The Doctrine of Territorial Nexus in Indian Constitutional Law

Authored By: Dewanshi Bhatt

Bennett University

Introduction

In a federal system of government, the distribution of legislative powers between the Union and the States constitutes a fundamental constitutional feature. Unlike unitary systems where power flows from a single central authority, federalism establishes a dual polity with distinct spheres of authority for different levels of government. As constitutional scholars have observed, “A Federal Constitution establishes the dual polity with the union at the centre and the states at a periphery, each endowed with sovereign powers to be exercised in the field assigned to them respectively by the constitution.” Crucially, “the one is not subordinate to the other in its own field, the authority of one is co-ordinate with that of other.”

The Indian Constitution embodies this federal principle through its careful allocation of legislative, executive, and financial authority. However, the territorial scope of legislation—particularly when laws have effects beyond the geographical boundaries of the enacting legislature—raises complex constitutional questions. The doctrine of territorial nexus provides the legal framework for resolving these questions, determining when a legislature may validly enact laws with extra-territorial operation.

This article examines the doctrine of territorial nexus as enshrined in Articles 245 and 246 of the Constitution of India. It analyzes the constitutional provisions governing legislative competence, explores the doctrine’s essential features and applications, examines landmark judicial pronouncements that have shaped its interpretation, and evaluates its particular significance for taxation of non-residents and cross-border transactions.

Constitutional Framework

Articles 245 and 246: Division of Legislative Powers

The territorial scope of legislative authority is primarily governed by Articles 245 and 246 of the Constitution of India, read in conjunction with the Seventh Schedule.

Article 245 establishes the geographical limits of legislative power:

(1) 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.

(2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.

Article 245(1) thus sets the territorial boundaries within which Parliament and State legislatures may ordinarily exercise their powers. Parliament’s jurisdiction extends to the entire territory of India, while State legislatures are generally confined to their respective territorial limits.

Significantly, Article 245(2) explicitly authorizes Parliament to enact legislation with extra-territorial operation. This provision clarifies that Parliamentary laws cannot be challenged merely because they produce effects beyond India’s borders. Courts must enforce such laws using available judicial machinery and are not entitled to question Parliament’s authority to legislate extra-territorially.

Article 246 addresses legislative competence from the perspective of subject matter:

(1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I of the Seventh Schedule (in this Constitution, referred to as the “Union List”).

(2) Notwithstanding anything in clause (3), Parliament, and subject to clause (1), the Legislature of any State also, shall have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution, referred to as the “Concurrent List”).

(3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution, referred to as the “State List”).

(4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State, notwithstanding that such matter is a matter enumerated in the State List.

Article 246 thus establishes a three-tier distribution of legislative powers: exclusive Parliamentary authority over the Union List, exclusive State authority over the State List (subject to Parliamentary paramountcy in certain circumstances), and concurrent jurisdiction over the Concurrent List.

Historical Development

The territorial operation of laws in India traces its origins to the Government of India Act, 1935, enacted by the British Parliament. The 1935 Act established the framework for territorial jurisdiction that was subsequently adapted and incorporated into the Constitution of India following independence. The constitutional provisions relating to territorial nexus thus represent a continuity of principles developed during the pre-independence period, refined to suit the federal structure of independent India.

The Doctrine of Territorial Nexus: Principles and Features

Core Concept

The doctrine of territorial nexus addresses a fundamental question: when may a State legislature validly enact legislation that has effects beyond its territorial boundaries? While Article 245(2) explicitly permits extra-territorial legislation by Parliament, State legislatures lack this express authorization. The doctrine of territorial nexus provides the constitutional mechanism through which State laws with extra-territorial effects may nonetheless be sustained.

The doctrine establishes that a State law having extra-territorial operation will be valid if there exists a sufficient nexus (connection) between the object or subject matter of the legislation and the State enacting it. Critically, the object or subject matter need not be physically located within the State’s territorial boundaries. What matters is whether a real and substantial connection exists between the State and the matter being regulated.

Essential Features

The doctrine operates according to several key principles:

Parliamentary Competence

Parliament possesses plenary power to enact laws for the entire territory of India and may legislate on matters with extra-territorial aspects, provided some nexus with India exists. This power is explicitly recognized in Article 245(2).

State Legislative Competence

State legislatures may enact laws with extra-territorial operation when a sufficient territorial nexus exists between the subject matter and the State. This applies across the full range of State legislative powers, including taxation.

Location Not Determinative

For the doctrine to apply, the object or person being regulated need not be physically present within the State’s territory. What matters is the existence of a sufficient territorial connection. A State may validly legislate regarding persons, property, transactions, or activities that occur partly or wholly outside its borders, provided the requisite nexus exists.

Application to Taxation

The doctrine has particular significance for taxation statutes. A State may levy taxes on persons, property, or transactions not physically located within its boundaries, provided a sufficient territorial connection exists. For example, sales or purchases need not occur within State territory if other elements of the transaction demonstrate adequate nexus with the State.

Non-Resident Taxation

The doctrine governs and validates taxation of non-residents who have sufficient connection with a State, even though they do not reside within its territory.

Invoking the Doctrine

The doctrine of territorial nexus becomes relevant in two principal circumstances:

First, when determining whether a particular State law has extra-territorial operation. Courts must examine whether the law’s effects extend beyond State boundaries.

Second, when extra-territorial operation is established, courts must assess whether sufficient territorial nexus exists between the subject matter of the legislation and the State enacting it.

In making this assessment, courts consider whether the connection is real and substantial rather than illusory or merely formal. The nexus must be pertinent to the regulatory or fiscal objective the legislature seeks to achieve.

Judicial Interpretation: Landmark Cases

State of Bombay v. R.M.D. Chamarbaugwala (1957)

State of Bombay v. R.M.D. Chamarbaugwala[^1] represents the foundational Supreme Court decision articulating the doctrine of territorial nexus in the taxation context.

Facts: The respondent, R.M.D. Chamarbaugwala, did not reside in Bombay (now Mumbai) but organized prize competitions through a newspaper printed and published in Bangalore. This newspaper enjoyed wide circulation in Bombay. All essential activities related to the competitions—including distribution of entry forms, collection of entry fees, and submission of entries—took place within Bombay. The State of Bombay sought to levy tax on the respondent for carrying on business within the State.

Issue: Could the State of Bombay validly tax a person who resided outside its territory but conducted business activities that had substantial connection with the State?

Holding: The Supreme Court held that sufficient territorial nexus existed to enable the Bombay Legislature to tax the respondent. The Court reasoned that all activities which competitors would ordinarily be expected to undertake occurred predominantly within Bombay. Although the organizer resided elsewhere and published the newspaper outside Bombay, the actual conduct of the competition—the essence of the business being taxed—took place within State territory.

Significance: This decision established that physical presence or residence within a State is not prerequisite for tax liability. What matters is whether the activities constituting the taxable business or transaction have real and substantial connection with the taxing State.

Tata Iron and Steel Company v. State of Bihar (1958)

Tata Iron and Steel Company v. State of Bihar[^2] further developed the territorial nexus doctrine, particularly regarding manufactured goods sold outside the State of production.

Facts: Bihar enacted legislation imposing sales tax on goods produced, found, or manufactured within the State, regardless of whether the actual sale was concluded within Bihar or outside its boundaries.

Issue: Could Bihar validly tax sales concluded outside its territory merely because the goods were manufactured within the State?

Holding: The Supreme Court upheld the legislation, finding sufficient territorial nexus between the State and the taxable transaction. The Court held that the place of manufacture constituted an adequate connection to justify taxation, even when the sale itself occurred elsewhere.

Significance: The Court articulated a two-element test for assessing sufficiency of territorial nexus:

Real Connection: The connection between the State and the object or transaction must be real and substantial, not merely formal or illusory.
Pertinence: The liability imposed must be pertinent to the territorial connection that exists.

The Court emphasized that whether sufficient nexus exists depends on the facts and circumstances of each case, requiring contextual analysis rather than mechanical application of rigid rules.

State of Bihar v. Shankar Wire Products Industries (1968)

In State of Bihar v. Shankar Wire Products Industries,[^3] the Supreme Court examined territorial nexus in the regulatory context beyond taxation.

Facts: The Bihar Weights and Measures (Enforcement) Act, 1959 required verification and stamping of weights, with fees charged for this service. The weights in question were manufactured in Bihar but intended for sale and delivery in other States.

Issue: Could Bihar validly require verification and stamping of weights manufactured within the State but destined for sale outside its boundaries?

Holding: The Supreme Court upheld Bihar’s legislative competence. The Court reasoned that verification and stamping should occur at the point of manufacture to protect consumer interests effectively. The Court held it irrelevant where the weights would ultimately be sold. Since manufacturing occurred in Bihar, sufficient nexus existed for Bihar to regulate the weights.

Significance: This decision demonstrates that the territorial nexus doctrine applies beyond taxation to general regulatory measures. The Court emphasized that the legislative objective—consumer protection—justified exercising jurisdiction at the point of manufacture, even though the products would be consumed elsewhere.

Shrikant Bhalchandra Karulkar v. State of Gujarat (1994)

In Shrikant Bhalchandra Karulkar v. State of Gujarat,[^4] the Supreme Court addressed the relationship between territorial operation and extra-territorial operation.

Holding: The Court held that so long as a State law applies to persons residing within State territory and to acts and things occurring within that territory, it cannot be characterized as having extra-territorial operation. Only when a law purports to regulate persons, acts, or things outside State boundaries does the question of extra-territorial operation arise, triggering the need to establish territorial nexus.

Significance: This decision clarifies that not every law with effects beyond State borders has “extra-territorial operation” requiring justification through territorial nexus. If the law directly regulates only matters within State territory, it remains intra-territorial even if indirect effects occur elsewhere.

Territorial Nexus and Non-Resident Taxation

The doctrine of territorial nexus has particular importance for taxation of non-residents—persons or entities not residing within a State but having sufficient connection to justify tax liability.

The Patiala State Bank Case (1943)

The Privy Council’s decision regarding Patiala State Bank provides an early and influential analysis of territorial nexus in income taxation.

Facts: The Patiala State Bank, owned and controlled by the Maharaja of Patiala, conducted banking business exclusively within the princely State of Patiala, with no branches or business operations in British India. However, during the relevant assessment year, the Bank acquired property at Mussoorie (part of British India) from a debtor in partial satisfaction of a loan. The Bank also collected interest in British India on Government of India securities acquired in the course of its business.

Issue: Could British India validly tax income arising from (1) the Mussoorie property and (2) the Government securities, when the Bank conducted no business operations within British India?

Holding: The Privy Council held that both income streams were taxable in British India. The income arose “in connection with” trade or business carried on in British India, creating sufficient nexus to justify taxation even though the Bank’s principal business operations occurred entirely outside British India.

Significance: This decision established that income taxation need not be confined to income from business operations physically conducted within the taxing jurisdiction. If the income has real connection with the territory—such as deriving from assets located there or securities governed by its laws—territorial nexus exists for tax purposes.

Contemporary Application

Modern Indian tax law extensively utilizes the territorial nexus doctrine to tax non-residents. Income tax legislation distinguishes between residents and non-residents but subjects both to taxation when income is earned in India or received in India, or when income arises from assets or activities having territorial connection with India. The doctrine provides the constitutional foundation for this taxation scheme.

Similarly, State taxation of non-residents engaged in business activities having nexus with the State—such as sales within the State, delivery of goods to State customers, or provision of services to State residents—rests on territorial nexus principles. The sufficiency of connection remains a question of fact and degree in each case.

Critical Analysis

Strengths of the Doctrine

The territorial nexus doctrine serves several important functions in Indian constitutional law:

Federalism Balance: It appropriately balances State autonomy with practical realities of economic activity that crosses State boundaries. States can effectively regulate and tax activities that meaningfully affect their territories without being confined to strictly intra-territorial matters.
Economic Efficiency: The doctrine prevents artificial tax avoidance by permitting States to reach transactions and activities that have real economic connection with State territory, even if formal elements occur elsewhere.
Flexibility: By focusing on sufficiency of connection rather than rigid territorial limits, the doctrine allows adaptation to evolving commercial practices and technological change.
Consumer Protection: As demonstrated in Shankar Wire Products, the doctrine enables States to regulate goods and services at appropriate points in production and distribution chains, protecting consumers effectively.

Limitations and Challenges

Despite its utility, the doctrine presents certain difficulties:

Uncertainty: The fact-specific nature of nexus determinations creates uncertainty. Businesses and individuals cannot always predict with confidence whether sufficient nexus exists for particular regulatory or tax purposes.
Potential for Multiple Taxation: When multiple States can each claim sufficient nexus to the same transaction or activity, overlapping tax liability may result. While constitutional provisions address some aspects of this problem, tensions remain.
Judicial Subjectivity: Determining what constitutes “sufficient” or “real and substantial” connection necessarily involves judicial value judgments, potentially leading to inconsistent outcomes.
Enforcement Difficulties: Even when nexus exists, practical enforcement of State laws against non-residents located outside State boundaries may prove difficult.

Conclusion

The doctrine of territorial nexus represents a pragmatic constitutional mechanism reconciling the territorial limitations on State legislative power with the practical reality that economic and social activities frequently transcend State boundaries. By requiring only that a real and substantial connection exist between the subject matter and the State, rather than insisting on physical presence within State territory, the doctrine enables effective governance in a federal system characterized by mobile populations, interstate commerce, and integrated economic activity.

Constitutional provisions, particularly Articles 245 and 246, establish the framework within which the doctrine operates. While Parliament enjoys explicit authority to legislate extra-territorially under Article 245(2), State legislatures must demonstrate sufficient territorial nexus to sustain laws with extra-territorial effects. Judicial decisions, from the Privy Council’s analysis in the Patiala State Bank case through landmark Supreme Court decisions in R.M.D. Chamarbaugwala, TISCO, and Shankar Wire Products, have progressively refined the doctrine’s application.

The doctrine’s significance extends across the full range of State legislative competence, from taxation to general regulatory measures. Its particular importance for non-resident taxation reflects the increasing economic integration that characterizes modern India. As commerce continues to evolve—particularly with digital technology facilitating business operations across physical boundaries—the territorial nexus doctrine will remain essential to determining the legitimate reach of State authority.

The doctrine thus serves as a vital instrument of cooperative federalism, permitting States to exercise meaningful governance while respecting constitutional boundaries. Its emphasis on real and substantial connection, rather than formal territorial presence, ensures that federalism enhances rather than frustrates effective administration of justice and public affairs in contemporary India.

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