In 1957, a case arose in Bombay where the respondent, who was not residing in Bombay (Mumbai) was conducting competitions with prize money through newspaper outlets published and printed in Bangalore but circulated widely in Bombay, including the operations for form filling and entry fees conducted in Bombay too. The state government that is Bombay govt. asked the respondent to pay tax for conducting business in their state.
The respondent challenged the Supreme Court saying, since the act operated extra-territorially as it affected the trade of conducting the competition outside the state, the state legislature has no competence in it. However, the Supreme Court held that since most of the activities for conducting the act was done in the state of Bombay, it was sufficient to prove the existence of territorial nexus, hence the state has the authority to levy tax on the respondent. This was the landmark case of State of Bombay v. R.M.D.C.[1]
What exactly is territorial nexus? Before jumping into the train of its constitutional definition and salient features, let’s elaborate the phrase “Doctrine of territorial Nexus” first.
In layman’s terms, the word doctrine implicit a principle or body of principle of a theory or a system based on beliefs or a tenet of law. Territorial means of or relating to a territory or region or a specific area and nexus signifies the connection or the series of connection associating two or more things.
To simplify, the literal definition of “Doctrine of Territorial Nexus” is, “It is the principle, which dealt with the distribution of legislative power and the subject of law in connection with the territory.”[2]
In this article, we will discuss the constitutional aspects of territorial nexus, it’s salient features while focusing on the history and judgments which led to its evolution and establishment.
What is Doctrine of Territorial Nexus?
The beginning of territorial nexus could be traced back in history, to The Government of India Act, 1935 which was passes in order to hand over a great deal of autonomy to the provinces of British India. This act established the principle of extra-territorial application of the law in India. During that time, the Indian territories vested in His Majesty the King, Emperor of India, it was referred to by the act of 1935.
The Doctrine of Territorial Nexus says that “Laws that are made by a particular State Legislature are only applicable in that particular State and not outside the territorial boundary of that State, except in scenarios where there is a sufficient nexus between that State and the object.”[3]
Article 245 of the Indian Constitution lays states that:-
(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.” [4]
(2) “No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.”[5]
Thus it can be inferred that both the centre and the state have their own jurisdiction over territories to make laws.
The Central and State government have legislative relations, which are two fold in nature that is:-
- Distribution of legislative power according to the territory,
- With respect to the subject matters of the under 7th schedule.
The Doctrine of territorial nexus comes under the first fold, distribution of legislative power. Article 245(1) states that legislations can be enacted by parliament for all or any part of the territory of India. In Article 245(2), it is stated that the laws enacted by the parliament will not be declared invalid just because it is extra-territorial meaning, operating outside the Indian territory.
The issue of extra-territoriality was elaborated in the case of A.H, Wadia v. Income Tax Commissioner, Bombay, where the Supreme Court held that, “The issue of extra-territoriality of enactment in the case of a sovereign legislature can never be posed in the municipal court as a basis for questioning its validity. Legislation may breach the laws of international law, may not be recognised by foreign courts, or may raise logistical challenges in implementing them, but these are policy concerns of interest to the domestic courts.”[6]
However, for states to make extra-territorial laws, an existing connection between the state and the object concerned has to be made, then only territorial nexus could be provided and state could be allowed to apply its own jurisdiction over the subject matter.
In a case concerning this issue, which is the case of Wallace v. Income Tax Commissioner, Bombay, a corporation listed in England was partnering with a business in India. The authorities of the Indian Income Tax sought to tax the whole company’s income. The Privy Council after introducing the geographical nexus doctrine, wanted to tax the company’s entire profit. It is claimed that the company was devoid of taxes by treating itself as being at home in India as it’s derivation from British India of a major part of its income for a year gave it an appropriate territorial relation for that year.
The court held that, “The taxation law must be upheld if there is an adequate link between the individual wanting to be fined and the state attempting to tax him. But the relation must be applicable to the illusory and the obligation sought to be placed. If there is a relationship is a matter of fact which can be decided accordingly by the courts of each case.”[7] Thus, safe guarding the legitimacy of the levy fee.
This could be seen applied in the case of State of Bombay v. R.M.D.C. , where the state of Bombay successfully established the nexus between Bombay and the object of matter i.e the competition conducted in the state by a non-resident of the state owning to levy of taxes. Applying the Doctrine of territorial nexus, the state of Bombay rightfully taxed the respondent.
The question is what are the specific conditions to apply for territorial nexus by the state? The state assembly is empowered enough to make laws having its own reasons. The Doctrine of territorial nexus is only valid where the following conditions are met-:
- The nexus must be legitimate.
- The liability shall be related to the territorial connection.
The doctrine can be invoked in the following circumstances:-
- If extra-territorial operations in a state exists.
- If there is legitimate and adequate nexus between the state and the object, If the object is located outside the territorial limits of the state, then it must have some territorial connection with the state.
These requirements are fulfilling enough to show the genuineness of the nexus and that it’s legitimacy would not be challenged by the court. Although, it is to be noted that in some cases under tax law it has been held that selling and purchase of goods would not be hindered by the territorial boundaries of the state, thus, state’s taxation authority could be retained under the excuse of buying and sale of goods.
Salient Features of the Doctrine of Territorial Nexus
- The parliament is empowered to make and enact laws within India’s jurisdiction i.e within the whole of territory of India and to the extra-territorial issues which have appropriate “nexus” with the Indian Territory as well.
- The doctrine is also applicable to the states. In statutes of taxing, the sale or purchase of goods is not necessary to b taken place within the territory of the state.
- To legitimately apply for territorial nexus, the object doesn’t need to be physically located within the territory of the state; however, territorial nexus with the state must be sufficient.
- The tax can be levied by the state on a property, person or object not only within its territorial limits but also having sufficient territorial connection with it.
- The doctrine governs the taxation of non-residents in India.
Landmark Judgments
- Tata Iron and Steel Co. Ltd v. State of Bihar, AIR 1958 SC 452[8]
The state of Bihar, for the purpose of levying sales tax, passed a sales tax Act.
It stated that if products or goods were found, made and manufactured in the state and the sale happened within the state or outside, then, the sales tax may be levied.
The court examined and found enough territorial nexus and allowed the act to be passed by affirming its validity.
The nexus between the law and the object is subjective, hence, facts and circumstances in each case need to be calculated to decide whether the object needs to be taxed or not. It was pointed out that, “Evaluating the sufficiency of the Territorial relation required consideration of two factors: the connection must be genuine and not fictitious, and the liability sought to be applied must be applicable to that connection.”
- The State Of Bihar & Others v. Sm. Charusila Das[9]
For the protection and conservation of the properties of Hindu religious trusts. The Bihar legislature enacted the Bihar Religious Trusts Act in 1950. The Act included all trusts along with a part of their assets located in Bihar.
The question arose, whether the Act extended to trust properties which are located outside Bihar’s Borders. Is it allowed for legislature of Bihar to pass a law that regulated such a trust that is located in Bihar and the ones based outside Bihar as well?
It was decided that this Act passed by the state will also apply to trust properties located outside of Bihar’s Territory, on the condition that the trust is located within the state’s borders and there is an appropriate and adequate nexus.
- Shrikant Bhalchandra Karulkar v. the State of Gujarat[10]
In this case, to examine and prove the legislative competence to make laws of extra-territorial application, provisions of Articles 245 and 246 of the Indian constitution was explored and discussed.
It was held that, “A law passed by a state legislature can’t be considered extra-territorial as long as it extends to people who live in that state’s jurisdiction, as well as all activities and acts that take place there.”
The court said that state cannot be considered to have extra-territorial operations if the laws enacted and the subject matter have adequate and justifiable nexus.
Moreover, it also provided two conditions to be satisfied viz.
- The nexus should be real, not an illusion.
- Charges imposed by such statute must be pertinent to the connection.
- Sondur Gopal v. Sondur Rajni[11]
In this case, the court reconfirmed the exception through which the state legislature can take part in extra-territorial operations by satisfying the features of Doctrine of territorial Nexus elaborated under Article 245.
The jurisdiction of the Hindu Marriage Act in light of the Doctrine of territorial nexus was also elucidated. The court observed and held that the Act is for all Hindus with Indian domicile irrespective of where they reside and which country’s citizenship they acquired.
Analysis
Article 245 of the Indian constitution lays down the provisions regarding distribution of legislative power vested on the parliament and the state legislature in order to pass laws in relation to the territory. Parliament is the legal authority empowered with establishing legislations, where its authority applies to the whole or some part of the country. It can also pass legislations for extra territorial activities if there is proper nexus and its regulations should never be challenged or invalidated. The state legislature has no authority to enact laws for outside of its territory operations.
However, this limitation is subject to one exception and it is known as “territorial nexus”.
If proper and adequate link could be established between the state and the object of law, then, the state is allowed to legislate on that mater, considering, it fulfills all the required conditions to apply for Territorial nexus.
The theory of territorial nexus can be viewed as a principle developed to explain and explore the possibility of applying one country’s law to another country or between two territories of the same country, with an aim to establish a genuine connection between the country that makes the law and the country where the law is supposed to be applied for the specific object matter.
The general rule for execution of laws is “extra territorium jus dicenti impune non-paretur,” which means that a state can only make laws on its subjects and that such laws can only be enforced within its territory.[12]
However, owning to present situations, with a noticeable high rise in global business transactions as well as commercial transactions between parties where both or multiple parties involved, all belong to different jurisdictions, has become more common on the global scale, where individuals and companies with their trades and commerce in multiple locations engage in operations of business. This has increased the importance of extraterritorial laws and different ways of applying them to protect a citizen’s and his country’s interests. As a consequence, if the criteria of real and necessary relation or nexus are met, laws are granted extra-territorial operation.
Conclusion
It can be concluded the constitution of India has provisions through which legislative powers between the federal government and the states has been split. Federalism is a complicated process, even though it is very much true that a federal state is created to distribute authority and power between the union and states. The power is distributed by the constitutional provisions to balance out the power in the executive and legislative branches.
Not to mention that the vastness of diversity and culture spread over each territory of Indian subcontinent makes it all the more important to relay some power in the hands of the states to protect the interests of their citizen’s and security. Moreover, if simple logic has to be used, then it is easy to understand as to why nexus is important to establish. As soon as an operation happens outside a state’s jurisdiction, which can be a threat to the state’s policies and security, involving a state’s citizen, then the responsibility does shift to the state’s government. But the problem is, since the citizen is out of the borders of the state, the state has little to no power in controlling the situation, not to mention the centre gets full control over the citizen’s dealing. Therefore, territorial nexus is a valid way to entrust their responsibility over their citizens and the state itself as a whole and they have to prove lawfully with sufficient links to satisfy the court that considerable nexus exist for state to take over the matter with their laws.
The splitting of authority and power over legislation between the union and states in the light of territorial arrangement creates a dual polity. While the parliament is powerful enough to make laws for extra-territorial operations, with protection from being questioned about its validity from states, the state legislature has no authority in doing so as mentioned in the Article 245. However, there is one exception which allows state legislature to legislate laws in their interests over extra-territorial operations, which is through territorial nexus. It can only be applicable if the state legitimately proves that a sufficient nexus exists between the state and the object matter outside the territory, thus giving the state the autonomy over its matters outside the state.
Territorial nexus can also be used outside India’s borders. It is a doctrine which is required to be extended outside its territorial limits and can be effectively called an international law.
[1] State of Bombay v. R.M.D.C, A.I.R. 1957 S.C. 699 (India)
[2].Snegapriya V S, The Doctrine of Territorial Nexus, Law Corner, https://lawcorner.in/the-doctrine-of-territorial-nexus/ (last visited Jun 14, 2021).
[3] Shajeeda Tajdeen, Article 245-Doctrine of Territorial Nexus, Into Legal World https://www.intolegalworld.com/article?title=doctrine-of-territorial-nexus (last visited Jun 14, 2021).
[4] INDIA CONST. art. 245, cl. 1.
[5] INDIA CONST. art. 245, cl. 2.
[6] A.H. Wadia v. commissioner of income tax, (1948) 51 BOMLR 287(India).
[7] Wallace bros. v. commissioner of income tax (1943) 45 BOMLR 929.
[8] Tata Iron and Steel Co. Ltd v. State of Bihar, A.I.R. 1958 S.C. 452 (India).
[9] State of Bihar v. Sm.Charusila Das A.I.R. 1959 S.C. 1002 (India).
[10] Shrikant Balachandra Karulekar v. Sate of Gujarat (1994) 5 S.C.C. 459 (India).
[11] Sondur Gopal v. Sondur Rajni A.I.R. 2013 S.C. 2678 (India)
[12] Doctrine of Territorial Nexus – The Law Express, The Law Express (2021), https://thelawexpress.com/doctrine-of-territorial-nexus (last visited Jun 15, 2021).
Author: Gargi Gouri from NLUO, Odisha.
Juris Centre 