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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                                                   59 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                                                   60 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                                                   61 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]                                                   62      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                                                   63 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                                                   64 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]                                                   65      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                                                   66 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                                                   67 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