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Judgment
Mishra, J.—The respondent/plaintiffs suit based upon a collaboration agreement (exhibit B-1) and as a shareholder in the appellant company
has been decreed for a sum of Rs. 3,67,273 towards royalty and a sum of Rs. 53,478 towards dividend with future interest at 6% per annum till
date of payment with proportionate costs. In this appeal, the main questions to be decided are :
(1) Whether the collaboration agreement (exhibit D-1) came to an end consequent on the alleged violation of Clauses 6(a), (b) and (c) thereof or
not ?
(2) Whether the respondent continued to be a shareholder of the appellant company or not ?
The learned trial judge has held that the collaboration agreement did not come to an end as there was no violation of any of the conditions
therein and that the respondent 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 transformers to be made by the latter and to depute its engineers for investigation and
assistance to the erection, designs, layouts and in such other matters and in such other manner as would be necessary and expedient for the
establishment of the factory in India by the latter and further that the former would not directly or indirectly render any technical aid or technical
assistance in relation to the manufacture of transformers to any other manufacturing company, firm or person in India nor would directly or
indirectly embark on any scheme of manufacture of transformers in India. The agreement also stipulated that the former would render services by
deputing its planning and production engineer and its technical experts for the purpose of investigating location for the erection of the letter''s
factory, designing and drawing a layout, ordering and obtaining plant, machinery and material suitable for the manufacturing process of the latter
and selecting suitable technical personnel for it for such period as the matter would require by providing facilities in the training for management
executives of the latter at its works in England, by supplying designs of all types of ranges and capacities of transformers to be manufactured, by
providing detailed factory instructions for all purposes, technical advice on purchases, detailed lists and specifications for all materials, by testing
and giving advice on the substitution of raw materials available in India in the place of imported ones and by providing research and development
information and facilities, all forms of technical assistance and fresh access to engineers of the latter to its factory in England on the latter paying
technical service charges calculated at 5% on the total turnover of the latter. It was also mutually agreed and understood by both of them that the
agreement would be deemed to have been concluded and being operative as and from January 21, 1956, and would be in force for a period of ten
years subject to extensions for such agreed further period, A further agreement in writing was, arrived at on March 1, 1965, by way of an
addendum to the agreement dated March 19, 1958. This stipulated that the former would be eligible to participate in the capital of the latter to an
extent not exceeding 30% and would, from September 1, 1958, always be entitled to technical service charges of 3% of the value of the turnover
of the letter''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 agreement dated March 19, 1958, as modified by the addendum to the agreement
dated March 1, 1965, would be read with and treated as part and parcel of the collaboration agreement dated March 19, 1968, save and except
Clauses 2 and 3 of the addendum dated March 1, 1965, to the indenture of agreement dated March 19, 1968.
It is not in dispute that the former, that is to say, Hackbridge and Hewittic Electric Company, rendered technical know-how and received
royalties from the latter, that is to say, the defendant, in terms as above up to January 31, 1970. It so happened, however, that soon after the
execution of the agreement dated August 29, 1968, Hackbridge and Hewittic Electric Company Limited, which was the contracting party with the
defendant, became a subsidiary of General Electric Company of England, which had a subsidiary in India from before known as General Electric
Company of India Limited. According to the plaintiff, the General Electric Company of India Limited has been manufacturing transformers in India
long prior to the aforesaid agreements between the parties and in spite of the fact that the plaintiff and the General Electric Company of India
Limited were subsidiaries of the General Electric Company of United Kingdom, they were separate legal entities. According to the defendant,
Hackbridge and Hewittic Electric Company Limited occupied, at all material times, a fiduciary position in regard to the defendant and had
undertaken to make the technical know-how available for manufacture of transformers exclusively to it in India and not be concerned directly or
indirectly in the manufacture of transformers during the subsistence of the agreement by any other person in India, and as a consequence of
Hackbridge and Hewittic Electric Company Limited becoming a subsidiary of the General Electric Company group, all technical information and
know-how available to Hackbridge and Hewittic Electric Company Limited became equally available to the General Electric Company of India
Limited, who were competitors of the defendant. It is also stated in the written statement.
. . . Similarly all information and technical data available with the defendant whether its own or furnished by Hackbridge Hewittic Electric
Company Ltd., are available to General Electric Company and through them to General Electric Company India Ltd. Hence a fundamental term of
the contract 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
embarked on any scheme of manufacture of transformers in India.
The plaintiff company thus now known as GEC Distribution Transformers Limited (Hackbridge and Hewittic Electric Company) is the
successor of Hackbridge Hewittic Electric Company Limited and a subsidiary of General Electric Company of United Kindgom which has got a
subsidiary known as General Electric Company of India Limited in India. It is not in dispute that the General Electric Company of India Limited has
been dealing in the same business as the defendant company, which it appears, had been permitted by Hackbridge and Hewittic Electric Company
under the aforesaid agreements.
Hackbridge and Hewittic Electric Company Limited acquired with the sanction of the appropriate authorities 12,000 equity shares in the
defendant company and it is not in dispute that the defendant paid from time to time dividends in respect of the said shares after obtaining sanction
from the appropriate authorities and after determination of Income Tax payable thereon ; the last of such payments having been made on or before
November, 1970. According to the plaintiff, a sum of Rs. 72,000 remained outstanding from the defendant to the plaintiff as dividend on the said
shares from January 31, 1972, to January 31, 1974. The defendant''s case in this behalf is that out of 12,000 shares allotted to Hackbridge and
Hewittic Electric Company Limited, 1500 shares were allotted against the royalty payable under the agreement. Since the collaboration agreement
stood terminated by reason of Hackbridge and Hewittic Electric Company having become a subsidiary of General Electric Company, it ceased to
be entitled to retain the share and thus entitled to any dividend on such cessation.
Before entering into the controversy and the contentions, we may also state that while the plaintiff has claimed both dividends and royalty until
the agreement ended on December 31, 1970, the defendant has alleged that on Hackbridge and Hewittic Electric Company becoming a subsidiary
and adopting a new name as the subsidiary of General Electric Company, United Kingdom, on and from November 29, 1968, it became
disentitled to claim any royalty or dividend subsequent to that date. According to the defendant, it had no obligation to pay any royalty after
November 29, 1968, Yet, it made the payment of royalty to the plaintiff for the period from November 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-1), 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-1 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 constituted a violation of Clause 6(a) of exhibit D-1 or not, it will be
proper to read exhibits D-1, D-2 and D-3 together/Clause 6(a) of exhibit D-1 is to the effect that the English company, that is to say, Hackbridge
and Hewittic Electric Company Limited, would not directly or indirectly render technical assistance in relation to the manufacture of transformers to
any other manufacturing company, firm or person in India nor would directly or indirectly embark upon any scheme of manufacture of transformers
in India. There is no pleading or proof of any direct assistance rendered to any person or any company in India by the English company or that any
technical know-how of the English company was transmitted into anybody in India. Clause 6(a) which existed during the last five years of the
agreement (vide exhibit D-1), however, mentioned about directly or indirectly rendering any technical aid or technical assistance or embarking
upon any scheme of manufacture of transformer in India by the English company. Two consequences of Hackbridge and Hewittic Electric
Company Limited becoming a subsidiary of General Electric Company of United Kindgom, however, cannot be denied. They being :
(1) All technical know-how of Hackbridge and Hewittic Electric Company Limited became the know-how of the principal company that is to say
General Electric Company of United Kingdom.
(2) General Electric Company India Limited, which admittedly was/is a subsidiary of General Electric Company of United, Kingdom, was in the
same field of manufacturing transformers as the defendant company was/is and as a subsidiary of the former, had the advantage of technical know-
how of its principal English company. In other words, a strong possibility had existed of the technical know how of Hackbridge and Hewittic
Electric Company Limited becoming available to General Electric Company of India Limited.
The learned trial judge has said that in the absence of positive evidence, documentary or oral, to show that Hackbridge and Hewittic Electric
Company Limited, England or the GEC Hackbridge Limited has transferred any technical knowledge or know-how that was originally imparted by
the defendant to any other manufacturing company in India, it is not possible to conclude that Clause 6 of exhibit D-1 had been violated. In the
opinion of the learned trial judge, as per Clause 6 which stated that the plaintiff 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 Hack-bridge 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 legal entity. It
is, however, not unknown to law that a subsidiary, instead of acting on its own, is found acting as an agent of its holding company.
Pennington in his book on Company Law, fourth edition, page 50, has taken notice of such decided cases where the court disregarded the
legal personality of the company because it was formed or used to facilitate evasion of legal obligations. He has noticed :
There are only two decided cases where the court has disregarded the separate legal personality of a company because it was formed or used to
facilitate the evasion of legal obligations. In the first of these cases the defendant had been employed by the plaintiff and had entered into a valid
agreement not to solicit the plaintiff''s customers or to compete with it for a certain time after leaving its employment. After this had happened the
defendant formed a company which carried on a competing business, and caused the whole of its shares to be allotted to his wife and an employee
of the company, who were appointed to be its directors. It was held that since the defendant in fact controlled the company, its formation was a
mere ''cloak or sham'' to enable him to break his agreement with the plaintiff, and an injunction was issued against him and against the company he
had formed restraining them from soliciting the plaintiffs customers. In the second case, a vendor of land sought to evade specific performance of a
contract for sale, by conveying the land to a company which he ''bought'' for the purpose. The company had been formed by third parties, and the
vendor purchased the whole of its shares from them, had the shares registered in the name of himself and a nominee, and had himself and the
nominee appointed directors. It was held again that the acquisition of the company and the conveyance of the land to it was a mere ''cloak or
sham'' for the evasion of the contract of sale, and specific performance of the contract was therefore ordered against the vendor and the company.
The American courts have been far readier to disregard a company''s separate legal personality when it was clearly formed or acquired to facilitate
a breach of the general law or of a contractual obligation. Their attitude is summed up in the words of Sanborn J. in a passage which further
litigation in this country will probably show represents English law too :-
''. . . A corporation will 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, 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 skill and direction ? Sixthly, was the company in
effectual and constant control ?''
In that case Atkinson J. held that a holding company was in occupation of premises, and was consequently entitled to compensation for the
disturbance of its business on the compulsory purchase of the premises by a local authority, even though the business was carried on at the
premises in the name of a subsidiary. The subsidiary had been formed simply in order to separate formally the business carried on in its name from
another business carried on by the holding company. The freehold in the premises and assets of the business were never transferred by the holding
company to the subsidiary. All the subsidiary''s shares were held by or in trust for the holding company, and the subsidiary''s directors were all
directors of the holding company. Accounts in respect of the business carried on in the subsidiary''s name were kept as part of the holding
company''s accounts, and the subsidiary''s profits were dealt with as though they had been earned by the holding company. It is difficult to imagine
a more complete identification of a holding company with its subsidiary, and it would have been a clear denial of justice to refuse the holding
company compensation for loss suffered in respect of a business which was in substance its, own. But in a business sense the identification of the
holding company with its subsidiary was equally as close in ... yet the court there refused to treat the subsidiary as the holding company''s agent so
that the holding company might be deemed the owner of the subsidiary''s property"".
Indeed, what has come to stay as an organic theory, under which the doctrine has departed from the orthodox approach extending the rule of
piercing the veil to know the true character of a person, has in essence made it almost obligatory to make a closer examination as to whether the
principal and subsidiary like principal and agent exist for each other or as one mind thus as organs of each other. It is often said that a corporation
is an abstraction. It has no mind of its own any more than it has a body of its own. Its active and directing will must consequently be sought, in the
person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego
and centre of the personality of the corporation. The orthodox 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 and DHN Food Distributors Ltd. v. London Borough of Tower Hamlets
[1976] 3 All ER 462 and the modern tendency is, where there is identity and community of interest between companies in the group, especially
where they are related as holding company and wholly owned subsidiary or subsidiaries, to ignore their separate legal entity and look instead at the
economic entity of the whole group.
The Supreme Court has extended this doctrine in circumstances defying the presumption that a subsidiary being a distinct legal personality will
not be enjoined with the activities of the holding company or any other subsidiary of the group. In McDowell and Co. Ltd. Vs. Commercial Tax
Officer, , the Supreme Court has said (at page 161 of 154 ITR) :
It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the
situation created by the devices could be related to the existing legislation with the aid of ''emerging'' techniques of interpretation as was done in
W.T. Ramsay v. IRC [1981] 2 WLR 449 ; [1982] AC 300, IRC v. Burmah Oil Co. Ltd. [1982] STC 30 and Furniss v. Dawson [1984] 1 All
ER 530 ; 2 WLR 226 , to expose the devices for what they really are and to refuse to give judicial benediction.
and referred to the observations in Furniss v. Dawson [1984] 1 All ER 530 (at page 154 ITR157 :
The fact that the court accepted that each step in a transaction was a genuine step producing its intended legal result did not confine the court to
considering each step in isolation for the purpose of assessing the fiscal results.
In The Commissioner of Income Tax, Madras Vs. Sri Meenakshi Mills Ltd., Ors., , the Supreme Court has stated (at page 616) :
It is true that from the juristic point of view, the company is a legal personality entirely distinct from its members and the company is capable of
enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But in certain exceptional cases,
the court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. For example, the court has
power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation. For instance, in Apthorpe v. Peter
Sckoenhoffen Brewing Co. [1899] 4 TC 41 , the Income Tax Commissioners had found 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 , 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 emanation of the American parent and that it was selling its
own goods as principal and not its parent''s goods as agent. Nevertheless, these sales were a means whereby the American company carried on its
European business and it was held that the substance of the arrangement was that the American company traded in England through the agency of
its subsidiary. We, therefore, reject the argument of Mr. Venkataraman on this aspect of the case.
In yet another case reported in Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 59 Comp Cas 134,
after referring to the judgments in The Commissioner of Income Tax, Madras Vs. Sri Meenakshi Mills Ltd., Ors., and McDowell and Co. Ltd. Vs.
Commercial Tax Officer, , the Supreme Court has observed (at page 136) :
It is true that in law the Associated Rubber Industry Ltd. and Aril Holdings Ltd. were distinct legal entities having separate existence. But, in our
view that was not an end of the matter. It is the duty of the court, in every case where ingenuity is expended to avoid taxing and welfare
legislations, to get behind the smoke-screen and discover the true state of affairs: The court is not satisfied with form and leave well alone the
substance of a transaction.
On the strength of the authorities aforementioned, it requires to be seen before it is held that the General Electric Company of India Limited,
admittedly, a subsidiary of General Electric Company Limited, United Kingdom, and the General Electric Company Limited, United Kingdom, are
separate entities and, therefore, the manufacturing of transformers by General Electric Company of India Limited cannot be said to be the
manufacturing of transformers by the General Electric Company Limited, United Kingdom, and through the General Electric Company Limited,
United Kingdom, by the plaintiff, who is admittedly a subsidiary of the General Electric Company Limited, United Kingdom. If, however, after
piercing the veil and/or removing the smoke-screen, it is found that their activities stand apart and that the subsidiaries have not been functioning
with the directing mind and will"" of the holding company, it can be said that the General Electric Company of India Limited''s manufacturing
process cannot be regarded as the manufacturing process of the plaintiff.
The difficulty in the instant-case, however, is that the learned trial judge proceeding on the 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/is a subsidiary could/can be deemed to be the activity of the plaintiff, viz., GEC, U. K. and thus indirectly the activity of the
plaintiff. Learned counsel for the plaintiff-respondent has tried to read in the words ""embarked upon either directly or indirectly a scheme of
manufacture"" a new venture or a venture in a distance to which a new scheme of manufacture was provided with the technical know how which
had been imparted to the defendant by the original English Company that is to say Hackbridge and Hewittic Electric Company. If that meaning is
sought to be given, the word ""indirectly"" in Clause 6(a) of exhibit D-1 will become redundant. There may not be any evidence to show that the
technical know-how imparted to the defendant was passed on to GEC India Limited, but GEC, U. K. must necessarily be deemed to impart its
technical know-how to GEC India Limited as if GEC India Limited is found to have carried on the business of GEC, U. K. as its subsidiary and in
the circumstances that the original English company as a subsidiary of GEC, U. K. became its agent, which for all purposes, lost its independent
character in that, the GEC, U. K. for manufacturing transformers used the technical know-how that originally belonged to the plaintiff''s
predecessor. Had there been an issue framed on the question whether the original English company after becoming GEC Transformers Ltd., U. K.
and a subsidiary of GEC, U. K. lost its independent identity or not, and whether the manufacture of transformers by the GEC India Limited was
the business of GEC, U. K. or not since the former was/is an agent of the-latter, and an attempt had been made to remove the smoke-screen to
find out who is the brain behind their operation, and thereafter a conclusion drawn that it was still possible to hold that the plaintiff company had not
indirectly embarked upon a scheme of manufacture of transformers in India, the position would have been different. Since there has been no issue
framed on this question, and the learned trial judge proceeded on the premise that GEC India Limited is a separate entity and not in any way
connected with the plaintiff, a very important aspect of the case was ignored and the parties failed to bring on the record any evidence that could
show that GEC India Limited and GEC, U. K. and the plaintiff company although in name three different companies, for their business 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 law and then to decide the question afresh. Before, however, we do so, a few more issues
decided by the learned trial judge need attention. The learned trial judge has taken notice of the provisions in Section 64 of the Contract Act,
which provides for a rescission of contract and Section 39, which lays down that when a party to the contract has refused to perform or disabled
himself from performing his promise in its entirety, the promisee may put an end to the contract unless he has signified by words or conduct his
acquiescence in its continuance. The learned trial judge on the basis of such provisions of the Contract Act, has agreed with the contention of the
plaintiff that in the absence of rescission of the contract as provided in Section 64 or the defendant putting the contract to an end in terms of
Section 39 of the Act, it would be difficult to accept the defendant''s case that it had no obligation under Clause 6(a) of exhibit D-1. The learned
trial judge has further held that there are materials to show that there was positive acquiescence on the part of the defendant company relating to
the changes in the constitution of the plaintiff company and it had no idea of putting an end to the collaboration agreement. Section 39 of the
Contract Act says that the promisee may put an end to the contract in a case in which it is found that a party to the contract has refused or disabled
himself from performing his promise. It does not mean that if no steps are taken to bring the contract to an end, it would be presumed that the
promisee acquiesced in its continuance, A perusal of the terms of the contract in Clause 6 of exhibit D-1 reveals that the conditions therein are in
the nature of restraint of trade. In England, this is of public policy, while in India, except in Section 27 of the Contract Act, this is a sort of promise
but somewhere between two different principles of public policy, viz., that on the one hand a person entering into a contract of his own free will
should be bound by his own bond end on the other hand, he should have unfettered liberty to exercise his powers and capacities for his own and
the community''s benefit. The English company had bound itself to the condition that it would not directly or indirectly render any technical aid or.
technical assistance in relation to the manufacture of transformers to any other manufacturing company, 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 evidence mainly for the
reason that in case, the case is remitted to the learned trial judge''s court for a rehearing, it would be proper to leave determination of this issue also
by him. Section 40 of the Indian Contract Act reads :
If it appears from the nature of the case that it was the intention of the parties to any contract that any promise contained in it should be performed
by the promisor himself, such promise must be performed by the promisor. In other cases, the promisor or his representatives may employ a
competent person to perform it.
If this be the case, then the defendant could ask for the technical know-how only from the promisor that is to say Hackbridge and Hewittic
Electric Company Limited. How then GEC, U. K. or GEC India can come in asking performance of the defendant''s promise to Hackbridge and
Hewittic Electric Company Limited ? In all such cases, one question must be answered, viz., did the contracting party promise personal
performance or did he merely promise a result ?
The learned trial judge had referred to quite a few documents which are in the nature of correspondence to hold that they indicate positive
acquiescence on the part of the defendant company relating to the changes in the constitution of the plaintiff company and that the defendant had no
idea of putting an end to the collaboration agreement. It appears that almost every document such as exhibits P-4, P-5 and P-8 was marked
without objection. As a result of this, they have to be read in evidence. But merely because they have been so admitted in evidence, will their
contents be taken to have been proved in accordance with law and assuming that the contents also are deemed to have been proved, unless found
relevant under one or the other provision of the Evidence Act, can they be read to draw conclusions ? When put to such a test, for example,
exhibit P-4 is the letter addressed to Mr. Massey, Chief Accountant, GEC Transformers (Hackbridge) Ltd., Hersham Lodge, Walton-on-Thames,
Surrey, U. K. The learned trial judge has said that such a letter could not have been addressed without the knowledge of what had happened in
England and the chairman and managing director of the defendant company could not have addressed Mr. B. Massey in that capacity. Then the
learned trial judge has referred to paragraph 8 of the letter and said :
. . . Perhaps, in paragraph 8 of the letter the 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 P.C. Purushothama Reddiar Vs. S. Perumal, , 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 was urged that even if the reports in question are admissible, we cannot look into the contents of those documents. This contention is again
unacceptable. Once a document is properly admitted, the contents of that document are also admitted in evidence though those contents may not
be conclusive evidence.
It appears, however, in the instant case that all these documents were only formally admitted without there being any attempt to establish by
legal evidence that the contents are proved. Having so taken the documents in evidence, the contents have been read as conclusive proof. This
evidently is not permissible.
Learned counsel for the appellant has, however, reiterated the plea of limitation, which has been negatived by the learned trial judge and also
taken us through certain provisions of the special statute which show that a foreign company cannot collect its share of profits without clearance by
the Reserve Bank of India. Since we propose to remit this case for a rehearing, we observe that notwithstanding the finding recorded already by
the learned trial judge, in view of the further opportunity that the parties would get to adduce evidence and contest afresh, it shall be open to the
parties to traverse afresh into the question of limitation and the issue of dividends as well.
In view of the errors noticed by us above in the impugned judgment, we are of the opinion that this is a fit case for remand to the learned trial
judge for framing appropriate issues, giving opportunity to the parties to lead further evidence and for disposal in accordance with law.
In the result, this appeal is allowed. The judgment and decree of the learned trial judge in C. S. No. 265 of 1975 dated July 31, 1979, is set
aside. But as the case is remitted to the learned trial judge for rehearing in the light of the above observations there will be no order as to costs.