M/s Continental Construction Ltd. Vs. Commissioner of Income-Tax, Central-I

Appeal: Civil Appeal No. 3458 of 1990

Petitioner: M/s Continental Construction Ltd.

Respondent: Commissioner of Income-Tax, Central-I

Apeal: Civil Appeal No. 3458 of 1990

Judges: S. RANGANATHAN, V. RAMASWAMI & N.D. OJHA, JJ.

Date of Judgment: Jan 15, 1992

INCOME TAX

Income-tax Act, 1961:

Sections 80-O and 80-HHB – AY 1983-84 – Foreign projects – Deductions in respect of – Board’s approval for “assessment years 1982-83 onwards” – Entitlement to deduction – Whether under S. 80-O or S.80-HHB – Provisions of section 80-HHB(5) cannot be frustrated by the terms of approval of the Board under section 80-O – Held that the assessee was entitled to the relief under section 80-O for AYs earlier to 1983-84 – For AY 1983-84, provisions of section 80-HHB to apply.

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 s.80-O which do not all relate to a “foreign project” as defined in s.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. For the reasons discussed above, we hold that the assessee was entitled to the relief under s.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 s.80-HHB(5). We, therefore, affirm the conclusion reached by the High Court and dismiss this appeal. (Paras 45 and 46)

1. Distributors (Baroda) P. Ltd. v. Union, 1985 (155) ITR 120. (Para 21)
2. CIT v. Indian Institute of Public Opinion, 1982 (134) ITR 23 (Delhi). (Para 31)
3. Cloth Traders P. Ltd. v. CIT, 1979 (118) ITR 243 – Overruled in 1985 (155) ITR 120. (Para 21)
4. Gestetner Duplicators Pvt. Ltd. v. CIT, 1979 (117) ITR 1 (SC). (Para 22)
5. Navnitlal Jhaveri’s case, 1965 (56) ITR 198 (SC).

Books and Articles Referred:

Black’s Law Dictionary, 6th Edition, 1991, pp. 614, 1369 and 1463. (Para 22)

RANGANATHAN, J. :
1. 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) answering, against the assessee, the following questions of law referred to it under S.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 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 questions; there were two references because the above questions arose 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.
2. 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 ss. 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 questions 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 judgment to the assessee’s appeal and to the first three of the four questions set out above.
3. The questions arise out of the assessee’s assessment to income tax for the assessment year 1983-84 (the calendar year 1982 being the relevant previous year). S.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 s.85 C. S.80-O was substituted in its place w.e.f. April 1, 1968. The section 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 :
S.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 assessee, 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.
4. 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 :
S. 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 –
(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 and 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 provisions 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 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, 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 Projects 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.
(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, the assessee utilises the amount credited th 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 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.”
The three questions which are now for consideration before us raise the issue whether the assessee is entitled to a deduction under S.80-O or S.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.
5. 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. 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 in Baghdad which was of the total value 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 S.80-O. A broad outline of these projects can be gathered from the following table :
—————————————–
S. No. Name of Date of Name of the other Date of Period of
Project agreement contracting party approval approval
by Board as per Board’sletter —————————————– 1. Abu Sukhair 6.9.75 State Organisation 11.8.76 For
Project of Industrial Design assessment
& Construction, years
Ministry of Industry 1976-77 to
& Minerals,Baghdad 1978-79
(Iraq)
2. Wadi Ghan Dam 8.8.77 Socialist People’s 31.8.78 For the
Libyan Arab assessment
Jamahiriya, years
Secretariat of Dams 1978-79
and Water Resources, and
Tripoli, (Libya) onwards
3. Amara Project 15.3.78 State Contracting 22.2.79 “Assessment
Co. for water and years 1979-
Sewerage Projects, 80 to 1982-
Ministry of Munici- 83″
palities, Republic
of Iraq
4. Nassiriyah 14.12.78 Ministry of Housing 7.2.80 “Assessment
Project & Construction, years 1980-
Govt. of Iraq. 81 and onwards”
5. Sulaimaniyah 10.10.79 Ministry of Housing 31.5.80 “Assessment
Project & Construction, years 1980-
Govt. of Iraq. 81 and onwards”
6. West Bank 12.4.80 Baghdad Sewerage 23.7.80 “Assessment
Project Board, Govt. of years
Iraq 1981-82
and onwards”
7. Karkh Project 17.12.80 Amanat Al-Asima, 28.10.83 “For the assess-
Baghdad Water ment year 1982-
Supply Administra- 83. For the sub-
tion, Govt. of Iraq sequent period
Baghdad your attention
is invited to
the provision
of s.80 HHB which
are operative
w.e.f. 1.4.83″
8. Diwaniyah 10.1.81 Water & Sewerage 28.10.83 -do-
Project Projects, Baghdad .RM 65
————————————————–
In the light of these approvals, the assessee claimed and obtained deduction under S.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.
6. For the assessment 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 in respect of seven of the above contracts, the eighth 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 S. 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 S.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 S.80-HHB that applied to these agreements and not S. 80-O. However, he declined to grant any relief to the assessee even under S.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.
7. 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 s. 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 meaning of s.80 HHB; and (3) even where the contracts had the approval of the CBDT the non-obstante provisions of s. 80 HHB(5) 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 bona fide belief all through that it was entitled to relief under s.80 O, it had not had a proper opportunity of putting forth its claim for relief under s. 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.
8. 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 under the provisions of section 80-HHB as the contracts were for execution of foreign projects. We further hold that in view of the provisions 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, be rejected and the conclusion arrived at by the learned Commissioner of Income-tax (Appeals) is upheld.”
9. 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 words quoted in the last column of the table set out earlier:
“Assessment years 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 the 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.
10. 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 s. 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 fulfilled as well as the amount, if any, which could be deducted under s. 80 O. The Court also came to the conclusion that the execution of the work by the assessee, in the present case, fall under s. 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.
11. As pointed out earlier, the assessee’s claim for deduction relates to seven contracts and depends on the terms and conditions of each one of them. However, the Karkh Water Supply scheme contract has been taken as the 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 s. 80 HHB and s. 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 s. 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.
12. 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 presettlement, 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 Iraqi Dinars (ID) of which 65% was 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).
13. 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 s. 80-O of the Act. A proforma prescribed by the Revenue was filled up and enclosed to the application. Para 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
industrial,commercial
or scientific knowledge,
experience, or skill
made available: Yes
b) technical services rendered Technical services will be rendered
or agreed to be rendered by us to Baghdad Water Supply
outside India (Please also Administration, Government of Iraq in
state the arrangements accordance with the said agreement dated
available with the applicant 17.12.80. The technical know-how and
for rendering such technical services will be rendered by us through
services and the mode of our qualified experienced and skilled
tendering such services) Engineers, scientists and Technicians,
for that purpose, a strength of about
1,800 Indian Engineers, Technicians
and semi-skilled labours will be
inducted.
6. Does the Agreement provide The agreement also provides for the
for supply of technical know supply use of goods as per details
how or rendering of any given below:
services other than those
covered by section 80-O (e.g. Machinery, plant, Equipment, Vehicles
use of trade marks or supply cement, steel-bars, Sand Aggregate,
of goods) if so, please Bitumen, Fencing-fabric, Shuttering specify them and also the material, Steel pipes, Patent items,
amount of consideration projection, cladding, ceiling, Joining,
receivable / received in Steel Pipes with lining and ductile
respect of them. iron pipes etc. The cost of supply of
these items will be determined at the
close of each year as the work progresses.
The total value of the contract is –
ID 152,956,253/-. After taking out the
net cost of machinery & equipment and other embedded items, as mentioned above (in which no profit element is involved), from the total value of the Contract, the remaining amount will be the value of technical know-how and services to be rendered by us under this contract. It is this amount for which we are seeking exemption u/s 80-O.
7. If technical know-how falls under 5(a)(i) above, please indicate. Not applicable.
(a) how the applicant acquired it or what arrangements he has made for acquiring it Not applicable.
(b) What are the applicant’s own rights in respect thereof Not applicable.
(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 it, if so, please specify the nature Not applicable. 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 Not applicable. the information imparted and the manner of its imparting;
(iii)its use by the other person to the agreement, if so, Not applicable please specify the nature and manner of the use.
8. If the technical know-how falls under 5(a)(ii) above, please specify
(a) the arrangements available We have on our rolls qualified with the applicant for Engineers and Technicians who have obtaining and imparting already acquired the requisite it scientific knowledge, experience and skill for giving such technical know-how and it is they, who will be imparting the same to the client by executing the works at the site in Iraq.
(b) the manner of imparting The Engineers and Technicians will be it working for about 5 years at the site of construction to impart the technical know-how and services on behalf of our Company.
9. Has the applicant made any agreement or arrangement with any other person in India or abroad, for obtaining the Not applicable technical know how etc., to be provided under this agreement or for rendering technical services? If so, please give the following information :
(i) the name and address of such other person; Not applicable.
(ii) details of the agreement or arrangement together with a certified copy of the written agreement, if any. Not applicable.
(iii)the nature, and extent of applicant’s relationship and association with such other person Not applicable.
10. Please state the nature Income out of imparting civil construction of the income in respect of know-how and services for the construction which deduction is claimed, of work of Karkh Water Supply Scheme,
viz., Baghdad.
Royalty
Commission
Fees
Any similar payment
11. Please indicate the Please see our reply under S.No.6 of portion/amount (alongwith this form. its computation) which is
eligible for deduction under
section 80-O of the Act.
14. On 9.7.81, the C.B.D.T. called upon the assessee to clarify four aspects of its application : (i) the details of 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 in 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 of making any profit on its consumption in execution of the works.
(ii) The qualified experienced skilled engineers, scientists and technicians are our employees and they are sent to Iraq for executing the work under contract. We do not avail of the services 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 tests in India, therefore, does not arise. These tests are part of the process undertaken to render technical know- how.
(iv) 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 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.”
.LM 1
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 mentioned, 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.
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.”
30. So far, we have looked at the language of S.80-O in isolation. The question to be considered next is whether the introduction of S.80-HHB 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 S.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 S.80-O, the terms of sub-section (5) of S.80-HHB make it clear that the assessee would be eligible for deduction under S.80-HHB only and cannot claim deduction under S.80-O in respect of any part of the consideration.
31. Sri Nariman, on behalf of the assessee, seeks to repel this contention in several ways. He submitted, firstly, that since the insertion of S.80-HHB has not resulted in the deletion of S.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 S.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 S.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. 23 (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 of the nature specified therein. If the applicability of S.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 S.80-O. Secondly, he contends that the definition of “foreign project” in S.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, S.80-HHB applies only to construction/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 constructions and installation of machinery or plant outside India, some further acts to be done by the assessee – such as making available information or rendering of services to the foreign Government or enterprise – the consideration attributable to such acts will not forfeit the deduction otherwise available under S.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 S.80-O, the receipts have already qualified for deduction under that section and S.80-HHB(5) does not operate after that stage. A reference is also made to the different language used in s.80HHA(6) which specifically excludes relief under section 80 I and J and to the language used inS.80-MM which specifically excludes S.80-O. Thirdly, it is submitted that, if the Board, after considering the arguments as to applicability of S.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 onwards 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 S.80-HHB has been introduced into the statute book.
32. The contention of Sri Nariman is that, even after the insertion of S.80-HHB, there is room for applicability of S.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 S.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’ the business, take in all aspects of a business involving the activities referred to in sub-section (2)(b) of S.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 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 s.80-HHB and s.80-O. It is perhaps possible to envisage cases where, while undertaking a foreign project, separate contracts are entered into for the two different sets of activities involved viz. (i) the construction of works and assembly or installation of plant and machinery and (ii) the transfer of rights and 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 s.80 HHB and another under s.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 s.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, artificially apportion the consideration under two headings referred to above and then apportion the relief under S.80-HHB and S.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 or 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 s.80-O. There is one single, integral, indivisible contract for executing a foreign project and the entire consideration is attributable to such execution.
33. Sri Nariman drew our attention to columns 27 and 28 in Form 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.
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 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 u/s 80-O may be referrable to S.80-HHB leaving a balance, at least, eligible for relief u/s 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 u/s 80-O in pursuance of the application that S.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 S.80-O.
34. Sri Ahuja sought to make a further point that even if the assessee’s case falls under S.80-O, the 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 enumerated in S.80-O. He suggested that it may actually be more beneficial to the assesssee to claim relief for 25% of the whole under S.80-HHB rather than claim 100% of say 10% attributable to S.80-O. There is, of course, a fallacy in this argument. For the assessee’s case is that the contract falls either wholly under S.80-O or partly under S.80-HHB and partly S.80-O. Thus, if only 10% of the receipts are attributable to S.80-O, the assessee would be entitled to relief of 25% of the 90% under S.80-HHB and the whole of the 10% under S.80-O – in other words a relief of 32 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 S.80-HHB and S.80-O and so the assessee will be entitled to only one and not both the reliefs.
35. The assessee has, naturally, placed considerable reliance on the approval granted by the Board u/s 80-O and, in particular, on the clarification, issued by the Board on 31.7.85 after the assessee’s representation, by deleting the reference to S.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 S.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 S.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 S.80-O would enure 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, once a contract stands approved u/s 80-O in relation to the first assessment year in relation to which the approval is sought, the approval enures 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. S.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 u/s 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 S.80-O would be available despite S.80-HHB. It seems to us that the Board’s clarification of 31.7.1985 (which merely withdraw the reference to s.80HHB and extends the approval beyond 1982-83) cannot be read as involving a further decision that the assessee should be granted relief under S.80-O contrary to the terms of S.80-HHB. S.80-O only empowers the Board to approve of a contract on being satisfied that it gives rise to receipts qualifying for deduction under S.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 addressed before us) are totally redundant and unnecessary. All that the Board has to do is to approve of an agreement for the purposes of S.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 S.80-O for all subsequent years too. But, after the insertion of S.80-HHB, in the matter of receipts governed both by S.80-HHB and S.80-O, 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 S.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 S.80-O 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 S.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 in respect of a contract entered into after 1.4.1983. Since S.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 S.80-HHB. But, despite such approval, the receipts under the contract cannot qualify for relief under S.80-O if the assessing officer comes to the conclusion that the case falls under S.80-HHB. The legislature has clearly envisaged the possibility of the same receipts qualifying for deduction u/s 80-HHB as well as under any other provision of the Act and has specifically provided that, in such a case, the terms of S.80-HHB will prevail over the provisions of such other provision. Sri Ahuja invited our attention to the fact that sub-section (5) was not part of S.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 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 S.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 S.80-O. Such approval, at its best, cannot overreach the limitations imposed on the relief available under that section as a consequence of S.80-HHB(5).
36. 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 S.80-O. Sri Ahuja would have no hold that the approval of the Board has significance only in that, without such approval, the assessee’s claim for relief u/s 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 S.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 points 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 S.80-O. In 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 was estimated at 25.49 million IDS or Rs.68 crores only. As against this, the assessment order shows that the relief claimed u/s 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 he 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.
37. 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 apex 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 contract 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 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 S.80-O. The objection that the services under the contract were rendered to self and not to a third part was also raised. These objections 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 has 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 S.80-O.
38. 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 S.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.
39. At the outset, it may be pointed out that, earlier S.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 which, inter alia, would be that no relief can 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 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 the 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 before-hand 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 assessments 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.
40. 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 S.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 S.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 as in paras 5(a)(i), 5(a)(ii) and 5(b) of the proforma. Even the situation where the contract is a 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 for 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 S.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.473/15/73-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 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.”
41. 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 S.80-O. The guidelines are of general nature, fully sanctioned by the provisions of S.119(1) of the Act and, being instructions enuring to the benefit of the assessee, cannot be gone back upon by the Departmental Officers 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 (1965-56 I.T.R. 198 S.C). In fact also, the Board has followed only its own guidelines – Elaborate reference to the correspondence, discussions and hearing is unnecessary. The Board has 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 S.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 in respect of the aspects gone into and decided upon by the Board.
42. 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 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.
43. As already mentioned, Sri Nariman also contended that, even after the insertion of S80-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 sections 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.
44. 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 S.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 S.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 sections relief may be given under s.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 u/s 80-O will enure for 1982-83 onwards. This is quite a correct statement for, 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 terms of S.80-O. Thus the assessee is entitled to deduction u/s 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 S.80-O but only because S.80-HHB(5) stands in the way and mandates that in cases to which both provisions will apply relief u/s 80-HHB will alone be available. The argument that the applicability of S.80-HHB should be excluded from contracts entered into, or those approved of u/s 80-O, before 1.4.1983, is patently untenable. 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 S.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 later 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 S.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 for that eventuality.
45. 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 s.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 years, 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 s.80-O which do not all relate to a “foreign project” as defined in s.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.
46. For the reasons discussed above, we hold that the assessee was entitled to the relief under s.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 s.80-HHB(5). We, therefore, affirm the conclusion reached by the High Court and dismiss this appeal. We, however, make no order as to costs.