Extra-Territorial Reach Of The Income-Tax Act, 1961

K. R. Sampath



1. Recent judgments of the Mumbai High Court in the case of Vodafone International Holdings B.V. v. Union of India [2008] 175 Taxman 399 and of the Supreme Court in CIT v. Eli Lilly & Co (India) (P.) Ltd. [2009] 178 Taxman 505 (SC), have created a furore amongst the expat employees in India. Commenting on the decision in the case of Eli Lilly & Co. (India) (P.) Ltd. (supra), it was observed that in what could have serious ramifications for multinational companies and their expat employees, the Supreme Court held that a foreign company registered and situated abroad is liable to deduct tax (TDS) on salary paid in the home country to their employees working here. Tax experts say that the decision has wider implications for MNCs with the court holding that TDS provisions can be extended beyond the country's borders in case of salaries.



In Eli Lilly & Co. (India) (P.) Ltd.s case (supra) the Supreme Court ob-served-



Lastly, on the question of extra-territorial operation of the Income-tax Act 1961 it may be noted that the 1961 Act has extra-territorial operation in respect of the subject-matters and the subjects which is permissible under Article 245 of the Constitution and the provisions are enforceable within the Area where the 1961 Act extends through the machinery provided under it. (p. 530)



The above observation has highlighted the interesting question as to whether, the Income-tax Act 1961 has extra-territorial operation or often referred to, though in our view wrongly, as extra-territorial jurisdiction.



2. First one should consider the Legislative powers of the Parliament under the Government of India Act 1935 the Independence Act 1947 and the Indian Constitution.



(a) Section 99(1) of the Government of India Act 1935 [25 & 26 GEO. 5. OH, 42] which conferred the legislative powers reads as follows :



99. Extent of Federal and Provincial laws-



(1) Subject to the provisions of this Act the Federal Legislature may make laws for the whole or any part of British India or for any Federated State, and a Provincial Legislature may make laws for the Province or for any part thereof;



(2) Without prejudice to the generality of the powers conferred by the preceding sub-section, no Federal law shall, on the ground that it would have extra-territorial operation, be deemed to be invalid insofar as it applies



(a) to British subjects and servants of the Crown in any part of India or



(b) to British subjects who are domiciled in any part of India wherever they may be or



(c) to or to persons on, ships or aircraft registered in British India or any Federated State wherever they may be.



(b) Prior to the Indian Constitution coming into force as part of removing the generally accepted limitation of colonial legislative jurisdiction, sections 6(1) and 6(2) of the Independence Act, 1947 (10 and 11 Geo 6 Ch 30), provided that



(1) The legislature of each of the New Dominions2 shall have full power to make laws for that Dominion, includes laws having extra-territorial operation. (Emphasis supplied)



(2) No law or no provision of any law made by the legislature of either of the new Dominions shall be void or inoperative on the ground that it is repugnant to the law of England, or to the provisions of this or any existing or future Act of Parliament of the United Kingdom, or to any order, or to repeal or amend any such Act, order, rule or regulation insofar as it is part of the law of the Dominion.



(c) Article 1(3) of the Constitution provides



The territory of India shall comprise-



(a) the territories of the States.



(b) the Union territories specified in the First Schedule and



(c) such other territories as may be acquired.



Article 73 referring to the extent of executive power of the Union, inter alia, states that



Extent of Executive power of the Union- (1) Subject to the provisions of this constitution, the executive power of the Union shall extend-



(a) to the matters with respect to which Parliament has power to make laws and



(b) to the exercise of such rights, authority and jurisdiction as are exercisable by the Government of India by virtue of any treaty or agreement.



Chapter 1 of Part XI of the Constitution deals with the relations between the Union and the States Distribution of legislative powers between the Union and the States. Article 245, which deals with the extent of laws made by the Parliament and Legislatures of States, reads as under



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. (Emphasis supplied)



Under the Seventh Schedule to the Constitution, the power to levy income-tax vests with the Union, item Nos. 82, 85, 86 and 87 read as under-



82. Taxes on income other than agricultural income.



85. Corporation tax.



86. Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and companies taxes on the capital of companies.



87. Estate duty in respect of property other than agricultural land.



It would be seen from (a) and (b) above, that since India got independently governed under the Government of India Act, 1935, there has always been a provision that the Parliament (Central Legislature) has powers to make laws which have extra-territorial operation, i.e., cover persons whether they are not Indian subjects or others who have a nexus or connection with India. However, there were certain limitations as well stated therein arising out of the fact that India had a Dominion Status and was primarily governed by the laws passed by the British Parliament. Once India became a Republic and had an independent sovereign status, the exceptions were not required and, hence, do not figure in the Constitution.



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