Project Reference Compilation Error

Question

In my C# solution, there is a web service project in which adding project reference of a class library project does not work, it throws compilation error saying -

The type or namespace name 'xyz' does not exist in the namespace 'abc.pqr' (are you missing an assembly reference?)

abc.pqr.xyz is from the class library being referenced.

while adding dll reference does not throw any compilation error.

I even checked the framework, it is .net framework 4 in both.

One thing more, the project which needs to have a reference was a web service project (Framework 3.5, converted to 4.0).

I added another web service (then converted to 4.0), then added project reference added the same code, compilation goes well.

Issue is with only one project in the solution.

Please help me to figure out the fix.