ivil Appeal No 2697  2698 of 1989
From the Judgment and Order dated 24387  1787 of the Andhra Pradesh High Court in Writ Petition No 105  8737 of 1987
NA Palkhivala PAS Rao DN Mishara Ranganatha Chari and Ms Rubi Anand for the Petitioners
SC Manchanda Ms A Subhashini and BB Ahuja for the Respondents
These appeals by Special Leave are directed against the dismissal by the Andhra Pradesh High Court of Writ Petitions filed by the appellant
The appellant Messrs Electronics Corporation of India Limited entered into a memorandum of understanding with a Norwegian company at Paris
This was followed by an agree ment dated 2 May 1986 executed at Hyderabad
Under that agreement the Norwegian company was to provide technical know how and technical services including facilities for the training of personnel to the appellant in connection with the manufacture of computers
The consideration for the technical know how and technical services was represented by Norwegian currency NOK 32 Millions equivalent to about Rs575 lakhs
Eighty five per cent of the consideration was to be paid from credit provided by Norwegian authorities and the balance fifteen per cent was to be paid out of free foreign exchange made available by the State Bank of India London Branch
It is not in dispute that the agreement had received the careful consideration of the Reserve Bank of India and of the Central Government
The appellant approached the Income Tax Officer for the grant of a No Objection Certificate  as contemplated under section 1952 of the 997 Income Tax Act 1961 to enable it to remit the instalments due without any obligation to deduct any income tax at source but the request was denied
On 23 December 1986 the appellant made an application to the Commissioner of Income Tax for a direction to the Income tax Officer but the Commissioner rejected the application
The Commissioner took the view that having regard to Section 91vii and Section 195 of the Income Tax Act 1961 the payment constituted income which was deemed to accrue or arise in India and was liable to deduction of tax at source
The appellant filed a Writ Petition against the order of the Commissioner and assailed the constitutional validity of Section 91vii of the Act
It was urged before the High Court that Parliament was not competent to enact Sec tion 91vii of the Act inasmuch as the provision possess es as extra territorial operation without any nexus between the person sought to be taxed and the country seeking to tax
It was further contended that even after the introduc tion of Section 91vii by the Finance Act of 1976 with effect from 1 June 1976 the requirement of a business connection of a foreign Company was required and the case was governed by CORBORANDUM CO
vs CIT 1977 108 ITR 335
It was also urged that after the introduction of the Explanation by the Finance Act of 1977 with effect from 1 April 1977 Section 91vii creates an invidious discrimi nation among companies which had entered into a foreign collaboration agreement prior to 1 April 1976 and those who have done so after that date and that therefore Article 14 was violated
The High Court repelled all the contentions of the appellant and dismissed the Writ Petition
A similar Writ Petition was filed by the appellant against an order of the Commissioner of Income tax declining to direct the grant of a No Objection Certificate in relation to disbursement made under a licence agreement with Messrs Control Data Indo Asia Company USA and the Writ Petition was dis missed by the High Court for the reasons which had found favour with it in the earlier case
It is contended by learned counsel for the appellant that section 91vii of the Income Tax Act is ultra vires inasmuch as it enables the levy of income tax on the Norwegian company in the one case and the American company in the other in circumstances which appear to show that the statute operates extra territorially without the need for any nexus between anything done in India and the person sought to be taxed
section 91vii declares 91 The following incomes shall be deemed to accrue or 998 arise in India i                vii income by way of fees for technical services payable by a the Government or b a person who is a resident except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India or c a person who is a non resident where the fees are payable in respect of services uti lised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India Explanation
For the purposes of this clause fees for technical services means any consideration including any lump sum consideration for the rendering of any managerial technical or consultancy services including the provision of services of tech nical or other personnel but does not include consideration for any construction assembly mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries
It seems that the Revenue is proceeding on the basis that the foreign company is liable to tax and that therefore the petitioner is obliged to deduct at source the tax pay able by the foreign company
We are informed that the serv ices are rendered by the foreign company in the nature of training abroad to personnel belonging to the appellant and that payment to the foreign company is also effected abroad
The Revenue rests its case on section 91viib of the Act and the question is whether on the terms in which the provi sion is couched it is ultra vires
Now it is perfectly clear that it is envisaged under our constitutional scheme that Parliament in India may make laws which operate 999 extra territorially
article 2451 of the Constitution pre scribes the extent of laws made by Parliament
They may be made for the whole or any part of the territory of India
article 2452 declares that no law made by Parliament shall be deemed to be invalid on the ground that it would have extra territorial operation
Therefore a Parliamentary statute having extra territorial operation cannot be ruled out from contemplation
The operation of the law can extend to persons things and acts outside the territory of India
The general principle flowing from the sovereignty of States is that laws made by one State can have no operation in another State
The apparent opposition between the two positions is reconciled by the statement found in British Columbia Electric Railway Company Limited vs The King A legislature which passes a law having extra territorial operation may find that what it has enacted cannot be directly enforced but the Act is not invalid on that account and the courts of its country must enforce the law with the machinery available to them
 In other words while the enforcement of the law cannot be contemplated in a foreign State it can nonetheless be enforced by the courts of the enacting State to the degree that is permissible with the machinery available to them
They will not be regarded by such courts as invalid on the ground of such extra territoriality
But the question is whether a nexus with something in India is necessary
It seems to us that unless such nexus exists Parliament will have no competence to make the law
It will be noted that Article 2451 empowers Parliament to enact law for the whole or any part of the territory of India
The provocation for the law must be found within India itself
Such a law may have extra territorial opera tion in order to subserve the object and that object must be related to something in India
It is inconceivable that a law should be made by Parliament in India which has no relationship with anything in India
The only question is then whether the ingredients in terms of the impugned provi sion indicate a nexus
The question is one of substantial importance specially as it concerns collaboration agree ments with foreign companies and other such arrangements for the better development of industry and commerce in India
In view of the great public importance of the question we think it desirable to refer these cases to a Constitution Bench and we do so order


Summary:
The respondent company was engaged in the manufacture of wireless receiving sets tape recorders tape players
These products were assessable under Tariff Items 33A and 37AA of the Central Excise Tariff
In the classification list and price lists filed by the respondentassessee company these goods were shown as unbranded goods
Subsequentiy it was found that the respondent assessee company was manufacturing their products in the brand name of Bush and were selling the same exclusively to Ms Bush India Ltd or its autho rised wholesale dealers only
The appellants Revenue alleged that there was wilful suppression of facts by the respondent company with intention to evade excise duty because this fact was not mentioned by the company in the price list or classification list filed
A show Cause Notice was issued requiring the respondent company to show cause as to why i Ms Bush India Limited should not be treated as a related person  and a favoured buyer of the respondent company for the purpose of determi nation of wholesale cash price ii the concessional rate of duty under notification No 35877 CE should 1024 not be denied to the respondent and iii the differential duty in respect of the goods cleared should not be recov ered
Instead of executing the surety bond the respondent assessee company filed a writ petition in the High Court praying for quashing of the Show Cause Notice and for a mandamus to allow it to clear the goods on the basis of the price at which the goods were sold by it to Bush India Limited allowing the benefit of the relevant notification
The High Court following its earlier decision held that for the purpose of payment of excise duty the market value of the goods of the respondent assessee company was the price charged by it from Ms Bush India Ltd and not the market value at which price Ms Bush India Ltd sold the goods
It further held that there was no misdeclaration of the value by the assessee company and it accordingly quashed the Show Cause Notice and the Demand Notice for recovery
In this appeal by the Revenue it was contended that in the facts and circumstances of the case the High Court committed an error in not realising that Ms Bush India Ltd was a related person and as such the price charged by the respondent company from Ms Bush India could not represent the correct assessable value for the purpose of excise duty
Dismissing the appeal HELD 1
Tax planning may be legitimate provided it is within the  framework of the law
But colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods
It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges
In order to create the atmosphere of tax com pliance taxes must be reasonably collected and when col lected should be utilised in proper expenditure and not wasted
It is too much to expect the legislature to inter vene and take care of every device and scheme to avoid taxation and it is up to the court sometimes to take stock to determine the nature of the new sophisticated legal devices to avoid tax and to expose the devices for what they really are and to refuse to give judicial benediction
1034A B D 2
One must find out the true nature of the transaction
Even though the corporation might be a legal personality distinct from its members the court is entitled to lift the mask of corporate entity if the conception is used for tax evasion or to circumvent tax obligation perpetrate a fraud
1034E 1033G 1025 3
It is unsafe to make bad laws out of hard facts and one should avoid subverting the rule of law
In the instant case facts have not been found with such an approach by the lower authorities and the High Court had no alternative on the facts as found but to quash the Show Cause and Demand Notices
It appears that the brand name Bush was affixed to the goods produced by the respondent
For the purpose of excise duty the market value of such goods was the price charged from Ms Bush India Ltd and not the market value at which price Ms Bush India sold the same
1034E 1033C E Juggi Lal Kamlapat vs Commissioner of Income tax UP  Mc Dowell and Co Ltd vs Commercial Tax Officer  Commissioner of Wealth Tax vs Arvind Narottam  Sherdeley vs Sherdeley and Greenberg vs IRC
referred to
Union of India vs Bombay Tyre International   Union of India  Ors vs Atic Industries Ltd   Union of India  Ors
vs Cibatul Limited 1985 Supp
3 SCR 95 Joint Secretary to the Government of India  Ors
vs Food Specialities Ltd 1985 Supp
3 SCR 165 and Ms Sidhosons  Ors
vs Union of India  Ors 1987 1 SCC 25 relied on