Case: Crompton Parkinson (Works) Private ltd., Bombay  Vs. Its Workmen And Others

The company was incorporated in India in the year 1987. 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 per cent, subsidiary of the well-known British company named Crompton Parkinson Ltd. (hereinafter called the Parent company). In 1937 the company commenced its business which was and is to manufacture electrical equipment such as transformers, motors, fans, starters anti 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 companys 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 companys 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 companys 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 12-8-1947 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;"(i) 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, 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."3. On 25-8-1955 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 Officer submitted his report to the Government of Bombay under sub-s. 4 of S. 12 ofthe Industrial Disputes Act,1947. TheGovernment of Bombay, after considering the said report and in exercise of the powers conferred on it by sub-s. 5 of S. 12 ofthe Industrial Disputes Act,1947,made an order on 6-8-1956 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 1954. On l0-9-1956 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 No. (IT) No. l09 of 1956 claiming, inter alia, that all workmen should be given bonus either (i) equivalent to 33 1/3 per cent. 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 30-6-1955 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 companys 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 companys officers. The Union requested the Tribunal to take into consideration the companys practice, inter alia, of writing off of very substantial amounts as service fees to the Parent company

Court's reasoning:
9. The Tribunal made its award in both the References on 8-1-1957. As regards the service fee, 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 it 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 workmenThus, 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 41/2 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 is 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 share-holders 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 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, Civil Appeals Nos. 459 and 460 of 1957, D/- 5-5-1959: (AIR 1959 SC 967 ), 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 employersIn the 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 companys accounts had been duly audited by its auditors who were duly appointed by the company and that the said auditors had duly certified 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 companys 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 companys 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, thatis to say, three days before the attainment of our independence and (iii) that at the date of the agreement the company was a 100 percent, sub-sidiary 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 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 simultaneously with the negotiations for the execution of the agreement and that in fact 26 per cent. 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 off 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 factthatthe 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 factthat1. After a careful consideration of the evidence on record we have come to the conclusionthatthis 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 alreadyt incase the whole of this service fee is to be allowed as we think it should be, then onthatbasis the available surplus would permit the payment of bonus of one months basic wages to the workmen.The company has no objection to payment of bonus to the workmen amounting to one months 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