{"id":36486,"date":"1989-05-02T00:00:00","date_gmt":"1989-05-01T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/electronics-corporation-of-india-vs-commissioner-of-income-tax-anr-on-2-may-1989"},"modified":"2017-05-08T02:13:09","modified_gmt":"2017-05-07T20:43:09","slug":"electronics-corporation-of-india-vs-commissioner-of-income-tax-anr-on-2-may-1989","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/electronics-corporation-of-india-vs-commissioner-of-income-tax-anr-on-2-may-1989","title":{"rendered":"Electronics Corporation Of India … vs Commissioner Of Income Tax & Anr on 2 May, 1989"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Electronics Corporation Of India … vs Commissioner Of Income Tax & Anr on 2 May, 1989<\/div>\n
Equivalent citations: 1989 AIR 1707, \t\t 1989 SCR (2) 994<\/div>\n
Author: R Pathak<\/div>\n
Bench: Pathak, R.S. (Cj)<\/div>\n
           PETITIONER:\nELECTRONICS CORPORATION OF INDIA LTD.\n\n\tVs.\n\nRESPONDENT:\nCOMMISSIONER OF INCOME TAX & ANR.\n\nDATE OF JUDGMENT02\/05\/1989\n\nBENCH:\nPATHAK, R.S. (CJ)\nBENCH:\nPATHAK, R.S. (CJ)\nMISRA RANGNATH\nVENKATACHALLIAH, M.N. (J)\n\nCITATION:\n 1989 AIR 1707\t\t  1989 SCR  (2) 994\n 1989 SCC  Supl.  (2) 642 JT 1989 (2)\t335\n 1989 SCALE  (1)1567\n\n\nACT:\nConstitution of India, 1950: Article 245.\n    Parliament--Legislative   competence--Whether  can\tpass\nlaw having extra--Territorial operation--Existence of  nexus\nwhether necessary.\nIncome Tax Act, 1961: Sections 9(1)(vii), 195.\nWhether extra-territorial in operation.\n    Agreement with foreign company--Fees payable for techni-\ncal\tservices--Whether    accrual\tof     income\t  in\nIndia--Tax--Whether to be deducted at source.\n\n\n\nHEADNOTE:\n    The\t appellant company entered into an agreement with  a\nNorwegian  Company  under which the latter  was\t to  provide\ntechnical  knowhow and technical services including  facili-\nties for the training of personnel of the appellant  company\nin  connection with the manufacture of computers for a\tcon-\nsideration  of NOK 32 Millions, Norwegian Currency,  equiva-\nlent to Rs.575 lakhs.\n    The appellant company applied to the Income Tax  Officer\nfor  'No Objection Certificate' under Section 195(2) of\t the\nIncome Tax, 1961 in order to remit the instalments due under\nthe  agreement without deducting the tax at source  but\t the\nsame was refused.\n    The application of the appellant company to the  Commis-\nsioner\tof Income Tax seeking a direction to the Income\t Tax\nOfficer\t was also rejected on the ground that having  regard\nto  Sections 9(1)(vii) and 195 of the Income Tax  Act,\t1961\nthe payment to the foreign company constituted deemed accru-\nal  of\tIncome\tin India and  therefore\t the  appellant\t was\nobliged\t to deduct at source the tax payable by the  foreign\ncompany. A writ petition filed by the appellant against\t the\norder  of the Commissioner and assailing the  constitutional\nvalidity of Section 9(1)(vii) of the\n995\nIncome\ttax  Act, 1961 was dismissed by the  High  Court  of\nAndhra\tPradesh. A similar writ petition filed\tagainst\t the\norder  of refusal of 'No Objection Certificate' by the\tCom-\nmissioner  of  Income Tax in relation to  disbursement\tmade\nunder an agreement with a U.S. Company was also dismissed by\nthe High Court.\n    Against  the  decision of the High\tCourt  appeals\twere\nfiled  in  this\t Court\tchallenging  the  vires\t of  Section\n9(1)(vii) of the Income Tax Act, 1961 contending that (i) it\nwas  extra-territorial in operation, and (ii) there  was  no\nnexus between anything done in India and the persons  sought\nto be taxed.\nReferring the matter to a Constitution Bench,\n    HELD: 1. It is envisaged under our constitutional scheme\nthat Parliament in India may make laws which operate  extra-\nterritorially.\tArticle 245(2) declares that no law made  by\nParliament shall be deemed to be invalid on the ground\tthat\nit  would  have extra-territorial  operation.  Therefore,  a\nParliamentary  statute\thaving\textra-territorial  operation\ncannot be ruled out from contemplation. The operation of the\nlaw  can  extend  to persons, things and  acts\toutside\t the\nterritory of India. The general principle, flowing from\t the\nsovereignty  of States, is that laws made by one  State\t can\nhave  no operation in another State. But while the  enforce-\nment  of the law cannot be contemplated in a foreign  State,\nit can, nonetheless, be enforced by the courts of the enact-\ning State to the degree that is permissible with the machin-\nery  available\tto them. They will not be regarded  by\tsuch\ncourts as invalid on the ground of such\t extra-territoriali-\nty. [998H, 999A-B, D]\n    British Columbia Electric Railway Company Limited v. The\nKing, [1946] A.C. 527, applied.\n    2.\tBut  unless  nexus exists Parliament  will  have  no\ncompetence to make the law. Article 245(1) empowers  Parlia-\nment to enact law for the whole or any part of the territory\nof  India. The provocation for the law must be found  within\nIndia  itself. Such a law may have extra-territorial  opera-\ntion  in order to subserve the object, and that object\tmust\nbe related to something in India. It is inconceivable that a\nlaw  should  be\t made by Parliament in India  which  has  no\nrelationship with anything in India. [999E-F]\n    2.1 In view of the great public importance of the  ques-\ntion,  whether\tthe ingredients of  the\t impugned  provision\nindicate a nexus\n996\nthese cases are referred to a Constitution Bench. [999H]\nCorborandum  Co. v. C.I.T., [1977] 108 I.T.R. 335;  referred\nto.\n\n\n\nJUDGMENT:\n<\/pre>\n
    CIVIL  APPELLATE JURISDICTION: Civil Appeal No.  2697  &
\n2698 of 1989.\n<\/p>\n
    From  the Judgment and Order dated 24.3.87 &  1.7.87  of
\nthe  Andhra  Pradesh High Court in Writ Petition No.  105  &
\n8737 of 1987.\n<\/p>\n
    N.A.  Palkhivala, P.A.S. Rao, D.N.\tMishara,  Ranganatha
\nChari and Ms. Rubi Anand for the Petitioners.
\n    S.C. Manchanda, Ms. A. Subhashini and B.B. Ahuja for the
\nRespondents.\n<\/p>\n
The Judgment of the Court was delivered by
\nPATHAK, C J: Special Leave granted.\n<\/p>\n
    These appeals by Special Leave are directed against\t the
\ndismissal by the Andhra Pradesh High Court of Writ Petitions
\nfiled by the appellant.\n<\/p>\n
    The\t appellant, Messrs Electronics Corporation of  India
\nLimited,  entered into a memorandum of understanding with  a
\nNorwegian  company at Paris. This was followed by an  agree-
\nment  dated  2 May, 1986 executed at Hyderabad.\t Under\tthat
\nagreement  the\tNorwegian company was to  provide  technical
\nknow-how  and technical services, including  facilities\t for
\nthe  training of personnel, to the appellant  in  connection
\nwith the manufacture of computers. The consideration for the
\ntechnical know-how and technical services was represented by
\nNorwegian  currency  NOK  32 Millions  equivalent  to  about
\nRs.575 lakhs. Eighty five per cent of the consideration\t was
\nto be paid from credit provided by Norwegian authorities and
\nthe  balance  fifteen per cent was to be paid  out  of\tfree
\nforeign exchange made available by the State Bank of  India,
\nLondon\tBranch. It is not in dispute that the agreement\t had
\nreceived  the careful consideration of the Reserve  Bank  of
\nIndia and of the Central Government.\n<\/p>\n
    The appellant approached the Income Tax Officer for\t the
\ngrant of a ‘No Objection Certificate’ as contemplated  under
\ns. 195(2) of the
\n997<\/span>
\nIncome Tax Act, 1961, to enable it to remit the\t instalments
\ndue  without  any  obligation to deduct any  income  tax  at
\nsource, but the request was denied. On 23 December, 1986 the
\nappellant made an application to the Commissioner of  Income
\nTax  for  a  direction to the Income tax  Officer,  but\t the
\nCommissioner rejected the application. The Commissioner took
\nthe view that having regard to Section 9(1)(vii) and Section
\n195  of\t the Income Tax Act, 1961, the\tpayment\t constituted
\nincome which was deemed to accrue or arise in India and\t was
\nliable to deduction of tax at source.\n<\/p>\n
    The appellant filed a Writ Petition against the order of
\nthe  Commissioner, and assailed the constitutional  validity
\nof  Section  9(1)(vii) of the Act. It was urged\t before\t the
\nHigh  Court that Parliament was not competent to enact\tSec-
\ntion 9(1)(vii) of the Act inasmuch as the provision possess-
\nes as extra territorial operation without any nexus  between
\nthe  person  sought to be taxed and the country\t seeking  to
\ntax. It was further contended that even after the  introduc-
\ntion  of Section 9(1)(vii) by the Finance Act of  1976\twith
\neffect\tfrom  1 June, 1976, the requirement  of\t a  business
\nconnection  of a foreign Company was required, and the\tcase
\nwas governed by CORBORANDUM CO. v. C.I.T., [1977] 108 I.T.R.\n<\/p>\n
335.  It was also urged that after the introduction  of\t the
\nExplanation  by the Finance Act of 1977 with effect  from  1
\nApril, 1977 Section 9(1)(vii) creates an invidious discrimi-
\nnation\tamong  companies which had entered  into  a  foreign
\ncollaboration agreement prior to 1 April, 1976 and those who
\nhave done so after that date, and that therefore Article  14
\nwas violated. The High Court repelled all the contentions of
\nthe  appellant\tand dismissed the Writ Petition.  A  similar
\nWrit Petition was filed by the appellant against an order of
\nthe Commissioner of Income tax declining to direct the grant
\nof a ‘No Objection Certificate, in relation to\tdisbursement
\nmade  under  a licence agreement with  Messrs  Control\tData
\nIndo-Asia  Company, U.S.A., and the Writ Petition  was\tdis-
\nmissed\tby  the High Court for the reasons which  had  found
\nfavour with it in the earlier case.\n<\/p>\n
It is contended by learned counsel for the appellant that s.
\n9(1)(vii)  of the Income Tax Act is ultra vires inasmuch  as
\nit  enables the levy of income-tax on the Norwegian  company
\nin  the\t one case and the American company in the  other  in
\ncircumstances which appear to show that the statute operates
\nextra-territorially  without the need for any nexus  between
\nanything done in India and the person sought to be taxed. S.
\n9(1)(vii) declares:\n<\/p>\n
\t      “9(1) The following incomes shall be deemed to
\n\t      accrue or
\n\t      998<\/span>
\n\t      arise in India–\n<\/p><\/blockquote>\n
\t      (i)…………………………………………
\n\t\t …………………………………………\n<\/p><\/blockquote>\n
\t      (vii)  income  by way of\tfees  for  technical
\n\t      services payable by–\n<\/p><\/blockquote>\n
\t      (a) the Government; or\n<\/p><\/blockquote>\n
\t      (b)  a person who is a resident, except  where
\n\t      the  fees are payable in respect\tof  services
\n\t      utilised\tin a business or profession  carried
\n\t      on  by  such person outside India or  for\t the
\n\t      purposes of making or earning any income\tfrom
\n\t      any source outside India; or\n<\/p><\/blockquote>\n
\t      (c) a person who is a non-resident, where\t the
\n\t      fees  are payable in respect of services\tuti-
\n\t      lised  in a business or profession carried  on
\n\t      by such person in India or for the purposes of
\n\t      making  or earning any’income from any  source
\n\t      in India;\n<\/p><\/blockquote>\n
\t\t\tExplanation.–For  the\tpurposes  of
\n\t      this  clause,  “fees for\ttechnical  services”
\n\t      means  any consideration (including  any\tlump
\n\t      sum  consideration) for the rendering  of\t any
\n\t      managerial, technical or consultancy  services
\n\t      (including the provision of services of  tech-
\n\t      nical or other personnel) but does not include
\n\t      consideration for any construction,  assembly,
\n\t      mining  or  like\tproject\t undertaken  by\t the
\n\t      recipient\t or  consideration  which  would  be
\n\t      income  of the recipient chargeable under\t the
\n\t      head “Salaries”.<\/p><\/blockquote>\n
    It\tseems  that the Revenue is proceeding on  the  basis
\nthat the foreign company is liable to tax and that therefore
\nthe  petitioner is obliged to deduct at source the tax\tpay-
\nable by the foreign company. We are informed that the  serv-
\nices  are rendered by the foreign company in the  nature  of
\ntraining abroad to personnel belonging to the appellant, and
\nthat payment to the foreign company is also effected abroad.
\nThe  Revenue rests its case on S. 9(1)(vii)(b) of  the\tAct,
\nand the question is whether on the terms in which the provi-
\nsion is couched it is ultra vires.\n<\/p>\n
    Now it is perfectly clear that it is envisaged under our
\nconstitutional scheme that Parliament in India may make laws
\nwhich operate
\n999<\/span>
\nextra-territorially.  Art. 245(1) of the  Constitution\tpre-
\nscribes\t the extent of laws made by Parliament. They may  be
\nmade  for the whole or any part of the territory  of  India.
\nArt. 245(2) declares that no law made by Parliament shall be
\ndeemed\tto  be\tinvalid on the ground  that  it\t would\thave
\nextra-territorial  operation.  Therefore,  a   Parliamentary
\nstatute\t having extra-territorial operation cannot be  ruled
\nout from contemplation. The operation of the law can  extend
\nto persons, things and acts outside the territory of  India.
\nThe  general  principle,  flowing from\tthe  sovereignty  of
\nStates, is that laws made by one State can have no operation
\nin  another State. The apparent opposition between  the\t two
\npositions  is reconciled by the statement found\t in  British
\nColumbia  Electric  Railway  Company Limited  v.  The  King,
\n[1946] A.C. 527:\n<\/p>\n
\t      “A  legislature  which  passes  a\t law  having
\n\t      extra-territorial operation may find that what
\n\t      it  has enacted cannot be\t directly  enforced,
\n\t      but  the Act is not invalid on  that  account,
\n\t      and the courts of its country must enforce the
\n\t      law with the machinery available to them.”\n<\/p><\/blockquote>\n
In  other words, while the enforcement of the law cannot  be
\ncontemplated  in  a foreign State, it can,  nonetheless,  be
\nenforced  by the courts of the enacting State to the  degree
\nthat  is permissible with the machinery available  to  them.
\nThey  will not be regarded by such courts as invalid on\t the
\nground of such extra-territoriality.\n<\/p>\n
    But\t the question is whether a nexus with  something  in
\nIndia  is necessary. It seems to us that unless\t such  nexus
\nexists\tParliament will have no competence to make the\tlaw.
\nIt will be noted that Article 245(1) empowers Parliament  to
\nenact  law  for the whole or any part of  the  territory  of
\nIndia.\tThe  provocation for the law must  be  found  within
\nIndia  itself. Such a law may have extra-territorial  opera-
\ntion  in order to subserve the object, and that object\tmust
\nbe related to something in India. It is inconceivable that a
\nlaw  should  be\t made by Parliament in India  which  has  no
\nrelationship  with anything in India. The only\tquestion  is
\nthen whether the ingredients in terms of the impugned provi-
\nsion  indicate a nexus. The question is one  of\t substantial
\nimportance,  specially as it concerns  collaboration  agree-
\nments with foreign companies and other such arrangements for
\nthe better development of industry and commerce in India. In
\nview  of  the great public importance of  the  question,  we
\nthink  it desirable to refer these cases to  a\tConstitution
\nBench, and we do so order.\n<\/p>\n
T.N.A.\n<\/p>\n
1000<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Electronics Corporation Of India … vs Commissioner Of Income Tax & Anr on 2 May, 1989 Equivalent citations: 1989 AIR 1707, 1989 SCR (2) 994 Author: R Pathak Bench: Pathak, R.S. (Cj) PETITIONER: ELECTRONICS CORPORATION OF INDIA LTD. Vs. RESPONDENT: COMMISSIONER OF INCOME TAX & ANR. DATE OF JUDGMENT02\/05\/1989 BENCH: PATHAK, […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-36486","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nElectronics Corporation Of India ... vs Commissioner Of Income Tax & Anr on 2 May, 1989 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/electronics-corporation-of-india-vs-commissioner-of-income-tax-anr-on-2-may-1989\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Electronics Corporation Of India ... vs Commissioner Of Income Tax & Anr on 2 May, 1989 - 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