Territorial Nexus and Extra-territorial Operation
Chapter Thirty-Four
Syllabus topic 2, "Federalism".
Pages 178 to 181 of 780
In one line
Parliament may legislate for things happening outside India; a State may not, unless there is a real connection between the State and the thing it is taxing or regulating.
In the wording a student can write in an exam: article 245(1) empowers Parliament to make laws for the whole or any part of the territory of India and a State Legislature to make laws for the whole or any part of the State. Article 245(2) provides that no law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation. There is no corresponding provision for a State, so a State law that operates outside the State is prima facie beyond article 245(1); the doctrine of territorial nexus saves such a law where the connection between the State and the object of the law is real and not illusory, and the liability imposed is pertinent to that connection.
Parliament: no territorial limit at all
Article 245(2) is a complete answer to any objection based on extra-territoriality. Parliament may tax a foreign company on income arising abroad, may punish an offence committed abroad by an Indian citizen, and may regulate the conduct of an Indian ship on the high seas.
What it does not do is give Parliament power over a subject it does not have. The provision removes a territorial objection, not a competence objection: the law must still fall within a Union or Concurrent entry, or the residue.
And it does not make Indian law enforceable abroad as a matter of international law. A foreign court is under no obligation to give effect to it. Article 245(2) is about the validity of the law in Indian courts.
A State: the nexus test
The two conditions, as they are usually stated, are that the connection must be real and not illusory, and that the liability sought to be imposed must be pertinent to that connection.
"Real and not illusory" means the fact relied on must be a genuine link with the State, not something manufactured to found jurisdiction.
"Pertinent to the connection" means the burden must relate to the link. A State that taxes a transaction because part of it occurred inside the State may tax that transaction; it may not use the same link to tax an unrelated business of the same person.
The commonest applications are sales tax, entertainment tax, and betting and gambling, and the reason is that all three involve activity that can straddle a border.
A worked example
A State enacts a law levying a tax on every advertisement broadcast on a television channel that is received in the State. The channel is uplinked from another State and has no office, studio or property in the taxing State. Is the tax valid?
Territorial Nexus and Extra-territorial Operation
Step one: identify the entry. Taxes on advertisements other than advertisements published in newspapers and advertisements broadcast by radio or television is Entry 55 of List II. Taxes on advertisements broadcast by radio or television are excluded from the State entry, which disposes of the case on competence alone.
Now change the facts so that the doctrine has work to do. Suppose instead the State taxes an entertainment event, and the event is a lottery organised in another State whose tickets are sold in this one.
Step two: is the connection real? Tickets are sold within the State, to residents of the State, by agents operating in the State. That is a genuine link and not a contrivance.
Step three: is the liability pertinent to the connection? If the tax is on the tickets sold within the State, yes. If the tax is on the whole turnover of the lottery wherever sold, no: the link supports a tax on the local part of the activity and no more.
Step four: state the limit. The doctrine expands a State's reach where an activity straddles a boundary; it does not turn a State Legislature into a national one, and a law that uses a slender local connection to tax an essentially external activity fails on the second limb.
The case
The doctrine is applied inside the ordinary competence enquiry rather than as a separate head. In State of Bombay v. F.N. Balsara, AIR 1951 SC 318. Facts. A challenge to the Bombay Prohibition Act 1949, which prohibited the manufacture, sale, possession, consumption and import of liquor, one of the grounds being that the Act reached transactions and property connected with places outside the State and encroached on the Union's power over import across customs frontiers. Held. The Act was in pith and substance a law with respect to intoxicating liquors within Entry 8 of List II, that an incidental encroachment on a Union entry did not invalidate it, and that the prohibition operated on acts done within the State; several provisions were nevertheless struck down for violating fundamental rights, including as they applied to medicinal and toilet preparations. Why it matters here is that it shows how the territorial question is actually decided: not by asking whether the law has any external effect, but by asking what the law operates on, which is the same question pith and substance asks.
Distinctions
| Parliament | A State Legislature | |
|---|---|---|
| Territorial limit in article 245(1) | The whole or any part of India | The whole or any part of the State |
| Extra-territorial operation | Expressly saved by article 245(2) | Not saved; needs a territorial nexus |
| Test | Competence under a List only | Competence, plus a real and not illusory connection with a pertinent liability |
| Typical use | Income arising abroad; offences committed abroad | Sales tax, entertainment tax, betting where the activity straddles a border |
Territorial Nexus and Extra-territorial Operation
What it does NOT mean
It does not mean article 245(2) enlarges Parliament's subject-matter competence. It removes a territorial objection only.
It does not mean any connection will do. The connection must be real and the liability pertinent to it, and both limbs must be satisfied.
It does not mean a State may never regulate a person outside it. It may, where the person's activity has a genuine link with the State, which is exactly what the doctrine permits.
And it does not mean the doctrine is a separate head of challenge. It is applied within the competence enquiry, alongside pith and substance.
Quick revision
Article 245(1): Parliament for the whole or any part of India, a State Legislature for the whole or any part of the State. Article 245(2): a law of Parliament is not invalid on the ground that it would have extra-territorial operation, which removes the territorial objection but not a competence objection and does not make Indian law enforceable abroad. There is no corresponding saving for a State, so a State law reaching outside the State needs a territorial nexus: the connection must be real and not illusory, and the liability sought to be imposed must be pertinent to that connection. Both limbs are required. Commonest in sales tax, entertainment tax and betting. Balsara: the question is what the law operates on, which is the pith and substance enquiry.
Test yourself
1. What does article 245(2) do, and what does it not do? It provides that a law of Parliament shall not be deemed invalid on the ground that it would have extra-territorial operation. It does not enlarge Parliament's subject-matter competence, and it does not make Indian law enforceable in a foreign court.
2. State the two limbs of the territorial nexus test. The connection between the State and the object of the law must be real and not illusory; and the liability sought to be imposed must be pertinent to that connection.
3. Why does a State need the doctrine when Parliament does not? Because article 245(2) saves only a law of Parliament. Article 245(1) confines a State Legislature to laws for the whole or any part of the State, and there is no corresponding saving, so a nexus must be shown.
4. Give an example of a connection that is real but a liability that is not pertinent. Tickets of an out-of-State lottery are sold within the State, which is a real connection; a tax on the entire turnover of the lottery wherever sold is not pertinent to it, because the link supports a tax on the local part of the activity only.
Territorial Nexus and Extra-territorial Operation
5. In which fields does the doctrine most often arise, and why? Sales tax, entertainment tax and betting and gambling, because in each the activity taxed can begin in one State and be completed in another.
6. Is territorial nexus a separate ground of challenge? No. It is decided inside the ordinary competence enquiry, by asking what the law in substance operates on, which is the same question the doctrine of pith and substance asks.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.