Electronics Corporation of India Ltd. v. Commissioner of Income Tax

Supreme Court of India, 2 May 1989, 3 judges, 1989 AIR 1707, 1989 SCR (2) 994, 1989 SCC Supl. (2) 642

The three-judge Bench expressed the view that Parliament may make laws operating extra-territorially but needs a nexus with something in India, and referred to a Constitution Bench whether Section 9(1)(vii) of the Income Tax Act shows such nexus.

Facts

The appellant agreed with a Norwegian company, which was to provide technical know-how and services, including training of personnel, for the manufacture of computers, for NOK 32 millions (about Rs. 575 lakhs). The Income Tax Officer refused a 'No Objection Certificate' under Section 195(2) of the Income Tax Act, 1961, to remit the instalments without deducting tax, and the Commissioner held the payment to be income deemed to accrue in India under Section 9(1)(vii). The appellant's writ petition, which also challenged the validity of Section 9(1)(vii), was dismissed by the Andhra Pradesh High Court, as was a similar petition about payments to a U.S. company. The Revenue relied on Section 9(1)(vii)(b). The appellant argued that the provision operated extra-territorially without any nexus between anything done in India and the person taxed.

Questions before the Court

Whether Section 9(1)(vii)(b) of the Income Tax Act, 1961 is ultra vires as a law operating extra-territorially without a nexus with India.
Whether a nexus with something in India is necessary for Parliament's competence to make a law having extra-territorial operation under Article 245.

What the Court held

The Bench expressed the view that the constitutional scheme envisages that Parliament may make laws operating extra-territorially. Under Article 245(2) such a law is not invalid on that ground; though it cannot be enforced in a foreign State, the courts of India can enforce it to the degree permissible with the machinery available to them.
The Bench also expressed the view that unless a nexus with something in India exists, Parliament has no competence to make the law: the provocation for the law must be found within India and its object must be related to something in India.
The Bench did not decide whether Section 9(1)(vii) indicates such a nexus. Given the great public importance of that question, especially for collaboration agreements with foreign companies, it referred the cases to a Constitution Bench.

Why it matters

The order states, in terms of Article 245(1) and (2), the distinction between the extra-territorial operation of a law, which does not invalidate it, and the requirement that the law have a nexus with something in India. It does not decide the validity of Section 9(1)(vii); that question, and the appeals, were referred to a Constitution Bench.

In the Court's words

Copied from the official judgment; each passage links to its page.

“Now it is perfectly clear that it is envisaged under our constitutional scheme that Parliament in India may make laws which operate extra-territorially. Art. 245(1) of the Constitution prescribes 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.”

Pathak, C.J.Page 4 of the judgment

“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 operation in order to subserve the object, and that object must be related to something in India.”

Pathak, C.J.Page 5 of the judgment

“The only question is then whether the ingredients in terms of the impugned provision indicate a nexus. The question is one of substantial importance, specially as it concerns collaboration agreements 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.”

Pathak, C.J.Page 5 of the judgment

Provisions interpreted

Article 245, Constitution
Section 9(1)(vii)(b), Income Tax Act, 1961
Section 195, Income Tax Act, 1961

Related judgments

Explained in GVK Industries Ltd. v. Income Tax Officer (2011)

Case and bench

Parties: Electronics Corporation of India Ltd. v. Commissioner of Income Tax
Case: Civil Appeal Nos. 2697 and 2698 of 1989
Decided: 2 May 1989
Bench: R.S. Pathak (CJ), Rangnath Misra, M.N. Venkatachalliah
Opinions: Order of the three-judge Bench delivered by Pathak, C.J. It expresses a view on Article 245 and refers the appeals to a Constitution Bench; it does not finally decide the appeals.