Case Study: Liability for ESI Contributions Before Commencement of Manufacturing Activities

Case:

Employees State Insurance Corporation (ESIC) vs. Minaxi Textiles Limited
R/FA No. 4970 of 2007

Court and Date:

Gujarat High Court
Decided on: 13 June 2025
Hon’ble Judge: Mr. Justice Hemant M. Prachchhak

Relevant Law:

Employees’ State Insurance Act, 1948 – Section 2(12)
Defines a “factory” as premises where ten or more persons are employed, and a manufacturing process is carried on or is ordinarily so carried on.

Background:

The dispute arose when ESIC conducted an inspection of Minaxi Textiles Limited, which was in the process of constructing a new factory unit. During the inspection, the ESI Inspector discovered that the company had paid various labor-related expenses — including security, soldering, mending, and beam-ginning expenses — for construction work but had not paid ESI contributions on those amounts.

The ESIC authorities issued a notice to recover ESI contributions for the omitted wages. The company, however, maintained that the construction work was for setting up a new unit and that manufacturing activities had not yet commenced, meaning no contribution liability existed under the ESI Act.

The ESI Court, Ahmedabad, sided with the company, setting aside ESIC’s recovery order. Dissatisfied, ESIC filed a first appeal under Section 82 of the ESI Act before the Gujarat High Court.

Legal Issue:

Whether a company is liable to pay ESI contributions on labor expenses incurred during the construction of a new factory building when manufacturing activities have not yet commenced.

Key Legal Findings:

• Under Section 2(12) of the ESI Act, a factory must be engaged in or ordinarily carrying on a manufacturing process for the Act’s provisions to apply.
• The construction of a factory building cannot be equated with “manufacturing activity.”
• The employer’s liability to pay ESI contributions arises only after the commencement of manufacturing operations, not during preliminary construction.
• The ESI Court had correctly observed that the company’s manufacturing work began only in 1997, after obtaining electricity and registration in December 1996.
• The High Court also referred to the precedent Regional Director, ESI Corporation v. Patel Printing Press (2003) 2 GLH 425, which held that construction workers are not employees connected with the manufacturing process and are outside the scope of ESI coverage.

Judgment:

The Gujarat High Court dismissed the appeal, upholding the ESI Court’s decision.
It held that:

• The manufacturing process had not commenced during the relevant period, and therefore, the company was not liable to pay contributions under the ESI Act.
• The ESI Court’s decision was well-reasoned, based on sound evaluation of both oral and documentary evidence.
• There was no illegality or infirmity in the ESI Court’s order.
  Accordingly, the appeal was dismissed, and the company was permitted to seek release of its bank guarantee.

Conclusion:

This judgment reinforces the principle that ESI liability arises only after a factory begins its manufacturing operations. Expenses incurred for construction or setup do not attract ESI contributions, as such activities are not connected to the manufacturing process under the Act. The court emphasized that administrative authorities must distinguish between construction work and production activity before enforcing contribution demands.

Key Learning:

• ESI contributions become payable only after commencement of manufacturing work.
• Construction workers employed for building a new unit are not employees of the factory under Section 2(12).
• The ESI Court’s factual findings, when supported by documentary evidence, cannot be easily overturned.
• Employers should maintain clear records showing when manufacturing activity officially begins.
• The decision promotes fair application of labor welfare laws and prevents undue financial burden on industries still in the construction phase.

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