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TMI Blog1990 (10) TMI 286X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent company continues to be a shareholder and, accordingly, entitled to the dividends on its shareholding in the defendant/appellant company. Hackbridge and Hewittic Electric Company was a company under the provisions of the English Companies Act with its registered office situated at Hersham, Walton-on-Thames, Surrey, England. By an agreement in writing dated March 19, 1958, between the said company and the defendant company, it was agreed that the former would assist the latter in the setting up of a plant for manufacture of power and distribution transformers of such types, ranges and capacities as would be mutually agreed and to give technical assistance and advice in connection with the working thereof on the terms and conditions, inter alia , that the former agreed to assist the latter in setting up a plant for manufacture of power and distribution transformers of such types, ranges and capacities as would be mutually agreed and to give technical assistance and advice in connection with the working thereof; to communicate to the latter all inventions, procedures, designs, layouts, methods of manufacture, experiences and technical know-how in respect of power transforme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the turnover of the latter's factory for a period of ten years from January 1, 1956, and extension of such further period on mutual agreement. This was followed by yet another indenture of agreement dated August 29, 1968, between the former and the latter on terms and conditions as follows: (1)The, agreement would be deemed to have been concluded and operative on and from 1st January, 1966, and would be in force for a period of five years commencing from the said date and ending with December 31, 1970. (2)A lump sum payment of pounds 1000 would be payable by the latter to the former for the technical service to be rendered by the former for substituting aluminium for copper for the manufacture of distribution transformers up to and including the range of 33 kv. (3)A royalty of 3% subject to tax would be payable to the former by the latter on the ex-factory sale price of power transformers in the range of 33 kv. and above. The Indian ex-factory price of imported components, if any, would be deducted from the sale price for the purpose of computing the royalty. (4)The latter would be free to export its products. (5)All the terms and conditions in the original indenture of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t regarding the know-how furnished by Hackbridge and Hewittic Electric Company Ltd., being exclusively for the defendant's benefit and Hackbridge Hewittic Electric Company Ltd., preserving the defendant's secrets ceased to exist after November 29, 1968. Similarly by becoming a subsidiary of General Electric Company, United Kingdom, Hackbridge Hewittic has been indirectly embarking upon the business of manufacture of transformers in India through General Electric Company Ltd". According to the plaintiff, the defendant wrongly contended that the manufacture of transformers in India by the General Electric Company of India, which was a subsidiary of the General Electric Company Limited, United Kingdom, amounted to breach of clause 6 of the agreement dated March 19, 1958, as modified by the addendum dated March 1, 1965, and reiterated in the indenture of agreement dated August 29, 1968, and further. "The plaintiff has not during the subsistence of the said agreement or otherwise directly or indirectly rendered any technical aid or technical assistance in relation to the manufacture of transformers to any other manufacturing company firm or person in India nor directly or indirectly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 29, 1968, to January 31, 1970, under mistake and which amount paid, it is entitled to recover from the plaintiff, and in any case, it is fully justified in declining to pay any royalty after February 1, 1970, and it has no liability to pay any dividend accordingly. The facts which appear to have been admitted are that the last collaboration agreement (exhibit D-3) was for a period of five years up to December 31, 1970. As per clause 5 of the said agreement, all terms and conditions contained in the original indenture of the agreement dated March 19, 1958 (exhibit D-l), as modified by the addendum (exhibit D-2) were treated as part and parcel of the collaboration agreement ending with December 31, 1970, but subject to such changes which are brought about in the original terms and conditions set out in exhibit D-l by exhibit D-2. Ordinarily, therefore, the defendant was bound to honour the agreement and pay the royalty until December 31, 1970. To understand whether there was any breach of terms of contract or not or in other words, whether as a result of the change by which Hackbridge and Hewittic Electric Company became a subsidiary of the General Electric Company, it constitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laintiff would not embark on any scheme of manufacture of transformers in India either directly or indirectly, there was no evidence to show that Hackbridge and Hewittic Electric Company or GEC Hackbridge Limited had embarked upon any venture in India in respect of production of power transformers. According to the learned trial judge, "Embarking upon necessarily implies a new venture". The learned trial judge has further said: "...The fact that the GEC India Ltd. was manufacturing power transformers ever since 1957 will not amount to embarking upon a new venture on the part of the plaintiff. Further, GEC India Limited is a separate entity and not in any way connected with the plaintiff..". Similarly in his opinion, there was no evidence to show that the plaintiff had transferred any technical know-how that was originally imparted to the defendant in favour of General Electric Company of India Limited. Before we go into the evidence, an appreciation of the law on the subject may be of help. There can be little doubt that each company shall have a separate legal personality and in that sense, a holding company shall be a separate entity while a subsidiary shall be separate a l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be looked upon as a legal entity as a general rule...but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons' ". Proceeding further to consider the issue, Pennington has referred to the case of Smith, Stone and Knight Ltd. v. Birmingham Corporation [1939] 4 All ER 116, 121, and quoted from the judgment of Atkinson J. observing: "In one such case, Atkinson J. attempted to catalogue the matters which the court will take into account in determining whether a subsidiary company is carrying on its business as an agent of its holding company. He said: 'I find six points which were deemed relevant. . . The first point was: were the profits treated as the profits of the company? when I say 'the company' I mean the parent company secondly, were the persons conducting the business appointed by the parent company? Thirdly, was the company the head and brain of the trading venture? Fourthly, did the company govern the adventure, decide what should be done and what capital should be embarked on the venture? Fifthly, did the company make the profits by its s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hodox approach that a company is a legal entity in itself and thus whether it is a subsidiary of another or not, is of no meaning or consequence for fixing the responsibility of the activities of one upon another. Thus, on the principle aforementioned, the fact that the subsidiary company has a distinct legal personality does not suffice to dispose of the possibility that its behaviour might be imputed to the parent company. Such may be the case in particular when the subsidiary, although being a distinct legal personality, does not determine its behaviour on the market in an autonomous manner but essentially carries out the instructions given to it by the parent company. When the subsidiary does not enjoy any real autonomy in the determination of its course of action on the market, it is possible to say that it has no personality of its own and that it has one and the same as the parent company (see ICI v. E. C. Commission [1972] 11 CMLR 557) and Ramaiya's Companies Act (10th edition, page 117). Based upon this, the courts in England have so pronounced in Harold Holdsworth and Co. ( Wakefield ) Ltd. v. Caddies [1955] 1 All ER 725 (HL) and DHN Food Distributors Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound as a fact that all the property of the New York company, except its land, had been transferred to an English company, and that the New York company had only been kept in being to hold the land, since aliens were not allowed to do so under New York law. All but three of the New York company's shares were held by the English company, and as the commissioners also found, if the business was technically that of the New York company, the latter was merely the agent of the English company. In the light of these findings, the Court of Appeal, despite the argument based on Salomon's case [1897] AC 22 (HL), held that the New York business was that of the English company which was liable for English income-tax accordingly. In another case, Firestone Tyre and Rubber Co. v. Lewellin [1957] 1 WLR 464; [1958] 33 ITR 741, an American company had an arrangement with its distributors in the continent of Europe whereby it obtained supplies from the English manufacturers, its wholly owned subsidiary. The English company credited the American with the price received after deducting the cost plus 5 per cent. It was conceded that the subsidiary was a separate legal entity and not a mere ema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e presumption that GEC India Limited is a separate entity and not in any way connected with the plaintiff and that GEC India Limited had been manufacturing power transformers under industrial licence from the Government of India ever since 1957 and since there is no evidence to show that the plaintiff had transferred any technical know-how that was originally imparted to the defendant to the GEC India Limited, the defendant has not established that the plaintiff company had embarked upon either directly or indirectly the scheme of manufacture of transformers in India. The learned trial judge has also said that there is absolutely no evidence to show that as a matter of fact the terms contained in clause .6( a ) of exhibit D-1 had been violated by the plaintiff company and that, "a mere possibility of violation cannot affect the collaboration agreement as contended by the defendant". His approach in this regard has evidently overlooked the fact that the activity of GEC India Limited after the original English company that is to say Hackbridge and Hewittic Electric Company Limited entered into a new constitution and became a subsidiary of GEC, U. K. of which GEC India Limited was/i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness activities, they were one and the same. Examination of this aspect could not have been confined to the issue of identity of the holding company, its subsidiary in India and the plaintiff company and their nature and character. Such examination would involve one more question and that would be whether the retention of separate legal identity of the plaintiff company and GEC India Limited by the holding company was its device to deal in transformers in India and use the technical know-how of the original English company or not. In case, the issues aforementioned on fuller examination, receive the answer that their separate legal identity was a cloak or a veil for the activities of GEC, U. K. in India with the technical know-how of the original English company that is to say Hackbridge and Hewittic Electric Company Limited, the plaint must fail. Our conclusion above on the question of interpretation of the terms and conditions in exhibit D-1, in view of the changed circumstances aforementioned, would lead us to remit the matter for a rehearing with a direction to frame a specific issue on the said question giving opportunity to the parties to lead evidence in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny, firm or person in India nor would directly or indirectly embark upon any scheme of manufacture of transformers in India. Similarly, the Indian company had bound itself to the condition that it would not directly or indirectly render any technical aid or assistance in relation to the manufacture of transformers in any part of the world nor would directly or indirectly undertake manufacture of the same in any part of the world. Thus it could be seen that violation of the constraint by either party would disentitle the other to renounce the contract. The instant case is one in which if facts are proved in the way the defendant company has alleged, the plaintiff rendered itself incapable of observing the restraint. A question thus will arise who was to perform the contract after the original English company changed its character, and if proved, as alleged by the defendant, merged itself into the holding company, that is to say GEC, U. K. There are some materials on the record in the instant case to show that it is the GEC, U. K. through its agent GEC India which wanted enforcement of the contract and asked the defendant to pay the royalty. We do not propose to deal with such eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he chairman and managing director indirectly refers to the transformation that has taken place in England. In exhibit P-4, a categorical admission is made that a sum of Rs. 3,67,273 is due to the plaintiff-company for the year ending December 31, 1970....". The maximum to which courts in India have gone to take into consideration the contents of such a document if it is properly admitted is indicated in the judgment of the Supreme Court in Purushothama Reddiar v. S. Perumal [1972] 1 SCJ 469; AIR 1972 SC 608, wherein a police report on an election meeting held by the returned candidate was admitted in an election petition without any objection. The Supreme Court has observed (at page 613): "Before leaving this case, it is necessary to refer to one of the contentions taken by Mr. Ramamurthi, learned counsel for the respondent. He contended that the police reports referred to earlier are inadmissible in evidence as the head constables who covered those meetings have not been examined in the case. Those reports were marked without any objection. Hence it is not open to the respondent now to object to their admissibility (see Bhagat Ram v. Khettu Ram, AIR 1929 PC 110). It ..... X X X X Extracts X X X X X X X X Extracts X X X X
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