Definition of “Industry” | Day 1: Union and states recommend tests to determine “sovereign functions”

Attorney General: Triple test is correct but its application has gone “overboard”

Attorney General R. Venkataramani appeared for the Union government. He focused on three issues: whether the triple test in Bangalore Water Supply is correct, whether government and welfare activities fall within “industry,” and the scope of “sovereign functions”.

He submitted that the “triple test” and “dominant nature test” are “in itself good tests,” but the problem is their application. According to him, there has been “indiscriminate application leading to over inclusion of activities” under the scope of “industry”.The triple test provides elements to be considered in determining an “industry”: a systematic activity; cooperation between employer and employee; and the production or distribution of goods or services calculated to satisfy human wants and wishes, excluding purely spiritual or religious services.

Notably, Parliament had enacted an amendment in 1982 which restricted the ruling of Bangalore Water Supply. However, this amendment was never brought into force due to “pressure” on the legislature and the executive. Venkataramani argued that the 1982 amendment substituted the definition of “industry” by excluding several categories, including activities relatable to sovereign functions. He said the Labour Codes enacted in 2020, “picks up” elements of Bangalore Water Supply while defining what can be excluded.

The 1982 amendment had excluded functions such as defence, research, atomic research and space from the purview of “industry”. Venkataramani added that other functions such as agricultural operations, hospitals or dispensaries, education, scientific research or training institutes, institutes managed by organisations that are engaged in charity and any activity of the government which is “relatable to the sovereign functions” too were excluded. At the same time, he said the concept of “sovereign functions” cannot be put into a formula and must be applied based on the nature of the activity. Justice B.V. Nagarathna asked whether “sovereign functions” should be construed broadly or restrictively. To this, the Attorney General clarified that the Union’s stance was a broad interpretation—effectively widening the ambit of functions that are not under the purview of “industry”. 

During the arguments, CJI Surya Kant reiterated that the Court would proceed on the basis that there is a reference before it and that it must examine Bangalore Water Supply. It indicated that the scope of “industry” will not be determined on the basis of the new labour codes, noting that it will come up for challenge later, as informed by Senior Advocate Indira Jaising at the start of the hearing. 

Nataraj: 1982 amendment and 2020 Code as interpretive tools

Additional Solicitor General K.M. Nataraj, appearing for the state of Uttar Pradesh, submitted that the 1982 amendment and the 2020 Code show that Parliament attempted to restrict the interpretation given in Bangalore Water Supply. He added that the previous interpretation was understood in a “colonial sense,” and must be read in an “Indian context”. Referring to the 2020 Code, he pointed out that it excludes not only sovereign functions but also activities relatable to sovereign functions. He pushed that the 1982 amendment and the 2020 Code can be taken as an “indicator for the purpose of interpretation”, describing it in the nature of a “clarificatory legislation”.

At this stage, Justice Joymalya Bagchi cautioned that such interpretive aid would effectively redefine the scope of Bangalore Water Supply. He asked, “Would it not in effect give a retrospective operation of the labour code?” He added that the Court would be “re-legislating a prospective law as a retrospective law,” since the Code was brought into force from 2025. He then pressed Nataraj on calling it “clarificatory,” asking if this was an attempt to “pass off a wolf in sheep clothing.” Nataraj responded that he was not saying it is a clarificatory law, but only “in the nature of a clarificatory law.” Justice Bagchi further observed that interpreting Bangalore Water Supply in the “shadow” of the 2020 Code could result in existing industrial disputes being affected by a new standard. Justice P.S. Narasimha too agreed with Justice Bagchi, stating that the argument on the basis of the original definition could be made without taking the 1982 amendment and the 2020 Code into account.

Naphade: Triple test does not flow from statute

Senior Advocate Shekhar Naphade appeared for the state of Maharashtra and the University of Mumbai. He challenged the basis of Bangalore Water Supply. He submitted that the “triple test” does not flow out of the wording of the statute and was “straightaway borrowed from an Australian judgement.” According to him, the judgement proceeds on a “value-loaded, worker-oriented approach.”

He argued that interpretation must return to the text of Section 2(j), particularly “trade,” “business,” “manufacture” and “calling,” and that “undertaking” must take colour from these words.

Instead of  going into the concept of  sovereign functions, Naphade proposed a simpler test: whether the activity is an essential governmental function arising out of a statutory obligation. If it is not “rooted in commerce,” it cannot be an industry. He proposed a “principal activity” test based on commercial character, arguing that activities like roads, irrigation and welfare schemes are carried out in discharge of statutory obligations and are not commercial.

Naphade referred to Corporation of the City of Nagpur v Its Employees (1959), to show the problem with the existing approach. He argued that once the principal activity is treated as an industry, the reasoning extends across departments, so that “even the tax department becomes an industry.” He said this shows where the logic in Bangalore Water Supply breaks down.

On education, he submitted, “What is the essence of teaching? It is intellectual enlightenment. It cannot be equated with a material service.” Referring to Articles 41 and 21A, he argued that what the State performs as a statutory obligation “cannot be treated as an industry at all.”

The Court will continue to hear arguments tomorrow. Senior Advocate Sanjay Hegde will begin arguments for the state of Karnataka.