2012 (7) TMI 1137 - HC - Indian Laws

Summary

Issues Involved: Coverage of the computer industry under the Employees' State Insurance Act, 1948, and whether software development constitutes a "manufacturing process" making such premises a "factory" under the E.S.I Act.

Issue-Wise Detailed Analysis:

1. Whether creation of software or development of software itself is a manufacturing process or not?

The court examined the definition of "manufacturing process" under Section 2(k) of the Factories Act, 1948, which includes various activities like making, altering, treating, adapting any article or substance with a view to its use, sale, transport, delivery, or disposal. The court noted that while the Factories Act was enacted before the widespread use of computers, the activities related to software development can be generally covered under the terms used in the definition of manufacturing process. The court concluded that software development is a manufacturing process, relying on clarifications from the Directorate General, Government of India, Ministry of Labour and Factories, which stated that "software development" falls within the meaning of "manufacturing process" under Section 2(k) of the Factories Act.

2. Whether the premises where computers are involved in manufacturing process is a factory under the E.S.I Act?

The court differentiated between the definitions of "factory" under the Factories Act and the E.S.I Act. The Factories Act uses the term "worker working," while the E.S.I Act uses "person employed for wages," thus giving a broader scope under the E.S.I Act. The court emphasized that the mere installation of computers does not make a premises a factory unless a manufacturing process is carried on. However, if software development is carried out, it constitutes a manufacturing process, making such premises a factory under the E.S.I Act. The court rejected the argument that Explanation II of Section 2(m) of the Factories Act, which excludes premises with only electronic data processing units or computer units from being considered factories, should apply to the E.S.I Act.

Judgment:

First Appeal No. 143 of 2012:
The court set aside the judgment of the E.S.I Court, which had quashed the demand for contributions from the respondent company. The court held that the respondent company's activities involved software development, which is a manufacturing process, making the premises a factory under the E.S.I Act. Therefore, the respondent is liable to pay the demanded contributions.

First Appeal No. 307 of 2012:
The court upheld the judgment of the E.S.I Court, which had directed the appellant to pay the contributions. The court found that the appellant was engaged in software development, constituting a manufacturing process, and thus the premises were a factory under the E.S.I Act. The appellant's arguments regarding lack of personal hearing and incorrect calculation of contributions were dismissed.

Conclusion:
The court concluded that software development constitutes a manufacturing process, and premises where such activities are carried out are factories under the E.S.I Act. The appeals were disposed of accordingly, with the judgment in First Appeal No. 143 of 2012 being set aside and the judgment in First Appeal No. 307 of 2012 being upheld.