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PETITIONER:

CONTINENTAL CONSTRUCTION LTD.

Vs.

RESPONDENT:

COMMISSIONER OF INCOME-TAX, CENTRAL-1

DATE OF JUDGMENT15/01/1992

BENCH:

RANGNATHAN, S.

BENCH:

RANGNATHAN, S.

RAMASWAMI, V. (J) II

OJHA, N.D. (J)

CITATION:

1992 AIR 803 1992 SCR (1) 57

1992 SCC Supl. (2) 567 JT 1992 (1) 140

1992 SCALE (1)65

ACT:

Income-tax Act, 1961 : Ss. 9(1)(vi),(vii),119(1),80-0,80-HHB :

Assessee-Engineering and Construction Company-

Undertaking of foreign projects-Approval by Central Board of

Direct Taxes-payments in respect of consideration for supply

of technical information for use outside India and rendering

Technical Services to foreign Government Enterprise-Whether

`similar' to `royalty', `Commission or `free' etc.-

Deductions-Scope of Assessee-Whether entitled to relief

under S. 80-O for assessment years earlier to 1983-84 -

Whether eligible for deductions under s. 80-HHB for

assessment years 1983-84 onwards.

Assessee Company-Foreign contracts-Execution of-

Construction of dam and irrigation project, water supply

project etc.-Services involving specialised knowledge,

experience and skill in constructional operations-Whether ar

technical services.

"Technical Services"-Whether can be rendered through

medium of employees, skilled and unskilled.

Foreign projects of `composite' activities-Activities

falling partly under S. 80-HHB-Whether relief can be granted

under each sections separately.

Activities of foreign contract falling under S. 80-0 as

well as Section 80-HHB-Deductions-Whether can be computed

under s. 80-HHB only.

Central Board of Direct Taxes-Circulars No. 187 dated

23.12.1975 & 253 dated 30.4.1979. Letters dated 28.10.83 and

31.7.1985-Board's power to grant approval to foreign

contracts-Purpose and scope of: Guidelines for approval

nature of: Approval once granted-Whether to continue for

subsequent assessment years for the same agreement.

58

Words and phrases :

`business of execution of a foreign project', profits

derived', `royalty', `similar', `technical services'-Meaning

of.

HEADNOTE:

Section 80-O of the Income Tax Act, 1961 provides for a

deduction in computing the total income, in respect of

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royalty, commission, fees, or any similar payment received

by the assessee from the Government of a foreign State or a

foreign enterprise in consideration for the use outside

India of any patent, invention, model, design, secret

formula or process, or similar property right or information

concerning industrial, commercial or scientific knowledge,

experience or skill made available or provided or agreed to

be made available or provided to such Government or

enterprise by the assessee or in consideration of technical

services rendered or agreed to be rendered outside India to

such government or enterprise by the assessee under an

agreement approved by the Central Board of Direct Taxes in

this behalf.

The appellant-assessee, a civil construction company,

describing itself as Engineers, and contractors executed

projects overseas and in India. It undertook certain

contracts for construction, inter alia, of a dam and

irrigation project, a fibre-board factory and a huge water

supply project in foreign countries. One of its projects,

called the Karkh Project, which constituted a major portion

of its gross total income was with the Iraqi Government

through the Baghdad Water Supply Administration (BWSA). The

contract was for the design, manufacture, delivery, supply,

construction and installation for the first stage of Karkh

Water Supply Scheme. Since tenders had been called for from

consortia the assessee associated with the State Contracting

Company for Water and Sewerage Projects, Baghdad (SCC) and

formed a consortium and the said consortium entered into an

agreement on 17.12.1980 with the Iraqi Government. The

terms of the consortium between the assessee and SCC were

set out in another agreement dated 18.12.1980 dividing the

areas of responsibility (the packages) under the contract

between the two.

The assessee applied to the Central Board of Direct

Taxes (CBDT) for latter's approval to the contracts "for the

supply of Civil construction know-how to the Government of

Iraq" under Section 80-O of the Income-Tax Act, 1961. In

para 5(a)(ii) of the proforma of the application prescribed

for the purpose, the assessee indicated that "information

concerning industrial, commercial, or scientific knowledge

or skill" was being made available outside India; and in

Column 5(b) thereof it mentioned that technical services

would be rendered by the assessee to

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BWSA, Government of Iraq through its Indian Engineers,

Scientists, technicians and semi-skilled labours to be

inducted for that purpose.

Meanwhile, by the Finance Act, 1982, section 80-HHB was

inserted to the Act with effect from 1.4.1983, providing for

25% deduction from the profits and gains derived from the

business of execution of a foreign project undertaken by the

assessee with the government of a foreign State-enterprise.

Sub-section (5) of section 80-HHB provided that not

withstanding any provision in Chapter VIA of the Act, no

part of any consideration or of the income comprised in the

consideration payable to the assessee for execution of a

foreign project shall qualify for deduction for any

assessment year under any such other provision.

The CBDT accorded its approval on 28.10.1983. However,

with respect to Karkh and Diwaniyah projects, the approval

was granted for the assessment year 1982-83, stating that

for the subsequent period section 80-HHB, which came into

force w.e.f. 1.4.1983, would be operative.

The assessee claimed and obtained deduction under

section 80-0 in respect of some of the contracts in some

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assessment year between 1976-77 to 1980-81.

For the year 1983-84, the assessee returned a gross

total income of Rs. 72,67,45,938 but as against this it

claimed a deduction of Rs. 89,16,19,198 : of this, the

deduction claimed in respect of karkh and Diwaniyah projects

came to Rs. 77,84,29,446 and Rs. 6,36,85,436 respectively.

As Board's approval under section 80-0 in respect of these

two contracts was limited to the assessment year 1982-83,

the Inspecting Assistant Commissioner (IAC) declined to

grant the assessee any deduction under section 80-0 not only

in respect of these two projects but also for the others,

holding that section 80-HHB, and not section 80-0, applied

to the agreements. However, relief was not granted even

under section 80-HHB on the ground that conditions for

exemption specified thereunder were not fulfilled. The IAC

determined assessee's total income at Rs. 89,41,35,103

raising a tax demand of Rs. 66,07,72,982.

On appeal, the Commissioner of Income Tax (Appeals)

agreed with the IAC to the extent that the assesse was not

entitled to relief under section 80-0 because : (1) the

approval of the CBDT for three of the contracts did not

extend to assessment year 1983-84; (2) all the contracts

undertaken by the assessee were in the nature of `foreign

projects' within the meaning of section 80-HHB; and (3)

notwithstanding the

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approval of the CBDT section 80-HHB (5) ruled out the grant

of relief under section 80-O for any of the projects. He

however, set aside the assessment and directed the IAC to

reappraise assessee's claim for exemption under section 80-

HHB holding that the assessee, being under a bona-fide

belief all through that it was entitled to relief under

section 80-O, did not have a proper opportunity of putting

forth its claim for relief under section 80-HHB.

The assessee appealed to the Income Tax Appellate

Tribunal (ITAT). During the pendency of the appeal before

ITAT, the CBDT, by its letter dated 31.7.1985 modified the

original letter of approval dated 28.10.1983 and made the

approval operative even for years subsequent to assessment

year 1982-83.

The ITAT affirmed the order of the C.I.T. but, at the

request of the assessee, made a reference to the High Court.

The High Court answered the reference against the assessee

holding that the execution of the work by the assessee fell

under section 80-HHB and not under section 80-O; the

receipts of the assessee from the contracts did not fall

within the category of receipts for which deduction is

provided in section 80-O; that the Board's approval was a

qualified one which fully authorised and empowered the

officer to determine whether all the conditions of the

section were fulfilled as well as the amount, if any, which

could be deducted under section 80-O,

In the assessee's appeal to this Court, it was

contended by the Revenue that (1) the receipts of the

assessee under the contract were profits and gains of its

business of execution of foreign projects under sub-clauses

(i) and (ii) of clause (b) of s. 80-HHB and did not qualify

for deduction under section 80-O as the receipts did not

fall under any of the categories either of royalty,

commission, fees or `any similar payment', and the assessee

either made any information available nor rendered any

technical service to its foreign clients; (2) the contract

for Karkh Water Supply Project was in the nature of a

turnkey project as the client wanted the project to be

executed by the consortium complete in all respects and

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handed over to it, and the client was neither interested in

the details of the information possessed or the services

rendered by the contractor nor was the assessee as per

consortium agreement, concerned with any part of the

contract other than the "civil works"; (3) the assessee

neither rendered any technical service nor made such

information available either to the consortium or to the

foreign government, but the information possessed by it and

the services rendered in these respects by its engineers and

other employees were utilised by the

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assessee itself; (4) the contract being an integral

indivisible one, it was not permissible to the assessee to

dissect the consideration as attributable to its several

ingredients and apportion a part of it as being payment for

information made available or technical services rendered to

the foreign government; (5) even assuming that the whole or

atleast a part of the consideration payable to the assessee

falls under section 80-O, still as per sub-section (5)of

section 80-HHB the assessee would be eligible for deduction

under section 80-HHB only; and (6) even if the assessee's

case falls under section 80-O to will be entitled to relief

not on the entire profits derived by it but only to that

portion of the receipts as can be described as having the

character enumerated in section 80-O

On behalf of the assessee it was contended that since

the insertion of section 80-HHB has not resulted in the

deletion of section 80-O, the two sections should be read

harmoniously and given effect to together restricting the

operation of section 80-HHB to contracts entered into on or

after 1.4.1983 so as not to effect the contracts entered

into before that date and approved by the Board; that even

after the insertion of section 80-HHB there is room for

applicability of section 80-O in relation to a contract of

composite activities and section 80-HHB applies only to

construction-installation activity simpliciter; and that

once an approval under section 80-O is granted (on whatever

date it be) the approval should ensure for the entire period

of contract and connot be restricted to any particular

assessment year or years.

On the question whether the assessee is entitled to a

deduction under section 80-O or section 80-HHB or partly

under one or partly under the other or under neither of the

provisions.

Dismissing the assessee's appeal, this Court,

HELD : 1.1 The assessee was entitled to the relief

under section 80-O for assessment years earlier to 1983-84

and the approval granted by the Board under that section was

right and proper. However, for the assessment year 1983-84,

the assessee does not qualify for deduction on the terms of

that section as the contract receipts are fully covered by

the provisions of section 80-HHB and the deduction under

that section will prevail over the relief that might have

been otherwise available in view of the terms of section 80-

HHB(5). [p.116AB]

1.2 The assessee's claim for exemption under section

80-HHB deserves to be considered afresh after giving the

assessee an opportunity of being heard, as directed by the

CIT (Appeals) and confirmed by the ITAT and the High Court.

[p. 86BC]

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Continental Construction Ltd. v. Commissioner of Income

Tax. (1990) 185 ITR 230, affirmed.

2.1 Eligibility of an item to tax or deduction can

hardly be made to depend on the label given to it by the

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parties. An assessee cannot claim deduction under section

80-O in respect of certain receipts merely on the basis that

they are described as royalty, fee or commission in the

contract between the parties. By the same token, the

absence of a specific label cannot be destructive of the

right of an assessee to claim a deduction, if in fact, the

consideration for the receipts can be attributed to the

sources indicated in the section. [p. 100BC]

2.2 The receipts by way of royalty, fees, commissions

and `similar payments' envisaged by section 80-O may be

derived in the course of a business or profession and

constitute part of the profits and gains of such business or

profession. For instance, the fees received by a consulting

scientist, an architect or an engineer for providing

technical services to others will nevertheless be assessable

as part of the profits and gains from such profession. [p.

90DE]

2.3 The essence of the exemption under section 80-O

lies, not in consigning the receipt to one of the

pigeonholes or `royalty', `commission' or `fees' but in

examining whether the receipt is a payment in consideration

of one of the two situations envisaged in the section :

e.g., where the assessee is the owner of a patent or

invention, he may generally permit another to make use of

patent or invention, in consideration of a `royalty'

payment; or, where the assessee is in possession or

technical know-how, he may be prepared to allow another to

make use thereof in consideration of a `fee' to the

assessee; or he may stipulate a consideration in the form of

a commission based on the sales of the products the other

party is able to manufacture with the aid of such invention

or know-how, or an assessee may have achieved some

speciality and he may agree to lend his services to some

other person and stipulate a consideration therefor which

may be variously described. [p. 92E-G]

Gestetner Duplicators Pvt. Ltd. v. C.I.T., (1979) 117

I.T.R. 1 (S.C.); Cloth Traders P. Ltd. v. C.I.T., (1979) 118

ITR 243 & Distributors (Baroda) P. Ltd. v. Union, (1985) 155

ITR 120, referred to.

2.4 The word `similar' occurring in section 80-O

connotes that the payment made to the assessee need not be

in the nature of royalty, commission or fees only; it could

be any payment of like nature, made in

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consideration of the use or supply of such an asset,

knowledge or services in the same manner as royalty, fees or

consideration could be. Therefore, any type of payment

received by an assessee will qualify for deduction under the

section so long as it is a payment made in consideration of

one of the two types of transaction referred to in the

section. [p. 93AB]

2.5 In column 5 of the applications for approval under

section 80-O the assessee stated that the payments under the

contracts did not come under category (a) (i) but they did

fall under categories a (ii) and (b) enumerated therein.

The finding of the Tribunal in this regard is not one of

fact based on an admission; it proceeds on an incorrect

appreciation of the contents of assessee's application for

approval. [pp. 93G; 94AB]

3.1 The expression "technical services" has a very

broad connotation and it has been used in section 9(1) (vii)

of the Act also so widely as to comprehend professional

services. [p. 98CD]

3.2 Services involving specialised knowledge experience

and skill in the field of constructional operations are

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"technical services". The Board's guidelines specifically

say so. [p.98DE]

3.3 Any engineering contract involves technical

services more so, a contract of the nature and magnitude

involved in the instant case. The contract executed by the

assessee was no ordinary contract; the activities thereunder

involved technical and expertise. It was executed jointly

with an enterprise that was nothing but an instrumentally of

the foreign State. [p. 95B-F]

3.4 The assessee had made available technical

information to the foreign Government for use outside India

and had also rendered technical services to the foreign

Government of the nature outlined in section 80-O. [pp.98F;

100F]

4.1 The assessee is a company and any technical

services rendered by it can only be through the medium of

its employees, skilled and unskilled. [p. 97E]

4.2 In order to say that a person is rendering

technical services to another, it is not necessary that the

service should be rendered by the former personally and not

through the medium of others. [p.98EF]

5.1 Section 80-HHB provides for an exemption in respect

of profits from a "foreign project" undertaken outside India

in the course of

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business. The expressions "business of execution of a

foreign project" or work forming part of it or the `profits

derived' from the business, take in all aspects of a

business involving than activities referred to in subsection

(2) (b) of section 80-HHB together with all activities,

commitments and obligation ancillary and incidental thereto

and the profits flowing therefrom. The definition cannot be

restricted to the mere physical activity or putting up the

superstructure, machinery or plant but should be understood

to take within its fold all utilisation of technical

knowledge or rendering of technical services necessary to

bring about the construction, assembly and installation. [p.

102FG]

5.2 Section 80-HHB comes into force on 1.4.1983 and

should be applicable for assessment year 1983-84 onwards in

all cases. It does not contain even a reference to section

80-O and so its applicability cannot depend on the formation

of the contract subsequent to that date or to the date of

its approval under the latter section being after that date.

[p. 115A]

5.3 Section 80-HHB does not confer an additional

benefit; sub-section (5) in no uncertain terms states that

the benefit thereunder will take away the benefit, if any,

under any other provision. This has to be given effect to.

[p. 115F]

5.4 The assessee is entitled to deduction under section

80-O on the terms of that section even for 1983-84 and

subsequent years. It becomes disentitled to the relief not

because it does not fulfil the requirements of section 80-O

but only because section 80-HHB(5) stands in the way and

mandates that in cases to which both provisions apply,

relief under section 80-HHB will alone be available. [p.

114G]

5.5 The fact that the income in question may qualify

for deduction under section 80-HHB does not necessarily

exclude the applicability of the provisions of section 80-O.

The language of sub-section (5) of section 80-HHB which

gives precedence to a claim under section 80-HHB over one

under any other provision, itself necessarily postulates the

possibility of the whole or part of the consideration

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payable to an assessee for the execution of a foreign

project qualifying for deduction under any other provision

as well. [pp.86G; 87A]

5.6 The statutory interdict cannot be frustrated by the

terms of an approval of the Board under section 80-O. Such

approval, at its best, cannot overreach the limitations

imposed on the relief available under that section as a

consequence of section 80-HHB(5). [p.107BC]

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5.7 The legislature has clearly envisaged the

possibility of the same receipts qualifying for deduction

under section 80-HHB as well as under any other provision of

the Act and has specifically provided that, in such a case,

the terms of Section 80-HHB will prevail over the provisions

of such other provision. [p. 106FG]

5.8 One cannot decline to give effect to the

applicability of a statutory provision on the ground of

hardship or on the ground that it restricts the relief

which, but for the insertion of the section, would have been

available to the assessee, particularly when the section

itself envisages the possibility of the assessee being also

eligible for relief under another section and makes special

provision for that eventuality. [p. 115BC]

5.9 The assessee was able to get 100% relief in earlier

years only because the contract is of such nature that it

consists only of the rendering or technical services so that

the fields of the two exemptions completely overlap. On the

other hand, it is possible to conceive of foreign projects

wherein the construction and installation aspect and

information or technical services aspect are kept separate.

Equally, there can be cases falling under section 80-O which

do not at all relate to a "foreign project" as defined under

section 80-HHB. In such cases the two provisions will

continue to operate independently. [p.115F-H]

6.1 The Board was fully justified in considering the

receipts of the assessee as falling under section 80-O and

in granting approval to the contract. [p. 105BC]

6.2 Board's approval for the purpose of section 80-O

cannot be tentative or provisional or qualified. The Board

can neither limit the relief to certain assessment years

only nor can it restrict or enlarge the scope of the relief

that can be granted under the section. [p. 106AB]

6.3 Once a contract stands approved under section 80-O

in relation to the first assessment year, the approval

enures for the entire duration of the contract. Section 80-

O does not envisage an application for approval of the

contract every assessment year or the limitation of the

approval granted by the Board to any particular assessment

year. [p. 105DE]

C.I.T. v. Institute of Public Opinion, (1982) 134

I.T.R. 23 (Del.), referred to.

6.4 The Board's approval in respect of assessment years

earlier to

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1983-84 will enable the assessee to claim like relief under

section 80-O for all subsequent years too. But, after the

insertion of Section 80-HHB, in the matter of receipts

government both by Section 80-HHB and Section 80-O, the

former and not the latter will prevail. [p. 106BC]

6.5 The Board's decision of 31.7.1985 extending the

approval beyond 1982-83 cannot be given effect to in the

same way as its earlier approval letter of 28.10.1983 for

the reasons : (1) the jurisdiction of the Board is to grant

approval to a contract cannot only for the purpose of

section 80-O, it has no jurisdiction to pronounce on the

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availability or otherwise of an exemption under section 80-

HHB and the Board's opinion as to this, even if expressly

stated, cannot bind the Officer, (2) the relief under

section 80-HHB is not dependent on the approval of the Board

and is for a totally different type of transaction; (3) the

letter of 31.7.1985 is also a decision in an individual case

and cannot be treated as a general circular incorporating a

policy decision by the Board that in all cases of a

particular type government by both sections relief may be

given under section 80-O; (4) the Board in the 1985 letter

only stated, and rightly, that the approval under section

80-O would enure for 1982-83 onwards, for the approval of

the Board is to the contract and so long as the contract

subsists the relief should be granted on the terms of

section 80-O; and (5) the approval which otherwise qualifies

the assessee for relief is no doubt still effective but its

power to qualify for relief if taken away by the new

statutory provision. [pp.114DG; 115B]

6.6 The reasons to vest power of approval in the Board

are that it is considered better equipped, both on

considerations of times as well as the technical knowledge

needed to examine the ramifications of technical

international contracts and decide how far the relevant

contract and the receipts thereunder are of the nature

intended to be covered by the exemption clause and that the

applicant is sure to take steps to obtain necessary approval

at a state earlier to the implementation of the contract and

he can know well before-hand where he stands in the matter

of tax exemption. [p. 110C-F]

6.7 After the power of approval was vested in the

Board, elaborate guidelines, as provided, inter alia, in

Board's Circular NO. 187 dated 23.12.1975 and Circular No.

253 dated 30.4.79, were drawn up which clearly envisage a

detailed examination, by the Board, of the terms of the

contract submitted to it for scrutiny from all angles

relevant for a decision as to eligibility for exemption

under section 80-O. These guidelines have also since

attained statutory recognition as the proforma earlier

prescribed by the Board has virtually been incorporated in

Rule

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11E and Form prescribed thereunder. The proforma calls for

details of the analysis of the receipts under the contract.

[pp. 111AB; 113BC]

6.8 The Board has chalked out for itself, quite

legitimately and properly, a very detailed and dominant rule

as to the availability of exemptions under section 80-O.

The guidelines are of general nature, fully sanctioned by the

provisions of section 119(1) of the Act and, being

instructions enuring to the benefit of the assessee, cannot

be gone back upon by the Department Officers subordinate to

the Board, particularly in a case where no steps have been

taken - or even suggested as necessary to be taken - to

revoke the approval already accorded. [p.112 FG]

Navnitlal Javeri's case (1965) 56 I.T.R. 198(SC),

relied on.

6.9 While granting the approval under Section 80-O, the

Board has not only the jurisdiction but also the

responsibility of examining the agreement submitted for

approval from all angles relevant to the deduction provided

for under section 80-O and it is not competent to the

Department to question the maintainability of the claim for

deduction under section 80-O in respect of the aspects gone

into and decided upon by the Board. [p.113DE]

6.10 However, the assessing officer is not deprived of

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his functions. He has to satisfy himself that (i) the

amounts in respect of which the relief is claimed are

amounts arrived at in accordance with the formula, principle

or basis explained in the assessee's application and

approved by the Board; (ii) the deduction claimed in the

relevant assessment year relates to the items and is

referable to the basis on which application for exemption

was asked for and granted by the Board; (iii) the receipts

(before the 1975 amendment) were duly certified by an

accountant or that, thereafter, the amounts have been

received in or brought into India in convertible foreign

exchange within the specified period. The second of these

functions is particularly important as the approval for

exemption granted in principle has to be translated into

concrete figures for the purposes of each assessment.

Neither the introduction of the words "in accordance with

and subject to the provisions of this section" nor the

various "conditions" outlined in the letter of approval add

anything to or detract anything from the scope of the

approval. [p.113E-H]

7.1 For purposes of income tax, a principle of

apportionment has always been applied in different contexts.

Consolidated receipts and expenses have always been

considered apportionable in the contexts; (a) of the capital

and revenue constituents comprised in them; (b) portions

68

of expenditure attributable to business and non-business

purposes; (c) of places of accrual or arisal and (d) of

agricultural and non-agricultural elements in such receipts

or payments. [p.100DE]

Kanga & Palkhivala on the Law and Practice of Income-

Tax (Vol. I Eighth Edition), referred to.

7.2 Contracts of the type envisaged by section 80-O are

usually very complex ones and cover a multitude of

obligations and responsibilities. It is not always possible

or worthwhile for the parties to dissect the consideration

and apportion it to the various ingredients or elements

comprised in the contract. [p. 100CD]

7.3 If, a contract obliges the assessee to make

available information and render services to the foreign

Government of the nature outlined in section 80-O, it is the

duty of the Revenue and the right of the assessee to see

that the consideration paid under the contract legitimately

attributable to such information and services is apportioned

and the assessee given the benefit of the deduction

available under the section to the extent of such

consideration. [p.100FG]

JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeal NO. 3458 of

1990.

Appeal by certificate from the Judgment and Order dated

24.5.1990 of the Delhi High Court in I.T.R. No. 110 of 1987.

F.S. Nariman, Srinivasan, Bishamber Lal Khanna, Harsh

Salve, Subhash Sharma, D.N. Sawhney, Ms. Geetanjali Mohan

and Vineet Kumar for the Appellant.

S.C. Manchanda, Ms. A. Subhashini and B.B. Ahuja for

the Respondents.

The Judgment of the Court was delivered by

RANGANATHAN, J. This is an appeal preferred by M/S.

Continental Construction Ltd. (hereinafter called `the

assessee') from the judgment of the Delhi High Court in

I.T.R. 110 to 112 of 1987 (reported in 1990-185 I.T.R.178)

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answering, against the assessee, the following questions of

law referred to it under section 256 of the Income Tax Act,

1961 (`the Act') :

1. "Whether on the facts and in the circumstances

of the case the Tribunal is right in holding that

the income arising from the

69

activities pursuant to the seven agreement with

foreign governments /enterprises, etc. are

governed by the provisions of section 80-HHB of the

Income-Tax Act, 1961 and not of section 80-O of

that Act?

2. "Whether on the facts and in the circumstances

of the case, the Tribunal was right in holding that

notwithstanding the approvals granted by the Board

to the seven agreements for the purpose of section

80-O, for the purpose of assessment for assessment

year 1983-84, the income arising from these

contracts have to be brought under section 80-HHB

of the Income-Tax Act, 1961?"

3."Whether on the facts of the case, the Tribunal

is right in holding that the income from the entire

activities under the seven agreements cannot be

bifurcated and is wholly covered under section 80-

HHB of the Income Tax Act, 1961?"

4."Whether on the facts and in the circumstances of

the case, the Tribunal is right in holding that the

assessee company is not an `industrial company' as

defined in the Finance Act, 1982?"

The first two Income-Tax References were made to the

High Court at the instance of the assessee which was

dissatisfied with the decision of the Income Tax Appellate

Tribunal on these qestions : there were two references

because the above qestions arouse out of two cross-appeals

before the Tribunal - one by the assessee and the other by

the Department. This appeal by the assessee, CA. 3458 of

1990 is disposed by the present judgment.

The third reference (I.T.R. 112/87) was made by the

Tribunal at the instance of the Department on a totally

different question which related to the interpretation of

sections 40(c) and 40A(5) of the Act. The High Court

answered all the three references in favour of the assessee

and the aggrieved Commissioner of Income Tax (C.I.T.)_ has

preferred an appeal to this Court from that part of the

judgment being C.A. 3458-A of 1990. But that question has

no connection with the other four question set out earlier.

We have, therefore, delinked the appeal by the C.I.T. for

separate hearing. Also, of the four questions posed above

in the assessee's appeal, counsel for the appellant has

stated that he is not pressing question No. 4 before us. We,

therefore, do not express any opinion on it and merely

dismiss the appeal in so far as this question is concerned.

In the result, we confine this judgemnt to the assessee's

appeal and to the first three of the four questions set out

above.

The questions arise out of the assessee's assessment to

income tax for

70

the assessment year 1983-84 (the calendar year 1982 being

the relevant previous year). Section 80-O of the Act, under

which the assessee claimed deductions, provides for a

deduction, in computing the total income , in respect of

royalties etc. from certain foreign enterprises. This topic

was originally dealt with by section 85-C. Section 80-O was

substituted in its place w.e.f. April 1, 1968. The section

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has since undergone amendments from time to time. As on

1.4.83, the provision, in so far as is relevant for our

purposes, was in the following terms :

Section 80-O Deduction in respect of royalties etc.

from certain foreign enterprises.

"Where the gross total income of an assessee, being

an Indian company, includes any income by way of

royalty, commission, fees or any similar payment

received by the assessee from the Government of a

foreign State or a foreign enterprise in

consideration for the use outside India of any

patent, invention, model, design, secret formula or

process or similar property right, or information

concerning industrial, commercial or scientific

knowledge, experience or skill made available or

provided or agreed to be made available or provided

to such Government or enterprise by the assessee,

or in consideration of technical services rendered

or agreed to be rendered outside India to such

Government or enterprise by the assesse, under an

agreement approved by the Board in this behalf and

such income is received in convertible foreign

exchange in India, or having been received in

convertible foreign exchange outside India, or

having been converted into convertible foreign

exchange outside India, is brought into India, by

or on behalf of the assessee in accordance with any

law for the time being in force for regulating

payments and dealings in foreign exchange, there

shall be allowed, in accordance with and subject to

the provisions of this section, a deduction of the

whole of such income so received in, or brought

into India in computing the total income of the

assessee.

During the currency of this provision, the Finance Act,

1982 introduced a new section 80-HHB w.e.f. 1.4.1983. This

provision reads thus :

Section 80-HHB Deduction in respect of profits and

gains from projects outside India -

(1) Where the gross total income of an assessee

being an Indian company or a person (other than a

company) who is resident in India includes any

profits and gains derived from the business of

71

(a) the execution of a foreign project undertaken

by the assessee in pursuance of a contract entered

into by him, or

(b) the execution of any work undertaken by him an

forming part of a foreign project undertaken by any

other person in pursuance of a contract entered

into by such other person, with the Government of a

foreign State or any statutory or other public

authority or agency in a foreign State, or a

foreign enterprise, there shall, in accordance with

and subject to the provision of this section, be

allowed, in computing the total income of the

assessee, a deduction from such profits and gains

of an amount equal to twenty five per cent thereof

:

Provided that the consideration for the execution

of such project or, as the case may be, of such

work is payable in convertible foreign exchange.

(2) For the purposes of this section -

(a) "convertible foreign exchange" means foreign

exchange which is for the time being treated by the

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reserve bank of India as convertible foreign

exchange for the purposes of the Foreign Exchange

Regulation Act, 1973 (46 of 1973), and any rules

made thereunder :

(b) "foreign project" means a project for -

(i) the construction of any building, road, dam,

bridge or other structure outside India;

(ii) the assembly or installation of any machinery

or plant outside India;

(iii) the execution of such other work (of whatever

nature) as may be prescribed.

(3) The deduction under this section shall be

allowed only if the following conditions are

fulfilled, namely :-

(i) the assessee maintains separate accounts in

respect of the profits and gains derived from the

business of the execution of the foreign project,

or, as the case may be, of the work forming part

of the foreign project undertaken by him and,

72

where the assessee is a person other than an Indian

company or a co-operative society, such amounts

have been audited by an accountant as defined in

the Explanation below sub-section (2) of section

288 and the assessee furnishes, along with his

return or income, the report of such audit in the

prescribed form duly signed and verified by such

accountant :

(ii) an amount equal to twenty five per cent of the

profits and gains referred to in sub-section (1) is

debited to the profit and loss account of the

previous year in respect of which the deduction

under this section is to be allowed and credited to

a reserve account (to be called the "Foreign

Project Reserve Account") to be utilised by the

assessee during a period of five years next

following for the purposes of his business other

than for distribution by way of dividends or

profits;

(iii) an amount equal to twenty five per cent of

the profits and gains referred to in sub-section

(1) is brought by the assessee in convertible

foreign exchange into India, in accordance with the

provisions of the Foreign Exchange Regulation Act,

1973 (46 of 1973), and any rules made thereunder,

within a period of six months from the end of the

previous year referred to in clause (ii) or, where

the Chief Commissioner or Commissioner is satisfied

(for reasons to be recorded in writing) that the

assessee is, for reasons beyond his control, unable

to do so within the said period of six months,

within such further period as the Chief

Commissioner or Commissioner may allow in this

behalf :

Provided that where the amount credited by the

assessee to the Foreign Projects Reserve Account

in pursuance of clause (ii) or the amount brought

into India by the assessee in pursuance of clause

(iii) or each of the said amounts is less than

twenty five per cent of the profits and gains

referred to in sub-section (1), the deduction under

that sub-section shall be limited to the amount so

credited in pursuance of clause (ii) or the amount

so brought into India in pursuance of clause (iii)

whichever is less.

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(4) If at any time before the expiry of five years

from the end of the previous year in which the

deduction under sub-section (1) is allowed,

73

the assessee utilises the amount credited to the

Foreign Projects Reserve Account for distribution

by way of dividends or profits or for any other

purpose which is not a purpose of the business of

the assessee, the deduction originally allowed

under sub-section (1) shall be deemed to have been

wrongly allowed, and the Income-tax Officer may,

notwithstanding anything contained in this Act,

recompute the total income of the assessee for the

relevant previous year and make the necessary

amendment; and the provisions of section 154 shall,

so far as may be, apply thereto, the period of four

years specified in sub-section (7) of that section

being reckoned from the end of the previous year in

which the money was so utilised.

(5) Notwithstanding anything contained in any other

provision of this Chapter under the heading "C-

Deductions in respect of certain incomes", no part

of the consideration or of the income comprised in

the consideration payable to the assessee for the

execution of a foreign project referred to in

clause (a) of sub-section (1) or of any work

referred to in clause (b) of that sub-section shall

qualify for deduction for any assessment year under

any such other provision."

.lm

The three questions which are now for consideration

before us raise the issue whether the assessee is entitled

to a deduction under section 80-O or section 80-HHB or

partly under one and partly under the other or, indeed,

under neither of the provisions. We shall now proceed to

set out the factual background in which the issues arise.

The assessee is a civil construction company which

describes itself as Engineers and Contractors. It has

executed a large number of projects overseas and in India,

its projects include dams, irrigation and hydel projects,

water supply and sewerage plants, marine and harbour works,

airports etc. The assessee entered into eight contracts for

the construction, inter alia, of a dam and irrigation

project in Libya, a fibre-board factory at Abu Sukhair in

Iraq and the huge Karkh Water Supply Project n Baghdad which

was of the total values of 534 million dollars. For these

contracts the assessee obtained the approval of the Central

Board of Direct Taxes (Board' or `C.B.D.T.') in terms of

section 80-O. A broad outline of these projects can be

gathered from the following table :

74

-------------------------------------------------------------------------

S. Name of Date of Name of the Date of Period of

No. Project agreement Other contrac- approval approval as per

ing party by Board Board's letter

-------------------------------------------------------------------------

1.Abu Sukhair 6.9.75 State Organisation 11.8.76 For assessment

Project of Industrial Design years 1976-77

& Construction, Mini- to 1978-79

stry of Industry &

Minerals, Baghdad

(Iraq)

2.Wadi Ghan 8.8.77 Socialist people's Lib 31.8.78 For the assess-

Dam -yan Arab Jamahiriya, ment years 1978-

Secretariat of Dams and 79 and onwards

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Water Resources, Tripoli,

(Libya)

3.Ammara 15.3.78 State Contracting Co. 22.2.79 "Assessment years

Project for Water and Sewerage 1979-80 to

Projects, Ministry of 1982-83"

Municipalities, Republic

of Iraq

4.Nassir- 14.12.78 Ministry of Housing & 7.2.80 "Assessment years

iyah Construcion, Govt of 1980-81 and onw-

Project Iraq ards"

5.Sulaim- 10.10.79 Ministry of Housing & 31.5.80 "Assessment years

aniyah Construction, Govt of 1980-81 and onw-

Project Iraq ards".

6.West Bank 12.4.80 Baghadad Sewerage Board 23.7.80 "Assessment years

Project Construction, Govt of 1980-81 and onw-

Iraq ards"

7.Karkh 17.12.80 Amanat Al-Asima, 28.10.83 "For the assessem-

Project Baghdad Water Supply ent year 1982-83.

Administration, Govt. For the subseque-

of Iraq, Baghdad nt period your

attention is in-

vited to the pro-

ision of s. 80

HHB which are

operative w.e.f.

1.4.83"

8.Diwan- 10.1.81 Water & Sewerage 28.10.83 -do-

iyah Projects, Baghdad

Project

75

In the light of these approvals, the assessee claimed

and obtained deduction under section 80-O in respect of the

receipts from the first six of the contracts in some of the

assessment years between 1976-77 to 1980-81.

For the assessment year 1983-84, the assessee returned

a gross total income or Rs. 72,67,45,938 but, as against

this, it claimed a deduction of Rs. 89,16,19,198 in respect

of seven of the above contracts, the eight having been

completed much earlier. Of this, the deduction claimed in

respect of the Karkh and Diwaniyah projects came to Rs.

77,84,29,446 and Rs. 6,36,85,436 respectively. As pointed

out above, the letter of approval of the Board under section

80-O in respect of these two contracts dated 28.10.83 was

limited to the assessment year 1982-83. The Inspecting

Assistant Commissioner (I.A.C.), Sri Hari Narain, who

completed the assessment on 26.3.1984 declined to grant the

assessee any deduction under section 80-O not only in

respect of these two contracts but also in respect of the

other five. He was of opinion that it was section 80-HHB

that applied to these agreements and not section 80-O.

However, he declined to grant any relief to the assessee

even under section 80-HHB as the conditions for exemption

specified in that sub-section were not fulfilled. In the

result, he determined the assessee's total income at Rs.

89,41,35,103 as against the NIL income returned by the

assessee, thus raising a tax demand of Rs. 66,07,72,982.

On appeal, the Commissioner of Income-tax (Appeals)

gave the assessee partial relief. He agreed with the IAC

that the assessee was not entitled to relief under section

80-O because : (1) the approval of the CBDT for three of

the contracts did not extend to assessment year 1983-84; (2)

all the contracts undertaken by the assessee were in the

nature of `foreign projects' within the maning of section

80-HHB; and (3) even where the contracts had the approval of

the CBDT the non-obstante provisions of section 80-HHB (5)

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ruled out the grant of relief under section 80-O for any of

the projects. He however, felt that as the assessee had

been under a bonafide belief all through that it was

entitled to relief under section 80-O, it had not had a

proper opportunity of putting forth its claim for relief

under section 80 HHB. He, therefore, set aside the

assessment to enable both sides to marshall their evidence

and to enable the IAC to reappraise the assessee's claim for

exemption under that section. The order of the CIT was

dated 26.3.85.

The Income-tax Appellate Tribunal (ITAT) agreed with

the CIT. Its conclusion, set out succinctly in para 48 of

its order was thus :

"To conclude this point, we would hold that the

income and consideration received by the assessee

in the execution of all the seven contracts in

general and the Karkh work in particular fell

76

under the provisions of section 80-HHB as the

contracts were for execution of foreign projects.

We further hold that in view of the provision of

section 80-HHB (5) the claim of the assessee under

section 80-O cannot be considered inspite of the

approval orders of the Board. This ground in the

assessee's appeal has, therefore, to be rejected

and the conclusion arrived at by the learned

Commissioner of Income-Tax (Appeals) is upheld,"

It may be mentioned here that, before the appeal was

heard by the ITAT, the CBDT on a representation made by the

assessee and after some enquiry and correspondence, issued

on 31.7.85 a letter modifying the original letter of

approval of 28.10.83 in respect of the Karkh and Diwaniyah

contracts. By this letter, the CBDT directed the

substitution of the following words in place of the word

quoted in the last column of the table set out earlier:

"Assessment year 1982-83 and onwards".

In other words, the CBDT lifted its earlier limitation

of approval only to assessment year 1982-83 and made it

operative even for subsequent assessment years. There has

been some criticism, on behalf of the assessee, of the

manner in which the Department has sought to get over the

effect of modification letter attributing it to some

misunderstanding or confusion. One of the assessee's

principal grievances is that the ITAT has erred in accepting

this explanation, treating the approval of 28.10.1983 as a

qualified one and ignoring the letter of 31.7.85. We shall

discuss this aspect later.

The ITAT, at the request of the assessee, referred the

four questions of law which we have set out earlier for the

decision of the High Court. The High Court came to the

conclusion that the receipts of the assessee from the

contracts did not fall within the category of receipts for

which deduction is provided in section 80-O. It was of the

view that the Board's approval was a qualified one which

fully authorised and empowered the officer to determine

whether all the conditions of the section are fullfilled as

well as the amount, if any, which could be deducted under

section 80-O. The Court also came to the conclusion that

the execution of the work by the assessee, in the present

case, fall under section 80 HHB and not section 80-O. In

the result, questions 1 to 3 were answered against the

assessee and in favour of the Revenue. The assessee, has,

therefore, preferred these appeals.

As pointed out earlier, the assessee's claim for

deduction relates to seven contracts and depends on the

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terms and conditions of each one of them. However, the

Karkh Water Supply scheme contracts has been taken as the

77

model or specimen for purposes of discussion both because

the terms and conditions of all the contracts are more or

less similar and also because the deduction claimed in

respect of this contract constitutes an overwhelmingly high

percentage of the assessee's total claim. We shall also,

therefore, proceed to discuss the issues raised in the light

of the terms and conditions of this contract and the

approval given therefor. Before doing so, we would like to

point out that for the assessment year 1983-84 with which we

are concerned, a discussion of the relative spheres of

section 80-HHB and section 80-O would be called for and the

assessee may get full or partial relief under either or

neither of the sections for the said assessment year; but

if, in the process, we come to the conclusion that the

provisions of section 80-O can have no application to the

contracts in question, such conclusion is bound to have

repercussion also on the deductions claimed by, and allowed

to, the assessee under that section in the earlier years in

respect of some of the contracts.

The Baghdad Water Supply Administration (BWSA) invited

tenders from 'experienced engineering consortia" to submit

tenders "for the design, manufacture, delivery, supply,

construction and installation, complete under a single

contract of the works required" for the first stage of the

Karkh Water Supply Scheme. The works comprised 'a River

intake and pumping station on the west bank of the River

Tigris about 30 kms. north of Baghdad; raw water pumping

through twin 1800 mm diameter pumping mains to a nearby

treatment works; treatment comprising essentially pre-

settlement, clarification and chemical coagulation, rapid

gravity sand filtration and disinfection with chlorine:

treated water storage; treated water pumping through twin

2200 mm diameter transmission pipelines to the city area,

and distribution and storage within the west bank part of

the city area and within the municipalities of Abu Ghraib

and Taji". Five volumes of documents containing

instructions, conditions, general specifications and

requirements, specifications for plant and civil works,

schedules, and supplementary information and a sixth volume

containing 99 drawings were issued along with the tender

documents. Since tenders had been called for from

Consortia, the assessee joined hands with the State

Contracting Company for Water and Sewerage Projects, Baghdad

(SCC) to form a consortium and was able to bag the contract

and an agreement was entered into on 17.12.80 between the

Iraqi Government and the Consortium. The terms of the

consortium between the assessee and SCC were set down in an

agreement dated 18.12.80 which divided the areas of

responsibility (the packages) under the contract between the

two. Broadly speaking, the SCC was made responsible for the

Reservoir works while the assessee was made responsible for

the civil works. The total value of the contract was

325,750,000 Iraq Dinars (ID) of which 65% was

78

payable in U.S. dollars, pound sterling or Swiss francs.

The value of the package of the assessee was ID 152,956,253

(75% of which was payable in the said foreign exchange).

On 3rd March, 1981, the assessee applied to the CBDT

for according approval to the contract "for the supply of

civil construction know-how to the Government of Iraq" under

section 80-O of the Act. A proforma prescribed by the

Revenue was filled up and enclosed to the application. Para

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5 to 11 of this proforma run as follows :

5. Please state whether the income is

received in consideration for-

(a) the use outside India of

(i) any patent, invention model,

design , secret, formula or

process, or similar property

right : No

(ii) information concerning in-

dustrial, commercial or sci-

entific knowledge, experi-

ence, or skill made available Yes

(b) technical services rendered Techincal services will be

or agreed to be rendered outside rendered by us to Baghadad

India (Please also state the arr- Water Supply Administration,

angements availabe with the appli- Government of Iraq in accord-

cant for rendering such technical ance with the said agreement

services and the mode of tendering dated 17.12.80. The technical

such services). know-how and services will be

rendered by us through our qu-

alified experienced and skilled

Engineers, Scientists and Tech-

nicians, for that purpose, a

strength or about 1,800 Indian

Engineers, Tecnicians and semi-

skilled labours will be inducted.

6.Does the Agreement provide for The agreement also provides for

supply of technical know-how or the supply use of goods as per

rendering of any services other details given below :

than those covered by section

80-0(e.g. use of trade marks

or supply of goods) if so Machinery, plant, Equipment, Ve-

please specify them and also hicles cement, steel-bars, Sand

the amount of consideration Aggregate, Bitumen, Fencing-fabri

c,

receivable/received in resp- Shuttering material, Steel pipes,

ect of them. Patent items, projection cladding

ceiling, Joining, Steel Pipes wit

h

joining and aductile iron pipes e

tc.

The cost of

79

supply of these tiems will be det

er-

mined at the close of each year a

s

the work progresses. The total va

lue

of the contract is ID 152,956,253

.

After taking out the net cos

t of

machinery & equipment and other e

mbed-

ded items, as mentioned above (in

whi-

ch no profit elements is involved

),

from the total value of the Contr

act

the remaining amount will be the

value of technical know-how and s

erv-

ices to be rendered by us under t

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his

contract, It is this amount for w

hich

we are seeking exemption u/s 80-O

.

7.If technical know-how falls Not applicable.

under 5(a)(i) above, please

indicate.

(a) how the applicant acquired Not applicable.

it or what arrangements he

has made for acquiring it

(b) What are the applicant's own Not applicable.

rights in respect thereof

(c) Whether its provision to the

other party to the agreement

involves :-

(i) transfer of all or any rights

of the applicant in respect of Not applicable.

it, if so, please specify the

nature and extent of the right

transferred and the manner of

its transfer :

(ii)the imparting of any information

concerning its working or use; if

so, please specify the information Not applicable.

imparted and the manner of its imp-

arting;

(iii)its use by the other person to the

agreement if so, please specify the

nature and manner of the use. Not applicable.

8.If the technical know-how falls under

(a)(ii) above, please specify

80

(a) the arrangements available with the we have on our rolls qual

ifed

applicant for obtaining and impart- Engineers and Technicians

who

ing it have already acquired the

re-

quisite scientific knowle

dge,

experience and skill for

giv-

ing such technical know-h

ow

and it is they, who will

be

imparting the same to the

client by executing the w

orks

at the site in Iraq.

(b) the manner of imparting it The Engineers and Technici

ans

will be working for about

5

years at the site of const

r-

uction to impart the techn

ical

know-how and services on b

e-

half of our Company.

9. Has the applicant made any agree-

ment or arrangement with any other

person in India or abroad for obta-

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ining the technical know-how etc., Not applicable.

to be provided under this agreement

or for rendering technical services?

If so please give the follwing infor-

mation :

(i) the name and address of such Not applicable.

other person;

(ii) details of the agreement or ar-

rangement together with a cer- Not applicable.

tified copy of the written

agreement, if any.

(iii)the nature, and extent of appli-

cant's relationship association Not applicable.

with such other person.

10. Please state the nature of the income Income out of imparting c

ivil

in respect of which deducation is claimed, construction know-how and

viz.., services for the connstru

c-

tion of work of Karkh Wat

er

Supply Scheme, Baghdad.

Royalty

Commissin

Fees

81

Any similar payment

11. Please indicate the portion/amount

(alongwith its computation) which is Please see our reply under

eligible for deduction under section S. No. 6 of this form.

80-O of the Act.

On 9.7.81, the C.B.D.T. called upon the assessee to

clarify four aspects of its application : (i) the details or

the materials and equipment to be supplied by the assessee

under the contract and the quantum of profit thereon; (ii)

whether any engineers, scientists and technicians were

recruited in India and there was any fee attributable to

such services ; (iii) whether any tests on materials and

workmanship were carried out in India and there was any fee

attributable to such tests; and (iv) the break-up of the fee

relating to the supply of information/know-how and rendering

of the technical services. The assessee answered in the

following terms on 4.8.1981 :

"As desired, the information/ clarification is

furnished below :-

(i) Our contract is for civil construction and

know-how. The use of materials and equipment

is part of these services. There is no

separate supply of materials and equipment.

As such the question of any separate quantum of

profit on the same does not arise. As the

material is purchased locally in Iraq, there

is no possibility or making any profit on its

consumption in execution of the works.

(ii) The qualified experienced skilled engineers,

scientists and technicians are our employees

and sent to Iraq for executing the work under

contract. We do not avail of the service of

any agency for the purpose. As such there are

no recruitment expenses involved. Consequently

no fee can be attributed on the transfer of

our workers to foreign country.

(iii)No tests will ever be taken in India because

all works will be executed in Iraq. The

question of attributing any fees to such test

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in India, therefore, does not arise. These

tests are part of the process undertaken to

render technical know-how

(Vi) The profits which will accrue to our Company

will be the gross contracts receipts less

expenses incurred in supplying technical know-

how and execution of the works, It is

82

estimated that this will be about 25% of the

contract value. The exact amount may vary and

will be known only after the works have been

completed."

There was further correspondence, discussion and

hearing including a detailed letter of the assessee dated

24.12.1981 and clarificatory letters dated 15.2.1982,

17.3.1982, 9.10.1982, some of the contents of which may have

to be referred to later. Eventually, the C.B.D.T. accorded

its approval to the agreements, as already maintained, on

28.10.1983. The letter of approval has to be extracted

here. It runs :

"I am directed to refer to your application

3.3.1981 received with your letter No. 601/IT/80-O

dated 3.3.1981 and to convey the approval of the

Central Board of Direct Taxes to the agreement

entered into between you and M/S. Amanat Al-Asima

Baghdad Water Supply Administration, Government of

Iraq, Baghdad, on 17.12.1980 for the purpose of

section 80-O of the Income-Tax Act, 1961, for the

assessment years 1982-83. For the subsequent

period your attention is invited to the provision

of Sec. 80-HHB which are operative w.e.f. 1.4.1983.

2. The income allowable as a deduction for the

assessment year 1981-82 and onwards would be the

income computed after accounting for expenses

incurred in earning such income i.e. net income.

3. The actual deduction to be allowed will,

however, be such portion of the income which has

been received in convertible foreign exchange in

India, or having been received in convertible

foreign exchange outside india or having been

converted into convertible foreign exchange outside

India is brought into India in accordance with the

law for the time being in force for regulating

payment and dealings in foreign exchange.

4. The grant of deduction from the total Income

will be subject to your fulfilling the other

conditions laid down in the Act in this behalf.

The amount eligible for deduction will be

determined by Income-tax Officer at the time of

assessment.

5. This approval is subject to any amendment in the

provisions of the Income-tax Act, 1961, from time

to time.

83

6. I am further to add that the approval accorded

by this letter is only for the purpose of section

80-O of the Income-tax Act, 1961, and should not be

construed to convey the approval of the Central

Government or Central Board of Direct Taxes or any

other statutory authority under the Government for

any other purposes."

It may be mentioned that even while the assessee's

applications for approval to the Kharkh & Diwaniya contracts

were pending, the Finance Act, 1982 had amended the Act to

insert section 80-HHB with effect from 1.4.1983.

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This amendment compelled the assessee to send a letter

to the C.B.D.T. on 9.10.82 explaining that this new

provision would not stand in the way of approval being

accorded to its contracts under section 80-O. But despite

the pleas in this letter the C.B.D.T., in para 1 of its

letter of approval of 28.10.1983 restricted the approval to

assessment year 1982-83. The assessee, therefore, wrote

again in detail on 2.12.1983, urging the Board that the

reference to section 80-HHB in the letter of approval was

uncalled for and that the approval granted should be made

valid for the entire duration of the contract. The material

on record shows that this letter was the subject of careful

consideration by the C.B.D.T. which finally issued a

clarification in the following terms on 31.7.1985, more than

a year and a half later :

"With reference to your representation dated

2.12.83 on the above subject, I am directed to say

that for the words and figures "assessment years

1982-83. For the subsequent period your attention

is invited to the provision of section 80-HHB which

are operative w.e.f. 1.4.83," appearing at the end

of para 1 of the Board's letter F. NO. 473/46/81-

FTD dated 28.10.83, the following words and figures

may please be substituted :

"assessment years 1982-83 and onwards"

It appears that though the above intimation to the

assessee was cryptic, the CBDT had decided to extend the

period of operativeness of its approval under section 80-O

only after consulting the Attorney General of India (A.G.).

The CBDT had circulated the opinion of the A.G. in this case

along with the statement of case put up to him for opinion

to all the officers of the Departments. On 14.8.1985, the

CIT Central-I), New Delhi wrote a letter to the concerned

member of the CBDT which makes interesting reading. We do

not wish to extract, or comment on, the contents of this

letter here. Suffice

84

it to say that the writer of the letter was of opinion that

the CBDT should not have reviewed the decision taken by it

on 28.10.83. He stated that, on the strength of the CBDT's

letter dated 31.7.85, the assessee was claiming 100%

exemption and requested that "clear instructions" should be

issued early 'on the complications" pointed out in the

letter; Thereupon, a letter. dated 24.9.1985 was addressed

by the Deputy Secretary (FTD), Government of India, (who, at

the time, happened to be Sri Hari Narain, the IAC who had

completed the assessment on the assessee) to the

C.I.T.(Central), New Delhi to the following effect :

"Please refer to your D.O. No. 77, dated 14th

August, 1985 addressed to Member I.T.(J) on the

above subject.

2. Letter F. No. 473/644/83-FTD dated 31 st July,

1985 was only in recognition of the position that

the approval u/s 80-O is for the agreement as such

and the mention of any time limit therein is

redundant, except for the starting year.

3. As would be noticed from all the approval

letters themselves, Board's approval to the

agreements is subject to the other conditions of

the Act being satisfied. These have to be examined

carefully by the assessing officers while making

the assessments. If the income does not satisfy

the requirements of section 80-O, it cannot be said

that the mere approval would automatically entitle

the assessee to relief u/s 80-O. The quantum, if

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any, of the income which would be entitled to

relief under section 80-O has necessarily to be

determined by them on the facts of each case.

4. It would also be noticed from all the approval

letters that they are subject to amendments enacted

in the Income-tax Act, 1961, from time to time.

Therefore, notwithstanding the approval under

section 80-O or the words "Assessment year 82-83 and

onwards", if the project or work falls within the

definition given in section 80-HHB(1), the same

would be hit by the provision of section 80-HHB(5).

5. Your apprehension that the approval has been

modified or that it ignores the provisions of

Section 80-HHB is, therefore, without any basis.

The position in respect of letter F. No.

473/643/83-FTD dated 31.7.1985 for the agreement

dated 10.1.81 in respect of the same assessee is

also identical."

85

Normally, correspondence of this type would be hardly

relevant for deciding question regarding the construction or

a section in the statute. But, apparently, the Department,

before the Tribunal, relief upon the letter of 14.9.85 as

superseding the effect of the approval granted on 31.7.85.

The Tribunal, in its appellate order, referred to these

letters. It observed :

"It is that in respect of Karkh and Diwaniyah

Projects confusion which has arisen in this case

could have been avoided. In the first approval

letter the Board confined the approval to the

assessment year 1982-83 and referred to section 80-

HHB for the subsequent years. On representation by

the assessee the matter was considered for almost

two years and meanwhile the assessment was also

made and the first appellate authority also decided

the matter. It was only in July, 1985 that the

Board rectified their earlier order removing the

reference to section 80-HHB for the assessment

years 1983-84 onwards. The second order was likely

to give an impression that the rectification has

been made in view of the representation made by the

assessee about the scope and application of section

80-HHB. This impression was not only created in

the minds of the assessee but also led to some

misunderstanding in the mind of the Commissioner.

When he sought a clarification the Board stated

that inspite of approval under section 80-O if the

income does not satisfy the requirements of that

section, the assessee would not be entitled to such

deduction. In this letter it was also stated that

the mention of the assessment years in the approval

orders was redundant. We have referred to this

clarification given by the Board only because the

the learned counsel for the revenue has adopted the

arguments given in this letter as his own. There

is no doubt that the first qualifies approval

followed by the modification of that approval

coupled with this thinking on the part of the Board

as given to the Commissioner does indicate that the

position was not clear in the mind of the

authorities who approved or modified the approval

of the contracts. Be that as it may, we have to

consider the matter from the angle of law as it

stands and we cannot decide on the basis of some

misunderstanding or confusions which might have

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been created at some stage."

Learned counsel for the assessee vehemently criticised

the issue of the letter of 'clarification" by the officer

who had completed the assessment in the case. He urged that

the Tribunal should not have taken into account the contents

of this letter at all and, in any event, could not have

drawn an

86

inference, because of this letter, that the position

was not clear in the mind of the CBDT. He also pointed out

that he had sought for a reference of a "question of law" Of

the High Court on this aspect which the Tribunal (in his

submission, unjustifiably) declined on the ground that the

letter had been considered only because it was adopted as an

argument by counsel for the Revenue. One aspect which may

need consideration by us is the question how for the issue

of the letter of 14.9.85 affects the assessee's claim for

exemption under section 80-O in the present case.

There does not seem to be much doubt that the

provisions of S. 80-HHB apply to the contracts in the

present case and that, at the worst, the assessee's claim

for exemption under section 80-HHB deserves to be considered

afresh after giving the assessee an opportunity of being

hard, as directed by the CIT (Appeals) and confirmed by

C.I.T. and the High Court (see 1990 : 185 ITR 230). It is

possible that, with section 80-HHB and 80-O, as they stand

today, it might not make very much difference to the

assessee whether the relief is granted under the one section

or the other, as they both permit a deduction from the gross

total income, of fifty per cent, of the profits in the one

case and of the qualifying receipts in the other. However,

till 1.4.1987, the relief under section 80-HHB was 25% of

the profits whereas the deduction under section 80-O was

100% of the qualifying receipts upto assessment year 1984-

85. Thereafter the latter was reduced to 50% only w.e.f.

1.6.1987. This has made it very material to decide whether

the assessee is entitled to the deduction under section 80-O

and the question that really arises for our consideration is

whether the relief under that section is available to the

assessee. We shall first discuss this question only the

language of section 80-O without taking into account the

insertion of section 80-HHB or the complication introduced

the case by the approvals of the CBDT referred to earlier.

The Department's case, urged with great emphasis and

vehemence by Sri B.B. Ahuja, is that a careful reading of

section 80-O will show that the deduction provided by that

section is very limited in nature and not available to the

assessee. He submits, on the other hand, that this case is

clearly one falling under the terms of section 80-HHB being

a case of execution of a "foreign project" as defined in

that section. We shall, however, consider the two aspects

of the argument separately for the fact that the income in

question may qualify for deduction under section 80-HHB does

not necessarily exclude the applicability of the provisions

of section 80-O. It is sufficient to point out that the

language of sub-section (5) of section 80-HHB which gives

precedence to a claim under section 80-HHB over one under

any other provision, itself necessarily postulates the

possibility of the whole or part of

87

the consideration payable to an assessee for the execution

of a foreign project qualifying for deduction under section

80-HHB falling for consideration also under any other

provision as well.

Sri Ahuja points out that Part C of Ch. VI-A of the Act

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Permits deductions, from the gross total income of an

assessee, of various "species" of income, which are

carefully defined, in section 80H onwards. Sections 80H to

80-JJA, 80QQ,80RR and 80S permit a deduction in respect of

the "profits and gains" or "profits" derived from various

types of business, undertakings or professions, sections 80K

to 80N and 80Q deal with income by way of "dividends" and

"interest" falling under certain categories; section 80-P,

which grants a deduction to cooperative societies,

classifies the deductible income into "profits and gains"

from activities in the nature of business on the one hand

and income falling under other heads such as interest,

dividends, income from house property etc. on the other;

80QQA refers to income derived from a profession but only in

the form of consideration for assignment or grant of

copyright interests or royalties or copyright fees; section

80R and 80RRA allow a deduction in respect of "remuneration"

:and section 80T relates to "capital gains". In other

words, the scheme of this Part of Ch. VI-A is to correlate

the deductions to specific heads of income. Section 80-HHB

talks of the profits and gains derived from a business-and

the assessee here is seeking such a deduction - but section

80-O provides for a deduction only in respect of an

assessee's receipts from a foreign Government or enterprise

by way of "royalty, commission, fees or any similar

payment." Not only this; the section also requires that the

assessee must have derived the receipts falling under the

above categories in one of two ways -

(i) in consideration for the use outside India of any

patent, invention, model, design, secret formula

or process or similar property, right or

information concerning industrial commercial or

scientific knowledge, experience or skill made

available or provided or agreed to be made

available or provided to such Government or

enterprise by the assessee; or

(ii) in consideration of technical services

rendered or agreed to be rendered outside

India to such Government or enterprise by

the assessee.

According to learned counsel, the receipts of the

present, assessee do not fulfill these requirements.

In support of the contention that the claim for the

assessee, on the facts,

88

is only for a deduction from the profits and gains of a

business carried on by it and that such a claim is not

referable to section 80-O at all. Sri Ahuja first draws our

attention to the treatment accorded to the receipts by the

assessee in its books of account as well as the claim made

in the applications filed before the CBDT. The balance

sheet of the company for the calendar year 1982 accounts for

"contract receipts" of Rs. 2,332,490,079 and "other receipt"

of Rs. 47,000,122. Deducting a total expenditure of Rs.

1,717,751,494 classified under three headings Direct

Contract Expenses, management expenses and other

expenditure, a "net profit" of Rs.661,738,707 is arrived at.

While the details of the "direct contract expenses" set out

in Schedule I include an item of "royalties" paid and the

details of "other expenditure" set out in Schedule K include

an item of payment of "technical consultation fees", there

is no similar item under contract receipts or other

receipts. The assessee's balance sheet is thus one of a

company carrying on business as Engineers and Contractors

and reflects only the profits derived from such business.

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It is then pointed out that the assessee has not been able

to identify the basis of the deduction claimed by it in the

application made to the C.B.D.T. In para 6 read with para

11 of the application, the assessee explains that it is

claiming exemption under section 80-O of the contract on the

the total value of the contract less the net cost of

machinery, equipment and other items (on which no profit

element is involved (and, obviously, though not specifically

mentioned, all other expenses incurred on the contract). In

other words, the exemption claimed is on the contract

receipts less the contract expenses : that is to say, on the

entire profits from the contract. Paras (i) and (iv) of the

letter of the assessee to the CBDT dated 4.8.81 also leave

no doubt regarding this. Para 10 of the proforma requires

the assessee to give details of the receipts under the four

headings mentioned in section 80-O but the assessee side-

steps the query with a vague answer. It is, therefore,

clear, says Sri Ahuja, that this is a case in which

deduction is claimed of the "profits and gains" of a

"foreign project", a claim surely falling under section 80-

HHB and totally outside the terms of section 80-O.

Sri Ahuja, in this context, relied on the observations

of this Court in Cloth Traders P. Ltd. v. C.I.T., (1979) 118

ITR 243. There the question which this Court had to

consider was whether the deduction provided for in section

80-M of the Act was of the gross amount of the inter-

corporate dividend received by an assessee or the net amount

thereof arrived at after deducting the expenses incurred for

the earning of such income. The Court held that the

deduction was available for the gross amount of the

dividend. This question does not concern us but in the

course of the discussion, the Court made the following

observations on which Sri Ahuja seeks to rely :

89

"Section 80M, sub-section (1), opens with the words

"where the gross total income of an assessee

......includes any income by way of dividends from

a domestic company" and proceeds to say that in

such a case there shall be allowed in computing the

total income of the assessee a deduction "from such

income by way of dividends" of an amount equal to

the whole of such income or 60 per cent of such

income, as the case may be, depending on the nature

of the domestic company from which the income by

way of dividends is received. Now, the words "such

income by way of dividends" must be referable to

the income by way of dividends from a domestic

company which is included in the gross total

income. The whole of such income, that is, income

by way of dividends from a domestic company or 60

per cent of such income, as the case may be, would

be deductible from the gross total income for

arriving at the total income of the assessee. The

words "where the gross total income of an

assessee.....includes any income by way of

dividends from a domestic company" are intended

only to provide that a particular category of

income, namely, income by way of dividends from a

domestic company, should form a component part of

the gross total income. These words merely

prescribe a condition for the applicability of the

section, namely, that the gross total income must

include the category of income described by the

words "income by way of dividends from a domestic

company". If the gross total income includes this

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particular category of income, whatever be the

quantum of such income included, the condition

would be satisfied and the assessee would be

eligible for deduction of the whole or 60 per cent

of "such income." Now, if the words "where the

gross total income of an assessee ....... includes

any income by way of dividends from a domestic

company" in the opening part of the section refer

only to the inclusion of the category of the

income denoted by the words "income by way of

dividends from a domestic company" and not to the

quantum of the income so included, the words "such

income" cannot have reference to the quantum of the

income included, that is, income by way of

dividends from a domestic company. The words "such

income" as a matter of plain grammar must be

substituted by the words "income by way of

dividends from a domestic company" in order to

arrive at a proper construction of the section and

if that is done, it would be obvious that the

deduction is to be in respect of the whole or 60

per cent of the "income by way of

90

dividends from a domestic company" which can only

mean the full amount of dividends received from a

domestic company."

Sri Ahuja is, of course, fully conscious that the

decision in Cloth Traders (supra) has since been overruled

by a larger bench of the Court in Distributors (Baroda) P.

Ltd. v. Union, (1985) 155 ITR 120 but he points out - and

we agree he is right in this - that the latter decision does

not affect the weight of the above observations. We

entirely agree with Sri Ahuja is that the deduction under

section 80-O is in respect of the categories of income

specifically referred to therein and this is an aspect to

which we shall advert later. But we are unable to agree

with him that there is an antithesis between the categories

of income so specified and the expression 'profits and

gains". It is no doubt true that, wherever the statute

refers to the "profits and gains" of a business, it has in

mind the income chargeable under the Act under that head -

head "D" specified in section 14 of the Act - but the other

categories of income referred to in the various sections are

not correlated to the headwise classification of section 14.

It is well known that items of interest, dividends and other

items of remuneration are not always referable to any

particular head. They may be assessable as "business"

income or income from other sources. In particular, the

receipts by way of royalty, fee, commissions and similar

payments may be derived in the course of a business or

profession and constitute part of the profits and gains of

such business or profession. For instance, a consulting

scientist, architect or engineer might provide technical

services to others and receive what is styled as "fees"

from them; the receipts will nevertheless be assessable as

part of the profits and gains from his profession. The mere

fact, therefore, that the assessee is carrying on business

as engineers and contractors and the receipts in question

flow to it in the course of its business as such will not

necessarily preclude relief under section 80-O if they can

be brought within the categories of receipts mentioned in

the section. The material question, therefore, is not

whether the receipts form part of the business profits of

the assessee but whether the entire receipts, or any part of

them, can be brought within the qualifying words in section

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80-O. To this basic question we shall now turn.

Sri Ahuja's point on this aspect is two fold. He first

points out that the contract does not stipulate for any

payment labelled under one of these categories. The

expressions royalty, commission and fees have well-known

connotations and the word "any similar payment", he says,

has to be construed ejusdem generis and the receipts under

the contract answer none of these descriptions. We do not

think that the mere fact that the contract does not

specifically assign the nomenclature mentioned in the

section to the payments made to the assessee can be

conclusive of the assessee's claim to

91

exemption. That apart, of the four expressions referred to

in the section there are referred to elsewhere in the Act.

While `royalty' is generally a consideration paid to the

owner of a right or asset - such as copyright patent right,

mining right etc. - for the privilege of using it for one's

own purposes, the other expressions are more comprehensive.

The expressions `royalty' and `technical fees' have been

defined in section 9. Though the definitions are only for

the purposes of clauses (vi) and (vii) of section 9(1)

respectively, they may be set out here. The definitions

read thus :

"S.9(1)(vi) - income by way of royalty payable by -

Explanation 2 : For the purposes of this clause,

"royalty" means consideration (including any

lumpsum consideration but excluding any

consideration which would be the income of the

recipient chargeable under the head "Capital

gains") for -

(i) the transfer of all or any rights (including

the granting of a licence) in respect of a

patent, invention, model, design, secret

formula or process or trade mark or similar

property;

(ii) the imparting of any information concerning

the working of, or the use of, a patent,

invention, model, design, secret, formula or

process or trade mark or similar property;

(iii) the use of any patent, invention, model

design, secret formula or process or trade

mark or similar property;

(iv) the imparting of any information concerning

technical, industrial, commercial or

scientific knowledge, experience or skill;

(v) the transfer of all or any rights (including

the granting of a licence) in respect of any

copyright, literary, artistic or scientific

work including films or video tapes for use

in connection with television or tapes for

use in connection with radio broadcasting,

but not including consideration for the sale,

distribution or exhibition of

cinematographic films; or

92

(vi) the rendering of any services in connection

with the activities referred to in sub-

clauses (i) to (v).

Section 9 (1) (vii) - income by way of fees for

technical services payable by -

xxx xxxx xxx

Explanation (2) : For the purposes of this clause,

"fees for technical services" means any

consideration (including any lump sum

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consideration) for the rendering of any managerial,

technical or consultancy services (including the

provision of services of technical or other

personnel) but does not include consideration for

any construction, assembly, mining or like project

undertaken by the recipient or consideration which

would be income of the recipient chargeable under

the head `Salaries'.

The word `commission' has a somewhat different

connotation and is used differently in different contexts.

It has been explained by this Court in Gestetner Duplicators

Pvt. Ltd. v. C.I.T., (1979) 117 I.T.R. 1 (S.C.) in the

context of the definition of `salary'. Black's Law

dictionary assigns very wide meaning to these expressions :

See, for example, p. 614, 1369 and 1463 of the Sixth Edition

(1991). But we do not think that it is necessary to attempt

any precise definition of each of these expressions or to

attempt to discern any common thread running through them so

as to restrict the meaning of the words `any similar

payment'. In our opinion, the true clue to the

interpretation of this expression lies not in the preceding

three words but really in the second part of the section.

The essence of the exemption lies, not in consigning the

receipt to one of these pigeonholes but in examining whether

the receipt is a payment in consideration of one of the two

situations envisaged in the section. To illustrate : where

the assessee is the owner of a patent or invention, he may

generally permit another to make use of the patent or the

invention in consideration of a `royalty' payment. Or,

again, where the assessee is in possession of technical

know-how, he may be prepared to allow another to make use

thereof in consideration of a `fee' to the assessee. He

may also stipulate a consideration in the form of a

commission based on the sales of the products the other

party is able to manufacture with the aid of such invention

or know-how. Again, an assessee may have achieved some

speciality and he may agree to lend his services to some

other person and stipulate a consideration therefore which

may be variously described. The nature of the asset, right,

information or services which can be brought under this

provision may be varied and the considera-

93

tion stipulated for allowing another to avail of the

assess's asset, knowledge or services can likewise assume

multi-farious forms. The word `similar' connotes that the

payment made to the assessee need not be in the nature of

royalty, commission or fees only; it could be any payment of

like nature i.e. made in consideration of the use or supply

of such an asset, knowledge or services in the same manner

as royalty, fees or consideration could be. We are,

therefore, of the view that any type of payment received by

an assessee will qualify for deduction under the section so

long only as it is a payment made in consideration of one of

the two types of transactions referred to in the section.

Sri Ahuja then draws attention to the finding of the

Tribunal in para 41 of its order :

"Admittedly in the present case, there is no claim

under the first part of the section and the claim

was that the assessee company was receiving

payments in consideration of technical services

rendered outside India."

He submits that this is a finding of fact based on an

admission which has not been specifically challenged by the

assessee in its application for reference to the High Court

and that it is not open to the assessee to go behind this

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position at this stage. It seems to us that there has been

some misconception on the part of the Tribunal. There are

actually two limbs to the first part of the relevant clause

of the section which are clearly brought out in clolumn 5 of

the application for approval made to the Board. Col. 5(a)

refers to consideration received for the use outside India

(i) of any patent, invention, model, design, secret formula

or process or similar property right and (ii) of information

concerning industrial, commercial or scientific knowledge,

experience or skill made available by the assessee. The

second part of the clause is dealt with in Col. 5(b) which

refers to consideration for technical services rendered

outside India to the foreign Government or enterprise. If,

in this context, we peruse the applications for approval

made by the assessee to the Board, it will be seen that the

assessee had no doubt clearly stated that the payments

received by it did not come under category (a) (i) above

referred to. It was, however, claimed that they did fall

under (a) (ii) as well as category (b). In the application,

this was further elaborated. The second limb of the first

clause of the section (a) (ii) was, it was claimed,

attracted in the manner set out in Col. 8 and the second

part of the section was explained to be attracted set out

against sub-para (v) of Col. 5. The Tribunal, in the

paragraph referred to by Sri Ahuja refers only to the first

limb of the first part of the section - which we have

referred to as "(a) (i)" - and has

94

overlooked the presence of the second limb referred to by us

as "(a) (ii)". Sri Ahuja may not, therefore, be quite

correct in asserting that the assessee had restricted its

claim before the Tribunal only to the ground of "technical

services" rendered by the assessee outside India to its

client. The assessee's claim rested both on the second limb

of the first part as well as on the second part of the

relevant clause. The finding of the Tribunal in this regard

is not one of fact based on an admission as suggested by Sri

Ahuja. The finding proceeds on an incorrect appreciation of

the contents of the assessee's application for approval.

There is no basis to put forward a contention that, though

in the application to the Board, the assessee had claimed

relief on two grounds, it had given up a part of the claim

before the Tribunal. The word "Admittedly" used by the

Tribunal in the passage relied on by Sri Ahuja does not

appear to refer to any admission over and above that

contained in regard to column 5 (a)(i) of the application

for approval. The question is whether the claim has been

substantiated under either of these headings.

Sri Ahuja vehemently argues it has not been. He

submits that the assessee has neither made any information

available to the foreign client nor has it rendered any

technical services to the said client. He contends that the

contract in favour of the two members of the consortium was

in the nature of a turnkey project. This meant that the

client was not interested in the details of the information

possessed or the services rendered by the contractor: all it

wanted was that the Water Supply Project, as per the

detailed specifications, designs and drawings furnished by

the BWSA should be executed by the consortium, complete in

all respects, and handed over to it. Sri Ahuja points out

by analysing the provisions of the consortium agreement that

the assessee was not concerned with any part of the contract

other than the "civil works". He says that all the

"Reservoir works" which involved the putting up of the

reservoir structures, the trunk pipelines and the

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mechanical and electrical plant for the project was the

responsibility of the SCC and that the assessee had nothing

to do but put up a few buildings and ancillary pipelines.

The assessee was nothing more than an engineering contractor

and, in constructing pump-houses or laying sanitary

fittings, he imparted no information and rendered no

technical services. Such information as it possessed in

these respects was utilised by itself and such technical

services, as were rendered by its engineers and other

employees were rendered to it and not to either its partner

in the consortium or to the foreign Government.

We do not desire to encumber this judgment with a

detailed discussion of the large number of clauses of the

contract (tender) document and the consortium agreement.

But it seems to us that while Sri Ahuja seems to be right in

saying that the assessee was concerned only with the civil

works

95

section of the project, he has over simplified the part

played by the assessee in the execution of the contract. It

is not necessary to quarrel with Sri Ahuja's description of

the contract as a "turn-key project" which, indeed, was the

description given to it by the assessee itself - in para 19

of the application to the Board and in para 2 of the letter

dated 17.3.82 - or his consequent suggestion that the

foreign government was not interested in. the minute details

or working of the contract but only in the final outcome.

Still the fact is that the contract executed by the assessee

is no ordinary contract. It may be that a good part of the

contract was executed by the SCC. But this cannot render

the assessee's part insignificant. If the State enterprise

itself was a fully expert body capable of completing the

entire project on its own, there would have been no need to

call for tenders from experienced consortia. The part of

the contract entrusted to the assessee was therefore no less

significant. The value of the assessee's package in the

contract was about ID 153 million as against the total value

of the contract estimated at ID 326 millions - more than 40

per cent. The job of the assessee involved survey, soil

investigation design, detailed drawings and construction of

all civil works and pipelines (other than trunk pipelines).

Even these activities involve technical knowledge and

expertise. It cannot therefore, be doubted that the

assessee, under the contract, had to make use, outside

India, of its industrial, commercial and scientific

knowledge, experience and skill. Sri Ahuja makes the point

that, even if this be so, the assessee made available no

information regarding such expertise to the foreign

Government. There is equally no doubt that, in executing

the contract the assessee has rendered technical services.

Any engineering contract involves technical services; more

so, a contract of the nature and magnitude involved in the

present case. Here again, Sri Ahuja says, no technical

services were rendered by the assessee to the foreign

Government; the assessee only made use of the technical

knowledge, experience and skill of its own employees to

perform a task undertaken by it.

We think the approach of Sri Ahuja on this issue is

narrow and unrealistic. It would be far from accurate to

say that no information of a technical nature was imparted

or made available to the foreign Government. It cannot be

forgotten that the contract was executed jointly with an

enterprise that was nothing but an instrumentality of the

foreign state. The contract had to be executed in close

coordination with the SCC. Every single step in the

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contract was done under the supervision of a Consortium

Board and a Project Management Board on which both the

partners of the consortium were represented. It would be

unpragmatic to suggest that this close association was not

aimed at enabling the foreign state to collect and acquire

such technical knowledge and know-how from the assessee as

could be reasonably acquired in the process of execution of

the project. In our view, there is force

96

in the assessee's contention that it would not be possible

to execute the contract without imparting to the foreign

state and enterprise information of the category specified

in the section. The findings of the Tribunal in this

regard, which have not been challenged by the Department,

and are contained in para 42 of the order, are as follows :

"42. We have already extracted some parts of the

contract and the terms of the agreement and from

these extracts it appears that the contract was for

execution of Karkh Water Supply Scheme contract

Stage 1. As already stated above "works" has been

given a defined meaning for interpreting the

contract as it means all the works to be executed

in accordance with the provision of the contract

including the design, manufacture, delivery,

supply, installation, construction, setting to

work, commissioning , site testing, operations and

maintenance as the case may be. Form of agreement

also makes it clear that the consideration of the

payment to be made by the employer to the

contractor was for executing, completing and

maintaining works in conformity in all respect with

the provisions of the contract. The general

specification of the work to be done gives the

details about head-works, making of the

transmission pipelines, reservoir works, trunk-

pipelines etc. The tender document itself had

given some geological hydrological and other

information for assisting the contractor at the

time of tendering but this information was not

guaranteed by the employer and the contractor had

to make use of and interprete the same on his own

responsibilities. The contract comprised all

surveys and site investigation and also detailed

design, manufacture, supply etc. of all the works

including mechanical plant and services, pipelines

and civil and building works from the point of

abstraction at the river Tigris intake to the

connections of the proposed primary feeder systems

to the existing distribution networks in the

various supply areas. The surveys, planning,

designing and actual construction as well as

installations were part of the whole contract and

the assessee company had to perform all these

functions and after completion of the work, had to

commission it and had to operate the works for a

period of three months after the issue of

Certificate of completion. The various surveys and

design reports are contemplated as a part of the

contract. The contract also contemplated training

the employers personnel for the operation and

maintenance of the whole of the work and had also

to conduct studies on water treatment process to

optimise operations.

97

Similar objective observations regarding technical

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competence, expertise and experience are also found in para

44 of the order which is extracted a little later. In the

context of these factors and findings, it is difficult to

say that no information of the type contemplated in col.

5(a)(ii) of the application form had been made available by

the assessee to the foreign Government for use outside

India. What exactly would be the proportion of the total

consideration that could reasonably be attributed to such

imparting of information would, however, be a separate

question and may have to be reasonably estimate.

But, even assuming that there could be some difference

of opinion on the above issue, there can be no doubt at all

that, under the contract, technical services were rendered

by the assessee to the foreign Government. In our opinion,

the attempt of Sri Ahuja to differentiate technical services

rendered to the assessee by its employees and technicians

from technical services rendered by the assessee to a

foreign constituent and urge that the latter alone can

qualify for relief under section 80-O on the ground that

the project in question was a turnkey project which has

succeeded before the High Court, proceeds on an unduly

narrow interpretation of the section. In our view, the

assessee was undoubtedly rendering services to the foreign

Government by executing the water supply project. These

services were no doubt technical services, as they required

specialised knowledge experience and skill for their proper

execution. The argument seems to be that the services in

the present case will not be covered by the section because

there was no privity of contract between the employees of

the assessee who contributed their technical skill and the

foreign Government. We think this argument cannot be

accepted. The assessee is a company and any technical

services rendered by it can only be through the medium of

its employees, skilled and unskilled, and even if the

contract had not related to a turnkey project, the

assessee's employees would have been answerable only to the

assessee and none else though, perhaps, in such an event,

the other party to the contract may have retained a larger

degree of control and supervision in the execution of the

contract. Even where the contractor is an individual or

firm and not a company, a contract of this magnitude can be

executed only through the medium of employees or other

personnel engaged by the assessee. The facts that,

physically speaking, it is only such employees that render

services and that, so far as they are concerned, they render

services only to their employer and not to the other

contracting party are in no way inconsistent with, or

repugnant to, the notion that, so far as the foreign

Government is concerned, it looks only to the assessee for

rendering of the technical services under the contract. The

High Court has pointed out that a person who manufactures a

television set ordered by another cannot be said to render

technical services

98

to the latter. In our view, that analogy is not apposite in

the context of a contract of the nature, magnitude and

specialisation with which we are concerned. Where a person

employs an architect or an engineer to construct a house or

some other complicated type of structure such as a theatre,

scientific laboratory or the like for him, it will not be

incorrect to say that the engineer is, in putting up the

structure, rendering him technical services even though the

actual construction and even the design thereof may be done

by staff and labour employed by the engineer or architect.

Where a person consults a lawyer and seeks an opinion from

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him on some issue, the advice provided by the lawyer will be

a piece of technical service provided by him even though he

may have got the opinion drafted by a junior of his or

procured from another expert in the particular branch of the

law. Shri Ahuja tried to negative this line of thinking by

urging that "professional services" have been brought within

the scope of section 80-O only by an amendment by the

Finance (No. 2) Act, 1991 and that, too, w.e.f. 1-4-1992

which is proposing to substitute the word "technical or

professional services" in place of the word "technical

services" now used in the section. It seems to us that this

amendment may be only of a clarificatory nature. The

expression "technical services" has a very broad connotation

and it has been elsewhere in the statute also so widely as

to comprehend professional services : vide section

9(1)(vii), referred to earlier. But we need not digress on

this aspect for two reasons. Firstly, whatever may be the

position regarding other "professional services", there can

hardly be any doubt that services involving specialised

knowledge experience and skill in the field of

constructional operations are "technical services". The

Board's guidelines, to which reference is made later,

specifically say so. Secondly, the question whether

"professional services" would be "technical services" or not

has no impact on the point we are trying to make viz. that

in order to say that a person is rendering such services to

another, it is not necessary that the services should be

rendered by the former personally and not through the medium

of others. For the reasons discussed above, we have come to

the conclusion that, under the contracts in question, the

assessee had made available technical information to the

foreign Government for use outside India and had also

rendered technical services to the foreign Government

outside India.

All the same, contends Sri Ahuja, the receipts of the

assessee under the contract are just the profits of its

business and cannot be described as received in

consideration of such information or services as discussed

above. If what Sri Ahuja means is that no part of the

payments made to the consortium is specially described by

the contract, or even the consortium agreement, as made in

consideration of such information or services he is no doubt

correct and the consequence of such non-specification has to

be

99

considered. But Sri Ahuja, like the Tribunal, seems to go

even further. He says that the contract has been found to

be an integral, indivisible contract and that it is not

permissible for the assessee to dissect the consideration as

attributable to its several ingredients and apportion a part

of the consideration as being payment for information made

available to, or technical services rendered to, the foreign

Government. The Tribunal observed :

"43. Schedule 11 to the contract refers to the

consideration of the work. Though the lumpsum

price is indicated for different works but the

overall consideration is for the work as a whole

and it is made clear even before the tenders were

given that the contract could not be bifurcated and

it could not be given in parts. Separate payments

are not contemplated for the surveys done, designs

made and the other studies carried on they are made

an integral part of the work. The assessee company

had to give proposals for execution of the works

and had to submit a preliminary work programme

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showing the starting and completion dates for each

complex and major installation including

construction of the preliminary works, submission

of functional plants and general designs and

periods for manufacture, delivery, erection etc.,

of all works required including plant and civil

works pipelines and services. The price schedules

were deemed to cover all expenses, costs risks and

all material necessary for the contractor to

execute, operate and maintain the works.

44. The perusal of the contract and its various

parts very clearly shows that is was contract for

commissioning of a turn-key project for the Karkh

Water Supply Scheme. It is true that for executing

this work, it was absolutely essential for the

contractor to have necessary technical competence

and they had to use highly experience technical

personnel for this purpose. From the very nature

of the work, it is clear that the execution of the

project involved a high degree of technical

competence as well as expertise and experience.

However, reading the contract as a whole, the

intention of the parties was only to get the whole

project being made available on a turn-key basis

according to the general specifications laid down

by the Baghdad authorities. It is not possible in

this contract either to separate one part from the

other or to bifurcate a part of consideration for

any particular service. We have already considered

the various case laws including certain decisions

the Hon'ble Supreme Court in the case of Gannon

Donkerley & Co. and Ram Singh Engineering

100

Works (supra) which throw light on interpretation

on such contracts. Various High Courts have also

considered similar questions throwing light on the

nature of contracts. Applying these principles, it

appears that this is an indivisible and integrated

contract for the whole work and has to be treated

as such."

In our view, neither of the propositions contended for

by Sri Ahuja can be accepted as correct. So far as the

first proposition is concerned, it is sufficient for us to

point out that it is a well-settled principle that

exigibility of an item to tax or tax deduction can hardly be

made to depend on the label given to it by the parties. An

assessee cannot claim deduction under section 80-O in

respect of certain receipts merely on the basis that they

are described as royalty, fee or commission in the contract

between the parties. By the same token, the absence of a

specific label cannot be destructive of the right of an

assessee to claim a deduction, if, in fact, the

consideration for the receipts can be attributed to the

sources indicated in the section. The second proposition is

equally untenable. Contracts of the type envisaged by

section 80-O are usually very complex ones and cover a

multitude of obligations and responsibilities. It is not

always possible or worthwhile for the parties to dissect the

consideration and apportion it to the various ingredients or

elements comprised in the contract. The cases referred to

by the Tribunal and Sri Ahuja as to the indivisibility of a

contract arose in an entirely different context. For

purposes of income-tax, a principle of apportionment has

always been applied in different contexts. Consolidated

receipts and expenses have always been considered

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apportionable in the contexts : (a) of the capital and

revenue constituents comprised in them; (b) portions of

expenditure attributable to business and non-business

purposes; (c) of places of accrual or arisal; and (d) of

agricultural and non-agricultural elements in such receipts

or payments. This is a point that does not need much

elaboration and it is sufficient to refer to decided cases

cited under the passages on this topic at pp. 47, 137, 264,

621 and 677 of Kanga & Palkhivala on the Law and Practice of

Income-tax (Vol. I, Eigth Edition). We are, therefore, of

opinion that if, as we have held, the contracts in the

present case oblige the assessee to make available

information and render services to the foreign Government of

the nature outlined in section 80-O, it is the duty of the

Revenue and the right of the assessee to see that the

consideration paid under the contract legitimately

attributable to such information and services is apportioned

and the assessee given the benefit of the deduction

available under the section to the extent of such

consideration.

So far, we have looked at the language of section 80-O

in isolation. The question to be considered next is whether

the introduction of section 80-HHB

101

has made a difference. On behalf of the Revenue, it is

urged that the facts of the present case squarely fall under

the scope of this new Section. The assessee, it is said,

has derived profits and gains from its business of

execution of a foreign project, as defined in clauses (b)(i)

and (ii) of sub-section (2) of the section. Whether the

contract is viewed as one directly entered into by the

assessee with the foreign Government or as involving the

execution of work undertaken by it as part of a foreign

project undertaken in pursuance of a contract entered into

by the consortium with the foreign Government, the profits

and gains qualify for deduction under section 80-HHB,

subject to the conditions and to the extent, outlined in the

section. Even assuming that the whole, or at least a part,

of the consideration payable to the assessee for the

execution of a foreign project or work in connection

therewith can be said also to fall under the terms of

section 80-O, the terms of sub-section (5) of section 80-HHB

make it clear that the assessee would be eligible for

deduction under section 80-HHB only and cannot claim

deduction under section 80-O in respect of any part of the

consideration.

Sri Nariman, on behalf of the assessee, seeks to repel

this contention in several ways. He submitted, firstly,

that since the insertion of section 80-HHB has not resulted

in the deletion of section 80-O, the two sections should be

read harmoniously and given effect to together. This, he

says, can be done by restricting the operation of section

80-HHB to contracts entered into on or after 1-4-1983 on

which date that section came into force and so as not to

affect contracts entered into before that date and approved

by the Board. In this context, it is pointed out that

section 80-O envisages grant of approval to a contract and

once such approval is granted (on whatever date it be) the

approval should enure for the entire period of contract and

cannot be restricted to any particular assessment year or

years. In support of this contention, the decision in

C.I.T. v. Indian Institute of Public Opinion, (1982) 134

I.T.R. 2 (Delhi) is relied upon. It is urged that, once the

approval is granted to a contract, Section 80-O becomes

operative in respect of all sums received under the contract

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of the nature specified therein. If the applicability of

section 80-HHB is thus restricted, it is submitted, the

terms of that section, including sub-section (5) thereof;

cannot stand in the way of the relief available to the

assessee under section 80-O. Secondly, he contends that the

definition of "foreign project" in section 80-HHB (2)(b) is

a restrictive one; it covers only the construction of the

nature specified in sub-clause (i) or the assembly and

installation of the nature specified in sub-clause (ii),

there being no other prescribed work in terms of sub-clause

(iii) and it is only the consideration received for the

carrying out of these two activities that is excluded from

the purview of relief under other sections under Heading `C'

of Ch. VI-A. In other words, it is said, section 80-HHB

applies only to con-

102

struction/installation activity simpliciter and not a

"composite" activity. It is argued that where, as in the

present case, the contract envisages, in addition to

construction of buildings or other structures and

installation of machinery or plant outside India, some

further acts to be done by the assessee-such as making

available information on rendering of services to the

foreign Government or enterprise - the consideration

attributable to such action will not forfeit the deduction

otherwise available under section 80-O. Some significance

is sought to be attached to the use in sub-section (5) of

the words "Notwithstanding anything contained in any other

provision under this Chapter" and not "Notwithstanding

anything done or any approval granted under any other

provision" as also the use of the word "shall not qualify"

at the end of the sub-section. It is argued that once

approval is granted under section 80-O, the receipts have

already qualified for deduction under that section and

section 80-HHB (5) does not operate after that stage. A

reference is also made to the different language used in

section 80-HHA(6) which specifically excludes relief under

section 80 I and J and to the language used in section 80-MM

which specifically excludes section 80-O. Thirdly, it is

submitted that, if the Board, after considering the

arguments as to applicability of section 80-HHB put forward

by the assessee, accepted this as a plausible view of the

relative area of operation of the two provisions, and

extended the approval to assessment year 1983-84 onward as

well, it could not be said to have exceeded its jurisdiction

and it is not open to the Revenue to ignore the order of

approval merely for the reason that section 80-HHB has been

introduced into the statute book.

The connection of Sri Nariman that, even after the

insertion of section 80-HHB, there is room for applicabilty

of section 80-O in relation to a contract of this type which

is not a construction/installation contract simpliciter

appears attractive but we do not think section 80-HHB should

be interpreted in such a narrow or pedantic fashion. The

section provides for an exemption in respect of profits

from a "foreign project" undertaken outside India in the

course of business. The expressions "business of execution

of a foreign project" or work forming part of it or the

`profits derived' from the business, take in all aspects of

a business involving the activities referred to in sub-

section (2)(b) of section 80-HHB together with all

activities, commitments and obligations ancillary and

incidental thereto and the profits flowing therefrom. The

definition cannot be restricted to the mere physical

activity or putting up the superstructure, machinery or

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plant but should be understood to take within its fold all

utilisation of technical knowledge or rendering of technical

services necessary to bring about the construction, assembly

and installation. However, we need not theoretically

eliminate all possibility of a contract involving

independent elements calling for consideration both under

103

section 80-HHB and section 80-O. It is perhaps possible to

envisage cases where, While undertaking a foreign project,

separate contracts are entered into forming two different

sets of activities involved viz. (i) construction of works

and assembly or installation of plant and machinery and (ii)

the transfer of rights know-how, the impartation of

technical knowledge or information and the rendering of

technical services and providing separate consideration

under each heading. It is perhaps possible to say in such

cases that there are two contracts in respect of a foreign

project, one of which will fall under section 80-HHB and

another under section 80-O. Or it may be that even though

there is a single contract, it separately identifies the two

sets of activities and provides separate consideration for

each. In such a case also, it is perhaps, possible to say

that the consideration for the foreign project does not

comprise in part or in whole of consideration that would

fall under section 80-O. But where the contract is for a

single indivisible consideration for the execution of a

foreign project and does not spell out the imparting of

information or the technical services and any consideration

therefor, it is difficult to segregate two parts of such a

contract, artifically apportion the consideration under two

headings referred to above and then apportion the relief

under section 80-HHB and section 80-O. This is particularly

so in the context of the fact that in the particular case,

as has been pointed out earlier the impartation of

information was only indirect consisting of what the foreign

enterprise of Government could gather from the manner of

execution of the contract by the assessee and the technical

services rendered to the non-resident principal consisted

only of the execution of the project for it by the assessee.

In other words, this is a case where the execution of the

foreign project, in itself, comprises the elements referred

to in section 80-O. There is one single, integral,

indivisible contract for executing a foreign project and

the entire consideration is attributable to such execution.

Sri Nariman drew our attention to columns 27 and 28 in

From 10F which read thus :

"27. Whether any part of the payment is derived

from, -

(a) the execution of a foreign project undertaken

by the applicant in pursuance of the agreement

under consideration, or

(b) the execution of any work undertaken by the

applicant and forming part of a foreign project

undertaken by any other person in pursuance of a

contract entered into by such other person with a

foreign Government or any statutory or other public

authority or agency in a foreign State or a foreign

enterprise.

104

28. With reference to 27(b) above, -

(a) furnish the date of the contract entered into

by the other person with the foreign Government or

enterprise for the execution of the foreign

project,

(b) whether all the services were rendered by the

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applicant -

(i) before the signing of such contract; or

(ii) after signing of contract."

He sought to contend on the strength of these columns

that a part only of the payment derived from a contract

submitted for approval under section 80-O may be referable

to section 80-HHB leaving a balance, at least, eligible for

relief under section 80-O. This is not the purport of this

para. On the other hand it seems to be clearly intended to

ensure while granting approval under section 80-O in

pursuance of the application that section 80-HHB(5) is given

effect to and no part of the payment derived from the

execution of such a project is allowed to qualify under

section 80-O.

Sri Ahuja sought to make a further point that even if

the assessee's case falls under section 80-O, assessee will

be entitled to relief not on the entire profits derived by

the assessee but only to that portion of the receipts as can

be ascribed the character in section 80-O. He suggested that

it may actually be more beneficial to the assessee to claim

relief for 25% of that whole under section 80-HHB rather

than claim 100% of say 10% attributable to section 80-O.

There is, of course, a fallacy in this argument. For the

assessee's case is that the contract falls either wholly

under section 80-O or partly under section 80-HHB and partly

section 80-O. Thus, if only 10% of the receipts are

attributable to section 80-O, the assessee would be entitled

to relief of 25% of the 90% under section 80-HHB and the

whole of the 10% under section 80-O in other words a relief

of 323-1/2% (which is more than 25%) of the whole. But, for

reasons, we have already set down this is a case in which

the impartation of information and provision of technical

services arise directly from the execution of the project

and nothing else. This being so there is a complete identity

of the matters governed by section 80-HHB and section 80-O

and so the assessee will be entitled to only and not both

the reliefs.

The assessee has, naturally, placed considerable

reliance on the approval granted by the Board under section

80-O and, in particular, on the

105

Clarification issued by the Board on 31.7.85 after the

assessee's representation, by deleting the reference to

section 80-HHB. The Department has sought to retaliate by

taking up the stand that the contracts in the present case

do not at all fall under section 80-O and that the Board

erred altogether in granting such approval. The Tribunal

accepted a suggestion put forward on behalf of the

Department that the clarification was the result of some

confusion and purported to obtain a further clarification

from the Board in a manner that has attracted vehement

complaint and criticism from the assessee. We do not think

it is necessary for us to enter into this realm of debate

for, apart from the doubtful sustainability of a collateral

attack by the Department on an approval granted by the

highest administrative authority under the Act, we have

endeavoured to point out that the Board was fully justified

in considering the receipts of the assessee as falling under

section 80-O and in granting approval to the contract. We

shall also proceed on the footing that the assessee is also

right in saying that the Board had, after considering its

representations, accepted the position that the approval

under section 80-O would ensure also for the assessment year

1983-84 onwards. In fact, we think that, irrespective of the

Board's clarification of 1985, the correct position is that,

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once a contract stands approved under section 80-O in

relation to the first assessment year in relation to which

the approval is sought, the approval ensures for the entire

duration of the contract. This is the principle enunciated

in C.I.T. v. Institute of Public Opinion, (1982) 134 I.T.R.

23 (Del.) the correctness of which cannot be doubted and is,

indeed, accepted by both counsel before us. Section 80-O

does not envisage an application for approval of the

contract every assessment year or the limitation of the

approval granted by the Board to any particular assessment

year. The Board is approving of a contract having regard to

the nature of the receipts flowing therefrom and once this

approval is granted, the assessee is entitled to seek a

deduction under section 80-O in respect of all the receipts

under the contract the consideration for which is traceable

to the three ingredients discussed earlier irrespective of

the assessment year in which the receipts fall for

assessment. The Board's approval of the contract - in 1983

as well as in 1985 - has no doubt this effect. But this is

not the same thing as saying that relief under section 80-O

would be available despite section 80-HHB. It seems to us

that the Board's clarification of 31.7.1985 (which merely

withdraws the reference to section 80-HHB and extends the

approval beyond 1982-83) cannot be read as involving a

further decision that the assessee should be granted relief

under section 80-O contrary to the terms of section 80-HHB.

Section 80-O only empowers the Board to approve of a

contract on being satisfied that it gives rise to receipts

qualifying for deduction under section 80-O and nothing

more. In fact the various terms and conditions of the

Board's letter of approval (in relation to which arguments

have been ad-

106

dressed before us) are totally redundant and unnecessary.

All that the Board has to do is to approve of an agreement

for the purposes of section 80-O. It has nothing more to do.

Its approval cannot be tentative or provisional or

qualified. It cannot be hedged in with conditions and

restrictions of the nature set out in the Board's letter. It

cannot limit the relief to certain assessment years only; it

cannot restrict or enlarge the scope of the relief that can

be granted under the section. The assessment years for which

relief is available, the extent of the receipts that qualify

for deduction and all other incidents flow from the language

of the section. The position therefore is that the Board's

approval of the agreements in the present case, originally

accorded legitimately and properly, as pointed out by us, in

respect of assessment years earlier to 1983-84 will enable

the assessee to claim like relief under section 80-O for all

subsequent years too. But, after the insertion of S. 80-HHB,

section 80-O the matter of receipts governed both by section

80-HHB, in the former and not the latter will prevail. We

have therefore come to the conclusion that the 31.7.85

amendment of the Board's approval cannot help the assessee

to overcome the mandate of section 80-HHB(5). The Board, by

its 31.7.1985 letter, could not have intended to say this

and, if it did, it acted outside the jurisdiction conferred

on it by the statute. While the Board has every right to

declare that section 80-applies in respect of the receipts

under a contract approved by it, it has no statutory or

other right to supersede or limit the clear terms of section

80-HHB.We find ourselves unable to accede to the proposition

of Sri Nariman that the scope of S. 80-HHB should be

excluded from application to contracts approved prior to

1.4.1983. Indeed, a difficulty of this type could arise even

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in respect of a contract entered into after 1.4.1983. Since

section 80-O, continues to be in the statute book even after

1.4.1983, an application may be made and a contract approved

under that section. In doing this the Board may not have,

and certainly need not have, considered the provisions of

section 80-HHB. But, despite such approval, the receipts

under the contract cannot qualify for relief under section

80-O if the assessing officer comes to the conclusion that

the case falls under section 80-HHB. The legislature has

clearly envisaged the possibility of the same receipts

qualifying for deduction under section 80-HHB as well as

under any other provision of the Act and has specifically

provided that, in such a case, the terms of section 80-HHB

will prevail over the provisions of such other provision.

Sri Ahuja invited our attention to the fact that subsection

(5) was not part of section 80-HHB at the stage of the

Finance Bill but was inserted during the passage of the Bill

in Parliament. The Finance Minister explained the purpose in

his budget speech. He said :

"Indian companies and resident non-corporate tax

payers are entitled under the Bill to an exemption

of 25 per cent of the

107

profits desired by them from the execution of

foreign contracts undertaken by them. Some doubts

have been raised that income derived from such

foreign projects may also be eligible for exemption

under section 80-O of the Income-tax Act. I propose

to make a provision to clarify that no part of the

consideration received by a person for the

execution of the foreign project or the income

comprised in such consideration shall qualify for

deduction under any other provision in the Income-

tax Act.

The statutory interdict thus inserted cannot be

frustrated by the terms of an approval of the Board under

section 80-O. Such approval, at its best, cannot overreach,

the limitations imposed on the relief available under that

section as a consequence of section 80-HHB(5).

There was a good deal of discussion before us as to the

scope and effect of the approval granted by the Board to the

terms of a contract under section 80-O. Sri Ahuja would

have us hold that the approval of the Board has

significance only in that, without such approval, the

assessee's claim for relief under section 80-O could not all

be entertained. It only opens the gate to enable the

assessee to enter and seek a deduction under the section. It

is not conclusive on any other aspect of section 80-O,

certainly not on the merits of the assessee's claim. Despite

the approval, the Income-tax Officer cannot be absolved of

his functions and responsibility of deciding whether the any

part of the assessee's receipts fulfills the characteristics

prescribed for deduction under the section and, if so, to

what extent the assessee is entitled to get the deduction

in accordance with and subject to the provisions of the

section. According to counsel, the Board is not competent to

decide these issues in the process of granting approval to

the agreement. He point out that, in the instant case, the

assessee has not identified the receipts or any parts

thereof as having the characteristics enumerated in the

section. Nevertheless the assessee purported to claim that

the entirety of such unidentified receipts would be the

value of the technical information and services to be

imparted or rendered under the contract (vide col. 6 of the

application), eligible for relief under section 80-O. In

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order, however, not to give an impression that exemption was

sought for the entire profits, the assessee purported to

exclude from the claim of exemption the net cost of certain

machinery, equipment and other items allegedly supplied to

the foreign Government under the contract on a no-profit

basis. Sri Ahuja says, the calculations of the assessee are

incorrect in several respects. These errors apart, the

consideration for services plus profits under the entire

contract was estimated at 69. 893 million ID at the time of

filing the application for approval as per a break-up chart

placed on record. Of this the figure of profits

108

was estimated at 25.49 million IDS or Rs. 68 crores only. As

against this, the assessment order shows that the relief

claimed under section 80-O for the assessment year 1983-84

alone was to the tune of Rs. 77.84 crores in respect of the

Kirkh contract. He also points out that the aggregate net

profits shown by the assessee from this contract for the

assessment years 1982-83 to 1989-90 were Rs. 165 crores,

almost 50% of the total receipts from the contract. Sri

Ahuja says, therefore, the application for approval was

based on wild estimates made before the contract began to be

worked in right earnest and the Board could certainly have

had no possible material for accepting the basis of claim

for exemption set out in col. 6 as correct. It would,

therefore, Sri Ahuja urges, be totally untenable to

interpret the Board's approval as a decision on the merits

of the assessee's claim putting the seal of finality as to

the basis or quantum of the relief to be granted to the

assessee. That is the exclusive domain of the assessing

officer which the Board has no business to encroach upon.

On the other hand, Sri Nariman contended that it would

be preposterous to attribute such an insignificant role to

the Board. The Board is the appex administrative authority

under the Act and the responsibility of approving the

contract was entrusted to such a high authority for weighty

reasons with the clear intention that, once the contract is

approved by the Board, the assessee should be entitled to

exemption subject only to the arithmetical computations

being left to be done by the assessing officer. He points

out that the Board had prescribed an elaborate and detailed

proforma on which the application for approval had to be

made, some portions of which have been extracted earlier in

this judgment. It requires the assessee to give full details

of the contract (col. 2 to 4, 3 to 19) explain how the

receipts under contract fulfill each of the requirements of

the section (col. 5 to 9), specify the nature and quantum of

the exemption claimed (col. 10 and 11) and indicate the

terms and mode of payment (col. 12). Elaborate guidelines

were drawn up and publicised by Board's circular no. 187

dated 23.12.75, (See (1976) 102 I.T.R. St. 83). These

guidelines, read with the proforma, clearly envisage a vital

role to the Board to analyse the terms of the contract and

nature of the assessee's receipts carefully and ensure that

they qualify for relief under the section. No doubt, the

approval is granted on the basis of the terms of the contact

and the actual quantification of the relief available under

the contract for any particular assessment year has to be

worked out by the assessing officer under the contract. It

is also possible that the Board's approval is obtained by

fraud or misrepresentation and the guidelines provide for

revocation of the approval in case some such situation is

found to exist. But, so long as the approval lasts, the

assessing officer is bound and cannot challenge the

correctness of the approval or take up the position that the

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109

contract itself falls outside the purview of the section.

Apart from this general position, Sri Nariman points out

that the approval of the Board had been accorded in this

case after full and detailed discussions, correspondence and

hearings stretching from 3.3.1981 - the date on which the

application was made to 28.10.1983 when approval was

given. These show that each and every aspect of the contract

was examined. The assessee was questioned as to how it was

claiming that no profit was involved in the sale of

materials. Details regarding technical personnel engaged by

the assessee and the extent of fees attributable to their

recruitment in India were called for. A query was raised as

to how the contract can be said to involve the rendering of

services to a foreign enterprise within the meaning of

section 80-O. The objection that the services under the

contract were rendered to self and not to a third party was

also raised. These objection were duly answered and it was

only after applying its mind and deliberating over the

matter that Board approved the contract. If there had been

any misrepresentation of facts on the basis of which the

approval had been secured, it was open to the Board to have

revoked the approval but this had not been done till today.

In the circumstances, Sri Nariman contends that the

Department should not be allowed to take up the stand that

the approval of the Board had no value at all and could be

completely ignored by the assessing officer because, In his

opinion, it did not fulfill the requirements of section 80-

O.

we have considered the contentions urged on behalf of

both parties. Since we have already expressed our conclusion

that the contract in the present case does come within the

fold of section 80-O and that the Board acted rightly in

granting approval to the contract, it may not be quite

necessary for us to express any opinion on this issue.

However, since the matter has been fully debated before us,

and is of some general importance we may indicate our views

on this issue.

At the outset, it may be pointed out that, earlier

section 80-O (and certain other sections in the statute) had

provided for the approval of the Central Government as a

condition precedent for the grant of relief or concessions

thereunder, where the relief or concession was in relation

to a contract with a foreign party. At that stage, it was

possible to take a view that the provision was intended only

as a safeguard to monitor contracts with foreigners as such

contracts may involve several aspects of policy, finance,

foreign exchange and other elements vital to the country's

interests. But this power of approval has since been shifted

to the Board which is the highest administrative authority

under the Act. This is a very significant change. No doubt,

even after the change, the approval acts as a safety valve

and enables the Government to decline its approval for

various reasons the effect of

110

which, inter alia, would be that no relief be sought for

under the relevant provisions. But there is a change in the

content and purpose of the approval. The Board has to grant

the approval "in this behalf" that is for the purposes of

this section. It is true that, even earlier, the approval of

the Central Government was to be granted "in this behalf"

but when the power is vested in the apex authority under the

Income-tax Act, it is clear that the scope of the Board's

powers is more extensive and should bear upon the terms of

the agreement vis-a-vis the claim for relief under the

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section in relation to which relief is sought. It is also

interesting to see that this power of approval has since

been de-centralised and vested in the Director-General and

Chief Commissioner which are authorities at a lower rung

than the Board but at a higher rung than the assessing

officer. While, at one time, the Income-tax Officer was

described as the king-pin of the tax administration and was

the sole repository of all functions pertaining to

assessment, the recent tendency has been to vest powers of

assessment even in officers above the rank of the Income-

tax officer either because of the amount involved or for

other reason. Here again, there is good reason, over and

above the general need to have a surveillance over foreign

contracts, why the power to grant approval is vested in a

higher authority in the Income-tax hierarchy itself. The

first is that the Board is considered better equipped, both

on considerations of time as well as the technical knowledge

needed to examine the ramifications of technical

international contracts and decide how far the contract in

question and the receipts thereunder are of the nature

intended to be covered by the exemption clause; The second

is that, with such a provision, the applicant is sure to

take steps to obtain necessary approval at a stage earlier

to the implementation of the contract and it will be

possible to require the party, if modification or changes

are called for, to modify the contract even at the outset so

as to bring it within the range of contracts for which

relief is intended. The third and perhaps and most important

reason is that such contracts are generally likely to be

long-term contracts and it is of the essence for an

applicant to know well beforehand where he stands in the

matter of tax exemption and whether he can proceed to

execute the contract on the basis that he would be eligible

for the relief he feels he is eligible for. It would result

in chaos if an assessee's contracts were left to be

scrutinised at the time of assessment several years after

they have been implemented and the availability of an

exemption provision which the assessee was banking upon and

on the basis of which he had entered into the contract,

denied to him for one reason or another whereas, duly

forewarned by a disapproval, he could have backed out of the

contract, if necessary, and saved his skin. In this

situation, we find it difficult to accept the plea of Sri

Ahuja that the approval is nothing but a measure for

screening the cases which an assessing officer may have to

consider.

111

We are also reinforced in this conclusion by the manner

in which the provision has been understood and implemented

by the Board since its introduction. The Board had issued

circulars earlier when the relief had been introduced

originally by the insertion of section 85-C and, again,

later in 1972. But, after the power of approval was vested

in the Board, elaborate guidelines were drawn up as pointed

out by Sri Nariman. These guidelines clearly envisage a

detailed examination, by the Board, of the terms of the

contract submitted to it for scrutiny from all angles

relevant for a decision as to eligibility for exemption

under section 80-O. The proforma calls for details of the

analysis of the receipts under the contract. An examination

whether the receipts can be said to be by way of royalty,

commission, fee or similar payment is undertaken. The

receipts are analysed under the three headings, as earlier

referred to us, set out in paras 5(a)(i), 5(a)(ii) and 5(b)

of the proforma. Even the situation where the contract is a

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composite one has been dealt with by the guidelines and this

may be referred to here in a little greater detail. In the

circular of 23.12.75 (supra), the Board decided that it

would decline approval in cases where the consolidated

consideration could not be legitimately attributed to know-

how, services etc. envisaged in the section but that in

cases where such apportionment was considered permissible,

it would grant approval to the agreement and have the

quantification of the exemption to be decided by the

assessing officer. It said :

"(ix) In the case of a composite agreement

specifying a consolidated amount as consideration

for purposes which include matters outside the

scope of section 80-O (e.g. use of trade marks,

supply of equipment etc.) the amount of the

consideration relating to the provision of

technical know-how or technical services, etc.

qualifying for purposes of section 80-O will have

to be determined by the Income-tax Officer

separately at the time of assessment after due

appreciation of the relevant facts. Where, however,

in the opinion of the Board, it will not be

possible to properly ascertain and determine the

amount of the consideration relatable to the

provisions of the know-how or the technical

services, etc., qualifying of section 80-O, the

Board may not approve such an agreement for the

purposes of section 80-O of the Act."

It had also taken the view that a consideration for the

use of the assessee's trade-mark would be outside the

purview of section 80-O. Subsequently, however, the Board

changed its line of approach on these two issues . In its

circular No. 253 dated 30-4-1979, the Board clarified :

"Attention is invited to the Board's Circular No.

187 (F. No. 473/

112

15/73-FTD) dated 23rd December, 1975 on the above

subject laying down the guidelines for the grant of

approval under section 80-O. The Board has had

occasion to re-examine the aforesaid guidelines and

it has been decided to modify the guidelines to the

extent indicated below :-

XXX XXX XXX

(ii) In para (ix) of the said circular, it was

mentioned that consideration for use of trade mark

would be outside the scope of section 80-O. It has

now been decided that payment made for the use of

trade-marks are of the nature of royalty, and

therefore, fall within the scope of section 80-O.

(iii) It was also stated in para 3(ix) of the

circular dated 23.12.1975 that in the case of a

composite agreement which specified a consolidated

amount as consideration for purposes which included

matters outside the scope of section 80-O, the

Board may not approve such an agreement for the

purposes of section 80-O of the Act if it' was not

possible to properly ascertain and determine the

amount of the consideration relatable to the

provision of the know-how or technical services

etc., qualifying for section 80-O. Thus the

benefits of section 80-O could be denied to the

entire amount of royalty, commission, fees etc.,

receivable under such an agreement. It has since

been decided that in such cases approval would be

granted by the Board subject to a suitable

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disallowance for the non-qualifying services after

taking into consideration the totality of the

agreement so that balance of the royalty'fees etc.

which is for the services covered by section 80-O

can be exempted."

It is thus clear that the Board has chalked out for

itself, we think quite legitimately and properly, a very

detailed and dominant rule as to the availability of

exemptions under section 80-O. The guidelines are of general

nature, fully sanctioned by the provisions of section 119(1)

of the Act and, being instructions enuring to the benefit of

the assessee, cannot be gone back upon by the Departmental

Officer subordinate to the Board, particularly in a case

where no steps have been taken - or even suggested as

necessary to be taken - to cancel or revoke the approval

already accorded. This is, indeed, a proposition well-

settled by the series of judicial decisions starting from

Navnitlal Javeri's case (1955) 56 I.T.R. 198 S.C. In fact

also, the Board has

113

followed only its own guidelines. Elaborate reference to the

correspondence, discussions and hearing is unnecessary. The

Board had reached its decision to approve the contract and

the basis of claim for exemption after full consideration

and analysis. We may, in this context, also point out that

while the Board, in the present case, simply approved of

some of the contracts on the basis of the application filed,

it has, in the case of some other contracts modified that

basis also. For instance, in regard to the Wadi Khan and Abu

Sukhair projects, the letter of approval states that

approval is granted subject to the condition or

clarification that only the profits relating to rendering of

technical services will qualify for the benefit of section

80-O of the I.T. Act and not the profits relating to the

supply of material/equipment. These guidelines have also

since attained statutory recognition as the proforma earlier

prescribed by the Board has virtually been incorporated in

Rule 11E and Form prescribed thereunder.

In fact Sri Nariman wants to utilise certain columns in

the statutory form to support his contentions that an

approval under section 80-O is effective even after section

80-HHB was introduced but to this argument, we shall advert

a little later. We have, in view of the above discussion, no

doubt at all that, while granting the approval under section

80-O, the Board has not only the jurisdiction but also the

responsibility of examining the agreement submitted for

approval from all angles relevant to the deduction provided

for under section 80-O and that it is not competent to the

Department to question the maintainability of the claim for

deduction under section 80-O of the aspects gone into and

decided upon by the Board.

We should, however, make it clear that our conclusion

does not mean the deprivation of all functions of the

assessing officer while making the assessment on the

applicant. The Officer has to satisfy himself (i) that the

amounts in respect of which the relief is claimed are

amounts arrived at in accordance with the formula, principle

or basis explained in the assessee's application and

approved by the Board; (ii) that the deduction claimed in

the relevant assessment year relates to the items and is

referable to the basis on which application for exemption

was asked for and granted by the Board; (iii) that the

receipts (before the 1975 amendment) were duly certified by

an accountant or that, thereafter, the amounts have been

received in or brought into India in convertible foreign

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exchange within the specified period. The second of these

functions is, particularly, important as the approval for

exemption granted in principle has to be translated into

concrete figures for the purposes of each assessment.

Neither the introduction of the words "in accordance with

and subject to the provisions of this sections" nor the

various "conditions" outlined in the letter of approval add

anything to or detract anything from the scope of the

approval

114

As already mentioned, Sri Nariman also contended that,

even after the insertion of S-HHB, the assessee would be

entitled to claim the deduction under section 80-O in view

of the Board's amendment to the letter of approval that the

approval will be operative for assessment year 1982-83

onwards, rescinding the qualification in the earlier letter

that the provisions of S. 80-HHB will apply for assessment

year 1983-84 onwards. It is true that the earlier

restriction was lifted by the Board after considering the

contentions raised by the assessee in its letter of 2-12-

1983 :

(a) that the two section operate in different

fields for exemption;

(b) that the approval once granted under section

80-O, the exemption to which the assessee became

eligible should ensure for the directions for the

entire contract; and

(c) that s. 80-HHB should be restricted to

agreements entered into before 1-4-1983.

But we are unable to give effect to the Board's

decision of 31-7-1985 in the same way as we have given

effect to the Board's earlier approval letter of 28-10-1983

for a number of reasons. The first is that the jurisdiction

of a Board is to grant approval to a contract only for the

purposes of section 80-O; it has no jurisdiction to

pronounce on the availability or otherwise of an exemption

under section 80-HHB and the Board's opinion as to this,

even if expressly stated by the Board, cannot bind the

Officer. The relief under section 80-HHB is not dependent on

the approval of the Board and is for a totally different

type of transaction. The letter of 31.7.85 is also a

decision in an individual case and cannot be treated as a

general circular incorporating a policy decision by the

Board that in all cases of a particular type governed by

both section relief may be given under section 80-O in which

event perhaps it could have been implemented by applying the

principle of the Jhavari case (supra). The second is that

the Board, in the 1985 letter, has only stated that the

approval under section 80-O will enure for 1982-83 onwards.

This is quite a correct statement of, as we have explained

earlier, the approval by the Board is to the contract and so

long as the contract subsists the relief should be granted

on the term of section 80-O. Thus the assessee is entitled

to deduction under section 80-O on the terms of that section

even for 1983-84 and subsequent years. It becomes

disentitled to the relief not because it does not fulfill

the requirements of section 80-O but only because section

80-HHB(5) stands in the way and mandates that in cases to

which both provisions will apply relief under section 80-HHB

will alone be available. The argument that the applicability

of section 80-HHB should be

115

excluded from contracts entered into, or those approved of

under section 80-O, before 1.4.1983, is patently untenable.

Section 8 comes into force on 1.4.1983 and should be

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applicable for assessment year 1983-84 onwards in all cases.

It does not contain even a reference to section 80-O and so

its applicability cannot depend on the formation of the

contract subsequent to that date or to the date of its

approval under the latter section being after that date.

Thirdly, the approval which otherwise qualifies the assessee

for relief is no doubt still effective but its power to

"qualify" for relief is taken away by the new statutory

provision. The argument that the assessee could not have

anticipated the insertion of section 80-HHB and is put to a

hardship if that section is applied is no doubt correct. But

one cannot decline to give effect to the applicability of

the statutory provision on the ground of hardship or on the

ground that it restricts the relief which, but for the

insertion of the section, would have been available to the

assessee, particularly when the section itself envisages the

possibility of the assessee being also eligible for relief

under another section and makes special provision of that

eventuality.

Sri Nariman submitted that we should not favour the

above interpretation as it would lead to an anomalous

result. He says that the whole idea of section 80-HHB was to

enlarge the benefits to contractors working abroad and

earning foreign exchange but that, by reason of our

decision, the assessee will now get relief only to the

extent of 25% in respect of a contract for which it got

100% benefit in earlier years. On the other hand, the

department would no doubt say that our conclusion that the

assessee was entitled, in earlier assessment year, to 100 %

relief on this type of contract is anomalous in the light of

the fact that subsequently the legislature specifically

provided that only 25 % of the earnings on foreign projects

should be exempted. In our view, there is no force in these

contentions. The anomaly, if it is one, arises because of

the specific language of the statute and the nature of the

contract we have to consider. S. 80-HHB does not confer an

additional benefit; sub-section (5) in no uncertain terms

states that the benefit thereunder will take away the

benefit, if any, under any other provision. This has to be

given effect to. Equally, the assessee was able to get 100 %

relief in earlier years only because the contract here is of

such nature that it consists only of the rendering of

technical services so that the fields of the two exemptions

completely overlap. On the other hand, as discussed earlier,

it is possible to conceive of foreign projects wherein the

construction and installation aspect and information or

technical services aspect are kept separate. Equally there

can be cases falling under section 80-O which do not all

relate to a "foreign project" as defined in section 80-HHB.

In such cases, the two provisions will continue to operate

independently. There is, therefore, no anomaly or absurdity

in the conclusion we have reached.

116

For the reasons discussed above, we hold that the

assessee was entitled to the relief under section 80-O for

assessment years earlier to 1983-84 and that the approval

granted by the Board under that section was right and

proper. However, for the assessment year 1983-84, the

assessee does not qualify for deduction on the terms of that

section as the contract receipts are fully covered by the

provisions of s. 80-HHB and the deduction under that section

will prevail over the relief that might have been otherwise

available in view of the terms of section 80-HHB(5). We,

therefore, affirm the conclusion reached by the High Court

and dismiss the appeal. We, however, make no order as to

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costs.

R.P. Appeal dismissed.

117