Bombay High Court
The Assistant Director vs M/S. Western Outdoor Interactive Pvt. ... on 11 July, 2012
Author: Mridula Bhatkar
Bench: Mridula Bhatkar
1 FA 143.12
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
CIVIL APPELLATE JURISDICTION
FIRST APPEAL NO.143 OF 2012
The Assistant Director
Employees' State Insurance Corporation
Sub 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).
--
::: Downloaded on - 09/06/2013 18:48:17 :::
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 ::: Downloaded on - 09/06/2013 18:48:17 ::: 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 1 st 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.
::: Downloaded on - 09/06/2013 18:48:17 :::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 16 th 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 22 nd 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.
::: Downloaded on - 09/06/2013 18:48:17 :::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 ::: Downloaded on - 09/06/2013 18:48:17 ::: 6 FA 143.12 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 ::: Downloaded on - 09/06/2013 18:48:17 ::: 7 FA 143.12 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;
::: Downloaded on - 09/06/2013 18:48:17 :::8 FA 143.12 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 on Alkali 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 ::: Downloaded on - 09/06/2013 18:48:17 ::: 9 FA 143.12 notices issued by the ESI Corporation to the Companies demanding the contribution under Section 45 of the Act are legal. In support, he relied on the judgment in the case of Poona Industrial Hotel Ltd., Vs . I.C.Sarin & Anr., 1980 LAB I.C.100.
9. The relevant provisions are reproduced hereinbelow for better understanding of the issues.
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."::: Downloaded on - 09/06/2013 18:48:17 :::
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 ::: Downloaded on - 09/06/2013 18:48:17 :::
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]
::: Downloaded on - 09/06/2013 18:48:17 :::
12 FA 143.12
(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. 1 st 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 ::: Downloaded on - 09/06/2013 18:48:17 ::: 13 FA 143.12 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 ::: Downloaded on - 09/06/2013 18:48:17 ::: 14 FA 143.12 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, ::: Downloaded on - 09/06/2013 18:48:17 :::
15 FA 143.12
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, ::: Downloaded on - 09/06/2013 18:48:17 ::: 16 FA 143.12 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 ::: Downloaded on - 09/06/2013 18:48:17 ::: 17 FA 143.12 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 ::: Downloaded on - 09/06/2013 18:48:17 ::: 18 FA 143.12 manufacturing process is carried on. Thus, software development or software application may be a manufacturing process, yet according to the Division Bench, it is not covered under the definition of "factory" under the Factories Act. So, the Labour Laws are not applicable to those establishments.
15. In Tata Consultancy Services Vs. State of Andhra Pradesh (supra), it was argued that creation, development, programming of software is a product of an intellectual acrobat hence is covered under the intellectual property right and not to be treated as goods and so not taxable. The Division Bench of the Hon'ble Supreme Court held that there are two types of software, i.e. standardised and customised.
Customised software is developed/created as per the demand of the consumers and it is held as "goods" as marketable hence is taxable. It held that the software is an arrangement of matter recorded in tangible medium and once it is in the form of a disk or floppy and the programme is movable, available in the market, then it would amount to "goods" and taxable. Thus, the intangibility of software is converted into marketable, saleable tangible product therefore, these are "goods" and it is covered under the Bombay Sales Tax Act, 1959. The said Judgment is also referred to a larger Bench.
::: Downloaded on - 09/06/2013 18:48:17 :::19 FA 143.12
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 Shetty's 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 ::: Downloaded on - 09/06/2013 18:48:17 ::: 20 FA 143.12 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, Shetty's 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 ::: Downloaded on - 09/06/2013 18:48:17 ::: 21 FA 143.12 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.::: Downloaded on - 09/06/2013 18:48:17 :::
22 FA 143.12
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
::: Downloaded on - 09/06/2013 18:48:17 :::
23 FA 143.12
"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 ::: Downloaded on - 09/06/2013 18:48:17 ::: 24 FA 143.12 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 9 th 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, ::: Downloaded on - 09/06/2013 18:48:17 ::: 25 FA 143.12 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 30 th 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 ::: Downloaded on - 09/06/2013 18:48:17 ::: 26 FA 143.12 company, has erroneously relied on the circular dated 22 nd 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 ::: Downloaded on - 09/06/2013 18:48:17 ::: 27 FA 143.12 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.::: Downloaded on - 09/06/2013 18:48:17 :::
28 FA 143.12
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) ::: Downloaded on - 09/06/2013 18:48:17 :::