The Hindu Business Line : An amendment redefining `India'

An intriguing amendment has been carried out through clause 3 of the Finance Act, 2007. It concerns the definition of "India". The Income-Tax Act, 1922 used "taxable territories" and gave an elaborate definition of that expression by referring to different periods in Indian history.

Definition in transition

The I-T Act, 1961 declared in Section 2(25A) that India shall be deemed to include the Union Territories of Dadra and Nagar Haveli, Goa, Daman and Diu and Pondicherry. Difficult questions arose with regard to the assessment of salary paid to those working on ocean-going vessels. Courts pointed out that the Merchant Shipping Act are not in pari material with the I-T Act. It was not even a fiscal legislation. It is relevant only in deciding cases of accidents. The Merchant Shipping Act is not applicable to the I-T Act.

International law refers to the law of the flag in order to decide the nationality of the vessel. The General Clauses Act, 1887 does not include Indian ships outside territorial waters of the country in the definition of India. The Circular 586 dated November 28, 1990, of the Central Board of Direct Taxes (CBDT) specifically lays down that "India", as defined under Section 2(25A) of the Act, does not extend to Indian ships operating beyond the Indian territorial waters.

Marine engineers working in an Indian ship owned by the Shipping Corporation of India will not be liable to Indian income-tax if the ship does not touch India during the prescribed period in the accounting year. The definition of `India' does not cover foreign-going Indian ships for the purposes of tax deductions in the hands of the employer (CIT vs Indo Oceanic Shipping Co. Ltd (2001 247 ITR 247 Bom) and CIT vs Avtar Singh Wadhwan (247 ITR 260)).

The definition in the I-T Act was extended to the continental shelf and the Exclusive Economic Zone in respect of specified mineral oil activities for oil extraction or production by Notification dated March 31, 1983.

The Sovereignty of India has always extended to its territorial waters and this includes the seabed and sub-soil underlying, and the air space over such waters.

The Central Government is empowered to extend any enactment to the continental shelf or the Exclusive Economic Zone or any part thereof.

Satellite TV

The definition of `India', as given in Section 2(25A), assumed importance in the context of taxing satellite TV channels. A foreign company derived income from lease of transponder capacity in the two satellites being operated in US stationary orbit, 36,000 km above the equator. The question arose whether income derived by the foreign company from this lease was taxable under the Indian legislation.

The Income-Tax Appellate Tribunal (ITAT) found that the satellites were not located in the orbital slot allotted to India. Observing that the process of amplifying and relaying the programmes is performed in the satellite which is not situated in the Indian airspace, the ITAT held that the lease income derived by the company was exempt from Indian taxation (Asia Satellite Telecommunication Co. Ltd vs Dy. CIT (2003 85 ITD 478 Delhi). The same view was taken in Dy. CIT vs Panamsat International Systems Inc (2006 9 SOT 100 Delhi).

Territory of India

Clause 3 of the Finance Act, 2007 amends Section 2(25A) of the I-T Act with a view to provide a comprehensive definition of "India". Henceforth, India will mean the Territory of India as referred to in Article 1 of the Constitution, its territorial waters, seabed and subsoil underlying such waters, continental shelf, Exclusive Economic Zone or any other maritime zone as referred to in the territorial waters, and the air space above its territory and territorial waters. Similar amendments have been effected to the Wealth Tax Act.

The efficacy of the amendment has to be tested in a proper judicial forum. Sovereignty over outer space will be governed by the Outer Space Treaty of 1967. Normal convention is that the outer space of any nation will cover a region 100 km beyond the surface of the earth.

The Indo-US Double Taxation Avoidance Agreement provides a comprehensive definition of India, which is more or less the same as the one found in the Finance Act, 2007 post-amendment.

Retrospective effect

The amendment will apply retrospectively, that is, from August 25, 1976, the date when the Maritime Act came into force. Section 293A of the I-T Tax enables the Central Government to make an exemption or other modification of tax in favour of persons with whom it has entered into an agreement in any business of prospecting for oil.

Oil exploration has so far received favourable treatment at the hands of the Government.

Probably, Section 293A could have been amended to enable taxation of the non-oil exploration sector. The amendment needs clarification in the light of provisions of international law.

(The author is a former Chief Commissioner of Income-Tax.)