A) ABSTRACT / HEADNOTE

This Supreme Court decision in Crompton Parkinson (Works) Private Ltd., Bombay v. Its Workmen and Others, [1959] Supp. 2 SCR 936, pivots around two critical industrial law questions: the deductibility of a technical service fee paid to a foreign parent company in determining bonus entitlement of workmen, and the misapplication of the Full Bench Bonus Formula by the Industrial Tribunal. The company, originally a wholly owned subsidiary of the UK-based Crompton Parkinson Ltd., entered into a Technical Aid Agreement in 1947, requiring payment of 5% of annual net sales as a service fee for technical and managerial inputs. The Tribunal, however, disallowed most of the fee in its bonus calculations and treated bonus as a prior charge before income tax and depreciation — a clear deviation from the prescribed bonus computation formula. The Supreme Court overturned these deviations, affirming the contractual legitimacy and commercial necessity of the full service fee payment, and stressed strict adherence to the Full Bench Formula in bonus disputes.

Keywords: Bonus, Industrial Tribunal, Technical Aid Agreement, Commercial Necessity, Full Bench Formula, Income Tax, Depreciation, Industrial Dispute, Service Fee, Workmen Compensation.

B) CASE DETAILS

i) Judgement Cause Title:
Crompton Parkinson (Works) Private Ltd., Bombay v. Its Workmen and Others

ii) Case Number:
Civil Appeals Nos. 756 & 757 of 1957

iii) Judgement Date:
6 May 1959

iv) Court:
Supreme Court of India

v) Quorum:
S.R. Das (C.J.), N.H. Bhagwati, S.K. Das, P.B. Gajendragadkar, K.N. Wanchoo (JJ.)

vi) Author:
S.R. Das, C.J.

vii) Citation:
[1959] Supp. 2 SCR 936

viii) Legal Provisions Involved:
Industrial Disputes Act, 1947; Indian Income-tax Act, 1922; Full Bench Bonus Formula

ix) Judgments overruled by the Case (if any):
None explicitly overruled.

x) Case is Related to which Law Subjects:
Labour and Industrial Law; Tax Law; Corporate Law

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The Crompton Parkinson (Works) Private Ltd. was originally a 100% subsidiary of the British Crompton Parkinson Ltd. It was engaged in manufacturing electrical equipment, utilizing patterns, designs, and trade names provided by its parent company. A 1947 agreement ensured long-term access to such technical assistance for a fee of 5% of net sales. The Union raised concerns during bonus determination for the year 1954-55, challenging this fee as excessive. The Industrial Tribunal upheld part of their contention, severely pruning the deductible amount, while also misapplying the Full Bench Bonus Formula by treating bonus as a prior charge. The Supreme Court reviewed both errors.

D) FACTS OF THE CASE

The appellant company, incorporated in India in 1937, entered into a Technical Aid Agreement in 1947 with its parent company for a 20-year period. This agreement, approved by the Government of India, obligated the appellant to pay 5% of its net annual sales as a service fee. In return, the parent company provided access to technical designs, trademarks, machinery expertise, bulk purchase benefits, and executive advisory. The agreement was executed just before independence and was accepted even by new shareholders like Greaves Cotton Ltd., who acquired 26% stake soon after. The fee was routinely approved by tax and financial authorities including the Reserve Bank of India.

In 1956, the company’s workmen demanded a substantial bonus, alleging high profits. During adjudication, the Tribunal disallowed 75% of the service fee while calculating the gross profits and treated bonus as a prior charge over tax and depreciation. The company challenged this decision before the Supreme Court.

E) LEGAL ISSUES RAISED

i) Whether the entire service fee paid under the Technical Aid Agreement should be allowed as business expenditure in computing surplus for bonus calculation?

ii) Whether the Tribunal erred in treating bonus as a prior charge before depreciation and income tax in violation of the Full Bench Bonus Formula?

F) PETITIONER/APPELLANT’S ARGUMENTS

i) The counsels for the appellant, led by N.A. Palkhivala and Solicitor General M.C. Setalvad, argued that the service fee constituted a binding contractual liability and commercial necessity. They relied on Section 10(2)(xv) of the Indian Income-tax Act, 1922, which permits deductions for expenses incurred wholly for business purposes. The service fee was regularly sanctioned by income-tax authorities and the Reserve Bank, reinforcing its legitimacy.

They submitted that the Tribunal lacked jurisdiction to question commercial decisions unless mala fides or sham transactions were shown, as upheld in Associated Cement Companies Ltd. v. Its Workmen, AIR 1959 SC 967. The company had no independent research division; thus, the fee substituted the cost of in-house facilities and offered ongoing innovation and branding benefits.

They also challenged the Tribunal’s computation of bonus contrary to the Full Bench Formula by treating bonus as a charge ahead of income-tax and depreciation. This formula, ratified in The Millowners’ Association, Bombay v. Rashtriya Mill Mazdoor Sangh, AIR 1950 Bom 188, demands uniform application for industrial peace.

G) RESPONDENT’S ARGUMENTS

i) The counsels for the respondent workmen, led by Rajani Patel and Janardan Sharma, contended that the 5% service fee was excessive and lacked economic justification. They alleged it was a device to suppress profits and avoid paying fair bonuses. They emphasized that the agreement was entered when the parent company had complete control over the Indian subsidiary and hence lacked arm’s length fairness.

They argued that the Tribunal rightly exercised its discretion to scrutinize the commercial necessity of such expenditure, especially when bonus rights of workmen were at stake. Additionally, they urged the Court to prioritize bonus as a moral and economic entitlement of workers over fiscal conservatism, urging redefinition of prior charges.

H) RELATED LEGAL PROVISIONS

i) Industrial Disputes Act, 1947, Section 10 and 12 — Governs reference and adjudication of industrial disputes.
ii) Indian Income-tax Act, 1922, Section 10(2)(xv) — Allows deduction of expenses incurred wholly and exclusively for business.
iii) Bonus Formula by Full Bench of Labour Appellate Tribunal (1950) — Determines surplus after deducting prior charges like depreciation, income tax, return on capital, and reserves.

I) JUDGEMENT

a. RATIO DECIDENDI

i) The Court held that the entire service fee was a legitimate business expense, not a sham or colourable transaction. Unless proven fraudulent or aimed at suppressing profits, such contractual liabilities must be honored. The Court emphasized judicial restraint in substituting the Tribunal’s views for business judgments of company directors.

The Court further ruled that bonus cannot be treated as a prior charge before depreciation and income-tax. The Tribunal must adhere to the Full Bench Formula to ensure uniformity and avoid arbitrariness, reaffirming Associated Cement Companies Ltd. v. Its Workmen, AIR 1959 SC 967.

b. OBITER DICTA 

i) The Court remarked that industrial peace depends on consistent application of settled bonus principles. Deviation by Tribunals from the Full Bench Formula invites chaos and distrust, and hence is impermissible.

c. GUIDELINES 

1. Service fees arising out of valid agreements must be fully allowed unless shown to be colourable or excessive with fraudulent intent.

2. Industrial Tribunals cannot re-characterize genuine contractual obligations absent cogent evidence of sham.

3. Tribunals must strictly follow the Full Bench Formula in bonus computation; any deviation undermines legal stability.

4. Bonus cannot be treated as a prior charge ahead of depreciation and taxation.

5. Approvals by statutory bodies like the Income-Tax Department and Reserve Bank are significant indicators of commercial legitimacy.

I) CONCLUSION & COMMENTS

The Supreme Court in this decision cemented key principles of industrial law and corporate governance. It upheld the sanctity of genuine commercial contracts and signaled judicial restraint in industrial adjudication. The judgment offers a strong precedent ensuring predictability in bonus computation and protecting companies from speculative disallowance of business expenses. It also reinforces worker entitlements within the established legal framework, discouraging populist or discretionary adjudication by Tribunals.

J) REFERENCES

a. Important Cases Referred

i) Associated Cement Companies Ltd. v. Its Workmen, AIR 1959 SC 967
ii) The Millowners’ Association, Bombay v. Rashtriya Mill Mazdoor Sangh, AIR 1950 Bom 188

b. Important Statutes Referred

i) Industrial Disputes Act, 1947
ii) Indian Income-tax Act, 1922, Section 10(2)(xv)