Doctrine of Territorial Nexus - Meaning, Explanation and Case Laws

When it comes to federalism, one of the most significant aspects is the distribution of power. The function of a federal state thus defined requires the distribution of powers and power between the national government as well as the governments of the respective states. The main feature of federalism is the allocation of governmental powers to more autonomous authorities.

The principle of dual politics in which the union is at the core and the states are at the periphery is formed in a constitution that is federal in nature, and each of them is vested with powers that are sovereign in nature and can only be exercised in the respective fields given to them by the constitution.

The central principle of the Union is that legislative, executive, and financial authority is divided between the centre and the states by the constitution itself, not through any legislation enacted by either.

Vatsala Sood explains the doctrine of territorial nexus in the context of federalism.

I. Introduction

An integral trait of federalism is the distribution of powers. A separation of jurisdiction between the Central Government and independent states includes the purpose with which a federal state is formed. In particular, the propensity of federalism to regulate government policy from both sides and to separate the power of the state between organised and autonomous institutions is visible because it forms the basic difference between the federal structure.

“A Federal Constitution establishes the dual politics with the union at the centre and the states at the periphery, each with sovereign powers to be exercised in the field assigned to them by the Constitution respectively.”

In its own field, one is not subordinate to the other, the authority of one is coordinated with that of the other. The fundamental concept of the union is that the legislative, executive and financial powers are separated not by any legislation enacted by the centre, but by the constitution itself, between the centre and the province.

‘The States are as sovereign in the area left to them by the Constitution as the Centre in the field entrusted to it.” – Dr B.R. Ambedkar.

A characteristic of sovereignty is the parliamentary competence to pass laws. This attribute is split into two parallel power sets, Centre and State respectively. Article 245 determines the geographical boundaries of the constitutional powers conferred by the assemblies of Parliament and of the State. Article 246 describes the relative authority of the assemblies of the Union and of the State concerning the issues of legislation[1].

II. The Doctrine of Territorial Nexus

Our Constitution confers the power of the state within its federal authority to make legislation. With regard to legislative relations, the Constitution of India provided for 2 to delegate legislative powers, one with regard to the territory and the other with regard to the subject-matter in question.

The constitution of India makes a two-fold distribution of legislative powers.

1. With respect to the territory
2. With respect to the subject matter.

With respect to the territory Article 245(1) states that according to the provisions of that constitution, legislation can be enacted by Parliament for all or any part of the territory of India. Under Article 245(2), a statute passed by Parliament shall not be found to be unconstitutional on the basis that it exists outside the jurisdiction of India i.e. that it takes place outside the territory of India.[2]

In A.H. Wadia v. Income Tax Commissioner, Bombay, the Supreme Court held:

“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.”[3]

The state legislature can make laws for the extra-territorial activity of all or some part of it, i.e. it takes place outside the state. There is one exception to this general law, though. If there is a relation between the object and the territory, a state rule of extra-territorial action is applicable[4].

A corporation which was listed in England was a partner in a business in India in Wallace v. Income Tax Commissioner, Bombay. The Indian Income Tax authorities have sought to tax the company’s whole income. The Privy Council introduced the geographical nexus doctrine and kept the levy tax correct. It is claimed that the derivation from British India of a major part of its income for a year gave a corporation an appropriate territorial relation for that year to warrant treating it as being at home in India for all purposes of taxing its income for that year from whatever source of income could be extracted.

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.[5]

III. Question of Law the State Legislature is Answerable for [6]

Today, the question is – whether a statute falls beyond the scope of the enactment of the state legislature?

The state assembly is empowered with its own reason to make laws. The geographical nexus doctrine is valid only where the following requirements are met. The following are those conditions:

1. The nexus must be legitimate.
2. The liability shall be related to the territorial connection.

These requirements are adequate enough to demonstrate that the nexus was genuine and that its legitimacy would not be challenged by the court. It has been held in some cases under tax law that the territorial boundaries of the State would not hinder the selling and purchase of goods. The buying and sale of goods would be a legitimate excuse to retain the state’s taxation authority.

The courts have consistently claimed in different cases relating to taxation laws that it is not mandatory for the selling or transaction to take place within the geographical boundaries of the State. Broadly speaking, local purchasing or selling practises carried out in the State with respect to local goods would be a sufficient justification for retaining the State’s powers of taxation, assuming of course, that those activities actually result in the transaction or acquisition being concluded and that they are regulated.

There is also a constitutional presumption that it is assumed that the Government has not exceeded its constitutional authority, and the legislation passed by the Legislature must be constructed in compliance with those powers.

IV. Extra-Territorial Operations

Parliament is granted the right to make laws that have a legal relationship with India within its territorial territory and also for extra-territorial purposes. Legislation or legislation particularly on this subject comes beyond the control of the parliament as it has the authority to do so. The fairness of these rules can’t be doubted. If the parliament passes any legislation that does not create any link with India, it would turn out to be ultra vires and will be known as the laws created for a foreign country.

It can be inferred that it cannot be found to be null or illegal if any legislation enacted by the parliament has a real link with India. If such legislation passed by parliament establishes no ultra vires will be a correlation with India.

Our Constitution states that the constitutional powers are bestowed on the parliament to pass laws for the territorial authority as well as for the intent which take cognizance of the extraterritorial purpose and exercise state or joint powers. The Public Trust Doctrine states that all laws passed by parliament with respect to extraterritorial operations shall be enacted for the purpose of safeguarding the welfare and security of India, which directly concludes that no laws shall be made for the extraterritorial operations if there is no nexus of such law or legislation with India.

V. Analysis of Indian Precedents

As mentioned earlier in this article, Article 245 of the Indian Constitution points out the degree to which legislative powers are vested on parliament and the state legislature in order to pass legislation in relation to the territory. Parliament has the right to establish legislation for which it is accountable. Parliament’s authority applies to the whole or only some part of India. They may also be passed for extraterritorial activities by the parliament provided there is a proper relation of the legislation with India. Such regulations should not be challenged or considered invalidated. Both rules, however, shall conform with the requirements of the constitution of India.

In parliament, the powers conferred are not absolute. The laws developed by the parliament for extraterritorial practices are supposed to function beyond the geographical borders of India. The state legislature has no authority to create rules for extraterritorial operations. This limitation by the state legislature though is subject to one exception and it is the territorial nexus. If it is known that the entity is adequately connected, the laws passed by the state legislature would have an effect beyond the state’s geographical borders.

In order to invoke the authority of the territorial nexus, the following circumstances are required:

If there exist extraterritorial operations in a state

If the object and the state have valid relations. It should be clear that the object is located beyond the state’s territorial borders, but it must have a territorial relationship with the state. This specifically implies that even though such laws require additional territorial activity, as long as the legislation passed by Parliament has a relation with India, the laws so enacted cannot be claimed to be legally unconstitutional. That is only where the laws passed by the Parliament are ultra vires in reference to extra-territorial aspects or reasons that have no association with India.

The framers of our Constitution definitely intended, in granting the Parliament the powers to legislate for India and, accordingly, also with regard to extra-territorial aspects or causes, that there be limitations as to the manner in which and to the degree to which the institutions of the State, including the Parliament, can become aware of extra-territorial aspects or causes and exercise the powers of the State.

The Doctrine of Public Trust demands that all legislation of the Parliament relating to extraterritorial issues or causes be imbued with the intent of protecting the rights, the health and security of India, along with Article 51, of the Directive Principle of State Policy, while not enforceable by a court of law, which is nevertheless necessary to governance, offers unambiguous support to that principle.[7]

• State of Bombay v. R. M. D. C.s [8]

A levy was imposed by the Bombay State on lotteries and prize competitions. The tax was applied to a journal printed and distributed in Bangalore, but in Bombay, it was widely circulated. Through this document, the respondent conducted the prize competitions. The Court held that an adequate territorial relation existed to cause the Bombay State to tax the newspaper.

The taxation law must be upheld where there is a sufficient connection between the individual sought to be fined and the State attempting to tax the person sought. The relationship between the State and the subject matter of law must therefore be actual and not illusory, and the responsibility pursued must be applicable to that connection. If there is a relationship is a matter of fact which can be decided accordingly by the courts of each case.

• Tata Iron and Steel Company v. the State of Bihar

In Tata Iron and Steel Company v. the State of Bihar, the territorial nexus principle was extended to sales tax law by the Supreme Court. A Sales Tax Act for the levy of sales tax was enacted by the state of Bihar. The dilemma was if the transaction was concluded within the state or outside whether the products were made, discovered and processed in the state.

The court held that the territorial nexus was adequate and upheld the Act as valid. The details and conditions in a particular case would depend on whether there is adequate relation between the statute and the object required to be taxed. It was observed that the evaluation of two factors concerned the adequacy of the territorial relation:

1. the link must be actual and not illusory;
2. the responsibility sought to be placed must be applicable to that link. [9]

• State of Bihar v. Charusila Dasi

The Bihar Hindu Religious Trusts Act, 1950, was passed by the Bihar legislature to protect and preserve land belonging to Hindu religious trusts. The Act extended to all trusts in the state of Bihar, any part of which was located. The respondent established a trust deed for many houses and land in Bihar and Calcutta for her property. The trust is based in Bihar.

The key issue for the decision was whether trust assets located outside the state of Bihar are protected by the Act. Will the Bihar legislature make a law with respect to such a trust situated in Bihar and other trust-related assets located outside Bihar?

The Supreme Court ruled, applying the territorial nexus doctrine, that the Act could influence the trust property outside Bihar, but belonging to a trust located in Bihar where the trustees functioned. In the state of Bihar, the Act seeks to allow for better management of Hindu religious trusts. The trust is located in Bihar and the state has statutory jurisdiction over it and also over its trustees or its servants and agents who must be in Bihar to manage the trust [10].

• GVK Industries Limited v. Income Tax Officer

There was a question as to whether the Parliament was allowed to pass laws on extra-territorial aspects or causes that have no relation with India, and whether such laws are without any value to India?

The term used in Article 245(5) is also the key to the answer to this question. With the assistance of the term used in Article 245(1), the Court extracted the responsibility of the Parliament and declared that the Parliament of India is to serve as the Parliament of India and of no other land, country or citizen.

In this respect, the Court also derived two similar restrictions, the first being that the Parliament should exercise its powers exclusively on the grounds of need for the good of India. The laws passed by Parliament can also boost the health of citizens in other territories, but the central and key aim remains the gain to or from India.

The second limitation that the laws passed by Parliament with respect to extra-territorial dimensions or reasons which have no relation with India or are supposed to have no connection with India and transgress the first condition. Reddy J. of Sudershan. The Constitutional Bench logically rejected the response to the question and held that the powers of Parliament to pass legislation pursuant to Article 245(1) do not apply to those extra-territorial aspects or reasons which have no effect on or nexus with India.[11]

• Shrikant Bhalchandra Karulkar v. the State of Gujarat

In this case, the Hon’ble Supreme Court, having respect to the provisions of Article(s) 245 and 246 of the Constitution of India, dealt with the constitutional authority to make laws having extra-territorial operation. It was argued that as long as the legislation of the State legislature extends to people living within its jurisdiction and to all things and activities within its territory, it cannot be treated as extra-territorial[12].

VI. Conclusion

It can be concluded that the legislative powers have been distributed in two folds. It can be surmised that the constitutional powers between the centre and the state have been split into two parts. Federalism is a very complicated mechanism since the distribution of powers between the union and the centre is the very reason for which a federal state is created. The constitution separates their power such that they can have their independence over the executive and legislative authority.

A state legislature can create laws for the whole extraterritorial activity or some part of it, i.e., it takes place outside the state. There is one exception to this general law, however. If there is a relation between the object and the territory, the state rule of extra-territorial action would be correct. Only Parliament and not the state legislatures are given the right to create a law of extra-territorial operation.

Therefore, if it provides an extra-territorial activity to its provisions, an Act of the State Legislature can be successfully contested in court unless extra-territorial operation can be retained on the basis of territorial nexus. This means that while the entity to which the legislation refers might not be physically situated within the geographical borders of a State, the law of the State would always be applicable if there is a connection or link between the State and the object.

The territorial nexus is not just limited to India’s territories but can be enforced overseas as well. At that time the law existing in India came into effect. Territorial nexus is a doctrine that requires a nation’s law to be extended outside its territorial limits and is effectively an international law.

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References

[1] Girish, R. (2017). Constitutional Governance of Extra-Territorial Operation of Indian Law. GNLU JL Dev. & Pol., 7, 7.

[2] Constitution of India, Mahendra Pal Singh, Eastern book publications, p. 206.

[3] A.H. Wadia v. commissioner of income tax, (1948) 51 BOMLR 287.

[4] Kochuni v. State of Madras, AIR 1960 SC 1080, Available Here

[5] Wallace bros. v. Commissioner of Income Tax (1943) 45 BOMLR 929.

[6] Sonwani, P. (2016). Distribution of Legislative Powers under the Indian Constitution. Research Journal of Humanities and Social Sciences, 7(1), 39-46.

[7] Supra^1

[8] State of Bombay v. R. M. D. C.s, AIR 1957 SC 699

[9] The Tata Iron & Steel Co., Ltd v. The State Of Bihar, 1958 AIR 452.

[10] The State of Bihar & Others v. Sm. Charusila Dasi, 1959 AIR 1002.

[11] GVK Industries Limited v. Income Tax Officer, (2011) 4 SCC 36.

[12] Shrikant Bhalchandra Karulkar v. State of Gujarat, 1994 SCC (5) 459, JT 1994 (5) 91.

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