Thursday, April 21, 2011

Territorial Nexus Revisited: GVK Industries v. Union of India


We have previously discussed issues surrounding the application of the “territorial nexus” doctrine to income tax law in several posts (here, here, here and here). In its recent decision in GVK Industries v. Union of India, a Constitution Bench of the Supreme Court has confirmed that the doctrine applies to Parliamentary laws. The precise question of the constitutionality of Section 9(1)(vii) of the Income Tax Act, 1961 was not answered by the Constitution bench.

In GVK, the following questions were referred to the Constitution bench:
(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 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?
(2) Does the Parliament have the powers to legislate "for" any territory, other than the territory of India or any part of it?

The Court explained the constitutional scheme by holding, “The grant of the power to legislate, to the Parliament, in Clause (1) of Article 245 comes with a limitation that arises out of the very purpose for which it has been constituted. That purpose is to continuously, and forever be acting in the interests of the people of India. It is a primordial condition and limitation… Clause (2) of Article 245 carves out a specific exception that a law made by 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 a law may need to be operated extraterritorially. Nothing more.” It was specifically held that any laws enacted by Parliament with respect to “extra- territorial aspects or causes” which have “no impact on or nexus with India” would be ultra vires Article 245 of the Constitution of India.

In a few Tribunal decisions such as Ashapura Minichem (discussed here and here), there were remarks that the doctrine of territorial nexus may not necessarily be relevant in tax laws (“It is thus fallacious to proceed on the basis that territorial nexus to a tax jurisdiction being sine qua non to taxability in a jurisdiction is a normal international practice in all systems. This school of thought is now specifically supported by the retrospective amendment to section 9”). GVK impliedly confirms that those observations must be read in their context. The issue of whether in particular Section 9(1)(vii) especially after the recent amendments satisfies the nexus requirements, is still unanswered. As Ashapur Minichem held, the “render + utilize” formula of Ishikawajima and Clifford Chance is now statutorily overridden by the Finance Act, 2010. Perhaps, Courts may now again insist on a factual “live link” to be established before the provisions of S. 9(1)(vii) can be invoked.

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