Supreme Court of India
SEELAN RAJ AND ORS.versusTHE PRESIDING OFFICER 1ST ADDITIONAL LABOUR COURT, CHENNAI AND ORS.
- Citation
- 2001 INSC 149
- Decided
- 16 March 2001
- Disposal
- Matter referred to larger bench
- Bench
- S RAJENDRA BABU
Holding
The Supreme Court held that the question of whether data processing and software preparation constitute a manufacturing process under the Factories Act, and the scope of Explanation II, requires consideration by a larger bench and therefore referred the matter to such a bench.
Summary
The Supreme Court examined an appeal arising from the closure of a data processing division of a computer services company. The central question was whether the activities of data processing and software preparation constitute a "manufacturing process" under Section 2(k) of the Factories Act, 1948, thereby rendering the establishment a "factory" despite Explanation II, which exempts electronic data processing units. The Labour Court had held the unit to be a factory and ordered reinstatement of workers; the Madras High Court set aside that award, relying on Explanation II to exempt the unit. The Supreme Court noted the conflicting interpretations and, rather than decide the issue, referred the matter to a larger bench for detailed consideration. Consequently, the appeal was not disposed on merits but was sent for further adjudication.
Issues considered
- Whether the second respondent's establishment qualifies as a factory under the Factories Act, 1948.
- Whether the activities of data processing and software preparation amount to a "manufacturing process" within the meaning of Section 2(k).
- Whether Explanation II to Section 2(m) of the Factories Act exempts electronic data processing units from the Act.
- Whether the closure of the establishment required prior permission under Section 25(0) of the Industrial Disputes Act, 1947, given the number of workmen employed.
- Whether the High Court's interpretation of Explanation II is legally correct.
Legislation cited
- Factories Act, 1948s. 2(k), s. 2(m)
- Industrial Disputes Act, 1947s. 25(0), s. 25FFA, s. 25L, s. 2(a)
Subjects
factory definitionmanufacturing processsoftwaredata processingExplanation IIindustrial disputeclosure of establishmentlabour law exemptionSupreme Courtlarger bench
Judgment
A SEELAN RAJ AND ORS.
v.
THE PRESIDING OFFICER !ST ADDITIONAL LABOUR COURT,
_,
CHENNAI AND ORS. '
MARCH 16, 2001
B
[S. RAJENDRABABU AND Y.K. SABHARWAL, JJ.]
Factories Act, 1948: Section 2(k), and Section 2(m), Explanation II.
lndust,.ial Disputes Act, 1947: Sections 2(a), 25L, 25FFA, 25 0.
c
Factory-Manufacturing p1vcess-Wha1 is-Company-Formed for the
object of rendering computer se1vices-Setting up of a data processing divi-
sion-Said data processing division subsequently became non viable-Clos WP
of said division-Notice under Section 25FFA sent to State Government-
Termination of services of workmen on account of elosure-lnduslrial dis-
D
pule-Labour Court directed reinstatement of workers and held that unit of
second respondent was a factory-Single Judge of High Court set aside the
award made by Labour Couit-lt held that an establishm~nt solely engaged as
electronic dala p1vcessing unit or computer unit, though may be a factory, yet
would be exempted from the application oflabourlaws by virtue ofExplanation
E II and such establishment cannot be held as a factory-Division Bench held
that an elecl1vnic ·data processing unit or a computer unit installed in any
premises or pm1 thereof and such activities, though may amount to manufac-
•
tu ring p1vcess, bringing within the ambit of the word 'factory' as defined under -
Section 2 (m) of the Act, would get out oft lie same because of Explanation II
F theieto-Appeal before Supreme Court-Question whether the activity carried
on by the second resfJondent in its activities ofdata processing and preparation
of software would constitute a manufacturing process-Malter referred to a
~
..
Larger Bench.
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 1300-1301
G of 1998.
From the Judgment and Order dated 14.8.97 of the Madras High Court
in W.A. Nos. 806/95 and 117 of 1997.
S. Murlidhar, V. Balaji, Ravi, A.T.M. Sarnpath and Hari Shankar K. for ,.
H the appearing parties.
462
SEEIAN RAh PRESIDING OFFICER !ST ADDL LABOUR COURT [RAJENDRA BABU, I.] 463
.... The following Order of the Court was delivered : A
\ RAJENDRA BABU, J. The facts arising in the case which led to the
· present dispute are in brief as follows :
The respondent company [respondent No.2 herein] was formed in the
year 1982 with the object of rendering compnter services to its customers B
relating to collection and maintenance of information and to develop company
software application to suit the special requirements of the customers; that
in March 1983, the second respondent set up a data processing division which
undertook data processing services such as preparation of pay rolls, financial
accounting and inventory control related statements; that subsequently there c
was a decline in the demand for the services of the data processing division
of the second respondent on account of availability of indigenously manu-
factured computer and in the year 1989, the division became non-viable and,
therefore, the second respondent was forced to close down the same. As on
4.1.1989, 46 persons were employed in the data processing division and they
were informed of the decision to close down the unit. On 30.1.1989, a notice D
under Section 25 fFA of the Industrial Disputes Act, 1947 (hereinafter
referred to as 'the ID Act') was sent to the State Government intimating the
Government that the data processing operations would be closed down with
effect from 3.4.1989. The services of the workmen in the data processing
division were terminated on account of closure of the unit and by October, E
i 1989, the software division of the second respondent also was closed and the
services of 71 workmen had been terminated after paying the closure com-
pensation in terms of the provisions of the ID Act.
Disputes were raised which were referred to the Labour Cotnt on the
question whether the closure of the data processing division rendering the F
appellants unemployed is justified or not. Before the Labour Cotnt, three
issues were raised, viz.
(i) whether the second respondent establishment is a factory;
•• G
(ii) whether on the date of closure of the establishment, the second
respondent was employing more than I 00 workmen requiring
protection from the specified authority for closure of the
establishment; and
(iii) to what relief the workmen are entitled H
464 SUPREME COURT REPORTS [2001] 2 S.C.R.
A Before the Labour Court, it was contended on behalf of the second .....
respondent that it manufactures software and thereafter sells the same and, -{
therefore, it is not an establishment as defmed under Section 25L of the ID
Act much less a factory as defined under Section 2(m) of the Factories Act,
1948 (hereinafter referred to as 'the Act') and, thus the dispute referred to
the Labour Court caunot be an industrial dispute in terms of Section 2(a) of
B
the ID Act. The Labour Court overruled the objections raised by the second
respondent and held that the ID Act covers the establishment of the second
respondent and directed reinstatement of the workmen with back wages. The
Labour Court also rejected the argument that the second respondent is not
a factory; that the second respondent employed more than 100 persons at
c the time of the services of the workmen were terminated and was, therefore,
required to comply with the provisions of Chapter V-B of the ID Act
inasmuch as prior permission of the State Government had not been obtained
as required under Section 25-0 of the ID Ac~ that the closure was unjustified;
that the establishment of the first respondent and the second respondent are
inter-connected as they belong to the same group of companies.
D
A writ petition filed against the award made by the Labour Court is
allowed by a learned Single Judge setting aside the award made by the Labour
Court. The learned Single Judge held that an establishment solely engaged
as electronic data processing unit or computer unit, though may be a factory,
E yet would be exempted from the application of labour laws by virtue of
Explanation II and such establishment caunot be held as a factory. On writ
)'
appeal, the Division Bench held that an electronic data processing unit or a
computer unit installed in any premises or part thereof and such activities,
though may amount to manufacturing process, bringing within the ambit of
the word 'factory' as defined under Section 2(m) of the Act, would get out
F of the same because of Explanation II thereto, which grants au exemption or
immunity to an electronic processing or computer unit from being brought
within the purview of the welfare legislation, namely, the labour laws. In the
view of the High Court, the object of bringing Explanation II to the Act is
G
to march in step together with the industrial modernisation and electronic
innovation in industrial field and in that view of the matter, the High Court
dismissed the writ appeal. Hence this appeal.
-
On behalf of the appellants, it is contended that the second respondent
manufactures software and, therefore, comes within the definition of a
'factory'; that when the finding of the Labour Court is that the process in
IH making the software and selling the same involves manufacturing process is
SEELAN RAJ v. PRESIDING OFFICER !ST ADDL LABOUR COURT [RAIENDRA BABU, l.] 465
a finding of fact, the same should not have been interfered with by the High A
Court, that the construction placed by the High Court ou Explanation II to
Section 2(m) of the Act is that the Explanation II does not take within its
sweep all activities, it is only in case if no manufacturing process is carried
on then the meaning attributed by the High Court would be correct; that the
High Court interpreted the expression "if no manufacturing process is carried
B
on" as meaning that "no other manufacturing process is carried on"; that the
view of the High Court would lead to anomalous situation that the unit would
be a factory under the Act only if it is solely engaged in electronic data
processing and not if such activities are carried on along with other manu-
facturing process would defeat the very purpose of the amendment to the Act
by which Explanation II was introduced to Section 2(m). c
The contention put forth is that the computer processing unit involves
manufacture of software like floppy, cartridges, chips, diskette, etc. as well
as process of feeding through manpower and those recorded mediums are
goods and are sold in the market as goods after being fed and such duly
prepared floppy or cassettes are sold in the market as valuable commodity. D
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 E
'( process adopted. Thus it results in a manufacturing process. It was strongly
contended that the preparation of software is a manufacturing process.
Section 2(m) of the Act defines what a factory means. That would be
any premises including the precincts thereof in which a manufacturing
process is being carried on, if it is with the aid of power, whereon JO or more F
workmen are employed and if it is without the aid of power whereon 20 or
more workmen are employed for the period mentioned therein. Explanation
II thereto sets out that the mere fact that au 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
G
premises or part thereof. Mere circumstance of installing a computer unit or
au 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 au exception to make certain things clear like installation of an
electronic data processing unit or a computer unit in au establishment will
not convert it into a factory if it is otherwise not so. Therefore, the key H
466 SUPREME COURT REPORTS [2001] 2 S.C.R.
A question to be detennined still is whether the activity· carried ou by the second
respondent in its activities of data proc.ossing and preparation of software
would constitute a manufacturing process. "Manufacturing process" for the
purposes of the Act has been defined under Section 2(k) as
follows :
B "(k) "manufacturing process" means any process for -
(i) making, altering, repairing, ornamenting, finishing, packing,
oiling, washing, cleaning, breaking up, demolishing, or other-
wise treating or adapting any article or substance with a view
to its use, sale, transport, delivery or disposal, or
c
(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, lithogra-
D phy, photogravure or other similar process or book binding; or
(v) constructing, reconstructing, repairing, refitting, fmisbing or
breaking up ships or vessels; or
(vi) preserving or storing any article in cold storage.;"
E
Jn order to understand whether data processing or sofware preparation
would involve a manufacturing process, it is necessary to know the legal
nature of a software and which is elusive in computer law. Computer software
is a term used to describe programmes that cause the computer to operate in
F a particular way. The other non-hardware parts of computer system such as
manuals are, sometimes, regarded as software. Commercially an important
distinction is drawn between standard package software and custom built
software. The former is marketed as standard product to meet requirements
of a large number of users, while the latter is written to meet particular
requirement of the user. A hybrid form of software also exists : the standard
G package is altered so that it fits customers' needs more clearly, adopting a
process of customisation. A distinction of technical nature is also drawn
between system software, which organises the way in which the hardware
operates and application software which performs the functions required by
user of the computer system. Software comprises the instructions that cause
H the hardware to work in a particular manner, for example, to process the
l J
SEEL\N RAJ v. PRESIDING OFFICER !ST ADDL LABOUR COURT [RAJENDRABABU, J.J 467
payroll of an office. From that angle, software is intangible and difficult to A
classify in legal terms. It appears to be pure information enjoyiug no physical
fo1m except that of magnetic notation on a tape or disk. Since it appears that
information is not goods one might conclnde neither is software. This
approach is flawed with because it draws a distinction between software and
the medinm on which software is supplied.
B
In Civil Appeal No. 2582 of 1998 - Tata Consultancy Services v. State
of Andhra Pradesh, decided on March 13, 2001, we have noticed the debate
on varions aspects of this question and, after adverting to a large nnmber of
decisions referred the matter to a Larger Bench for consideration. For
identical reasons, we think this matter should also be referred to a Larger C
Bench. Ordered accordingly.
T.N.A. Matter referred to a Larger Bench.
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