The growing sense of social, economic, and political interconnectedness among nations has resulted in a significant growth in both recognised and unrecognised cross-border activity. Such interferences have been viewed as a threat to national autonomy and sovereignty, as well as the belief in peaceful coexistence, throughout modern history. This has resulted in clashes and disagreements between nations, their people, and their businesses.

The concept of classical sovereignty refers to a country’s sole authority to govern itself. The phrase extraterritorial refers to the exercise of legal authority or jurisdiction outside of territorial boundaries. The concept of “extraterritorial operation of law” is both an extension and a contradiction of the concept of “extraterritorial operation of law.” The Indian Constitution gives parliament the power to legislate with the extraterritorial application of law.

In India, the notion of extraterritorial applicability of the law was established by the Government of India Act of 1935. This Act was introduced by the British Parliament to allow the provinces of British India a large measure of autonomy. The Indian lands vested in His Majesty the King, Emperor of India, at the time were the subject of the 1935 Act. After independence, the topic is discussed in the Indian Constitution.

The first line of the Indian Constitution’s preamble says that India is a sovereign nation. The division of legislative powers is outlined in Chapter 1 of Part XI of the Indian Constitution. Article 245 specifies the extent of laws passed by Parliament and state legislatures that are subject to a provisions mentioned in the Constitution.

As stated in Article 245(1), the legislature of a state makes laws for the whole or any part of the state, which means that state laws would be void if they had an extraterritorial application.

But, there exists an exception to this general rule. A state law with an extraterritorial operation is legitimate if there is a sufficient link between the object and the state.

• The doctrine of territorial Nexus would be applicable if the two conditions which have been specified are fulfilled.
• The Nexus must be legitimate in nature
• The liability must be related to the territorial connection.

The two factors listed above are sufficient to establish whether a nexus is legitimate or not.

CONSTITUTIONAL PROVISIONS

The ability of parliament to pass laws is one of the characteristics of sovereignty. This quality is divided into two power sets: the Centre and the State. The geographical bounds of the constitutional authorities bestowed by the assemblies of Parliament and the State are defined under Article 245. And, article 246 establishes the relative jurisdiction of the Union and State assemblies over legislative matters.

Under Article 245 of the Indian Constitution it is stated that:

1. With respect to the provisions of this constitution,
2. Parliament has power to make laws for the whole or any part of the territory of India, and,
3. Legislature has jurisdiction to make laws for whole or any part of the state.

Article 245(2) of the Indian constitution states that no objections can be brought about the validity of any law passed by the Indian parliament respecting extraterritorial operations. As a result, the legality of a law cannot be questioned. In this instance, a court is obligated to uphold the regulations governing extraterritorial activity.

In the view of this article it can be understood that both state and union have their own jurisdiction to make laws.

The Indian Constitution seeks to create three functional areas (Article 246):

1. an exclusive area for the Centre;

Article 246(1) gives Parliament the “sole power” to pass laws concerning any of the Union List topics (List I in the Seventh Schedule). The items in this list are those that require a national uniform law. The states do not have the authority to enact legislation in this area. Art. 246(1) starts with the words: “Notwithstanding anything in clauses (2) and (3).”

This means that if any matter is within the exclusive competence of the Centre i.e. List I, it becomes a forbidden field for the States.

1. an exclusive area for the States; and

Article 246(3) grants the States sole legislative authority over the matters listed in the State List (List II in the Seventh Schedule). These are issues that allow for local variances and are best handled at the state level from an administrative standpoint; as a result, the Centre is banned from legislating on these issues. Article 246(3) open with the words: “subject to clauses (I) and (2)”.

Thus, if a particular matter falls within the exclusive competence of the States, i.e. List II, that represents the forbidden field for the Centre.

1. a common or concurrent area in which both the Centre and the States may operate simultaneously, subject to the overall supremacy of the Centre.

The existence of a broad contemporaneous field for the Centre and the States is a distinctive aspect of the Indian concept of power division. With respect to the topics mentioned in the Concurrent List, Article 246(2) imposes concurrent legislative power on both the Centre and the States (List III in the Seventh Schedule).

• Functions of national importance should belong to the Center, while those of local interest should go to the Regions, according to a basic test used to determine which subjects should be assigned to one or the other level of government.

 This test is fairly broad, similar to an ad hoc formula, and it does not result in a consistent pattern of power and function allocation between the two levels of government in all federal countries. The lack of uniformity is due to the fact that what is of general or national relevance against what is of local importance cannot be determined a priori.

• Certain subjects like defence, foreign affairs and currency, are regarded as being of national importance everywhere and are thus given to the Centre. Beyond that, the allocation of other subjects to the Centre is determined by the exigencies of the country’s condition, the people’s views and philosophy at the time of constitution-making, and the future function that the Centre is expected to play.

A study of the federations now extant in the world shows that there is no fixed formula, or a set pattern, for division of powers between the Centre and the regional governments. Usually certain powers are allotted exclusively to the Centre; certain powers are allotted exclusively to the regions, and there may be a common or concurrent area for both to operate simultaneously.[1]

Allocation of subjects to the lists is not by way of scientific or logical definition but by way of a mere enumeration of broad categories. The power to tax cannot be deduced from a general legislative entry as an ancillary power.[2]

INSTANCES OF USAGE OF DOCTRINE OF TERRITORIAL NEXUS

As mentioned above the doctrine of territorial Nexus would be applicable if the two conditions which have been specified are fulfilled.

1. The Nexus must be legitimate in nature
2. The liability must be related to the territorial connection.

The two factors listed above are sufficient to establish whether a nexus is legitimate or not. 

If a state law professes to touch men and property beyond the state, it is invalid. A state’s legislation may apply to people living within its borders, to property (movable and immovable), and to acts and events that occur inside its borders. The idea of territorial nexus is used to determine whether a state law has extraterritorial application.

The territorial nexus theory is used to determine whether a state law has extraterritorial application. It means that the thing to which the law applies does not have to be physically located within the State’s territorial boundaries; instead, it must have a sufficient geographical link with the State. If the subject-matter of the Act and the State making the law have a territorial relationship, the statute in question is not considered to have extraterritorial application.

Therefore, 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 nexus with it. There are number of instances where this doctrine was used to practice extraordinary operation by the states.

Wallace v. Income-tax Commissioner[3]

In the present case, a firm that was registered and incorporated in also conducted business in India via a sleeper partner. In that financial year, the company produced a huge profit. The income tax authorities attempted to charge a tax on the respondent’s company. The respondent disputed the income tax authorities, but the Privy Council determined that the idea of territorial nexus existed and that the tax was valid. The fact that the majority of the income came from British India was enough to establish a territorial nexus.

FEATURES OF THE DOCTRINE[4]

• The parliament has the authority to enact legislation within India’s jurisdiction as well as extraterritorial concerns with a nexus to Indian territory.
• This doctrine could likewise be applied to states. This is illustrated by taxing statutes in which the sale or purchase does not have to take place wholly within the state’s borders.
• Regardless of whether the object in question is physically located within the state’s authority, this doctrine can only be used by assessing its geographical link with the state. Thus, it is one of these exceptions that causes the state to impose taxes on property, people, and things not just within its borders, but also on those who have a sufficient territorial connection with it.
• The taxes of non-residents in India are governed by this doctrine.
• The state legislature’s restriction is subject to one exception, which is territorial nexus. If it is determined that there is a sufficient relationship between the object and the legislation issued by the state legislature will have an impact beyond the state’s borders.

The key decision in GVK Industries Ltd. v. ITO[5] elucidates the notion of geographical nexus and presents an extraordinary explanation of Article 245(2) of the Constitution. The significance of this idea is that it indicates that Indian law can be implemented outside of Indian territory. The significance of this idea can be seen in areas like foreign transactions, contracts, and crimes, where extraterritorial application of law is required to defend the nation’s interests, welfare, and security. This approach can be applied to a wide range of cross-border challenges, including income tax laws, antitrust laws, human rights legislation, bankruptcy, terrorism, and concerns originating from corrupt activities. Furthermore, although apparently functioning in one jurisdiction, cross-border economic, business, social, and political groups may have an impact on or in another.

ANALYSIS OF INDIAN PRECEDENTS

As discussed above the Article 245 of the Indian Constitution explains the extent to which the legislative powers are conferred to parliament and state legislatures in order to pass laws in respect to the territory. Parliament has the right to establish legislation for which it is accountable. Parliament’s authority extends to all of India or just a part of it.

The circumstances and considerations that govern a federation’s plan of power division vary from place to place and time to time. The pattern of division of functions in any federal country is largely conditioned by the interaction of two contending and conflicting forces—forces favoring centralization resulting in a federal union and promoting a strong centre, and the forces supporting decentralization, local or particularistic tendencies born of such factors as ethnic, religious, cultural, linguistic and economic, which manifest in powers being given to regional governments.[6]

The powers granted in parliament are not absolute. The extraterritorial legislation enacted by the Indian parliament are intended to apply beyond the country’s geographical borders. The state legislature does not have the authority to enact rules governing extraterritoriality. However, there is one exception to the state legislature’s restriction, and that is the territorial nexus. The legislation passed by the state legislature would have an impact beyond the state’s geographical borders if it is recognized that the entity is adequately connected.

State Of Bombay V Rmdc[7]

Even though Respondent did not live in Bombay, he ran competitions with cash prizes through a newspaper printed and published in Bangalore that had a large distribution in Bombay. All of the competition’s important operations, such as filling out papers and paying entrance fees, took place in Bombay. The state government wanted to tax the respondent because he was doing business in the state.

The Supreme Court was asked to decide whether the respondent, the competition organiser, who was based outside of Bombay, could be legitimately taxed under the Act.

It was determined that there was a substantial Territorial Nexus to allow the Bombay Legislature to tax the respondent because all of the activities that the competitor would normally be anticipated to engage in occurred mostly within Bombay.

Tata Iron And Steel Company vs. Bihar State[8]

The state of Bihar established a sales tax act to charge a tax on all sales, whether they took place within the state’s territorial bounds or outside of them. The commodities must also be manufactured in the state. In this case, it was held that there was an established link between the taxed object and the statute.

It was pointed out that determining the sufficiency of the Territorial Connection entailed taking into account two factors:

• The connection must be real and not illusory
• The liability sought to be imposed must be pertinent to that connection

Shrikant Bhalchandra Karulkar v. Gujarat State[9]

In this case, the Hon’ble Supreme Court considered the constitutional authority to make extraterritorial laws in light of the provisions of Article(s) 245 and 246 of the Indian Constitution. It was argued that law passed by the State legislature cannot be considered extraterritorial as long as it applies to persons residing within its authority as well as all goods and activities within its territory.

The British Parliament passed the Government of India Act, 1935, which established the territorial operation of law in India. It was dealt with under the Government of India Act, 1935, which applied to Indian territory prior to independence. It is addressed in India’s constitution after independence.

A State is entitled to levy a tax on the carriage of goods through its territory although the goods belong to, and the tax is payable by, the people outside the State.[10]

State of Bombay v. Narayandas Mangilal[11]

The Bombay State Legislature passed a law prohibiting a bigamous marriage and made it a criminal offence to enter into such a marriage. Marriages between people who were domiciled in the state and persons who were not domiciled in the state were likewise outlawed. The High Court declared the Act ultra vires as there was no territorial nexus between the State and the marriage performed or crime committed outside the State, even when it was done by a person domiciled in the State.

The State Of Bihar & Others v. Sm. Charusila Das[12]

The Bihar legislature passed the Bihar Hindu Religious Trusts Act in 1950 to safeguard and safeguard the properties of Hindu religious trusts. All trusts with a portion of their assets in Bihar were covered by the Act.

The question was whether the Act covered trust properties outside of Bihar’s borders. Is it conceivable for the Bihar legislature to pass legislation governing such a trust situated in Bihar as well as other trust assets based outside of Bihar?

It was decided that the statute passed by the state of Bihar will apply to property located outside of Bihar’s territorial limits if the trust is located within the state’s borders and there is an acceptable Nexus.

CONCLUSION

It can be concluded that the distribution of powers between the federal government and the states is a crucial component of federalism, and that this power is divided by the constitution itself. Because the distribution of powers between the union and the centre is the very basis for the creation of a federal state, federalism is a very complicated mechanism. The constitution separates their powers so that they can exercise autonomy over the executive and legislative branches of government.

Article 245(2) of the Indian Constitution gives the Indian Parliament the power to legislate on extraterritorial aspects or causes that have a direct or indirect, tangible or intangible, direct or indirect, tangible or intangible impact on the territory of India, or any part of India, or the interests of the welfare, well-being, or security of Indians. As a result, extraterritorial legal operations must have a connection to or impact on India. The law passed by Parliament concerning extraterritorial operations is subject to judicial review, but it can never be declared invalid because of its extraterritorial nature.

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[1] MP JAIN, Indian Constitutional Law 560  (8^th ed., 2018)

[2] State of W. B. v. Kesoram Industries Ltd., (2004) 10 SCC 201 : AIR 2005 SC 1646.

[3] Wallace v. Income-tax Commissioner, AIR 1948 P.C. 118.

[4] Snegapriya VS, The Doctrine of Territorial Nexus, Lawcorner, April 30, 2021, https://lawcorner.in/the-doctrine-of-territorial-nexus/

[5] G.V.K. Industries Limited And  v Income-Tax Officer And Anr 1997 228 ITR 564 AP

[6] MP JAIN, Indian Constitutional Law 554 (8^th ed., 2018)

[7] State Of Bombay V Rmdc, AIR 1957 SC 699.

[8] Tata Iron And Steel Company vs.State of Bihar [1957] 8 STC 26 (Pat).

[9] Shrikant Bhalchandra Karulkar v. State of Gujrat (​1994) 5 SCC 459 [Para 6]

[10] Khyerbari Tea Co. v. State of Assam, AIR 1964 SC 925 : (1964) 5 SCR 975

[11] State of Bombay v. Narayandas Mangilal, AIR 1958 Bom. 68.

[12] The State Of Bihar & Others v. Sm. Charusila Das AIR 1959 SC 1002

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Author: Shubhashish Roy from ICFAI University, Dehradun.

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