IT Companies "Manufacturing process" for ESI Act- Bombay HC Judgment

7/31/2019 IT Companies "Manufacturing process" for ESI Act- Bombay HC Judgment

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1 FA 143.12

IN THE HIGH COURT OF JUDICATURE AT BOMBAYCIVIL APPELLATE JURISDICTION

FIRST APPEAL NO.143 OF 2012

The Assistant DirectorEmployees State Insurance CorporationSub Regional Office Marol,

Panchdeep Bhavan, Plot No.9,Road No.7, MIDC, Andheri (East),Mumbai 400 093 ....Appellants

Vs.

M/s. Western Outdoor Interactive Pvt. Ltd.185-A, SDF-VI, Phase I,

SEEPZ, Andheri (East),Mumbai - 400 096 ...Respondents

WITH

FIRST APPEAL NO. 307 OF 2012

M/s. Reliable Software Systems Pvt. Ltd.42, 1st floor, RNA Arcade (Krystal Avenue)3rd Cross Lane, Lokhandwala Complex,

Andheri (W), Mumbai 400 093 ....Appellants

Vs.

Employees State Insurance Corporation

Regional Office, Marol,Panchdeep Bhavan,Plot No.9, Road No.7,MIDC, Andheri (E),

Mumbai 400 093 ...Respondents

--Mr. H.V. Mehta for the Appellants (in FA No. 143 of 2012).

Mr. P.M. Bhagat for Respondents (in FA No.143 of 2012).Mr. P.V. Satam for the Appellants (in FA No. 307 of 2012).Mr. P.M. Palshikar for the Respondents (in FA No. 307 of 2012).

--


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2 FA 143.12

CORAM : MRS. MRIDULA BHATKAR, J.

Reserved on : 30th March, 2012.

Pronounced on : 11th July, 2012.

Judgment :-

. By consent, the Appeals are taken up for final disposal at

the stage of admission. Perused record and the documents produced by

the parties.

2. In these two Appeals, same question of law regarding

coverage of the computer industry under the Employees State Insurance

Act, 1948 is involved and Employees State Insurance Corporation is a

common contesting party. The Appeals are heard together and decided

by a common order.

Facts of First Appeal No. 143 of 2012 :-

3. The Appeal is directed against the Judgment and Order dated

7th April, 2011 passed by the learned Judge of the Employees Insurance

Court, Mumbai. The Respondent-Company is a computer unit involved in

software development and other activities. After visit, the Inspector of

ESI Corporation sent a letter in the form C-11 on 26th June, 2001 and

informed the Respondents that they are covered under the provisions of


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3 FA 143.12

the Factories Act with effect from 1st January, 2001. The Applicants were

involved in the manufacturing process and in the month of January, 2001,

sixty two persons were employed in their establishment. So the demand of

contribution of Rs.53,679/- for the period from 1st January,2001 to 30th

September, 2002 was made under Section 45-A of the Employees State

Insurance Act, 1948 (hereinafter referred to as the E.S.I. Act). It was

challenged before the Employees State Insurance Court, Mumbai. The

Employees State Insurance Court held that the activities carried out by the

applicants is not Manufacturing Process, hence it is not a factory as defined

under section 2(12) of the E.S.I. Act. It was held that the claimants are

doing the commercial activities. The circular dated 22nd November, 2002

was issued under Section 1(v) of the E.S.I. Act, 1948 by the Employees

State Insurance Corporation, New Delhi and certain commercial activities

and services were covered under the Establishments and Shops Act. The

demand for contribution was made for the period from 1st January, 2001

till 30th September, 2002. The Court held that the circular issued dated

22nd

November, 2002 cannot be made applicable retrospectively.

Therefore, it allowed the Application of the Respondents and the order

passed by the Appellant-Corporation under Section 45-A of the Employees

State Insurance Act dated 8th September, 2003 is quashed and set

aside. Hence, this Appeal.


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4 FA 143.12

Facts of First Appeal No. 307 of 2012 :-

4. The Appellant is doing a business of software development.

The respondent-Corporation issued C-19 letters dated 16th February,

2005 and 24th February, 2005 demanding a contribution to the tune of Rs.

1,72,282/- towards Employees State Insurance (claiming recovery of the

contribution) for a period of January, 1998 to March, 2004 including

interest of Rs.1,05,658/-. Thus, the claim of total amount of Rs.2,79,940/-

was made. The Appellant filed an Application under Section 77 of the

Employees State Insurance Act, 1948 before the Employees State

Insurance Court for challenging the coverage under the Act on the ground

that unit is not carrying out manufacturing process and cannot be

brought within the meaning of Section 2(12) of the Employees State

Insurance Act, 1948. In this case, circular dated 22nd November, 2002

was not produced before the Labour Court. Therefore, the Labour Court

did not refer to the impugned circular but the Court held that the software

development is a manufacturing process and the Appellant is a factory so

Application filed by the Appellant under Section 75 was dismissed and

directed a recovery of the entire amount of contribution plus interest for

the period from January, 1998 till March, 2004. Hence, this Appeal.


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5 FA 143.12

5. Pursuant to the Supreme Court judgment in the case of

Southern Agency Rajmundri Vs.ESIC, reported in 2000 (7)SCALE690, a

circular dated 22th November, 2002 was issued wherein it was mentioned

that premises where the economic activities are carried out leading to the

sale and purchase of the goods are to be treated as a shop for the purpose of

ESI Act. Twenty three establishments are enlisted as covered under the

definition of shop for the purpose of coverage under section 1(v) of the E.S.I.

Act. The computer units where the manufacturing process is not carried out,

those units were not covered under the definition of factories; but as they

are involved in commercial and business activities were covered under the

definition of Shop and covered under the E.S.I. Act.

6. Learned Counsel for the Respondent in First Appeal No. 143 of

2012 argued that the E.S.I. Court has rightly allowed the claim and

cancelled the notice of demand of contribution sent by E.S.I Court. He

submitted that his Company is not carrying out any activities of

manufacturing process and even if the activities are carried out, the

circular whereby the computer industries are taken out of the definition

of manufacturing process is not applicable to the computer industries

and any activity carried out with the help of computer cannot be

considered within the definition of factory. He further submitted

that his company was only concerned with rendering in-flight services to


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the air craft and is not indulged into any kind of manufacturing process.

He pointed out that the circular dated 22nd November, 2002, even if it

is made applicable, the period of contribution is prior to the issuance of

the circular. Hence, the order of E.S.I. Court is valid and legal and is to

be maintained.

7. Learned counsel for the Petitioner in First Appeal No.307 of

2012 and for the Defendant in First Appeal No.143 of 2012 argued that

their company is not involved in any manufacturing process though they are

using the computer units. They cannot be given coverage under the E.S.I.

Act. In First Appeal No.307 of 2010, it is argued that in the Petitioner

company at the relevant time, there were 8 employees plus 2 Directors and

though these 10 persons were employed the petitioners were engaged in

providing on-line information to the share market traders regarding the

position of shares in the share market. So the use of the company is only for

the purposes of receiving, storing and transmitting the information to the

clients in the stock market. There is no question of development of any

software therefore, the finding given by the ESI Court is contrary to the law.

It is argued that no personal hearing was given in the matter and the actual

contribution was worked out to Rs.1,39,431/- and not the amount of Rs.

1,74,282/- as directed to pay. The amount of interest is also challenged and

it is stated that it should be less and wrongly the amount of contribution is


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shown higher. It is further argued by the learned Counsel that the activities

carried out and the services provided by the companies cannot be covered

under the definition of manufacturing process. Therefore, they are

exempted from the Labour Laws. Learned Counsel of both the contesting

companies vehemently 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.

8. Learned counsel for the E.S.I. 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. He heavily relied on the impugned

circular by which the computer units are covered under the definition of

shop. While elaborating the concept of shops, he gave example of various

business activities conducted by different establishments. In support, he

relied on-

1 Hyderabad Race Club, Malakpet, Hyderabad Vs.

ESI Corporation, Hyderabad, III L.L.J. (Supp).;

2 New Grand High Class Bakery Vs.The Employees'

State Insurance Corporation, Bombay, 1976

LAB.I.C.1466;

3 M/s Baranagar Service Station Vs.The

Employees' State Insurance Corporation 1988

LAB.I.C.302;


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4 M/s East West Hotels Ltd. Vs.Regional Director

E.S.I.C., I.L.L.J.;1986;

5 Employees State Insurance Corporation

Vs.Tiecion Private Limited, I.L.L.J.1996

He argued that for the purpose of manufacturing process, it is

not necessary that the process should end in substance being manufactured.

What is required is that it should carry on manufacturing process. In support

of his submission, he relied onAlkali Metals (P) Ltd. Vs. Employees' State

Insurance Corporation, 1976 Lab.I.C.186. Mr. Mehta argued that the

words used in the definition of manufacturing process, if taken into account,

then the activities carried out by the Companies i.e. the Petitioner and the

Respondents are covered under manufacturing process. He relied on

Gateway Auto Services, a Partnership Firm, Bombay-1 Vs. The Regional

Director, Employees' State Insurance Corporation and another, 1981,

LAB.I.C.49. Learned Counsel submitted that the impugned companies were

carrying on manufacturing process therefore, they are factories and there is

no question to give them opportunity to show cause as to why the E.S.I. Act

should not be applied to the said Companies. He argued that certain

commercial activities carried out by the computer units are considered as a

shop under the circular. The activities of the companies in the present

Appeals are covered under Section 2(12) of the E.S.I. Act and therefore, the


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10 FA 143.12

In the Factories Act, 1948, 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


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11 FA 143.12

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.

Section 2(14-AA) of the said Act states that the definition of

manufacturing process shall have the meaning assigned to it in the

Factories Act, 1948 (63 of 1948).

10. 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

book-binding;][or]


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(v) constructing, reconstructing, repairing,

refitting, finishing or breaking up ships or

vessels; or

[(vi) preserving or storing any article in

cold storage.]

11. Explanation II was introduced in the Factories Act by way of

amendment by the Act No. 20 of 1987 in Section 2 (w.e.f. 1st December,

1987). In the year 1948, when the Factories Act was enacted, the concept

of computers was unknown to India. Approximately after 1980, people

started using computers in the offices and industries on large scale.

Techno-dependency of the industries, laboratories, shops, establishments

speedily increased. The computers became integral part of the industry and

the world economy. Thus, in 1987, to meet the demand of the time,

Explanation II was added in the Factories Act. Electricity is required to

operate computers. However, the mere installation and every use of the

computers though powered by electricity does not constitute a

manufacturing process. If no manufacturing process is involved then it

cannot be covered under the definition of the term factory as defined

under Section 2(m) of the Factories Act.

12. At Serial Nos. 3 and 6 in the circular dated 22nd November,

2002, computer units which are involved in commercial activities are

described By issuing the circular under sub-section (v) of Section 1 of the


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ESI Act, the Government implemented a policy to bring certain commercial

activities and service organizations under the categories of shops and

commercial establishments. So those establishments are covered under the

E.S.I. Act. The scope of the shop and commercial establishment is

broadened to give justice to the object of beneficial legislation of the E.S.I.

Act. It is significant to note that in the circular apart from the I.T. related

services other commercial activities viz. accounting, auditing, architecture,

consultancy firms, gymnasium and health club, cable T.V. operators, Private

T.V. channels, real estate developers, national and international law firms are

covered under the extended meaning of shops and commercial

establishments under Section 1(v) of the E.S.I. Act. These activities

rendering intangible services are covered under the Act, therefore, the

activities which are mentioned at Serial No.3 i.e. Dot Com Companies

providing host of E-services including on-line shopping and at Serial No. 6

Computer Training Centers though not carrying out manufacturing process,

are covered under the shops and commercial establishments in the circular.

So the E.S.I. Act is applicable to those establishments/ firms/

companies.

13. Apparently, the circular under Section 1(v)of the E.S.I. Act

bringing certain activities and I.T. related services under the definition of

Shops, Commercial Establishments and a scope of factory in Section


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2(12) of the E.S.I. Act and the meaning of manufacturing process under

Explanation II of Section 2(m) of the Factories Act look interlinked and

alike, but they are separate issues and not to be mixed up. The law makers

could distinguish between a mere use of the computers which does not lead

to a manufacturing process. The software makes a computer functional.

It is used for operating accounts, checking balances, listing, counting,

tabling, charting, to give instructions and so on. Software is a bundle of

commands or instructions. It is an application. Therefore, the issues are :-

(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?

Both the parties have relied on the judgments as follows:-

1. Seelan Raj R. and 14 others and P.O., I

Addl. Labour Court & Ors. and between

Cholamandalam Software Ltd. and Presiding

Officer, I Addl. Labour Court & Others, reported

in II L.L.J., Madras High Court, page 156,

2. Tata Consultancy Services Vs. State of

Andhra Pradesh in Civil Appeal No. 2582 of

1998,


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3. D.V. Shetty Vs. Bombay Municipal

Corporation, reported in 2003(0) AIJ-MH

127679.

Let me clarify that these Judgments are not under the E.S.I.

Act. However, learned Counsel submitted that Explanation II of Section

2(m) of the Factories Act aids and assists for the grasp of term

manufacturing process hence it is to be borrowed and applied to the

factory in the E.S.I. Act. Therefore, these rulings are to be considered.

14. In Seelan Raj R. (supra), the workmen in software company

raised industrial disputes. The employees were terminated, the Labour

Court reinstated the workmen. The writ was filed by the Management of

the Software Company and the learned Single Judge of the Madras High

Court set aside the award of the Labour Court and held that the

provisions of Section 25-O of the Industrial Disputes Act are not attracted.

So, the workmen filed an Appeal before a Division Bench of the Madras

High Court. The Division Bench confirmed that order and dismissed the

Appeal. It observed in paragraph 9 as follows :-

9. The word factory has been explained in Section

2(m) and while deciding whether a particular

establishment is a factory or not, the meaning

attributed to the words, manufacturing process and

industrial establishment would be relevant. But on a

plain reading of Explanation II added on December 1,


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1987, it becomes abundantly clear that an electronic

data processing unit, or a computer unit installed in

any premises or part thereof, and such activities may

amount to manufacturing process, bringing within

the ambit of the word factory as defined under

Section 2(m) of the Factories Act, yet Explanation II

grants an exemption/immunity to an electronic data

processing or computer unit from being brought within

the purview of the welfare legislations namely the

labour laws. Thus, an establishment solely engaged as

electronic data processing unit or computer unit,

though may be a factory, yet would be exempted from

the application of labour laws by virtue of Explanation

II and such establishment cannot be held as a factory.

The only object of bringing Explanation II is to march

in step together with industrial modernization and

electronic innovation in industrial field. Computer is

a recent innovation and has augmented industrial

development to a great extent. By computerization,

efficiency has been increased adding to the national

resources available for development. The legislature

still thought more scope for the use of electronics and

computer, and its contribution to the national

development. Thus, in our view, giving priority to the

laudable object of national prosperity, the legislature

thought it proper to grant immunity to such units from

application of welfare legislation, namely labour laws,

so that such developmental projects can strengthen

national growth without any hurdle or impediment.

Of course, the statement of objects and reasons for


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bringing out the amendment, does not expressly say

so, but, if read in between the lines, we derive the

aforesaid scope from para 2 of the statement of

objects and reasons.

The Division Bench of the Madras High Court has held that any

use of the computer or any work carried out with the help of the computer is

taken out of the purview of Labour Laws. A Civil Appeal was filed against

the Seelan Raj however, Supreme Court referred the case to a larger bench

to consider the interpretation of Explanation-II of Section 2(m) of the

Factories Act. In the Civil Appeal of Seelan Raj, the Supreme Court, while

referring that matter to a larger bench, has considered the submissions made

by the Appellants and the Respondents and also considered the case of

Tata Consultancy where the issue was whether software is goods and,

therefore taxable? In the case of Seelan Raj, though the issue was not

pertaining to tax and it was in respect of the applicability of the Industrial

Acts and the labour laws to the units/establishments where software is

developed/used; the interpretation of Explanation-II of Section 2(m) of the

Factories Act is the crux of the matter in the case. The Division Bench of

Madras High Court has taken a view that while amending Section 2(m) by

inserting Explanation-II, the Legislature wanted to give complete protection

to the computer industries. The Division Bench observed that the phrase

used if no manufacturing process is carried on means that no other


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16. Learned Counsel appearing for the Respondent in F.A.143/2002

and the Appellants in F.A.307/2005 relied on the judgment of the learned

Single Judge of this Court in D.V. Shetty Vs.Bombay Municipal

Corporation, reported in 2003(0)AIJ-MH 127679. In the said judgment,

the Court has considered Explanation-II of section 2(m) of the Factories Act,

1948 and held that the use of the data processing unit or installation of the

computers cannot bring that particular premises within the definition of

factory under the Factories Act. However, this judgment is distinguishable

considering the application of different laws and facts of the present case.

In Shetty's case (supra), the Petitioner failed to obtain requisite permit

under the Mumbai Municipal Corporation Act,1988 (the M.M.C. Act) for

running a factory therefore, a prosecution was launched against him under

Section 390 of the M.M.C. Act. So far as the applicability of Shettys case

(supra) is concerned, it is necessary to see the provisions of Section 390 of

the M.M.C. Act. The said section has been embodied in Chapter XV dealing

with sanitary provisions which are enacted for the purpose of taking care of

the nuisance, which is likely to be caused to the residents of that locality. It

also deals with the density of the population in the neighbourhood of such

factories and the nuisance which would be thereby caused to the inhabitants

of the neighbourhood due to working of the factory in the vicinity. The

learned Single has observed that the factories do work by creating some sort

of noise, tremors and on account of that, the inhabitants or residents of a


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particular locality are likely to be put to annoyance and nuisance. The

learned Single Judge has further observed that considering the nature of the

computer use and data processing, the information units are free from such

possibility of nuisance and they are not likely to create any nuisance which is

contemplated by working of a factory in general parlance. Therefore, he

held that a data processing or computer unit is not a factory and observed

that failure to obtain permission under the M.M.C. Act is not an offence so

he quashed the prosecution under section 390 of the M.M.C. Act.

17. In the present case, legality of demand of contribution under

the E.S.I. Act is the issue. The E.S.I. Act is a welfare legislation and is a

progressive step taken by the State. Therefore, in my humble opinion,

Shettys case (supra) is not helpful to the contesting software companies in

the present case. The learned Single Judge has passed his decision on the

case of Seelan Raj (supra) for the purpose of interpretation of Explanation II.

After going through the erudite exposition of the Division Bench of Madras

High Court and relevant provisions of the E.S.I. Act and the Factories Act,

with due respect, I endorse my disagreement with the view taken by the

Division Bench of the Madras High Court on the point of Explanation-II of

Section 2(m) of the Factories Act. The issue of interpretation of

manufacturing process in Explanation II of Section 2(m) of the Factories

Act is not finally decided by the Supreme Court in both the Appeals, hence


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issue is still res-integra. 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.

18. As stated in the beginning, the meaning of the term

manufacturing process under Section 14AA of the E.S.I. Act shall have

the meaning assigned to it in the Factories Act, 1948 i.e. 2(k). While

reading Explanation-II of Section 2(m) of the factories Act, the phrase if

no manufacturing process is carried on is to be read necessarily in respect

of the substance manufactured in the premises by any means or any method

including the computer. The language of Explanation-II is to be read in a

literal sense by applying rule of literal interpretation. No additional words

can be read between the lines by referring to the purpose and object of the

amendment. Therefore, 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. It is erroneous to read the clause as no

other manufacturing process is carried out (excluding the computers). 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.


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19. 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 definition 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. I rely on the decision 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 para 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


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manufacturing process in the Factories Act, 1948.

We cannot apply the definition of manufacturing

process in one statute to another statute.

20. Let me now examine the meaning of manufacturing

process as defined under Section 2(k) of the Factories Act. Many verbs

describing different activities are mentioned in the said definition. It is true

that each activity and verb has its own connotation. The Factories Act was

enacted in 1948 and at the relevant time, use of computer and software

was alien to the Legislature. Naturally, the words which are more

appropriate, precisely describing the activities carried out with the help of

the computers i.e. development of software, programming of data,

application etc. were neither known nor in practice at the relevant time

when the Act was enacted. Albeit, the absence of these words, the

manufacturing of the substance with the help of computers can be covered

generally under the activities which are mentioned in the definition of

manufacturing process as making, altering, treating, adapting etc. Thus, the

Section defining manufacturing process allows a wide interpretation. This

can be substantiated by giving example that some other activities like

turning, milling, fitting welding, drilling, ironing, cooking, painting etc. are

not specifically mentioned in the definition of manufacturing activities

though these are considered as manufacturing process at various work

places and covered under different verbs used in the definition of


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manufacturing process. Therefore, though computer related activities like

development, programming, application are not mentioned in the definition

and to that effect there is no amendment in the section; the definition takes

care of activities like development and application.

21. In my considered view, if manufacturing process is carried out

as contemplated under Section 2(12) of the E.S.I. Act, then that particular

unit cannot be made an exception to the application of the E.S.I. Act. To

borrow the meaning from the provision of Explanation II of Section 2(m) of

the Factories Act, will be a mayopic 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.

22. On this point, I may advert to a letter produced by Mr. Mehta

which is issued by the Joint Director, ESIC, New Delhi dated 9th December,

2003, Exhibit-H, to the Regional Director where it is communicated that the

Directorate General, Government of India, Ministry of Labour and Factories,

Advisory Services and Labour Institutes by letters dated 9th March, 2003,


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and dated 22nd September, 2003 has clarified that the term software

development falls within the meaning of manufacturing process under

section 2(k) of the Factories Act, 1948. I do not find any hesitation to rely

on and adopt this clarification that the software development is a

manufacturing process. Again going back to the facts in First Appeal No.

307 of 2012, in the form filled up by the Appellants, they have mentioned

that the unit is a software development therefore, the order of the ESI

Court that the Appellants are covered under the E.S.I. Act and they are

liable to pay the contribution is legal. Hence, no interference is required in

the order except the amount of the contribution.

23. The submissions of learned Counsel in First Appeal No. 307

of 2012 that no opportunity of hearing was given by the Corporation is

not accepted. After the letter of demand for contribution dated 30th

January, 2001, Corporation sent follow up letters. It appears that the

company had an opportunity to produce relevant records and

documents before the Corporation as well as before the E.S.I. Court but

the opportunity was not availed off.

24. In First Appeal No. 143 of 2012, a notice for demand of

contribution for the period from 1st January, 2001 to 30th September,

2001 was issued. The E.S.I. Court, while allowing the claim of the


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company, has erroneously relied on the circular dated 22nd November,

2002. The E.S.I. Court ought not to have given undue weightage to that

circular. In the circular at Serial No.3-Dot Com Companies providing a

host of e-services including online shopping and at Serial No. 6-

Computer Training Centres are to be covered under the definition of

Shops and so was covered under the E.S.I. Act. The E.S.I. Court has

erred in including the Appellant-company either under Serial No.3 or

Serial No.6. The record discloses that the Respondent-Company i.e. M/s.

Western Outdoor Interactive Pvt. Ltd in First Appeal No. 143 of 2012 is

engaged in the business of software development, maintenance of

software, content management, creation and maintenance of designs,

integration and development of applications for In-flight entertainment

system which is available in the air craft. It includes development of

games to be used in the In-flight Entertainment Systems. Thus, it was

neither a Computer Training Centre nor a Dot Com Company, a host of

e-services including online shopping. The circular was issued with an

object to enhance the meaning of word shop and it was not with a

view to restrict the meaning of manufacturing process which is one of the

ingredients of the factory under the E.S.I. Act. The record of the

Respondent Company shows that 48 computers were installed and the

work of development of the software was carried out in the said premises.

If 48 computers would have been used only for the purpose of Computer


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Training Centers, then it would have been treated as a shop and the ESI

scheme would have made applicable to the premises due to the impugned

circular and if 48 computers would have been used only for calculation

or charting etc. then it would have been neither a factory nor a shop

under the circular and out of the ambit of the E.S.I. Act. Therefore, the

findings given by the E.S.I. Court in First Appeal No. 143 of 2012 require

interference hence the order of the E.S.I. Court is set aside. The issues are

answered as follows :-

Issues Findings

(i) Whether creation of software or

development of software itself is

a manufacturing process or not? Yes

(ii) Whether the premises where

computers are involved in manufacturing

process is a factory under the E.S.I. Act? Yes

25. Appeals are disposed of by following order :-

1. In First Appeal No.143 of 2012, the Judgment and

order passed by the E.S.I. Court is set aside and the

Respondents are liable to pay the contribution as

demanded by the Applicants/Corporation. Hence, the Appeal

is allowed.


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2. In First Appeal No.307 of 2012, the Judgment and

order passed by the E.S.I. Court is maintained. Hence, the

Appeal is dismissed.

(Judge)

Documents

IT Companies "Manufacturing process" for ESI Act- Bombay HC Judgment