Article 245 of Indian Constitution empowers Union Parliament and State Legislatures to make laws for the whole of India and for the States respectively. It is also provided in the said article that no law made by the Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation. Parliament is empowered, among others, to make laws relating to 'taxes on income other than agricultural income'. As held by Privy Council in the case of Raleigh Investment Company (12 ITR 265), a law made by the Parliament will not be construed as having violated the safeguards laid down by the Constitution, if the legislation does not travel beyond its designated frontiers, if it is made for 'the peace and good governance' of the country and it does not assail any of the fundamental rights of the citizens, as enshrined in the Constitution. While making laws relating to taxes on income, Parliament is entitled to make laws not only in respect of all incomes earned by a resident of the country, whether within the country or abroad, but also in respect of such income earned by a nonresident, which has sufficient territorial connection with India or which is sourced from India.

However, laws made by a sovereign country are enforceable only as far as its sovereignty extends. As such, revenue laws of one Sovereign State are not applicable in another Sovereign State, nor the Courts of one State will assist another State in implementation of its revenue laws in any foreign jurisdiction. (See Electronic Corporation of India - 2002-TII-29-SC-INTL). It is equally true for other laws also. If an individual, whether resident or nonresident, commits a cognizable offence in India, for which he is liable to be arrested, escapes to a foreign country, it will not be possible for the Indian administration to arrest the accused from the other country, as the Indian Penal Code or Criminal procedure Code will not be enforceable in the said country. If the Parliament enacts an extradition law unilaterally in this regard to get back the fugitives, it will be constitutionally valid, but it will not be enforceable. Rather India has to enter into an extradition treaty with the other country to seek its co-operation and support.

As mentioned above, if a non-resident residing abroad has sufficient territorial connection with India and he has earned income from such connection (refer section 9 of the Income-tax Act), the law made by Parliament levying taxes on such income will be constitutionally valid. But enforcement of such tax liability is an altogether different matter. If the non-resident has a fixed place of business in India, an assessment can definitely be made and taxes easily collected from him. Section 593 of the Companies Act also requires a non-resident company having a fixed place of business in India to maintain books of account relating to its Indian activities and submit final accounts to Indian authorities. But the position changes if the non-resident having no or temporary presence in India, earns income in the nature of interest, royalty, dividend, fees for technical services, capital gains or even business income. It will not be possible to enforce the tax liability on the non-resident staying abroad, as he cannot be compelled to comply with notices, nor the Courts of the country of residence of the non-resident will assist in the matter, the only exception is that if the source-country has entered into a double taxation avoidance agreement containing the article on 'assistance in the collection of taxes' with the country of residence of the nonresident, it can take recourse to that, provided the other country accepts that the income was taxable in the source country in accordance with the bilateral convention.

In view of the above, special provisions have been incorporated in the Income-tax Act to safeguard recovery of taxes from the nonresident on income earned and taxable in India. Section 195 of the Income-tax Act makes it mandatory for any person, resident or nonresident who pays to a nonresident or credits in his accounts any income as payable to the nonresident, which is chargeable to tax under Income-tax Act, to deduct tax at source on behalf of tax administration from such income before such income is paid to the nonresident. Comparison of sections 115A and 195 read with section 37A (rates in force) will show that the rate at which tax is required to be deducted from a non-resident and the rate at which tax has to be finally assessed are identical. Though it has not been specifically stated in the Act, the amount of tax deducted under section 195 is for all practical purposes a final withholding. The intended applicability of section 195, as amended retrospectively by Finance Act, 2012, to 'any person irrespective of 'whether he has a place of business or any other presence in India', i.e., any person anywhere in the world, may not make the provision constitutionally invalid, merely because it implies extra-territorial operation. But the provision will not be enforceable in its entirety. A nonresident person, residing or carrying on business abroad and having no presence in India who imports certain services from a nonresident or resident carrying on a business of providing such services in India cannot be expected to deduct tax on behalf of Indian government and remit the amount to India. He will have the least impetus to do it. Such liability cannot also be enforced on him, unless Indian tax administration will have some other option, like attachment of assets in India belonging to the nonresident or his associates, to twist their arms.

Famous tennis player, Andre Agassi, had taken part in Wimbledon tennis tournament in England. He had earlier contracted with Nike and Head, two sportswear and tennis racket manufacturing foreign companies to wear clothes and use rackets bearing the logos of these companies during any international tournament for remuneration payable to a foreign company, Agassi Inc, owned by Agassi. According to British tax laws and also double taxation avoidance convention, all income derived by a nonresident sportsperson from participation in a sports event in England was only taxable in the said country. British tax law also provided for deduction of tax at source from such income. But the foreign companies did not deduct any tax on behalf of British tax administration while making payment to the foreign company belonging to Andre Agassi in connection with Wimbledon tournament. It was argued before House of Lords by the taxpayer, relying on very heavily on well-known authorities such as Exparte Blain (1879) 12 Ch.D.522 and, more recently, Clark (Inspector of Taxes) v Oceanic Contractors Inc [1983] 2 AC 130 that “… the broad, general, universal principle that English legislation, unless the contrary is expressly enacted or so plainly implied as to make it the duty of an English court to give effect to an English statute, is applicable only to English subjects or to foreigners who by coming into this country, whether for a long or short time, have made themselves during that time subject to English jurisdiction …” And of foreign companies with no trading presence in the United Kingdom, it is to be presumed that Parliament did not intend them to be caught by the tax collection provisions imposed by the UK domestic law. Relying on the above it was argued that Agassi, not having any trading presence in UK, was not subject to UK Tax legislation. House of Lords accepted by implication that liability for tax deduction under the UK domestic law cannot be fastened on a foreign company not having any trading or any other presence in UK. But the court held that the promotional fees received by Agassi for promoting the merchandise of those two companies during Wimbledon tournament had sufficient territorial connection with UK, so as to be taxable in UK (Agassi v Robinson, HM Inspector of Taxes, House of Lords, [2006] UKHL 23).

In fact most probably due to these reasons, section 160(1)(i) of the Income-tax Act provides that in respect of the income of a non-resident specified in sub-section (1) of section 9, the person, who is an agent of the nonresident (under general law) including a person, who is treated as an agent under section 163, will be construed as representative assessee of the nonresident. The term 'agent' has been given a wide definition in section 163 to include- (i) any person in India, who is employed by or on behalf of the nonresident; (ii) who has any business connection with the nonresident, (iii) from or through whom the nonresident is in receipt of any income, whether directly or indirectly; or (iv) who is a trustee of the nonresident; and includes also (v) any other person who, whether a resident or nonresident, has acquired by means of a transfer , a capital asset in India.

However, a broker in India who deals with or through a nonresident broker, who is not a principal, in the ordinary course of his business and does not deal directly with or on behalf of a nonresident principal is not to be treated as agent of any nonresident principal.

The above definition of an agent of a non-resident in section 163, and hence of a representative assessee of the nonresident under section 160 (1)(i) is rather wide and to some extent inequitable. It does not conform to the basic scheme of section 160. Under clauses (ii) to (iv) of section 160(1) - (1) in respect of the income of a minor, lunatic or idiot, the guardian or manager of such a minor etc,, lunatic or idiot, who receives or is entitled to receive income on behalf of such minor etc; (2) in respect of the income, the Court of Wards, the Administrator General, Official Trustee, manager, receiver etc, appointed under any court order, who receives or is entitled to receive income on behalf of the beneficiaries such person, such trustees; and (3) in respect income which a trustee appointed under a trust or wakf declared by a written trust deed receives or is entitled to receive on behalf of the beneficiaries of the trust or wakf, the trustee; are construed as agents of such beneficiaries in respect of the income mentioned.

In other words, only such persons are construed as representative assesses in respect of income of the beneficiaries or wards, who manages the properties of the beneficiaries, generating such income or receives or is entitled to receive the income from such properties. Definitely the liability to pay tax on income of the beneficiary etc. can be justifiably fastened on to the representative assessee, provided he is entitled to receive the income of the beneficiary, so that he can pay tax out of such income. It will be inequitable to ask the representative assessee to pay tax on the income of the beneficiary, if he does not handle or receive the income of the beneficiary.

However, the provisions of section 163 defining an agent of a nonresident do not conform to the above pattern. An employee simpliciter of the nonresident, or a person having any business connection with the nonresident (any business carried on in India, which regularly facilitates the business of the nonresident abroad is said to constitute a business connection of the nonresident in India. An Indian business which provides services to facilitate the business of the nonresident, also constitutes a business connection) may not have access to the income earned by the nonresident. Before appointing a person under section 163, as agent of the nonresident, an opportunity to be heard is granted to the person, but it is doubtful, whether he can raise the above argument.

Section 139(1) of the Income-tax Act, as amended in 2001, made it mandatory for every company and firm (incorporated in India or outside) to furnish returns of income every year. It also provided that every person, other than a company or firm, if his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year, exceeded the maximum amount not chargeable to tax, shall furnish a return. Accordingly, every foreign company or firm, whether it has earned taxable income in India or not, and the representative assessee in India of a nonresident, who has earned income taxable in India has the obligation to furnish a return of income for the purpose of assessment on behalf of the nonresident. How far a nonresident enterprise, having no presence in India, will comply in this regard is a matter of doubt, unless the nonresident apprehends some adverse action affecting him. Tax administration otherwise will have to appoint some person in India, as agent and representative assessee of the nonresident to initiate assessment proceeding.

Section 161(1) also provides that every representative assessee, as regards the income in respect of which he is the representative assessee, shall be subject to the same duties (compliance with all the provisions relating assessment procedure, payment of taxes etc), responsibilities and liabilities, as if the income were income received by or accruing to him beneficially, and shall be liable to assessment in his own name in respect of that income in representative capacity.

A non-resident enterprise, not having any presence in India, should not normally be required to furnish return of income, even if it has taxable income during the year, firstly because full tax payable on such income would have been deducted and paid by the payer under section 195. If it has not been paid the payer will be guilty of default as provided in section 201 and required to make good the tax loss along with interest and penal consequences. Secondly, the payer can also be treated as agent and representative of the nonresident and the assessment proceeding initiated against him. If the non-resident has received income from more than one payer or agent during a previous year, separate assessments can be made on the agents in respect of incomes received through them. Problem may arise if a nonresident payer, not having any presence in India, does not care to deduct tax on behalf of the Indian tax administration from the payment made to the nonresident, even if such payment constitutes income taxable in India. In such a situation, the only option available to collect tax will be to appoint a person in India as agent and representative assessee of the nonresident, as any notice to the nonresident, who does not have any regular presence in India, may not be complied with, unless some other way is found to enforce it.

Recently section 206AA of the Act has made it compulsory for a nonresident to obtain PAN registration, irrespective of whether he has a regular place of business in India or not, or face deduction of tax at a higher rate. Nonresidents abroad, who do not have any presence in India, are forced to comply with this provision, as the resident payer is in turn forced to deduct tax at a rate higher than the statutory rate of tax for TDS if the nonresident does not obtain PAN. Due to compulsion of DTAA, the nonresident is finally assessed at the statutory rate of tax and becomes entitled to refund. To claim the refund, however, the nonresident will have to furnish a return of income, where PAN has to be quoted. There may be other situations in which the nonresident may be entitled to refund. In all cases the nonresident or his representative assessee will have to furnish return of income voluntarily.