ecommerce mir013

Indira Gandhi National Open UniversitySchool of Law

MIR-013COMMERCE AND

CYBERSPACE

E-Commerce 1

Block

1E-COMMERCEUNIT 1

E-commerce: Evolution, Meaning and Types 5

UNIT 2

Payment Mechanism in Cyberspace 15

UNIT 3

Advertising and Taxation vis-à-vis E-commerce 25

UNIT 4

Consumer Protection in Cyberspace 36

Indira GandhiNational Open UniversitySchool of Law

MIR-013Commerce and

Cyberspace

Expert CommitteeProf. N.R. Madhava MenonChairmanFormer Director, NationalJudicial Academy, BhopalMember, Commission onCentre States RelationsNew Delhi

Prof. D.N. JauharDepartment of LawPunjab UniversityChandigarh

Dr. Dinesh Kumar AbrolSenior Scientist, NationalInstitute of Science, Technologyand Development StudiesNew Delhi

Dr. Raman MitalReader, Faculty of LawUniversity of DelhiDelhi

Dr. B.K. KeaylaSecretary General andManaging Trustee, Centre forStudy of Global Trade Systemand DevelopmentNew Delhi

Mr. Zakir ThomasFormer RegistrarCopyrightsGovernment of IndiaAdditional Director Income TaxNew Delhi

Ms. Kiron PrabhakarAdvocateJ. Sagar AssociatesNew Delhi

Dr. G.C. BharukaJudge Hight Court (Retd.)New Delhi

Programme Coordinator: Ms. Gurmeet Kaur, SOL, IGNOU

We acknowledge our thanks to Prof. S.C. Garg, Former PVC and Director (I/c) SOL andProf. B.S. Saraswat, former Director (I/c), SOL for facilitating the development of the programme.

Block Preparation Team

Dr. Anirban MazumdarWest Bengal NationalUniversity of JuridicalSciences, Kolkata

Mr. Sanjay ParikhAdvocate, Supreme CourtNew Delhi

Prof. Biswajit DharInternational Institute ofForeign TradeNew Delhi

Prof. Pandav NayakSOSS, IGNOU

Prof. Srikrishna Deva RaoDirector, SOL, IGNOU

Ms. Gurmeet KaurSOL, IGNOU

Ms. Suneet KashyapSOL, IGNOU

Mr. Anand GuptaSOL, IGNOU

Unit WriterMr. Vakul SharmaAdvocate Supreme CourtNew Delhi

Content EditorDr. Raman MitalReaderDelhi University

Course Coordinator: Ms. Suneet Kashyap, SOL, IGNOU

Print ProductionMr. Yashpal Word ProcessingSection Officer (Publication) Sh. Mahesh Kumar, Shri Rishi RajSchool of Law Sh. Vishal Khatri, Ms. Manisha Saini

March, 2008© Indira Gandhi National Open University, 2008ISBN: 978-81-266-3327-2All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any othermeans, without permission in writing from the copyright holder.Further information on the Indira Gandhi National Open University courses may be obtained from theUniversity’s office at Maidan Garhi, New Delhi-110 068 or the official website of IGNOU at www.ignou.ac.inPrinted and published on behalf of Indira Gandhi National Open University, New Delhi by Director, SOL,IGNOU.Cover Design: ADA Graphics, G-15, Nariana Vihar, New Delhi.Lasertypesetted at Graphic Printers, 204, Pankaj Tower, Mayur Vihar, Phase-I, Delhi-110091.Printed at :

Language EditorDr. Nandini SahuReader in EnglishSOH, IGNOU

Ms. Suneet KashyapLecturerSOL, IGNOU

Format EditorProf. Basanti PradhanSTRIDE, IGNOU

Ms. Suneet KashyapLecturerSOL, IGNOU

MIR-013 COMMERCE AND CYBERSPACECommerce in a cyberspace basically means E-commerce (also called E-business) isjust another term for conducting business over the internet. Whenever something isbought or sold over the internet on sites, you tend to do E-commerce. Many a times thedesire to engage in commerce becomes a reason for all of us to enter cyberspace. Inthe course we will examine some of the questions which we face concerning the use ofCyberspace as a tool of commerce.

E-commerce has many advantages for E-consumers. By using the internet facility priorto buying one can know the range, quality and price of the object desired to purchase.However, when we conduct business in the internet we should also take care of thethings that our personal and financial information is safe.

Business can engage in E-commerce with each other through sites called B2B (Businessto Business) services. With B2B Services, one can save time and money by gettingquotes from a number of suppliers. Using a mobile device such as cellular phone orPDA for E-commerce transaction is called m-commerce. The dangers of m-commerceare similar to those of E-commerce. Thus m-commerce should have the same securitymechanism as E-commerce.

Whenever we enter into a transaction over the internet, we enter into a contract (onlinecontract) where there is a buyer and a seller. An online contract like any contract requirestwo parties, a proposer and an acceptor.

There are a number of forms of online contract. Block 2 Unit 5 will explain the differentforms of online contracts. There are a number of abuses of E-commerce too. We willbe studying different form of abuses and how to guard ourselves from these abuseswhile being on the internet.

Block 1 and 2 deals with E-commerce and online contracts. In this course we willstudy the various form of E-commerce and online contracts.

Block 3 and 4 of the course is devoted to Intellectual Property Protection in Cyber-space and Management of IPRs in Cyber space. This Course has attempted to elaboratethe different process of dispute resolution in cyberspace and the way of resolving thedisputes.

BLOCK 1 E-COMMERCEThe course on the theme of “E-commerce” has been divided into four Blocks(comprising generally four Units in each Block) of which this is the first one. E-commerce or Electronic Commerce consists primarily of the distributing, buying,selling, marketing and servicing of products or services over electronic systemssuch as the Internet and other computer networks.

Unit 1 of the Block emphasizes on the definition of E-commerce, explainingthe distinction between the E-commerce and E-business. Regardless of hownarrowly or broadly e-commerce is defined, e-commerce occurs in variousforms and between various entities in the market. In Unit 1 the different modelsof e-commerce have been discussed. Payment mechanism in cyber space isabout paying for goods and/or services ordered or consumed using modernmeans of information technology.

Unit 2 of the Block attempts to explain the various attributes. Various initiativesof the Reserve Bank of India in the electronic fund transfer domain have beendiscussed. The unit further looks into the various products and services, whichone being presently offered as online payment options to the discerning user.

As we know commercial transactions do not occur in vacuum. They require allkind of support services in the form of advertising, marketing, sales, logistics,insurance and banking.

Unit 3 of the Block deals basically with the concept of online advertising andtaxation. The unit looks into various forms of online advertising available toonline advertisers and explains the electronic taxation issue vis-à-vis digitaland non-digital goods.

The protection of consumers in cyberspace is an issue which boggles the mindof an E-consumer. Unit 4 of the Block gives an overview of how law protectsthe consumers at e-marketplace and whether a contract for sale of goods orservices made online will have the same effects of contract as a contract in thephysical world.

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UNIT 1 E-COMMERCE: EVOLUTION,MEANING AND TYPES

Structure

1.1 Introduction

1.2 Objectives

1.3 E-commerce Evolution

1.4 Defining E-commerce1.4.1 Difference between E-commerce and E-business1.4.2 E-commerce Definitions

1.4.2.1 E-commerce: A Commercial Transaction

1.4.2.2 E-commerce & WTO

1.5 Types of E-commerce Models1.5.1 Business-to-Business (B2B)1.5.2 Business-to-Consumer (B2C)1.5.3 Consumer-to-Business (C2B)

1.5.4 Consumer-to-Consumer (C2C)

1.6 E-commerce: The Future

1.7 Summary

1.8 Terminal Questions

1.9 Answers and Hints

1.10 References and Suggested Readings

1.1 INTRODUCTIONElectronic commerce is a process, which is happening with the help of Informationand Communication Technologies. In order to see its evolution it is important tosee how commerce itself evolved over a period of time.

1.2 OBJECTIVESAfter studying this unit, you should be able to:

define the term e-commerce and make a distinction between e-commerceand e-business;

explain how e-commerce is a commercial transaction;

make a nexus between e-commerce and the World Trade Organization;

explain the different models of e-commerce; and

analyse the future of e-commerce.

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1.3 E-COMMERCE EVOLUTIONAs the society evolved the commercial practices also evolved. The barriers totrade were broken chiefly by the language and later by transport. The barter tradegave way to acceptance of bullion as the trading currency. With the passage of timenation states emerged as new political units and with new technological developments,like telegraph and telephone further facilitated the trade. For over a century thesetelecommunication devices became an integral part of the commercial enterprisesall over the world.

Later, in the early 1960s, computers were increasingly used to disseminate informationacross geographical space. Though telegraph, telephones, telex and facsimile werestill the relied upon options, nevertheless the big corporations opted for ElectronicData Interchange (EDI). It refers to the process by which goods are ordered,shipped, and tracked computer-to-computer using standardised protocol. EDI1

permits the “electronic settlement and reconciliation of the flow of goods and servicesbetween companies and consumers”. EDI saves money because the computer,and not an office staff, submits and processes orders, claims, and other routinetasks.

EDI began in the 1960s as a computer-to-computer means of managing inventory,bill presentment, shipment, orders, product specifications, and payment. EDI ismade possible because trading partners enter into master agreements to employelectronic messaging permitting computer-to-computer transfers of information andvalidating computer-to-computer contracts.2

The early adopters of EDI were companies running complex operations in the airlines,shipping, railways and retail sectors. These companies developed their ownproprietary format for interchanging data messages. It led to development ofproprietary systems. These proprietary systems whether of a retail or automobilecompany were operation specific. It was felt that a universal standard was impracticaland unnecessary. Consequently, the lack of universal standards made it difficult forcompanies to communicate with many of their trading partners.

In late 1970s, the American National Standards Institute (ANSI) authorized acommittee called the Accredited Standards Committee (ASC) X-12 (consisting ofgovernment, transportation, and computer manufacturers) to develop a standardbetween trading partners. The standard was called ANSI X-12. Over a period oftime sectors like paper, chemical, warehouse, retail, telecommunications, electronics,auto, metals, textile, and aerospace developed and started using sector specificEDI standards, which are subset of X12 standards.

Under the aegis of United Nations, organizations from different sectors collaboratedand developed an internationally approved standard structure for transmittinginformation between different trading partners, called the United Nations ElectronicData Interchange for Administration, Commerce and Transport (UN/EDIFACT)in 1986. It ensures transmission compatibility of electronic business documentsglobally. In the US companies tend to use ANSI X-12 protocol while their Europeancounterparts prefer EDIFACT. Moreover, various industry sectors use their industry-specific protocols.

The EDI was like a business-to-business (B2B) model involving a company and itsvarious vendors performing commercial transactions using proprietary networks.By late 1980s computers acquired the status of ‘personal computer’, i.e. became

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part of the private domain of an individual. It was EDI at the individual level supportedby the public networks known as Internet.

Hence, e-commerce evolved out of EDI and should be considered as a next logicalstep in the development of commercial processes involving commercial transactions.Thus e-commerce means doing business electronically across the extended enterprise.It covers any form of business or administrative transaction or information exchangethat is executed using any information and communications technology.

Narrowly put, e-commerce is limited to specific initiatives, such as sales via theInternet, electronic procurement, or electronic payment.

Please answer the following Self Assessment Question.

Self Assessment Question 1 Spend 3 Min.

Trace the evolution of E-commerce.

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1.4 DEFINING E-COMMERCEIt is important to note that phrases, like ‘e-business’, ‘e-commerce’, Internet business,Net commerce etc. are commonly being used these days. Thus for the sake ofclarity e-commerce should be distinguished from e-business. In fact, e-commerceis a subset of e-business.

1.4.1 Difference between E-commerce and E-businessE-business refers to all aspects of a business where technology is important. Thismay include knowledge management, design, manufacturing, R&D, procurement,finance, project planning, human resource planning and the related activities. E-commerce is that part of e-business that relates directly to sales & marketing. Thatis, e-commerce is part of the all-encompassing world of e-business.

E-business is a wider concept that embraces all aspects of the use of informationtechnology in business. It includes not only buying & selling but also servicingcustomers and collaborating with business partners and often involves integrationacross business processes & communication within the organization.

1.4.2 E-commerce DefinitionsAs the Internet makes way for new business transactions via its complextelecommunications network, it is difficult to provide a single all encompassingdefinition of e-commerce. It means different to different people. Thus it would beprudent to look into various definitions of e-commerce to comprehend e-commerceand its different characteristics:

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1.4.2.1 E-commerce: A Commercial Transaction

E-commerce defined simply, is the commercial transaction of services in an electronicformat. In general terms, e-commerce is a business methodology that addressesthe needs of organizations, traders and consumers to reduce costs while improvingthe quality of goods and services and increasing the speed of service delivery. Itrefers to all forms of transactions relating to commercial activities, including bothorganizations and individuals that are based upon the processing and transmissionof digitized data, including text sound and visual images. A broad definition of e-commerce is: “The marketing, promoting, buying & selling of goods electronically,particularly via the Internet”, which encompasses, interalia, “e-tailing (virtual shopfronts), EDI, which is B2B exchange of data; e-mail & computer faxing; [and]B2B buying and selling3”.

A narrower definition is “the trading of goods and services in which the final orderis placed over the Internet”. The Office of Tax Policy at the US Department ofTreasury defines e-commerce most broadly as any transaction that occurs with thefacilitation of electronic “tools and techniques”. The Internet Tax Freedom Act(ITFA), 1998, on other hand provides the only legal definition of e-commerce as“any transaction conducted over the Internet or through Internet access, comprisingthe sale, lease, license, offer or delivery of property, goods, services or information,whether or not for consideration, and includes the provision of Internet access”.The US Census Bureau measures e-commerce by looking at “the value of goodsand services sold online whether over open networks such as the Internet, or overproprietary networks running systems such as EDI4”.

According to European Commission, e-commerce encompasses more than thepurchase of goods online. It includes a disparate set of loosely defined behaviours,such as shopping, browsing the Internet for goods and services, gathering informationabout items to purchase and completing the transaction. It also involves the fulfillmentand delivery of those goods and services and inquiries about the status of orders.Like any other sustained business activity it also means conducting consumersatisfaction surveys, capturing information about consumers and maintainingconsumer databases for marketing promotions and other related activities.Interestingly, its Directive on E-commerce (2000/31/EC) defined the term‘commercial communication’ instead of defining ‘E-commerce’. Article 2(f) defined‘commercial communication’ as any form of communication designed to promote,directly or indirectly, the goods, services or image of a company, organization orperson pursuing a commercial, industrial or craft activity or exercising a regulatedprofession.

The Gartner Group5 defines e-commerce as an evolving set of:

(a) Home-grown or packaged software applications that link multiple enterprisesor individual consumers to enterprises for the purpose of conducting business.

(b) Business strategies aimed at optimizing relationships among enterprises andbetween individuals and enterprises through the use of information technologies.

(c) Business processes (such as procurement or selling or order status checkingor payment) that, by definition, cross boundaries, and

(d) Technologies and tools that enable these applications, strategies and processesto be implemented and realised.


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1.4.2.2 E-commerce & WTO

Interestingly, the World Trade Organization (WTO) Ministerial Declaration6 on E-commerce defines e-commerce as “the production, distribution, marketing, salesor delivery of goods and services by electronic means”. The six main instrumentsof e-commerce that have been recognised by WTO are telephone, fax, TV, electronicpayment & money transfer systems, EDI and Internet. In other words, e-commercecan be conducted over telephones, fax machines, automatic teller machines (ATMs),electronic payment systems such as prepaid telephone cards, electronic datainterchange (EDI), television and the Internet. That means activities like, bookingan order over telephone, sending invoices over fax, ordering from shopping networksas advertised on TV etc. amount to indulging in e-commerce activities.

It is laudatory on the part of WTO to have provided a very wide definition of e-commerce; it is understandable as WTO member consists of developed, developingand the least developed countries (LDCs).

The growing importance of electronic commerce in global trade led the Membersof the WTO to adopt a declaration on global electronic commerce on 20 May1998 at their second Ministerial Conference in Geneva, Switzerland. The declarationdirected the General Council of the WTO to establish a comprehensive workprogramme to examine all trade-related issues arising from electronic commerce,and to present a report on the progress of the work programme at the third MinisterialConference of the WTO. The declaration setting up the work programme includedthe statement that “Members will continue their current practice of not imposingcustoms duties on electronic commerce”. The work programme was adopted bythe WTO General Council on 25 September 1998. Subsequently, under the auspicesof the General Council on June 15, 2001, WTO Members Governments identifiedthree types of transactions on the Internet:

Transactions for a service, which is completed entirely on the Internet fromselection to purchase and delivery.

Transactions involving “distribution services” in which a product, whether agood or a service, is selected and purchased on-line but delivered by conventionalmeans.

Transactions involving the telecommunication transport function, includingprovision of Internet services.

That is, the stress is on using low cost technology application, i.e. Internet formanaging and facilitating the entire chain of commercial processes. Web makes itpossible to dispense with the normal value chain for retailing, through direct salesby manufacturing to consumers. It can create new points on the value chain, suchas Internet portals that act as shopping malls or aggregators that offers a new wayof amassing buying power.



What are the different modes by which e-commerce be conduced?

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1.5 TYPES OF E-COMMERCE MODELSRegardless of how narrowly or broadly e-commerce is defined, e-commerce occursin various forms and between various entities in the market. It is necessary toconsider the various forms that Internet commerce embodies in order to understandthe implications for taxation. E-commerce can be categorised in four ways:(1) business to business (B2B); (2) business to consumer (B2C); (3) consumer tobusiness (C2B); and (4) consumer to consumer (C2C).

Table 1: E-commerce Models Matrix Business Consumer Business B2B

www.vendome.niit.com

B2C www.indiatimes.com

Consumer C2B www.makemytrip.com

C2C www.ebay.in

These models represent ‘online’ commercial transactions and are comparable totheir ‘offline’ counterparts. In other words, all these online models have adoptedthe functionalities of ‘brick and mortar’ (offline) companies and are being identifiedas ‘click and mortar’ companies. Clicks have replaced the bricks for faster, efficientand effective commercial transactions. Take a case of Dell computers. One canpurchase a Dell computer or a server by visiting the site: www.dell.co.in and clickingon the desired computer or server configuration. Dell computers cannot be purchasedfrom physical shops. One has to visit its site to purchase. Dell in a way has doneaway with bricks in favour of clicks.

Moreover, these new business models are creating immense economic value byoffering huge variety of products and service online. Amazon offers 57 times asmany titles as a typical large bookstore stocks. This is often referred to as “long-tail” phenomenon: books that once lacked a market can be shifted at any time offAmazon’s virtual shelves. It has been estimated that in 2000 the value of onlinesales of books that were not available at a typical bookstore was $ 578 million.

1.5.1 Business-to-Business (B2B)It is a new name given to EDI. As the name suggests, it is a business platforminvolving two independent or even dependent business entities. In B2B version ofonline transaction(s) the manufacturing organization takes a lead in setting up abusiness platform. This platform acts a business communication channel betweenthe manufacturing/software developer entity and its vendors/suppliers, i.e., whateverwas being done earlier in offline manner are now being done online. This may


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include registration of vendors, invitation of quotations, negotiations, price settlement,contract finalisation, procurement, cargo tracking, and payments – online. Thus aB2B platform acts as a business facilitator, negotiator and dealmaker, which facilitates,negotiates and clinches deal between independent or dependent business units.

1.5.2 Business-to-Consumer (B2C)It refers to a business platform, involving a business entity and consumers. It is aretail version of e-commerce known as e-tailing. Selling goods or services throughweb based shops. It is the most popular model of e-commerce as it has helpedmoving commercial transactions from public domain to private domain. B2C isabout creating a better offline shopping experience – online.

It has benefit for both the business entity and consumer. E-tailing is a cheaperoption as it is cheaper to set up a single website and warehouse combination thanoperate a chain of shops. From the point of consumer benefits are in the form ofconvenience, wider choice and time saver. From the consumer’s point of view,online shopping is a great leveler. One can shop at any time (24×7), from anywhere,i.e. all consumers are to be treated equally online. It has made shopping a greatfun!

1.5.3 Consumer-to-Business (C2B)It is an innovative retail-marketing platform, where a business entity offers a varietyof packages or options to entice the online customer. Here the business entity/service provider bids for consumer. It is often referred to as ‘reverse auction’.Such models are widely prevalent in tourism and travel industry. The tour operators,hotels and airlines not only give deep discounts to the consumers but also givethem option to negotiate the prices. It is a pro-active version of e-commerce as itoffers deals, packages or bundle of products at competitive prices.

Interestingly, its major success has come by the adoption of this model by thebusiness entities – mainly the manufacturers. This process of reverse auction hasresulted into major savings for the manufacturers, as suppliers bid for the purchaseorders, offering discounts in the process.

1.5.4 Consumer-to-Consumer (C2C)It represents a consumer business platform, which is for the consumer, by the consumer.It is referred to as online ‘consumer-to-consumer’ auctions. Almost anything canbe offered on such online platforms. A buyer who wants a particular item enters themaximum amount he is prepared to pay. This remains a secret to other bidderswhile auction site’s computers monitor the bidding. Highest offer is accepted untilthe end of auction. Highly popular online auction sites, like eBay also providesservices where bidders may even check the reliability of a seller, how he has beenrated by other buyers by reading comments left by people who have done businesswith him before. Once a bid has been won, the two sides contact each other, thebuyer pays and the seller sends the goods. Payments can be made online as well.PayPal7, an online payments company supports eBay buyers. This is an improvementover traditional selling or auction processes in terms of convenience and volume ofgoods being auctioned.

To begin with, these models were nothing but the online version of successful offline

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businesses. Apart from these ‘pure’ business models, some ‘necessity’ businessmodels have also occupied Internet space. These business models occupy the ‘nicheservice’ areas. For example, Yahoo! Hotmail, Rediff, AOL etc. fulfill the need of anelectronic post office; search engines providing directory services; and governmentwebsites for facilitating better government-to-citizen or government-to-businessinterface8.

Interestingly, with the passage of time these online models have also matured. AB2C model is no longer a ‘business-to-consumer’ model, it is integrating functionalitiesof other models like C2C or C2B also. It is far easier for a website that is successfulat selling one product to branch into others. For example, Amazon has moved fromselling books only to selling sea foods and other products as well. It is now hostingauctions, and courting eBay traders. Similarly, eBay is no longer a C2C platformbut is also selling goods at fixed price, like e-tailer, B2C. Online market place ismore dynamic and ready for all kinds of innovation. Yahoo! has made so manyrecent changes to its business that it is being called “the new google”, while Googleis using it’s advertising formula to steer specialist buyers straight to specialist onlinesellers.

Online businesses have to keep on reinventing themselves to remain successful. E-entrepreneurs have to have an open mind about the future. In a way, the Internethas opened up opportunities to be very creative in the design of the business model.The success of e-commerce models is built around managing supplies, partnersand customers effectively and efficiently. E-commerce is more customers orientedthan its offline counterpart. The offline world was one where producers said tocustomers: “I have made this; buy it from me at this price”. In the online world,customers are saying, “I want this; sell it to me at this price”.

Online world allows things like customer aggregation & auctions to be done inways that are impossible in the physical world. Internet as a strong price-deflationmechanism: raising your prices is harder when your customers instantly comparethem with everyone else. Price & product comparisons have been made easier bythe development of “shopping bots”. Websites like, Mysimon.com & Dealpilot.comenable buyers quickly to compare products, prices and availability.



Mention the different models of E-commerce.

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1.6 E-COMMERCE: THE FUTUREE-commerce is growing. It is a reality and part of everyday life. Economies ofscale and scope are also easier to obtain online than offline. The biggest boost of


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e-commerce over the next few years will come not from snazzier websites or snappiermarketing but from the proliferation of broadband Internet connections. Mobilephones and a host of other electronic devices are now being hooked to the web,ousting the personal computer from its monopoly position in providing Internetaccess.

As desktop (PC) access will increasingly migrate to the mobile environment, itwould be more of m-commerce (mobile commerce) than e-commerce. Technologicaladvances would make the commercial transactions further personalised. And asthe numbers of customers who shop, grow, the business will scale, bringing in alower cost structure.

Let us now summarize the points covered in this unit.

1.7 SUMMARYE-commerce represents online transactions.

It is the retail version of the Electronic Data Interchange (EDI).

In general terms, e-commerce is a business methodology that addresses theneeds of organizations, traders and consumers to reduce costs while improvingthe quality of goods and services and increasing the speed of service delivery.

In terms of types, it has four types: Business-to-Business (B2B), Business-to-Consumer (B2C), Consumer-to-Business (C2B) and Consumer-to-Consumer(C2C).

These models are dynamic business models and are changing as per the needsof the e-consumers.

1.8 TERMINAL QUESTIONS1. Traditional business models have found extension in the electronic medium.

Discuss this statement in light of various e-commerce models giving examples.

2. E-commerce business models are adapting themselves to the changing consumerbehaviour in an online environment. Is it a correct statement to make? Explain.

1.9 ANSWERS AND HINTSSelf Assessment Questions

1. EDI.

2. E-commerce can be conducted over telephone, fax machines, automatic tellermachine (ATMs), electronic payment system such as prepaid telephone cards,electronics data interchange (EDI), televisions and the internet.

3. (1) Business to Business (B2B), (2) Business to Consumer (B2C), (3) Consumerto Business (C2B), and (4) Consumer to consumer (C2C).

Terminal Questions

1. Refer to section 1.3 of the unit.

2. Refer to sections 1.3, 1.4 of the unit.

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1.10 REFERENCES AND SUGGESTED READINGS

1. Teitelman Robert and Stephen Davis. “How the Cash Flows?”. Institutional

Investor 58. Aug.1996.

2. Electronic Messaging Services Task Force. The Commercial Use of Electronic

Data Interchange: “A Report and Model Trading Partner Agreement”. 45 Bus.

Law 1645. 1990.

3. US Small Business Administration. Office of Advocacy. E-commerce: Small

Business Venture Online. at 3 July. 1999.

4. US Department of Commerce. US Census Bureau. E-Stat. at (Mar. 18. 2002).

5. www.gartner.com

6. www.wto.org

7. www.paypal.com

8. Sharma, Vakul. “E-commerce: A New Business Paradigm”. in Legal Dimensions

of Cyberspace Ed. Verma, S.K. and Mittal Raman. ILI Publications. 2004.

UNIT 2 PAYMENT MECHANISM INCYBERSPACE

Structure

2.1 Introduction

2.2 Objectives

2.3 Electronic Fund Transfer (EFT)2.3.1 How Electronic Fund Transfer Works?2.3.2 Different Mode of EFT Mechanism2.3.3 The Electronic Clearing Services (ECS)2.3.4 RBI EFT2.3.5 INFINET2.3.6 Structured Financial Messaging System (SFMS)

2.3.7 Real Time Gross Settlement System (RTGS)

2.4 Online Payment Mechanism2.4.1 How Online Payment Mechanism Works?2.4.2 Electronic Cash2.4.3 Electronic Wallets2.4.4 Smart Card2.4.5 Digital Cheques2.4.6 Digital Signature

2.4.7 Digital Certificates

2.5 Online Payments and the Information Technology Act, 20002.5.1 Online Payments and Negotiable Instruments

2.5.2 Establishment of Public Key Infrastructure (PKI)

2.6 Future of E-money

2.7 Summary




2.1 INTRODUCTIONPayment mechanism in cyberspace is all about paying for goods and/or servicesordered or consumed using modern means of information technology. Such paymentmechanism in order to be accepted must have all the attributes of a widely acceptedoffline payment system.

2.2 OBJECTIVESAfter studying this unit, you should be able to:

explain the meaning of electronic fund transfer (EFT) and how it works; 15

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explain the different modes of EFT mechanism;explain EFT as an important tool in online financial and banking networks andits crucial role in electronic settlement;discuss the online payment mechanism in the form of credit cards, smart cards,electronic wallet, and digital certificates; anddescribe the role of law in shaping the online payment mechanism.

2.3 ELECTRONIC FUND TRANSFER (EFT)Electronic Fund Transfer means transferring money from one bank account to anotherin the same (intra bank) or different bank branches (inter bank). EFT has been in usesince 1960s when banks first started using proprietary EDI network to share bankinginformation. This was later converted into automated clearing houses. At a globallevel, to facilitate faster fund transfer between the remitter and beneficiary, the paymentinstructions are sent through telex, SWIFT1 (Society for Worldwide InterbankFinancial Telecommunications), Wire Transfer, CHIPS2 (Clearing House InterbankPayment System) etc. But when it comes to transfer of funds domestically, the optionshave been restricted to demand draft, mail transfer or telegraphic transfer.

2.3.1 How Electronic Fund Transfer Works?Electronic fund transfer implies transfer of money using Internet technologies. Thisinvolves participation of payer and payee and their respective banks including anautomated clearing house.Step 1: Payee submits the cheque to his bankStep 2: Payee’s bank presents the cheque to the automated clearing houseStep 3: Automated clearing house informs the drawer’s bankStep 4: Drawer’s bank clears the chequeStep 5: Payee receives the payment

PAYEE

PAYEE’s BANK

INTERNET

DRAWER’s BANK

DRAWER

AUTOMATED CLEARING HOUSE

Figure 1: EFT mechanism using Internet

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In India, electronic fund transfer system has got a fillip when the Central Governmentamended the Negotiable Instruments Act, 1881 and brought in forth the NegotiableInstruments (Amendment and Miscellaneous Provisions) Act, 2002, and introducedthe concept of a “truncated cheque” in section 6 (b) of the said Act:

Section 6(a) “ a truncated cheque” means a cheque which is truncated during thecourse of a clearing cycle, either by the clearing house or by the bank whetherpaying or receiving payment, immediately on generation of an electronic image fortransmission, substituting the further physical movement of the cheque in writing.

Explanation II. – For the purposes of this section, the expression “clearing house”means the clearing house managed by the Reserve Bank of India or a clearing houserecognised as such by the Reserve Bank of India.

As evident from the aforesaid section, the truncation process involves replacingphysical cheques with their electronic images, which will travel through the stages ofthe clearing cycle. During the whole process of truncation the instrument would remainwith the collecting bank.

2.3.2 Different Mode of EFT MechanismOver the period of time, the Reserve Bank of India (RBI) has taken various initiativesto introduce technology to facilitate electronic fund transfer at both corporate andretail banking level. For example, electronic settlement in the form of the electronicfunds transfer services – Electronic Clearing Services (ECS), i.e., Credit Clearingand Debit Clearing and retail Electronic Funds Transfer (EFT) system has been agreat success. In 2003-2004, the value of cheque transactions shrunk 16%, whilesettlements through the ECS3 jumped 200%.

Further, it has introduced Centralised Funds Management System (CFMS), SecuritiesServices System (SSS), Real Time Gross Settlement System (RTGS) and StructuredFinancial Messaging System (SFMS) to transform the existing systems into a state-of-the-art payment infrastructure in India.

2.3.3 The Electronic Clearing Services (ECS)The Electronic Clearing Services (ECS) ‘credit scheme’ and the Electronic ClearingServices (ECS) ‘debit scheme’ are two activity lines, which have become importantvehicles for furthering improvements in customer services. In ECS – credit, a seriesof electronic payment instructions are generated to replace the paper instruments.The system works on the basis of a single debit transaction triggering a large numberof credit entries. These credits or the electronic payment instructions which possessthe details of the beneficiary’s account number, amount and bank branch, are thencommunicated to the bank branches through their respective service branches forcrediting the accounts of the beneficiaries either through magnetic media duly encryptedor through hard copy. ECS – debit is meant for payment of charges to utility servicessuch as electricity, telephone companies, payment of insurance premia and loaninstallments etc. by customers. ECS – credit, has become popular and is being availedof by most corporate entities and official bodies.

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The two activity lines which have become important vehicles for furtheringimprovements in customer services are ......................and ......................

2.3.4 RBI EFTRBI EFT – a scheme introduced by RBI to help banks offer their customers moneytransfer service from account to account of any bank branch to any other bankbranch has widened its reach to more than 150 centres in the country. RBI EFTsystem is an inter-bank oriented system, wherein RBI acts as an intermediary betweenthe remitting bank and the receiving bank and effects inter-bank funds transfer. Thecustomers of banks can request their respective branches to remit funds to thedesignated customers irrespective of bank affiliation of the beneficiary.

2.3.5 INFINETThe setting up of the apex-level National Payments Council in May 1999 and theoperationalisation of the Indian Financial Network (INFINET) by the Institute forDevelopment and Research in Banking Technology (IDRBT), Hyderabad have beensome important developments in the direction of providing a communication networkfor the exclusive use of banks and financial institutions. INFINET members includeRBI, Public sector banks, Private banks, Foreign banks, Cooperative banks andFinancial Institutions.

2.3.6 Structured Financial Messaging System (SFMS)At the base of all inter-bank message transfers using the INFINET is the StructuredFinancial Messaging System (SFMS). It would serve as a secure communicationcarrier with templates for intra-bank and inter-bank messages in fixed messageformats that will facilitate straight ‘through processing’. All inter-bank transactionswould be stored and switched at the central hub at Hyderabad while intra-bankmessages will be switched and stored by the bank gateway. Security features of theSFMS would match international standards.

2.3.7 Real Time Gross Settlement System (RTGS)It is significant to note that the RTGS system in banking sector has the potential toemerge as a major payment mechanism in India. Through this system both processingand final settlement of fund transfer instructions can take place in real time. It wouldhelp banks to scale up transactions that they have been processing. When fullyimplemented, RTGS would pave the way for a paperless money transfer mechanism.It would facilitate payment/receipt of funds without going through the traditional modeof pay order/demand draft/mail transfer/telegraphic transfer, which takes two to sevendays to real time transactions.

RTGS apart from providing a real time funds settlement environment has also becomecritical to an effective risk control strategy. The risks inherent in a net settlementsystem are well known. Payment system risks in a net settlement system are suchthat the default by one bank may lead to a ‘knock-on’ or domino effect to the system.Gross settlement reduces the risk significantly, as transactions are settled one by oneon a bilateral basis in a real time mode.


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Presently, RBI is aiming to give legal sanctity to the whole EFT system by bringinglegislation on the Electronic Funds Transfer and its role in electronic settlement.Moreover, it has suggested numerous amendments in the: Bankers’ Book EvidenceAct, the Negotiable Instruments Act, the Banking Regulation Act and the RBI Act.

2.4 ONLINE PAYMENT MECHANISMPlastic money, i.e. credit cards has already made a presence in India and is fastbecoming online shoppers’ choice4. Credit cards have registered a slow but steadygrowth in India. All the major banks, both public and private sectors, use the majorinternational brand names like VISA and MASTERCARD. The most recent trend isto issue multipurpose cards which function as credit cards, debit cards or AutomaticTeller Machines (ATM) cards. This is essentially to enable the holder to exercise achoice of payment option.

2.4.1 How Online Payment Mechanism Works?Online business requires a website (Sub merchant) which acts as a kind of e-shopfor the users. It gives details of products (or services). A customer can buy any of theproducts listed on such a website by making payment against the same either in cashor cheque or through the route of online payment namely credit card/debit card/netbanking. The sub-merchant’s are linked to a Payment Gateway facility provided bya Master Merchant, which works in association with a Payment Gateway Bank,which is further linked to VISA or MASTERCARD – the Credit Card Companies.

To illustrate the mechanism, when a prospective customer visits a website (of a Sub-merchant) on Internet and selects a product he intends to buy, he is redirected to thewebsite of Master Merchant (Payment Gateway) where the customer feeds all hisdetails like name, credit card number, billing address etc. and completes the transactionby making the payment online. The Master Merchant at its end analyse the details ofcredit card holder (name, address, phone number, IP address etc.) and forwards therequest to the Payment Gateway Bank and to Credit Card Companies. Dependingon the report generated, the Master Merchant accepts or rejects the purchase orderof the customer. Acceptance would lead to the customer account being debited bythe same amount and the sub-merchant would be required to dispatch the orderedgoods to the customer’s address.

Sub-merchantwww.xyz.com

Master Merchantwww.abc.com

Payment Gateway Bank

Master/Visa Card

Figure 2: Online payment mechanism using credit card

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Apart from credit card based transactions, other online payment systems include:

2.4.2 Electronic CashE-cash is a pre-paid system. Consumers buy electronic tokens and build up electronicfunds for use over the Internet. It is stored in an electronic device such as a chip cardor computer memory. The person who has purchased such cash can use it online formaking payments. It is also known as cyber cash5.

2.4.3 Electronic WalletsE-wallets can be useful for making a series of micro payments online for example,downloading MP3 music file, paying for an online article etc. A mechanism is necessarythat ensures that the transaction costs of collecting payment for such items do notexceed the value of the transaction. A software wallet requires a user to set up anonline account to which heads an amount of money. When transactions areundertaken, the wallet is debited6.

2.4.4 Smart CardSmart cards use a micro controller chip embedded in the card. The cards can bepurchased and reloaded again and again. It works as an electronic purse storingdigital money, which could be used over public terminals (Websites, ATMs, Telephonelines) etc. Another example of smart card is the Stored Value Cards (pre-paid SIMcards for mobile phones).

2.4.5 Digital ChequesIt is a cheque in the electronic form. Here, the consumer uses his digital signatures tosign an e-cheque. The consumer fills in the cheque online and then sends it via asecure server to the recipient. The amount specified on the cheque is electronicallywithdrawn from the sender’s account and deposited in the recipient’s account.

2.4.6 Digital SignatureIt is a mechanism to ensure authenticity, message integrity, non-repudiation andconfidentiality of an electronic record. It is based on asymmetric crypto-system,which uses a private key to encrypt, and a public key to decrypt messages. A digitalsignature regime requires a trusted third party – Certifying Authority (CA) to verifyand authenticate the identity of a subscriber (a person in whose name the DigitalSignature Certificate is issued). These days, even smart cards may contain digitalsignatures of a subscriber.


Self Assessment Question 2 Spend 3 Min.Define digital signature...................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................


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2.4.7 Digital CertificatesDigital certificates are like trust certificates developed by a consortium led by MasterCard and Visa. These digital certificates provide Secure Electronic Transaction (SET)to the users. SET allows a purchaser to confirm that the merchant is legitimate andconversely allows the merchant to verify that a credit card is being used by its owner.It also requires that each purchase request include a digital signature, further identifyingthe cardholder to the retailer.

SET is an improvement over SSL (Secure Sockets Layer) encryption method. SSLuses a private key to encrypt data that is then transmitted over the SSL connection.It is used to encrypt customer and credit card information when it is transmittedacross the Internet. The message ‘You are about to view information over a secureconnection’, is an indication that SSL is in use. Websites protected by SSL alsocarry a security symbol in the status bar, often in the form of a closed lock7.

A key difference between SSL and SET lies in the allocation of risk. SET makes thebuyer responsible for proving her credentials, whereas, with SSL, the merchant takesresponsibility for checking the buyer’s ability to pay and that the credit card accountbeing referenced belongs to the user initiating the transaction8.



The difference between SSL and SET lies in .........................................

2.5 ONLINE PAYMENTS AND THE INFORMATIONTECHNOLOGY ACT, 2000

The Information Technology Act, 2000 is a facilitating as well as an enabling Act. Itfacilitates e-commerce by enabling a digital signature regime. It is important to notethat a digital signature regime not only authenticates electronic records but also playsan important role in electronic fund transfer.

2.5.1 Online Payments and Negotiable InstrumentsWhen the Information Technology Act, 2000 came into effect on October 17, 2000it was non-applicable to the negotiable instruments, like promissory note, chequeand bill of exchange but subsequently to facilitate e-commerce related transactions,the Central Government amended the Negotiable Instruments Act, 1881 and broughtin forth the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act,2002 to recognise “a cheque in the electronic form” (e-cheque) and “a truncatedcheque”. Therefore, to facilitate e-commerce related transactions, creation andacceptability of ‘e-cheque’ (a signer uses his digital signatures to sign an e-cheque)and payment or receipt on the basis of an electronic image of a ‘truncated cheque’are now legally valid. Still, the negotiable instruments, like promissory note and billof exchange are considered non-applicable under the Act.

Further banking transactions in India are being regulated by the Indian Central Bank– the Reserve Bank of India (RBI). Banks, which are going for e-cheque and truncatedcheque facilities, have their secured proprietary IT networks in place conforming tothe guidelines issued by the RBI from time to time on network banking.

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For example, “Punjab National Bank” (PNB) was among the first banks to deploythe first image-based cheque clearing system in India. This provided clearance ofinter-city cheques within 48 hours after the cheque is presented, at selected centresusing cheque truncation, where there is image based cheque clearing system. Earlierit took about 15-20 days for clearance of outstation cheques. PNB was the firstbank to launch the Intra Bank Inter City Cheque truncation project by using NCR’sECPIX (Electronic Cheque Presentment with Image Exchange) technology. After asuccessful pilot run the system was introduced by connecting MICR Centres locatedat Lucknow, Nagpur, Jaipur, Kanpur, Ludhiana, Chandigarh, Jalandhar, Agra,Allahabad and Varanasi.

2.5.2 Establishment of Public Key Infrastructure (PKI)The Information Technology Act, 2000 gives a legal mandate to the use of digitalsignatures to protect confidentiality of data protection. It is based on “asymmetriccrypto system” [Section 2(1)(f)], wherein two different keys are used to encryptand decrypt the electronic records. A private key is used to encrypt an electronicrecord and a public key is used to decrypt the said record. Private key is keptconfidential and is to be used by the signer (subscriber) to create the digital signature,whereas the public key is more widely known and is used by a relying party to verifythe digital signature and is listed in the digital signature certificate. The subscriber’spublic key and private key constitute a functioning key pair. In an asymmetric cryptosystem, a private key is mathematically related to public key and it is computationallyimpossible to calculate one key from the other. Hence the private key cannot becompromised through knowledge of its associated public key.

It calls for establishment of a Public Key Infrastructure (PKI), which is based onmutual trust involving subscribers, Certifying Authorities and the Controller ofCertifying Authorities (CCA). Public Key Infrastructure (PKI) represents a set ofpolicies, processes, server platforms, software and workstations used for the purposeof administering Digital Signature Certificates (DSCs) and public-private key pairs,including the ability to generate, issue, maintain, and revoke public key certificates.

The Information Technology Act, 2000 provides for a statutory environment forestablishment of a PKI to administer DSCs. It has provisions related to powers andfunctions of the Controller of Certifying Authorities [Sections 17-34 of The InformationTechnology Act], Certifying Authorities [Sections 35-39 of The InformationTechnology Act] and Subscribers [Sections 40-42 of The Information TechnologyAct]. The Controller of Certifying Authorities is a public body and acts as a regulator,whereas the Certifying Authorities could be any person, who fulfills all the licensingconditions put forth by the Controller of Certifying Authorities.

The success of this PKI model can be gauged from the fact that presently, in Indiathere are seven licensed Certifying Authorities, namely, Safescrypt, Institute forDevelopment & Research in Banking Technology (IDRBT), Tata Consultancy Services(TCS), National Informatics Centre (NIC), Mahanagar Telephone Nagar Limited(MTNL), (n) Code Solutions Ltd. and Department of Customs and Excise.Moreover, it is important to note that most of these Certifying Authorities are quiteactive in both businesse-to-consumer (B2C) and business-to-business (B2B) domain.For example, TCS is issuing DSCs for online Tax Filing, Northern Railway e-procurement, ONGC e-procurement etc.; MTNL is issuing free DSCs to MTNLBroadband customers; Safescrypt is issuing DSCs for EXIM (Export-Import)


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purposes to vendors dealing with the Directorate General of Foreign Trade and (n)Code Solutions Ltd. is issuing DSCs to Northern Railway vendors (e-procurement).



PKI is based on ............................... system.

2.6 FUTURE OF E-MONEYThe growth of e-commerce depends on effectiveness and acceptability of onlinepayment mechanisms. Newer technologies are making online world a safer, convenientand cost effective medium to do monetary transactions.

What would be the result of these technological advances, replacing money withdigital cash? This gradual e-monitisation can shrink cash demand and may affect themoney supply and rate of interest in the long term. It will also restrict RBI’s ability toconduct open market operations. The current trends, involving e-monitisationtransactions through credit cards and Internet will require monetary policy to takenot of the ongoing revolution in the payments and settlement system9. According toRBI the spread of e-monitisation does not require monetary and financial aggregatesto be redefined, as long as transactions take place through the banking channel.However, e-money instruments, like credit cards, debit cards and stored-value cardshave a potential to bypass the banking channels altogether and serve as parallelmoney suppliers.


2.7 SUMMARYOnline payment is fast emerging as a good alternative to physical mode ofpayments.

Electronic fund transfer mechanisms are a reality now.

Financial institutions and banks have transformed themselves into huge financialnetworks providing real time facilities to their customers.

The traditional ‘brick-and-mortar’ banking model has given way to ‘click- and-mortar’ banking model which has made many online payment options availableto a consumer.

Significantly, the law also grants legal validity to such online payment instruments.

2.8 TERMINAL QUESTIONS1. It is said that technology has made online world a safer, convenient and cost

effective medium to do monetary transactions. Do you agree with this statement?Give reasons.

2. What is the role of public key infrastructure in creating trust in an online medium?

3. Explain the working of online payment mechanism?

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1. Electronic Clearing Services (ECS) ‘credit scheme’ and Electronic ClearingServices (ECS) ‘debit scheme’.

2. It is a mechanism to ensure authenticity, message integrity, non-repudiation andconfidentiality of an electronic record.

3. The allocation of risk.

4. Asymmetric crypto system.

Terminal Questions

1. Refer the unit and analyse the problem in your own way.

2. Refer to sub-section 2.4.2 of the unit.



1. SWIFT is a reliable. Secure. high-speed. global telecommunications network

owned by its bank participants and used to transmit financial instructions in

machine-readable formats worldwide.

2. CHIPS are a computerised funds transfer system operated by the New York

Clearing House Association. It is used primarily for high-value, cross-border

payments.

3. www.rbi.org.in

4. According to Power Shopper Report - IOAI Ecommerce Report 2005. 62%

of online shoppers have used ‘credit cards’ for online purchase.

5. See: www.cybercash.com

6. See: www.ecoin.net

7. Rowley Jennifer. “E-business – Principles & Practice”. p.249. Palgrave. 2002.

8. Ibid. p.252

9. Sharma Vakul. 2004 “E-commerce: A New Business Paradigm”. in Legal

Dimensions of Cyberspace. Ed. Verma. S.K. and Mittal Raman. ILI Publications.

UNIT 3 ADVERTISING AND TAXATION VIS-À-VIS E-COMMERCE

Structure

3.1 Introduction

3.2 Objectives

3.3 Online Advertising

3.4 Forms of Online Advertising3.4.1 Banner Advertisements and Payment Models3.4.2 Looking Beyond the Banner Ads3.4.3 Cookies as an Advertising Tool3.4.4 Google AdWords: Pay Per Click

3.4.5 Other Advertising Tools

3.5 Online Advertising: Boon or Bane?

3.6 E-commerce and Taxation

3.7 Tax Issues Emerging from Online Transactions

3.8 E-taxation: Problem Areas

3.9 An Overview of Developing E-taxation Practices3.9.1 The Internet Tax Freedom Act (ITFA)3.9.2 OECD Model Treaty

3.9.3 India: E-taxation Practice

3.10 Summary




3.1 INTRODUCTIONCommercial transactions do not occur in vacuum. They require all kind of supportservices in the form of advertising, marketing, sales, logistics, insurance and banking.If these support functions are considered essential for offline commercial transactions,then these can also be taken as essential for online commercial transactions.

3.2 OBJECTIVESAfter reading this unit, you should be able to:

explain the concept of online advertising and taxation and make a comparisonbetween traditional media and online media;

describe the different forms of online advertising and the way it works;25

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explain the merits and demerits of online advertising;

explain the relationship between e-commerce and taxation; and

discuss the tax issues emerging from online transaction.

3.3 ONLINE ADVERTISINGIt is important to note that online advertising is still in its nascent stage of development.It is still evolving and is often considered to be complementary of offline marketingefforts. Any comparison of online advertising with offline advertising would be anunequal comparison but nevertheless should be made.

Table 1: Comparison1 between traditional media and online media

Traditional Media Online Advertising space Expensive and limited Cheap and unlimited Advertising time Expensive commodity

for marketers Expensive commodity for users

Image creation Image is everything Information is secondary

Information is everything Image is secondary

Communication Push, one-way Pull, interactive Audience Mass Targeted Links to further information

Indirect Direct/embedded

Investment in design High Low, allows change Interactivity Low Low to two-way

dialogue Online advertising is specifically meant for online consumers. It is technology drivenpromotion of products, people, businesses and events in a digital medium, whichprimarily includes Internet, but of late even mobile telephones are also being included.As compared to traditional media, online media is still new and its audience (e-consumers) base is extremely low.



Online advertising is meant for ......................................

3.4 FORMS OF ONLINE ADVERTISINGOnline advertising is a part of e-commerce ecosystem. To begin with, the Internetuser population was extremely small, but with the passage of time, it has grownexponentially. If the earliest version of e-commerce happened on proprietary networksin the form of EDI, it is now happening at a public networks and these networkshave brought more and more consumers closer to businesses than ever before. Onlineadvertising has played an important role in bringing the consumer and the businessescloser and like e-commerce it has also grown exponentially.

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3.4.1 Banner Advertisements and Payment ModelsA banner advertisement is a small graphics link, sometimes called a ‘hot link’, placedon a Web page. The banner is linked to the advertiser’s Web pages, so that clickingit will transport the browser into the advertiser’s site.

A banner advertisement can be placed anywhere on a Web page. They lookdeceptively similar to ‘real-world’ magazine advertisements. The effect of such adsis precisely measurable, as the advertiser collating ‘click-throughs’ can easily countthe users who click on the banner.

The earliest banner advertisement payment model was based on a simple, flat ratefee with little or no co-relation between the actual, or even the expected number ofvisitors to the site and the cost. Later, this unrealistic model was replaced by paymentmodel based on the CPM model (cost per thousand impressions or page views),whereby advertisers pay on the basis of impressions of an advertisement. That is,advertising rates were calculated on the number of Web users accessing the Webpage holding the banner.

In most cases, the publishers owning and operating the sites selling the advertisementspace will guarantee a number of impressions per month, and either price on theCPM basis, or provide a fixed monthly price with a quotation for the equivalentCPM. For example, some of the most visited sites on the web would normally yieldaround 2.25 million impressions per month, with CPMs around Rs. 1000.00 toRs. 1500.00 only depending on the location of web pages. If it is on a home page ofa popular site, the cost per month may even exceed Rs. 20,000.00.

The problem with CPM is that it is difficult to assess the impact of impressions interms of cost-benefit analysis. Moreover, technologically speaking, impressions aredifficult to assess because site visits – the nearest Web has an impression not readilyrecorded by the Web servers themselves. Web servers receive requests to transferpage contents – that is, they receive ‘hits’ – and each page might require several hitsto be satisfied, as different text or graphics elements are transferred. Now which ofthese hits is to be recorded as the impression? Does an impression occur when thefirst part of the page is copied to the browser, or when all of it is copied? What if theuser chooses to interrupt a transfer, having already received part of the page – Doesthis count as an impression or not? And if unique impressions are required – i.e., acount of unduplicated visits – how is this to be achieved2?

A calculation based on impressions alone is not a good parameter and would beunwise of an advertiser to rely on such a measure without an independent audit ofthe numbers involved.

Proctor & Gamble, a global Fast Moving Consumer Goods (FMCG) company seta precedent in April 1996 when they agreed with search-provider Yahoo! that theywould pay advertising fees based not on CPMs but on click-throughs themselves. Itis based on, Cost per click (CPC) – the amount an advertiser pays for each visitorwho clicks on his or her online advertisement. Click rate is the percentage of visitorswho click on a banner ad. Click through is the number of people who click on abanner ad and get to the advertiser’s Web site. The idea of paying for results, as itwere, rather than promises is today gaining wider credence among the advertisers.In other words, inserting an advertisement on a well-focused Web page – one that isattracting the audience appropriate for the advertisement – is clearly worth buying,even at higher advertising rates.

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3.4.2 Looking Beyond the Banner AdsOne of the simplest approaches to extend the value of a simple banner is to create aninteractive ad. It requires the ‘programmability’ of the computer on which theadvertisement is displayed, so as to create new and interesting shapes, images ormessages whenever the banner is seen – by using the facilities of Sun’s Java orMicrosoft’s ‘ActiveX’ applets.

An Applet is a small program or set of instructions copied from a web server on tothe local browser, just like the graphics and textual content fold. With these applets,however, instead of merely fulfilling a simple display role, the browser can executethe program logically. It allows several concurrent parts of the program to be executedsimultaneously; each part is called thread and can be used to gather information,animate pictures or to perform the most complicated of software functions.

Web applets are used within the banners to provide engaging computer games –banner games. The use of Java applets in the ‘live’ banner allows images to moveand evolve as the mouse is moved around the screen.

3.4.3 Cookies as an Advertising ToolWhen the online shopper does shopping it is necessary to maintain a record of theseshopping details. Holding this record on the server is problematic, hence the data isstored on the browser or client end, available to the server for update as subsequentshopping choices are made. When the shopping session is complete, the server needssimply to examine the collected records and use this to place the order and invoice.The data stored on the local browser is referred to as a ‘cookie’. In other words, a“cookie” is a block of text (digital identification tags) which the website (accessed)places in a file on a computer hard disk of a person to track his activity. While a codein the cookie file enables the site to label the person as a particular user, it doesn’tidentify the person by name or address unless the person has registered himself andprovided the site with such information or set up preferences in his browser to do soautomatically.

From the point of online advertisement, cookies can be used to record the locationof the browser, so that only advertisements for a specific country, city, or even individualuser are displayed. Also, cookies can be used to track the path through a series ofWeb pages or shopping choices (known as ‘click trail’). Cookies help in creating aprofile of the user so that only those advertisements for a particular web page or sitethose are relevant to the user are displayed before him. For example, internationalonline advertising companies insert ads on web pages with cookies tagged on them.Once clicked, they start building up the user’s profile as he moves from one site toanother. This is how the advertising companies, known as profilers build acomprehensive profile of the user’s surfing habits and use it to put ads targeting himon their partner sites. Also there has been an increasing use of profiling softwaretool(s) that reads the user’s on-line activity and recommends other similarproducts.

3.4.4 Google AdWords: Pay Per ClickCredit should be given to the search engines to translate the search results into ads.In 2000, Google introduced its first advertising programme called AdWords, whichallowed advertisers to place their ads alongside search results. These were not called


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advertisements, but “sponsored links” and appeared separately on the right side ofthe search page, demarcated by a vertical line. Initially, AdWords advertisers paidGoogle based on the number of times their ads showed up alongside the searchresults. By 2002, it started charging advertisers per click.

It is an innovation from Google, which has pioneered pay-per-click text advertisement,which appear alongside search results, triggered by keywords in the search query.In this case, the advertiser will bid for keywords that he thinks would be used bypeople to search the services and products he is providing. When a user searchesusing these keywords then they will see a listing and brief description of the advertiser’ssite, known as ‘Google AdWords’ which would appear to the right of its searchresult. The advertiser will only pay if that user decides to click on the description andfollow the link to the advertiser’s actual site. These keywords cost not much forrelatively not-so-popular words but may cost on the high side if they relate to popularproducts and services. The advertisement is displayed for free with the site ownerpaying for those click throughs within a daily budget they have stipulated in advance.The rank of AdWords displayed on the right of the Google screen is decided bymultiplying the maximum cost-per-click by the click through rate. Interestingly, majorityof AdWord advertisers are small and medium enterprises. Only a minimum ofRs. 250.00 is needed to sign up for the service and money gets deducted from theaccount based on the number of clicks.

In 2005, Google started AdSense, which extended Google and the advertiser’s reachto other (but specified) sites, which are using Google search. Suppose a visitor on ashare and stock investment site runs a search (using Google search on the site’swebpage) for a tax advisor. The tax advising firms whose ads show up as sponsoredlinks will pay Google, which in turn will split some revenue with the website.

3.4.5 Other Advertising ToolsBlogger, Blogs and Forums

Blogger allows anyone to publish onto web instantly. It is like publishing one’s owndiary. Blogging has grown with web users publishing what are called webblogs orBlogs. This is a web page made up of usually short, frequently updated posts thatare arranged chronologically. The blog posts are like instant messages to the web.These are being increasingly used to influence the viewers and many times theseblogs are used to promote products and services in a clandestine manner.

Micro sites

These are like magazine inserts and usually associated with infotainment sites. Theyare placed in such a manner that they create interest to the visitor. These Micrositeshave sometimes also been called ‘brand modulus’ or even ‘cuckoos’, since they are‘eggs’ placed in another bird’s nest.

Messenger Services

Search engines, like Yahoo!, MSN, Google, Talk etc. help users to connect to otherusers instantly via messages or voice chat or webcam. These messenger alerts appearlike Pop-ups (term given to when a new browser window which opens up while theuser is viewing a website) on users display. These days they are one of the mostpopular ways to advertise on the Internet.

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Short Messaging Service (SMS)

Short Messaging Text is used in sending advertisements to mobile phone users. Thisis commonly known as text messaging and usually involves a short message quiteoften using shortened or abbreviated form of words. This is an example of intrusiveform of advertising.

Spyware

Spyware are malicious programs often hides insecurity holes in Windows, collectingdata for market research, and will sometimes announce it by parasitically attachingan ad to the computer screen. This is known as adware. Sometimes spyware is partof mainstream software and it is the price a gullible Net user pays for that freedownload. Spywares are capable of not only generating annoying pop-upadvertisements but also collect passwords and credit card numbers.

Web casting

It is a push technology that delivers personalised information to the individual’scomputer (even to his mobile number). For effective personalisation, web castingneeds to build a profile of the user’s interests. It comes in the form of NewsAlerts,MessageAlerts, and StockAlerts etc.

Please answer the following Self Assessment Questions.


Google is a .............................................

The full form of SMS is ...............................................

3.5 ONLINE ADVERTISING: BOON OR BANE?From the Net advertiser perspective, online advertising is a boon for the advertisers.It is low cost, fast and has the widest of the wide reach. It is a good investment ofmoney. From the Net user perspective, online advertising may become a nuisance.He may not want it and yet he cannot do without it. It is intrusive and yet useful andinformative. It is the cost a Net user is paying for availing many services free of costover the Internet. Nevertheless, it eats into Net users’ Internet usage time and slackensthe speed of Internet. Also, the most disturbing aspect of online advertising is that itcould violate privacy of the Net user.

3.6 E-COMMERCE AND TAXATIONTax revenues are a major source of income to the governments – whether Central orstate. There have been numerous statutory provisions giving powers to thegovernments to levy both direct and indirect taxes. Over a period of time, numeroustax procedures and tax authorities have been created to streamline the tax collections.The advent of e-commerce has opened up a Pandora’s Box – how to tax onlinetransactions? Is it possible to tax such transactions in view of nature of Internet?Should e-commerce be taxed on lines of offline commercial activities? There aremore questions than answers.

The broad consensus that has emerged is: (i) Online transactions should not be immunefrom taxation solely because the sale is conducted through a medium distinct from


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that of traditional offline businesses, and (ii) It is not prudent to tax these onlinetransactions purely on the basis of traditional taxation approach applicable to offlinebusinesses.

3.7 TAX ISSUES EMERGING FROM ONLINETRANSACTIONS

As e-commerce represent online transactions involving consumer(s) and business(es)– it is occurring instantaneously, which makes it difficult to determine who the buyerand seller are and where they are respectively located. Question is how to tax suchonline transactions? From a point of electronic taxation following issues may emerge3:

Who is the customer?

Where does the customer live?

Did the transaction constitute sale of tangible property, the performance of aservice, or the transfer of intangible property?

Which jurisdiction has the authority to tax the sale?

What online activities constitute sales for sales tax purposes?

What constitutes a business connection/substantial nexus within a taxingjurisdiction?

Can Central and/or state Government(s) technologically capable to monitor allonline transactions?

What kind of record retention requirements is necessary for tax purposes?

Answers to these questions would lay down the ground rules of electronic taxationvis-à-vis e-commerce. Until then, traditional tax rules must be utilized to addressthese complex issues. Moreover, it is a myth that electronic tax is an ‘additional’ taxburden – the fact is, it is a new tax which is applicable in lieu of other indirect taxes.

3.8 E-TAXATION: PROBLEM AREASApart from the above-mentioned tax issues there are certain problem areas as well.The problems are because of the very nature of Internet technology, which is seamlessand unobtrusive. It may lead to4:

a) the lack of ‘physical’ connection between a consumer in one state and a sellerin another state;

b) absence of permanent establishment (PE) – “place of business”;

c) ever changing location of web servers hosting the website, meant for onlinetransactions;

d) relocation of businesses in tax havens, like Bahamas, Monaco, etc.

e) general confusion regarding which country has the right to tax the transaction,and at what rate;

f) non-taxation of digital (intangible) goods, like software, music and data (orinformation);

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g) export and import of digital (intangible) goods across international borderswithout paying customs duty (or tariffs), thereby bypassing the existing export-import policies, regulations and tax system;

h) a parallel channel of transactions, ignoring the traditional documents based onbanking practices;

i) the general lowering down of ‘barriers to trade’ for the smaller and mediumbusiness entities; and

j) complete disregard to accounting and audit procedures.

These problem areas constitute real threat to the establishment of an extensive platformdealing with electronic taxation. It is thus imperative that in order to construct aneffective e-taxation regime the problem areas should be addressed and properguidelines must be framed to deal with such issues. But care should be taken not toimpose an overly strong regulation and tax regime as this could lessen the financialattractiveness of conducting electronic commerce.

3.9 AN OVERVIEW OF DEVELOPING E-TAXATION PRACTICES

World over the nation states are in the process of introducing e-taxation in a selectivemanner. There have been legislative and treaty provisions unfolding the e-taxationpractices.

3.9.1 The Internet Tax Freedom Act (ITFA)The Internet Tax Freedom Act was introduced in March 1997 in the US Senate andwas enacted into law on October 21, 1998. Its objective was to ensure the continuedgrowth of the Internet as well as to prevent multiple or discriminatory taxes whichcould potentially stifle the growth of e-commerce. It further articulated5:

Jurisdictions are free to impose taxes on all “e-business sales provided that thetax rate is the same as that which would have been imposed, had the transactionsbeen conducted in a traditional manner, such as by mail-order.

States may impose taxes on sales of “tangible personal property over the Internet,just as if those sales were conducted” in person.

A three year moratorium on multiple or discriminatory taxes on e-commerce.

The ITFA moratorium expired on October 22, 2001, and was retroactively extendeduntil November 1, 2003.6 On December 3, 2004, Congress made the moratoriumon taxes on Internet access and multiple and discriminatory taxes on electroniccommerce imposed by Internet Tax Freedom Act permanent.7 Even though the IFTAimposes a moratorium on taxes, it still allows the imposition of a singlenondiscriminatory tax on goods and services sold on the Internet. In order to collecta sales tax on Internet transactions, a State in the US must show that it has sufficientjurisdiction over a company doing business over the Internet. Today many pure playe-commerce companies (e-tailers), like Amazon.com and eToys, are paying salestaxes as if their tax exposure is similar to catalogue businesses.


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3.9.2 OECD Model TreatyThe Organization for Economic Co-operation and Development (OECD), a 30member organization has proposed that the basis of any online taxation system shouldbe equitable, simple, certain, effective, distortions free, flexible and dynamic. Theidea is to create a uniform mode of taxation whether offline or online. That is, anyonline taxation system should completely harmonize with existing offline taxationsystem. Broadly speaking, electronic commerce should be taxed neither more norless heavily than other commerce, and online sales should, to the extent possible, betaxed at the state of destination of sales, irrespective of the fact whether the vendor(seller) has a physical presence in the state or not.

The OECD Commentary, on the “OECD Model Treaty” issued on January 28,2003, clarified from an e-commerce perspective.

Whether a website constitutes a “place of business”?

The OECD Commentary mentions that a website, which is a combination of softwareand electronic data, does not in itself constitute tangible property and hence cannotbe referred to as a “place of business”.

Whether location of a server constitutes a permanent establishment (PE)?

The OECD Commentary provides that if an enterprise owns (or leases) and operatesthe server on which the website is stored and used, the place where that server islocated could constitute a permanent establishment of the enterprise.

It is evident that the OECD countries place a lot of emphasis on permanentestablishment from e-taxation perspective.

3.9.3 India: E-taxation PracticeWith the growth of e-commerce in India, it was felt that India should also adopt theconcept of PE in view of rapid globalisation of commerce. The Finance Act, 2002has introduced the definition of Permanent Establishment (PE) in the Income TaxAct, 1961. It shall mean to include a fixed place of business through which thebusiness of an enterprise is wholly or partly carried on [S.92F (iii (a)]. It may includea wide variety of arrangements, like a place of management, a branch, an office, afactory, a workshop or a warehouse etc. The definition is similar to that of the OECDmodel. Apart from statutory provisions defining PE, e-taxation in India is still adeveloping area. In fact, online taxation regime is presently confined to developmentof IT infrastructure facilitating online filing of tax returns. Once it is achieved, e-taxation rollout would be the next logical step.

Further, it is obligatory to note that in Tata Consultancy Services v. State of AndhraPradesh[AIR 2005 SC.371], the issue before the Hon’ble Supreme Court waswhether the canned software which were available off the shelf in the form of softwarepackages sold by the appellants can be termed to be “goods” and as such assessableto sales tax. The Constitutional Bench of five judges opined that for the purpose ofsales tax, the term “goods” cannot be given a narrow meaning. In India, the test todetermine whether a property is “goods”, for purposes of sales tax, is not whetherthe property is tangible or intangible or incorporeal. The test is whether the concerneditem is capable of abstraction, consumption and use and whether it can be transmitted,transferred, delivered, stored, possessed etc. Admittedly in the case of software,both canned and uncanned, all of these are possible.

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It is important to note that under the Sale of Goods Act, 1930 “goods” means everykind of movable property other than actionable claims and money; and includesstock and shares, growing crops, grass, and things attached to or forming part of theland which are agreed to be severed before sale or under the contract of sale [S.2(7)].

The Hon’ble Supreme Court’s decision has further widened the tax regime to includeintangible property as well.



The full form of OECD is .............................................................


3.10 SUMMARYOnline advertising is aiding online marketing initiatives.

It has moved from a flat fee payment model to a more dynamic ‘pay per click’model.

Over a period of time, online advertising has become intrusive and bane for theNet users’ and it is thus imperative that online service providers should now optfor self-regulation.

It is a myth that electronic tax is an additional tax burden. The fact is that it isnot! It is meant to tax e-commerce transactions but the process is not easybecause of the very nature of Internet technology, which is seamless andunobtrusive.

Nevertheless, world over, the governments are coming to terms with the e-taxation reality.

3.11 TERMINAL QUESTIONS1. Online advertising is a necessary evil. Justify the statement with the help of

examples.

2. What is so difficult about taxing e-commerce transactions?

3. Explain the different forms of online advertising?


1. Online consumers

2. (a) Search Engine

(b) Short Messaging Service

3. Organization for economic co-operation and development


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Terminal Questions





1. Janal D. “Online Marketing Handbook – how to promote. advertise and sell

your products and services on the Internet”. Van Nostrand Reinhold. 1998.

2. Armstrong Steven. “Advertising on the Internet”. Kogan Page. 2001.

3. Rustad L. Michael and Cyrus Daftary, “E-business Legal Handbook. Aspen

Law & Business”. 2002.

4. Sharma Vakul . “Information Technology – Law and Practice”. Universal Law

Publishing Co.. 2004.

5. The Internet Tax Freedom Act. Pub. L. 105-277. S 1101.a, Oct. 21. 1998.

6. On November 28. 2001. President Bush signed H.R. 1552. the “Internet Tax

Non-discrimination Act” which simply amended the IFTA so that the moratorium

would not expire until Nov. 1. 2003.

7. Public Law 108-435. 108th Congress. Dec. 3. 2004.

UNIT 4 CONSUMER PROTECTION INCYBERSPACE

Structure

4.1 Introduction

4.2 Objectives

4.3 E-consumers

4.4 E-consumer Support and Service4.4.1 E-mail Support4.4.2 Newsgroups, Chat Rooms, Message Boards, Blogs4.4.3 FAQs4.4.4 Consumer Service Information4.4.5 Feedback Forms

4.4.6 Help Desk

4.5 Caveat Emptor: Consumers Beware!4.5.1 Private Policy

4.5.2 Terms of Service

4.6 Legal Remedies4.6.1 The Consumer Protection Act, 19864.6.2 The Specific Relief Act, 1963

4.6.3 The Sale of Goods Act, 1930

4.7 Summary




4.1 INTRODUCTIONToday cyberspace represents an e-marketplace. It has got e-shops, e-malls etc.,selling all kinds of goods and services. If there are e-sellers, then there are e-buyersas well. These e-buyers, buying goods and/or availing services on the Internet shouldbe treated as the consumers as defined under the Consumer Protection Act, 1986.

4.2 OBJECTIVESAfter reading this unit, you should be able to:

describe who is an e-consumer and how the general profile of e-consumer isdifferent from that of offline consumer in many ways;

explain the various kinds of support and service, which is being provided to thee-consumers by the e-commerce service providers; and

explain the legal remedies and analyse whether the rights of e-consumers havebeen protected or not.36

4.3 E-CONSUMERSE-consumers are consumers who are buying, consuming or selling1 goods or servicesusing digital medium (Internet or any other electronic platform). It is interesting tonote that the e-consumers are consuming both tangible (physical) goods as well asintangible (digital) goods. The digital medium helps e-consumers to place buy ordersfor physical goods using e-commerce business models, like business-to consumer(B2C), consumer-to-business (C2B) and consumer-to-consumer (C2C); it also helpsthem to download digital goods in the form of MP3 music files, data, databases,content, software etc.

Interestingly, the term e-consumer nowadays includes both e-commerce (electroniccommerce) and m-commerce (mobile commerce) consumers.

E- consumer: A Profile

The general profile of e-consumer is different from that of offline consumer in manyways. An e-consumer is urban, young, technology savvy, educated, convenienceshopper and multiple choices oriented. Moreover, he is smart; he knows where tolook for discount on the Net. As compared to physical world, ease of price comparisonand greater choices are the biggest plus points in favour of e-consumers.

It is thus important to compare a physical shopping experience with that of onlineshopping experience to understand the psyche of e-consumer – his wants and needs.

Table 1: Comparison2 between physical and online shopping

Physical Shopping Online Shopping Shop/Supermarket/Mall Website Display windows Home Page Store layout Frames, browse and search

function, navigation buttons In-store promotion/sales/discounts Special offers, discounts Store atmosphere Interface consistency, graphics

quality Number of branches Links to other similar sites Product displays Menu buttons Look and touch of the merchandise Look and feel of the merchandise Footfalls (number of people entering the store)

Number of unique visits to the online store

As indicative from the aforesaid table, e-consumer shopping decisions are based on“look and feel” factors, i.e. products which require “low touch” (which consumersprefer to be able to see and feel before they buy). Nevertheless, the distinctions areblurring, e-consumers are now even going for goods, which require look and touch,for example dresses and diamond jewelry3.

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Consumer Protection inCyberspace

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Who is an E-consumer? Are you an E-consumer?

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4.4 E- CONSUMER SUPPORT AND SERVICEE-commerce is more about personalised support and service. E-consumer is a seekerof information before he makes a buy decision. Hence, the ability to collect productinformation and make comparisons between the different product offerings fromdifferent providers is often viewed as one of the main competitive challenges of e-shopping and is therefore a key aspect of the online shopping experience. Forexample, price and product comparisons have been made easier by the developmentof “shopping bots”. Websites such as Mysimon.com and DealPilot.com enable buyersquickly to compare products, prices and availability. In other words, e-consumersare being assisted at every step by the technology.

Significantly, at e-marketplace, an e-consumer is not alone. There exists a communityof e-consumers helping each other in every possible manner. For example, eBay, anauction site provides a platform for buyers to rank sellers on the basis of their businessdealings. Bad reviews against a particular seller would mean no further businessdealings with that seller on eBay platform. This is a self-regulating process. Similarly,a site called Epinions.com provides an “open source” style of review for products ofall kinds, with visitor providing all the material. The company makes no attempt toedit any of this, but once posted, the reviews themselves are rated by other users.

Consumer support and service in the digital medium is one of the means to protectnot only the organization reputation but also provide an opportunity to redress theconsumer complaints and grievances. Consumer service is concerned with giving e-consumers the opportunity to talk to the organization and to receive personalisedresponses.

There are a number of different avenues through which consumer service and supportcan be delivered4: (a) E-mail support (b) Newsgroups, chat rooms, message boards,blogs (c) FAQs (d) Consumer service information (e) Feedback forms (f) Helpdesk support.

4.4.1 E-mail SupportE-mails are the best means of communication between the consumer and theorganization. If handled effectively, the consumer will be duly satisfied and theorganization will learn more about the types of difficulties that consumers have withits products or services and evolve solutions to those problems.


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E-mail services can be expensive to operate due to the personalised nature of theresponse to begin with. But by incorporating technology, the system may be soprogrammed to produce an answer from its databank automatically.

4.4.2 Newsgroups, Chat Rooms, Message Boards, BlogsThese services allow consumers to communicate with one another. These are oftenbeing used to share knowledge and create a self-help group. In the present dayenvironment, such services help in creating awareness among consumers. Blogs arethe latest edition in this discussion centric online environment. Blogs5 are a kind ofpersonalised e-diaries carrying views of the blogger; others may join and post theirviews.

4.4.3 FAQsFrequently Asked Questions are common consumer-service resources. They arethe most common questions posed by consumers, which are collected, together withtheir answers, and can be viewed online. The only disadvantages with FAQs are thatthey are not personalised.

4.4.4 Consumer Service InformationIt provides relevant information to the consumer, which may include productspecifications, compatibility charts, pricing, warranty details etc. Such an informationresource helps the consumer not only in arriving at a decision, but also safeguardshim against any artificial price increase by a retailer.

4.4.5 Feedback FormsThese are the forms through which customers can complain or provide valuablecomments about the service and the products provided by the organization. Theseforms are valuable assets from the point of view of consumer trust and retention.

4.4.6 Help DeskHelp desk support system in a form of toll free number, provides real time help toconsumers. It works 24×7, wherein call center executives listen to complaints andgrievances and try to solve problems.It is thus imperative for any organization selling services or goods online to provideto its consumers a system of online help. Such a system would resolve initial disputesamicably, which may crop up between the consumers and the organization.Please answer the following Self Assessment Question.

Self Assessment Question 2 Spend 3 Min.Name the different avenues through which consumer service and support can bedelivered.............................................................................................................................................................................................................................................................................................................................................................................................................................................................................

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4.5 CAVEAT EMPTOR: CONSUMERS BEWARE!E-consumers do have certain rights as consumers. But it is obligatory to note that theconsumers have certain obligations as well. It is expected that e-consumer are aware!Any failure to protect their interests would be considered to be his own failing.

In the digital medium, it is natural for the consumer to read the privacy policy andterms of service conditions posted on e-tailer’s website. Such policy statementsconstitute online contracts between the consumer and the service provider (e-tailer).

4.5.1 Privacy PolicyPrivacy policy posted on the website provides details of ways and means of protectingusers’ ‘personal’ and ‘not-so-personal’ information. It provides details6, like:

What kind of information is to be collected: e-mail address, name, phone number,postal address, age, gender, occupation, credit card number etc?

What kind of technological tools will be used to collect information?

How the information thus collected will be used and for what purpose?

Whether information to be given to any third-party and for what purpose?

Whether a choice will be given to the individual to opt-out from collection anddistribution of online information.

What will be the business transaction consequences of an individual who hasrefused to provide private information or has refused to accept a cookie or hasopted out of a particular use of such information?

How individually identifiable private information collected can be reviewed and,if necessary, corrected or removed?

How frequent the privacy policy will be reviewed?

Whether the site will be independently verified to ensure that its securityadequately protects its customers from the risk of security breaches.

Privacy policy may exist in a form of ‘Safe Harbor Agreement’, which may providefor terms such as:

(a) Notice – to the consumer, i.e., data subject about what information is collected,processed and used.

(b) Choice – covers the ability for consumers to ‘opt-out’ from direct marketing.

(c) Onward Transfer – choice for consumers about the way in which a third partycould use their data.

(d) Security – taking reasonable measures to protect data from loss, misuse etc.

(e) Data Integrity – data to be kept accurate, current and complete etc.

(f) Access – consumers to have reasonable access to information about themderived from non-public sources.

(g) Enforcement – assuring compliance with data protection; also readily availableand affordable independent recourse mechanisms by which consumers’complaints and disputes can be resolved.


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4.5.2 Terms of ServiceA posted term of service conditions is also an important statement on behalf of an e-tailer. It signifies that the user’s use of this website constitutes user’s agreement to bebound by these terms and conditions of use. It may contain following details:

(a) Notice

Please review these Site ‘terms of use’ which govern your use and purchase ofproducts and services from our website. By accessing, browsing or using the site,you signify your assent to these terms of use. If you do not agree to these terms ofuse then please do not use this site.

(b) Membership Eligibility

Use of the site is available only to persons who can form legally binding contractsunder applicable law. Persons who are “incompetent to contract” within the meaningof the Indian Contract Act, 1872 including minors, undischarged insolvents etc. arenot eligible to enter and execute financial transactions with the site.

In consideration of the use of the service, the user agrees to provide true, accurate,current and complete information about himself as prompted by the User RegistrationForm. It is the user’s obligation to maintain and promptly update the personalinformation as requested in the User Registration Form in order to make it true,accurate, current and complete.

(c) Website Limited License

As a user of this site you are granted a nonexclusive, nontransferable, revocable,limited license to access and use this site and its content in accordance with theseTerms of Use. Provider may terminate this limited license at any time for any reason.

(d) Protecting Passwords

The user is responsible for maintaining the confidentiality of the password and username and is fully responsible for all activities that occur under his password.

(e) Price Offers

The prices advertised on this site are for Internet orders and is inclusive of all central/local taxes and delivery and handling charges. Prices and the availability of items aresubject to change without notice.

(f) Modifications to Site

The service provider reserves the right, for any reason, in its sole discretion, toterminate, change or suspend any aspect of the site, including, but not limited to,content, features or hours of availability. The service provider may impose limits oncertain features of the site or restrict your access to part or the entire site withoutnotice.

(g) Disclaimer of Liability

This site is provided on an “as is, as available” basis. Provider expressly disclaims allwarranties, including the warranties of merchantability, fitness for a particular purposeand non-infringement. Service provider disclaims all responsibility for any loss, injury,claim, liability, or damage of any kind resulting from, arising out of or any way relatedto the use of the site.

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(h) Indemnification

You agree to indemnify, defend and hold harmless provider, its officers, directors,employees, agents, licensors, suppliers and any third party information providers tothe site for and against all losses, expenses, damages and costs, resulting from anyviolation of these Terms of Use by you.

(i) Governing Law and Jurisdiction

The Terms of Use are governed by and construed in accordance with the relevantIndian laws. You agree that any action at law or in equity arising out of or relating tothese terms shall be filed only in the courts / tribunals and forums located in Delhi andyou hereby consent and submit to the personal jurisdiction of such courts and forumsfor the purposes of litigating any such action.

All provisions in this Agreement regarding representations and warranties,indemnification and disclaimers shall survive any termination of this Agreement.



Explain the term Caveat Emptor?

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4.6 LEGAL REMEDIESIt does not imply from the aforesaid discussion that e-consumers rights and obligationsare confined to the privacy policy and term of service conditions only. Does he haverights if he gets defective goods or services?

Consumer protection in cyberspace can be understood with the help of the followingstatutes:

(a) The Consumer Protection Act, 1986

(b) The Specific Relief Act, 1963

(c) The Sale of Goods Act, 1930

4.6.1 The Consumer Protection Act, 1986Recourse to consumer protection under the Consumer Protection Act, 1986 is takenafter the dispute has arisen. The Act applies to all goods and services unless specificallyexempted by the Central Government. It covers all the sectors of the economy –private, public and cooperative. Further, it provides for adjudication process, whichis simple, speedy and less expensive.


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Consumer is defined under section 2(1)(d) of the Act as a person who buys anygoods or services for a consideration, which has been paid or promised. Thereforeany person buying goods and/or availing services on the Internet will be a consumerfor the purposes of Act. It provides a very wide definition of “service” as serviceof any description which is made available to potential users and includes,but not limited to, the provision of facilities in connection with banking, financinginsurance, transport, processing, supply of electrical or other energy, boarding orlodging or both, entertainment, amusement or the purveying of news or otherinformation, but does not include the rendering of any service free of charge or undera contract of personal service [section 2(1)(o)]. This definition is capable of includingall online service providers since it is an inclusive definition.

According to section 2(1)(c) of the Act “complaint” means any allegation in writingmade by a complainant that the goods or services hired or availed suffer fromdeficiency in any respect. The complainant can be a consumer or his legalrepresentatives, any registered voluntary consumer association, Central or StateGovernment [section 2(1)(b)].

But if a consumer in the digital medium faces any defects in goods or deficiency inservices, who are the persons against whom he can lodge a complaint? The term“deficiency” means any fault, imperfection, shortcoming or inadequacy in the quality,nature and manner of performance which is required to be maintained by or underany law for the time being in force or has been undertaken to be performed by aperson in pursuance of a contract or otherwise in relation to any service [section2(1)(g)]. A consumer has every right to file a complaint against all such serviceproviders, which may include information providers, websites owners, paymentgateways etc. in a District Forum.

Further, section 2(1)(j) of the Act, further qualifies a manufacturer as a person whomakes or manufactures any goods or parts thereof, or assembles them or puts hisown mark on any goods manufactured by any other manufacturer. A trader is aperson (including manufacturer) who sells or distributes any goods for sale. In otherwords, a complaint can also be made against manufacturer and trader selling goodsonline.


Self Assessment Question 4 Spend 3 Min.Define consumer briefly.........................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................

4.6.2 The Specific Relief Act, 1963A mature legal system endeavours to provide not merely a remedy for every rightinfringed, but also an adequate remedy. The Specific Relief Act provides that effectiveremedial action.

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It provides preventive relief in the form of temporary and perpetual injunctions[sections 37 and 38] to the plaintiff to prevent the breach of an obligation existing inhis favour, whether expressly or by implication. For example, a person can moveagainst any service provider, even an online service provider to a court and plead forissuing injunction against a service provider, if he feels that the service provider is notfulfilling his contractual obligations or preventing the breach of an obligation existingin his favour. The court can perpetually enjoin the defendant (service provider) fromthe assertion of a right, or from the commission of an act, which would be contraryto the rights of the plaintiff.

Further, the plaintiff in a suit for perpetual injunction under section 38, or mandatoryinjunction under section 39 of the Act, may claim damages either in addition to, or insubstitution for, such injunction and the court may, if it thinks fit, award such damages[section 40].

4.6.3 The Sale of Goods Act, 1930Under Article 366 (13) of the Constitution of India, the expression “goods” includesall materials, commodities and articles. Different enactments over the years havefurther enlarged the definition of goods. For example, under the Sale of Goods Act,1930, “goods” means every kind of movable property other than actionable claimsand money; and includes stock and shares, growing crops, grass and things attachedto or forming part of the land which are agreed to be severed before sale or underthe contract of sale [section 2(7)].

A contract of sale is made by an offer to buy or sell goods for a price and acceptanceof such offer [Section 5 of Sale of Goods Act, 1930]. Now the question is – is itpossible to make an online contract? Section 4 of the Information Technology Act,2000 has accorded legal acceptance to electronic records. Therefore, an offer andan acceptance through an electronic record will form a contract for the purposes ofthe Sale of Goods Act, 1930. Thus a contract for sale of goods made online willhave:

(a) the same effects of contract;

(b) would require same level of performance of contracts;

(c) will give same rights and duties to the seller and buyer; and

(d) will have same consequences for breach of contract as a contract in the physicalworld.

The Buyer’s Rights under the Sale of Goods Act, 1930

It is significant to note that the Sale of Goods Act has laid down a statutory provisionwith respect to implied condition as to quality or fitness, i.e., if the buyer, expresslyor by implication, makes known to the seller the particular purpose for which thegoods are required, thereby relying on the seller’s skill or judgment, (except in caseof sale an article under its patent or trade name) there is an implied condition that thegoods shall be reasonably fit for such purpose [section 16]. Further, a buyer has aright to examine the goods, i.e. where goods are delivered to the buyer, which he hasnot previously examined, he cannot be said to have accepted them until he has had areasonable opportunity of examining them. The seller is bound to give the buyer areasonable opportunity of examining the goods, on buyer’s request. Moreover, where


45

goods have been delivered to the buyer and he intimates to the seller that he hasrejected the goods due to some defect; he is not bound to return them to the seller[sections 41-43].

Also, the Act protects the buyer from any breach of contract arising out of sellers’actions, like where the seller wrongfully neglects or refuses to deliver the goods tothe buyer, the buyer may sue the seller for damages for non-delivery. The buyer mayalso sue for specific performance, i.e., the buyer may apply to the Court to direct theseller to deliver the goods. In case of breach of warranty the buyer may sue the sellerfor damages for breach of warranty or set up against the seller the breach of warrantyin diminution or extinction of the price [sections 57-59].

It is thus evident from the aforesaid discussion that legal remedies are available tothe e-consumers in the form of statutory provisions. Nevertheless, e-consumer hasto be careful and vigilant in exercising their legal rights.


4.7 SUMMARYE-consumers are consumers who are buying, consuming or selling goods orservices using digital medium (Internet or any other electronic platform).

The digital medium helps e-consumers to place buy orders for physical goodsusing e-commerce business models, like business-to consumer (B2C), consumer-to-business (C2B) and consumer-to-consumer (C2C); it also helps them todownload digital goods in the form of music files, data, databases, content,software etc.

A proactive website is the one which provides consumer support and servicefunctions in the form of e-mail queries, feedback forms, consumer serviceinformation etc.

The knowledge of privacy policy and terms of use are also beneficial for e-consumers.

From statutory perspective enactments, like the Consumer Protection Act, 1986,the Specific Relief Act, 1963 and the Sale of Goods Act, 1930 play a criticalrole in safeguarding the e-consumers interests in cyberspace.

4.8 TERMINAL QUESTIONS1. Examine the role of ‘privacy policy’ and ‘terms of use’ statements vis-à-vis e-

consumers.

2. Do you think that the enactments, like Consumer Protection Act, 1986, theSpecific Relief Act, 1963 and the Sale of Goods Act, 1930 are adequate tosafeguard the interests of e-consumers in online environment?


1. An E-consumer is one who buys, consumes or sell good or services using digitalmedium, Yes.

2. (a) E-mail support(b) News Groups, Chat Rooms, Message boards, Blogs(c) FAQs(d) Consumer service information(e) Feedback forms(f) help desk support.

3. The term ‘Caveat Emptor’ means consumer be aware.

4. Consumer is defined under section 2(1)(d) of the Act, as a person who buysany goods or services for a consideration, which has been paid or promised topay.

Terminal Questions

1. Refer to sub-section 4.4.1 of the unit.



1. Auction sites. like www.ebay.in represents a consumer-to-consumer C2C model.

2. Adapted from Lohse. G.L. and Spiller. Electronic Shopping: “The Effect of

Customer Interfaces on Traffic and Sales” Communications of the ACM, Page

1998.

3. The success story of www.baazee.com revolved around selling diamond jewelry

to e-consumers. Interestingly www.ebay.in sells all kinds of physical goods like

cameras. TVs. mobile phones. electronic devices and even automobiles.

4. Rowley Jennifer. “E-business: Principles & Practice” Palgrave. p. 130. 2002.

5. According to. www.technorati.com which tracks blogs on the Internet that there

are 30 million blogs and there number is growing everyday!

6. Sharma Vakul. “Handbook of Cyber Laws” Macmillan. India. 2002.

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