NLIU LAW REVIEW

Extra-Territorial Operation of Taxing Statute: The Income Tax Act, 1961

L. Usha in this article attempted to establish the position in International Law with regard to extraterritorial operation of legislations of sovereign states.

Abstract

Jurisdiction is a sine-quo-non of sovereignty. It’s an expression of power which the sovereign expresses over its subjects. While this principle is unambiguous, the power of a sovereign to legislate matters beyond its jurisdiction is a debatable one. There is no express prohibition with regard to the same in international law. But however states have to adhere to the doctrine of nexus in order to avoid arbitrariness. The position with regard to enforcement of taxing statutes beyond its territorial limits also functions on the same principle. It has resurfaced in the recent times especially with regard to the Indian Income Tax Act of 1961.There is no express provision in the Act which lays down that the Act shall have extraterritorial application. However based on the power granted by the parliament under Article 245 of the Indian Constitution it can be inferred that an Act which has extraterritorial operation cannot be declared to be illegal. Many cases have emerged before the Income tax authorities in the recent times with regard to enforcement of the Act vis-à-vis non-residents. This is so because the various provisions of the Act seek to charge tax based on particular criteria, for example based on residential status, place of accrual, deeming provisions and business connection. Therefore, it can be said that the Act operates extraterritorially only when some nexus is established with the object sought to be taxed. This article seeks to explore this proposition.
The author has first attempted to establish the position in International Law with regard to extraterritorial operation of legislations of sovereign states. An attempt is made to delve into the doctrine of nexus is which is subsidiary to the above stated principle. Later the author has moved to the core issue of this article which is extraterritorial operation of the taxing statutes with special reference to the Income Tax Act, 1961. This involves discussion of various provisions of the Act which entail extraterritorial operation of the Act and also consideration of various topical judicial precedents on the position of Indian judiciary with regard to the same.