GVK Industries v. Income Tax Officer

G.V.K. Industries was an Indian company setting up a power project in Andhra Pradesh. It agreed to pay a success fee to a foreign company, A.B.B. Projects and Trade Finance International of Zurich, for advice and help in arranging a loan for the project. A success fee is a fee paid when the work succeeds.

The Income Tax Officer said that G.V.K. had to deduct tax at source (T.D.S.) before paying the foreign company, because this income had arisen in India. The duty to deduct tax on payments to non-residents was in Section 195 of the Income Tax Act, 1961. According to the lecture, from 1 April 2026 this provision is found in Section 393(2) of the Income-tax Act, 2025. The Department relied on Section 9(1)(i) and Section 9(1)(vii)(b). Section 9 sets out which income is deemed to arise in India. Section 9(1)(vii) treats fees for technical services (technical, managerial or consultancy services) paid by an Indian resident as income arising in India, except where the service is used for a business outside India or for earning income outside India.

G.V.K. filed a writ petition in the Andhra Pradesh High Court challenging this part of Section 9 as unconstitutional. Relying on the E.C.I.L. (Electronics Corporation of India) case, the High Court held that Section 9(1)(i) did not apply but that Section 9(1)(vii) applied fully and was valid. G.V.K. appealed to the Supreme Court. The Court found that the appeal raised a major constitutional question about the limit of Parliament's territorial power. That question had also arisen in the E.C.I.L. case and had been referred to a Constitution Bench, so this matter also went before a Constitution Bench.

1. Can Parliament legislate on extra-territorial matters (matters outside India's boundaries) that have no direct or indirect effect on Indian territory or on Indians?

2. Can Parliament make a law for a foreign territory if that territory has nothing at all to do with India?

G.V.K. Industries argued that the relevant part of Section 9 of the Income Tax Act was unconstitutional because Parliament had no power at all to legislate on foreign transactions. It also argued that the provision violated the equality guaranteed under Article 14.

The Income Tax Department argued that the success fee was income arising in India. It relied on Section 9(1)(i) and Section 9(1)(vii)(b), and said G.V.K. had to deduct tax at source before paying the foreign company.

Before the Constitution Bench, G.V.K. withdrew its challenge to the constitutional validity of this part of Section 9.

The Constitution Bench answered the two constitutional questions as follows.

First, Parliament can legislate on foreign matters only if they have a real connection with India. If an activity takes place outside India, Parliament can legislate on it only when it has some effect on India or on the interest, welfare or security of the people of India. The link must be real, not imaginary or fanciful. The effect need not be large or significant; even a small real effect is enough. No quantitative test of how big the effect is or how strong the connection is applies to Parliament's power.

Second, Parliament can make law only for India. A law meant only for a foreign territory, with no connection to India at all, would be ultra vires (beyond its power) and void.

The Court explained that the word 'for' in Article 245 means the purpose of the law must be India's interest. It also said that, unlike the British Parliament, the Indian Parliament is not an unlimited sovereign. Its power comes from the Constitution and is limited by it. Whether a law has a real connection with India is a mixed question of fact and law, so the courts will examine it. If Parliament writes a stronger connection requirement into a particular law, courts will apply that too, but that requirement comes from the statute, not from the Constitution.

On the actual result: because G.V.K. withdrew its challenge to Section 9, the Bench did not rule on the section's validity. It answered only the two constitutional questions and sent the appeal back to a regular bench. The Andhra Pradesh High Court had already upheld the section. According to the lecture, on 18 February 2015 a two-judge bench of the Supreme Court decided the tax issue in favour of the Income Tax Department. It held that the success fee was a fee for consultancy services, so G.V.K. was liable to deduct tax. G.V.K. lost.

Article 245(1), Constitution of India; Article 245(2), Constitution of India; Article 1, Constitution of India; Article 14, Constitution of India; Section 9(1)(i), Income Tax Act, 1961; Section 9(1)(vii)(b), Income Tax Act, 1961; Section 195, Income Tax Act, 1961; Section 393(2), Income-tax Act, 2025 (as stated in the lecture)

This is the leading case on Parliament's extra-territorial legislative power under Article 245. Students must know the 'real nexus with India' test, the 'benefit of India' requirement drawn from the word 'for' in Article 245(1), and the meaning of Article 245(2). They must also know the point that the Indian Parliament is not an unlimited sovereign. The case draws a clear line between Parliament's territorial and extra-territorial jurisdiction. It also confirms that whether a nexus exists can be reviewed by the courts. Students should also remember the outcome: the Constitution Bench answered only the constitutional questions, and G.V.K. later lost on the tax issue.

Hypothetical: Zoya runs a company in Hyderabad and pays a consultancy fee to Farhan's firm in another country for advice on her Indian factory. An Indian tax law requiring Zoya to deduct tax from this payment would have a real nexus with India, because the service is used for a business in India and paid for by an Indian resident. So Parliament can validly make such a law.

Now suppose Parliament passed a law regulating a contract between Aadil and Renu, both living abroad, about a shop in a foreign city that has no effect at all on India or Indians. That law would have no real nexus with India. It would be a law for a foreign territory, and so ultra vires and void.