Lakshmi Kumaran & Sridharan AttorneysAn ISO 9001 / 27001 certified law firm

Software companies covered under ESI Act

24th July, 2012

The Bombay High Court has held that software companies are covered under the definition of ‘factory’ in the Employees’ State Insurance Act, 1948. It was held that the definition of ‘factory’ in the ESI Act has wider meaning as compared to the definition of the same under the Factories Act.

The Court in its order dated 11-7-2012 in the case Asstt. Director, ESIC v. Western Outdoor Interactive held that the meaning of the term ‘factory’ for the purpose of ESI Act is not to be understood in the context of Explanation II of Section 2(m) of the Factories Act. It was noted that 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 terms “person employed for wages” are used, indicating the difference.

It was also held that creation or development of software is a manufacturing process for such purposes. The Court held that though computer related activities like development, programming and application have not been mentioned in the definition and there was no amendment to that effect, the definition took care of activities like development and application. 

The High Court observed that application of the ESI Act is not regressive but a progressive step and to think that its application would affect IT industry adversely is a futile fear.

Earlier the party, engaged in the business of software development, had challenged the letter demanding ESI contribution from them. The challenge was on the ground that the unit was not carrying out any manufacturing process and hence cannot be brought within the meaning of Section 2(12) of the Employees’ State Insurance Act, 1948.
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