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TMI Blog1959 (5) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany was incorporated in India in the year 1937. The registered office of the company is at Bombay. The authorised capital of the company is ₹ 75 lacs divided into 75,000 ordinary shares of the value of ₹ 100 each. Out of the authorised capital, shares of the value of ₹ 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 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 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 willingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Labour Appellate Tribunal as far back as 1950 and it has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntire 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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