Doctrine of Territorial Nexus and Extra-Territorial Operations

Introduction

One of the key characteristics of the Indian Constitution is the division of powers. Under the Federal Constitution, there are two tiers of government. On the one hand, the country is ruled by a central government. On the other hand, the State Governments exist, each of which has jurisdiction over one of the constitution’s states. As a result, India’s people are ruled by two governments: the central government and the state governments.

Governmental tasks and authorities are divided and shared between the two levels of government. As a result, a federal constitution envisions a two-tiered distribution of authorities and functions. The goal that a federal state aspires to achieve.

The propensity of federalism to limit government action on all sides and divide the state’s strength among co-ordinate and autonomous institutions is particularly obvious, since it represents the fundamental difference between a federal and a state system. Also, a government that is based on a unitary system. “A Federal Constitution establishes a dual polity, with the union at its Centre.”

A federal constitution forms a dual polity, with the union at its Centre and the states at its perimeter, each endowed with sovereign powers to be exercised in the fields given to them by the constitution.” “In their own field, the one is not subordinate to the other; the one’s authority is coordinated with the other’s.” In truth, the primary premise of the federation is that legislative, executive, and financial power is distributed between the Centre and the states by the constitution itself, not by any statute issued by the center. The Indian constitution does this. There is a certain ambiguity to the enactment of laws and their application outside particular state legislature (other states) and outside the territory of India that raises a concern. The Article addresses this same problem and offers recommendations for the same

The definition of territorial in this notion of territorial nexus is simply that it refers to a territory, area, or place, and the definition of nexus is that it refers to people, things, or events. Territorial Nexus theory is an application for extra-territorial cooperation between governments. There must be sufficient Nexus between the item and the state for Extra-Territorial operations across states. The state legislature has the authority to establish laws within the geographical jurisdiction.

The corporation was founded and registered in England, but it also works in India, according to the privy council in “Wallace Bros and Co. Ltd v. The Commissioner of Income”[2]. In that accounting year, this firm made a lot of money using Sleeping Partner, thus the income tax authorities levied a tax on the respondent. The income tax authorities, on the other hand, were challenged by the respondent. The Privy Council determined that the tax is acceptable because of the theory of territorial Nexus, which states that because a large portion of the profit is produced through India, the doctrine of territorial Nexus applies.

Doctrine Of Territorial Nexus Salient Features

  • It is recognized that the Indian parliament has the authority to pass laws relating to India’s territory, extraterritoriality, or factors that have an impact on India’s nexus.
  • The Territorial Nexus Doctrine applies to states and is frequently used in taxation matters.
  • The significance of an adequate territorial Nexus between states and objects is stated in this philosophy.
  • Governments collect taxes on people, things, and objects inside their borders, but under the doctrine of territorial nexus, states can levy taxes on extra-territoriality if there is a genuine enough nexus.
  • This theory governs the taxation of non-Indian citizens.

Constitutional Provisions For Territorial Nexus

State Legislations And The Territorial Nexus

  • The state legislature has the right to pass legislation within its jurisdiction, according to Article 245(1) of the Indian constitution. However, if a state legislature passes legislation that reaches beyond territorial bounds, the Territorial Nexus Doctrine applies if there is a substantial nexus between the item and the state. The Supreme Court articulated two justifications for the application of the territorial nexus concept to extraterritorial operations to evaluate the essential adequacy of connection.
  • “Nexus Legitimacy”
  • Liability arising from a territorial link.
  • These two elements are sufficient to establish whether the Nexus is genuine or not. As a result, parliament has the authority to enact laws relating to territory or extraterritoriality, and such laws will only be upheld if a lawful territorial Nexus exists.
  • As previously stated in this article, Article 245 of the Indian constitution specifies the degree to which legislative powers are delegated to parliament and state legislatures to enact legislation pertaining to the territory. Parliament has the authority to enact laws in the areas over which it has jurisdiction. Parliament has jurisdiction over the entire country or any part of it. They can also be adopted by parliament for extraterritorial activities if the legislation has a strong enough link to India. These laws cannot be called into question or declared unconstitutional. All legislation, however, must adhere to the Indian Constitution’s stipulations.
  • These laws cannot be called into question or declared unconstitutional. All legislation, however, must adhere to the Indian constitution’s stipulations.
  • The authority granted by parliament is not absolute. Extraterritorial laws are enacted by the parliament to conduct activities outside of India’s borders. The state legislature lacks the authority to enact legislation governing the extraterritorial activity. However, there is one exception to the state legislature’s prohibition, and that is territorial nexus. If it is determined that there is a significant relationship between the item and the laws adopted by the state legislature will have an impact beyond the state’s territorial bounds,
  • If it is determined that there is a sufficient relationship between the item and the legislation issued by the state legislature will have an impact beyond the state’s borders.
  • In order to invoke territorial nexus jurisdiction, the following conditions must be met: • If a state has extraterritorial operations
  • If the object and the state have a genuine relationship. It should be apparent that the object must be located outside of the state’s geographical boundaries, but it must have a territorial link to the state.

Landmark Judgements

State of Bombay   vs.   R.M.D. Chamarbaugwala[1]

In the current instance, the respondent, who was not a Bombay resident, held a crossword puzzle reward competition through a newspaper printed and published in Bangalore. This study received a lot of attention in Bombay. To collect the forms and payments for this competition, depots were built. It drew a large number of customers for the competition’s ticket.

The state government subsequently levied a takeover charge against the respondents’ firm for participating in a prize competition in the state. The respondent appealed to the Supreme Court, and the topic of whether the tax may be imposed on someone who lives outside the state’s borders was questioned. The supreme court determined that there was a sufficient geographical link and that the government had the jurisdiction to tax the defendant for the money generated by his firm as a result of the prize competition.

Tata Iron and Steel Company vs. Bihar State Tax Act[2]

The state of Bihar established a sales tax legislation to charge a tax on all transactions, whether they took place inside the state’s territorial bounds or outside of them. The commodities must also be made in the state. In this case, it was determined that there was an established link between the taxable object and the statute. The idea of territorial nexus is made up of these two basic aspects.

State of Bihar v. Charusila Dasi[3]

In this instance, the state of Bihar enacted laws to protect the holdings of Hindu religious trusts. All trusts within Bihar’s geographical limitations are included in this statute. As a result, respondent Madea’s trust deeded some of her assets in Bihar and Calcutta, and the trust was located inside Bihar’s territorial bounds. Several doubts have been raised concerning the act’s reach.

The statute passed by the state of Bihar was held to have effect over property located outside of Bihar’s geographical bounds, with the caveat that the trust must be located inside the state’s borders.

The statute passed by the state of Bihar was held to have effect over property located outside of Bihar’s geographical bounds, provided the trust was located inside the state’s boundaries and there was a sufficient link.

Shrikant Bhalchandra Karulkar v. The State of Gujarat[4]

In this case, Shrikant Bhalchandra Karulkar v. the State of Gujarat, the Supreme Court of India found that the state legislature has the authority to adopt laws for extraterritorial activities that complies with the stipulations of Articles 245 and 246 of the Constitution. The state legislature’s laws apply to a person, and his actions within the state’s territorial bounds are not regarded as extraterritorial.

Extraterritorial Jurisdiction and Constitutional Provisions

Parliament has the authority to pass laws both within its territorial jurisdiction and for extra-territorial purposes with a valid connection to India. Parliament has the authority to enact legislation or laws in this area. The legality of these statutes cannot be questioned. Any legislation enacted by the parliament that has no link with India would be declared extra vires and will be seen as laws enacted for a foreign country. It may be inferred that any law approved by the parliament that has a genuine relationship with India cannot be regarded as unconstitutional.

As a result, any law made by the parliament that has a genuine relationship withIndia cannot be ruled unlawful or unconstitutional. It would be extra vires if such legislation approved by parliament established no relationship with India. The legislative powers given tothe parliament in order to pass laws within the territorial jurisdiction as well as to take cognizance of extraterritorial purposes and exercise state or collective powers are stated in our constitution. The doctrine of public trust argues that any extraterritorial laws established by parliament must be enacted to ensure the welfare of the people.

The doctrine of public trust states that all laws enacted by parliament with respect to extraterritorial operations must be enacted to safeguard India’s welfare and security, implying that no laws for extraterritorial operations should be enacted if there is no nexus between the law and India.

Relationship Between Territorial Nexus and Extra-Territorial Jurisdiction

Parliament has the authority to pass laws both within its territorial jurisdiction and for extra-territorial purposes with a valid connection to India. Parliament has the authority to enact legislation or laws in this area. The legality of these statutes cannot be questioned. Any legislation enacted by the parliament that has no link with India would be declared extra vires and will be seen as laws enacted for a foreign country. It may be inferred that any law approved by the parliament that has a genuine relationship with India cannot be regarded as unconstitutional.

As a result, any law made by the parliament that has a genuine relationship with India cannot be ruled unlawful or unconstitutional. It would be extra vires if such legislation approved by parliament established no relationship with India. The legislative powers given to the parliament to pass laws within the territorial jurisdiction as well as to take cognizance of extraterritorial purposes and exercise state or collective powers are stated in our constitution. The doctrine of public trust argues that any extraterritorial laws established by parliament must be enacted to ensure the welfare of the people.

The doctrine of public trust states that all laws enacted by parliament concerning extraterritorial operations must be enacted to safeguard India’s welfare and security, implying that no laws for extraterritorial operations should be enacted if there is no nexus between the law and India.

Critical Analysis

It may be inferred that the distribution of powers between the federal government and the states is a crucial component of federalism and that this authority is divided by the constitution itself. The constitution establishes a dual polity between the union and the states, with the parliament having the power to make laws for the whole of India or any part of it, as well as extraterritorial operations. A state legislature, on the other hand, does not have the power to make laws for extraterritorial operations. However, there is one exemption that allows such legislatures to pass legislation for extraterritorial objectives provided there is a link between the two.

However, there is one exception that allows such legislatures to make laws for extraterritorial purposes if there is a connection between the object and the state. This means that if the object is located outside the state’s territorial limits but still has a territorial connection with the state, the law will be valid. The theory of territorial nexus extends the reach of the law beyond a nation’s borders.

Article 245 of the Indian Constitution establishes the doctrine of territorial nexus, which stipulates that if there is a territorial nexus or relationship between the subject matter and the enacting legislation, state laws might have extra-territorial nexus. In the case of Wallace v. Income Tax Commissioner, Bombay, in 1948, the privy council established the doctrine of territorial nexus for the first time.

The Indian Constitution is founded on the notion of federalism, and it recognizes the allocation of powers in two ways: first, according to the area, and second, according to the subject matter at hand. Part XI – The Union’s and States’ Relationships in the Distribution of Legislative Power is discussed in Chapter I- Legislative Relations of the Indian Constitution, which is addressed by constitutional provisions from Articles 245 to 255. Article 245 refers to laws enacted by parliaments and legislatures of states with territorial authority. “The fountain source of legislative power is Article 245.” Article 246 discusses the subject-matter jurisdiction of laws enacted by parliament and legislative states.

The Supreme Court made a noteworthy statement, stating that the theory of territorial Nexus plays a critical role in tax assessment. When there is a transaction from one state to another and some of the money is generated in both jurisdictions, a tax is applied

Conclusion

The territorial nexus concept states that the Indian parliament has the jurisdiction to adopt legislation about India’s territory, extraterritoriality, or factors that impact the country’s nexus. The Territorial Nexus Doctrine is a legal principle that applies to states and is widely utilized in taxation. The significance of an adequate territorial Nexus between states and objects is stated in this philosophy. Governments collect taxes on people, things, and objects inside their borders, but under the doctrine of territorial nexus, states can levy taxes on extra-territoriality if there is a genuine enough nexus. This theory governs the taxation of non-Indian citizens.

The Supreme Court identified two bases for the applicability of the notion of territorial nexus, “Legitimacy of Nexus and Liability related to Territory Connection,” to evaluate the essential adequacy of Nexus for extraterritorial operations.

These two elements are sufficient to establish whether the Nexus is genuine or not. As a result, parliament has the authority to enact laws relating to territory or extraterritoriality, and such laws will only be lawful if a legitimate territorial Nexus exists.

The goal of the Connection theory is not to prevent the state from exercising extraterritorial jurisdiction, but to evaluate whether there is a suitable, adequate, or reasonable territorial nexus between the state and the subject of substance.

Bibliography

Constitutional Provisions

The extent of laws made by Parliament and by the Legislatures of States

Article 245

(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 an extra-territorial operation”

“Subject matter of laws made by Parliament and by the Legislatures of States”

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 I in 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, 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)

(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”

Research Papers

Doctrine of Territorial Nexus DECEMBER 2020. ISSUE 02 09-DEC-2020<>

Books

D D Basu, ‘Introduction to the constitution of India 2021Feb2<https://lexisnexis.in/Introduction-to-constitution-of-India>

Articles & Online Resources

Doctrine of Territorial Nexus

https://www.legalserviceindia.com/legal/article-1343-doctrine-of-territorial-nexus.html

https://lexforti.com/legal-news/doctrine-of-territorial-nexus/

https://advocatespedia.com/Doctrine_of_Territorial_Nexus

https://www.legalbites.in/doctrine-of-territorial-nexus/


[1] AIR 1957 SC 699

[2] 1956 7 STC 158 Pat

[3] 1959 AIR 1002 1959 SCR Sup.

[4] JT 1994 (5) SC 91 a, 1994 (3) SCALE 190 a, (1994) 5 SCC 459, 1994 Supp 1 SCR 568

Author

  • Vishal Gupta

    Vishal is a Second year Student at National Law Institute University, Bhopal. He is really happy to work for Legally Flawless.

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