Pre-1989 factory status under Section 2(12) required proof of manufacturing with power.

The respondents operated a synthetic-detergent manufacturing unit at Vatva, Ahmedabad, from 1 September 1983. The Employees’ State Insurance Act, 1948 (“ESI Act”) was applied to the unit from 1 March 1988, and an ESI Code was allotted with effect from that date.

Subsequently, the Employees’ State Insurance Corporation treated the unit as covered from 1 September 1983 and raised demands aggregating to Rs. 51,72,079, including contributions for the periods from 1 September 1983 to 28 February 1988 and from 1 March 1988 to 28 February 1989.

The respondents challenged the demand before the ESI Court under Section 76 of the ESI Act. The ESI Court partly allowed the application and quashed the demand. The Corporation filed the present appeal under Section 82(2) of the ESI Act.

Whether the respondents’ premises constituted a “factory” under the unamended Section 2(12) of the ESI Act during the period from 1 September 1983 to 28 February 1988?

Whether the Corporation proved that the manufacturing process was carried on with the aid of power/electricity, as required under the applicable definition of “factory”?

Whether the respondents were liable to pay ESI contributions for the period preceding the allotment of the ESI Code and the alleged date of coverage?

Whether the ESI Court erred in holding that the respondents’ establishment was not covered under Section 2(12) of the ESI Act?

Whether the appeal raised any substantial question of law so as to be maintainable under Section 82(2) of the ESI Act?

The Court applied Section 82(2) of the ESI Act, under which an appeal to the High Court lies only on a substantial question of law.

For the relevant period, the Court applied the pre-20 October 1989 version of Section 2(12), defining a “factory” as premises where 20 or more persons were working or had worked on any day during the preceding twelve months and where a manufacturing process was carried on with the aid of power or was ordinarily so carried on.

Thus, both the employment threshold and the use of power in the manufacturing process had to be established.

The burden lay on the Corporation to prove that the establishment satisfied the statutory definition during the period for which contributions were demanded.

The Court accepted that the evidence established the presence of more than 20 employees; indeed, the respondents’ evidence indicated that approximately 500 workers were employed when the factory restarted.

However, the statutory requirement of proving that manufacturing was carried on with the aid of electricity or other power was not established.

The Corporation’s inspector, who inspected the premises in 1987, admitted that no earlier inspection had taken place and that he had not verified whether electricity was used in manufacturing detergent powder.

Another Corporation witness, who visited the premises only on 1 June 1989, admitted that he had no evidence showing that electricity was used to operate machinery or motors.

Consequently, the Corporation failed to prove the essential power-use requirement for the period covered by the demand.

The Court therefore found no error in the ESI Court’s conclusion that the premises did not fall within the applicable definition of “factory” and held that the issues raised were essentially factual and disclosed no substantial question of law.

The respondents’ establishment therefore could not be treated as a “factory” under the applicable version of Section 2(12) of the ESI Act for the period in question.

Finding no substantial question of law under Section 82(2), the Court dismissed the Corporation’s appeal and upheld the ESI Court’s decision quashing the demand of Rs. 51,72,079.