Territorial Nexus – Concept
The concept of Sovereignty outlines a nation’s exclusive right to govern itself without interference from other Nations. As a general principle laws made by one State have no operation in any other state.
The advancement in science and technology have led to a substantial increase in trade, commerce, services. There is considerable surge in movement of man, machine and labour between countries. These upward changes in a nation could affect the economics, interest, welfare and security of another Nation. The conduct of the people beyond the borders of the enforcing Nation, has an effect within that Nation. The situation of ‘conduct outside’ and ‘effect inside’, may have territorial jurisdiction to take action.
The question that arises is whether jurisdiction should be based on ‘actual conduct’ within the borders of a Nation (“actual conduct”) or should it extend to conduct which is outside the borders of a nation but which has effect within the nation (“effect of the conduct”)? The effect should not be just ‘illusory’. The extra-territorial jurisdiction will depend on how substantial the effect is.
The “Doctrine of effects” or “Effects Doctrine” and its extraterritorial application in the context of antitrust laws is well known. The effects doctrine is a product of a judicial intervention established in the case of US v. Aluminium Company of America[i], (“Alcoa case”) where the U.S. Court of Appeals for the Second Circuit held “that any State may impose liabilities, even upon persons not within its allegiance, for conduct outside its borders that has consequences within its borders”.
Section 32 of the Competition Act, 2002 is based on “Effects Doctrine”. Section 32 provides that the CCI shall have power to inquire into any agreement or abuse of dominant position or combination taken place outside India if such agreement or dominant position or combination has, or is likely to have, an appreciable adverse effect on competition in the relevant market in India.
Similarly, the Indian Penal Code (IPC) provides for extension of Code to extra-territorial offences. Section 1 of the IPC provides that the Code extends to whole of India. The section 3 of the IPC deals with the punishment of offences committed beyond the territory of India but which legally may be tried within India. Section 4 states that the Act also applies on any Indian citizen who has committed offences beyond the territorial boundary of India. By virtue of section 4(3), the provisions of IPC are also extended to ‘Any person in any place without and beyond India committing offence targeting a computer resource located in India’. The section 3 and 4 of IPC signify that the attribute of extra-territorial operation of law.
Territorial Nexus under Government of India Act of 1915, 1919 and 1935
The concept of extra territorial operation of law evolved in India with the Government of India Act, 1915 (hereinafter referred as “GOI Act of 1915”). Section 65[ii] of the GOI Act of 1915 conferred on the Indian Legislature “power to make laws (a) for all persons, for all courts and for all places and things within British India, (b) for all subjects of His Majesty and servants of the Crown within other parts of India, and (c) for all native Indian subjects of His Majesty without and beyond as well as within British India, etc., etc.”
As can be seen from the above extract, section 65 gave Indian Legislature power to make laws for all persons, courts, places or things within British India or subjects/servants within other parts of India. Clause (c) of section 65(1), specifically provided that Indian Legislature could make laws for native Indians without and beyond as well as within British India. Thus, Legislative power under GOI Act of 1915 was much restricted and circumscribed.
In contrast, the Government of India Act, 1919 and Government of India Act, 1935 (hereinafter referred as “GOI Act of 1935”)[iii] provided much wider power. Section 99(1) GOI Act of 1935[iv] had empowered the Federal legislature to make laws for the whole or part of British India or any Federated State. Sub-section (2) of section 99 provides that ‘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 an extra-territorial operation, be invalid so far as it applies; to certain subjects/servants/ships/aircraft etc.’
As can be seen from the above extract of section 99(1), Legislature was empowered to make laws for whole or any part of British India. The ordinary meaning of the word “For”, is “in the interest of, to the benefit of, intended to go to, in defence, support, in favour of[v]. These meanings give a wide scope to the word “for” and hence words “for a company” would mean “for the purpose or need of a company”[vi]. Therefore, “For British India” are words of very wide import. They can be interpreted as “for the purpose or need of British India”. They do not indicate any territorial limit.
Territorial nexus in the context of Section 99 of GOI Act of 1935 was interpreted in an interesting case of The Governor-General in Council v. The Raleigh investment co., ltd[vii] (Raleigh’s case).
The Raleigh Investment Co., Ltd., a company incorporated and having its registered office in England. Raleigh had no office in India. Raleigh held the bulk of the shares in nine sterling companies, which were also incorporated in England. These nine companies had their registered offices in England and were controlled from London. However, these companies carried on business in British India. The local boards in India managed the business in India. Profits were made by sterling companies from India operations and on such profits, taxes were discharged in British India. No share registers are kept in India and general meetings were held outside India. These sterIing companies declared and paid their dividends in England (it was dividend paid by company in England to its shareholders in England).
Under the Income Tax Act, 1922, Section 3 provided charge for income tax and section 4 provided for scope of total income. Explanation 3 to Section 4(1)(c ) provided that dividend paid without British India shall be deemed to be income accruing and arising in British India to the extent to which it has been paid out of profits subjected to income-tax in British India.
Based on the above, The Raleigh Investment Co., Ltd, a non-resident, was assessed in British India to income-tax and super-tax in respect of the dividends which it had received in England from the sterling companies, under s. 4 (1) (c) read with Explanation 3 there under.
The Assessee contended that the said provisions were ultra vires the Indian Legislature under section 99 of GOI Act of 1935. The Federal Court held that under Section 99, the Indian Legislature has power to make laws having extra- territorial operation. The only limitation is that the law must be “for British India”. The Constitution Act must be construed liberally and so as to give the widest possible amplitude to the powers and no limitations other than those expressly imposed should be invoked if the matter is within the words used in the Act.
The Federal Court held that the source of the dividends paid to the Raleigh Investment Co., Ltd. by the sterling companies was British India and in making the dividends liable to income-tax and supertax on that basis the Indian Legislature was not giving its law any extra-territorial operation. The Court further observed that even if there was any extraterritorial operation in the impugned provisions, it was Within the legislative powers given to the Indian Legislature by the Constitution Act, and therefore the impugned provisions were not ultra vires.
The Federal Court compared the language of section 65 of GOI Act of 1915 and section 99 of GOI Act of 1935 and held that the expression “for the whole or any part of British India” used in section 99(1) is much wider. The Court observed that “The expression ‘places and things within British India’ would have imposed a strict territorial limitation upon the powers of the Indian Legislature. In the Act of 1935, sub-sec (1) of s. 99 does not use the expression “things, within British India”, but empowers the Federal Legislature to make laws “for the whole or any part of British India” and the “topics” on which it can legislate are specified in Lists I and III of the Seventh Schedule.
It was argued on behalf of assessee that if there was general power for extra-territorial legislation was available in section 99(1), there was no necessity to enact sub-section (2) of section 99.
The Federal Court held that sub-section (1) is capable of being read as including the power to make laws even in respect of the matters specified in the five cases dealt with in sub-section (2). To arrive at this conclusion, the Federal Court relied on the opening words of sub-sec (2), namely, “without prejudice to the generality of the powers conferred by the preceding sub-section”. The Federal Court held section 99(2) enumeration of items was with abundant caution.
The Court finally concluded that “In our judgment therefore the extent, if any, of extra-territorial operation which is to be found in the impugned provisions is within the legislative powers given to the Indian Legislature by the Constitution Act”.
[i] 148 F.2d 416 (2nd Cir. 1945)
[ii] Section 65 – Powers of Indian legislature
(1) The Indian legislature has power to make laws–
(a) for all persons, for all courts, and for all places and things, within British India; and
(b) for all subjects of His Majesty and servants of the Crown within other parts of India; and
(c) for all native Indian subjects of His Majesty, without and beyond as well as within British India; and
(d) for the Government officers, soldiers airmen and followers in His Majesty’s Indian forces, wherever they are serving, in so far as they are not subject to the Army Act or the Air Force Act; and
(e) for all persons employed or serving in or belonging to the Royal Indian Marine Service; and
(f) for repealing or altering any laws which for the time being are in force in any part of British India or apply to persons for whom the Indian legislature has power to make laws.
[iii] Section 99 of Both GOI Act of 1919 and GOI Act of 1935 are similarly worded.
[iii] Section 99.-(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 subsection, no Federal law shall, on the ground that it would have extra territorial operation, be deemed to be invalid in so far 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; or
(d) in the case of a law with respect to a matter accepted in the Instrument of Accession of a Federated State as a matter with respect to which the Federal Legislature may make laws for that State, to subjects of that State wherever they may be; or
(e) in the case of a law for the regulation or discipline of any naval, military, or air force raised in British India, to members of, and persons attached to, employed with or following, that force, wherever they may be.
[v] M. C. Sharma v Punjab University, Chandigarh, AIR 1997 P&H 87, 127.
[vi] Chaitram Verma v Land Acquisition Officer, Raipur, AIR 1994 MP 74, 81
[vii] (1944) FCR 229