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G. V. K. Industries Ltd. vs. Income Tax Officer (2011)

June 18, 2024

The article is written by Jyotika Saroha. The present article provides a detailed overview of the landmark judgement in G.V.K. Industries Ltd. vs. Income Tax Officer (2011). It elaborates on the factual background, facts, issues, judgement of the Court, laws and precedents applied in the said case. Lastly, it deals with the analysis of the judgement.

Table of Contents

Introduction

It is generally presumed that the laws made by a country should apply within the territory of that country. However, under the Indian Constitution, Article 245 deals with the extent of law made by the Parliament and the state legislatures. It provides that the Parliament may make laws for the whole or any part of the territory of India and similarly, the state legislature can make laws for the whole or any part of the State, but there is an exception laid down in clause (2) of Article 245, which states that the law made by Parliament shall not be deemed invalid merely on the ground that its application is territorial in nature. Nowadays, most countries like the United States of America, have made laws that have extraterritorial operations, for instance, anti-corruption laws. During recent years, the trend of legislating laws on extraterritorial operations is increasing. The Courts has also given various judicial pronouncements wherein issues regarding extraterritorial operations are being upheld. One such instance is the case of G.V.K. Industries Limited and Anr. vs. Income Tax Officer and Anr (2011). In the present case, the major focus is on the issue with regard to the powers of Parliament to legislate on extraterritorial operations.

Details of the case

Name of the case: G.V.K Industries Limited and Anr. vs. Income Tax Officer and Anr.

Case Number: Civil Appeal No. 7796 of 1997

Equivalent Citation: (2011) 4 SCC 36

Laws Discussed: Income Tax Act, 1961– Section 9(1)(i), Section 9(1)(vii)(b), Constitution of India- Article 245, Article 14

Court: Supreme Court of India

Bench: Hon’ble Justices S.H. Kapadia, B. Sudershan Reddy, K.S. Panicker Radhakrishnan, Surinder Singh Nijjar, and Swatanter Kumar

Author of the judgement: Justice B. Sudershan Reddy

Parties to the case

Petitioners: G.V.K. Industries Limited and Anr.

Respondents: Income Tax Officer and Anr.

Judgement date: 1st March, 2011

Facts of G. V. K. Industries Ltd. vs. Income Tax Officer (2011)

The petitioner company, G.V.K. Industries Limited, is incorporated under the Companies Act, 1956 in the state of Andhra Pradesh in order to initiate a gas power project. For the said purpose, the petitioner company constructed a power generating station that is especially designed to operate natural gas as a fuel in the East Godavari District of Andhra Pradesh. Now, in order to get the loan easily and to raise finance, the petitioner company intended to take advantage of the expert services of professionals who could help them make the required scheme to raise finance. The petitioner company did not find such professionals in India and it approached experts outside India for the consultancy services. The company, namely ABB- Projects & Trade Finance International Ltd., located in Zurich, Switzerland, was hired by the petitioner company for the purpose of providing consultancy services. The services offered by the ABB company included studying and assessing of lending alternatives, new methods for local and foreign borrowings, helping the petitioner during loan negotiations, structuring of documents, etc. For the services provided by the ABB company, the petitioners had to pay them the ‘success fee’, basically, the invoice for payment was sent by the ABB company and the said proposal was placed before the petitioner’s company.

Issues raised

There were two issues raised before the Hon’ble Supreme Court:

Whether the Parliament is constitutionally restricted from making legislations regarding the extraterritorial aspect?
Whether the Parliament has power to make legislation regarding the extraterritorial aspect or the territory situated outside India?

Proceedings of the case

Application filed before the Income Tax Officer

After the invoice was sent to the petitioner’s company, it immediately went to the concerned Income Tax Officer (ITO) for the purpose of issuing a ‘No Objection Certificate’ to deduct the said sum of money and to discharge the tax liability under the Income Tax Act, 1961, as ABB had no place of business in India and all the services provided to the petitioner’s company were rendered from outside India. It was submitted by the petitioner company that Section 9(1)(i) of the Income Tax Act, 1961, would not be applicable to the ABB company as it does not have a business connection in India, and Section 9(1)(vii)(b) would not be applicable either as ABB has not provided any technical services. Hence, the Income Tax Officer rejected the application filed by the Income Tax Officer.

Application filed before the Commissioner of Income Tax (CIT)

The petitioner company filed a revision petition before the Commissioner of Income Tax, who allowed to discharge ABB from tax liability under the Income Tax Act, 1961, by furnishing a bank guarantee for the said amount of tax, but after 6 months, the Commissioner of Income Tax withdrew its earlier decision and ordered the payment of tax required to be paid as per Section 9(1)(i) and Section 9(1)(vii)(b) as a condition precedent for before issuing a ‘No objection certificate’.

Writ Petition before the High Court of Andhra Pradesh

The petitioner company, being aggrieved by the decision of the Commissioner of Income Tax, approached the High Court of Andhra Pradesh by filing a writ of certiorari for quashing the orders passed by the Commissioner of Income Tax. The petitioner company challenged the constitutional validity of Section 9(1)(vii)(b) and argued that it is beyond the competence of the legislature and also violates Article 14 of the Indian Constitution. The High Court upheld the decision of the Commissioner of Income Tax by stating that Section 9(1)(i) would not be applicable in the present case and refused to provide the petitioner company with the ‘No Objection Certificate’. The Court further upheld the validity of Section 9(i)(vii)(b).

Civil appeal filed before the Supreme Court

The petitioner company, being aggrieved with the decision of the High Court, approached the Hon’ble Supreme Court by filing an appeal.

Arguments of the parties

Petitioners

The main contentions of the petitioner are as follows:

It was contended that the Parliament lacks legislative power in order to enact laws in other states, i.e., they may not be enforceable and the extraterritorial laws might be prejudicial to India.
It was further contended that if an organ of state holds the power of extraterritoriality and it comes out as a benefit for India or is being used for the welfare of the country then that should not be held invalid for our country.
It was also contended that the provisions mentioned herein are not extraterritorial in nature.
The distinction was drawn from the case of Electronics Corporation of India Ltd. . vs. Commissioner of Income Tax and Anr. (1989) (herein referred as ECIL), wherein it was contended that the laws under Article 245 made by the Parliament cannot be disproved merely because they are operated extraterritorially.

Respondent

The main contentions of the respondents are as follows:

The main contention raised by the Attorney General was the reconsideration of the judgement given in the ECIL case, as it provides a very narrow and short interpretation of Article 245. It has limited the power of Parliament to make legislation regarding extraterritorial operations, which would have a direct impact on the nexus with India.
It was further contended that the Indian courts do not have power to hold that the extraterritorial laws made by the Parliament are not valid merely on the ground of being extraterritorial in nature.
It was also contended that Article 245 is the only source of power for the Parliament to make legislation regarding extraterritorial operations.
It was contended that the combined reading of Article 245(1) and 245(2) makes it clear that the laws made inside the territory of India cannot be held invalid on the ground merely that they would be applied outside India as well.
The respondents relied on the fact that Clause 179 of Draft Constitution was split up into two separate parts and was later adopted as Clauses (1) and (2) of Article 245; it was contended that it was the intention of the Drafting Committee to make Article 245(2) independent and a source of legislative power for the Parliament to make laws on extra-territorial operations.
While making these contentions, the respondents relied upon the following cases namely, Ashbury vs. Ellis (1893), Emmanuel Mortensen vs. David Peters (1906), British Columbia Electric Railway Company Ltd. vs. The King (1946), Governor General in Council vs. Raleigh Investment Co. Ltd (1944), Wallace Brothers and Co. vs. Commissioner of Income Tax, Bombay (1948), A.H. Wadia vs. Commissioner of Income Tax, Bombay (1948), State vs. Narayandas Mangilal Dayame (1949) and Rao Shiv Bahadur vs. State (1958) in order to support his contentions regarding the Parliament’s power to make laws with respect to extraterritorial application. It was contended that Article 245(2) possesses independent power and restricts the invalidation of laws on the ground of being extraterritorial in nature. The Court has no power to make them unconstitutional or strike a law as ultra vires on the said ground. The Court while looking into the cases cited or relied upon by the respondents stated that the powers given to Parliament are unconstrained and that it can make laws that have no nexus with Indian territory.
It was contended that drafting two separate clauses of Draft 179 as 179(1) and 179(2) indicates the intention of the framers to make these two clauses separate so that they have their own existence.
The respondents further argued that the act and function of making laws are similar to the act and function of operating the laws.

Laws/concepts involved in G. V. K. Industries Ltd. vs. Income Tax Officer (2011)

Income Tax Act, 1961

Section 9(1)(i)

Section 9 deals with the income that is deemed to be accrued or arise in India and the sub section (1) clause (i) states that all the income that is accruing or arising through any business connection in India whether directly or indirectly through any property, from any source or asset of income in India or through the transfer of a capital asset that is situated in India shall be deemed to be income accrued or arise in India.

Section 9(1)(vii)(b)

It provides that any income that is deemed to be accrued in India, even when it is earned by a non-resident, is liable to be deducted in tax. It deals with the income that is being payable for the technical services offered by a person who is a resident of India, except wherein the said fees are payable with regard to the services offered during the course of business carried on by such person outside India.

Constitution of India

Article 245 of the Indian Constitution

It deals with the extent of laws that are being made by the Parliament and State Legislatures. The Article is further divided into two clauses. Article 245(1) states that the Parliament may make laws regarding the whole or any part of the territory of India and similarly, the State Legislature may make laws regarding the whole or any part of the state to which it belongs. Article 245(2) provides that the laws made by the Parliament shall not be deemed invalid merely on the grounds that they would apply to extra-territorial operations.

A.H. Wadia vs. Commissioner of Income Tax, Bombay (1949)

In the present case, the scope of powers of the Indian Parliament was discussed, and to what extent it can make laws regarding extraterritorial operations. The Bombay High Court in this case held that the Parliament has the power to make laws that are extraterritorial in nature but for that, there should be a nexus or a relation between India and the subject of that particular law, and it should be for the benefit and welfare of Indian citizens. The case developed a significant principle about the powers of Parliament that it can make laws on the aspect of extraterritoriality.

State of Bihar vs. Charusila Dasi (1959)

In this case, a law, namely the Bihar Hindu Religious Trusts Act, 1950, that was made by the Government of Bihar, was challenged as it had extraterritorial application. In it’s judgement, the Supreme Court, by upholding the validity of the said legislation, stated that any law made by the state legislature should be confined within the territorial limits of that state only. It was further held that the Parliament has the power to make laws on extraterritorial application while the state legislatures cannot do so.

Article 14 of the Indian Constitution

This Article provides that all citizens are equal in the eyes of the law and are treated equally. It also states that all individuals enjoy equal protection of laws which implies that in similar situations, individuals will be treated in the same manner.

Precedents involved in G. V. K. Industries Ltd. vs. Income Tax Officer (2011)

Electronics Corporation of India Ltd. vs. Commissioner of Income Tax (1989)

The present case deals with the issue of the extraterritorial applicability of the provisions of The Employees Provident Funds and Miscellaneous Provisions Act, 1952 to employees who are working outside India. The Supreme Court held that the said Act is applicable to the workers or employees who are working outside India as it is related to India as the employees employed by an Indian company. The Court further discussed the powers of Parliament and stated that unless a nexus is prevalent, the Parliament has no power or is not competent enough to make laws. It is pertinent to note that, as per Article 245(1), the Parliament has the power to make laws for the whole or any part of the territory of India and that law may have an extra-territorial operation but its object should be related to India itself.

Emmanuel Mortensen vs. David Peters (1906)

In the present case, Mortensen, a Danish citizen, was engaged in fishing within the Moray Firth on the coast of Scotland. He was found fishing in the area beyond the three mile limit from the coast, which is restricted as per international law as it is above the limit of territorial waters. Mortensen was found guilty of fishing in the restricted area and he was charged under the Sea Fisheries Act and the Herring Fisheries (Scotland) Act and later brought before the Scottish Court. Mortensen argued that the British law could not be applicable to foreign nationals. The main issue before the Court was whether the law of Britain could be extended to a foreign national for conducting acts in waters beyond the prescribed limit of three miles. The Court, in its judgement, held that the Parliament of Britain has the power and authority to legislate on issues regarding the protection of fisheries within its area and the extension was valid under the said law. Hence, Mortensen was convicted of violating the Herring Fisheries (Scotland) Act, 1889.

Governor General in Council vs. Raleigh Investment Co. Ltd. (1944)

In this case, Raleigh Investment was a joint stock company that engaged in business activities in British India. The dispute arose when the Indian tax authorities made tax assessments of the British Indian company. The said company challenged the legality of said tax assessments by stating that they were not in accordance with the tax laws. It was contended that the assessment is ultra vires and invalid. Whether the assessment was made beyond the scope of legal powers given to the tax authorities. The Privy Council, in its judgement, held that the Court has the jurisdiction to review the actions of tax authorities as to whether they acted within their jurisdiction or not. The Court further held that the actions of the executive, be they tax assessments, must act within the bounds of law.

Wallace Brothers and Co. vs. Commissioner of Income Tax, Bombay (1948)

The petitioner company herein is a company incorporated under the laws of the United Kingdom carrying out its business operations in British India. The dispute in this case, arose when the Indian tax authorities tried to assess the company for income tax. The company stated that it cannot be taxed under Indian law as the earnings are made in the UK and not in British India. The company, while challenging the said assessments, contended that the tax authorities acted beyond its jurisdiction. The primary issue in the case was whether the income earned by the company in the UK could be taxed within India by the tax authorities. The Privy Council held in its judgement that Indian tax authorities can impose tax on the income earned by the company carrying out its business within the territories of India and that the income is subject to Indian tax laws. The present case is a significant one in the field wherein the issue with regard to imposing tax on foreign entities and the jurisdiction of tax authorities came into play.

Judgement in G. V. K. Industries Ltd. vs. Income Tax Officer (2011)

It was held by the Hon’ble Supreme Court that the Parliament does not have power and it is not competent to enact laws that are extraterritorial in nature. However, such laws can be passed by the Parliament if they are for the benefit of Indian people or for their welfare. The Court also stated that the Parliament of India works for the people of India and to serve their interests but it has no power to make laws of extraterritorial nature that have no object relating to India. The Supreme Court focused upon some terms while dealing with the factor of nexus that should be related to India and those terms are ‘for the benefit of India’, ‘to the benefit of India’, ‘in the benefit of India’, ‘in the interest of India’, ‘welfare of India’, ‘well-being of India’, ‘enhancement of interest of the people of India’ etc. It was stated that the Parliament is a ‘sovereign legislature’ and it has power to make extraterritorial laws. The aspect of ‘territorial sovereignty’ was also dealt with in this case wherein the Court stated that this aspect would be violated if the Parliament made a law that has no relation with India but the international treaties and laws will protect it.

The Court looked into the intention of the drafters who used these two terms, i.e., ‘extraterritorial law’ and ‘extraterritorial operation’, separately and it was stated that a law made in this regard that has no nexus with Indian territory is ultra vires of Article 245 of the Indian Constitution. Therefore, Article 245(1) is not applicable to extra-territorial aspects that do not have an object or nexus in Indian territory.

Rationale behind this judgement

Parliament is constitutionally restricted from making legislations regarding the extraterritorial aspect

For the first issue raised before the Supreme Court, it stated that the powers provided to the different organs must be exercised in order to protect the interests of people and their welfare. The Parliament was established with the motive of serving the people of India and making laws that benefit them. The aspects and causes of extraterritorial operations that need to be determined must have a nexus within the domain of Parliament and not outside it and they must have an object related to Indian territory. Therefore, the Court stated that Article 245(1) will not be applicable to the legislations that are extraterritorial in nature when they have no nexus with the Indian territory.

Parliament has power to make legislations regarding the extraterritorial aspect or the territory situated outside India

The Supreme Court observed that though the Parliament is not competent to make laws regarding extraterritorial operations, if the nexus is relating to Indian territory and it is in the best interests of Indian people, then such laws may be passed by the Parliament. It was further observed that the main motive of Parliament should be to make laws for the welfare of citizens. The Court looked into the judgement of ECIL case, wherein it was stated that there is a narrow interpretation given in this case regarding the Parliament’s power to pass laws for extraterritorial operations. However, the Apex Court in the present case on hand stated that Parliament may use its power to legislate upon the aspect and causes of extraterritorial operations that benefit the people of India.

The Court stated that Parliament should be deemed to have the power to enact any legislation but it is a prerequisite that it be for the benefit of Indian citizens. The Court refused to accept the arguments that India has inherited the illimitable powers of the British Parliament. The Court further stated that it is necessary to make a distinction between the acts and functions of making laws which refer to making or enacting the laws and the acts and functions of operating such laws which mean the implementation of laws. It was stated that making a law ‘invalid’ falls within the purview of the judiciary after examining the vires of said legislation. The phrases include “making laws”, “operation of laws”. “Invalidating a law” are associated with different organs, i.e., the executive, legislature and judiciary, respectively. Hence, the organ that can hold a law as invalid is the judiciary. The Court noted that indeed, it is necessary for the state to have some extraordinary powers in its hands but such powers are to be exercised within the four corners of constitutional permissibility as per its values and its schemes.

The Court also discussed the modern concept of sovereignty and the thoughts of some political philosophers like Thomas Hobbes and Jean Bodin, who were in favour of absolute power given to the state within its territory in order to prevent internal conflicts. They both stood for ‘blind political absolutism’. It was further opined that the courts should be very careful when the issue of claiming vast powers comes before them, especially when it is related with the implementation of laws

Analysis of G. V. K. Industries Ltd. vs. Income Tax Officer (2011)

The case is a significant precedent wherein the Supreme Court empowers the Parliament to make laws regarding extraterritorial operations but it is only to be made when the nexus is relating to the Indian territory or it benefits the people of India, as it is the duty of Parliament to work for the welfare of people of India and to make laws that serve their interests. This case has widened the scope of Article 245(1) by giving powers to Parliament to make laws on this particular subject.

If we look at the laws of other countries, it is not only in India that by virtue of Article 245 the Parliament can make laws regarding extra territorial operations, but in other countries like the United States of America, it has implemented several laws with regard to extra territorial operations for instance the anti-corruption laws, laws with respect to securities etc. The present case sheds light upon how the tribunal and Court dealt with the aspect of taxation inside and outside the territory of India. However, it is pertinent to note that the power given to Parliament under Article 245 is not unlimited or unfettered and it does not mean that it can legislate on any subject of its choice, no it can’t do that. The parliament can legislate only upon the subjects having territorial operations which are directly related to the territory of India and is beneficial for the citizens of India.

Conclusion

It can be concluded that this case has helped change the interpretation of previous precedents set up by the courts regarding the power of Parliament to make legislation on extraterritorial operations. Now, the Parliament has the power to legislate on the aspects or causes of extraterritorial operations that have an object directly in the territory of India. Therefore, this case is of paramount importance in relation to the territorial nexus and its application to taxation matters.

Frequently Asked Questions (FAQs)

What is an extra-territorial operation?

It means that a state has jurisdiction over its citizens outside their country. For instance, for crimes committed outside one’s own country or in a foreign country, the person can still be prosecuted regardless of the state to which he belongs.

What are the other Indian laws that provide for these provisions with respect to extraterritorial operations?

The laws in India that provide for specific provisions for extraterritorial operations include Section 1(3) of the Foreign Exchange Management Act, 1999, wherein it states that the Act shall be applicable to all branches, offices and agencies that are present outside India and that are owned and under the control of a person who is a resident of India.