ELECTRONICS CORPORATION OF INDIA LTD. versus COMMISSIONER OF INCOME TAX & ANR.

Citation: [1989] 2 S.C.R. 994 · Decided: 02-05-1989 · Supreme Court of India · Bench: R.S. PATHAK, RANGANATH MISRA, M.N. VENKATACHALIAH · Disposal: Directions issued

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Judgment (excerpt)

A 
B 
ELECTRONICS CORPORATION OF INDIA LTD. 
v. 
COMMISSIONER OF INCOME TAX & ANR. 
MAY 2, 1989 
[R.S. PATHAK, CJ, RANGANATH MISRA AND 
M.N. VENKATACHALIAH, JJ.) 
Constitution of India, 1950: Article 245. 
Parliament-Legislative competence-Whether can pass law 
having extra-Territorial operation-Existence of nexus whether 
).. .. 
c necessary. 
·( 
D 
Income Tax Act, 1961: Sections 9( l)(vii), 195. 
Whether extra-territorial in operation. 
Agreement with foreign company-Fees payable for technical 
services-Whether accrual of income in India-Tax-Whether to be 
deducted at source. 
~ 
The appellant company entered into an agreement with a Nor-
E 
wegian Company under which the latter was to provide technical know-
how and technical services including facilities for the training of per-
sonnel of the appellant company in connection with the manufacture of 
computers for a consideration of NOK 32 Millions, Norweign 
Currency, equivalent to Rs.575 lakhs. 
F 
The appellant company applied to the Income Tax Officer for 'No 
Objection Certificate' under Section 195(2) of the Income Tax, 1961 in;' 
order to remit the instalments due under the agreement without deduct-
ing the tax at source but the same was refused. 
The application of the appellant company to the Commissioner of 
G 
Income Tax seeking a direction to the Income Tax Officer was also 
rejected on the ground that having regard to Sections 9(l)(vii) and 195 
of the Income Tax Act, 1961 the payment to the foreign company con-
stituted deemed accrual of Income in India and therefore the appellant 
was obliged to deduct at source the tax payable by the foreign company. 
A writ petition filed by the appellant against the order of the Commis-
H 
sioner and assailing the constitutional validity of Section 9(1)(vii) of the 
994 
-· 
ELECTRONICS CORPN. v. C.l.T. 
995 
, Income tax Act, 1961 was dismissed by the High Court of Andhra 
~ Pradesh. A similar writ petition tiled against the order of refusal of 'No 
Objection Certificate' by the Commissioner of Income Tax in relation 
to disbursement made under an agreement with a U.S. Company was 
also dismissed by the High Court. 
Against the decision of the High Court appeals were filed in this 
Court challenging the vires of Section 9(l)(vii) of the Income Tax Act, 
··"--
1961 contending that (i) it was extra-territorial in operation, and (ii) 
l-1iere was no nexus between anything done in India and the persons 
sought to be taxed. 
Referring the matter to a Constitution Bench, 
HELD: I. It is envisaged under our constitutional scheme that 
Parliament in India may make laws which operate extra-territorially. 
Article 245(2) declares that no law made by Parliament shall be deemed 
to be invalid on the ground that it would have extra-territorial opera-
tion. Therefore, a Parliamentary statute having extra-territorial opera-
tion cannot be ruled out from contemplation. The operation of the law 
can extend to persons, things and acts outside the territory of India. 
The general principle, flowing from the sovereignty of States, is that 
laws made by one State can have no operation in. another State. But 
while the enforcement of the law cannot be contemplated in a foreign 
State, it can, nonetheless, be enforced by the courts of the enacting 
State to the degree that is permissible with the machinery available to 
them. They will not be regarded by such courts as invalid on the ground 
of such extra-territoriality. [998H, 999A-B, D] 
British Columbia Electric Railway Company Limited v. The 
King, [1946] A.C. 527, applied. 
A 
B 
c 
D 
E 
F 
2. But unless nexus exists Parliament will have no competence to 
. ..._,make the law. Article 245(1) empowers Parliament to enact law for the 
whole or any part of the territory oflndia. The provocation for the law 
must be found within India itself. Such a law may have extra-territorial 
operation in order to subserve the object, and that object must be 
G 
-./ related to something in India. It is inconceivable that a law should be 
made by Parliament in India which has no relationship with anything in 
India. [999E-F] 
2.1 In view of the great public importance of the question, 
whether the ingredients of the impugned provision indicate a nexus 
H 
A 
B 
c 
D 
E 
996 
SUPREME COURT REPORTS 
.[1989] 2 S.C.R. 
these cases are referred to a Constitution Bench. [999H) 
).. 
Corborandum Co. v. C./. T., [i977) 108 I.T.R. 335; referred to. 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2697 
& 2

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