G. V. K. Industries Ltd. & Anr. v. ITO & Anr. — 228 ITR 564 (A.P.):
3.1 Brief facts in the above case were: main object of the company was to generate and sell electricity for which purpose it was constructing a power generation station designed to operate using natural gas as fuel near Rajahmundry in the State of Andhra Pradesh. For the purpose of raising funds for the said project, GVK Inds. Ltd. (Company) needed expert services of qualified and experienced professionals who could prepare a scheme for raising finance and tie-up the required loan. For this purpose, the Company had entered into an agreement with a non-resident company (NRC), namely, ABB-Project and Trade Finance (International) Ltd. Zurich, Switzerland. Under the agreement, the NRC was to act as financial advisor and render requisite services for a success fee. Accordingly, the NRC rendered professional services from Zurich by correspondence as to how to execute documents for sanction of loan by the financial institutions within and outside India on the basis of which the Company approached such institutions and obtained the requisite loan. For a successful rendering of services, the NRC sent an invoice to the Company for payment of success fee amounting to US$.17.15 lakh (Rs.5.4 crores). For the purpose of remittance of this amount, the Company approached the ITO for issuing NOC for remitting the amount without TDS u/s. 195 without any success. The Company also approached the CIT, u/s. 264, who ultimately took the view that the NOC can be issued only after making TDS and payment thereof to the Government. This was challenged by the Company before the Andhra Pradesh High Court.
3.2 After considering various contentions raised on behalf of the Company and various judgments of the Apex Court as well as High Courts and after considering the scope of the services/work undertaken by the NRC, the Court took the view that a ‘business connection’ between the Company and NRC has not been established. Hence what remains to be considered is whether the amount of success fee can be treated as FTS u/s. 9(1)(vii)(b). In this context, it was contended on behalf of the Company that the NRC merely rendered advice in connection with procurement of loan which does not amount to rendering technical or consultancy services and hence, amount in question is not FTS. The Revenue had taken a view that the success fee is FTS as the services rendered by the NRC fall within the ambit of both managerial and consultancy services as contemplated in the definition of FTS given in Explanation to section 9(1)(vii) (b) considering the scope of the services/work of the NRC, the Court took the view that the advice given to procure loan to strengthen finance would be as much a technical or consultancy service as it would be with regard to management, generation of power or plant and machinery. Accordingly, the Court held that the success fees in question fall within the ambit of section 9(1)(vii). In fact, it appears that this was not seriously disputed by the counsel appearing for the Company, but the main argument seems to be that if that is so, then, provisions would be unconstitutional for want of legislative competence. For this, reliance was placed on the commentary given in the book (i.e., Law of Income Tax and Practice) written by the learned authors Kanga and Palkhivala.
3.3 Dealing with the above-referred issue raised on behalf of the Company, the Court stated that having regard to the present liberalisation policy, it is for the Government to take steps to have clause (vii)(b) of section 9(1) either replaced or amended so as to make income by way of FTS chargeable only when territorial nexus exists. After making this observation, the Court upheld the validity of the provisions mainly relying the judgment of the same Court as well as of the Apex Court in the case of ECIL (referred to in para 2 in Part-1).
G. V. K. Industries Ltd. & Anr. v. ITO & Anr. — 332 ITR 130 (SC):
4.1 The judgment of the Andhra Pradesh High Court in the above case came up for consideration before the Apex Court at the instance of the Company (i.e., assessee). Considering the importance of the issue involving validity of section 9(1)(vii)(b), the matter was finally referred to the Constitutional Bench. For the purpose of deciding the issue, the Court noted that the High Court having held that section 9(1)(i) did not apply in the facts of the case of the Company, nevertheless upheld the applicability of section 9(1) (vii)(b) and also upheld the validity of the said provisions mainly relying on the judgment of three-Judge Bench of the Apex Court in the case of ECIL.
4.2 For the purpose of dealing with the issue, the Court noted that the Apex Court in the case of ECIL conclusively determined that clauses (1) and (2) of Article 245, read together, imposed requirement that laws made by the Parliament should bear a nexus with India and ask that the Constitution Bench be constituted to consider whether the ingredients of section 9(1)(vii)(b) indicate such a nexus. In the course of proceedings before the Constitution Bench, the Company (i.e., GVK Inds. Ltd.) withdrew its challenge to the constitutional validity of section 9(1)(vii)(b) and elected to proceed only on the factual matrix as to the applicability of the said section. However, the learned Attorney General (A.G.), appearing on behalf of the respondent, pressed upon the Bench to reconsider the decision of the three-Judge Bench in the case of ECIL. Considering the constitutional importance of the issue, the Court agreed to consider the validity of the requirement of relationship to or nexus with the territory of India as a limitation on the powers of the Parliament to enact laws pursuant to Article 245(1).
4.3 For the purpose of deciding the above issue, the Court noted that the central constitutional theme before the Court relate to whether the Parliament’s powers to legislate, pursuant to Article 245, include legislative competence with respect to aspects or causes that occurred, arise, or exist or may be expected to do so, outside the territory of India. For this purpose, the Court noted that there are two divergent and dichotomous views on this. First one arises from a rigid reading of the ratio in the case of ECIL which suggests that the Parliament’s powers to legislate, incorporate only competence to enact laws with respect to aspects or causes that occur, or exist, solely within India. In this context, the Court further observed as follows (page 133):
“….A slightly weaker form of the foregoing strict territorial nexus restriction would be that the Parliament’s competence to legislate with respect to extra-territorial aspects or causes would be constitutionally permissible if and only if they have or are expected to have significant or sufficient impact on or effect in or consequence for India. An even weaker form of the territorial nexus restriction would be that as long as some impact or nexus with India is established or expected, then the Parliament would be empowered to enact legislation with respect to such extra-territorial aspects or causes. The polar opposite of the territorial nexus theory, which emerges also as logical consequence of the propositions of the learned Attorney General, specifies that the Parliament has inherent powers to legislate ‘for’ any territory, including territories beyond India, and that no Court in India may question or invalidate such laws on the ground that they are extra-territorial laws. Such a position incorporates the views that the Parliament may enact legislation even with respect to extra-territorial aspects or causes that have impact on, effect in or consequence for India, any part of it, its inhabitants or Indians, their interest, welfare, or security, and further that the purpose of such legislation need not in any manner or form be intended to benefit India.”
4.4 After noting the above-referred divergent views, the Court framed the following two questions for the decision of the Constitutional Bench (pages 133/134):
“(1) 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 con-sequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians?
(2) Does the Parliament have the powers to legislate ‘for’ any territory, other than the territory of India or any part of it?
4.5 Before proceeding to decide the questions framed, the Court noted the provisions of Article 245 of Constitution, which fall in part XI of Chapter 1 under the head ‘Extent of laws made by the Parliament and by the Legislatures of the States’. The Court also stated that many expressions and phrases that are used contextually in the flow of language, involving words such as ‘interest’, ‘benefit’, ‘welfare’, ‘security’ and the like in order to satisfy the purpose of laws and their consequences, can have range to meanings. The Court then, for the purpose of the judgment, decided to set forth the following range of meanings for such expressions and phrases (pages 134/135):
‘aspects or causes’, ‘aspects and causes’:
“events, things, phenomena (howsoever common place 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.”
‘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.”
‘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, well being of, or security of inhabitants of India, and Indians in general, that arise on account of aspects or causes.”
‘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 interest or, 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.”
4.6 Dealing with the ratio of the judgment in the case of ECIL, the Court stated as under (pages 136/137):
“The requirement of nexus with the territory of India was first explicitly articulated in the decision by a three-Judge Bench of this Court in ECIL. The implication of the nexus requirement is that a law that is enacted by the Parliament, whose ‘objects’ or ‘provocations’ do not arise within the territory of India, would be unconstitutional. The words ‘object’ and ‘provocation’, and their plural forms, may be conceived as having been used in ECIL as synonyms for the words ‘aspects’ and ‘cause’, and their plural forms, as used in this judgment.”
4.6.1 The Court further noted that in the case of ECIL, while dealing with the validity of section 9(1) (vii)(b) of the Act and interpreting the provisions of Article 245(1) and (2), the Court, in that case, drew the distinction between the phrases ‘make laws’ and ‘extraterritorial operation’ — i.e., the acts and functions of making laws versus the acts and functions of effectuating a law already made. The Court also noted the conclusion of the Court in that case that the operation of the law can extend to persons, things and acts outside the territory of India. However, the principle enunciated in that case does not address the question as to whether a Parliament may enact a law ‘for’ a territory outside boundaries of India. The Court then observed as follows (page 138):
“….To enact laws ‘for’ a foreign territory could be conceived of in two forms. The first form would be, where the laws so enacted, would deal with or be in respect of extra-territorial aspects or causes, and the laws would seek to control, modulate or transform or in some manner direct the executive of the legislating State to act upon such extra-territorial aspects or causes because: (a) such extra-territorial aspects or causes have some impact on or nexus with or to India; and (b) such laws are intended to benefit India. The second form would be when the extra-territorial aspects do not have, and neither are expected to have, any nexus whatsoever with India, and the purpose of such legislation would serve no purpose or goal that would be beneficial to India.”
4.6.2 The Court then further noted that in the case of ECIL, it was concluded that the Parliament does not have the powers to mark laws that bear no relationship to or nexus with India. The obvious questions that arises from this is: “what kind of nexus?” According to the Court, in this context, the words used in that case (referred to in para 2.5.2 in Part-1) are instructive both as to principle and also the reasoning. The Court then opined that the distinction drawn in that case between ‘make laws ‘ and ‘operation of laws’ is a valid one and leads to a correct assessment of relationship between clauses (1) & (2) of Article 245.
4.6.3 Concluding on the possible effect of the rigid reading of the judgment of in the case ECIL, the Court stated as under (page 139):
“We are, in this matter, concerned with what the implications might be, due to use of the words ‘provocation’, ‘object’, ‘in’ and ‘within’ in connection with the Parliament’s legislative powers regarding ‘the whole or any part of the territory of India’, on the understanding as to what aspect and/or causes the Parliament may legitimately take into consideration in exercise of its legislative powers. A particularly narrow reading or understanding of the words used could lead to a strict territorial nexus requirement wherein the Parliament may only make laws with respect to objects or provocations — or alternately, in terms of the words we have used ‘aspect and causes’ — that occur, arise or exist or may be expected to occur, arise or exist, solely within the territory of India, notwithstanding the fact that many extra-territorial objects or provocations may have an impact or nexus with India. Two other forms of the foregoing territorial nexus theory, with weaker nexus requirements, but differing as to the applicable tests for a finding of nexus, have been noted earlier.
4.7 Having noted the implications of the judgment in case of ECIL and the issue arising therefrom, and the impact thereof on the powers of the Parliament to enact a law with respect to ‘extra-territorial aspects or causes’, the Court also noted that learned A.G. appeared to be concerned by the fact that the narrow reach of Article 245 in the context of the ratio in the case of ECIL would significantly incapacitate the Parliament, which is charged with the responsibility of legislating for the entire nation, in dealing with extra-territorial aspects or causes that have an impact on or nexus with India. The Court also noted the following propositions made by the learned A.G. with respect to the meaning, purport and ambit of Article 245 (pages 139/140), which, it seems, the Court found as moving to another extreme:
“(1) There is a clear distinction between a Sovereign Legislature and a Subordinate Legislature.
(2) It cannot be disputed that a Sovereign Legislature has full power to make extra-territorial laws.
(3) The fact that it may not do so or that it will exercise restraint in this behalf arises not from a Constitutional limitation on its powers but from a consideration of applicability.
(4) It does not detract from its inherent rights to make extra-territorial laws.
(5) In any case, the domestic courts of the country cannot set aside the legislation passed by a Sovereign Legislature on the ground that it has extra-territorial effect or that it would offend some principle of international law.
(6) The theory of nexus was evolved essentially from Australia to rebut a challenge to income-tax laws on the ground of extra-territoriality.
(7) The principle of nexus was urged as a matter of construction to show that the law in fact was not extra-territorial because it has a nexus with the territory of the legislating State.
(8) The theory of nexus and the necessity to show the nexus arose with regard to State Legislature under the Constitution since the power to make extra-territorial laws is reserved only for the Parliament.”
4.7.1 According to the Court, the main propositions are that the Parliament is a ‘Sovereign Legislature’ and that such a ‘Sovereign Legislature’ has full power to make extra-territorial laws. The Court, then, stated that this can be analysed in two ways. The first aspect of this is: the phrase ‘full power to make extra-territorial laws’ would implicate the competence to legislate with respect to extra-territorial aspects or causes that have an impact on or nexus with India, wherein the State machinery is directed to achieve the goals of such legislation by exerting the force on such extra-territorial aspects or causes to modulate, change, transform or eliminate their effects. The second aspect of this is: such powers would also extend to legislate with respect to the extra-territorial aspects or causes that do not have any impact on or nexus with India. The Court then noted that according to the learned A.G., both these forms of powers are within the legislative competence of the Parliament. The Court then assumed that the learned A.G. did not mean that the Parliament would have powers to enact extra-territorial laws with respect to foreign territories that are devoid of justice i.e., they serve no benefits to the denizens of such foreign territories. Considering historical background of establishment of India as a nation, the Court, in this context, observed as under (page 141):
“To the extent that extra-territorial laws enacted have to be beneficial to the denizens of another territory, three implications arise. The first one is when such laws do benefit the foreign territory, and benefit India too. The second one is that they benefit the denizens of that foreign territory, but do not adversely affect India’s interest. The third one would be when such extra-territorial laws benefit the denizens of the foreign territory, but are damaging to the interest of India. We take it that the learned Attorney General has proposed that all three possibilities are within constitutionally permissible limits of legislative powers and competence of the Parliament.”
4.7.2 The Court then also noted the propositions of the learned A.G. that the Courts do not have power to declare the extra-territorial laws enacted by the Parliament invalid on the grounds that they have an ‘extra-territorial effect’ whether such laws are with respect to extra-territorial aspects or causes that have any impact on or nexus with India, or that do not in any manner or form work to, or intended to be or hew to the benefit of India or that might even be detrimental to India. The Court then noted the far-reaching implications of this proposition including the one that the judiciary also has been stripped of its essential role even where such extra-territorial laws may be damaging to the interests of India.
4.8 For the purpose of considering the propositions made by the learned A.G., the Court referred to relevant principles of constitutional interpretation. In this context, the Court noted that under the scheme of Constitution the sphere of actions and extent of powers exercisable by various organs are specified. Such institutional arrangements made under the constitution are legal, inter alia, in the sense that they are susceptible to judicial review with regard to determination of vires of any of the actions of the organs of the State. The actions of such organisation are also judiciable, in appropriate cases, where the values or the scheme of the constitution may have been transgressed. The Court then dealt with the guiding principles for interpretation in the process of such review, the powers of the Parliament to amend the Constitution and also noted that such amending powers do not extend to the basic structure of the Constitution. The Court also referred to relevant principles of interpretation in this context and the methods to be adopted for the same.
4.9 The Court then proceeded to analyse the provisions of Article 245 and stated that under the clause
(1), the Parliament is empowered to enact a law ‘for’ the whole or any part of the territory of India. The word that links subject, ‘the whole or any part of the territory in India’, with the phrase that grants the legislative powers to the Parliament is ‘for’. After noting the range of meanings of the word ‘for’, the Court observed as under (page 146):
“Consequently, the range of senses in which the word ‘for’ is ordinarily used would suggest that, pursuant to clause (1) of Article 245, the Parliament is empowered to enact those laws that are in the interest of, to the benefit of, in defence of, in support or favour of, suitable or appropriate to, in respect of or with reference to ‘the whole or any part of the territory of India.”
4.9.1 The Court then noted that the problem with the manner in which Article 245 has been explained in the case of ECIL relates to the use of the word ‘provocation’, and ‘object’ as the principal qualifiers of laws and then specifying that they need to arise ‘in’ or ‘within’ India. Considering the effect of this, the Court took the view as under (page 147):
“Consequently, the ratio of ECIL could wrongly be read to mean that both the ‘provocations’ and ‘objects’ — in terms of independent aspects or causes in the world of the law enacted by the Parliament, pursuant to Article 245, must arise solely ‘in’ or ‘within’ the territory of India. Such a narrowing the ambit of clause (1) of Article 245 would arise by substituting ‘in’ or ‘within’, as prepositions, in the place of ‘for’ in the text of Article 245. The word ‘in’, used as a preposition, has a much narrower meaning, expressing inclusion or position within the limits of space, time or circumstances, than the word ‘for’. The consequence of such a substitution would be that the Parliament could be deemed to not have the powers to enact laws with respect to extra-territorial aspects or causes, even though such aspects or causes may be expected to have an impact on or nexus with India, and laws with respect to such aspects or causes would be beneficial to India.”
4.9.2 The Court then noted that the view that a nation/state must be concerned only with respect to persons, property events, etc. within it’s own territory emerged in the era when external aspects and causes were thought to be only of marginal significance, if at all. The Court also noted the earlier versions of sovereignty emerged in the context of global position and lesser interdependence of the nations at the relevant time. Having noted the earlier scenario, the Court stated that on account of scientific and technological developments, the magnitude of cross border travel and transactions has tremendously increased. Moreover, existence of economic, business, social and political organisations that operate across borders, implies that their activities, even though conducted in one territory, may have an impact on or in another territory. Global criminal and terror network are also example of how things and activities in a territory outside one’s own borders would affect interests, welfare, well being and security within. The Court then stated that within the international law, the principles of strict territorial jurisdiction have been relaxed, in the light of greater inter dependencies and other relevant reasons. At the same time, no State attempts to exercise any jurisdiction over matters, persons, or things with which it has absolutely no concern. After noting this position with regard to international law concerning power of making law with regard to extra-territory aspects and causes, the Court held as under (page 149):
“Because of interdependencies and the fact that many extra-territorial aspects or causes have an impact on or nexus with the territory of the nation/ state, it would be impossible to conceive legislative powers and competence of national parliaments as being limited only to aspects or causes that arise, occur or exist or may be expected to do so, within the territory of its own nation-state. Our Constitution has to be necessarily understood as imposing affirmative obligations on all the organs of the State to protect the interest, welfare and security of India. Consequently, we have to understand that the Parliament has been constituted, and empowered to, and that its core role would be to, enact laws that serve such purposes. Hence even those extra-territorial aspects or causes, provided they have a nexus with India, should be deemed to be within the domain of legislative competence of the Parliament, except to the extent the Constitution itself specifies otherwise.”
4.10 The Court then dealt with the extreme view canvassed by the learned A.G. that the Parliament is empowered to enact a law in respect of extra-territorial aspects or causes that have no nexus with India, and further more could such laws be bereft of any benefit to India? While rejecting such a proposition, the Court stated as under (pages 149/150):
“The word ‘for’ again provides the clue. To legislate for a territory implies being responsible for the welfare of the people inhabiting that territory, deriving the powers to legislate from the same people, and acting in a capacity of trust. In that sense the Parliament belongs only to India and its chief and sole responsibility is to act as the Parliament of India and of no other territory, nation or people. There are two related limitations that flow from this. The first one is with regard to the necessity, and the absolute base line condition, that all powers vested in any organ of the State, including the Parliament, may only be exercised for the benefit of India. All of its energies and focus ought to only be directed to that end. It may be the case that an external aspect or cause, or welfare of the people elsewhere may also benefit the people of India. The laws enacted by the Parliament may enhance the welfare of people in other territories too; nevertheless, the fundamental condition remains: that the benefit to or of India remain the central and primary purpose, That being the case, the logical corollary, and hence the second limitation that flows therefrom, would be that an exercise of legislative powers by the Parliament with regard to extra-territorial aspects or causes that do not have any, or may be expected not to have nexus with India, transgresses the first condition. Consequently, we must hold that the Parliament’s powers to enact legislation, pursuant to clause (1) of Article 245 may not extend to those extra-territorial aspects or causes that have no impact on or nexus with India.”
4.10.1 The Court further explained reasons for taking the above view and drew support from sources such as Directive Principle of State Policy, etc. The Court then stated that it is important to draw a clear distinction between the acts and functions of making laws and acts and functions of operating laws. Making laws implies the acts to changing or enacting laws.
The phrase ‘operation of law’, in its ordinary sense, means effectuation or implementation of the laws. The acts and functions of implementing laws already made fall within the domain of the executives. The essential nature of the act of invalidating a law is different from both the act of making a law, and act of operating a law. Invalidation of laws falls exclusively within the functions of the judiciary, and occurs after examination of vires of a particular of law.
4.11 Dealing with the powers of judiciary to invalidate a law, the Court stated that the only organ of State which may invalidate the law is judiciary and the provisions of Article 245(2) should be read to mean that it reduces the general and inherent. powers of the judiciary to declare a law ultra vires only to the extent of that one ground of invalidation. Explaining the effect of this provision, the Court stated as under (page 154):
“Clause (2) of Article 245 acts as an exception, of a particular and a limited kind, to the inherent poser of the judiciary to invalidate, if ultra vires, any of the laws made by any organ of the State. Generally, an exception can logically be read as only operating within the ambit of the clause to which it is an exception. It acts upon the main limb of the article — the more general clause — but the more general clause in turn acts upon it The relationship is mutually synergistic in engendering the meaning. In this case, clause (2) of Article 245 carves out a specific exception that law made by the Parliament, pursuant to clause (1) of Article 245, for the whole or any part of the territory of India may not be invalidated on the ground that such law may need to be operated extra-territorially. Nothing more. The power of judiciary to invalidate laws that are ultra vires flows from its essential functions, Constitutional structure, values and scheme, and indeed to ensure that the powers vested in the organs of the State are not being transgressed, and they are being used to realise a public purpose that subserves the general welfare of the people. It is one of the essential defences of the people in a constitutional democracy.”
4.12 Referring to various decisions, cited and relied on by the learned A.G. in support of his propositions, the Court stated that in none of these cases, the issue under consideration has been dealt with. The Court also noted that having gone through those decisions, none stand for the proposition that the powers of the Parliament are unfettered and the Parliament possesses a capacity to make laws that have no connection whatsoever with India. Having noted this factual position, the Court also dealt with some of the decisions.
4.13 Before answering the questions framed, the Court also decided to share its thoughts on some important concerns such as claims of supremacy or sovereignty for various organs to act in a manner that is essentially unchecked and uncontrolled. In this context, the Court also explained the misconception of the sovereignty and of power, and predilections to oust judicial scrutiny even at the minimum level, such as examination of the vires of the legislation or other type of state actions.
4.14 Finally, while answering the first question framed, the Court held as under (page 166):
“(1) 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 con-sequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians?
Answer to the above would be yes …..”
4.14.1 Explaining the effect of the above answer, the Court further held as under (page 166):
“However, 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, well-being of, or security of inhabitants of India, and Indians.”
4.14.2 While answering the second question framed (referred to in para 4.4 above), the Court also held that the Parliament does not have power to legislate ‘for’ any territory, other than the territory of India or any part of it.
4.15 After taking the above view, the Court has sent back the matter of GVK Inds. Ltd. (referred to in para 3 above) to the Division Bench for its decision in the light of judgment of the Constitution Bench.
Conclusion:
5.1 In the above case, the Constitution Bench has laid down the criteria to test the validity of the laws enacted by the Parliament or any provisions of such laws. Therefore, any law enacted by the Parliament (including tax laws) would be governed by the same.
5.2 The Court has held that 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, well-being of, or security of inhabitants of India, and Indians. The Court has also held that any law enacted by the Parliament with respect to extra-territorial aspects or causes that have no impact on or nexus with India would be ultra vires as that would be law made “for” a foreign territory.
5.3 The Court also held that in all other respects (other than referred to in para 5.2 above), the Parliament has a power to enact a law with respect of extra-territorial aspects or causes and such power is not subject to test of ‘sufficiency’ or ‘significance’ or in any other manner requiring a pre-determined degree of strength. For this purpose, all that is required is that the connection to India be real or expected to be real, and not illusory or fanciful.
5.4 On the basis of the tests and principles laid down by the Apex Court in the above case, any issue arising under the IT Act relating to validity of any provision, will have to be decided. Accordingly, challenge if any, to the validity of the provisions of section 9(1)(vii)(b) will have to be tested on that basis.
5.5 Considering the meanings ascribed to various expressions, such as ‘aspects or causes’ ‘extra territorial aspects’, etc. (referred to in para 4.5 above), the scope of inclusion within the legislative competence is substantially wider and of such exclusion is much narrower. In this context, by and large, the Parliament has the power to enact any law in national interest with regard to extra territorial aspects or causes, once there in real connection thereof with India.
5.6 It seems that validity of the retrospective introduction/substitution (w.e.f. 1-4-1976) of Explanation to section 9(1) by the Finance Act, 2010 (referred to in para 1.5 in Part-1) may need to be separately considered.
