Title not extracted — [1992] 1 S.C.R. 57

The Judgment of the Court was delivered by -1

RANGANATHAN, J. This is an appeal preferred by M/s. Continen- G tal 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 section 256 of the Income Tax Act, 1961 ('the Act') :

1Copy pinpoint1. "Whether on the facts and in the circumstances of the case the H Tribunal is right in holding that the income arising from the ).

CONTINENTAL CONSTRUCTION v. C.I.T. [RANGANATHAN, J.) 69

--r' activities pursuant to the seven agreement with foreign govern- A ments/ enterprises, etc. are governed by the provisions of section 80-HHB of the Income-Tax Act, 1961 and not of section 80-0 of that Act?"

2Copy pinpoint2. "Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that notwithstanding the approvals B granted by the Board to the seven agreements for the purpose of section 80-0, 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?"

3Copy pinpoint3. "Whether on the facts of the case, the Tribunal is right in c 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?"

4Copy pinpoint4. "Whether on the facts and in the circumstances of the case, the Tribunal is right in holding that the assessee company is not an D '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 refer- ences because the above questions arose out of two cross-appeals before the E 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 (l.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 F answered all the three references in favour of the assessee and the aggrieved '~ r Commissioner of Income Tax (C.I.T.) has preferred an appeal to this Court r 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 G 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.

The questions arise out of the assessee's assessment to income tax for H

70 SUPREME COURT REPORTS [1992) 1 S. C. R.

- A the assessment year 1983-84 (the calendar year 1982 being the relevant r previous year). ·Section 80-0 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 enteiprises. This topic was originally dealt with by section 85-C. Section 80-0 was substituted in its place w .e.f. April 1, 1968. The section has since undergone amendments B from time to time. As on 1.4.83, the provision, in so far as is relevant for our pUIJ>Oses, was in the following terms :

Section 80-0 Deduction in respect of royalties etc. from certain ·foreign enterprises. A._ c "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 enteiprise by the assessee, or in consideration of technical serv- ices rendered or agreed to be rendered outside India to such Government or enteiprise 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 -4 into India, in computing the total income of the assessee.

During the currency of this provision, the Finance Act, 1982 introduced G 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 H company or a person (other than a company) who is resident~ ,,.. India includes any profits and gains derived from the business of-

CONTINENTALCONSTRUCTIONv.C.I.T. [RANGANATHAN, J.] 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 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 : c 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 - D (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 : E (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 un-dertaken by him and, H

72 SUPREME COURT REPORTS [1992] 1 S. C.R.

A where the assessee is a person other than an Indian com- y pany 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 B 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 c 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 followiiig for the pur- poses of his business other than for distribution by way of dividends or profits;

D (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 rea- sons. 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 ' -I 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 whkh the deduction under sub-section (1) is ,._

CONTINENTAL.CONSTRUCTION v. C.I.T. [RANGANATHAN, J.] 73

allowed, the assessee utilises the amount credited to the Foreign A -( 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 con- tained in this Act, recompute the total income of the assessee for B 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. ./.. c (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 exeeution 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- D section shall qualify for deduction for any assessment year under any such other provision."

The three questions which ar~ now for consideration before us raise the issue whether the assessee is entitled to a deduction under section 80-0 or section 80-IDIB 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. In India, its projects include dams, irrigation and hydel projects, water supply and sewerage plants, marine and harbour works, t- airports etc:The assessee entered into eight contracts for the construction, r- 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 section 80-0. A broad outline of these projects can be gathered from the following table :

74 SUPREME COURT REPORTS [1992] 1 S. C. R.

A s. Name of Date of Name of the Date of Period of No. Project agreement other contract- approval approval as per ing party by Board Board's letter

1. Abu Sukhair 6.9.75 State Organisation of 11.8.76 For assessment years Project Industrial Design & 1976-77 to 1978-79 Construction, Ministry B of Industry & Minearls, Baghdad (Iraq)

2. Wadi Ghan 8.8.77 · Socialist People's Lib- 31.8.78 For the assessment Dam yan Arab Jamahiriya, years 1978-79 and Secretariat of Dams onwards c and Water Resources, Tripoli, (Libya)

3.Amara 153.78 State Contracting Co. 22.2.79 "Assessment years Project for Water and Sewer- 1979-80 to 1982-83" age Projects, Ministry of Municipalities, Re- D public of Iraq

4. Nassiriyah 14.12.78 Ministry of Housing & 7.2.80 "Assessment years Project Construction, Govt. of 1980-81 and onwards" Iraq

E S. Sulaimaniyah 10.10.79 Ministry of Housing & 31.5.80 "Assessment years Project Construction, Govt. of 1980-81 and onwards" Iraq

6. West Bank 12.4.80 Baghdad Sewerage 23.7.80 "Assessment years Project Board, Govt of Iraq 1981-82 and onwards"

F 7. Karkh 17.12.80 Amanat Al-Asima, 28.10.83 "For the assessment Project Baghdad Water Supply year 1982-83. For the ~ Administration, Govt. subsequent period your ·-l of Iraq, Baghdad attention is invited to the provision of s. 80 HHB which are opera- G tive w.e.f. 1.4.83"

8. Diwaniyah 10.1.81 Water & Sewerage 28.10.83 -do- Project Projects, Baghdad

CONTINENTAL CONSTRUCTION v. CJ.T. [RANGANATHAN, J.] 75

-I In the light of these approvals, the assessee claimed and obtained de- A duction under section 80-0 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 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 eight having been B completed much earlier. Of this, the deduction claimed in respect of the Kaikh'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 80-0 in respect of these two contracts dated 28.10.83 was limited to the assessment year 1982-83. The Inspecting Assistant Commissioner (l.A.C.), Sri Harl Narain, who completed the assessment on 26.3.1984 declined to c grant the assessee any deduction under section 80-0 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 80-0. However, he declined to grant any relief to the assessee even under section 80-HHB as the conditions for exemption specified in that su~section were not fulfilled. In the result. he determined the assessee's total income at D Rs. 89,41,35,103 as against the NIL income returned by the assessee, thus raising a tax dem~d of Rs. <XJ,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 pnder section 80-0 because : (1) the approval of the CBDT for three E 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) ruled out the grant of relief under section 80-0 for any of the projects. He, however, felt that as the assessee had been under a bona fuie belief all F 'r through that it was entitled to relief under section 80-0, it had not had a proper opportunity of putting forth its claim for relief under section 80 HHB. t 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. G 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 con- sideration received by the assessee in the execution of all the seven contracts in general and the Karkh work in particular fell H )<

76 SUPREME COURT REPORTS (1992] 1 S. C.R.

A 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 80-0 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 wnclusion arrived at by the learned B 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 C 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 years 1982-83 and onwards".

In other words, the CBDT lifted its earlier limitation of approval only D to assessment year 1982-83 and made it operative even for sub~quent 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 E . 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 80-0. It was of the view that the Board's approval was a qualified one which fully authorised and empowered the officer to deter- mine whether all the conditions of the section are fulfilled as well as the amount, if any, which could be deducted under section 80-0. 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 80-0. In the result, questions I to ~ 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 coptracts and depends on the terms and conditions of each one of them. H However, the Karkh Water Supply scheme contracts has been taken as the

CONTINENTAL CONSTRUCTION v. CJ.T. [RANGANATHAN, J.] 77

-l 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 precentage 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 Jhe 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 80-0 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 80-0 can have no application to the contracts in question, such conclusion is bound to have repurcussion 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 D a single contract of the works required" for the first stage of the Karlch 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 worlcs; treatment comprising essentially pre-settlement, clarifica- tion and chemical coagulation, rapid gravity sand filtration and disinfection E 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 munici- palities of Abu Ghraib and Taji". Five volumes of documents containing instructions, conditions, general specifications and requirements, specifica- tions for plant and civil works, schedules, and supplementary information and F 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 G 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 H

78 SUPREME COURT REPORTS [1992] 1 S. C.R.

A 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 urthe Government of Iraq" under section 80-0 of the Act. A proforma prescribed B by the Revenue was filled up and enclosed to the application. Para 5 to 11 of this proforma run as follows :

5Copy pinpoint5. Please state whether the income is received in consideration for-

(a) the use outside India of c }..__ (i) any patent, invention model, design, secret, formula or process, or similar property right : No

(ii) information concerning in- D dustrial, commercial or sci- entific knowledge, experi- ence, or skill made avail- Yes able. (b) technical services rendered or Technical services will be rendered by us agreed to be rendered outside India to Baghdad Water Supply Administration, (Please also state the arrangements Government of Iraq in accordance with the available with the appliclillt for said agreement dated 17.12.80. The techni- rendering such technical services cal know-how and services will be ren- and the mode of tendering such dered by us through our qualified experi- services ). enced and skilled Engineers, Scientists and Technicians, for that purpose, a strength of about 1,800 Indian Engineers, Technicians and semi-skilled labours will be inducted.

6Copy pinpoint6. Does the Agreement provide for The agreement also provides for the supply supply of technical know-how or use of goods as per details given below : G rendering of any services other than those covered by section 80-0 (e.g. Machinery, plant, Equipment, Vehicles use of trade marks or supply of cement, steel-bars, Sand Aggregate, Bitu- goods) if so, please specify them men, Fencing-fabric, Shuttering material, and' also the amount of considera- Steel pipes, Patent items, projection, clad- tiott receivable/ received in respect ding, ceiling, Joining, Steel Pipes with lining of them. and ductile iron pipes etc. The cost of H

CONTINENTAL CONSTRUCTION v. Cl.T. [RANGANATHAN, J.) 79

supply of these items will be determined at A ~

~' the close of each year as the work pro- gresses. 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 remain- B ing amount will be the value of technical know-how and seivices to be rendered by us under this contract. It is this amount for which we are seeking exemption u/s 80-0.

7Copy pinpoint7. If technical know-how falls l.Dlder 5(a)(i) above, please indicate. Not applicable. c (a) how the applicant acquired it or what arrangements he has made Not applicable. for acquiring it

(b) What are the applicant's own rights Not applicable. D in respect thereof

(c) Whether its provision to the other party to the agreement involves :- ;o(

(i) transfer of all or any rights of E the applicant in respect of it, if Not applicable. so, please specify the nature and extent of the right trans- ferred and the manner of its transfer ;

(ii) the imparting of any informa- F tion concerning its working or ~ use; if so, please specify the Not applicable. ~ information imparted and the manner of its imparting;

(iii) its use by the other person to G the agreement if so, please specify the nature and manner Not applicable. of the use.

8Copy pinpoint8. If the technical know-how falls un- der 5(a)(ii) above, please specify H

80 SUPREME COURT REPORTS [1992] 1 S. ".:. R.

A (a) the arrangements available with the We have on our rolls qualified Engineers applicant for obtaining and impart- and Technicians who have already acquired ing it the requisite scientific knowledge, experi- ence and skill for giving such technical know-how and it is they, who will be imparting the same to the client by execut- ing the works at the site in Iraq.. B (b) the manner of imparting it The Engineers and Technicians will be working for about 5 years at the site of construction to impart the technical know- how and services on behalf of our Com- pany. c 9. Has the applicant made any agree- ment or arrangement with any other person in India or abroad for obtaining the technical know-how etc., to be Not applicable. provided under this agreement or for rendering technical services? If so, D please give the following information :

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

(ii) details of the agreement or ar- E rangement together with a cer- Not applicable. tified copy of the written agree- ment, if any.

(iii) the nature, and extent of applicant's relationship and as- Not applicable. F sociation with such other per- son.

10Copy pinpoint10. Please state the nature of the in- Income out of imparting civil construction i come in respect of which deduction is know-how and services for the construc- claimed, viz., tion of work of Karkh Water Supply Scheme, Baghdad. G . Royalty

Commission

Fees H ).,

CONTINENTAL CONSTRUCTION v. C.I.T. [RANGANATHAN, J.] 81

Any similar paymenJ A -(

11Copy pinpoint11. Please indicate the portion/ amount (alongwith its computation) which is Please see our reply under S. No. 6 of this eligible for deduction under section form. 80-0 of the Act

On 9.7.81, the C.B.D.T. called upon the assessee to clarify four aspects B 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, scientisls 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 c 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 D use of materials and equipment is part of these services. There is no separate supply of mateC::als 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 _J( Iraq, there is no possibility of making any profit on its con- sumption in execution of the works. E

(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 r country. t- (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 -~

82 SUPREME COURT REPORTS [1992) 1 S. C.R.

A estimated that this will be about 25% of the contract value. The exact amount may vary and will be known only afcer the works have been completed."

There was further correspondence, discussion and hearing including a detailec:l letter of the assessee dated 24.12.1981 and clarificatory letters dated B 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 c your letter No. 601/IT/80-0 dated 3.3.1981 and to convey the approval of the {;entral 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 80-0 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 IltC()me-tax Officer af 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. H

CONTINENTAL CONSTRUCTION v. C.l.T. [RANGANATHAN, J.] 83

6. I am further to add that the approval accorded by this letter is A only for the purpose of section 80-0 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 pur- poses." B 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.

This amendment compelled the assessee to send a letter to the C.B.D.T. C on 9.10.82 explaining that this new provision would not stand in the way of approval being accorded to its contracts under section 80-0. 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 l:l year and~ half ~ater :

"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 atten- tion 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-FID dated 28.10.83, the follow- F ing words and figiires may please be substituted :

"assessment years 1982-83 and onwards"

I.t appears that though the above intimation to the assessee was cryptic, the CBDT had decided to extend the period of operativeness of its approval G under section 80-0 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 H

84 SUPREME COURT REPORTS [1992) 1 S. C.R.

A 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.~985 was addressed by the Deputy Secretary (FfD), Government of B India, (who, at the time, happened to be Sri Hari Narain, the IAC who hat! 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. 777, dated 14th August, 1985 addressed to Member I.T.(J) on the above subject c

2. Letter F. No. 473/644/83-FTD dated 31st July, 1985 was only in recognition of the position that the approval u/s 80-0 is for the agreement as such and the mention of any time limit therein is redundant, except for the starting year.

D 3. As would be noticed from all the approval letters themselves, Board's approval to the agreements is subject to the other condi- tions 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 80-0, it cannot be said that the mere approval would automatically E entitle the assessee to relief u/s 80-0. The quantum, if any, of the income which would be entitled to relief under section 80-0 has necessarily to be detennined by.them on the facts of each case.

4. It would also be noticed from all the approval letters that they ' f ..

are subject to amendments enacted in the Income-tax Act, 1961, F from lime to time. Therefore, notwithstanding the approval under section 80-0 or the words "Assessment year 82-83 and onwards'', if the project or work falls within the definition given in section 80-HHB(l), the same would be hit by the provision of section 80- HHB(S). 0

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-FTO dated H 31.7.1985 for the agreement dated 10.1.81 in respect of the same assessee is also identical.••

CONTINENTAL CONSTRUCTION v. C.I.T. [RANGANATHAN, J.] 85

Nonnally, correspondence of this type would be hardly relevant for A deciding questions regarding the construction of 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 true that in respect of Karkh and Diwaniyah Projects B confusion which has arisen in this case could have been avoided. In the first approval letter the Board confined f:!1e 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 assess- ment 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 80HH-B 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 80-0 if the income does not satisfy the require- ments 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 learned counsel for the revenue has adopted the arguments given in this letter as his own. There is no doubt that the first qualified 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 confusion which might have 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 H

86 SUPREME COURT REPORTS (1992] 1 s·. C.R.

A 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" to 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 ·1T1ay .need consideration by us is the question B how for the issue of the l~tter of 14.9.85 affects the assessee's claim for exemption under section 80-0 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 consid- c ered afresh after giving the assessee an opportunity of being heard, as directed by the CIT (Appeals) and confirmed by the C.l.T. and the High Court (see 1990: 185 ITR 230). It is possible that, with sections 80-HHB and 80-0, as they staild 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, D 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 80-0 was 100% of the qualifying receipts upto assessment year 1984-85. Thereafter the latter was reduced to 50% but the former was raised to 50% only w.e.f. 1.6:1987. This has made it very material to decide whether the assessce is entitled to the deduction E. under section 80-0 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 80-0 without taking into account t))e insertion of section 80-HHB or the complication introduced into the case by the approvals of the CBDT referred to earlier. F The Department's case, urged with great emphasis and vehemence by Sri B.B. Ahuja, is that a careful reading of section 80-0 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 G "foreign project" as defined in that section. We shall, however, consider the two aspects of the· argument separately for t))e -fact that the income in question may qualify for deductiQn under sectimi" SO-HHB does not necessar- ily exclude the applicability of the provisions of section 80-0. 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

CONTINENTAL CONSTRUCilON v. Cl.T. [RANGANATHAN, J.] 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 permits deductions, from the gross total income of an assessee, of various "species" of income, which are carefully defined, in section 80H onwards. Sections B 80H to 80-JJA, SOQQ, 80RR and SOS pennit a deduction in respect of the "profits and gains" or "profits" derived from various types of business, undertakings or professions, sections SOK to SON 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 deduct- ible income into "profits and gains" from activities in the nature of business c on the one hand and income falling under other heads such as interest, divi- dends, income from house property etc. on the other; 80QQA refers to income derived from a profession but only in the fonn of consideration for assignment or grant of copyright interests or royalties or copyright fees;, section SOR and BORRA allow a deduction in respect of "remuneration" : and section SOT relates to "capital gains". In other ~ords, the scheme of this Part D 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 80-0 provides for a deduction only in respect of an assessee 's receipts from a foreign Govern- ment or enterprise by way of "royalty, commission, fees or any similar payment". Not only this; the section also requires that the assessee must have E 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 fonnula or process or similar property, right or infonnation concerning industrial, commercial or scientific 'r-. knowledge, experience o,r skill made available or provided or F r ~ 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 G 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, H ~-

88 SUPREME COURT REPORTS [1992] 1 S. C.R.

)- A 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 80-0 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 B receipts" of Rs. 47,000,122. Deducting a total expenditure of Rs. 1,717,751,494 classified under three headings Direct Contract Expenses, management ex- penses 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 c 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. It is then pointed out that the assessee has not been able to identify ~e 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 D that it is claiming exemption under section 80-0 of the contract on 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 E (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 80-0 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 squarely falling under section 80-HHB F and totally outside-the terms of section 80-0. - --<

Sri Ahuja, in this context, -relied on the observations of this Court in i Cloth Traders P. Ltd. v. CJ.T., (1979) ll8 ITR 243. There the question which this Court had to cQnsider was whether the deduction provided for in G section 80-M of che -Ad 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--concem us but in the course of the discussion, the Court made the following observations on which Sri Ahuja seeks to rely : H .!lo

CONTINENTAL CONSTRUCTION v. C.l.T. [RANGANATHAN, J.] 89

' "Section SOM, 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 incorrie 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 divi- dends from a domestic company which is included in the gross _..j_ total income. The whole of such income, that is, income by way of dividends from a domestic company or 60 per cent of such c 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 Jncome includes this particular category of income, whatever be the quantum of such income included, the condition would be satis- fled 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 F r of the section refer only to the inclusion of the category of the income denoted by the words "income by way of dividends from .r 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, but they must be held referable only to the category of the income included, that is, income by G 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 H ...,<.

90 SUPREME COURT REPORTS (1992] 1 S. C. R.

- A 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 I1R 120 but he points out B - 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 80-0 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". c 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 head- wise classification of section 14. It is well known that items of interest, dividends and other items of remuneration are not always referable to any D 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 eQgineer 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 bdsiness as engineers and contractors and the receipts in question flow to it in ttle course of its business as such will not necessarily 'preclude relief under sec~on 80-0 if they can be brought within the catego- ,ries of receipts mentioned in the section. The material question, therefore, is not whether ihe 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 80-0. To this basic question we shall now turn.

Sri Abuja'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

CONI1NENTAL CONSTRUCTION v. C.I.T. [RANGAN ATHAN, J.] 91

exemption. That apart, of the four expressions referred to in the section three are referred to elsewhere in the Act While 'royalty' is generally a considera- tion 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 purroses of clauses (vi) and (vii) of section 9(1) respectively, they may be set out here. The definitions read thus :

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

xxx xxx xxx c Explanation 2 : For the purposes of this clause, "royalty" m_eans consideration (including any lumpsum consideration but exclud- ing 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 D 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; E

(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 te,chnical, in- dustrial, 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 inducting consideration for the sale, distribution or exhibition of cinematographic films; or

92 SUPREME COURT REPORTS (1992] 1 S. C.R.

A (vi) the rendering of any services in connection with the activi- ties referred to in sub-clauses (i) to (v).

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

B xxx xxx xxx

Explanation (2) : For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of c 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. CJ.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 interpreta- tion 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· H which can be brought under this provision may be varied and the considera- ,

CONTINENTAL CONSTRUCTIQN v. C.I.T. [RAN GAN ATHAN, J.] 93

-. ,· tion stipulated for allowing another to avail of the assessee's asset, know- ledge or services can likewise assume multi-farious forms. The word 'simi- lar' 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 A

i.e. made in consideration of the use or supply of such an asset, knowledge or servic~ 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 B 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 : C "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." D 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 position at this stage. It seems to us that there has been some misconception on the part of the Tribunitl. There are aciually two limbs to the first part of the relevant clause of the section which are clearly brought out E · in column 5 of the application for approval made to the Board. Col. S(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 knowl- edge, experience or skill made available by the assessee. The second part of the clause is dealt with in Col. S(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 H

94 SUPREME COURT REPORTS [1992] 1 S. C.R.

A 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 B 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 Trib1,mal. The word "Admittedly" used by the Tribunal in the passage relied on by Sri Ahuja does c not appear to refer to any admission over a~d 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 contrac- tor: 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 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 io us that while Sri Ahuja seems to be right in saying that the assessee was concerned only with the civil works

CONTINENT AL CONSTRUCTION v. C.I.T. [RANGANATHAN, J.] 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 "tum-key project" which, indeed, was the description given to it by the assessee itself - in para 19 of the appl!cation 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. c ' 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 knowl- edge and expertise. It cannot therefore, be doubted that the assessee, under D · 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 Goyernment. 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 Gov- ernment; 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 .enter- prise 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 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 associa- tion 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 H

96 SUPREME COURT REPORTS (1992] IS. C.R.

A 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 :

B "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 c contract including the design, manufacture, delivery, supply, installation, construction, setting to work, commissioning, site testing, operations and maintenance as ~e 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 respects with the provisions of the contract. The general specifi- cation 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 geologi- cal 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 interpret 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 exi:;ting 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 contem· plated as a part of the contract. The contract also contemplated training the employers personnel for the operation and mainte- nance of the whole of the work and had also to conduct studies on water treatment process to optimise operations.