Crompton Parkinson (Works) Private Ltd., Bombay v. Its Workmen and Others

Judgment

r959 May 6. CROMPTON PARKINSON (WORKS) PRIVATE LTD., BOMBAY ITS WORKMEN AND OTHERS (S. R. DAS, c. J., N. H. BHAGWATI, s. K. DAS, P. B. GAJENDRAGADKAR and K. N. WANOHOO, .T.J.) I nditstrial Dispute-Bonus-Gross Profits-E xpenditt<rc, when may be disallowed-Service Fee-TFhether allowable expcnditure- Available Surpl1's-Bon1ts, deducted as prior charge-Propriety of. Initially the appellant was a roo% 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 kno\v1edge and research it did not maintain a separate research establishment on which it \vould otherwise have had to spend far more than the service fee it paid. The agreement had received the approval of the Govern1nent; the incon1e-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 pay1nent was in the nature of capital expenditure.

In calculating the available surplus the Tribunal deducted as a first charge 4! months basic wages as bonus before deducting depreciation and incometax contrary to the terms of the l'ull 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 vie\v 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. 1'he 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 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. Crompton k Parkinson (Works) Associate ement ompanies Ltd. v. Its Wor men, .A. Nos. 459 4nd 460 of 1957, decided on 5-5-59, followed. rBivaleb_t ' . om ay CIVIL APPEI,LATE JURISDICTION: Civil Appeals Nos. 756 & 757 of 1957. Its Workmm Appeal by special leave from the Award dated January 8, 1957, of the Industrial Tribunal, Bombay, in I. T. Ref. Nos. 109 and 147 of 1956. 0. K. Daphtary, Solicitor-General of India, N. 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 &· Others DAS, C. J.-These are appeals by special leave filed Das c. J. 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 ~arent company).

In 1937 us 1 959 the company commenced its business which was and is to manufacture electrical equipment such as trans- Crompton Parkinrnn (Wo•ks) 1ormers, motors, fans, starters and sw1tc gears and to Pdvate Ud, sell the same in the market. All the goods, which the 11ombay company manufactures, are manufactured wholly in accordance with patterns, designs, specifications and n~n;;,;,:~·· technical processes developed by and belonging to the Parent company which the latter makes available to Das c. J. 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. fo the year 1947, after the company's business had been. established on a firm footing, an agreement wa.s 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 :- ( l) the use of the latest designs, manufacturing information and production methods discovered and developed by Crompton Parkinson Ltd . ; (ii) the fullest information and ad vice 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, raw materials and manufacturing parts. Under this r959 facility the appellants obtain the benefit of bulk purh• h C p k' Ltd rompton c ase terms un er w IC rompton at' mson · Parl<insoii (Works) purchase their raw materials;

Private Ltd., (iv) the benefit of the knowledge an<.1 experience Bombay of Crompton Parkinson Ltd.'s executive in all matters Its IV or Ii men relating to technical, mechanical and financial manage- & others ment; (v) the service of the Crompton Parkinson Ltd.'s Das c. J. 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 considerations 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. ]'or 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 remitt_s1d 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 no settlement was arrived at as a result of the conciliation proceedings, the Conciliation Otticer submitted c,-on1pto11 Pa•ki,,son (Wo•ks) IS report to the overnment o om ay under sub-s. 4 l"ivat• Ud, of s. 12 of the Industrial Disputes Act, 1947. The Bombay Government of Bombay, after considering the said report and in exercise of the powers conferred on it by Its Wo•kmen sub-s. 5 of s. 12 of the Industrial Disputes Act, 1947, & Othets made an order on August 6, 1956, referring the dis- Das c. J. putes 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 General 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, tbat all workmen should be given bonus either (i) equivalent to 33?3% of their earnings during 1954-55 or (ii) a pro-rata 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 atta.ching 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 tremeudously 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 SUPREME COURT REPOI~TS of very substantial amounts' as service fees to the Parent company. The company filed its written statement in reply to Patki1~:0: r;otk•) the statement of claim filed by the Union in Reference Private Ltd,, No. (IT) 109 of 1956. While agreeing that .it had made Bombay reasonable progress, the company did not admit that the progress had been as rapid or phenomenal as the Its Workmen &- Others Union had suggested.

The company stated that it had been able to accumulate only small reserves, that, Das c. J. 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 favourably with those paid by similar concerns, that they paid to the Parent company a service fee as consideration for the use of their patterns, valuable designs, technical aid, benefit of research and ancillary services and facilities. F'•r Lhe 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 foe 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 SUPREME COURT HEPORTS [1959)

Supp. • 95J expenditure actually incurred and paid in the course of business or to request that such an item already Pa.k~;;~:''<~~o,ks) debited to the accounts, which had duly been audited T>iva" Ltd, and passed, should be disallowed. The company sub- JJombay mitted that in any event the said payment was fully justified and reasonable. However, in compliance Its WMkmen with the Tribunal's directions, the company on Decem- & 01""' ber 18, 1956, filed an affidavit affirmed on Decem her Das c. 1. 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 tho company. Shri V. V. Dhume was examined before the Tribunal and his oral testimony was also recorded. The material provisions of the said agreement ha Ye already been summarised above.

Efom the affidavit and the oral evidence of Shri V. V. Dhumo 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 good will 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 manufacture 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 (2) s.c.tt. SUPREME COtJRT REl>OttTS !}43 company's invaluable services under the said agreer959 ment. According to Shri V. V. Dhume the service fee rompton paid by the company to the Parent company const1- Parkinson (Works) tutes, in a substantial measure, a mere reimbursement Private Ltd., of expenses incurred by the latter in the maintenance Bombay and operation of its research department and rendering of facilities to the company. Shri V. V. Dhume fur- ~~;:C~"' ther stated that, had the company to maintain its own research department to provide such service and Das c.

J. 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 con- , tractual 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, [1959]

Supp. r959 the Tribunal held (i) that the amount of service fee Pt paid by the company to the Parent company was rom on Parkinson (Works) excessive and beyond the reqmrements of commercial Pduate Ltd., necessity and was allowable as an expense only as to Bombay one quarter thereof and (ii) that in any event even if the commercial necessity of the payment could not bo ri.;:;,:~•n challenged, a large part of the payment was in the nature of capital expenditure and that only the Das c. J. 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 ha.s 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~ 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 bouus as a prior charge even before the recognised itums 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 h~ad to chaos and industrial unrest. The boi;rns formula was evolved by the Labour Appellate Tribunal as far back as 1950 r959 and it has been generally approved by this Court in more decisions than one and what is more it has Parki;s 0 ;;;P~~orks) worked fairly satisfactorily. In our judgment in the Private Ltd., appeals of Associated Cement Companies Ltd. v. Its Hombay Workmen (1) we have deprecated such departure from the bonus formula by individual Tribunals, for clearly Its Workmen 0- Others such departure is not conducive to the harmonious and peaceful relations between the workmen and Das c. 1. 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 incometax 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 the absenc~ of cogent and compelling evidence leading to the definite conclusion and finding that a purported expenditure was sham or had been made 'Yith 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 had been duly audited by its auditors who were duly appointed by the company and that the said auditors had duly certified (r) [1959] S.C.R 925. u9 ' 959 in the manner provided for by the Indian Com- Crompton panies Act, that the said accounts had been drawn rarkinson (Works) up in conformity with the law and exhibited a true I'rfoate Ltd., and correct view of the state of the company's Bombay affairs.

The Tribunal has paid no attention to the fact, appearing in the evidence on record before him, Its Workmen that the income-tax department had allowed such service fee as legitimate revenue expense and the Das c. J. 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 company was still in a stage of development and growth. In any case the fa_ct 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 simultaneously with the negotiations for the execution of t]J.e agreement and that in fact 26% of the shares were r959 itcquirnd by Messrs. Greaves Cotton Co. Ltd. Further, such service fee has been paid year after year from P k~rompt(olVn k l a1 inson or s 1947 right up to the bonus year rn question. The Private Ltd., second reason is equally unsustainable. The fact that Bombay a great constitutional change was envisaged may well and properly have been the reason for placing the Its Workmen legal relationship between the company and the Parent company on a firmer and permanent legal Das c. J. 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 overloo~s 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 alreadv 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 wag~ 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 '959 n.llowing only one month's basic wages to its workmen who are respondents to these appeals instead of 2i rompton th ' b . "d d . Parkiuson (Wo>ks) mon s as10 wages as prov1 e m t e awar , su Ject, Private Ltd., of course, to the conditions laid down in the awn.rd.

Be Bombay it noted here that the company has paid this bonus to the respondents and nothing remains due and payable Its Workmen for bonus for 1954-55. Considering all circumstances of these appeals, we r.lirect each party to bear its own Das c. J.. costs of these appeals. '959 May 5. Appeal allowed ·in part. THE INDIAN HUME PIPE CO., LTD., THEIR WORKMEN (S. R. DAS, c. J., N. H. BHAGWATI, s. K. DAS, P. B. GAJENDRAGADKAR and K. N. WANCHOO, JJ.) Inditslrial Dispute-Boniis -Available Surplus - Previous losses written off-Expenditure on patents written off-Debenture redemption reserve-If proper prior charges-Preference shares. return on-Calcitlations 011 All-India basis, whether proper. The appeliant manufactured hume pipes and had factories in different parts of India, Pakistan and Ceylon.

For determining the available surplus for the payment of bonus for the year 1954-55 the appellant claimed deductions as prior charges on account of (i) losses suffered on the Lahore factory written off, (ii) expenditure on patents written off, and (iii) debenture redemption reserve. It also claimed 6% retnrn on the preference shares as return on paid up capital. The losses on the Lahore factory had been incurred in the previous years which had been carried forward from year to year and had been written off ~s irrecoverable in the bonus year. The amounts spent on the purchase of the patents which had been worked off in the previous years had also been written off in the bonus year. The appellant had issued debentures in 1942-43 redeemable in 1962-63 and claimed Rs. 3,50,000 as the annual contribution towards the redemption reserve.

The appellant had issued preference shares on which the share-holders, under the terms of the issue, were not entitled to more than 5%, but the appellant claimed a return of 6% on these shares also as return on paid up