From the perspective of indirect taxes, Union Budget 2018 was rather tepid. There were no changes on the GST front but Customs front was busy with a plethora of amendments on rates as well as non-rate aspects. The increase in rate of duty on imports appears to indicate towards an adoption of protectionist policy by the Government. Nonetheless, it is a welcome move by many indigenous industries.   

Apart from the amendments in rates, there have been other intriguing changes in customs law. Section 2(28) of the Customs Act, 1962 contains the definition of ‘Indian Customs Waters’ to mean the waters extending into the sea up to the limit of contiguous zone of India as per the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (“Territorial Waters Act”). Section 5 of the Territorial Waters Act specifies that the contiguous zone is up to 24 nautical miles from the coast of India.

The Union Budget 2018 has proposed to extend this definition to the exclusive economic zone under Section 7 of the Territorial Waters Act. Section 7 specifies that the exclusive economic zone extends up to a whopping 200 nautical miles from the coast of India. From 24 to 200 nautical miles – the Budget has sought to expand the scope of Indian Customs Waters almost 10 times!

How exactly is this significant? The customs law is littered with references to Indian Customs Waters. The salient provisions are summarised below:

In a nutshell, the powers of arrest, confiscation and search stand extended from 24 nautical miles to 200 nautical miles from the Indian coast. The Budget 2018 has more in store in this regard. Section 1 of the Customs Act, 1962 has been proposed to be amended to extend the operation to any offence or contravention committed by any person outside India. The proposed amended Section 1 reads as

It extends to the whole of India and, save as otherwise provided in this Act, it applies also to any offence or contravention thereunder committed outside India by any person.

Consequently, any act such as mis-declaration, forgery, concealment of goods taking place outside India will be subject to penal and prosecution provisions under the customs law.

While the intention behind the above provisions may be noble, there may be a few constitutional hurdles coming up. Article 245 of the Constitution of India may pose a few problems. Article 245 clearly stipulates that the Parliament may make laws for the whole or part of the territory of India. Article 1 of the Constitution clarifies that territory of India comprises of the territories of States, Union Territories and such territories as may be acquired. Exclusive economic zone and other countries do not fall under the ambit of territory of India by any stretch of imagination! Sub-clause (2) of Article 245 goes on to clarify that no law shall be deemed to be invalid on the ground that it would have extra-territorial operation. Do the proposed amendments discussed above pass the test laid down under Article 245?

It is evident from the provisions of Article 245 that the law should have a territorial nexus with India. The concept of territorial nexus has been examined in myriad case laws. Perhaps the most famous of these precedents is the judgment given by the Supreme Court in the case of State of Bombay v R.M.D.Chamarbaugwala[5]. The Supreme Court held that sufficiency of the territorial nexus involves consideration of the following two elements:

• The connection must be real and not illusory
• Liability sought to be imposed should be pertinent to the nexus

In the present instance, it may be argued that any offences or contravention pertaining to the customs law have a connection with the import or export of goods into or from India. The issue of what is an acceptable nexus or connection is fraught with subjectivity. Professor Michael Lang in his book ‘Introduction to the Law of Double Taxation Conventions’ says that “in International law practice, there are no significant limits on the tax sovereignty of states. In designing the domestic personal tax law, the national legislator can even tax situations when, for example, only a "genuine link" exists. It is only when neither the person nor the transaction has any connection with the taxing state that tax cannot be levied”.

Although the above article talks about personal tax law, an analogy can be drawn for the customs law. Further, judicial precedents have not laid down any criteria for determining the sufficiency and genuineness of the territorial nexus. Accordingly, this question must be answered on a case to case basis. Whether a nexus exists depends on the facts and circumstances of the transaction under consideration as well. Each allegation under these provisions must be examined separately to determine whether a territorial nexus for Article 245 exists.

Even the GST laws have extended their provisions to foreign lands. Under the IGST law, provision of services from an Indian branch to a foreign head office does not qualify as export of service. On the contrary, such services are subject to IGST. This provision has been questioned in the High Court on the grounds that they flout the provisions of Article 245.

It remains to be seen if the proposed amended customs provisions are tested in the fires of Article 245. With the sheer number and imaginative variety of allegations dreamed up by tax officials in India, it seems inevitable that such a test is just around the corner.