Judges: S.H. Kapadia, C.J., B. Sudershan Reddy, K.S. Panicker Radhakrishnan, S.S. Nijjar and Swatanter Kumar, JJ.

Facts:

The Appellant by way of a writ petition filed in Andhra Pradesh High Court had challenged an order of the Respondents which decided that the Appellant was liable to withhold a certain portion of monies being paid to a foreign company, under either one Sections 9(1)(i) or Section 9(1)(vii)(b) of the Income Tax Act 1961. The Appellant had also challenged the vires of Section 9(1)(vii)(b) of the Income Tax Act 1961 for want of legislative competence and violation of Article 14 of the Constitution. The High Court held that Section 9(1)(i) of Act is not applicable in the circumstances of the facts of the case. However, upheld the applicability of Section 9(1)(vii)(b). It also upheld the constitutional validity of the said provision. While deciding the case, the High Court mainly relied on the ratio of the judgment passed by a three judge bench of this Court in ECIL. Hence, the present appeal.

The matter came up for consideration before lower bench of this Court. In light of the far reaching issues of great constitutional purport raised in this matter, the fact that such issues had been raised previously in ECIL, which were also referred to a constitutional bench has referred the matter before the present bench.

Issues:

I. Is the Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on, or effect(s) in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians?

II. Does the Parliament have the powers to legislate "for" any territory, other than the territory of India or any part of it?

Law:

Constitution of India - Article 245 - Extent of laws made by Parliament and by the Legislatures of States - (1) Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State.

(2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extraterritorial operation.

Constitution of India - Article 1 - Name and territory of the Union - (1) India, that is Bharat, shall be a Union of States. (2) The States and the territories thereof shall be as specified in the First Schedule. (3) The territory of India shall comprise - (a) The territories of the States; (b) the Union territories specified in the First Schedule; and (c) such other territories as may be acquired.

Interpretation of - "aspects or causes" "aspects and causes:

events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like, in the social, political, economic, cultural, biological, environmental or physical spheres, that occur, arise, exist or may be expected to do so, naturally or on account of some human agency.

Interpretation of - extra-territorial aspects or causes:

aspects or causes that occur,arise, or exist, or may be expected to do so, outside the territory of India.

Interpretation of - "nexus with India", "impact on India", "effect in India", "effect on India", "consequence for India" or "impact on or nexus with India"

any impact(s)on, or effect(s) in, or consequences for, or expected impact(s) on, or effect(s) in, or consequence(s) for: (a) the territory of India, or any part of India; or (b)the interests of, welfare of, wellbeing of or security of inhabitants of India, and Indians in general, that arise on account of aspects or causes.

Interpretation of - "benefit to India" or "for the benefit of India", "to the benefit of India", "in the benefit of India" or " to benefit India" or "the interests of India", "welfare of India", "well-being of India" etc.:

protection of and/or enhancement of the interests of, welfare of, well-being of, or the security of India (i.e., the whole territory of India), or any part of it, its inhabitants and Indians.

Analysis:

Restrictions on Parliament to enact legislation with respect to extra-territorial aspects or causes

I. The 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: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians.

II. 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.

III. All that would be required would be that the connection to India be real or expected to be real, and not illusory or fanciful. Whether a particular law enacted by Parliament does show such a real connection, or expected real connection, between the extra-territorial aspect or cause and something in India or related to India and Indians, in terms of impact, effect or consequence, would be a mixed matter of facts and of law.

IV. Obviously, where the Parliament itself posits a degree of such relationship, beyond the constitutional requirement that it be real and not fanciful, then the courts would have to enforce such a requirement in the operation of the law as a matter of that law itself, and not of the Constitution.

Power of Parliament to legislate "for" any territory, other than the territory of India or any part of it

I. 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.

II. Such laws would fall within the meaning, purport and ambit of the grant of powers to Parliament to make laws "for the whole or any part of the territory of India", and they may not be invalidated on the ground that they may require extra-territorial operation.

III. However, 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.

Conclusion:

I. The Parliament is constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on or effect(s) in or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians.

II. The Parliament do not have the powers to legislate "for" any territory, other than the territory of India or any part of it.

Important Precedents:

I. Electronics Corporation of India Ltd. v. Commissioner of Income Tax and Anr. MANU/SC/0331/1989