Project: Labour Law II

IX Semester

PROJECT TOPIC
Factory under Factories Act 1948

SUBMITTED TO

Assistant Professor
Mr. Mahendra Soni

SUBMITTED BY

Yogesh Chalisa

ROLL NO. – 2016 BA.LLB 39

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 ACKNOWLEDGEMENT

I take this opportunity to thank everyone who helped me out in completing my project
directly or indirectly. I show and express a special token of gratitude towards Assistant
Professor Mr. Mahendra Soni, without whose guidance and support, it would have been
pretty difficult to complete this project. I would also like to thank NLIU’s library, which
helped me a lot in the construction of this project. I acknowledge that without their help this
project would not have been seen this day.

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Contents
Review of Literature..................................................................................................................3

List of cases............................................................................................................................3

List of statutes........................................................................................................................4

Statement of Problem.................................................................................................................5

Objective of Study......................................................................................................................5

Hypothesis..................................................................................................................................5

Research Question......................................................................................................................5

1. Introduction............................................................................................................................6

2. Definition of Factory..............................................................................................................6

3. Manufacturing Process...........................................................................................................8

What is Manufacturing Process?............................................................................................8

Whether softwares are article or substance............................................................................9

Whether computer unit makes, repairs, alters or does any of the process mentioned in
section 2(k)...........................................................................................................................12

4. Explanation II.......................................................................................................................13

5. Conclusion and Suggestion..................................................................................................18

Bibliography.............................................................................................................................20

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Review of Literature
List of cases
1. “Management of Cholamandalam vs. Presiding Officer”1

In this case Madras High Court observed that the phrase 'if no manufacturing process is being
carried on' in the Explanation II of section 2(m) of Factories Act 1948, means 'if no other
manufacturing process is carried on'. Thus, even if software development or software
application is a manufacturing process, it would be excluded from the definition of factory
under the Factories Act if no other manufacturing process was carried on at the
establishment.

This decision was appealed and referred by the Supreme Court to a larger bench for decision
in 2001, but so far there has been no ruling on this subject by the Supreme Court.

2. “Seelan Raj R. vs P. O., I Addl. Labour Court”2

Madras High Court held that Explanation II grants an exemption/immunity to an electronic

data processing or computer unit from being brought within the purview of the definition of
‘Factory’. 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 object of bringing Explanation II is to grant immunity to such units from application of
labour laws so that such developmental projects can strengthen national growth without any
hurdle or impediment.

This judgment was appealed to the Supreme Court, and following judgment was passed in
pursuant thereto.

3. “Seelan Raj And Ors vs Presiding Officer 1St Additional”3

To decide whether data processing or software preparation would involve a manufacturing

process, the apex court referred the matter to a Larger Bench for consideration.

4. “Tata Consultancy Services Vs. State of Andhra Pradesh”4

1
1995 (2) CTC 54.
2
(1997) IILLJ 972 Mad
3
Appeal (civil) 1300-1301 of 1998.
4
Appeal (civil) 2582 of 1998.

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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. 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". This Judgment is also referred to a larger Bench.

5. “The Assistant Director vs M/S. Western Outdoor Interactive”5

In this case Bombay High Court disagreed with Madras High Court and held that 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.

6. “Rajiv Kaul vs Government Of Tamil Nadu”6

Madras upheld its own view on the issue in “R. Seelan Raj Vs. The Presiding Officer” 7 and
held that the Explanation- II of Section 2(m) grants an exemption/immunity to an electronic
data processing or computer unit from being brought within the purview of 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.

List of statutes
1. “Factories Act 1948”

Section 2(m) of “Factories Act 1948” defines factory under section 2(m) as any establishment
in which a manufacturing process (defined under section 2(k)) is carried on in its premise
with 20 workers (or 10 workers if power is used in manufacturing process). Under
Explanation II, it specifically says that just because a computer unit or electronic data
processing unit is installed in a premise, it won’t make it a factor under this Act, unless some
manufacturing process is carried on there.

2. “The Occupational Safety, Health and Working Conditions Code, 2020”

5
First Appeal No.143 of 2012.
6
Crl.OP.Nos.17936 & 17937 of 2013.
7
(1997) IILLJ 972 Mad.

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This recently passed central legislation has replaced “Factories Act 1948”, but it has not
made any substantial change in the definition of factory and manufacturing process. Just
minimum number of workers have been increased from 20 to 40 (and in case power is used in
manufacturing process, then from 10 to 20).

Statement of Problem
Explanation II of section 2(m) of “Factories Act 1948” is ambiguous. There can be more than
one interpretations of it is possible.

Objective of Study
To find out whether Electronic Data Processing Unit or a Computer Unit is excluded from the
definition of the term ‘factory’ or not.

Hypothesis
There are conflicting judgements of Bombay and Madras High Courts, and this issue is still
pending in the Supreme Court, however the author opines that legislature has intended to
exclude such premises from the definition of term ‘factory’.

Research Question
Whether the premises where Computer Units are installed are excluded from the definition of
‘factory’ under section 2(m) of “Factories Act 1948”?

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1. Introduction
“Factories Act 1948”8 is a welfare legislation which seeks to improve working condition of
workers working in factory. But this Act applies only to those establishments which qualifies
to be factory under section 2(m) of the Factories Act or section 2(1)(w) of the code. For being
a factory under this section, there must at least 40 workers (in case of power is used for
manufacturing process, then 20 workers) working in the establishment. Second there must be
a manufacturing process is carried on. Manufacturing is defined under section 2(k) of the
factories Act 1948. But this definition seems to fall apart when it comes to premise in which
computer units are installed. The article or substance that they make is not tangible, like any
most of the article covered under section 2(k) of the Factories Act. Therefore, it is not clear
that whether use of computer units can involve manufacturing process. This confusion
consequently give rise to another confusion in Explanation II of section 2(m) of Factories
Act. It says that any premises where computer units are installed cannot become factory ipso
facto factory unless some manufacturing process is carried on. The problem is what is this
manufacturing process it is talking about. Is it saying that it is manufacturing process
involved in use of computers (and consequently thereby declaring that use of computer units
can involve manufacturing process)? Or is it saying that computer units not at all can involve
manufacturing process unless some other manufacturing process is carried on? Or is it saying
that use of computer units has multifarious nature and therefore it may and may not involve
manufacturing process; and only when some kind of manufacturing process is involved, then
it can be said to be a factory? These three conflicting interpretations persists in the new code
also. Researcher has tried to show how the existing provision in Explanation II is ambiguous.

Part II discusses the meaning of the term ‘factory’. Part III discusses the meaning of the term
‘manufacturing process’. Part IV specifically focussed on Explanation II of section 2(m) of
the Act. Part V concludes the project and give suggestions of the researcher.

2. Definition of Factory
Factories Act makes numerous provisions for regulating the working condition of worker in
the factory premises. In the interest of workers, the Act curtails the liberty of employer to
regulate his premise and labours in any manner he wants. If owner fails to comply with the
provisions of this Act, then there are penal provisions too.

8
And now “The Occupational Safety, Health and Working Conditions Code, 2020”.

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Employers always try to avoid their liabilities under this Act by one way or another. For this
they take various arguments before the labour court, High Court and Supreme Court. One of
the argument is ‘we are not factory at all!’. If occupier proves this, then he would free him
from the application of entire the Act. For this reason, definition of ‘Factory’ given under
section 2(m)9 become quintessential, and much litigation are done on various aspects of it.

Any establishment which has at least 40 workers (in case of power is used for manufacturing
process, then 20 workers), and has any manufacturing process in it, then it will qualify to be a
Factory. But the crux of the definition lies in the word ‘manufacturing process’, which will be
discussed in subsequent part. Speaking figuratively, if someone proves that there is a
manufacturing process involves in any establishment then 90% of the task is completed. 5%
task is needed for proving that it has sufficient number of workers and 5% for proving that it
is not excluded in any of the explanations. But these explanations are just applicable only to
highly specified field like to mines, hotels and IT sectors, and so in lot many cases, even this
5% is not required to be proved.

As per Explanation II, mere installation of computer unit or electronic data processing unit
does not make it a factory unless some manufacturing process is carried on. If one gives this
provisions a quick careless reading, then this explanation would make perfect sense to him.
He would conclude that unless and until a manufacturing process is carried then computer
units shall not be considered as factory. This works will with the main body of section 2(m)
which says that an establishment must have manufacturing process to be a factory. But if he
reads it closely then he will come to know some issues with it that he failed to notice by his
careless reading of the provision.

He would be confused what does this ‘manufacturing process’ relates to. Does it relate to
manufacturing process other than that of involved in use of computer units? Or does it relate

9
“Section 2(m)—
“factory” means any premises including the precincts thereof—
(i) 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
(ii) whereon twenty 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 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, railway running shed or a hotel, restaurant or eating place.
Explanation I—For computing the number of workers for the purposes of this clause all the workers in
different groups and relays in a day shall be taken into account;
Explanation II. —For the purposes of this clause, the mere fact that an Electronic Data Processing Unit or a
Computer Unit is installed 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.”

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to manufacturing process involved in the use of computer units? Then he will wonder
whether commuter units can involve any manufacturing process at all. Then he will go to
section 2(k) for understanding the meaning of ‘manufacturing process’.

“The Occupational Safety, Health and Working Conditions Code, 2020”10 has retained this
definition with only one change. The minimum number of workman in any established where
manufacturing process is carried on with the aid of power is increased from 10 to 20, and in
the manufacturing process carried on without the aid of power is increased from 20 to 40.

3. Manufacturing Process
What is Manufacturing Process?
Manufacturing process is defined under section 2(k) of “Factories Act”11 and section 2(1)
(zi) of “the Occupational Safety, Health and Working Conditions Code, 2020”. 12 These
10
Section 2(1) (w) of the “The Occupational Safety, Health and Working Conditions Code, 2020” reads as—
“"factory" means any premises including the precincts thereof—
(i) whereon twenty 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
(ii) whereon forty 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 without the aid of
power, or is ordinarily so carried on,
but does not include a mobile unit belonging to the armed forces of the Union, railways running shed or a hotel,
restaurant or eating place:
Provided that where under any law for the time being in force in a State immediately before the commencement
of this Code, the number of workers specified is more or less than the number specified in clause (i) or clause
(ii), then, the number specified under the law of the State shall prevail in that State till it is amended by the
competent Legislature.
Explanation I.—For computing the number of workers for the purposes of this clause all the workers (in
different groups and relays) in a day shall be taken into account.
Explanation II. —For the purposes of this clause, the mere fact that an Electronic Data Processing Unit or a
Computer Unit is installed in any premises or part thereof, shall not be construed as factory if no manufacturing
process is being carried on in such premises or part thereof.”
11
“(k) “manufacturing process” means any 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 letter press, lithography, photogravure or other
similar process or book binding; or
(v) constructing, reconstructing, repairing, refitting, finishing or breaking up ships or vessels; or
(vi) preserving or storing any article in cold storage.”
12
Section 2(1) (zi) of the Occupational Safety, Health and Working Conditions Code, 2020 defines
manufacturing process as—
“(zi) "manufacturing process" means any 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

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definitions say, among many things, that first there must be an “article or substance” and then
such “article or substance” must be made, altered, etc. “with a view to its use” etc. And if
both of these requirements are present then the process would qualify to be a manufacturing
process.

In “M/S. Kores India Ltd., Chennai vs Commissioner Of Central Excise” 13, referring to
“Empire Industries Limited vs Union Of India”14 the court held that transformation of an
article is the essence of any manufacturing process. Change must be there. Such change was
done to make the article marketable. It is a creative process, by which a something is created
out of something and made such something full of value in a commercial sense.
Commercially this new article has a new identity and a new function. The court also
acknowledged that there can be a spectrum of transformations possible in an article. But an
article is said to be manufactured by a manufacturing process only when it succeeds in
achieving its own identity and function. Commercially it become different from its parent
article.

Whether softwares are article or substance

Before finding out whether softwares qualify to be article or substance within section 2(g) of
Factories Act, it is necessary to know whether any intangible thing is covered in it or not.

In “Re: K.V.V. Sarma, Manager vs Unknown”15 appellant contended that the Act does not
cover manufacturing of intangible article or substance. He argued that intangible things, like
finished films shoes in theatre of played in TV, have the different commercial characteristics
than any tangible product has. Any tangible product, like a car, has its own objective value
because it is made of some matters. But with regard to a film, its values depend upon the
approval of the viewers. If they don’t like then it would be worthless.16

(iii) generating, transforming or transmitting power; or

(iv) composing, printing, printing by letter press, lithography, offset,
photogravure screen printing, three Dimensional or four Dimensional printing,
prototyping, flexography or other types of printing process or book binding; or
(v) constructing, reconstructing, repairing, refitting, finishing, or breaking
up ships or vessels; or
(vi) preserving or storing any article in cold storage; or
(vii) such other processes as the Central Government may notify.”
13
C.A. Nos. 2682-2690 of 2000.
14
1986 AIR 662.
15
AIR 1953 Mad 269
16
Para 14.

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The court held that making of intangible things, like finished films, requires many scientific
and mechanical processes, and thus it include ‘adapting any article or substances with a view
to its use. Here the use being the exhibition of the film for entertainment.17

Appellant then contended that our Indian Act, i.e. section 2(g) of Factories Act, 1934 has
borrowed many manufacturing processes like ship-building, printing from section 151(1) of
the English Factories Act, 1937, but it has specifically excluded cinematography films from
the definition of manufacturing process. Intention is clearly visible here that cinematography
is excluded from being manufacturing process within the Act.18

The court refutes this contention by distinguishing the object of the English Act from that of
Indian Act. English Act, as per the court, was to regulate employment of manual labour. The
court said that Factories Act makes no distinction between manual work and intelligence
work. It applies to both of them. The court says India’s new intelligentsia are vulnerable and
require protection. That is why, court reasons, that Factories Act applies to artists as well as
intellectual work.19

The court finally concluded that any intangible thing made from a raw material can be article
or substance within the meaning of this Act, if finished product made has its own distinctive
identity and use.

Now let’s focus specifically on softwares. There are various elements of section 2(k), and all
of them has to be satisfied before declaring any process as a manufacturing process. But the
most basic requirement is that there must be an article or substance to be manufactured. Here
crucial question is— whether intangible electronic data processing can at all be regarded as a
manufacturing process? It can be one argument that the article or substance must necessarily
be three dimensional, and processing data within the computer and the printing of the results
of the analysis in suitable format cannot be regarded as an 'article' or 'substance'. 20 There can
also be an argument that even the intangible things like softwares should be considered as
article.

Supreme Court in “Tata Consultancy Services case”21 delved on this issue. The court
acknowledged that computers are used for making software. It observed that in software,
information or data is recorded and arranged in a systematic way. It is then stored in a floppy

17
Para 13.
18
Para 15.
19
Para 15.
20
As argued by petitioner in Management of Cholamandalam, supra note 1, para 18.
21
Supra note 4.

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disk, and these floppy disks are made available in market for the sale and purchase. The court
held that these softwares are converted in tangible form for sale and purchase in market are
goods for the purpose of the “Bombay Sales Tax Act, 1959”. If software can be goods for the
purpose of taxation, then what stops it from being article for the purpose of manufacturing
process. The Judgment is referred to a larger Bench.

This judgment has taken a very narrow understanding of ‘software’. Today many softwares
are not required to be stored in a tangible form. It can be easily downloaded from the internet.
Today, due to advancement of technology, there is no dependency on any tangible medium
for software to be transferred, used, purchased, sold or delivered.

In “Seelan Raj”22 also the apex court dealt with this issue. The court defined the meaning of
computer software as programmes that cause the computer to operate in a particular way.

The court hinted at the crux of the problem behind softwares to be considered as ‘article’ or
‘substance’. Softwares are essentially intangible thing, but it on its own has no purpose, it is
made for a tangible thing, for example, MS Word is made for users to make documents, and
this documents can be printed and this printed document is a tangible form. One can easily
say that this MS Word and the soft copy of document cannot be goods because it is not
tangible, but it would be difficult to belittle the importance of this intangible MS Word
software and document. Yes, these are intangible, but is it possible to bring the printed
document into existence without them? Even they bring into existence a thing that has a
separate commercial identity. One can go on online shopping platform like Amazon and
purchase e-books instead of any published books. These e-books are completely intangible
product solely with the help of software of Computers and it saleable, so it would pass the
test laid down is “M/S Crores” case. But still the traditional mind would not ready to admit
them as an article or substance, because these forms negate conventional sense of article
which consider them as a tangible thing.

The court acknowledged that legal nature of a software is elusive in nature. The court deemed
it fit to be decided by a higher a bench of the Supreme Court. But till today we have not got
the answer. This unanswered is going to make difficulty. But the author would like to give his
own opinion.

Computer makes things that are intangible in nature. MS Word, Facebook app, Search
Engines, Photoshop, et catera are all intangible. They are made with intellectual, not manual,

22
“Seelan Raj and Ors vs Presiding Officer 1St Additional Appeal (civil) 1300-1301 of 1998.”

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labour. But the end product is saleable and purchasable. These end products offend
conventional sense of article, but they all have their own distinct identity and use, so why we
should have qualms in accepting them as such what they are. In the opinion of author, they
are article within the meaning of section 2(k) of “Factories Act 1948.”

Whether computer unit makes, repairs, alters or does any of the process
mentioned in section 2(k)
A manufacturing process must be 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.
These words have to be understood in their conventional meaning as the court has treated as
such and didn’t go to prescribe any specific meaning to them.

The question is whether electronic data processing unit or computer unit do these things to
their data when they make their end product. Bombay High Court in “D.V. Shetty case”23
observed that Information Technology of a computer does not bring anything new in
existence. They collect, assimilates, rewrites, transcripts and classifies the data which is
already in existence. Compute makes the work speedier, comfortable and economical. They
lower the human effort and maximizes the result. The court held that the test is to see whether
a process creates something new. If yes, then it is manufacturing process. When a process
changes the get up or modifies a thing then it will not be a manufacturing process. 24 As per
the court, computer unit cannot be held as involving manufacturing process. The court
explained its reasoning with the help of illustration of offices of lawyers, Chartered
Accountants and architects where computers are used to make a general file through MS
office. Court reasoned that if use of computers is considered to be involving manufacturing
process, then even these offices will be covered under the Factories Act 1948 and would
result in great hardship to these professions. It can be deciphered from the illustrations that
the court has taken only the general use of computers. Computers are more sophisticated than
that. Today electronic data processing is used for sending emails, shopping, video calling,
controlling the movement of satellites outside the earth’s atmosphere, fighting a war.
Electronic data are so much important, that the term ‘data-warfare’ is in prominence in
today’s parlance. It is subjected to rigorous law. It would be a gross understatement of the
utility of computer if we say that computer is limited to offices of these professional. Instead,
23
Bombay High Court Mr. D.V. Shetty, Being The Head ... vs Bombay Municipal Corporation, ... on 28 April,
2003.
24
Para 15 Ibid.

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computers are replacing manual labour works in many factories. In many factories, robots
operated by artificial intelligence is used instead of human labour. Explanation II is precisely
added in the section to make it clear that not all uses of computers and electronic data
processing amount to manufacturing process, but some may be. For example, an electronic
data processing unit, recording daily attendance of workers may not be manufacturing
process, but use of data by Facebook INC may be.

Even if we assume that electronic data processing does not bring anything new existence, we
can take for the granted the court’s reasoning that brining something into existence is a
condition precedent for a process to be a manufacturing process. Section 2(m) itself uses the
expressions ‘ornamenting’, ‘packaging’, ‘oiling’. So the court’s reasoning does not hold
much water.

The reasoning of the court is bad in law. In “M/S. Kores India Ltd., Chennai vs
Commissioner of Central Excise, 2004” the apex court held that the essence of manufacture
is the change of one object to another for the purpose of making it marketable, i.e. an article
of substance is converted into something commercially different. There may not be
something new to be brought into existence.

In this part we see that judiciary is not conclusive on the issue whether softwares can be
article or substance under section 2(k) of Factories Act. But while reading Tata Consultancy
Services25 and Seelan Raj26, it is clear that Supreme Court is inclined towards acknowledging
them as article or substance. The author too supports such a move. It was also absorbed that
use of computer unit of electronic data processing unit involves the data which are already in
existence it does not stop it from being a manufacturing process.

4. Explanation II
Explanation II of section 2(m) says that installation of electronic data processing unit or
computer unit does not make a premise a factory if no manufacturing process is carried on
there. The ambiguity lies in these italic words. There are following interpretations possible
for these expressions—

1. Computer unit does not involve manufacturing process. Premise where computer
units are installed shall not be considered as factory at any condition, no matter what the
function of such computer unit is. Such premise can only be considered as factory when some

25
Supra note 4.
26
Appeal (civil) 1300-1301 of 1998.

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manufacturing process, satisfying all the requirements of section 2(k), is being carried on
there.

2. Computer unit involves manufacturing process. But section 2(m) excludes it from
being a factory by virtue of Explanation II added to it. Explanation says that premise where
computer unit is installed shall not be considered as factory unless some manufacturing
process other than that involving computer units is carried on there.

3. Computer unit has multifarious functions. It may involve manufacturing process and
may not. Explanation II is added just to clarify that such premises shall not be considered as
factory where computer units installed therein does not involve manufacturing process. But it
will be when computers are used for manufacturing some article or substance.

The project will discuss these three interpretations and then will give researcher’s opinion on
it.

In “Management of Cholamandalam vs Presiding Officer, I Addl. Labour (Mad HC) 27”

the court first held that Explanation II categorically exclude premises on which electronic
data processing or computer units are installed and wherein no other manufacturing process is
being carried on from the scope of the definition of Factory. Then court held that if this
being the intention behind the Explanation II then it cannot be held that use of computer units
or electronic data processing unit involves manufacturing process, otherwise it will defeat the
intention. The reference to ‘manufacturing process' in the Explanation is referring to
manufacturing process other than the use of the computer units.

Here court is dealing with the issue in a reversed order. First court has to decide whether the
use of computer units can involve manufacturing process as defined under section 2(k), and
then it had to decide what was the intention of legislature behind enacting section 2(m). The
court should not have made this categorical remark about the intention, rather it should have
given concreate reasons for it after deciding other underlying issues regarding manufacturing
process.

In this case respondent argued that Explanation II is applicable only when computer unit was
installed in the premises by the employer for captive use, and not when the computer unit is
used for the purpose of rendering service to customers for a price. This argument is based on
the reasoning that computer units is multifarious and it may and may not be used for
manufacturing purposes.
27
Supra note 2.

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The court rejected it. Court reasoned that nowhere in Explanation II there is a mention of
nature, extent or purpose for which the computer unit can be used so as to make them
manufacturing process. Operation of Explanation is not limited to the computer units which
are used for captive use only.

But Explanation II also does not specifically say what does ‘manufacturing process’ used in it
refers to. It may be possible that this manufacturing process indeed refers to that involved in
use of computer units of electronic data processing unit. These arguments and counter-
argument will run in loop and no finality can be reached until the Supreme Court steps in to
clarify whether use of computer units or electronic data processing unit can involve
manufacturing process, as defined under section 2(k), or not.

As a passing remark the court held that it is not possible that computer units are just installed
for storage. But court didn’t take into account the fact that there is a different types of use.
First, computer can be used for non-commercial purpose, and second it can be used for
commercial purpose.

Finally, the court concluded that the electronic data processing units even if regarded as
involving manufacturing process, Explanation II specifically exclude it from the definition of
"factory" when such units are installed in a premises where no other manufacturing process is
taking place.

This clearly reflects that court escaped from dealing with the real issue. It was equivocal with
regard to issue whether use of computer units involves manufacturing process or not. It has
blended the 1st and 2nd interpretations mentioned above.

With regard to 2nd interpretation which the court adopted along with 1 st interpretation, it will
be dealt with in the next judgement.

In “Seelan Raj R. vs P. O., I Addl. Labour Court” 28, Mad HC, respondent argued that
Computer involved manufacturing process. It involves manufacture of software floppy,
cartridges, chips, diskette, etc. as well as process of feeding through manpower and these
recorded mediums are goods and are sold in the market as goods after being fed. The duly
prepared floppy or cassettes are sold in the market as valuable commodity. The intrinsic
value thereof includes the cost of blank medium as well as instructions or knowledge record
thereon through the intellectual process of manpower. Thus, the manpower deployed for data
processing is required to use its expertise knowledge to convert a blank medium into a
28
Supra note 2.

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valuable commodity. Thus, the entire value of blank medium is changed by manufacturing
process.

To buttress the point, reliance was also made on the production of films or exhibition material
which was held as manufacturing process in “K. V. V. Sarma, Manager, Gemini S&os,
Madras”. Responded argued that similar process is used in the software as is used in the
production of films or exhibition material, and therefore even production of software by
computer units should be considered as manufacturing process.

The intrinsic value thereof includes the cost of blank medium as well as instructions or
knowledge recorded thereon through the intellectual process of manpower. Thus, the
manpower deployed for data processing is required to use its expertise to convert a blank
medium into a valuable commodity. Therefore, the entire value of blank medium is changed
by manufacturing process adopted. Thus it results in a manufacturing process. It was strongly
contended that the preparation of software is a manufacturing process.

The court held that from the reading of Explanation II itself, it is 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. But it grants an exemption
immunity to an electronic data processing or computer unit from being brought within the
purview of Factories Act 1948.

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.

What the court here doing is that it is adding itself a word in the Explanation II. That is, it is
saying that the words ‘if not manufacturing process is carried on’ means ‘if no other
manufacturing process is carried on’. It is submitted that the court is doing legislation which
is not permissible in our country.

There is a Bombay High Court judgment. D.V. Shetty vs Bombay Municipal Corporation
2003. Though this case deals with a local law of state of Maharashtra, but its decision
regarding holding IT sector as factory in pertinent for this project.

In this case petitioner was prosecuted for not having permit in view of section 390 of the
Mumbai Municipal Corporation Act, 1988 will have to be considered, which provides:

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(1) No person shall newly establish in any premises any factory, workshop or workplace
in which it is intended that stream, water (electrical) or other mechanical power shall be
employed, without the previous written permission of the Commissioner nor shall any person
work or allow to be worked, any such factory, workshop or workplace without such
permission.

(2) The Commissioner may refuse to give such permission if he shall be of opinion that
the establishment of such factory, workshop or workplace in the proposed position is
objectionable by reason of the density of the population in the neighbourhood thereof, or will
be a nuisance to the inhabitants of the neighbourhood.

(3) If any written permission for the establishment of a factory, workshop or workplace
granted under Sub-section (1) be revoked by the Commissioner in the exercise of his powers
under Sub-section (3) of Section 479, no person shall continue or resume the working or use
of such factory, workshop or workplace until such written permission is renewed or a fresh
written permission is granted by the Commissioner.

The petitioners are having 190 Computers kept in the premises, which is having A.C. plant.
There were 80 persons from the staff members, who were operating those computers on the
relevant date. According to the case of the Corporation, the said unit was using 400 H.P. of
electricity. He was not having a permit in view of provisions of Section 390 of the Act.

Bombay High Court held that section 390 has been embodied in Chapter 15 which deals with
sanitary provisions which impliedly means that the said provisions are enacted for the
purpose of taking care of the nuisance, which is likely to be caused to the residents of that
locality. Computers are does not create or is not likely to create such a nuisance which is
contemplated by working of a factory in general parlance. Therefore, premised where
computers are used cannot be considered as factory.

So here the court argues that if some provisions of the Act, like relating nuisance etc. are not
applicable to any premise, then such premise should not be considered as factory at all. If we
apply the reasoning of this case in the context of Factories Act, then we cannot say that any
of the provisions will not be applicable on it. Provisions regarding leaves, working hours etc.
can be very well be applicable on it.

In Assistant Director, while interpreting the word "if no manufacturing process is carried on",
Bombay High Court held that the phrase is to be read necessarily in respect of the substance
manufactured in the premises by any means or any method including the computer. The

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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.

The court finally held that the software development is a manufacturing process under ESI
Act. Though the court throughout the judgment was emphasising that it is interpreting section
2(k) and 2(m) of Factories Act for the purpose of ESI Act, and therefore it should not be used
for Factories Act, it is difficult to understand how an interpretation of a provision should not
be used for such provision, but for other Act which depends upon the parent provision.

Only Supreme Court was able to find out the main issue in “Seelan Raj And Ors vs
Presiding Officer 1St Additional”29. It held that Explanation II thereto sets out that the mere
fact that an electronic data processing unit or a computer unit is installed in any premises or
part thereof would not render a unit into a factory if no manufacturing process is carried on in
such premises or part thereof. Mere circumstance of installing a computer unit or an
electronic data processing unit would not convert it into a factory. This explanation does not
control the main provision. On the other hand, it merely sets out an exception to make certain
things clear like installation of an electronic data processing unit or a computer unit in an
establishment will not convert it into a factory if it is otherwise not so. Therefore, the key
question to be determined still is whether data processing and preparation of software would
constitute a manufacturing process. But the court deemed it fit to be decided by higher bench
and referred it. We are still to date waiting for it.

5. Conclusion and Suggestion

Section 2(m) of Factories Act 1948 have a specific provision for the premises where
computer units of electronic data processing units are installed. The same provision is
incorporated in the 2020 code as it is. It says that just because a computer unit or electronic
data processing unit is installed in any premise, it won’t qualify to be a factory within the
meaning of this Act unless any manufacturing process is carried on the premise. This

29
Supra note 3.

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provision is ambiguous. It does not clarify which ‘manufacturing process’ it is talking about,
whether it relates to manufacturing process involved in the use of computers or it is any
manufacturing process other than used in computers. Other than this, it is also not clear
whether use of computer units involves manufacturing process. Madras and Bombay High
Courts has differed in this respect. Madras High Court ruled that use of computer units cannot
involve manufacturing process, and therefore ‘manufacturing process’ under section 2(m)
means ‘other manufacturing process’. Bombay High Court didn’t deal with Factories Act
directly, but it has held that use of computer units can involve manufacturing process, and it
can be factory as well under section 2(m). The Supreme Court in Seelan Raj 30 has made a
very clear understanding of Explanation II of section 2(m) that it just clarify that mere
installation of computer units in the premise does not make it a factory, if otherwise it is not
so. It also hit the nail when it framed the right question that whether data preparation or
software making is a manufacturing process. But it didn’t answer it and referred it the higher
bench and this issue till date is still unresolved.

Researcher is of the opinion that question of including IT Industry within the ambit of
Factories Act is highly legislative concern. Explanation II of section 2(m) is inherently
ambiguous and the new 2020 code also didn’t resolve it. Researcher is of the opinion that
section 2(k) included intangible article, like software, within its ambit. And explanation II of
Section 2(m) says that premises where computers units are installed can be factory provided
some manufacturing process is carried on with the help of these computers. Section 2(m) is
inserted because computer and electronic data processing units have multifarious functions. It
can involve manufacturing process, or it may be involved in most mundane task like keeping
record the domestic budget. The article produced by it is intangible in nature. So legislature
thought it would be good to clarify that premises where computers are installed can be
factory but provided these computers are used in some manufacturing process.

30
Appeal (civil) 1300-1301 of 1998.

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Bibliography
• “Management of Cholamandalam vs. Presiding Officer31”
• “Seelan Raj R. vs P. O., I Addl. Labour Court32”
• “Seelan Raj And Ors vs Presiding Officer 1St Additional33”
• “Tata Consultancy Services Vs. State of Andhra Pradesh”34
• “The Assistant Director vs M/S. Western Outdoor Interactive35”
• “Rajiv Kaul vs Government Of Tamil Nadu”36
• “Mr. D.V. Shetty, Being The Head ... vs Bombay Municipal Corporation”  
• “M/S. Kores India Ltd., Chennai vs Commissioner Of Central Excise37”
• “Re: K.V.V. Sarma, Manager vs Unknown38”

31
Supra note 1.
32
Supra note 2.
33
Supra note 3.
34
Supra note 4.
35
Supra note 5.
36
Supra note 6.
37
C.A. Nos. 2682-2690 of 2000.
38
AIR 1953 Mad 269.

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