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Issues: (i) Whether creation or development of software amounts to a manufacturing process; (ii) Whether premises where computers are involved in such activity constitute a factory under the Employees' State Insurance Act, 1948.
Issue (i): Whether creation or development of software amounts to a manufacturing process.
Analysis: The definition of manufacturing process in the Factories Act, 1948 was applied through Section 2(14-AA) of the Employees' State Insurance Act, 1948. On a literal reading of Section 2(k) of the Factories Act, activities such as making, altering, treating, adapting and similar operations are wide enough to cover software development. Explanation II to Section 2(m) of the Factories Act was held to clarify that mere installation of a computer does not by itself create a factory, but it does not exclude software development from the scope of manufacturing process where such process is in fact carried on. The Court also relied on administrative clarification treating software development as falling within manufacturing process.
Conclusion: Yes. Software creation or software development is a manufacturing process.
Issue (ii): Whether premises where computers are involved in such activity constitute a factory under the Employees' State Insurance Act, 1948.
Analysis: The definition of factory under Section 2(12) of the Employees' State Insurance Act, 1948 is broader in its wording than the corresponding definition under the Factories Act, 1948. Where the premises have the prescribed number of persons employed and a manufacturing process is carried on, the establishment falls within the statutory definition of factory for ESI purposes. Explanation II to Section 2(m) of the Factories Act was not treated as controlling the scope of the ESI Act, and the beneficial object of the ESI legislation supported coverage of such establishments when manufacturing activity is present.
Conclusion: Yes. Premises where computers are used in manufacturing process constitute a factory under the Employees' State Insurance Act, 1948.
Final Conclusion: The challenge to ESI coverage failed in one appeal and succeeded in the other, with software development treated as manufacturing process and ESI liability upheld for establishments satisfying the statutory definition of factory.
Ratio Decidendi: For the purpose of the Employees' State Insurance Act, 1948, software development can constitute a manufacturing process, and an establishment carrying on such process with the requisite employment strength falls within the definition of factory.
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