“All subjects over which the sovereign power of a State extends are objects of taxation, but those over which it does not extend are, upon the soundest principles, exempt from taxation. This proposition may almost be pronounced self-evident.”

— Chief Justice John Marshall of the US Supreme Court in McCulloch v. Maryland [17 US 316 (1819)]

Under English law, a law cannot be challenged as being unconstitutional for being extra-territorial in effect. Domestic tribunals will not hear any challenge to any law on the basis only that such a law has either extra-territorial operation or has no sufficient nexus with Great Britain. This is not because extra-territoriality is a unique concept which cannot be tested in British Courts. Rather, English Parliament is supreme and nothing is ultra vires its powers. The English Courts only apply a strong presumption that an Act of Parliament will not have extra-territorial effect till Parliament says so expressly or 
if such a result is a matter of necessary implication.

The law in India has developed on a different footing, primarily because of the limitations imposed by the Constitution. Article 245 reads:

“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.”

The current state of the law on this point is set out in the seminal decision GVK Industries v. ITO [(2011) 4 SCC 36]. In GVK Industries, the Supreme Court states:

“124. We now turn to answering the two questions that we set out with:

(1) Is Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on or effect(s) in or consequences for:

(a) the territory of India, or any part of India; or

(b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians?

The answer to the above would be yes. However, Parliament may exercise its legislative powers with respect to extra-territorial aspects or causes – events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like –that occur, arise or exist or may be expected to do so, naturally or on account of some human agency, in the social, political, economic, cultural, biological, environmental or physical spheres outside the territory of India, and seek to control, modulate, mitigate or transform the effects of such extra-territorial aspects or causes, or in appropriate cases, eliminate or engender such extra-territorial aspects or causes, only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians.

125. It is important for us to state and hold here that the powers of legislation of Parliament with regard to all aspects or causes that are within the purview of its competence, including with respect to extra-territorial aspects or causes as delineated above, and as specified by the Constitution, or implied by its essential role in the constitutional scheme, ought not to be subject to some a priori quantitative tests, such as “sufficiency” or “significance” or in any other manner requiring a predetermined degree of strength. All that would be required would be that the connection to India be real or expected to be real, and not illusory or fanciful.

126. Whether a particular law enacted by Parliament does show such a real connection, or expected real connection, between the extra-territorial aspect or cause and something in India or related to India and Indians, in terms of impact, effect or consequence, would be a mixed matter of facts and of law. Obviously, where Parliament itself posits a degree of such relationship, beyond the constitutional requirement that it be real and not fanciful, then the courts would have to enforce such a requirement in the operation of the law as a matter of that law itself, and not of the Constitution:

127. (2) Does Parliament have the powers to legislate “for” any territory, other than the territory of India or any part of it?

The answer to the above would be no. It is obvious that Parliament is empowered to make laws with respect to aspects or causes that occur, arise or exist, or may be expected to do so, within the territory of India, and also with respect to extra-territorial aspects or causes that have an impact on or nexus with India as explained above in the answer to Question 1 above. Such laws would fall within the meaning, purport and ambit of the grant of powers to 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 may require extra-territorial operation. Any laws enacted by Parliament with respect to extra-territorial aspects or causes that have no impact on or nexus with India would be ultra vires, as answered in response to Question 1 above, and would be laws made “for” a foreign territory.”

GVK Industries upholds the validity of a legislation even if the law is directed towards patently extra-territorial behaviour, as long as the law results in welfare of the Indian people. Now this is a dangerous doctrine, at least as applied to tax law. A tax will always accrue to the Indian Treasury and thus result in welfare of the Indian people. On that basis, effectively no tax law can be challenged at all on the basis of extra-territoriality.

In Vodafone International Holdings BV v. Union of India [(2012) 6 SCC 613], income tax was sought to be levied on transfer of shares outside India which resulted in the transfer of business in India. Radhakrishnan J., held that a tax law can have extra-territorial effect, as long as the Act imposing the tax conveys so in clear terms. Absent Parliamentary indication, the Courts 
will not interpret a law to have extra-territorial effect.

Article 265 says that no tax shall be levied or collected without the authority of law. The genesis of this article is in the principle that taxes cannot be levied without representation. That is, tax cannot be levied upon a people without their consent expressed through democratic means. The author submits Article 265 imposes an inherent limitation on the levy of tax on extra-territorial transactions. If a transaction is entered into by A and B, both non-citizen taxpayers resident in foreign territory and the transaction itself is not entered into in India, then the Indian legislature is not competent to tax it and recover the taxes from property which may be situate in India. Though the tax is ultimately for benefit of the Indian people, the cherished constitutional principle – no taxation without representation – would render such an enactment unconstitutional. In fact, such behaviour may even result into India becoming a pariah state in international commerce. In an increasingly inter-linked world, the rules of composite international trade and comity within nations requires one country to respect the sovereignty of another. Levying taxes with respect to property, objects and transactions within the sovereign jurisdiction of another nation and with no real nexus to India, or a fanciful nexus in other words, only because there is some means of recovery in India will only make the Indian state an object of distrust in the international community.

Now, the question which arises is: how far can the right to taxation go under the GST Act when it comes to extra-territorial causes and effects. The answer is much more complicated than a bare analysis of Article 245. For one, there is no settled law on the situs of a “supply”, the heart of the charging section. A “supply” can start with an “agreement to supply” and the stipulation of consideration, then the actual performance of a “supply”. It is clear that the GST Act cannot be ordinarily interpreted to tax a supply which takes place in a foreign country and where only consideration is paid in India. It may be constitutional for Parliament to enact such a tax, but the GST Act as enacted today does not levy such a tax. Similarly, merely because negotiations have been performed in India, the tax cannot be levied in India, for negotiations are not a “supply”.

There are some interesting issues which arise in this regard. Suppose A is importing certain goods into India from England. Before the goods cross the customs frontiers of India, A transfers the title of goods through a transfer of documents of title when the goods are on high seas to B, who is resident in Bangladesh and will take delivery there. Clearly the physical supply has happened from England to India. However, can the Revenue tax the transaction by holding that the contractual transfer has taken place in India, in as much the endorsement on the documents of title took place in Indian territory? The GST Amendment Act 2018 addresses this problem, but the Act is yet to be notified.

Such problems will keep on arising and pose challenging questions for the taxation field for quite some time. We can only hope that Parliament is proactive and fair in providing solutions to these problems, and not wait for the Supreme Court to settle these questions after a quarter-century.

[Source: Article printed in Souvenir of 21st National Convention 2018 held from 22nd to 23rd December, 2018 at Guwahati]

Let your preparations be wise, correct and of such kind that will lead to your true welfare, supreme good and lasting satisfaction and happiness. This must engage your active, enthusiastic attention throughout the period of your youth life.

— Swami Vivekananda