Doctrine of Territorial Nexus

Clause 1 of article 245 says- Subject to the provisions of this 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. However, second clause says that a law made by parliament cannot be held invalid on ground that it has an extra-territorial operation.

This implies that state law cannot have extra-territorial operation. The Doctrine of territorial nexus emanates from the Supreme Court interpretation of this provision in context with extra-territorial operation of a law made by state government in India.

This can be understood by an example. We imagine that I live in Rajasthan running a Lottery business in Bangalore using my network and people over there. The people in Bangalore will pay for lottery tickets and from whatever receipts I get, I will pay the prize money and keep rest as profit after paying applicable taxes. Question is – since I am living in Rajasthan but my business was conducted in Bangalore, should I pay tax to Karnataka Government?

The court has reviewed such cases and established that even I am not living in Bangalore, since business activity was conducted there; I should pay tax to Karnataka Government. The court says that if there is sufficient nexus between state and the object, then the state law can operate outside state also. Here, I am an object and Karnataka government is state; and there is a nexus between object and state because of my business activity in that state despite not living there or physically present there. This is called Doctrine of territorial nexus.

In simple words, Doctrine territorial nexus says that laws made by a state legislature are not applicable outside the state, except when there is a sufficient nexus between the state and the object. Its importance can be judged by the following observations of supreme court:

“Territorial nexus doctrine, thus, plays an important part in assessment of tax. Tax is levied on one transaction where the operations which may give rise to income make take place partly in one territory and partly in another. The question which would fall for consideration is as to whether the income that arises out of the said transaction would be required to be apportioned to each of the territories or not.

Income arising out of operation in more than one jurisdiction would have territorial nexus with each of the jurisdiction on actual basis. If that be so, it may not be correct to contend that the entire income “accrues or arises” in each of the jurisdiction.”