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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

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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

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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

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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.

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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

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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

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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

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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.