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PETITIONER: ELECTRONICS CORPORATION OF INDIA LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX & ANR.

DATE OF JUDGMENT02/05/1989

BENCH: PATHAK, R.S. (CJ) BENCH: PATHAK, R.S. (CJ) MISRA RANGNATH VENKATACHALLIAH, M.N. (J)

CITATION:  1989 AIR 1707            1989 SCR  (2) 994  1989 SCC  Supl.  (2) 642 JT 1989 (2)   335  1989 SCALE  (1)1567

ACT: Constitution of India, 1950: Article 245.     Parliament--Legislative   competence--Whether  can  pass law having extra--Territorial operation--Existence of  nexus whether necessary. Income Tax Act, 1961: Sections 9(1)(vii), 195. Whether extra-territorial in operation.     Agreement with foreign company--Fees payable for techni- cal     services--Whether    accrual    of     income     in India--Tax--Whether to be deducted at source.

HEADNOTE:     The  appellant company entered into an agreement with  a Norwegian  Company  under which the latter  was  to  provide technical  knowhow and technical services including  facili- ties for the training of personnel of the appellant  company in  connection with the manufacture of computers for a  con- sideration  of NOK 32 Millions, Norwegian Currency,  equiva- lent to Rs.575 lakhs.     The appellant company applied to the Income Tax  Officer for  ’No Objection Certificate’ under Section 195(2) of  the Income Tax, 1961 in order to remit the instalments due under the  agreement without deducting the tax at source  but  the same was refused.     The application of the appellant company to the  Commis- sioner  of Income Tax seeking a direction to the Income  Tax Officer  was also rejected on the ground that having  regard to  Sections 9(1)(vii) and 195 of the Income Tax  Act,  1961 the payment to the foreign company constituted deemed accru- al  of  Income  in India and  therefore  the  appellant  was obliged  to deduct at source the tax payable by the  foreign company. A writ petition filed by the appellant against  the order  of the Commissioner and assailing the  constitutional validity of Section 9(1)(vii) of the 995 Income  tax  Act, 1961 was dismissed by the  High  Court  of Andhra  Pradesh. A similar writ petition filed  against  the order  of refusal of ’No Objection Certificate’ by the  Com- missioner  of  Income Tax in relation to  disbursement  made under an agreement with a U.S. Company was also dismissed by

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the High Court.     Against  the  decision of the High  Court  appeals  were filed  in  this  Court  challenging  the  vires  of  Section 9(1)(vii) of the Income Tax Act, 1961 contending that (i) it was  extra-territorial in operation, and (ii) there  was  no nexus between anything done in India and the persons  sought to be taxed. Referring the matter to a Constitution Bench,     HELD: 1. It is envisaged under our constitutional scheme that Parliament in India may make laws which operate  extra- territorially.  Article 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.  Therefore,  a Parliamentary  statute  having  extra-territorial  operation cannot be ruled out from contemplation. The operation of the law  can  extend  to persons, things and  acts  outside  the territory of India. The general principle, flowing from  the sovereignty  of States, is that laws made by one  State  can have  no operation in another State. But while the  enforce- ment  of the law cannot be contemplated in a foreign  State, it can, nonetheless, be enforced by the courts of the enact- ing State to the degree that is permissible with the machin- ery  available  to them. They will not be regarded  by  such courts as invalid on the ground of such  extra-territoriali- ty. [998H, 999A-B, D]     British Columbia Electric Railway Company Limited v. The King, [1946] A.C. 527, applied.     2.  But  unless  nexus exists Parliament  will  have  no competence to make the law. Article 245(1) empowers  Parlia- ment 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  opera- tion  in order to subserve the object, and that object  must be related to something in India. It is inconceivable that a law  should  be  made by Parliament in India  which  has  no relationship with anything in India. [999E-F]     2.1 In view of the great public importance of the  ques- tion,  whether  the ingredients of  the  impugned  provision indicate a nexus 996 these cases are referred to a Constitution Bench. [999H] Corborandum  Co. v. C.I.T., [1977] 108 I.T.R. 335;  referred to.

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal No.  2697  & 2698 of 1989.     From  the Judgment and Order dated 24.3.87 &  1.7.87  of the  Andhra  Pradesh High Court in Writ Petition No.  105  & 8737 of 1987.     N.A.  Palkhivala, P.A.S. Rao, D.N.  Mishara,  Ranganatha Chari and Ms. Rubi Anand for the Petitioners.     S.C. Manchanda, Ms. A. Subhashini and B.B. Ahuja for the Respondents. The Judgment of the Court was delivered by PATHAK, C J: Special Leave granted.     These appeals by Special Leave are directed against  the dismissal by the Andhra Pradesh High Court of Writ Petitions filed by the appellant.     The  appellant, Messrs Electronics Corporation of  India Limited,  entered into a memorandum of understanding with  a Norwegian  company at Paris. This was followed by an  agree- ment  dated  2 May, 1986 executed at Hyderabad.  Under  that

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agreement  the  Norwegian company was to  provide  technical know-how  and technical services, including  facilities  for the  training of personnel, to the appellant  in  connection with the manufacture of computers. The consideration for the technical know-how and technical services was represented by Norwegian  currency  NOK  32 Millions  equivalent  to  about Rs.575 lakhs. Eighty five per cent of the consideration  was to be paid from credit provided by Norwegian authorities and the  balance  fifteen per cent was to be paid  out  of  free foreign exchange made available by the State Bank of  India, London  Branch. It is not in dispute that the agreement  had received  the careful consideration of the Reserve  Bank  of India and of the Central Government.     The appellant approached the Income Tax Officer for  the grant of a ’No Objection Certificate’ as contemplated  under s. 195(2) of the 997 Income Tax Act, 1961, to enable it to remit the  instalments due  without  any  obligation to deduct any  income  tax  at source, but the request was denied. On 23 December, 1986 the appellant made an application to the Commissioner of  Income Tax  for  a  direction to the Income tax  Officer,  but  the Commissioner rejected the application. The Commissioner took the view that having regard to Section 9(1)(vii) and Section 195  of  the Income Tax Act, 1961, the  payment  constituted income which was deemed to accrue or arise in India and  was liable to deduction of tax at source.     The appellant filed a Writ Petition against the order of the  Commissioner, and assailed the constitutional  validity of  Section  9(1)(vii) of the Act. It was urged  before  the High  Court that Parliament was not competent to enact  Sec- tion 9(1)(vii) of the Act inasmuch as the provision possess- es as extra territorial operation without any nexus  between the  person  sought to be taxed and the country  seeking  to tax. It was further contended that even after the  introduc- tion  of Section 9(1)(vii) by the Finance Act of  1976  with effect  from  1 June, 1976, the requirement  of  a  business connection  of a foreign Company was required, and the  case was governed by CORBORANDUM CO. v. C.I.T., [1977] 108 I.T.R. 335.  It was also urged that after the introduction  of  the Explanation  by the Finance Act of 1977 with effect  from  1 April, 1977 Section 9(1)(vii) creates an invidious discrimi- nation  among  companies which had entered  into  a  foreign collaboration agreement prior to 1 April, 1976 and those who have done so after that date, and that therefore Article  14 was violated. The High Court repelled all the contentions of the  appellant  and dismissed the Writ Petition.  A  similar Writ Petition was filed by the appellant against an order of the Commissioner of Income tax declining to direct the grant of a ’No Objection Certificate, in relation to  disbursement made  under  a licence agreement with  Messrs  Control  Data Indo-Asia  Company, U.S.A., and the Writ Petition  was  dis- missed  by  the High Court for the reasons which  had  found favour with it in the earlier case. It is contended by learned counsel for the appellant that s. 9(1)(vii)  of the Income Tax Act is ultra vires inasmuch  as it  enables the levy of income-tax on the Norwegian  company in  the  one case and the American company in the  other  in circumstances which appear to show that the statute operates extra-territorially  without the need for any nexus  between anything done in India and the person sought to be taxed. S. 9(1)(vii) declares:               "9(1) The following incomes shall be deemed to               accrue or               998

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             arise in India--               (i)................................................                  ................................................               (vii)  income  by way of  fees  for  technical               services payable by--               (a) the Government; or               (b)  a person who is a resident, except  where               the  fees are payable in respect  of  services               utilised  in a business or profession  carried               on  by  such person outside India or  for  the               purposes of making or earning any income  from               any source outside India; or               (c) a person who is a non-resident, where  the               fees  are payable in respect of services  uti-               lised  in a business or profession carried  on               by such person in India or for the purposes of               making  or earning any’income from any  source               in India;                         Explanation.--For  the  purposes  of               this  clause,  "fees for  technical  services"               means  any consideration (including  any  lump               sum  consideration) for the rendering  of  any               managerial, technical or consultancy  services               (including the provision of services of  tech-               nical or other personnel) but does not include               consideration for any construction,  assembly,               mining  or  like  project  undertaken  by  the               recipient  or  consideration  which  would  be               income  of the recipient chargeable under  the               head "Salaries".     It  seems  that the Revenue is proceeding on  the  basis that the foreign company is liable to tax and that therefore the  petitioner is obliged to deduct at source the tax  pay- able by the foreign company. We are informed that the  serv- ices  are rendered by the foreign company in the  nature  of training abroad to personnel belonging to the appellant, and that payment to the foreign company is also effected abroad. The  Revenue rests its case on S. 9(1)(vii)(b) of  the  Act, and the question is whether on the terms in which the provi- sion is couched it is ultra vires.     Now it is perfectly clear that it is envisaged under our constitutional scheme that Parliament in India may make laws which operate 999 extra-territorially.  Art. 245(1) of the  Constitution  pre- scribes  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.  Therefore,  a   Parliamentary statute  having extra-territorial operation cannot be  ruled out from contemplation. The operation of the law can  extend to persons, things and acts outside the territory of  India. The  general  principle,  flowing from  the  sovereignty  of States, is that laws made by one State can have no operation in  another State. The apparent opposition between  the  two positions  is reconciled by the statement found  in  British Columbia  Electric  Railway  Company Limited  v.  The  King, [1946] A.C. 527:               "A  legislature  which  passes  a  law  having               extra-territorial operation may find that what               it  has enacted cannot be  directly  enforced,               but  the Act is not invalid on  that  account,               and the courts of its country must enforce the               law with the machinery available to them."

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In  other words, while the enforcement of the law cannot  be contemplated  in  a foreign State, it can,  nonetheless,  be enforced  by the courts of the enacting State to the  degree that  is permissible with the machinery available  to  them. They  will not be regarded by such courts as invalid on  the ground of such extra-territoriality.     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  opera- tion  in order to subserve the object, and that object  must be related to something in India. It is inconceivable that a law  should  be  made by Parliament in India  which  has  no relationship  with anything in India. The only  question  is then whether the ingredients in terms of the impugned provi- sion  indicate a nexus. The question is one  of  substantial importance,  specially as it concerns  collaboration  agree- ments 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. T.N.A. 1000