PETITIONER:
ELECTRONICS CORPORATION OF INDIA LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX & ANR.
DATE OF JUDGMENT02/05/1989
BENCH:
PATHAK, R.S. (CJ)
BENCH:
PATHAK, R.S. (CJ)
MISRA RANGNATH
VENKATACHALLIAH, M.N. (J)
CITATION:
1989 AIR 1707 1989 SCR (2) 994
1989 SCC Supl. (2) 642 JT 1989 (2) 335
1989 SCALE (1)1567
ACT:
Constitution of India, 1950: Article 245.
Parliament--Legislative competence--Whether can pass
law having extra--Territorial operation--Existence of nexus
whether necessary.
Income Tax Act, 1961: Sections 9(1)(vii), 195.
Whether extra-territorial in operation.
Agreement with foreign company--Fees payable for techni-
cal services--Whether accrual of income in
India--Tax--Whether to be deducted at source.
HEADNOTE:
The appellant company entered into an agreement with a
Norwegian Company under which the latter was to provide
technical knowhow and technical services including facili-
ties for the training of personnel of the appellant company
in connection with the manufacture of computers for a con-
sideration of NOK 32 Millions, Norwegian Currency, equiva-
lent to Rs.575 lakhs.
The appellant company applied to the Income Tax Officer
for 'No Objection Certificate' under Section 195(2) of the
Income Tax, 1961 in order to remit the instalments due under
the agreement without deducting the tax at source but the
same was refused.
The application of the appellant company to the Commis-
sioner of Income Tax seeking a direction to the Income Tax
Officer was also rejected on the ground that having regard
to Sections 9(1)(vii) and 195 of the Income Tax Act, 1961
the payment to the foreign company constituted deemed accru-
al of Income in India and therefore the appellant was
obliged to deduct at source the tax payable by the foreign
company. A writ petition filed by the appellant against the
order of the Commissioner and assailing the constitutional
validity of Section 9(1)(vii) of the
995
Income tax Act, 1961 was dismissed by the High Court of
Andhra Pradesh. A similar writ petition filed against the
order of refusal of 'No Objection Certificate' by the Com-
missioner of Income Tax in relation to disbursement made
under an agreement with a U.S. Company was also dismissed by
the High Court.
Against the decision of the High Court appeals were
filed in this Court challenging the vires of Section
9(1)(vii) of the Income Tax Act, 1961 contending that (i) it
was extra-territorial in operation, and (ii) there was no
nexus between anything done in India and the persons sought
to be taxed.
Referring the matter to a Constitution Bench,
HELD: 1. It is envisaged under our constitutional scheme
that Parliament in India may make laws which operate extra-
territorially. Article 245(2) declares that no law made by
Parliament shall be deemed to be invalid on the ground that
it would have extra-territorial operation. Therefore, a
Parliamentary statute having extra-territorial operation
cannot be ruled out from contemplation. The operation of the
law can extend to persons, things and acts outside the
territory of India. The general principle, flowing from the
sovereignty of States, is that laws made by one State can
have no operation in another State. But while the enforce-
ment of the law cannot be contemplated in a foreign State,
it can, nonetheless, be enforced by the courts of the enact-
ing State to the degree that is permissible with the machin-
ery available to them. They will not be regarded by such
courts as invalid on the ground of such extra-territoriali-
ty. [998H, 999A-B, D]
British Columbia Electric Railway Company Limited v. The
King, [1946] A.C. 527, applied.
2. But unless nexus exists Parliament will have no
competence to make the law. Article 245(1) empowers Parlia-
ment to enact law for the whole or any part of the territory
of India. The provocation for the law must be found within
India itself. Such a law may have extra-territorial opera-
tion in order to subserve the object, and that object must
be related to something in India. It is inconceivable that a
law should be made by Parliament in India which has no
relationship with anything in India. [999E-F]
2.1 In view of the great public importance of the ques-
tion, whether the ingredients of the impugned provision
indicate a nexus
996
these cases are referred to a Constitution Bench. [999H]
Corborandum Co. v. C.I.T., [1977] 108 I.T.R. 335; referred
to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2697 &
2698 of 1989.
From the Judgment and Order dated 24.3.87 & 1.7.87 of
the Andhra Pradesh High Court in Writ Petition No. 105 &
8737 of 1987.
N.A. Palkhivala, P.A.S. Rao, D.N. Mishara, Ranganatha
Chari and Ms. Rubi Anand for the Petitioners.
S.C. Manchanda, Ms. A. Subhashini and B.B. Ahuja for the
Respondents.
The Judgment of the Court was delivered by
PATHAK, C J: Special Leave granted.
These appeals by Special Leave are directed against the
dismissal by the Andhra Pradesh High Court of Writ Petitions
filed by the appellant.
The appellant, Messrs Electronics Corporation of India
Limited, entered into a memorandum of understanding with a
Norwegian company at Paris. This was followed by an agree-
ment dated 2 May, 1986 executed at Hyderabad. Under that
agreement the Norwegian company was to provide technical
know-how and technical services, including facilities for
the training of personnel, to the appellant in connection
with the manufacture of computers. The consideration for the
technical know-how and technical services was represented by
Norwegian currency NOK 32 Millions equivalent to about
Rs.575 lakhs. Eighty five per cent of the consideration was
to be paid from credit provided by Norwegian authorities and
the balance fifteen per cent was to be paid out of free
foreign exchange made available by the State Bank of India,
London Branch. It is not in dispute that the agreement had
received the careful consideration of the Reserve Bank of
India and of the Central Government.
The appellant approached the Income Tax Officer for the
grant of a ‘No Objection Certificate’ as contemplated under
s. 195(2) of the
997
Income Tax Act, 1961, to enable it to remit the instalments
due without any obligation to deduct any income tax at
source, but the request was denied. On 23 December, 1986 the
appellant made an application to the Commissioner of Income
Tax for a direction to the Income tax Officer, but the
Commissioner rejected the application. The Commissioner took
the view that having regard to Section 9(1)(vii) and Section
195 of the Income Tax Act, 1961, the payment constituted
income which was deemed to accrue or arise in India and was
liable to deduction of tax at source.
The appellant filed a Writ Petition against the order of
the Commissioner, and assailed the constitutional validity
of Section 9(1)(vii) of the Act. It was urged before the
High Court that Parliament was not competent to enact Sec-
tion 9(1)(vii) of the Act inasmuch as the provision possess-
es as extra territorial operation without any nexus between
the person sought to be taxed and the country seeking to
tax. It was further contended that even after the introduc-
tion of Section 9(1)(vii) by the Finance Act of 1976 with
effect from 1 June, 1976, the requirement of a business
connection of a foreign Company was required, and the case
was governed by CORBORANDUM CO. v. C.I.T., [1977] 108 I.T.R.
335. It was also urged that after the introduction of the
Explanation by the Finance Act of 1977 with effect from 1
April, 1977 Section 9(1)(vii) creates an invidious discrimi-
nation among companies which had entered into a foreign
collaboration agreement prior to 1 April, 1976 and those who
have done so after that date, and that therefore Article 14
was violated. The High Court repelled all the contentions of
the appellant and dismissed the Writ Petition. A similar
Writ Petition was filed by the appellant against an order of
the Commissioner of Income tax declining to direct the grant
of a ‘No Objection Certificate, in relation to disbursement
made under a licence agreement with Messrs Control Data
Indo-Asia Company, U.S.A., and the Writ Petition was dis-
missed by the High Court for the reasons which had found
favour with it in the earlier case.
It is contended by learned counsel for the appellant that s.
9(1)(vii) of the Income Tax Act is ultra vires inasmuch as
it enables the levy of income-tax on the Norwegian company
in the one case and the American company in the other in
circumstances which appear to show that the statute operates
extra-territorially without the need for any nexus between
anything done in India and the person sought to be taxed. S.
9(1)(vii) declares:
“9(1) The following incomes shall be deemed to
accrue or
998
arise in India–
(i)…………………………………………
…………………………………………
(vii) income by way of fees for technical
services payable by–
(a) the Government; or
(b) a person who is a resident, except where
the fees are payable in respect of services
utilised in a business or profession carried
on by such person outside India or for the
purposes of making or earning any income from
any source outside India; or
(c) a person who is a non-resident, where the
fees are payable in respect of services uti-
lised in a business or profession carried on
by such person in India or for the purposes of
making or earning any’income from any source
in India;
Explanation.–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 tech-
nical 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”.
It seems that the Revenue is proceeding on the basis
that the foreign company is liable to tax and that therefore
the petitioner is obliged to deduct at source the tax pay-
able by the foreign company. We are informed that the serv-
ices are rendered by the foreign company in the nature of
training abroad to personnel belonging to the appellant, and
that payment to the foreign company is also effected abroad.
The Revenue rests its case on S. 9(1)(vii)(b) of the Act,
and the question is whether on the terms in which the provi-
sion is couched it is ultra vires.
Now it is perfectly clear that it is envisaged under our
constitutional scheme that Parliament in India may make laws
which operate
999
extra-territorially. Art. 245(1) of the Constitution pre-
scribes the extent of laws made by Parliament. They may be
made for the whole or any part of the territory of India.
Art. 245(2) declares that no law made by Parliament shall be
deemed to be invalid on the ground that it would have
extra-territorial operation. Therefore, a Parliamentary
statute having extra-territorial operation cannot be ruled
out from contemplation. The operation of the law can extend
to persons, things and acts outside the territory of India.
The general principle, flowing from the sovereignty of
States, is that laws made by one State can have no operation
in another State. The apparent opposition between the two
positions is reconciled by the statement found in British
Columbia Electric Railway Company Limited v. The King,
[1946] A.C. 527:
“A legislature which passes a law having
extra-territorial operation may find that what
it has enacted cannot be directly enforced,
but the Act is not invalid on that account,
and the courts of its country must enforce the
law with the machinery available to them.”
In other words, while the enforcement of the law cannot be
contemplated in a foreign State, it can, nonetheless, be
enforced by the courts of the enacting State to the degree
that is permissible with the machinery available to them.
They will not be regarded by such courts as invalid on the
ground of such extra-territoriality.
But the question is whether a nexus with something in
India is necessary. It seems to us that unless such nexus
exists Parliament will have no competence to make the law.
It will be noted that Article 245(1) empowers Parliament to
enact law for the whole or any part of the territory of
India. The provocation for the law must be found within
India itself. Such a law may have extra-territorial opera-
tion in order to subserve the object, and that object must
be related to something in India. It is inconceivable that a
law should be made by Parliament in India which has no
relationship with anything in India. The only question is
then whether the ingredients in terms of the impugned provi-
sion indicate a nexus. The question is one of substantial
importance, specially as it concerns collaboration agree-
ments with foreign companies and other such arrangements for
the better development of industry and commerce in India. In
view of the great public importance of the question, we
think it desirable to refer these cases to a Constitution
Bench, and we do so order.
T.N.A.
1000