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Is a software company a factory?

January 28, 2013 3 comments

The judgment of the Honorable Bombay High Court in Asst. Director E.S.I.C  Vs  Western Outdoor Interactive Pvt. Ltd, pronounced in July 2012, has become a hot subject for discussion in the I.T industry particularly in Mumbai which  is a hub of many a I.T and ITeS business. The anxious question that throws the I.T industry in dilemma is if an industry dealing with software development or applications in it’s business is a factory, whether the Factories Act 1948 will also be applicable to it?

The dispute arose out of a demand notice issued by the Employees  State Insurance Corporation to two companies of which one is engaged in software development, maintenance of software and content management, creation and maintenance of designs, integration and development of applications for in-flight entertainment system including development of games to be used in in-flight entertainment system. The other company carries on the business of providing stock market services to it’s traders and in the process, uses computers in recording, storing and transmitting share market data to it’s clients.

The companies contended that their activities are commercial in nature and cannot be termed as manufacturing process within the meaning of Sec.2(14AA) of the ESI Act 1948 and further that the explanation to section –II to Sec.2(m) of the Factories Act which defines “Factory”, excludes a premises from the definition of factory merely because some computer units were installed on it if no manufacturing process is carried on such premises.

The High Court has considered the definition of  “factory” both under Sec.2(m) of the Factories Act as well as under Sec.2(12) of the ESI Act and also the definition of “manufacturing process” under Sec.2(k) of the Factories Act since the same was adopted by Sec.2(14AA) of the ESI Act. The High Court observed that the definition of “manufacturing process” in sec.2(k) of the Factories Act(which was borrowed by Sec.2(14AA) of the ESI Act) uses various verbs like making , altering, repairing,  ornamenting etc. to cover various activities like welding etc. within the ambit of manufacturing process though it does not specify such activities in the definition. Similarly though the activity of software development and applications are not specified under Se,2(k) of the Factories Act, they nevertheless fall within the definition of manufacturing process.

The High Court further observed that the definitions of  “factory” under the ESI Act and that under Factories Act are different and the same is wider under ESI Act than under Factories Act since Explanation –II to Sec.2(m) of the factories Act(which excludes the premises, having computer units from factories If no manufacturing process is carried on it) is not incorporated in Se.2(12 ) of the ESI Act and further the issue whether software development is a factory under Factories Act is still pending before the larger Bench of the hon’ble Supreme Court and has no relevance to the present case that since it arose under ESI Act.

Thus the implication of this judgment  will be that it terms a software development unit as factory only for the purpose of the ESI Act but not under Factories Act since that issue is pending before the larger Bench of the Supreme Court. It may not be much concern to I.T industries, if they are covered under ESI Act as factories since they will any how cannot avoid being covered under ESI on the basis of “shops” based on the judgment of Supreme Court in the case of Southern Agency, Rajahmundry Vs  ESIC 2000(7) SCALE 69o.

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This is a Guest post by Sai kumar, an HR professional with three decades of experience in the field of labour laws and industrial relations in a public sector as well as in a reputed labour law firms. 

Sai Kumar has been  involved  extensively in research on labour law issues and case-law  on subjects such as the Industrial Disputes Act, the Standing Orders Act, the Factories Act, the Contract Labour Act, the P.F Act, the ESI Act  and the Gratuity Act etc.

The opinions expressed in the various blog posts on this site are those of the respective authors and are not necessarily endorsed by Talentmoon Human Capital Solutions LLP ( ” Talentmoon”)  or its Partners.  The guest posts on the various Labour laws and acts are only intended to present these laws in simplified language and they are not to be construed as legal interpretations or legal advice. The replies to various comments & queries on these blogs are based on the understanding of these Acts and laws, by the guest Author and the reader is advised to use his discretion and take appropriate legal opinion before acting on these posts & comments.

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