GVK INDS. LTD. & ANR. V/s THE INCOME TAX OFFICER & ANR. (2011) 4 SCC 36

Case GVK INDS. LTD. & ANR. V/s THE INCOME TAX OFFICER & ANR. (2011) 4 SCC 36
CourtBefore the Supreme Court of India
Case Number CIVIL APPEAL NO. 7796 OF 1997
BenchChief Justice SH kapadia, Justice B. Sudershan Reddy, Justice KSP Radhakrishnan, Justice SS Nijjar, Justice Swatanter Kumar.
Decided OnMarch 1, 2011
Author of the judgementJustice B. Sudershan Reddy..
Advocates for the appellantS. Ganesh, Senior Advocate ( UA Rana, MS Mrinal Majumdar and MS Devina Sehgal)
Advocates for the respondentGoolam E. Vahanvati, Attorney General (Rupesh Kumar, Arijit Prasad, DD Kamat, Rohit Sharma, Mihir Chatterjee, Nishant Patil, MS Naila Jung, Anoopam Prasad, BV Balaram Das, MS Sushma Suri)
Author of the briefAditya Gor

Brief facts and procedural history:

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 of Sections 9(1)(i) or 9(1)(vii)(b) of the Income Tax Act (1961). (Para 7)

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 has upheld that Section 9(1)(i) did not apply in the circumstances of the facts of the case, nevertheless upheld the applicability of Section 9(1)(vii)(b) on the facts and also upheld the constitutional validity of the said provision. The High Court mainly relied on the ratio of the judgment by a three judge bench of this court in ECIL. Being aggrieved by this, an appeal has been filed before the Supreme Court. (Para 7)

Issues raised before the court and Conclusions:

  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:
    1. the territory of India, or any part of India; or
    2. the interests of, the welfare of, the well-being of, or security of inhabitants of India, and Indians? (Para 4)

The answer to the above would be yes. 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. 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 apriori 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. 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. 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.

  1. Does the Parliament have the powers to legislate “for” any territory, other than the territory of India or any part of it? (Para 4)

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. 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 an extra-territorial operation. 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, as answered in response to Question 1 above, and would be laws made “for” a foreign territory.

The ratio of the bench:

ECIL Conclusion-

(After conclusively determining that Clauses (1) and (2) of Article 245, read together, impose a requirement that the laws made by the Parliament should bear a nexus with India, the three judge bench in ECIL asked that a constitutional bench be constituted to consider whether the ingredients of the impugned provision, i.e.,  Section 9(1)(vii) of the Income Tax Act (1961) indicate such a nexus.) – (Para 9)

The requirement of a 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. (Para 11)

The issue under consideration in ECIL was whether Section 9(1)(vii)(b) of the Income Tax Act (1961) was unconstitutional on the ground that it constitutes a law with respect to objects or provocations outside the territory of India, thereby being ultra vires the powers granted by Clause (1) of Article 245. Interpreting Clauses (1) and (2) of Article 245, Chief Justice Pathak (as he then was) drew a 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. (Para 12)

The principle that was enunciated in ECIL was that the problems of inability to enforce the laws outside the territory of a nation state cannot be grounds to hold such laws invalid. It was further held that the courts in the territory of the nation-state, whose legislature enacted the law, ought to nevertheless order that a law requiring extra-territorial operation be implemented to the extent possible with the machinery available. It can, of course, be clearly appreciated that the said principle falls within the ambit of the prohibition of Clause (2) of Article 245. (Para 13)

However, the principle enunciated above does not address the question as to whether the Parliament may enact a law “for” a territory outside the boundaries of India. 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 extraterritorial 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 is 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. (Para 14)

It was concluded in ECIL that the Parliament does not have the powers to make laws that bear no relationship to or nexus with India. (Para 15)

Ratio as given by the author of the judgment:

The word that links the subject, “the whole or any part of the territory of India” under clause (1) of 245 with the phrase that grants legislative powers to the Parliament, is “for”. It is used as a preposition. The word “for”, when ordinarily used as a preposition, can signify a range of meanings between the subject, that it is a preposition for, and that which preceded it. (Para 33)

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”. As much as many extra-territorial aspects or causes may have an impact on or nexus with the nation-state, they would legitimately, and indeed necessarily, be within the domain of legislative competence of the national parliament, so long as the purpose or object of such legislation is to benefit the people of that nation state. (Para 34 & 35)

On account of scientific and technological developments, the magnitude of cross border travel and transactions has increased tremendously. Moreover, existence of economic, business, social and political organizations and forms, of more or less determinate structure, and both recognized and unrecognized, that operate across borders, implies that their activities, even though conducted in one territory may have an impact on or in another territory. (Para 39)

To claim the power to legislate with respect to extra-territorial aspects or causes, that have no nexus with the territory for which the national legislature is responsible for, would be to claim dominion over such a foreign territory, and negation of the principle of self-determination of the people who are nationals of such foreign territory, peaceful coexistence of nations, and co-equal sovereignty of nation-states. Such claims have, and invariably lead to, shattering of international peace and consequently detrimental to the interests, welfare and security of the very nation-state, and its people, that the national legislature is charged with the responsibility for. 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. (Para 40 & 41)

Thus the Parliament is not empowered to enact laws in respect of extra-territorial aspects or causes that have no nexus with India. (Para 42)

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 are to act as the Parliament of India and of no other territory, nation or people. 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. (Para 43)

For a legislature to make laws for some other territory would be to act in a representative capacity of the people of such a territory. That would be an immediate transgression of the condition that the Parliament be a Parliament for India. The word “for”, that connects the territory of India to the legislative powers of the Parliament in Clause (1) of Article 245, when viewed from the perspective of the people of India, implies that it is “our” Parliament, a jealously possessive construct that may not be tinkered with in any manner or form. (Para 44)

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. (Para 45)

The interpretational support for this conclusion is that Parliament may not legislate for territories beyond India from Article 51, a Directive Principle of State Policy, though not enforceable, nevertheless fundamental in the governance of the country. International peace and security have been recognized as being vital to the interests of India. This is to be achieved by India maintaining just and honorable relations, by fostering respect for international and treaty obligations etc., as recognized in Article 51. To claim the power to legislate for some other territories, even though aspects or causes arising, occurring or existing there has no connection, to India would be to demolish the very basis on which international peace and security can be premised. (Para 46 & 47)

Further, with regards to the second limb of the argument, the court held that it is important to draw a clear distinction between the acts & functions of making laws and the acts & functions of operating the laws. Making laws implies the acts of changing and enacting laws. The phrase operation of law, in its ordinary sense, means the effectuation or implementation of the laws. While there may be some overlap of functions, the essential cores of the functions delineated by the meanings of the phrases “make laws” “operation of laws” and “invalidate laws” are ordinarily and essentially associated with separate organs of the state – the legislature, the executive, and the judiciary respectively, unless the context or specific text, in the Constitution, unambiguously points to some other association. (Para 51)

In Article 245 we find that the words and phrases “make laws” “extra-territorial operation”, and “invalidate” have been used in a manner that clearly suggests that the addresses implicated are the legislature, the executive, and the judiciary respectively. While Clause (1) uses the verb “make” with respect to laws, thereby signifying the grant of powers, Clause (2) uses the past tense of make, “made”, signifying laws that have already been enacted by the Parliament. The subject of Clause (2) of Article 245 is the law made by the Parliament, pursuant to Clause (1) of Article 245, and the object, or purpose, of Clause (2) of Article 245 is to specify that a law so made by the Parliament, for the whole or any part of territory of India, should not be held to be invalid solely on the ground that such laws require extra-territorial operation. The only organ of the state which may invalidate laws is the judiciary. (Para 52)

The power of the 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 that they are being used to realise a public purpose that subserves the general welfare of the people. It is one of the essential defenses of the people in a constitutional democracy. (Para 53)

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