Before going to the legality of the Doctrine, let us get down to the basics of
the Territorial Doctrine. Territorial, the simple meaning of Territorial means
relating to a particular territory, locality, or region. On the other hand,
Nexus means a connection or link between things, persons, or events. Article 245
of the Indian Constitution enunciates Territorial Nexus and it is widely
interpreted in various cases in the Supreme Court. In this article, we would
discuss the Evolution of the Doctrine, its Salient features, Landmark Judgments,
and constructive criticism on the Doctrine.
By putting an Analogy on a hypothetical situation let us understand how the
Doctrine works in layman's terms,
We imagine that I live in Rajasthan running a Lottery business in Bangalore
using my network and people over there. The people in Bangalore will pay for
lottery tickets and from whatever receipts I get, I will pay the prize money and
keep rest as profit after paying applicable taxes.
Question is – since I am living in Rajasthan but my business was conducted in
Bangalore, should I pay tax to Karnataka Government?
The court has reviewed such cases and established that even I am not living in
Bangalore since the business activity was conducted there; I should pay tax to
the Karnataka Government. The court says that if there is sufficient Nexus
between state and the object, then the state Law can operate outside the state
also. Here, I am an object and the Karnataka government is state; and there is a
Nexus between object and state because of my business activity in that state
despite not living there or physically present there. This is called the
Doctrine of Territorial Nexus.
The court has applied the Doctrine of Territorial connection or Nexus to
income-tax legislation, sales tax legislation, and also to legislation imposing
a tax on gambling.
Evolution & The Meaning Of The Doctrine
The concept of extra Territorial operation of Law evolved in India with the
Government of India Act, 1935. This Act was made by the British Parliament with
an aim to grant a large measure of autonomy to the provinces of British India.
The Act of 1935 applied to the territories in India for the time being vested in
His Majesty the King, Emperor of India. Later after independence, the concept is
discussed in the Constitution of India.
The federalism feature in the Indian Constitution establishes a Dual Polity
between the Centre and the State. The basic principle of federation is that the
legislative, executive, and financial authority is divided between the Centre
and state not by any Law passed by the Centre but by Constitution itself. The
legislative powers are distributed in two ways which are provisioned by the
Distribution of legislative powers in respect of the territory
With respect to the subject matters of the list under 7th schedule
The Territorial Nexus is derived from Article 245 of the Indian Constitution.
Article 245 (1) states that:
- Parliament may make laws for the whole or any part of the territory of
- The legislature of a State may make Laws for the whole or any part of
Under Article 245(2) of the Indian constitution, if any Law is made by the
parliament regarding the extraTerritorial operations, no questions can be raised
on its validity. Thus the validity of legislation can't be questioned. In this
case, a court is bound to enforce the Laws made with regards to
extra-Territorial operations. This legislation cannot be invalidated.
The Territorial case was enunciated in the case of A.H. Wadia vs Commissioner Of
Income-Tax it was held that a question of extraterritoriality of enactment
can never be raised against a supreme legislative authority on the grounds of
questioning its validity. The legislation may offend the rules of international
Law, may not be recognized by foreign courts, or there may be practical
difficulties in enforcing them but these are questions of policy with which the
domestic tribunals are not concerned.
Territorial Nexus is one such exception that allows the state to make Laws for
extraterritorial operations if it shows that there exists a Nexus between the
object and the state. But to bring effect to the Laws introduced by the states
for extra Territorial purpose, the Nexus between the object and the state must
Salient Features Of The Doctrine
- It is well-established that the Parliament is empowered to make Laws
concerning aspects or causes that occur, arise or exist, or maybe expected
to do so, within the territory of India and also with respect to
extra-Territorial aspects or causes that have an impact or Nexus with India.
In Wallace v. Income-tax Commissioner, Bombay a company that was registered
in England was a partner in a firm in India. The Indian Income-tax Authorities
sought to tax the entire income made by the company. The privy council applied
the Doctrine of Territorial Nexus and held the levy tax valid.
- The Doctrine of Territorial Nexus has been applied to the States as
well. In various cases relating to taxation statutes, the courts have time
and again stated that the sale or purchase doesn't need to take place within
the Territorial Limits of the State.
- It signifies that the object to which the Law applies need not be
physically located within the territorial boundaries of the state, but must
have a sufficient Territorial connection with the state.
- A state may levy a tax on a person, property, object or transaction not
only when it is situated within its territorial limits, but also when it has
a sufficient and real Territorial connection with it. Whether there is
sufficient connection is a question of fact and will be determined by courts
in each accordingly.
- The Doctrine of Territorial Nexus governs the taxation of non-residents
Critical Analysis Of The Doctrine
State of Bombay vs RMDC The Respondent was not residing in Bombay but he conducted Competitions with
prize money through a newspaper printed and published from Bangalore having
a wide circulation in Bombay. All the essential activities like filling up
the forms, entry fees, etc. for the competition took place in Bombay. The
state govt. sought to levy tax the respondent for carrying on business in
The question for decision before the Supreme Court was if the respondent,
the organizer of the competition, who was outside the state of Bombay, could
be validly taxed under the Act.
Decision-It was held that there existed a sufficient Territorial Nexus to
enable the Bombay Legislature to tax the respondent as all the activities
which the competitor is ordinarily expected to undertake took place mostly
Tata Iron And Steel Company vs. Bihar State Tata Iron And Steel Company vs. Bihar State- The state of Bihar passed a
Sales Tax Act for levy of sales tax.
Tax Act for levy of sales tax whether the sale was concluded within the
state or outside if the goods were produced, found and manufactured in the
state. The court held there was sufficient Territorial Nexus and upheld the
Act as valid.
Whether there is sufficient Nexus between the Law and the object sought to
be taxed will depend upon the facts and circumstances of a particular case.
It was pointed out that sufficiency of the Territorial connection involved
consideration of two elements:
- the connection must be real and not illusory
- the liability sought to be imposed must be pertinent to that connection.
The State Of Bihar & Others vs Sm. Charusila DasBihar legislature enacted the Bihar Hindu Religious Trusts Act,1950, for the
protection and preservation of properties appertaining to the Hindu religious
trusts. The Act applied to all trusts any part of which was situated in the
state of Bihar.
The question was whether the Act applies to trust properties that are situated
outside the state of Bihar. Can the legislature of Bihar make a Law concerning
such a trust situated in Bihar and other properties appertaining to such trust
which is situated outside Bihar?
It was held that the act passed by the state of Bihar could have the effect over
the property situated outside the Territorial limits of Bihar keeping in mind
that the trust must be situated with the limits of the state and there exist the
Shrikant Bhalchandra Karulkar v. the State of GujaratIn this case, it was dealt with the legislative competence to make Laws having
extra Territorial operation in view of the provisions of Article(s) 245 and 246
of the Constitution of India.
It was held by the court that so long as the Law made by State legislature
applies to the persons residing within its territory and to all things and acts
within its territory, it cannot be considered as extra-Territorial.
After sales tax was introduced in the Provinces under the powers conferred by
the Government of India Act 1935, it became the fashion for many Provinces to
levy on the basis of the Territorial Nexus theory, tax on sale not wholly
concluded within the territory of the Provinces.
Thus in the case of a sale where the goods are in one Province, the owner in
another, the buyer in a third Province, the contract is concluded in a fourth
Province, the price is paid in the fifth Province and the goods are delivered in
a sixth Province all the Provinces could levy a sales tax.
When the Constitution was enacted, to prevent this evil of multiple taxations it
was provided that only the State in which the goods were delivered for
consumption should be allowed to levy a sales tax. This was achieved by article
286(1) (a) and its explanation thereunder.
Here some of the cons of applying the Doctrine of Territorial Nexus in the
cases in India:
- In the GVK case, the Court observed that if the power to enact Laws
for any territory, including a foreign territory, were to be read into
clause (2) of Article 245, the phrase 'for the whole or any part of the
territory of India' in clause (1) of Article 245 would become a mere
surplusage. In jurisprudence, surplusage is a useless statement completely
irrelevant to the cause.
- A state legislature is not competent enough to make Laws for the
extraterritorial operations. It is the job of the parliament and there will
definitely be a conflict of interest between the State and the parliament.
- The scope of the Territorial Nexus Doctrine is so wide that it only
requires proving a Nexus between the object and the state. So there are high
chances to get succumbed by ulterior motives.
- The legislation may offend the rules of international Law, may not be
recognized by foreign courts or there may be practical difficulties in
- The Doctrine of Territorial Nexus allows the effect of Law outside the
Territorial limits of the nation for extra Territorial purposes if there
exists a sufficient connection between the object and the state. So it is
basically confiding with International Law which is decided by a
In this rapidly changing world and globalized era, every written constitution
should have efficacy to deal with the matter of extra-Territorial operation of
Law related to matters of trade, commerce & services that occur outside of the
country. Article 51 of the Constitution of India contains important positive
policy statements for the promotion of international peace and security,
fostering respect for international Law and treaty obligation. Thus the balance
between article 51 and 245 of the Constitution of India is needed in the making
of Laws related to the extra-Territorial operation
Federalism is a very complex mechanism though it is the very purpose for which a
federal state is formed includes the distribution of powers between the union
and the Centre. Their power is partitioned by the constitution so that they
should their independence over the executive and legislative authority.
Thus, The Doctrine of Territorial Nexus does not debar a State Law from having
an extra-Territorial jurisdiction. It simply lays down that if a State wants to
extend its Laws beyond its boundary then it will have to satisfy the Court that
there is a sufficient Nexus between the subject matter concerned and the state
making the Law.
Though the legislative power of a State is Territorially limited to that State
or part thereof, when it comes to the question of taxing powers, a State gets
competence based on the Doctrine of Territorial Nexus to tax events that have
not taken place fully within its Territorial limits. It is enough even if the
Territorial connection is partial if it is real and not illusory and the taxing
liability is relevant to that connection.
Written By Ukkash F
- (1949) 51 BOMLR 287
- (1943) 45 BOMLR 929
- 1957 AIR 699 SCR 874.
- 1958 AIR 452 SCR 1355
- 1959 AIR 1002
- (1994) 5 SCC 459
- GVK Industries Limited v. Income Tax Officer, MANU/SC/0163/2011