MAHARASHTRA NATIONAL LAW UNIVERSITY, AURANGABAD

RESEARCH PROJECT
ON
Doctrine of Territorial nexus (Article 245)

Submitted by
KRISHNA SHARMA
B.A.LL.B [Hons.] Semester IV
Roll No. 2022/BALLB/58

Paper: Constitutional Law - I

Under the guidance of

Mr. Yusuf Hayath

Assistant Professor of Law

MAHARASHTRA NATIONAL LAW UNIVERSITY, AURANGABAD

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 DECLARATION

This declaration is made at Aurangabad that this project is prepared and drafted by
me, Krishna Sharma. It contains the project work that was assigned to me during my
4th Semester period and successfully accomplished from my side.
This project is a sincere attempt at the compilation of the aforementioned work.
This has not been submitted, either in whole or in part, to any other Law University or
affiliated Institute under which any University is recognized by the Bar Council of
India, for the award of any other law degree or diploma, within the territory of
India.

KRISHNA SHARMA
22/B.A.LL.B/58

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Sr. PARTICULARS Page
No No.
.
1. INTRODUCTION 4-6

2. TERRITORIAL NEXUS AND 6-7

THE PARLIAMENT

3. TERRITORIAL NEXUS AND 7-8

THE STATE LEGISLATURE

4. EXTRA-TERRITORIAL 9-10
OPERATION

5. THE DOCTRINE OF 10-13

TERRITORIAL NEXUS IN
INDIAN LEGISLATION

6. CASE LAWS 13-14

7. CONCLUSION 15

8. BIBLIOGRAPHY 16

TABLE

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RESEARCH OBJECTIVE
The project's goals are as follows:

• To comprehend the notion of the territorial nexus theory;

• To comprehend the conditions necessary to establish an extraterritorial operation;

HYPOTHESIS
The Indian constitution's powers granted to the legislature have not been overreached.

RESEARCH QUESTIONS
The primary objective of the present work-
What is the concept of the doctrine of territorial nexus?
To what extent does the state government have the power to make extra-territorial laws?
What is the circumstance under which the doctrine of territorial nexus can invoked?

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INTRODUCTION
Federalism, which refers to the separation of powers between the federal and state levels, is a
very intricate system that serves as the basis for the formation of federal states and includes
the division of powers between the union and the federal level.
The constitution divides their powers so they can have autonomy over the legislative and
executive branches. Due to the federal form of our constitution, there are two distinct polities
—the union and the state. They are granted sovereign powers, which they must exercise in
accordance with the Constitution. The fundamental definition of federalism—the separation
of powers—is found in our constitution, which is the ultimate law of the nation. One essential
component of sovereignty is jurisdiction. It is a manifestation of the sovereign's authority
over the people. Article 245 of the Indian Constitution defines the idea of territorial nexus,
which establishes the allocation of legislative functions.
Article 245 provides, among other things, that (subject to the provisions of the Constitution).
Parliament may make laws for the whole or any part of the territory of India and the
legislature of a State may make laws for the whole or any part of the State. Thus, article 245
sets out the limits of the legislative powers of the Union and the States from the geographical
(or territorial) angle. From the point of view of the subject matter of legislation, it is article
246 which is important. Article 246 reads as under:
Article 246(1): Parliament alone has the authority to enact legislation pertaining to any of the
subjects included in List 1 of the Seventh Schedule (referred to as the Union List in this
Constitution), regardless of what paragraphs (2) and (3) may say. (2) Subject to section (1),
and notwithstanding anything in clause (3), Parliament and the Legislature of any State shall
have the authority to enact legislation pertaining to any of the subjects included in List III of
the Seventh Schedule (referred to as the Concurrent List in this Constitution).
(3) The Legislature of any State, subject to paragraphs (1) and (2), shall have the only
authority to enact laws for the State or any portion thereof pertaining to any of the subjects
included in List II of the Seventh Schedule (hereafter referred to as the State List).
(4) Even if an issue is listed in the State List, Parliament has the authority to enact laws
pertaining to it for any area of India's territory that is not a State.

The Indian Constitution's Part XI addresses the distribution of legislative powers, legislative
relations, and relations between the union and the states. Section 245.
Article 245: Scope of laws passed by parliament and state legislatures:

1) Subject to the provisions of this constitution, parliament may pass laws covering all or any
portion of India's territory, and state legislatures may pass laws covering all or any portion of
their respective states.

2) No law passed by parliament may be rejected on the grounds that it would apply outside of
its geographical jurisdiction.

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This statement, "Subject to the provisions of this Constitution," refers to the parliament's
ability to enact legislation for all or any portion of India's territory, subject to other
constitutional stipulations. Stated differently, this power is not unrestricted. Other clauses that
the courts have interpreted include the division of powers, basic rights, and other clauses in
the constitution.

Territorial Nexus and the Parliament

1. It is quite evident from Article 245 (2) of the Indian Constitution that 'No legislation
adopted by Parliament will be deemed to be illegal on the premise that it would have extra-
territorial operation'. Legislation cannot, therefore, be challenged on the grounds that it
operates outside of its geographical boundaries.
2. It is a well-established fact that our nation's courts are obligated to uphold the law using
the tools at their disposal and are not permitted to contest the Legislature's jurisdiction to
enact laws outside of its borders.
3. A law remains lawful even in cases of extraterritorial operation. But in certain situations,
including those concerning tax laws, some connection to India could still be required.1

Territorial nexus and the state legislature

A state's legislature has the authority to enact laws for the entire state or just a portion of it.
This means that it is now possible to question if the State Legislature actually has the
authority to pass a given statute. Numerous court rulings have established that the laws that a
state is authorized to enact must be for that state.2

Thus, the States have also been subject to the Territorial Nexus Doctrine. There are two
requirements outlined in this regard.3

• The relation or connection between them must be real.

• That relationship must be relevant to the responsibility that is being sought to be imposed.
If the first two requirements are met, the courts will not examine any additional analysis of
Nexus's suitability.4
The courts have often held that the sale or purchase need not occur inside the state's borders
in a number of decisions involving taxation legislation. In general, local transactions
involving the purchase or sale of local commodities that are carried out within the State
would serve as a sufficient foundation to support the State's taxing authority, provided that
these transactions naturally lead to a final sale or purchase that is subject to taxation.5

1
Electronics Corporation of India Ltd. v. Commissioner of Income Tax, AIR 1989 SC 1707
2
State of Bombay v. United Motors (India) Ltd., AIR 1953 SC 252
3
State of Bombay v. R.M.D. Chamarbaugwala, AIR 1957 SC 699
4
Khyerbari Tea Co. v. State of Assam, AIR 1964 SC 925
5
Poppatlal Shah v. State of Madras, AIR 1953 SC 274

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Additionally, the laws passed by the Legislature are to be construed in a way that is
compatible with its constitutional powers, since the Legislature is considered not to have
overreached its authority. This is known as the Presumption of Constitutionality.

Extra-Territorial Operation
It is commonly known that the Parliament has the authority to enact laws pertaining to
matters or causes that transpire, emerge, or exist inside the borders of India, as well as
extraterritorial matters or causes that are connected to or effect India.
These laws would be legitimate despite requiring extraterritorial operation because they
would be within the meaning, purpose, and scope of Parliament's grant of authority to make
laws "for the whole or any part of the territory of India." Any legislation passed by the
parliament pertaining to an extraterritorial issue or cause unrelated to India would be
considered ultra vires, or laws intended for a foreign territory.6

This suggests that legislation passed by the Parliament cannot be deemed to be

unconstitutional as long as they have a connection to India, even if they provide for
extraterritorial operation. Such laws "would be ultra vires" only insofar as they are enacted by
the Parliament concerning extraterritorial aspects or causes that have no nexus with India.7

Once more, the definition of an appropriate Nexus is a matter of opinion. According to

Professor Michael Lang's book Introduction to the Law of Double Taxation Conventions,
"there are no significant limits on the tax sovereignty of states in international law practice."
The national legislature can even tax circumstances where, for example, there is simply a
"genuine link" when creating the domestic personal tax legislation. Taxes are only unable to
be collected when there is no relationship between the subject of the transaction and the state
that imposes them.

The framers of our Constitution certainly intended that there be limitations on how and to
what extent the organs of the State, including the Parliament, may take cognizance of
extraterritorial aspects or causes and exert the State powers (which are the powers of the
collective) on such aspects or causes. This is because they granted the Parliament the
authority to legislate 'for' India, and consequently also concerning extraterritorial aspects or
causes.8

Together with Article 51, a Directive Principle of State Policy that is fundamental to
governance even though it is not enforceable in court, the Doctrine of Public Trust requires
that every legislation by the Parliament relating to extraterritorial aspects or leads to be
imbued to protect the interests of, welfare of, and security of India. These provisions provide
clear support for the finding that Parliament may not enact laws concerning extraterritorial
aspects or causes whereby such aspects or causes have no nexus any kind with India.

6
GVK Industries Ltd v. ITO. (2011) 4 SCC 36.
7
Metro abnd metro, agra vs assesses, I.T.A. NO. 393/Agra/2012
8
Constitution Assembly Debates, Office Report, 1948-49, page 601 (Lok Sabha secretariat, New Delhi).

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The doctrine of territorial nexus in Indian legislation
Article 245: The scope of laws passed by state and federal legislatures.
1. The legislature of a state may enact laws for the entirety or any portion of the state, subject
to the requirements of this constitution. Similarly, Parliament may enact laws for any portion
of the Indian territory.

2. The mere fact that a legislation passed by parliament could operate outside of its borders
does not render it unconstitutional.
This statement, "Subject to the provisions of this Constitution," refers to the parliament's
ability to enact legislation for all or any portion of India's territory, subject to other
constitutional stipulations. Stated differently, this power is not unrestricted. Other clauses that
the courts have interpreted include the division of powers, basic rights, and other clauses in
the Constitution.

"Extra-territorial operation" Law designed to function outside of India's borders If a state

legislation operates extraterritorially, meaning it affects areas outside of the state, it is null
and invalid. There is one exception to this broad norm, though. If there is a strong enough
connection between the object and the state, a state law governing extraterritorial operations
will be enforceable. The case State of Bombay vs. R.M.D.C. sheds light on this.9

The Doctrine of Territorial nexus can be invoked under the following circumstances-
if a certain state operates outside its borders.
if the state enacting the law and the subject matter of the Act have a geographical connection.
It means that the thing to which the law applies just has to have a sufficient geographical link
with the state, not necessarily be physically located inside its borders. In addition to being
located inside its borders, a person, piece of property, thing, or transaction may be subject to
a tax by a state if there is a substantial and genuine territorial relationship.

9
State of Bombay vs. R.M.D.C, 1957 AIR 699, SCR 874

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CASE LAWS

TATA IRON AND STEEL COMPANY V. STATE OF BIHAR10

In order to impose sales tax on items that were created, discovered, and made in the state of
Bihar, regardless of whether the transaction was completed within or outside the state, the
state approved the Sales Tax Act. The Act was affirmed as lawful by the court on the grounds
that there was adequate geographical linkage. The specific facts and circumstances of each
instance will determine whether or not there is a sufficient connection between the law and
the thing that is being sought to be taxed. It was noted that two factors had to be taken into
account in order to determine if the geographical relationship was sufficient.

 There must be a genuine, non illusory link.

 The proposed liability needs to be relevant to that relationship.

STATE OF BIHAR VS CHARUSILA DAS11

The Bihar Hindu Religious Trusts Act, 1950 was passed by the legislature of Bihar with the
intention of safeguarding and preserving the assets owned by Hindu religious trusts. Any trust
with any portion located in the state of Bihar was covered by the Act. The Respondent
registered her holdings, which included many residences and land in Bihar and Calcutta,
under a trust deed. The trust has its location in Bihar. Whether the Act extended to trust
properties located outside of the state of Bihar was the primary issue up for determination.

Whether the trust so established was a public or private trust was up to the court to determine.
Is it possible for the Bihar legislature to enact legislation regarding a trust that is located
within the state of Bihar as well as properties that belong to the trust but are located outside
of Bihar?

By using the geographical linkage concept, the Supreme Court determined that the Act may
apply to trust property that was located outside of Bihar but related to a trust that had its
trustees' offices in Bihar. The purpose of the Act is to improve the management of Hindu
religious trusts in the state of Bihar. Since the trust is located in Bihar, the state has legislative
authority over it as well as over the trustees and any employees or representatives who must
be present in Bihar in order to manage the trust. The religious institution and the property
attached to it must be considered an integrated whole as they cannot be separated from one
another. Additionally, the relationship between the trust and the property attached to it must
be genuine and not fictitious.
The geographical link or nexus theory has been applied by the court to laws imposing sales
taxes, income taxes, and gaming taxes.

10
AIR 1958 SC 482
11
AIR 1959 SC 1002

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THE STATE OF BOMBAY VS RMD CHAMARBAUGWALA12
If a state's laws operate extraterritorially, that is, they have no legal force outside of the state.
There is one exception to this broad norm, though If there is a strong enough connection
between the object and the state, a state law governing extraterritorial operations will be
enforceable.
The case State of Bombay vs. R.M.D.C. 16 makes this clear. The following situations allow
for the use of the Territorial Nexus Doctrine:
• If a certain state operates outside its borders

• If the state enacting the law and the Act's subject matter have a geographical connection

It means that the thing to which the law applies just has to have a sufficient geographical link
with the state, not necessarily be physically located inside its borders. In addition to being
located inside its borders, a person, piece of property, thing, or transaction may be subject to
a tax by a state if there is a substantial and genuine territorial relationship.

Although the responder did not live in Bombay, he held competitions with cash prizes
through a newspaper that was produced and printed in Bangalore and had a large readership
in Bombay. All necessary competition-related tasks, such as completing forms and paying
entrance fees, were completed in Bombay. The respondent was to be subject to a tax from the
state government for conducting business there. The Supreme Court was asked to rule on
whether the competition's organizer, who was not a resident of Bombay, could lawfully be
subject to taxation under the Act. Conclusion: Since all of the competitor's typical operations
were mostly conducted within Bombay, it was determined that there was a sufficient
territorial link for the Bombay Legislature to tax the respondent.

WALLACE V. INCOME TAX TAX COMMISSIONER13

A firm with its exclusive location for control and management was formed in the United
Kingdom. One of its members operated a business in India. India accounted up a large
portion of the company's overall profit. It was decided that since there was a substantial
geographic connection between the firm and India for this reason, India may impose income
tax on the total amount of the company's income, not only the fraction that came from India.

RAJ SHIPPING V. STATE OF MAHARASHTRA 14

The assessed person was involved in the business of providing fuel (also known as "bunker
supplies") to commercial vessels that were situated in Indian territorial seas off the coast of
Maharashtra. Purchase orders for gasoline were placed by shipping boats with assessors, who
then placed purchase orders with oil marketing companies (OMCs). Fuel was decanted into
cargo tanks of assessed' barges at the barge loading site, which was reached by OMCs.
Following their receipt of gasoline from OMCs, the barges proceeded to the shipping vessel's
mooring position where they discharged the fuel into the vessel.

12
1957 AIR 699, 1957 SCR 874
13
AIR 1948 PC 118
14
2015 SCC ONLINE BOM 5767

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There was no question about the fact that motor spirit sales were subject to sales tax, but sales
at retail establishments are not. However, assessors failed to pay sales tax and claimed an
exemption from paying MVAT on the sale of HSD. Additionally, it argued that the
accomplished sales transactions did not fall inside the State of Maharashtra's territorial
jurisdiction.

CONCLUSION
The Doctrine territorial nexus, to put it simply, states that laws passed by state legislatures are
only effective inside their borders if there is a strong enough connection between the state
and the object. Thus, the idea of territorial linkage is crucial to the determination of taxation.
Since tax is assessed based on the territorial nexus concept, it is a significant factor in the
assessment of tax. One transaction when the activities that might result in revenue occur
partially in one jurisdiction and partially in another is subject to taxation.
Any portion of a state that operates extraterritorially—that is, outside the state—may be
enacted by the state legislature. There is one exception to this broad norm, though. If there is
a strong enough connection between the object and the state, a state law governing
extraterritorial operations will be enforceable. The only authority to enact laws with
extraterritorial reach is granted to Parliament, not state legislatures.
Therefore, unless extraterritorial operation can be upheld on the basis of territorial linkage, an
Act of the State Legislature that grants its provisions extraterritorial operation may be
successfully challenged in court. This implies that even while the thing to which the law
applies might not be found physically inside a state's borders, the state law will still be
enforceable if there is some sort of relationship or nexus between the state and the object.
Territorial nexus is not limited to India's borders; it may be used elsewhere. At that point, the
Indian legal system comes into effect. Territorial nexus is an international legal notion that
permits the applicability of a country's laws outside of its borders.

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BIBLIOGRAPHY
Books
1. Indian Constitutional Law- M.P. Jain (7th Edition Lexis Nexis)
2. Constitution of India- V.N. Shukla (11th Edition Eastern Book Company)
3. The constitution of India (14th Edition PM bakshi)
Online
1. http://www.gktoday.in/blog/doctrine-of-territorial-nexus/
2. http://www.taxsutra.com/experts/column?sid=417
3. http://www.studymode.com/subjects/doctrine-of-territorial-nexus-in-india-page1.html
4. http://www.livelaw.in/
5. http://www.legallyindia.com/
6. http://www.indiankanoon.org/

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