Facts

Assessee company was incorporated with the purpose of setting up a gas based power project in Andhra Pradesh. With the  intention to  utilize  expert  services of a qualified and experienced professionals who could prepare a scheme for raising the required finance and tie up the required loan, it sought services of a consultant and eventually entered into an agreement with ABB – Projects & Trade Finance International Ltd., Zurich, Switzerland, (‘ABB’). ABB rendered professional services from Zurich by correspondence as to how to execute the documents for sanction of loan by the financial institutions within and outside the country. After successful rendering of services ABB sent invoice to Assessee company. After receipt of the invoice Assessee company approached the concerned Income Tax Officer (‘ITO’) to issue a ‘No Objection Certificate’ to remit the said sum duly pointing out that the ABB had no place of business in India; that all the services rendered by it  were from outside India; and  that no part of  fee  could be  said  to arise or accrue or deemed to arise or accrue in India attracting the liability under the Income-tax Act, 1961 (‘the Act’). It was also stated as the ABB had no business connection s. 9(1)(i) is not attracted and further as NRC had rendered     no technical services s. 9(1)(vii) is also no attracted. However ITO rejected the application.

Assessee thereafter filed a revision application before the Commissioner of Income Tax (‘CIT’). CIT permitted the Assessee to remit the said sum to ABB by furnishing a bank guarantee for the tax amount. However after six months the   CIT revoked the earlier order and directed the Assessee to deduct tax and pay the amount as a condition precedent for issuance of ‘No objection certificate’.

Being aggrieved the Assessee approached the High Court by filing a writ, praying to quash the orders. The department argued that services rendered by ABB fell within the ambit of managerial as well as consultancy services as per section 9(1)(vii)(b). The Court upheld that section 9(1)(i) did  not  apply  in the present facts however, held that services come within the scope of technical services section 9(1)(vii) and hence Assessee was not entitled to ‘No objection certificate’. The Assessee had also challenged constitutional validity of section 9(1)(vii)(b) on the ground of legislative competence and violation of Article 14 of Constitution. The Court relied on Electrical Corporation of India  Ltd. (‘ECIL’)  v.  CIT rendered in WP.  No. 105/1987 on 24 March 1987, approved  in (1990) 183 ITR 43 (SC) and rejected the contention.

 

 

Thereafter the Assessee company approached the Supreme Court. When the matter came up before two-Judge Bench of Supreme Court, the bench took note of the far-reaching issues of constitutional purport and referred it to larger bench. When the matter came before three-Judge bench they referred it to Constitution bench.

Before the Constitution Bench the Assessee withdrew its challenge to the constitutional validity of Section 9(1)(vii)(b) of the Act and elected to proceed on the factual matrix as to the applicability of the said provision. However, Attorney General pressed upon for reconsideration, the decision in  three-Judge Bench  in ECIL case, the larger Bench considered the validity of the requirement of a relationship to or nexus with territory of India as a limitation on the powers of Parliament to enact laws pursuant to clause (1) ofArticle 245 of the Constitution.

 

Issue

Two divergent, and dichotomous, views were before the Constitution Bench. First one was whether Parliament powers to legislate, incorporate only a competence, to enact laws with respect to aspects or causes that occur, arise or exist, or may be expected to do so, solely within India. A slightly weaker form       of the foregoing strict territorial nexus restriction would be that the Parliament’s competence to legislate with respect to extra-territorial aspects or causes would    be constitutionally permissible if and only if they have or are expected to have significant or sufficient impact on or effect in or consequence for India. An even weaker form of the territorial nexus restriction would be that as long as some impact or nexus with India is established or expected, then the Parliament would  be empowered to enact legislation with respect to such extra-territorial aspects      or causes. The polar opposite of the territorial nexus theory, was whether the Parliament has inherent powers to legislate “for” any territory, including territories beyond India, and that no court in India may question or invalidate such laws on the ground that they are extra-territorial laws. Such a position incorporates the views that Parliament may enact legislation even with respect to extra-territorial aspects or causes that have no impact on, effect in or  consequence for  India,  any part of it, its inhabitants or Indians, their interests, welfare, or security, and further that the purpose of such legislation need not in any manner or form be intended to benefit India. Juxtaposing these two divergent views the Bench framed followingquestions:

• Is the Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on, or effect(s) in, or consequences for:
  1. the territory of India, or any part of India; or
  2. the interests of, welfare of, well being of, or security of inhabitants of India, and Indians?

 

 

• Does the Parliament have the powers to legislate “for” any territory, other than the territory of India or any part of it?

 

View

The Court observed that in ECIL decision it was concluded that the Parliament does not have the powers to make laws that bear no relationship to or  nexus with India. The Court was of the opinion that the distinction drawn in ECIL between “make laws” and “operation” of law is a valid one, and leads to a correct assessment of the relationship between Clauses (1) and (2) of Article 245.

Because of interdependencies and the fact that many extra-territorial aspects    or causes have an impact on or nexus with theterritory of the nation-state, it would be impossible to conceive legislative powers and competence of national parliaments as being limited only to aspects or causes that arise, occur or exist       or may be expected to do so, within the territory of its own nation-state. Indian Constitution has to be necessarily understood as imposing affirmative obligations on all the organs of the State to protect the interests, welfare and security of India. Consequently, the Parliament has been constituted, and empowered to,  and that its core role would be to, enact laws that serve such purposes. Hence   even those extra-territorial aspects or causes, provided they have a nexus with India, should be deemed to be within the domain of  legislative competence of the Parliament, except to the extent the Constitution itself specifies otherwise. The Parliament’s powers to enact legislation, pursuant to Clause (1) of Article 245 may not extend to those extra-territorial aspects or causes that have no impact on or nexus with India.

To enact legislation with respect to extra-territorial aspects or causes, without any nexus to India, would in many measures be an abdication of the responsibility   that has been cast upon Parliament as above. International peace and security has been recognized as being vital for the interests of India. This is to be achieved       by India maintaining just and honourable relations, by fostering respect for international and treaty obligations etc., as recognized in Article 51. It is one matter to say that because certain extra-territorial aspects or causes have an impact on or nexus with India, Parliament may enact laws with respect to such aspects or causes.

The Court was unable to agree with the view that Parliament, on account of an alleged absolute legislative sovereignty being vested in it, should be deemed to  have the powers to enact any and all legislation, de hors the requirement that the purpose of such legislation be for the benefit of India. The absolute requirement     is that all legislation of the Parliament has to be imbued with, and at the core     only be filled with, the purpose of effectuating benefits to India. This is not just      a matter of the structure of our Constitution; but the veryfoundation.

List I -Union List of the Seventh Schedule clearly lists out many matters that could be deemed to  implicate aspects or  causes that arise beyond the  territory of India. In particular, but not limited to, note may be made of Entries 9

 

 

through 21 thereof. Combining the fact that the Parliament has been granted residuary legislative powers and competence with respect to matters that are  not enumerated in Concurrent and State Lists, vide Article 248, the fact that Parliament has been granted legislative powers and competence over various matters, as listed in List I of the Seventh Schedule, many of which may clearly      be seen to be falling in the class of extra-territorial aspects or causes, vide Article 246, and the powers to make laws “for the whole or any part of the territory of India”, vide Article 245, the Court concluded that, contrary to the rigid reading      of the ratio in ECIL, Parliament’s legislative  powers and competence  with respect to extra-territorial aspects or causes that have a nexus with India was considered and provided for by the framers of the Constitution. Further, in as much as Article 245, and by implication Articles 246 and 248, specify that it is “for the whole or  any part of the territory of India” that such legislative powers have been given to the Parliament, it logically follows that Parliament is not empowered to legislate with respect to extra-territorial aspects or causes that have no nexus whatsoever with India.

Article 260, in Chapter II of Part XI is arguably the only provision in the Constitution that explicitly  deals with the jurisdiction  of  the Union in relation    to territories outside India, with respect to all three functions of governance – legislative, executive and judicial. It is clear from the text of Article 260 that it is  the Government of India which may exercise legislative, executive, and judicial functions with respect of  certain specified foreign territories, the  Governments of  which, and  in  whom such powers have been vested, have entered into  an agreement with Government of India asking it do the same. Indeed, from Article 260, it is clear that Parliament may enact laws, whereby it specifies the conditions under which the Government of India may enter into such agreements, and how such agreements are actually implemented.

 

Held

As per the Court, the answer to the first question was affirmative. However, Parliament may exercise its legislative powers with respect to extra-territorial aspects or causes—events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like—that occur, arise or exist or may be expected to do so, naturally or on account of some human agency, in the social, political, economic, cultural, biological, environmental or physical spheres outside the territory of India, and seek to control, modulate, mitigate or transform the effects of such extra-territorial aspects or causes, or in appropriate cases, eliminate or engender such extra-territorial aspects or causes, only when such extra-territorial aspects or causes have, or are expected to have, some impact on,   or effect in, or consequences for: (a) the territory of India, or any part of India; or

(b) the interests of, welfare of, well-being of, or security of inhabitants of India,   and Indians.

 

 

It further held that whether a particular law enacted by Parliament does show such a real connection, or expected real connection, between the extra-territorial aspect or cause and something in India or related to India and Indians, in terms     of impact, effect or consequence, would be a mixed matter of facts and of law. Obviously, where Parliament itself posits a degree of such relationship, beyond the constitutional requirement that it be real and not fanciful, then the courts would have to enforce such a requirement in the operation of the law as a matter  of that law itself, and not of the Constitution.

The answer to second question was negative. The Court held that it was obvious that Parliament is empowered to make laws with respect to aspects or causes that occur, arise or exist, or may be expected to do so, within the territory of India,    and also with respect to extra-territorial aspects or causes that have an impact     on or nexus with India. Any laws enacted by Parliament with respect to extra- territorial aspects or causes that have no impact on or nexus with India would be ultra vires, and would be laws made “for” a foreignterritory.

 

Editorial:

• GVK Industries ITO (2015) 371 ITR 453 (SC) have explained difference between “situs of residence” and “situs of source of income” also held that source rule is in consonance with the nexus theory and does not fall of the said doctrine on the ground of extraterritorial operations. Apex Court relies on Constitution bench judgment in GVK, observes “what is prohibited by international taxation law is imposition of sovereign act of a State on a sovereign territory. This principle of formal territoriality applies in particular, to acts intended to enforce internal legal provisions abroad.

•                Vodafone International Holdings BV v. UOI (2012) 341 ITR 1 (SC)

Substantial territorial nexus between the income and the territory which seeks to tax that income, is of prime importance to levy tax.

• Useful reference may also be made to the following decisions:

—             CIT v. Havells India Ltd (2012) 352 ITR 376 (Delhi) (HC)

• DIT Lufthansa Cargo India (2015) 375 ITR 85 (Delhi) (HC) 

• “To lose patience is to lose the battle.”

  – Mahatma Gandhi