Issue: Whether Software Industries come under the ambit of the Factories Act vide the judgment pronounced

by the Bombay High Court on 11th of July, 2012? Case Notes: The Bombay High Court in the impugned judgment has decided that establishments which are involved in the process of software development are considered as a factory within the ambit of ESI Act but not under the Factories Act. The main point of contention in this case was whether an establishment involved in the process of software development would be termed as a factory under the ESI Act and hence liable to pay contribution accordingly. In this matter, due consideration was attached to the Explanation II of Section 2 (m) of the Factories Act. The Learned Counsel appearing on behalf of the software companies argued that the computer related activities cannot be treated as manufacturing process especially in the light of Explanation II of Section 2(m) of the Factories Act. The Learned Counsel appearing on behalf of the ESI Corporation submitted that these companies are using computers and they are not entitled to get benefit of Explanation II of Section 2(m) of the Factories Act. The Learned Single Judge while considering this aspect held that the interpretation of the term manufacturing process and the term factory are to be understood for the purpose of E.S.I. Act and not under the Factories Act In paragraph 17 of the judgment, the Court went on to opine that: .Moreover, the present Appeals are under the E.S.I. Act, so interpretation of manufacturing process and the term factory are to be understood for the purpose of E.S.I. Act and not under the Factories Act. While interpreting Explanation II of Section 2 (m) of the Factories Act, the Learned Single Judge opined that the clause no manufacturing process is carried on is to be understood as it is covering any type of manufacturing process including related to the computer..The purpose of the Explanation is to clarify that merely because a computer or computers are installed, the place will not be treated as a factory if otherwise no manufacturing process is carried on. While drawing a reference to the definition of factory as defined under the ESI Act, the Learned Single judge held that the definition of factory under the Act has a much wider ambit than that of the definition of the term factory as defined under the Factories Act. Hence the term factory has to be interpreted in light of its wider ambit and scope as laid down under the ESI Act while considering the scope of an establishment falling within the purview of the ESI Act. The relevant excerpts from the judgment which illustrates the above mentioned aspect is captured below:

Significantly, the definition of factory in Factories Act and E.S.I. Act are not the same. Explanation II of Section 2(m) of the Factories Act is inserted in the Factories Act and not in the E.S.I. Act. It marks difference in its interpretation and application. In the definition of factory under Factories Act the words worker working are used, while in the E.S.I. Act, in the section defining factory, the term person employed for wages are used. A difference in these two definitions of one word factory can be explained by example. A clerk or staff in the premises is not covered under the definition of worker under the Factories Act, however, under the ESI Act, the word worker is not used but the legislature chose the word person and for working, the word employed is used. Thus, the premises where person is employed for a clerical work is covered under the definition factory under the E.S.I. Act. Therefore, definition of factory has wider meaning under the ESI Act than the Factories Act. While deciding on the above mentioned issue, the Learned Single Judge referred to the judgment of the Supreme Court in the case of Quzi Noorul, H.H.H. Petrol Pump and Anr. Vs. Deputy Director, Employees State Insurance Corporation, reported in (2009) 15 SCC 30 wherein the Supreme Court held in paragraph 6 of the Judgment as follows: 6. In this connection, it may be stated that the words manufacturing process in different statutes have different meanings. For instance, in the Central Excise Act, 1944, the word manufacture means bringing into existence a different commodity, though this is not the definition of manufacturing process in the Factories Act, 1948. We cannot apply the definition of manufacturing process in one statute to another statute. The Bombay High Court further went into interpreting the word manufacturing process as defined under Section 2 (14AA) of the ESI Act. Section 2 (14AA) of the ESI Act lays down that the term manufacturing process has the same meaning as that of the term manufacturing process which is defined under the Factories Act under Section 2 (k).The Court opined that though computer related activities like development, programming, application are not specifically mentioned in the definition of the term under Factories Act, the definition takes within its consideration activities like computer programming and development. Thus the Court held that considering the fact that software development involves manufacturing process as contemplated under Section 2 (12) of the ESI Act, the software establishments which are a party to the dispute in hand cannot be made an exception while considering the contribution payable under the ESI Act. While referring again to the Explanation II of Section 2 (m) of the Factories Act the Court went on to observe: To borrow the meaning from the provision of Explanation II of Section 2(m) of the Factories Act, will be a myopic view defeating the object and spirit of the E.S.I. Act. The meaning of the term factory for the purpose of E.S.I. Act is not to be understood in the context of Explanation II of Section 2(m) of the Factories Act. This is not a harmonious construction of the Statute. Application of E.S.I. Act is not a regressive but a progressive step and to think that if E.S.I. Act is made applicable then it will affect I.T. industry adversely is a futile fear.

Thus the court held that the software industry which carries on the work of development of software falls within the purview of manufacturing process which is one of the key ingredients to determine an establishment as a factory for the purpose of the ESI Act. While disposing off the appeal, the Bombay High Court answered the issues which were raised for its decision as follow: Issues (i) Whether creation of software or development of software itself is a manufacturing process or not? (ii) Whether the premises where computers are involved in manufacturing process is a factory under the E.S.I. Act? Findings Yes

Yes

Relevant Definitions referred in the judgment: ESI Act: The term Factory is defined under Section 2 (12) of the Employees State Insurance Act, 1948 which reads as follows: factory means any premises including the precincts thereof (a) whereon ten or more persons are employed or were employed for wages on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on with the aid of power or is ordinarily so carried on, or (b) whereon twenty or more persons are employed or were employed for wages on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on without the aid of power or is ordinarily so carried on, but does not include a mine subject to the operation of the Mines Act, 1952 (35 of 1952) or a railway running shed. Section 2(14AA) states that: The definition of manufacturing process shall have the meaning assigned to it in the Factories Act, 1948 (63 of 1948) Factories Act: Definition of factory under Section 2(m) is as follows: factory means any premises including the precincts thereof:(a) whereon ten or more workers are working or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on with the aid of power or is ordinarily so carried on, or (b) whereon twenty or more workers are working or were working on any day of the preceding twelve month, and in any part of which a manufacturing process is being carried on without the aid of power or is ordinarily so carried on, but does not include a mine subject to the operation of the Mines Act, 1952 (35 of 1952) or a mobile unit

belonging to the armed forces of the Union, a railway running shed or a hotel, restaurant or eating place, or a poly house or green house engaged in the activity of floriculture or pomology or High Value Crops. Explanation I :............. Explanation II provides that for the purposes of this clause, the mere fact that an Electronic Data Processing Unit or a Computer Unit is installed in any premises or part thereof, shall not be construed to make it a factory if no manufacturing process is being carried on in such premises or part thereof. The term manufacturing process is defined under Section 2(k) of the Factories Act, 1948. Section 2(k) thereof reads as under: 2(k) manufacturing process means process for: (i) making, altering, repairing, ornamenting, finishing, packing, oiling, washing, cleaning, breaking up, demolishing or otherwise treating or adapting any article or substance with a view to its use, sale, transport, delivery or disposal; or (ii) Pumping oil, water, sewage, or any other substance; or (iii) generating, transforming or transmitting power; or (iv) composing types for printing, printing by letterpress, lithography, photogravure or other similar process or bookbinding; or (v) constructing, reconstructing, repairing, refitting, finishing or breaking up ships or vessels; or [(vi) preserving or storing any article in cold storage.