As the world shrinks, domestic laws cross political borders and try to reach people wherever they are. Law-breakers also operate without borders, like hackers and those who secrete dirty money in dark corners of the earth. There are labyrinths of jurisdictions, as in the Julian Assange story, involving several governments, courts and nationalities. The Vodafone tax case in India has highlighted this complexity in public revenue matters.
It was this intricacy that led smaller benches of the Supreme Court to refer certain questions on the extra-territorial operation of Indian tax laws to a Constitution bench. The Attorney General demanded wide powers for Parliament, but the Supreme Court was modest in its interpretation and reined in the powers of the lawmakers in its judgment delivered last week in the case GVK Industries Ltd vs Income Tax Officer. The focal point of the decision was Section 9 of the Income Tax Act which deals with income “deemed to accrue or arise in India”. They are (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situated in India.
If this definition is not a rich enough harvest for chartered accountants and lawyers, the various explanations for it make it a confusion of clear thoughts. For instance, “in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India”.
Another such long provision deals with income by way of fees for technical services payable by the government or people.
If this is read in juxtaposition with the constitutional provisions, one would realise the dimensions of the tangled issue. Article 245, dealing with the extent of laws made by Parliament and state legislatures, says they can make laws for the whole or any part of the country. Then comes the rub: “No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.”
Two or more divergent and dichotomous views are possible. This was illustrated in the case Electronic Corporation of India vs Commissioner of Income Tax (1989), from which the present constitutional reference arose. One interpretation suggests that Parliament can enact laws with respect to only those causes that occur or are expected to arise solely within India. This is the rigid view. But another view is that Parliament is competent to pass laws on issues if they have “significant or sufficient impact” on or consequences for India. Yet another possible reading of the constitutional provision would be that as long as some impact or nexus is established with India, Parliament would be justified to legislate on such subjects.
The Attorney General introduced yet another interpretation that tried to put more power in the hands of the lawmakers. But it did not find favour in the unanimous judgment of five judges. It was the “polar opposite” of the former views. According to the law officer, Parliament has inherent powers to legislate for any territory, including territories beyond India, and no court in India may question or invalidate such laws on the ground that they are extra-territorial laws. Parliament is a “sovereign legislature” and, therefore, has full power to make extra-territorial laws.
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The proposition is tempting, especially in the context of the government’s posture of doing everything to unearth colossal amounts of sullied wealth secreted in tax havens. In the event, it was the court that reined in the apparent enthusiasm of the government.
Taking a via media, the Supreme Court stated that those extra-territorial aspects or causes, provided they have nexus with India, should be deemed to be within the domain of Parliament. Accepting the Attorney General’s elucidation would lead to “extreme conclusions”. The court categorically rejected his opinion that Parliament is empowered to enact laws in respect of extra-territorial aspects or causes that have no impact on or nexus with India. “We are unable to agree that Parliament, on account of an alleged absolute legislative sovereignty being vested in it, should be deemed to have powers to enact any and all legislation.” This applies even when the government claims there are “serious security risks or law and order problems”. Every exercise of power should be within the four corners of constitutional permissibility, according to the court.
The core issue is, thus, settled for the present. But the 80-page judgment is so complex with further definitions and exegetic erudition that it required a summary of conclusions which itself runs to 12 pages. If the world contracts further, the next judgment on this point would be longer.