PETITIONER: CROMPTON PARKINSON (WORKS) PRIVATELTD., BOMBAY Vs. RESPONDENT: ITS WORKMEN AND OTHERS DATE OF JUDGMENT: 06/05/1959 BENCH: DAS, SUDHI RANJAN (CJ) BENCH: DAS, SUDHI RANJAN (CJ) BHAGWATI, NATWARLAL H. DAS, S.K. GAJENDRAGADKAR, P.B. WANCHOO, K.N. CITATION: 1959 AIR 1089 1959 SCR Supl. (2) 936 CITATOR INFO : R 1960 SC 819 (14) RF 1969 SC 612 (23) ACT: Industrial Dispute-Bonus-Gross Profits-Expenditure, when may be disallowed-Service Fee-Whether allowable expenditure- Available Surplus-Bonus, deducted as prior charge-Propriety of. HEADNOTE: Initially the appellant was a 100% subsidiary of the British company, Crompton Parkinson Ltd. In 1947 an agreement called " Technical Aid Agreement " was concluded between the two companies under which the appellant agreed to pay to the parent company 5% Of the net value of its sales every year as service fee for the use of their patterns, valuable designs, technical aid, benefit of research and ancillary services and facilities. As the appellant obtained the benefit of the parent company's technical knowledge and research it did not maintain a separate research establishment on which it would otherwise have had to spend far more than the service fee it paid. The agreement had received the approval of the Government; the income-tax authorities had, every year, allowed the service fee as legitimate expenditure ; and the remittances to the parent company had been sanctioned by the Reserve Bank of India. In the claim for bonus by the workmen, the Tribunal, in calculating the gross profits, pruned down the allowable expenditure on account of the service fee to one fourth on the grounds that the amount of service fee paid was excessive and beyond the requirements of commercial necessity and that a large part of the payment was in the nature of capital expenditure. In calculating the available surplus the Tribunal deducted as a first charge 4 1/2 months basic wages as bonus before deducting depreciation and income-tax contrary to the terms of the Full Bench formula. Held, that the entire amount of service fee paid ought to have been allowed as proper expenditure. Unless it was definitely found that a purported expenditure was sham or had been made with the express object of minimising the profits with a view to deprive the workmen of their bonus, the Tribunal could not substitute its own judgment as to what was or was not commercially justified in place of that of the appellant and its directors. The service fee was a genuine expenditure and represented a binding contractual obligation which could legally be enforced against the appellant and a breach thereof may have had serious consequences affecting its business. Held further, that the Tribunal acted wrongly in deducting 937 bonus as a prior charge even before the recognised items of prior charges. Such departures from the Full Bench Formula by Tribunals were to be deprecated. Associated Cement Companies Ltd. v. Its Workmen, C.A. Nos. 459 and 460 of 1957, decided on 5-5-59, followed. JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 756 & 757
of 1957.
Appeal by special leave from the Award dated January 8,
1957, of the Industrial Tribunal, Bombay, in 1. T. Ref.
Nos. 109 and 147 of 1956.
C. K. Daphtary, Solicitor-General of India, Y. A.
Palkhivala and S. N. Andley, for the appellant.
Rajani Patel and Janardan Sharma, for the respondents.
1959. May 6. The Judgment of the Court was delivered by
DAS, C. J.-These are appeals by special leave filed by
Crompton Parkinson (Works) Private Ltd. (hereinafter
referred to as the company) against that part of the award
made in References (IT) Nos. 109 and 147 of 1956 by the
Industrial Tribunal, Bombay, on January 8, 1957, which
concerns the demand of its workmen for bonus for the
company’s financial year 1954-55. That award was published
in the Bombay Government Gazette of January 17, 1957, in
Part IL at pages 351-364.
The material facts and circumstances leading upto the said
award, as they appear from the evidence placed on record
before the Tribunal, may shortly be stated as follows:- The
company was incorporated in India in the year 1937. The
registered office of the company is at Bombay. The
authorised capital of the company is Rs. 75 lacs divided
into 75,000 ordinary shares of the value of Rs. 100 each.
Out of the authorised capital, shares of the value of Rs. 60
lacs have been issued, subscribed and fully paid. At its
inception the company was 100% subsidiary of the well known
British company named Crompton Parkinson Ltd. (hereinafter
called the Parent company). In 1937
938
the company commenced its business which was and is to
manufacture electrical equipment such as transformers,
motors, fans, starters and switch gears and to sell the same
in the market. All the goods, which the company
manufactures, are manufactured wholly in accordance with
patterns, designs, specifications and technical processes
developed by and belonging to the Parent company which the
latter makes available to the company. The company’s
products are sold under the trade names and marks belonging
to the Parent company, namely, ” Crompton Parkinson “, ”
Crompton “, ” Parkinson ” and ” C. P. “. Between 1937 and
1947 the company’s business is said to have been in a stage
of development and progress and it is admitted that the
Parent company made no charge for the several services and
facilities given by it to the company. In the year 1947,
after the company’s business had been established on a firm
footing, an agreement was concluded between the two
companies in order to provide, on a long term basis, for the
continuance of the technical assistance and service and
other facilities afforded by the Parent company on which the
company was wholly dependent. That agreement, which is said
to be of a type commonly executed between the manufacturing
and industrial concerns in India and their respective
associates, parents or affiliates abroad and generally known
as ” Technical Aid Agreements ” is said to have received the
approval of the Government of India to promote the
industrial development of the country. That agreement was
actually executed on August 12, 1947, and provided that for
a period of 20 years the Parent company would render to the
company various facilities and services, including, amongst
others, the following :
(1) the use of the latest designs, manufacturing information
and production methods discovered and developed by Crompton
Parkinson Ltd.;
(ii) the fullest information and advice as to the most
suitable machine tools and production machinery and
equipment and as to the correct operation and use thereof;
(iii) the supply at cost of machinery, equipment,,
939
raw materials and manufacturing parts. Under this facility
the appellants obtain the benefit of bulk purchase terms
under which Crompton Parkinson Ltd. purchase their raw
materials;
(iv) the benefit of the knowledge and experience of Crompton
Parkinson Ltd.’s executive in all matters relating to
technical, mechanical and financial management;
(v) the service of the Crompton Parkinson Ltd.’s experts
and technical personnel;
(vi) facilities for training of selected employees of the
petitioners in Crompton Parkinson Ltd.’s Works, and
(vii) licence to use on the appellants’ products the
world-famous trademarks, “Crompton Parkinson”, ” Crompton “,
” Parkinson ” and ” C. P. ” belonging to Crompton Parkinson
Limited.”
In lieu of all royalties, licence fees and other con-
siderations usually allowed for services and facilities of
this kind, the company agreed to pay to the Parent company
service fee calculated at the rate of 5% of the net value of
the sales made by the company from year to year. For the
year 1954-55 the company had actually paid the amount of
service fee and the same, after deducting the Indian income-
tax, had been remitted to the Parent company. Shortly after
the execution of the aforesaid agreement, 26% of shares of
the company were acquired by Messrs. Greaves Cotton Co.
Ltd., which is an Indian Company and the company ceased to
be a 100% subsidiary of the Parent company. It is said that
when negotiations for the aforesaid agreement were going on
negotiations were also in progress for the transfer of
shares to the Indian company and that the latter was
apprised of the terms of the proposed agreement and approved
of the terms of payment of 5% of the net value of sales.
On August 25, 1955, the General Engineering Employees Union
representing the workmen who are respondents Nos. 1 and 2
submitted certain demands to the company. No agreement
having been arrived at, the matter was referred to the
Conciliation Officer. As
940
no settlement was arrived at as a result of the conciliation
proceedings, the Conciliation Officer submitted his report
to the Government of Bombay under sub-s. 4 of s. 12 of the
Industrial Disputes Act, 1947. The Government of Bombay,’
after considering the said report and in exercise of the
powers conferred on it by sub-s. 5 of s. 12 of the
Industrial Disputes Act, 1947, made an order on August 6,
1956, referring the disputes between the company and its
workmen (other than those of the Watch and Ward staff) over
their demands mentioned in the schedule to that order for
adjudication to the Tribunal from whose award the present
appeals have been filed. This reference was marked as (IT)
No. 109 of 1956. By another order made on October 10, 1956,
the Government of Bombay referred the disputes between the
company and its workmen belonging to the Watch and Ward
staff over the latter’s demands mentioned in the schedule to
that order for adjudication to the same Tribunal. That
reference was marked as (IT) No. 147 of 1956.
On September 10, 1956, a statement of claim was filed by the
Genera Secretary, General Engineering Employees Union, on
behalf of the workmen (other than those of the Watch and
Ward staff) in Reference (IT) No. 109 of 1956 claiming,
inter alia, that all workmen should be given bonus either
(i) equivalent to 331 % of their earnings during 1954-55 or
(ii) a prorate bonus equivalent to their six months’ basic
wages, basic wage being calculated at the daily rate of pay
which the workmen drew on June 30, 1955, and bonus being
given without attaching any conditions. In the statement of
claim the Union contended: (i) that during the year 1954-55
the company had made huge profits, (ii) that the company’s
business had expanded by leaps and bounds and production had
mounted up very much and the company had made huge profits
and (iii) that the wages paid to its employees fell terribly
short of the living wage standard and extremely out of any
reasonable proportion to the tremendously high salaries paid
to the company’s officers. The Union requested the Tribunal
to take into consideration the company’s practice, inter
alia, of writing off
941
of very substantial amounts as service fees to the Parent
company.
The company filed its written statement in reply to the
statement of claim filed by the Union in Reference No. (IT)
109 of 1956. While agreeing that it had made reasonable
progress, the company did not admit that the progress had
been as rapid or phenomenal as the Union had suggested. The
company stated that it had been able to accumulate only
small reserves, that, in spite of its increased turnover,
its profit for the year in question was quite low on account
of stiff competition, that the wages paid to the workmen
compared favorably with those paid by similar concerns, that
they paid to the Parent company a service fee as con-
sideration for the use of their patterns, valuable designs,
technical aid, benefit -of research and ancillary services
and facilities. For the purposes of the reference, the
company filed a copy of its audited balance-sheet and profit
and loss account for the year 1954-55 as a confidential
exhibit. In the said profit and loss account, service fee
of 5% so paid for the year was shown as an item of
expenditure.
The Union on behalf of the workmen belonging to the Watch
and Ward staff filed a statement of claim in Reference (IT)
No. 147 of 1956 regarding certain special claims of those
workmen to which the company replied by its written
statement. It is not necessary to refer to that statement
of claim by the Union or the company’s written statement,
for they are not relevant to the question of bonus.
In the course of hearing of the References, which were taken
up together, the workmen, through their counsel, submitted
to the Tribunal, amongst other things, that the payment of
the said service fee by the company was not justified and
that the same should be disallowed as an item of expenditure
for the purpose of calculating bonus payable to the workmen
for the year 1954-55. The Tribunal thereupon called upon
the company to bring on record by an affidavit all relevant
facts and circumstances relating to the payment of service
fee. The company submitted that it was not open to the
workmen to question an item of
942
expenditure actually incurred and paid in the course of
business or to request that such an item. already debited to
the accounts, which had duly been audited and passed, should
be disallowed. The company submitted that in any event the
said payment was fully justified and reasonable. However,
in compliance with the Tribunal’s directions, the company on
December 18, 1956, filed an affidavit affirmed on December
14, 1956, by Shri V. V. Dhume. the Secretary to the company
setting forth the relevant facts and circumstances relating
to the payment of the said service fee. At the further
direction of the Tribunal, a copy of the agreement dated
August 12, 1947, was also filed by the company. Shri V. V.
Dhume was examined before the Tribunal and his oral
testimony was also recorded.
The material provisions of the said agreement have already
been summarised above. From the affidavit and the oral
evidence of Shri V. V. Dhume referred to above, it is clear
that all the goods which the company manufactures are
manufactured wholly in accordance with the patterns,
designs, specifications and technical -processes developed
by and belonging to the Parent company which it makes
available to the company and that the company’s products are
sold exclusively under the trade names and marks belonging
to the Parent company. There can be and is no dispute that
the company has thus at its disposal the benefit of the
Parent company’s accumulated knowledge and experience,
technical data and goodwill and the reputation attaching to
its products. It is clear upon the evidence on record that
the manufacture of specialised electrical goods and
equipment of the types produced by the company is a highly
specialised business of a very competitive nature requiring
the use of the most up to date technique. In order to keep
abreast with the latest development in the field of manufac-
ture of this kind of equipment, the company will ordinarily
have to maintain its own research laboratories and
specialised staff to develop new methods and innovations and
processes. The company, however, does not maintain a
separate research establishment -Of its own but obtains the
benefit of the Parent
943
company’s invaluable services under the said agreement.
According to Shri V. V. Dhume the service fee paid by the
company to the Parent company constitutes, in a substantial
measure, a mere reimbursement of expenses incurred by the
latter in the maintenance and operation of its research
department and rendering of facilities to the company. Shri
V. V. Dhume further stated that, had the company to maintain
its own research department to provide such service and
facilities, the annual expense of the company would have far
exceeded the service fee actually paid by it to the Parent
company. It also appears from the affidavit of Shri V. V.
Dhume that the independent shareholders of the company who
had acquired 26% shares of the company about the time when
the ” Technical Aid Agreement ” was executed had willingly
accepted that agreement. Apart from the fact that the
agreement had received the approval of the Government of
India in the Ministry of Finance as well as in the Ministry
of Commerce and Industry, the income-tax authorities have
from year to year allowed the full amount of the service fee
paid by the company to the Parent company as an expenditure
incurred wholly and exclusively for the purposes of the
company’s business. Likewise every payment and remittance
made by the company representing the service fee to the
Parent company has been sanctioned by the Reserve Bank of
India ever since 1947. The payment of the service fee no
doubt represents a binding contractual obligation on the
company which can be legally enforced against it and a
breach thereof on the part of the company may well lead to
the cancellation thereof by the Parent company as a result
whereof the company will be deprived of the services and
facilities obtained by it under the agreement and may even
be prevented from carrying on its business. There was no
serious cross-examination of Shri V. V. Dhume regarding
these matters by counsel appearing for the workmen and no
substantive evidence on these questions was led by the
workmen.
The Tribunal made its award in both the References on
January 8, 1957. As regards the service fee,
944
the Tribunal held (i) that the amount of service fee paid by
the company to the Parent company was excessive and beyond
the requirements of commercial necessity and was allowable
as an expense only as to one quarter thereof and (ii) that
in any event even if the commercial necessity of the payment
could not be challenged, a large part of the payment was in
the nature of capital expenditure and that only the balance,
being in fact a quarter thereof, was allowable as revenue
expense for the purpose of determining the surplus available
for the payment of bonus to the workmen. Thus, as regards
the service fee, the Tribunal in its award proceeded to
“prune it down “. In the actual calculations made by the
Tribunal for determining the available surplus according to
the bonus formula appearing in what has been marked as
confidential exhibit T-1, the Tribunal has allowed only Rs.
2 lacs out of the total of Rs. 7.67 lacs actually paid as
service fee and added back Rs. 5.67 lacs to the profits. It
will also be noticed from that confidential exhibit T-1 that
the Tribunal has deducted as a first charge 4 1/2 months’
basic wages as bonus before depreciation as well as tax, on
no better ground than that, in the view taken by it, income-
tax should not be deducted as a prior charge on the gross
profits in preference to bonus. In so doing the Tribunal
has not, quite clearly, followed but has made variations in
that formula. The bonus formula enjoins the Tribunals to
arrive at the available surplus after providing for certain
prior charges mentioned therein and then to determine, after
taking into consideration all material circumstances, how
that available surplus should be distributed’ between the
three interests, namely, the industry, the shareholders and
the workmen. To deduct bonus as a prior charge even before
the recognised items of prior charges appears to us to put
the cart before the horse. Such a process is certainly not
giving effect to. the bonus formula but amounts to ad hoc
determination which may vary according to the length of the
proverbial foot of the Lord Chancellor and is bound to lead
to chaos and industrial unrest. The bonus formula was
evolved by
945
the Labour Appellate Tribunal as far back as 1950 and it has
been generally approved by this Court in more decisions than
one and what is more it has worked fairly satisfactorily.
In our judgment in the,’ appeals of Associated Cement
Companies Ltd. v. Its Workmen (1) we have deprecated such
departure from the bonus formula by individual Tribunals,
for clearly such departure is not conducive to the
harmonious and peaceful relations between the workmen and
their employers.
The only other question which calls for our decision is the
correctness of the Tribunal’s award as to the service fees.
The conclusion of the Tribunal on that point is founded on
the ground that the test of ” commercial necessity ” applied
by the income-tax authorities for determining whether the
expenditure was allowable under s. 10(2)(xv) of the Indian
Income-tax Act should also be applied by the Tribunal. The
Tribunal evidently overlooked the fact that the income-tax
authorities are entitled to apply the test of commercial
necessity by reason of the express provisions of s.
10(2)(xv) which authorise them to arrive at the taxable
income, profits and gains after making allowance for
expenditures laid out and expended wholly and exclusively
for the purpose of the business. There is no such provision
in the Industrial Disputes Act. In tile absence of cogent
and compelling evidence leading to the definite conclusion
and finding that a purported expenditure was sham or had
been made with the express object of minimising the profits
with a view to deprive the workmen of their bonus, it is no
part of the duty of an Industrial Tribunal to substitute its
own judgment as to what was or was not commercially
justified in the place of the judgment exercised by the
company and its Directors in whom. in law the management of
the company is confided. The Tribunal has completely
overlooked the fact that the company’s accounts bad been
duly audited by its auditors who were duly appointed by the
company and that the said auditors had duly certified
(1) [1950].S.C.R 925.
119
946
in the manner provided for by the Indian Companies Act, that
the said accounts had been drawn up in conformity with the
law and exhibited a true and correct view of the state of
the company’s affairs. The Tribunal has paid no attention
to the fact, appearing in the evidence on record before him,
that the income-tax department had allowed such service fee
as legitimate revenue expense and the entire amount of the
service fee was allowed as a deduction by income-tax
authorities every year as a revenue expenditure wholly and
exclusively incurred as a matter of commercial necessity of
the company’s business. Nor does the Tribunal appear to
have adverted to the fact that the remittances to the Parent
company were allowed by the Reserve Bank which always
exercises close scrutiny on every payment made to non-
residents with a view to prohibit payments which are not
justified. Nor has the Tribunal taken note of the fact that
the Ministry of Finance and the Ministry of Commerce and
Industry have approved of the payment of the service fee as
provided in the agreement. A conclusion drawn by the
Tribunal without adverting to the evidence before it amounts
to an error of law and cannot possibly be sustained.
Further, the Tribunal appears to have been led away by three
facts, namely, (i) that the company did not pay any service
fee during the period 1937-47, (ii) that the agreement was
executed on August 12, 1947, that is to say three days
before the attainment of our independence and (iii) that at
the date of the agreement the company was a 100% subsidiary
of the Parent company. As regards the first reason, the
explanation may well be that during the period 1937 to 1947
the growth was still in a stage of development and growth.
In any case,the fact that no fees had been charged during a
particular ‘period when the company was 100% subsidiary of
the Parent company cannot reasonably be taken’ as a reason
for not allowing them in future. It will be recalled that
negotiations were going on for the acquisition of a
considerable block of shares by an Indian company simultane-
ously with the negotiations for the execution of the
947
agreement and that in fact 26% of the shares were acquired
by Messrs. Greaves Cotton Co. Ltd. Further, such service,
fee has been paid year after year from 1947 right up to the
bonus year in question. The second reason is equally
unsustainable. The fact that a great constitutional change
was envisaged may well and properly have been the reason for
placing the legal relationship between the company and the
Parent company on a firmer and permanent legal footing. The
Tribunal seems to have overlooked the fact stated by Shri V.
V. Dhume, that ” the payment of the service fee for the
services of this nature is quite a common feature in India
“. The reasonableness and legality of the payment of such
fee is also supported by the fact that the income-tax
authorities and the Reserve Bank of India have not taken any
exception to such payment. The last reason adopted by the
Tribunal clearly overlooks the fact that shortly after the
execution of the agreement about 26% of shares in the
company were acquired by an Indian company and year after
year ever since then these independent shareholders of the
Indian company had willingly accepted the service agreement.
Finally the award does not disclose any basis on which the
Tribunal has purported to ” prune it down ” to one quarter
of the amount actually paid by the company.
After a careful consideration of the evidence on record we
have come to the conclusion that this part of the award
concerning disallowance of the major portion of the service
fees cannot be supported or upheld. The Tribunal in the
award itself has pointed out, as already stated, that in
case the whole of this service, fee is to be allowed, as we
think it should be, then on that basis the available surplus
would permit the payment of bonus of one month’s basic wages
to the workmen. The company has no objection to payment of
bonus to the workmen amounting to one month’s basic wages,
subject to the conditions laid down in the award in this
behalf and indeed it has done so since the date of the
award. The result, therefore, is that we allow, these
appeals to the extent that the award of the Tribunal:’be
varied and modified by
948
allowing only one month’s basic wages to its workmen who are
respondents to these appeals instead of 2 1/2 months’ basic
wages as provided in the award, subject, of course, to the
conditions laid down in the award. Be it noted here that
the company has paid this bonus to the respondents and
nothing remains due and payable for bonus for 1954-55.
Considering all circumstances of these appeals, we direct
each party to bear its own costs of these appeals.
Appeal allowed in part.