Electronics Corporation of India Ltd. v. Commissioner of Income Tax & Anr.
PATHAK, CJ: 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 agreement dated 2 May,
1986 executed at Hyderabad. Under that agreement the Norwegian
company was to provide technical know-how and technical services,
F 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
G 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 Y
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
H of a 'No Objection Certificate' as contemplated under s. 195(2) of the
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ELECTRONICS CORPN. v. C.l.T. [PATHAK, CJ.] 997
.J Income Tax Act, 1961, to.enable it to remit the instalments due with
out 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 Commis
sioner 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 deduc
\tion of tax at source.
The appellant filed a Writ Petition against the order of the Com
missioner, 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 Section 9(1)(vii) of the Act inasmuch as the provi· C
sion possesses 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 introduction of Section 9(1)(vii)
by the Finance Act of 1976 with effect from 1 June, 1976, the require·
ment of a business connection of a foreign Company was required, and
the case was governed by CORBORANDUM CO. v. C./. T., [1977]
108 I.T.R. 335. It was also urged that after the introduc·tion of the
Explanation by the Finance Act of 1977 with effect from 1 April, 1977
Section 9(1)(vii) creates an invidious discrimination among companies
which had entered into a foreign collaboration agreement prior to I
April, 1976 and those who have done so after that date, and that there
fore Article 14 was violated. The High Court repelled all the conten·
lions of the appellant and dismissed the Writ Petition: .A similar Writ
Petition was filed by the appellant against an order of the Commis
sioner of Income tax declining to direct the grant of a 'No Objection
Certificate, in relation to disbursement made under a licence agree
ment with Messrs Control Data Inda-Asia Company, U.S.A., and the
Writ Petition was dismissed 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 G
"'(' 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) delcares:
"9(1) The following incomes shall be deemed to accrue or H
A arise in India- ,,_
ro ················································· ~
(vii) income by way of fees for technical services payable
8 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 pro-
c fession 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 pay-
able in respect of services utilised in a business or profes-
D sion 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
E managerial, technical or consultancy services (including the
provision of services of technical or other personnel) but
does not include consideration for any construction, assem-
bly, 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 payable by the foreign company.
We are informed that the services are rendered by the foreign com-
pany in the nature of training abroad to personnel belonging to the
G 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 provision is couched
it is ultra vires.
Now it is perfectly clear that it is envisaged under our constitu
H tional scheme that Parliament in India may make laws which operate
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ELECTRONICS CORPN. "· C.l.T. [PATHAK, CJ.I 999
extra-territorially. Art. 245(1) of the Constitution prescribes the A
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
~. contemplatiojl. The operation of the law can extend to persons, things B
y and acts outside the territory of India. The general principle, flowing
y'
· 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 Limitedv. The King, [1946] A.C. 527:
c "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 ac
count, and the. courts of its country must enforoe the law
with the machinery available to them."
In other words, while the enforcement of the law cannot be-contempla
ted 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 operation in f'.
order to subserve the object, and that object must be related to some
thing in India. It is inconceivable that a law should be made by Parlia
ment in India which has no relationship with anything in India. The
only question is then whether the ingredients in terms of the impugned
provision indicate a nexus. The question is one of substantial impor
tance, specially as it conoems collaboration agreements with foreign G
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. H