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GVK Industries Ltd. v. Income Tax Officer

Supreme Court of India, 1 March 2011, 5 judges

Under Article 245, Parliament may legislate on extra-territorial aspects or causes only where they have a real, not illusory, impact on or nexus with India or Indians, and has no power to make laws for a foreign territory.

Facts

The appellant challenged in the Andhra Pradesh High Court an order holding it liable to withhold part of the monies paid to a foreign company under Section 9(1)(i) or 9(1)(vii)(b) of the Income Tax Act, 1961, and the validity of Section 9(1)(vii)(b). The High Court held Section 9(1)(i) inapplicable but applied Section 9(1)(vii)(b) and upheld it, relying mainly on ECIL. A two judge bench referred the appeal to a Constitution Bench on 28 November 2000, and a three judge bench placed it before this Bench on 13 July 2010. The appellant withdrew its constitutional challenge and argued only applicability. The Attorney General asked the Court to reconsider ECIL, and the Court agreed to examine the nexus requirement as a limit on Parliament's power under Article 245(1).

Questions before the Court

  1. Whether Parliament is constitutionally restricted from enacting laws on extra-territorial aspects or causes that have, and are expected to have, no impact on or consequences for India, its territory or the interests, welfare, wellbeing or security of its inhabitants and Indians.
  2. Whether Parliament has power to legislate "for" any territory other than the territory of India or any part of it.

What the Court held

  • Yes to the first question. Parliament may legislate on extra-territorial aspects or causes only when they have, or are expected to have, some impact on, effect in or consequences for the territory of India or the interests, welfare, wellbeing or security of inhabitants of India and Indians. Laws on such aspects with no nexus with India are ultra vires.
  • No a priori quantitative test such as "sufficiency" or "significance" applies. The connection with India must be real or expected to be real, not illusory or fanciful; whether a law shows it is a mixed question of fact and law.
  • No to the second question. Parliament cannot make laws "for" a foreign territory. Laws on matters within India, or on extra-territorial aspects with a nexus with India, are laws for the territory of India and cannot be invalidated because they require extra-territorial operation.
  • The distinction drawn in ECIL between making laws and the operation of laws was approved, but the ratio of ECIL must not be read rigidly to require that the provocations and objects of a law arise solely within India.
  • The Attorney General's argument that Parliament, as a sovereign legislature, has absolute power to make extra-territorial laws was rejected: the Constitution is supreme, and the powers vested in Parliament and other organs of the State may be exercised only for the benefit of India. The appeal was directed to be listed before an appropriate bench for disposal.

Why it matters

The Constitution Bench answers the questions referred to it, which ECIL had earlier sent to a Constitution Bench, and states the test for Parliament's competence over extra-territorial matters: a real, not fanciful, connection with India, with no requirement of sufficient or significant nexus. It separates laws needing extra-territorial operation, protected by Article 245(2), from laws made for a foreign territory, which are beyond Parliament's power. It reads Article 245 with Articles 1, 51, 246, 253 and 260 and rejects a claim of unlimited legislative sovereignty.

In the Court's words

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

“It is important for us to state and hold here that the powers of legislation of the Parliament with regard to all aspects or causes that are within the purview of its competence, including with respect to extra-territorial aspects or causes as delineated above, and as specified by the Constitution, or implied by its essential role in the constitutional scheme, ought not to be subjected to some a-priori quantitative tests, such as “sufficiency” or “significance” or in any other manner requiring a pre-determined degree of strength. All that would be required would be that the connection to India be real or expected to be real, and not illusory or fanciful.”
B. Sudershan Reddy, J.Page 77 of the judgment
“The answer to the above would be no. It is 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 as explained above in the answer to Question 1 above.”
B. Sudershan Reddy, J.Page 78 of the judgment
“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, as answered in response to Question 1 above, and would be laws made “for” a foreign territory.”
B. Sudershan Reddy, J.Page 79 of the judgment
“We are 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.”
B. Sudershan Reddy, J.Page 15 of the judgment

Provisions interpreted

Related judgments

Case and bench

Parties
GVK Inds. Ltd. v. The Income Tax Officer
Case
Civil Appeal No. 7796 of 1997
Decided
1 March 2011
Judges named in the file
B. Sudershan Reddy, K.S. Radhakrishnan, Surinder Singh Nijjar, Swatanter Kumar
Opinions
Unanimous. Single judgment written by B. Sudershan Reddy, J., signed by the Chief Justice of India (name not printed in the file) and by K.S. Radhakrishnan, Surinder Singh Nijjar and Swatanter Kumar, JJ.

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