Constitutionality of Extra-Territorial Taxation of Off-Shore Services of Non- Residents under Income Tax Act, 1961

Abstract

Income Tax Act, 1961 being a quintessential law for handling the tax base of Indian government, continues to be inundated with controversial rules that have been exposed to several interpretations from time to time. The notion that Indian resident has income tax liability is invariable undoubted. However, extension of this liability to nonresidents is governed by rule of ‘extraterritoriality’. Indian laws with extraterritorial operation hold sanctity within the text of India constitution although remains a contentious issue. Plethora of judicial decisions embarked the questions of constitutionality of extra-territorial laws and attempted to project a holistic approach. Section 9 of the Act that taxes a non-resident’s income for services offered to an Indian resident is alleged to reflect the true intention of Indian constitution that validates laws which operate beyond the territory of India. This provision establishes tax liability for non-resident if the source of income is India based upon the doctrine of ‘territorial nexus’ which is a well-recognized principle of international law.