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Doctrine of Territorial Nexus

The term federalism means the division of powers between the centre and state. It 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. As our constitution is of federal structure it establishes dual polity between the union and state.

They are conferred with the sovereign powers which are to be used in a manner directed by the Constitution. Our constitution is of is the supreme law of the land provides the basic meaning of federalism that is the division of powers.

Jurisdiction is a sine-qua-none of sovereignty. It's an expression of power which the sovereign expresses over its subjects. "Territorial nexus is a concept described in Article 245 of the Constitution of India that determines how legislative powers are divided.

Article 245 provides, inter alia, that (subject to the provisions of the Constitution).
  • Parliament may make laws for the whole or any part of the territory of India and
  • the legislature of a State may make laws for the whole or any part of the State
(b) Thus, article 245 sets out the limits of the legislative powers of the Union and the States from the geographical (or territorial) angle. From the point of view of the subject matter of legislation, it is article 246 which is important. Article 246 reads as under:
Article 246(1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List 1 of the Seventh Schedule (in this Constitution, referred to as the Union List).

 (2) Notwithstanding anything in clause (3), Parliament, and subject to clause (1), the Legislature of any State also, shall have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution, referred to as the Concurrent List). (3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution, referred to as the State List).

(4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State, notwithstanding that such matter is a matter enumerated in the State List.[1]

- PART XI of Indian Constitution, RELATIONS BETWEEN THE UNION AND THE STATES, LEGISLATIVE RELATIONS, Distribution of Legislative Powers Article 245.[2]

Article 245-Extent of laws made by parliament and by the legislatures of states:
  1. Subject to the provisions of this constitution, Parliament may make laws for the whole or any part of the territory of India, and the legislature of a state may make laws for the whole or any part of the state.
  2. No law made by parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.

Subject to the provisions of this constitution, this phrase means that the power enjoyed by the parliament to make laws for the whole or any part of the territory of India will be read in subject to other provisions of the constitution. In other words, this power is not absolute. Other provisions like the distribution of powers, fundamental rights and other provisions of the constitution as interpreted by the courts.

Territorial Nexus and the Parliament
Article 245 (2) of the Constitution of India makes it amply clear that No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation. Thus, legislation cannot be questioned on the ground that it has extra-territorial operation.

It is well-established that the Courts of our country must enforce the law with the machinery available to them; and they are not entitled to question the authority of the Legislature in making a law which is extra-territorial.[3]

Extra-territorial operation does not invalidate a law. But some nexus with India may still be necessary in some of the cases such as those involving taxation statutes.[4]

Territorial Nexus and the State Legislature
The Legislature of a State may make laws for the whole or any part of the State. Now, this leaves it open to scrutiny whether a particular law is really within the competence of the State Legislature enacting it. There is plethora of cases that have stated that the laws which a state is empowered to make must be for the purpose of that State.[5]

Thus, the Doctrine of Territorial Nexus has been applied to the States as well. There are two conditions that have been laid down in this respect[6]
  • The Connection (nexus) must be real and not illusory.
  • The liability sought to be imposed must be pertinent to that connection.
If the above two conditions are satisfied, any further examination of the sufficiency of Nexus cannot be a matter of consideration before the courts.

In various cases relating to taxation statutes, the courts have time and again stated that it is not necessary that the sale or purchase should take place within the Territorial Limits of the State. Broadly speaking local activities of buying or selling carried in the State in relation to local goods would be sufficient basis to sustain the taxing power of the State, provided of course, such activities ultimately result in concluded sale or purchase to be taxed.[7]

There is also a Presumption of Constitutionality that the Legislature is presumed not to have exceeded its constitutional powers and a construction consistent with those powers is to be put upon the laws enacted by the Legislature.

Extra-Territorial Operation
It is well-established that the Parliament is empowered to make laws with respect to 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.

Such laws would fall within the meaning, purport and ambit of grant of powers of 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 require extra territorial operation. Any law enacted by the Parliament with respect to extra territorial aspects or causes that have no nexus with India would be ultra vires and would be laws made for a foreign territory.[8]

This clearly indicates that as long as the law enacted by the Parliament has a nexus with India, even if such laws require extra territorial operation, the laws so enacted cannot be said to constitutionally invalid. It is only when the laws enacted by the Parliament with respect to extra territorial aspects or causes that have no nexus with India that such laws would be ultra vires.[9]

What is an acceptable Nexus is again a subjective question? Professor Michael Lang in his book Introduction to the Law of Double Taxation Conventions says that in International law practice, there are no significant limits on the tax sovereignty of states. In designing the domestic personal tax law, the national legislator can even tax situations when, for example, only a "genuine link" exists. It is only when neither the person nor the transaction has any connection with the taxing state that tax cannot be levied.

In granting the Parliament the powers to legislate for India, and consequently also with respect to extra-territorial aspects or causes, the framers of our Constitution certainly intended that there be limits as to the manner in which, and the extent to which, the organs of the State, including the Parliament, may take cognizance of extra-territorial aspects or causes, and exert the State powers (which are the powers of the collective) on such aspects or causes.[10]

Doctrine of Public Trust requires that all legislation by the Parliament with respect to extraterritorial aspects or causes be imbued with the purpose of protecting the interests of, the welfare of and the security of India, along with Article 51, a Directive Principle of State Policy, though not enforceable in a court of law, nevertheless fundamental to governance, lends unambiguous support to the conclusion that Parliament may not enact laws with respect to extra-territorial aspects or causes, wherein such aspects or causes have no nexus whatsoever with India.

Doctrine of territorial nexus in Indian legislation
Article 245-Extent of laws made by parliament and by the legislatures of states.
  1. Subject to the provisions of this constitution, Parliament may make laws for the whole or any part of the territory of India, and the legislature of a state may make laws for the whole or any part of the state.
  2. No law made by parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.

Subject to the provisions of this constitution, this phrase means that the power enjoyed by the parliament to make laws for the whole or any part of the territory of India will be read in subject to other provisions of the constitution. In other words, this power is not absolute. Other provisions like the distribution of powers, fundamental rights and other provisions of the constitution as interpreted by the courts.

Extra- territorial operation Law made to operate outside territorial limits of India

State laws would be void if it has extra- territorial operation i.e., takes effect outside the state. However, there is one exception to this general rule. A state law of extraterritorial operation will be valid if there is sufficient nexus between the object and the state. This is clarified by the case State of Bombay vs. R.M.D.C.[11]

The Doctrine of Territorial nexus can be invoked under the following circumstances:
  • Whether a particular state has extra-territorial operation
  • If there is a territorial nexus between the subject- matter of the Act and the state making the law
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.

Case laws
Tata Iron and Steel Company v. State of Bihar[12]
The state of Bihar passed a Sales 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 a consideration of two elements.
  • The connection must be real and not illusory
  • The liability sought to be imposed must be pertinent to that connection

State of Bihar vs Charusila Dasi[13]
Bihar 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 Respondent created a trust deed of her properties of several houses and land in Bihar and Calcutta. The trust being situated in Bihar.

The main question for decision was whether the Act applied to trust properties which are situated outside the state of Bihar.

The court had to decide whether the trust thus created was a private trust or public trust. Can the legislature of Bihar make a law with respect to such a trust situated in Bihar and other properties appertaining to such trust which are situated outside Bihar?
Applying the doctrine of territorial nexus, the Supreme Court held that the Act could affect the trust property situated outside Bihar, but appertaining to a trust situated in Bihar where the trustees functioned.

The Act aims to provide for the better administration of Hindu religious trusts in the state of Bihar. The trust being situated in Bihar the state has legislative power over it and also over its trustees or their servants and agents who must be in Bihar to administer the trust. What is necessary is that the connection between the trust and the property appertaining thereto is real and not illusory and that the religious institution and the property appertaining thereto form one integrated whole as one cannot be dissociated from the other.

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.

The State of Bombay vs R. M. D. Chamarbaugwala [14]
State laws would be void if it has extra- territorial operation i.e., takes effect outside the state. However, there is one exception to this general rule.
A state law of extra-territorial operation will be valid if there is sufficient nexus between the object and the state.
This is clarified by the case State of Bombay vs. R.M.D.C.[15]

The Doctrine of Territorial nexus can be invoked under the following circumstances:
  • Whether a particular state has extra-territorial operation
  • If there is a territorial nexus between the subject- matter of the Act and the state making the law

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.

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 of 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 state.

The question for decision before the Supreme Court was if the respondent, the organiser 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 within Bombay.

Wallace v. Income Tax Commissioner[16]
A company was incorporated in the United Kingdom and had its control and management exclusively situated there. A member of it carried on business in India. The company made an overall profit of which a major part accrued from India. It was held that India could levy an income tax on the entire income of the company, and not only on the portion accruing from India, for there a sufficient territorial nexus between the company and India for this purpose.

Shrikant Bhalchandra Karulkar v. State of Gujarat[17]
It was held that:
There is no general Formula defining what territorial connection or nexus is sufficient or necessary for application of the law to a particular object. Sufficiency of the law to a particular object sufficiency of the territorial connection involves consideration of two elements viz:
  1. The connection must be real and not illuary
  2. The liability sought to be imposed under the act must be pertinent or relevant to that connection
Whether in a given case there is sufficient territorial nexus or not is a question of fact and it is for the courts to decide in each case whether the territorial nexus, being put forward as the basic of the application of the law is sufficient or not.

Raj Shipping v. State of Maharashtra[18]
Assessed was engaged in business of supplying fuels (bunker supplies) to shipping vessels located in territorial waters of India, off the coast of Maharashtra. Shipping vessels placed purchase order for fuel to assesses. assesses, in turn, placed purchase order on oil marketing companies (OMCs). OMCs transported fuel to barge loading point where fuel was decanted in cargo tanks of barges owned by assesses.

After taking delivery of fuel from OMCs, the barges sailed to the anchorage point of shipping vessels and unloaded fuel in vessel. There was no dispute on the fact that the Sales tax was leviable on sale of motor spirit but sales of motor spirit at retail outlet are exempt. But assesses claimed exemption from payment of MVAT on sale of HSD and did not pay sales tax. It also contended that sale transactions executed were not within the territorial jurisdiction of the State of Maharashtra.

E.R. Samuel v. State of Punjab [19]
The State of Punjab sought to levy electricity duty in respect of electricity consumed within the territories of Himachal Pradesh, the duty was sought to be levied on the petitioners in that case on the ground that they were employees of the State of Punjab. It was held that the mere fact that the petitioners were employees of the State of Punjab did not constitute sufficient territorial nexus so as to empower the State of Punjab to impose the levy on the petitioners.

This case does not further the case of the petitioners. The event had taken place outside the State of Punjab and the mere fact that they were employees of the State of Punjab obviously did not constitute sufficient territorial nexus between the tax imposed and the persons sought to be taxed.

CONCLUSION
In simple words, Doctrine territorial nexus says that laws made by a state legislature are not applicable outside the state, except when there is a sufficient nexus between state and object. Territorial nexus doctrine, thus, plays an important part in assessment of tax. Tax is levied on one transaction where the operations which may give rise to income make take place partly in one territory and partly in another.

The Legislature of a state may make laws for the whole or any part of has extraterritorial operation i.e. takes effect outside the state. However, there is one exception to this general rule. A state law of extra-territorial operation will be valid if there is sufficient nexus between the object and state. The power to make a law having extra territorial operation is conferred only on Parliament and not on the state legislatures. Hence an Act of the State Legislature, if it gives extra-territorial operation to its provisions, can be successfully challenged in the court, unless extra-territorial operation can be sustained on the ground of territorial nexus.

It means that although the object to which the law applies may not physically be located within the territorial limits of a State, yet the State law will be valid if there exists a connection or nexus between the state and the object. Territorial nexus is not confined within the boundaries of India but can be applied overseas. The law that is prevalent in India comes into force at that time. Territorial nexus is a doctrine that allows application of the law of a nation outside its territorial boundaries and it is basically an International law.

End-Notes:
  1. http://lawmin.nic.in/olwing/coi/coi-english/Const.Pock%202Pg.Rom8Fsss(16).pdf
  2. http://lawmin.nic.in/ncrwc/finalreport/v2b3-3.htm
  3. British Columbia Electric Railway Co. Ltd. v. King, AIR 1946 PC 180
  4. Electronics Corporation of India Ltd. v. Commissioner of Income Tax, AIR 1989 SC 1707.
  5. State of Bombay v. United Motors (India) Ltd., AIR 1953 SC 252.
  6. State of Bombay v. R.M.D. Chamarbaugwala, AIR 1957 SC 699.
  7. Poppatlal Shah v. State of Madras, AIR 1953 SC 274
  8. GVK Industries Ltd v. ITO, (2011) 4 SCC 36.
  9. Metro & Metro, Agra vs assesses, I.T.A. No.: 393/Agra/2012
  10. Constituent Assembly Debates, Official Report, 1948-49, page 601 (Lok Sabha Secretariat, New Delhi)
  11. State of Bombay vs. R.M.D.C, 1957 AIR 699, SCR 874.
  12. AIR 1958 SC 482
  13. AIR 1959 SC 1002
  14. 1957 AIR 699, 1957 SCR 874
  15. Ibid.
  16. AIR 1948 PC 118
  17. AIR1994 5 SCC 459
  18. 2015 SCC ONLINE BOM 5767
  19. AIR 1966 Him Pra 59

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