What Is Factory - and Manufacturing Process

The following aspects may be examined for clubbing of two or more units.
Whether both / all the units concerned are independent legal entities.
b) Whether the principal employers of all these units are coparceners of a Hindu
Undivided Family.
Even if the Management is separate, when other factors like functional
integrality, interdependence
of manufacturing process, inter-changeability of employees etc. exists, they may
be considered for
clubbing.
c) Whether the work which is carried on by all the units is inter-connected/ inter-
Related/identical.
d) Whether the employees employed in all the units are interchangeable.

e) Whether the Manager/Accountant/Watchman/cash counter/packing
section/dispatch section is
common for all the units. If so, examine whether the salaries/wages of these
persons are booked in
the accounts of one unit only or in the accounts of all the units. If it is booked in
only one unit, how
they are sharing this expenditure?
f) Examine the title to the ownership of the premises in which the units are
functioning. If only one unit
or only one of the persons involved is the owner, examine whether the others pay
rent to the owners.
There must be necessary entries to that effect in the Books of Account.
g) If the electricity connection is common to all the units, how they are sharing the
expenditure? Are
they separated by sub-meters, and the cost of consumption of each unit is paid
to the unit having
main meter, and the unit having the main meter is paying the total bill?
h) In case the units are functioning in a rented premise, examine the share of rent
paid by all the units.
The tenancy agreement has to be examined to ascertain whether the landlord
was really aware of
there being two or more independent legal entities as tenants in his building.
i) The procedure adopted by the units in purchasing raw materials from the
Suppliers. If only one unit

is purchasing raw materials for all the establishments, the functional integrality
can be established
very clearly.
Whether the end product (finished product) of one unit is used as raw-material
for another unit? If so
the procedure followed in settling the bills etc. may be examined.
j) Whether there is any godown in addition to the business premises. If so, find out
who is the owner of the godown. Examine whether all the units store goods in the
same godown. If the godown is the property of one of the units, or one of the
partners, examine whether the other units pay any rent to the owner. If it is a
rented one, how the rent is shared by them?
k) How the common facilities like water, sewerage, toilets, security etc. are used
and shared by them.

Especially, in cases of Hotels and Lodges, commonness of the parking lot, Telephone
facilities ,same kitchen being used for the Hotel and the Guests at the lodges, supply of food
items prepared in the Hotel and Billing for them at the time of finalization of payment, location
of Reception, Security Guards being common are some of the factors that prove to be crucial
in clubbing these units and courts have accepted these arrangements as inter-connected
functions of the same activity.
l) Sharing of advertisement charges in case of common advertisement, Sharing of
professional and technical services, and how the expenditure is incurred and
shared by them.
‘FACTORY’ – COURT JUDGMENTS:

a) Cricket club of India Ltd., covered The Cricket Club of India Ltd., having a
catering department which provides food and refreshments for their members and
guests coming to the club is covered by the Act. Bombay High Court- 1992 )
2)LLN.180)
b) The Bombay High Court observed that the fact that the manufacturing activity is
carried on in one part of the premises and the rest of the work is carried on in the
other part of the premises cannot take the premises out of the definition of the
‘factory’, which means that the manufacturing process iscarried on ‘in a part’.
(Bhararti Udyog v. ESIC 1982 (2) LIC 1344, 1982 (2) LLN.728.)
c) The sub-stations of the electricity board engaged in distribution of energy,
generated and or transformed at different premises, confirms to definition of
‘factory. –Rajasthan High court (2003(1) LIC.931; 2003(93) FLR39; 2003(5)LLN
(SNOC)31; 2003(1)LLJ.104)
Explanation:
Manufacturing tea or coffee means converting garden lucked tea leaf to the first
stage of tea; or converting coffee beans procured from plantation to the first stage
of coffee powder.
Blending, packing or re-packing of tea or coffee is done by

using manufactured tea or coffee that has taken place
elsewhere.
Thus, a clear distinction has been made between factories exclusively engaged in
manufacturing process incidental to or connected to the manufacturing of coffee or tea,
and the manufacturing process of blending, packing or re-packing of tea or coffee.
While blending, packing or re-packing of coffee or tea is

considered ‘seasonal’ under clause (a) of the definition of
‘seasonal; factory’ if they are engaged for a period not
exceeding seven months in an year, factories that are
functioning for more than seven months in a year doing the
same activity, are not to be considered as ‘Seasonal’, but to
be covered under the Act.
It may be noted that;

Re-drying un-manufactured leaf tobacco;
2. Salt manufacture in certain States;

3. Ice manufacture in certain States;
4. Wool pressing with or without cotton pressing
and ginning; and
5. Decortication of walnuts.
It may be noted that “Rice Mills” are not ‘seasonal factories’.

The exemption given earlier to’ Rice Mills’ considering them as
‘seasonal’ has been withdrawn from 01-7-1989 vide Government
of India notification No. S-38014/90, SSI, dated 23/28-9-91. Hence
‘Rice Mills” are now to be covered as afactory under section
2(12) or as an Establishment under Section 1(5) as the case may
be.
The factories and establishments
procuring such manufactured tea or coffee solely for the purpose of their
subsequent blending, packing or re-packing or converting to value added products
such as converting to instant coffee or tea bags and different varieties of blended
tea or coffee are not covered
Beedi making,
breaking and roasting of cashew nuts,
conversion of a raw film in to a finished product,
curing of ginger,
cutting and drying of Arecnuts,
garbing of pepper, dry-cleaning of cloths,
stitching of clothes (tailoring),
fermentation of toddy without the aid of human agencies or machinery,
grading-coconut or fruits, and packing with a view to sale,
preparation of salt from sea water,
preparation of food stuffs, coffee/tea, and eatables, fruit juices,
peeling, washing, refrigeration air-conditioning and maintaining artificial
temperature as in hatcheries,
preserving milk in cold storage with an intention to its sale and cleaning of
prawns, ironing of clothes,
stitching of gunny bags,
alteration of magnetic tape in to disc/floppy in software development,
Medical transcription/ Legal encryption services involving satellite
communications, data processing, web designing, web development, C-
DAC/CAM/CAE/GIS
product life cycle management, cable TV operation/internet service
providing etc. amount to manufacturing process.
Some of the illustrations of court cases are provided hereunder to serve as

important guidelines:
1. Manufacturing process merely refer to the particular business carried
on and does not necessarily
refer to the production of some articles. (ESIC vs. southern Motors-
1998 (92) FJR.724)
2. To fall within the definition of a ‘factory’, it should carry on a
manufacturing process. It does not
require that the process should end in a substance being
manufactured. (Alkali Metals (P) Ltd., v
ESIC – 1973 LIC.83)
3. Beedi making is a manufacturing process. (Bombay High court-
LLJ1935. 182 to 198).Beedi
Industry covered.(Ramchand Omkarlal Agarwal v. Union of India and
others- 2006(3)LLJ.441;
2006(4)LIC.4014)
The provisions of ESI Act are applicable to Beedi workers. (Division Bench
of Karnataka High court in Gaffar and Jahangir Beedi works, Mysore
vs. Union of India and others- 1991(78)FJR.342)
4. Breaking and roasting of cashew nuts is a manufacturing process.
(Andhra Pradesh High court (LLJ -July 1963)
5. Curing ginger is a manufacturing process-Supreme Court (SC LJ(Vol.3)
1950-67, page 1540 to 1557)
6. Cutting and drying of Arecnuts and garbing of pepper amounts to
manufacturing process- Kerala High Court LLJ 1959.page 50)
7. Preparation of food stuffs, coffee and eatables is held to be
manufacturing process. – A.P. High Court (LLJ 1959-page 5.)
8. Preparation of salt from sea waters is a manufacturing process-
Supreme Court-SCLJ(vol.3-Page1623)
9. Conversion of a raw film in to a finished product amounts to
manufacturing process-Calcutta High Court (Indrapuri studio (p) Ltd. v.
ESIC – 1961(2) LLJ. 306).
10. Dry cleaning process is a manufacturing process. –Punjab and
Haryana High Court (1992 CLR-469)
11. Fermentation of toddy without the aid of human agencies or
machinery held to be a manufacturing process.- Kerala High court (LLJ
1966(2).369).
12. Grading of Coconut or fruits and packing in a bag with a view to their
sale is a manufacturing process.-Kerala High court LLJ –1959(2), Page
750)
13. Ghee purchased, sampled, and analysed chemically is held to be a
manufacturing process. A.P.High court (LLJ-1960(1).55)
14. Handloom weaving, mat weaving by persons engaged in an industrial
school for imparting instruction to pupils is held NON-manufacturing process. –
Kerala High Court LLJ-1961(1).184)
15. Peeling, washing, cleaning of prawns is held to be a manufacturing
process.-High Court of Madras (LLJ-October 1968 .473)
16. Packing masala constitutes a manufacturing process and the

premises where the activity takes place is a factory. (ESIC vs. Dave Griha
Udyog-2001 (1) LLN.564: 2001 (99) FJR.490)
17. Slicing of Bread with the help of machine electrically operated has
been held as ‘manufacturing process’. (New Grand High Class Bakery v.
ESIC – 1975 LIC.533)
18. Stitching of gunny bags amounts to manufacturing process- High Court
of Madras LLJ-1966(2).3)
19. The operation of ‘crushing boulders’ in to various smaller sizes, falls
within the expression ‘breaking up’ and amounts manufacturing process.
(M/s Desai Metal Works v. ESIC and another- 1993(1)LLJ.1085).
20. The equipment maintenance and repairing department of a hospital
which repairs and maintains the equipment is covered by the term
‘factory’. (Supreme Court’s decision in Civil Appeal No.
3125 of 1998 between Christian Medical College and ESIC- dated 23rd
November, 2000 communicated vide Hqrs .letter No. T-
11/13/51/98/Ins.IV dated 30-1-2001)
21. Peeling of potatoes, toasting bread, and boiling of water for
preparation of coffee, if done with the aid of power and that work is
closely connected with the preparation of food, then manufacturing
process is said to be carried on with the aid of power. Division Bench of
Madras High Court’s decision in the case of ESIC, Madras vs. Spencer&
Co. Ltd., Madras- 1979 (38) FLR-204)
22. ‘Storing of milk’ procured by the society from its members for sale
amounts to manufacturing process. (Decision of the Division Bench of
Madras High Court in the case of Kumbhakonam Milk Supply Co-operative
society v ESIC, Madras – 2003 LLR 844; 203 LIC 3604; 2003(3)
LLJ, 416; 2003 (3) LLN.303; 2003 (98)FLR.1108; 2003(2)CLR.738).
23. Pasturisation of Milk amounts to manufacturing process (Madras High
Court’s decision in P.Natarajan v ESIC and Coimbatore Co-operative Milk
supply union Ltd., v ESIC- 1973(26)FLR.19; 1973LIC.747; 1973(1)LLN.113;
1972(42)FJR.546)
24.‘Tailoring’ amounts manufacturing process. (1985 LIC.1104- Vasanth
Agenda Kumar singh v All India Handloom Fabrics Marketing Co- operative
Society Ltd.)
The above examples are only illustrative and not exhaustive but they show
how extensive and far reaching are the applications of the expression
manufacturing process under the Act.
L 2.7 Power: After the amendment of the definition of
Factory’ from 1st June, 2010, the definition of
‘Power’ has no significance. However, for covering the units
prior to 1st June2010, under the old definition,
it is necessary to understand the definition of ‘power’.
According to Section 2(13-C), power shall have
the meaning assigned to it in the Factories Act, 1948.
Section 2(g) of the Factories Act defines ‘power’ as

‘electrical energy, or any other form of energy which is
mechanically transmitted and is not generated by human or
animal agency’ i.e. any power, force or energy required in the
process is generated other than through human or animal
agency.
Use of L.P.Gas for cooking, Industrial Gases for welding etc.,
use of steam in manufacturing process has been held as
“power”.

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The following aspects may be examined for clubbing of two or more units.

d) Whether the employees employed in all the units are interchangeable.

Suppliers. If only one unit

rented one, how the rent is shared by them?

and shared by them.

‘FACTORY’ – COURT JUDGMENTS:

Blending, packing or re-packing of tea or coffee is done by

While blending, packing or re-packing of coffee or tea is

It may be noted that;

2. Salt manufacture in certain States;

4. Wool pressing with or without cotton pressing

and ginning; and

It may be noted that “Rice Mills” are not ‘seasonal factories’.

Some of the illustrations of court cases are provided hereunder to serve as

16. Packing masala constitutes a manufacturing process and the

Section 2(g) of the Factories Act defines ‘power’ as

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