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
109 and 147 of 1956
C K Daphtary Solicitor General of India Y A Palkhivala and section N Andley for the appellant
Rajani Patel and Janardan Sharma for the respondents
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 75000 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 section 4 of section 12 of the 
The Government of Bombay  after considering the said report and in exercise of the powers conferred on it by sub section
5 of section 12 of the  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 767 lacs actually paid as service fee and added back Rs 567 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 12 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 vs 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 section 102xv 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 section 102xv 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 
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 1950SCR 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 casethe 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 12 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


Summary:
The workmen were originally employed by Ms MM Ispahani Ltd which shortly before the partition of India transferred its registered office from Calcutta to Chittagong
The appellant company was incorporated on September 5 1947 and took over the good will and trading rights of Ms M M Ispahani Ltd and also purchased its stock in trade properties and assets
Most of the shares of the appellant were held by Ms M M Ispahani Ltd and the business of the appellant was of the same nature carried on in the same premises with the same workmen on the same remuneration
On the transfer of Ms M M Ispahani Ltd to Chittagong the question arose of retrenching those workmen who were not willing to go to Chittagong and when the appellant company came into existence it agreed to employ those workmen
The workmen apparently agreed to the termination of their services with Ms M M Ispahani Ltd and after receiving their provident funds and arrears of salaries they were appointed by the appellant
Ms M M Ispahani Ltd used to pay puja bonus to the workmen at the rate of one month s wages and the appellant also paid the same from 1948 up to 1952 even in the years in which the appellant suffered losses
As the appellant did not pay puja bonus for 1953 a dispute arose and was referred for 25 adjudication
The workmen also claimed benefits from the appellant for the period of service rendered by them under Ms M M Ispahani Ltd Held that the workmen were entitled to the puja bonus equal to one month s wages as it was an implied term of the employment of the workmen
Puja was a special festival in Bengal and it had become usual with many firms there to give bonus before Puja to their workmen
A claim for puja bonus was based either on implied agreement or on customary payment
An implied agreement could be inferred if the following circumstances were established i that the payment was unbroken ii that the payment had been made for a sufficiently long period and iii that it was not paid out of bounty
The payment need not necessarily be at a uniform rate throughout and it was for the Tribunal to decide the quantum in a particular year taking into account the various payments made in previous years
In the present case the payment was unbroken and was not made out of bounty as it was made even in years of loss
The sufficiency of the length of the period depended on the circumstances of each case and in the present case the appellant had paid the bonus since its birth
Mahalaxmi Cotton Mills Ltd Calcutta vs Mahalaxmi Cotton Mills Workers Union approved
Held further that the workmen were not entitled to any benefits arising out of their employment with Ms M M Ispahani Ltd The workmen had agreed to the termination of their service with that company and there was no express or implied undertaking given by the appellant regarding continuity of service when employing the workmen