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November 30, 2020

Any laws enacted by Parliament w.r.t extraterritorial aspects that have no impact on or nexus with India would be ultra vires – SC

by CA Shivam Jaiswal in Income Tax

Any laws enacted by Parliament w.r.t extraterritorial aspects that have no impact on or nexus with India would be ultra vires – SC

Article 245 of the constitution declares that parliament may make laws for the whole or any part of the territory of India and a state legislature can make laws for the whole or any part of the state. Seventh Schedule of the constitution distributes the legislative powers between the centre and the state by putting subjects into Union List, State List and Concurrent List.

The centre can make law on any of the subjects in the union list or in the concurrent list. The parliament can override the law of a state on a subject listed in concurrent list. In addition to these powers, the residuary powers are also vested with the parliament. Let us refer to the case of GVK Industries Ltd. v. ITO where the main issue under consideration was whether Parliament can enact laws w.r.t extraterritorial aspects that have no impact on or nexus with India or not.

Facts of the Case:

  • 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 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.
  • It was also stated as the ABB had no business connection section 9(1)(i) is not attracted and further as NRC had rendered no technical services section 9(1)(vii) is also no attracted.
  • However, ITO rejected the application.

Application to CIT

  • 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 6 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’.

Petition to High Court (HC)

  • Being aggrieved the Assessee approached the HC 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.
  • Thereafter the Assessee company approached the Supreme Court.

Observations of SC on whether Parliament’s powers to enact legislation can extend to extra-territorial aspects or not

  • Due to interdependencies and the fact that many extra-territorial aspects or causes have an impact on or nexus with the territory 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 had 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 was 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 Article 245(1) may not extend to those extra-territorial aspects or causes that have no impact on or nexus with India.

Observations of SC on when can Parliament enact legislation for extra-territorial aspects

  • 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 were recognized as being vital for the interests of India.
  • This was to be achieved by India maintaining just and honourable relations, by fostering respect for international and treaty obligations etc., as recognized in Article 51.
  • If certain extra-territorial aspects or causes had an impact on or nexus with India, Parliament may enact laws with respect to such aspects or causes.
  • SC 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 was 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.

Observations of the SC on the provisions of the Constitution

  • Union List of the Seventh Schedule clearly listed out matters that could be deemed to implicate aspects or causes that arise beyond the territory of India.
  • Combining the fact that the Parliament was 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 was granted legislative powers and competence over various matters, as listed in List I of the Seventh Schedule, many of which were clearly 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, SC concluded that 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 dealt 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 was 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.

In conclusion:

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:

  • the territory of India, or any part of India; or
  • the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians.

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 extraterritorial aspects or causes that have no impact on or nexus with India would be ultra vires, and would be laws made “for” a foreign territory

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