed by other gratuity-providing rules.

The Court ultimately held that HWP employees are Central Government servants governed by the CCS (Pension) Rules, 1972, and therefore fall within the exclusion clause under Section 2(e) of the PG Act. Consequently, the PG Act does not apply to them.

Statutory Framework

Payment of Gratuity Act, 1972

The PG Act is a welfare legislation providing statutory gratuity to employees engaged in factories, mines, plantations, ports, railways, shops, and establishments. Section 2(e) defines “employee” and specifically excludes:

“any person who holds a post under the Central Government or a State Government and is governed by any other Act or by any rules providing for payment of gratuity.”

This exclusion is crucial; it carves out government servants already protected by a parallel gratuity regime.

CCS (Pension) Rules, 1972

The CCS Rules govern pensionary benefits of Central Government employees, including:

• Retirement gratuity
• Death gratuity
• Pension
• Commutation benefits

Gratuity under CCS Rules is calculated on a structured formula linked to pay and length of service, distinct from the ceiling and formula under the PG Act.

Background and Factual Matrix

(a) Establishment of the Department of Atomic Energy

The Atomic Energy Act, 1962 (AE Act) was enacted to provide for the development and control of atomic energy for peaceful purposes. Section 3 of the AE Act empowers the Central Government to:

• Develop, produce and use atomic energy
• Carry out research
• Establish authorities, corporations, or government companies
• Undertake projects either directly or through other instrumentalities

The Department of Atomic Energy (DAE) functions under the Prime Minister and supervises various units and boards engaged in nuclear research and production.

(b) Constitution of Heavy Water Projects Board

On 1 May 1969, an Office Memorandum constituted a Board of Management for Heavy Water Production Projects under DAE.

The Heavy Water Plant (HWP), Tuticorin, is one such project operating under this Board. Importantly:

• HWP was not incorporated under the Companies Act.
• It was not established as a Public Sector Undertaking (PSU).
• It was not a Government company with a separate legal personality.
• It functioned directly under the DAE.

3. Origin of the Dispute

The dispute arose when retired HWP employees discovered that:

• Gratuity payable under the Payment of Gratuity Act, 1972 was higher than Gratuity payable under the CCS (Pension) Rules, 1972

One such retired employee, N. Manoharan, was issued a pension payment order on 25 July 2014 under the CCS (Pension) Rules.

Believing themselves entitled to higher gratuity under the PG Act, certain retired employees filed applications before the Controlling Authority under the PG Act.

Proceedings Before Authorities

(a) Controlling Authority

The Controlling Authority held:

• HWP is an “industry” under the Industrial Disputes Act, 1947.
• Employees qualify under Section 1(3)(b) of the PG Act.
• The employees were entitled to differential gratuity under the PG Act.

The Authority directed payment of the difference between the gratuity calculated under the PG Act and that under CCS Rules.

(b) Appellate Authority

The Deputy Chief Labour Commissioner dismissed HWP’s appeal, upholding the applicability of the PG Act.

(c) High Court of Madras

HWP challenged the orders. The Division Bench of the High Court allowed the writ appeals and held:

1. HWP employees are Central Government servants.
2. CCS (Pension) Rules govern them.
3. Section 2(e) of the PG Act excludes them.
4. Section 14 (overriding effect) does not apply.
5. Employees cannot claim benefits under two statutes.
6. Those who have already withdrawn differential gratuity need not refund.
7. Those who had not withdrawn must return the deposits.

Aggrieved employees approached the Supreme Court.

Issues 

1. Whether employees of the Heavy Water Plant are “employees” under Section 2(e) PG Act.
2. Whether Section 14 (overriding clause) can defeat CCS Rules.
3. Whether absence of exemption under Section 5 makes PG Act applicable.
4. Whether acceptance of CCS gratuity bars subsequent PG Act claim.

Supreme Court’s Reasoning

Determination of “Jurisdictional Fact”

The Court held that the applicability of the PG Act depends on a jurisdictional fact—whether the person falls within the definition of “employee”.

Since the appellants:

• Held civil posts under the Central Government,
• Were appointed under CCS Rules,
• Received retirement benefits under CCS (Pension) Rules,

they squarely fall within the exclusion clause of Section 2(e).

Interpretation of Section 2(e)

The Court emphasised:

• The definition uses “means” and “does not include”, an exhaustive exclusion.
• Even if an establishment performs industrial functions, the nature of the employment relationship is decisive.
• Government servants governed by statutory pension rules are outside PG Act from the threshold stage.

Section 14 Has No Role

Employees argued that Section 14 gives overriding effect to PG Act over CCS Rules.

The Court rejected this:

• Section 14 applies only to persons who are employees under the PG Act.
• If a person is excluded under Section 2(e), the Act never applies.
• An overriding clause cannot expand the scope of definition.

Heavy Water Plant Is Not a Separate PSU

A key contention was that the Heavy Water Plant was an autonomous industrial unit.

The Court held:

• It is a departmental unit of the Department of Atomic Energy.
• Not incorporated under the Companies Act.
• Employees are Central Government servants, unlike PSU employees.
• Therefore, analogy with municipal corporations or government companies is misplaced.

Distinguishing Earlier Precedent

Reliance was placed on MCD v. Dharam Prakash Sharma (1998), where PG Act applied to municipal employees.

The Court distinguished:

• MCD employees were not holding civil posts under the Central Government.
• CCS Rules were only adopted by the Corporation.
• In the present case, employees were original government servants.

Key Highlights

Justice Pankaj Mithal and Justice S. V. N. Bhatti observed:

"A person who is governed by any other Act, or governed by any Rules providing for payment of gratuity, does not come within the ambit of the definition of “employee” under the PG Act.

On examination of constitution, establishment, and continuation, we notice the character of HWP as an adjunct of the Department of Atomic Energy, and by choice, we are not adverting to the appointment orders or any other circulars for deciding the jurisdictional fact of “employees”. Therefore, the employees fall within the exclusionary clause of Section 2(e) of the PG Act. The result of such exclusion is that Sections 5 and 14 are not attracted in deciding on the applicability of the PG Act to the employees of HWP."

Final Ruling

The Supreme Court conclusively held:

• Employees governed by CCS (Pension) Rules are excluded from the PG Act.
• Sections 5 and 14 of PG Act are irrelevant once the exclusion applies.
• Differential gratuity already withdrawn need not be refunded, but unwithdrawn amounts must be returned.

Conclusion

The Supreme Court has reaffirmed a clear legislative intent that government servants governed by CCS (Pension) Rules cannot migrate to the Payment of Gratuity Act for higher benefits. The exclusion in Section 2(e) is categorical and cannot be diluted by notions of industrial activity or Section 14 override.

This decision brings certainty to public finance and service jurisprudence. While the PG Act remains a beneficial legislation, its benefits are confined to those whom Parliament intended to cover, not to employees already secured by a comprehensive statutory pension regime.

Important Link

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