1

Law

Information and Communication Technology

E-Commerce- Concepts & Issues

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DESCRIPTION OF MODULE

Items Description of Module

Subject Name Law

Paper Name Information and Communication Technology

Module Name/Title E-Commerce: Concepts & Issues

Module Id IV

Objectives To study and analyse the concept and issues of the

Ecommerce in general with reference to its

functioning and in special with reference to Indian

scenario.

Prerequisites E-commerce, EDI, digital Signature, Smart cards, principles of

taxation, merits and demerits of online

advertisement

Role Name Affiliation

Principal Investigator Prof. (Dr.) Ranbir

Singh

Vice Chancellor,

National Law

University, Delhi

Co-Principal

Investigator

Prof. (Dr.) G.S.

Bajpai

Registrar, National

Law University Delhi

Paper Coordinator Dr. Aparajita Bhatt Assistant Professor,

National Law

University Delhi

Content

Writer/Author

Ms. Mrunal

Dattatraya Buva

Visiting Professor,

Indian Law Institute,

New Delhi

Content Reviewer Mr. Pavan Duggal Advocate, Supreme

Court of India

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Module Overview:

This module is a conceptual study which describes and analyses e-commerce, its perspectives and

issues involved. It inculcates the following scheme of chapters:

Conceptual Analysis: the concept of e-commerce, business models for e-commerce etc.

E-Commerce: An Indian Perspective

From M-commerce to Ecommerce

E-Commerce: Terms of Service Agreements E-Commerce: Terms of Service Agreements

Disintermediation and Re-intermediation

Online payment

Electronic taxation

Conclusion and Suggestions

Learning Outcome:

On studying this module you will be able to understand

i) Concept of Ecommerce and development of Ecommerce in India

ii) Ecommerce and terms of service agreements

iii) Online payment system: Concept, types, development and issues

iii) Online Advertisement : concept, types and issues

iv) Taxing Ecommerce in India: Concept, principles, issues

v) Challenges Ahead

1. Introduction

Over the last few centuries, human beings have experienced two major revolutions—the industrial

revolution and the electronic revolution. The former transformed our society from being agricultural

based to industrial based, whereas the latter transformed our society from being mechanical based to

electronic based.1

E-commerce is a new way of conducting, managing and executing business transactions using modern

means of information technology. E-commerce defined simply, is the commercial transaction of

*The researcher /Author of this research paper is Ms. Mrunal Dattatraya Buva, Advocate Supreme Court of

India and guest faculty for Cyber Laws at Indian Law Institute, New Delhi. 1 Dr. Bhasin Madan Lal. “E-Commerce and M-Commerce Revolution: Perspectives, Problems and Prospects.”

December 2005: The Chartered Accountant : 824

4

services & goods in an electronic format. E-commerce is a ‘commerce based on bytes’. E-commerce

defined simply, is the commercial transaction of goods and/or services in an electronic format.

E-Commerce refers to the paperless exchange of business information using Electronic Data

Interchange, Electronic Mail, Electronic Bulletin Boards, Electronic Fund Transfer and other network

based technologies. It not only automates manual processes and paper transactions but also helps the

organization move to a fully electronic environment and change the way we operate. E-commerce is a

new business methodology that addresses the needs of organizations, traders and consumers to reduce

costs while improving the quality of goods and services and increasing the speed of service delivery.

By Internet Commerce we mean the use of the global Internet and World Wide Web (WWW) for

commerce. With the advent of Internet & Website, being the all-pervasive communication tools,

scope of Ecommerce has increased manifold. For these reasons the term I-Commerce has become

synonymous with the term E-Commerce.2

2. Conceptual Analysis

2.1. E-commerce: Legal Definition

The Internet Tax Freedom Act (ITFA), 1998, on other hand, more narrowly defines e-commerce as

“any transaction conducted over the Internet or through Internet access, comprising the sale, lease,

license, offer or delivery of property, goods, services or information, whether or not for consideration,

and includes the provision of Internet access”. 3

2.1.1 E-commerce & WTO

The World Trade Organization (WTO) Ministerial Declaration on E-commerce defines e-commerce

as “the production, distribution, marketing, sales or delivery of goods and services by electronic

means”.4

2.1.2 E-commerce & EDI

During late 60s, though telegraph, telephones and telex were still relied upon options for

faster communication, nevertheless EDI was fast emerging as a computer-to-computer means of

managing inventory, bill presentment, shipment, orders, product specifications, and payment. It is a

process by which goods are ordered, shipped, and tracked computer-to-computer using standardised

protocol. 5 EDI permits the “electronic settlement and reconciliation of the flow of goods and services

between companies and consumers”; and saves money because the computer, and not an office staff,

submits and processes orders, claims, and other routine tasks.

India joined the EDI movement in early 1992, when it obtained the observer status in the Asia

EDIFACT Board (ASEB). India became a member of ASEB in August 1992. The community

2 Gandhi Sunil Kr. “E-Commerce And Information Technology Act, 2000.”, 11:March 2006 :Vidyasagar

University Journal of Commerce. 3 Available at http://nhdd.com/linked_media/publications/InternetLawPractice.pdf accessed on 6 November

2013 at 7 PM. 4 McIntosh Joanna (ed) “WTO, E-Commerce and Information Technology” available at

http://www.iie.com/publications/papers/wunsch1104.pdf accessed on 29th November 2013 at 1 PM. 5 Teitelman Robert et. al, How the Cash Flows? : 58:Aug.1996: Institutional Investor.

5

partners for customs system were broadly identified as Banks6, Airlines, Airport Authority of India

(AAI), Apparel Export Promotion Council (AEPC), Sea Ports (Port Trust Authorities), Director

General of Foreign Trade (DGFT) etc. EDI is also used in international trade, electronic fund transfer

(EFT) between supplier and customer via banker, insurance claim settlement etc.7

2.1.3. E-commerce & Business Process Reengineering (BPR)

The idea behind business process reengineering is to create effective and efficient business

processes for better quality. The thrust of BPR lies in managing the existing resources in an optimum

manner. Example: E-commerce, forever creates efficient and effective business processes for better

quality at a lower cost.8

2.1.3 E-commerce: An Online Approach9

E-commerce online approach is to perform traditional marketing & sales functions such as

Payment and Funds Transfer, Order Entry and Processing, Invoicing, Inventory Management, Cargo

Tracking, Electronic Catalogs, Point-of-sale Data Gathering, Advertising, Marketing & Customer

Support Function.

E-consumer: A New Phenomenon

E-consumer desires are very hard to predict, pinpoint, or decipher in electronic markets whose

shape, structure and population are still in the early stages – more so, in Indian milieu.10

2.1.4Differentiating between E-commerce & E-business11

E-business refers to all aspects of a business where technology is important. This may include

knowledge management, design and manufacturing, R&D, procurement, finance, project planning,

human resource planning and the related activities. It is that part of e-business that relates directly to

sales & marketing. It is a part of the all-encompassing world of e-business.

2.1.4.1Stages of E-Business:

Business tries to connect, adapt, integrate and outsource IT systems so companies can spend more

time managing their business. It process through following stages

Stage 1: Conducts business transaction on the Web in order to increase profits and provide better

customer service.

Stage 2: Integrating core processes to establish more responsive relationships with employees,

suppliers and partners and

6 The Structured Financial Messaging Solution (SFMS) has emerged as the EDI system for banks, allowing

exchange of secure and structured messaging within the banks and between banks using the INFINET. 7 Supra note 2

8 Janesan Moneque et al Business Process Redesign for effective e-commerce processes in the service industry

available at http://is.ieis.tue.nl/staff/hreijers/Papers/Beta%20report%20bpr.pdf accessed on 6. October 2013.

9Kuller Edwin, Approaches to Ecommerce available at

http://www.emarketservices.com/clubs/ems/prod/eMarket%20Services%20-

%20Approaches%20to%20ecommerce.pdf accessed on 2nd

November 2013 at 12AM.. 10

Ibid 11

Difference between Ecommerce and Ebusiness available at

http://www.ebusinessprogrammers.com/ebusiness/ecommerce_and_ebusiness.asp accessed on 13 December

201 at 2.30AM.

6

Stage 3: Focuses almost all time and effort on core competencies.

(Table: 1) : Describes three stages of e-business

2.1.4.2 Classification of Aspects of E-business Models:12

E-business models are based on various aspects such as technology, software domain, management

and statutory-legal dimension.

1. The technology aspect Covers E-business Models comprising of

telecommunication, networking and other

infrastructure issues

2. The software domain Includes programming languages, web page design,

customer interface-transactions management,

security and privacy management, and large scale

data mining

3. The management aspect Deals with the business strategies for value creation,

growth and customer development and retention.

4. The statutory and legal dimension Addresses various cyber laws dealing with security,

crimes etc. and government policies for nurturing the

Internet based Ecommerce.

(Table 2): Aspects of E-business Classification

2.1.4.3. Ecommerce Models:

Functionally, e-commerce involves, businesses and consumers. It can be divided into four distinct

segments, which are Business-to-Business (B2B), Business-to-Consumer (B2C), Consumer-to-

Business (C2B), and Consumer-to-Consumer (C2C)

i) Business-to-Business (B2B)

It is a business platform involving two independent or even dependent business entities using

information and communication tools which acts a business communication channel between the

manufacturer and its suppliers. This may include registration of vendors, invitation of quotations,

negotiations, price settlement, contract finalization, procurement, cargo tracking, and payments –

online. Thus a B2B platform acts a business facilitator, negotiator and dealmaker, which facilitates,

negotiates and clinches deal between independent or dependent business units. 13

Eg.

www.amazon.com

12 Mahadevan , “Business Models for Internet Based E-Commerce”. 42: 2000: California Management Review

Summer . 13

Available at

http://www.upscsuccess.com/sites/default/files/documents/03_Commerce_and_Cyberspace_@nadal.pdf

accessed on 22nd

December 2013 at 5PM.

7

(Image 1: Describes B2B Model)

(Source: http://www.eservglobal.com/uploads/files/index.pdf)

ii) Business-to-Consumer (B2C)

It refers to a business platform, involving a business entity and consumers. It is a retail version of e-

commerce. Selling goods or services through web based shops. It is based on the concept of ‘shopping

at convenience’. It is a retail version of e-commerce known as e-tailing.14

It is the most popular model

of e-commerce as it has helped moving commercial transactions from public domain to private

domain. Eg. www.imn.com

( Image 2: Describes B2C Model)

(Source: http://www.eservglobal.com/uploads/files/index.pdf)

iii) Consumer-to-Business (C2B)

14 Dr. Khurana Anil , “Introduction to Ecommerce” available at

http://www.ddegjust.ac.in/studymaterial/mcom/mc-201.pdf accessed on 25th

December 2013 at 1 AM.

8

It is a kind of retail marketing platform, where a business entity seeks or rather ‘chases’ customers

actively. It is a pro-active version of e-commerce, offering customers’ deals, packages or bundle of

products at competitive prices. It negotiates or bids by offering ‘best possible deals’ to the customers.

It is often referred to as ‘reverse auction’.15

Eg. www.monster.com.

( Image 3: Source: http://www.eservglobal.com/uploads/files/index.pdf)

iv) Consumer-to-Consumer (C2C)

It represents a consumer business platform, where one consumer acts a resource person selling goods

in an online medium to other consumers at a price. One may call such processes as ‘consumer 2

consumer’ auctions. It is in the realm of resale and rentals. It has helped in creating a market for

second hand goods. A B2C model is no longer a ‘business -to-consumer model, it is integrating

functionalities of other models like C2C or C2B also. Eg. www.bazee.com, ebay.

( Image 4: Describes C2C Model)

(Source: http://www.eservglobal.com/uploads/files/index.pdf)

15 Id

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All in all, the success of e-commerce models is built around managing supplies, partners and

customers effectively and efficiently. 16

3. E-Commerce: An Indian Perspective

E-commerce: Phase I

The first phase of e-commerce lasted from 1996 to 2001. It helped in shaping new rules of

commercial transactions in the electronic marketplace. India followed the models of developed

countries while creating e-commerce models, without realizing that one needs technology tools and

business maturity to understand this new medium of business. The result was mushrooming of

‘dotcoms’ as new business engines without proper infrastructure. The dotcoms bubble burst of 2001

gave useful lessons in terms of e-commerce, i.e. without the spread of technology, development of

critical infrastructure; one cannot have revenue generating e-commerce activities. 17

E-commerce: Phase II

Post 2002, the useful lesson , which e-commerce realm got was one has to have a sensible

business model, which should not only work technology wise but also business wise. It also gave a

message that without electronic banking18

e-commerce will not be successful.

3.1 E-commerce: Changing Perceptions

The reasons of this change in perception from phase I to phase II are provided as under:

3.1.1 Better Information Technology Infrastructure

E-business models are moving from the proprietary EDI ‘specific’ solutions to Internet based

‘mass’ solutions. It has more to do with better computer penetration, increase in number of mobile

phone users and Net users, high-speed connectivity rather than anything else.19

3.1.2 Wider Acceptance of Online Payment System20

Online payment mechanism means ‘payment’ and ‘acceptance’ of virtual money. Any such

online payment system requires not only the parties transacting business over the Net but also a

‘payment gateway’ facilitating such transactions, Eg. Credit cards and other modes of online

payment.21

Proprietary online payment systems like Cyber Cash , E-Cash can be used online for

making payments such as Secure Sockets Layers (SSL, developed by Netscape provides privacy,

integrity and authentication through digital certificates).22

Smart Card are being used over public terminals (Websites, ATMs, Telephone lines) etc. A

system of Credit card transactions over the Internet is being currently developed jointly by Visa and

MasterCard with technical assistance from companies like Netscape, IBM and VeriSign; which is

16 Turban Efraim et al Electronic Commerce.:6th Prentice Hall Press Upper Saddle River, NJ, USA: 2010.

17 Joseph P. T. S. J., Ecommerce an Indian Perspective: PHI Learning Pvt. Ltd., 23-Dec-2011.

18 Electronic banking is a process of delivery of banking services and products through electronic channels such

as telephone, Internet, cell phone, etc., and it encompasses Internet –telephone- mobile banking, etc. First

example of e-banking was in the form of Shared Payment Network System (SPNS) or SWADHAN network of

ATMs for 24x7 electronic banking service to the customers’ any where in the city of Mumbai. 19

E-business – Chapter-3 Available at http://highered.mcgraw-

hill.com/sites/dl/free/0073195588/438531/sample_chapter3.pdf accessed on 26th December 2013 at 2 PM. 20

Sharma Vakul on E-commerce: A New Business Paradigm in Legal Dimensions of Cyberspace edited by

Verma S.K. et al. ILI Publication: 2004. 21

Ibid 22

Supra note 13.

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known as Secure Electronic Transactions (SET). 23

The adoption of Digital/ Electronic Signatures as

authentication standards provides integrity, confidentiality and non-repudiation of electronic records

for legal recognition of electronic contracts and legal sanctity to online payment system.24

2.1.3 Legal Recognition to E-commerce Practices

Legal recognition to E-commerce practices has come a long way from the initial adoption of

UNCITRAL’s Model Law on Electronic commerce by the General Assembly of the United Nations in

early 1997. The purpose is to encourage the use of electronic commerce and to provide nations with

model legislation “governing the use of alternatives to paper-based methods of communication and

storage of information” 25

. It is based on “functional-equivalent” approach and gives legal acceptance

to electronic records and digital signatures i.e. asymmetric cryptosystem.26

2.1.4 Adoption of Security Standards by the Industry

Business thrives on safety, security and trust whether it is offline or online. Internet being an

open, integrated and public system requires far better security coverage than its offline counterpart.27

It needs an ‘encryption’ technology that provides:

(i) Confidentiality

It uses encryption technology to ‘encrypt’ the information in such a way that only an intended

user could ‘decrypt’ the information.28

(ii) Authentication

It means use of encryption technology to identify the sender or originator of the information.

Similarly it should be possible to ensure that the message is sent to the person for whom it is meant.

(iii) Integrity

It is to verify that the information, which is received, has not been manipulated during its

transmission. The information should appear exactly as it was stored or sent by the sender or

originator. 29

(iv) Non-repudiation

Encryption technologies make it possible to bind messages and message acknowledgements

with their originators.30

(v) Auditability

23 Khem:“Development of Ecommerce” available at http://www.siteforinfotech.com/2012/11/development-of-e-

commerce.html accessed on 2nd

Feb 2012, at 3 PM. 24

Ibid 25

Supra note 20 26

Miller Riel et al: “The Promises and Perils Of 21st Century Technology: An Overview Of the Issues”,

available at http://www.oecd.org/futures/35391210.pdf accessed on 1st December 2013 at 7AM. 27

Fred B. Schneider. Trust in Cyber Space : National Academy Press.1999. 28

James Boyle: “Foucault in Cyberspace: Surveillance, Sovereignty and Hardwired Censors” 66 University Of

Cin Va ti Law Review 177 29

Information Security: Challenges and Solutions available at http://www.peterindia.net/ITSecurityView.html

accessed on 19th December 2013 at 9PM. 30

Supra note 23

11

The Data Encryption Standard (DES) and the RSA algorithm (patented by its inventors,

Rivest, Shamir and Adleman, in 1977) have emerged as symmetric and asymmetric cryptographic

protocols respectively. 31

It is to ensure specified confidentiality and integrity of data. Industry

(payment gateways, banks, online service providers etc.) has been able to adopt cryptographic

protocols to encrypt information, messages or data. When a single secret key is used to maintain

communication between the sender and the receiver, it is referred to as a symmetric cryptography

(ATM cards) or private-key cryptographic system and where different keys are used for encryption

and decryption purposes, it is referred as a asymmetric cryptography (digital signature certificates)or

public-key cryptographic system.

4. From E-Commerce to M-commerce

One of the rapidly growing areas of e-commerce is mobile (or m-) commerce. M-commerce was born

due to new technological advances, such as, GSM networks, WAP protocols ( Wireless Application

Protocol is for accessing information over a mobile wireless network), and 3G technologies. Actually,

m-commerce was long perceived but was first introduced in the late 1990s. By using innovative

technologies, mobile operators have promised to consumers more effective ways of communicating

and transacting their business.32

If e-commerce can be seen as a dynamic ‘commercial’ process, then m-commerce can be referred

to as a dynamic ‘techno-commercial process. It is far more consumer oriented than e-commerce

practices. M-commerce depends on the ‘efficient’ assimilation and adaptation of technology by the

consumer, for the consumer, of the consumer. 33

In the last 20 years, the world has seen evolution of

new communication technologies are as under:

1G: First step of cellular architecture, represented by brick like phones,

•2G: Introduced digital technology. Primarily used for voice communications but data features

like short messaging service (SMS) allowed,

•2.5G: Currently the most prevalent technology standard, has better software allowing increased

data rates

•3G: Promises greater bandwidth, bigger data pipes to users allowing more information flow,

and

•4G: High speed multimedia delivery smart phones.

Table 2: Describes evolution from 1G (First Generation Mobile Phones) to the current 4G (Fourth

Generation Mobile Phones):

It is important to note that a website is useful, if it does something practical, such as allow

customers to access their accounts or businesses to cut costs by improving & streamlining business

processes. Similarly, if ‘m-commerce’ is to complement ‘e-commerce’ – it must have practical

31 Sharma Vakul, Information Technology – Law & Practice: Universal Law Publishing: 2009.

32 Supra note 1

33 Maamar Zakaria:“Commerce, E-Commerce, and M-Commerce: What Comes Next?” 12: 46, December

2003:Communications Of The Acm:251

12

applications.34

Moreover, m-commerce has its own distinctive features, namely, Personalisation, On

Demand Services, and Micropayments

4.1 M-commerce is about Personalization

It includes: made for me services (examples, like ringtones, ringback tones, gaming etc.) , sms/mms

,instant messaging , mobile blogging , real time responses, mobile banking etc.

4.2 M-commerce is about On Demand Services

All information, especially personal information has to cope with new demand. People want

to access their personal data & their personal software-environment anytime, anywhere. 35

4.3 M-commerce is about Micropayments

It is a financial payment in an amount that is small relative to the transaction costs that would

be incurred in making the payment using traditional payment mechanism. Eg. Desktop access has

migrated to mobile environment. 36

4.4 Differentiating between E-commerce & M-commerce:

The question – is there a difference between the two? The answer is YES and it is NO also! YES, in

the sense that in India for the large section of society e-commerce meant use of computer, and

computer network for online transactions. The e-commerce remained confined to metropolitan

centers, there existed a digital divide – digital haves’ and digital have-nots’. On the other hand, in the

last 15 years, mobile phone is the first screen for the majority of the population, whereas for urban

population in India – mobile has been the third screen – the earlier two were TV and Computer. This

difference has made use of mobile applications complementary for urban dwellers for e-commerce

purposes, and supplementary for the rest of the population. 37

NO, in the sense that m-commerce is a logical extension of e-commerce processes. E-

commerce includes m-commerce. These days, desktops are mobile and with the result all e-commerce

applications are available on mobile phone as well. It is for the user to decide from where he is

performing commercial transaction – whether from a computer or from a communication device.38

Comparison between E-Commerce and M-commerce is given as below39

:

Sr. No E-Commerce M-Commerce

1. (Client/server) Approach (Mobile-agent) Approach

2. The searching process may be boring

and repeatative

the mobile agent can do the searching as per the

specification of requirement

34 Infra note 43

35 Åkesson Maria: “ Value proposition in m-commerce: exploring service provider and user perceptions

available at http://www.diva-portal.org/smash/get/diva2:239430/FULLTEXT01 accessed on 15th December

2013 at 8PM. 36

Report on E-Commerce And Development, The UNCTAD Secretariat 2001. 37

Sharma Vakul.White Paper on E-commerce. IAMAI Pub. 2010 38

Khalled hassanian et al:” Understanding M-commerce: A Consumer Centric Model.”, 3 (2002) : QJEC :247. 39

Chan, Lee et al , E-Commerce: Fundamentals and Applications. John Wiley & Sons, Ltd., England:2001.

13

3. The search process ties down resources,

while you visit each site in turn

The search process, frees up your resources.

4. If the network gets down, you may need

to search it from the beginning.

It is less dependent on the network condition as

the searching is done at the remote sites by

mobile agent.

5. It is time-consuming because you visit

the sites only one by one.

Efficient as the search can be proceeded in

parallel by sending out multiple agents.

6. Device: Imovable or portable, Public or

private. Eg. Desktop, PC, Notebook etc

Device: Portable handy private device. Eg.

Mobile, PDA etc

(Table 3: describes comparison between E-commerce and M-commerce)

5. E-Commerce: Terms of Service Agreements

The purpose of terms of service agreements means and includes, to set down what you have

agreed; or Present the inflexible terms under which you will accept business including: Defining the

contract; Defining the business procedures; Protection of your business and your rights; Limitation of

your liability; Other relevant matters etc. 40

Ground rules for framing terms of service agreements are as under:

(i) Know your site implies that one should be aware of website’s revenue model, its

functionalities and target users.

(ii) Website’s strengths and weaknesses can be analysed by understanding every aspect of the

site.

(iii) Transform your site’s strengths and weaknesses into appropriate disclaimers

(iv) Cover yourself from all angles by framing appropriate,adequate and relevant terms of service

conditions.

5.1 A model Terms of Service (ToS) conditions:

The terms of service conditions may include the things such as Notice, Website Limited

License, Limitations on Use, Intellectual Property Rights, Linking to this Website, Advertisers,

Errors and Corrections, Third Party Content, Disclaimer, Limitation of liability, Indemnification,

Third Party Rights, Unlawful Activity, Governing Law and Jurisdiction, Modifications to Terms of

Use, If You Do Not Agree etc. Following are some important clauses:

5.1.1 Notice

40 Emmanuel Marilly et al: “Service Level Agreements: A Main Challenge for Next Generation Networks”

available at http://www-rp.lip6.fr/adanets/PublicDoc/Papers/001_ECUMN02-SLA-NGN.pdf accessed on 16th

December 2013 at 12 AM..

14

Make it explicitly clear to all users that if they do not agree to the terms & conditions they should not

access this site or any of its links.

5.1.2 No Warranty / Disclaimer of Warranty

Inform that all the information & material (text, graphics, links or other items) are provided “as is”,

“as available”.

5.1.3 Disclaim all Errors or Omissions

Disclaim all kinds of implied, express or statutory warranties, failure of performance, interruption,

defect, delay in operation or transmission, computer virus, or line or system failure.

i) Site Contents, Ownership, Use Restrictions

Create copyright for all the information & material (text, graphics, links or other items).

Make the user responsible for providing true, accurate, current and complete information, for

example: Terms of Use / Service Agreement 41

5.2 Protecting the business

5.2.1 Framing a Privacy Policy

Merely creating terms of service conditions is not enough. It must be complemented with an

appropriate privacy policy also. Following questions need to be asked:

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 be given to the individual to opt-out from

collection and distribution of online information.

What will be the business transaction consequences of an individual who has refused to

provide private information or has refused to accept a cookie? How individually identifiable

private information collected can be reviewed, corrected or removed? How frequently the

privacy policy will be reviewed? Whether the site is independently verified to ensure that its

security controls adequately protect its customers from risk of security breaches?

5.2.2 Objective and Contents of Privacy Policy:

It may include Privacy Notice, the Information which website collects, how the website uses the

information, how the Information will be protected. Privacy policy on the Web site is a Platform for

Privacy Preferences (P3P) industry standard to allow Web users to gain more control over the

personal info being collected on the Web and to make privacy policies easier to find and understand;

determine if Web site privacy policies match users’ privacy needs42

5.3 E-commerce: Service Level Agreements43

41 Ibid

42 Ackeram Mark S.: Privacy in persuasive Environments: next generation labeling protocols: 8 Pers Ubiquit

Comput (2004): 430–439. 43

Sharma Vakul. Handbook of Cyber Laws .Macmillan India, 2002.

15

In order to create e-commerce related websites, an entrepreneur has to enter into various

agreements with different service providers. He may be entered into domain name registration

agreement, content development agreement, web designing agreement, web hosting agreement etc.

5.3.1 Domain Name Registration Agreement

Domain names are bought and sold every day, often with no legal problems.44

It is an

agreement between the Registrar and the Registrant. Person who pays to acquire the domain name is

being referred to as the Registrant.45

The main clauses of such an agreement to include Place/location

of registrar, Security to protect domain name registration records, Right of refusal, Transfer and

assignment of domain name, Transfer to another domain name registrar, Length of domain name

registration period, Renewal of domain name, Mandatory information required from the registrant,

Revocation of domain name, Transfer and assignment of domain name, Place of jurisdiction and

governing law, Whether ‘Uniform Domain Name Dispute Resolution Policy’ (UDRP) applicable

etc.46

5.3.2 Content Development Agreement

If a company elects to develop its website without outside assistance, it enters smaller number

of agreements which cover licenses for web development to create and maintain content. If, on the

other hand, an organization outsources its website development, it needs to enter into a developer’s

agreement with a third party47

i.e. between the Content developer and the Website owner. The main

clauses of such an agreement to include: Define content, Exclusive or non-exclusive right to content,

Issue of ownership of copyright / trademark related to content, Display all copyright notices, bylines,

disclaimers, restrictions, etc., Maintaining editorial integrity of the content, Retaining all rights, title

and interest in the content, Content usage rights over multiple platforms/media, No liabilities for any

indirect, incidental, special or consequential damages, Place of jurisdiction and governing law etc.

5.3.3 Web Designing Agreement

It is an agreement between the Web designer and the Website owner. The main clauses of such an

agreement to include: Designing cost for the ‘home page’ & other web pages, Item wise designing

cost -image, photograph, flash, banner ads etc., Confidentiality of designs, Copyright and trademarks,

Use of licenced software, Prototype / Beta testing and final approval, Deployment/ debugging of the

website, Time period for completion, Training of personnel, Indemnity against third party claims,

Jurisdiction and governing law. 48

5.3.4 Web Hosting Agreement

It is an agreement between the Web hosting service provider and the Website owner. The main

clauses of such an agreement to include: Bases pricing on bandwidth used, Rents racks /Rackspace on

44 Michel Cyger, Domain Name Purchase Sale Agreement available at http://www.domainsherpa.com/domain-

name-purchase-sale-agreement/ accessed on 31st October 2012.

45Abbott Frederick M.: “ On The Duality Of Internet Domain Names: Propertization and Its Discontents 1: 3:

2013: Journal Of Intellectual Property And Entertainment Law: 1. 46

Present online dispute resolution service providers are Asian Domain Name Dispute Resolution Centre

(ADNDRC), CPR Institute for Dispute Resolution National Arbitration Forum (NAF) and WIPO. 47

Richardson Helen H.:“Website Development Agreements/Licensing of Website Content” available at

http://files.ali-cle.org/thumbs/datastorage/skoobesruoc/source/CL035_SL035-Ch07_thumb.pdfaccessed on 31st

October 2012 at 3:13 AM 48

Carol A. Kunze, “Web Site Legal Issues” 2: 14: 1998 Santa Clara Computer & High Technology Law

Journal:477

16

servers, Sell racks on servers, Data backup, performance monitoring and browser behavior analysis on

customised basis, Offers site development services, mirroring and caching, e-commerce web

solutions, Offers support/monitoring services round the clock, UPS / Back up power/Generator,

Disaster management and business continuity services, if any, Percentage of hosting uptime or

downtime, Site bandwidth/Backbones connected, Jurisdiction and governing law.49

6. Ecommerce & Online Advertisements

Online advertising is a part of e-commerce ecosystem. It has played an important role in bringing

the consumer and the businesses closer and like e-commerce it is has also grow exponentially. 50

6.1 Why Online Advertising?

Online advertising is a growing phenomenon because of Growing Net Population,

Exponential Growth in E-Commerce Transactions, and Emergence of Net as a Channel to

Complement ‘Offline’ Commercial activities etc.

6.2. Types of Online Advertisements51

The types of online advertisements include Text ads, Display Ads, Flash / DHTML Ads,

Interstitial Ads, Video Ads, On-Site Sponsorships, Advertorials, Contextual Targeting, Behavioral

Targeting, Geo-Targeting / Local Advertising, Websites, Banner Ads, Interactive Ads, Pop up

Windows, Blogs/Blogging, Ticker Tape, Web Directories, Search Engines,Sponsored Links,

Hyperlinking Facility,Spam Emails/Spamming etc.

6.2.1 Text ads

Advertisements displayed as simple, text-based hyperlinks are known as Text Ads. They do

not include graphic images and are sold on non-search website which can be served either by

individual websites, or a publisher’s own ad servers52

. Eg. Humana Health Insurance

6.2.2 Display Ads

Graphical advertisements featured on websites are known as Display Ads. Display ads are

often available in many standard shapes and sizes, including: banners, leader boards, skyscrapers,

large boxes, and other sized graphical ads. Display ads are sold on non-search websites and can be

served either by individual websites, or a publisher’s own ad servers. Eg. Blair Clothing

6.2.3 Flash / DHTML Ads

These kinds of ads incorporate Flash animation or other motion graphics. Ads may be animated

display ads in more traditional shapes and sizes, or, they can be sophisticated that function similarly to

pop-up ads but with much deeper integration into the overall design of the site.

6.2.4 Interstitial Ads

Interstitial ads appear between web pages that the user requests. These load in the background and do

49 Ibid

50 Available at http://www.navneet.tecindia.co.in/navneet-cyberlaw/MIR-013-B1-unit3.pdf

51 Available at http://www.webadvantage.net/digital-marketing-services/online-media-buying-planning/types-

of-online-advertising accessed on 1st November 2012 at 3 pm. 52

Singh Debudatta: Variants of online Advertising available at http://www.slideshare.net/rajarajurani/internet-

advertising-5655436

17

not interrupt the users immediate browsing experience, they are a preferred method of delivering ads

with rich media, streaming video, and/or large graphics.53

6.2.5 Video Ads

Currently video ads can either be content created entirely by the advertiser, or show your ad within a

video. Major search properties like Google (through YouTube), MSN, Yahoo, and AOL all offer

advertising on their video websites.54

6.2.6 On-Site Sponsorships

On-Site sponsorships are ads (typically just a company’s logo) that can be bought on

individual website which appear in an area reserved for sponsors. Eg: Connections Academy55

6.2.7 Advertorials

Advertisements in editorial form that appear to contain objectively-written opinions are

known as paid editorial ads, or “Advertorials” which are typically featured on publisher’s websites

and promote products and services related to the website’s content. Eg: International Federation for

Animal Welfare (IFAW)

6.2.8 Contextual Targeting

When ads are served based on related content a user is currently reading or browsing online, it

is known as contextual targeting. Contextual ads are purchased through major search properties like

Google, Yahoo, MSN, and through many other contextual ad networks. Eg: IFAW56

6.2.9 Behavioral Targeting

Behavioral targeting is based on a variety of online factors such as recent online purchases,

searches, and browsing history, as well as demographic details such age or gender. Eg.Connections

Academy57

6.2.10 Geo-Targeting / Local Advertising

When ads are served based on a user’s geographical location, it is known as geo-targeting. It

also includes network buys through radio, television and newspaper websites, as well as localized

search engines and directories such as Yahoo! Local, Google Local, and AOL City Guide.

6.2.11 Websites

A website is like an electronic brochure, which is available 24x7. This could be a most cost effective

tool not only to market, but also to sell goods and service over the Internet.

6.2.12 Banner Ads

A banner advertisement is a small graphics link, sometimes called a ‘hot link’, placed on a Web page.

The banner is linked to the advertiser’s Web pages, so that clicking it will transport the browser into

the advertiser’s site. It can be placed anywhere on a Web page. The effect of such ads is precisely

53 Maja Levi Jaksic et al: “Innovative Management and Business performance.” University of Belgrade, faculty

of organizational Sciences: 2012. 54

Ibid 55

Ibid 56

Available at http://www.maxklick.com/types-of-internet-advertising.php accessed on 24tth November 201at

11.30 AM. 57

Ibid

18

measurable, as the advertiser collating ‘click-throughs’ can easily count the users who click on the

banner.58

6.2.13 Interactive Ads

One of the simplest approaches to extend the value of a simple banner is to create an

interactive ad. It requires the ‘programmability’ of the computer on which the advertisement is

displayed, so as to create new and interesting shapes, images or messages whenever the banner is seen

– by using the facilities of Sun’s Java or Microsoft’s ‘ActiveX’ applets.

6.2.14 Cookies

The data stored on the local browser is referred to as a ‘cookie. Cookies can be used to record

the location of the browser, so that only advertisements for a specific country, city, or even individual

user are displayed. Cookies help in creating a profile of the user so that only those advertisements for

a particular web page or site those are relevant to the user are displayed before him.59

6.2.15 Blogs

This is a web page made up of usually short, frequently updated posts that are arranged

chronologically. These are being increasingly used to influence the viewers and many times these

blogs are used to promote products and services in a clandestine manner. These days, a micro-

blogging site, like twitter is being to promote all kind of causes.60

6.2.16 Search Engine Listings, etc.

Other facilities, like ticker tape, use of meta-tagging for search engines/web directory listings

have given a great impetus to online advertising. In 2000, Google introduced its first advertising

programme called Ad Words, allowing advertisers to place their ads alongside search results. These

were not called advertisements, but sponsored links, demarcated by a vertical line. By 2002, it started

charging advertisers per click text advertisement. The advertiser will only pay, if that user decides to

click on the description and follow the link to the advertiser’s actual site. The advertisement is

displayed for free with the site owner paying for those clicks through within a daily budget they have

stipulated in advance.61

In 2005, Google started AdSense, which extended to other sites, which are

using Google search.

6.2.17 Spamming

Spam is a form of unsolicited e-mail. Most spam comes with no effective return address, and

no easy way to trace sender because it is inserted into the network using a variety of techniques that

rely on badly-configured mail systems, web servers and network components. Following are the

advantages and disadvantages of spamming:

Advantages of Spamming:

Sender

Advantages of Spamming:

Recipients

Disadvantage of Spamming

Mass mailing of messages Gain in terms of information, if

not knowledge

Using valuable bandwidth/

clogging of the Net

58 Supra note 43

59 ibid

60 Supra note 13.

61 ibid.

19

Global reach of messages Brought in social behaviour

change:

Filing up disk space in

computers, networks etc.

Extremely low cost advertising Forced cautious approach Slowing down the Net access

rate

Personalised messages Forced concern for privacy Information overload

Cost effective Frauds/forgeries

Anonymity of the sender Annoyance to the Net users

Table 4: describes Advantages and disadvantages of spamming

6.3 Online Advertising: Ethical Issues

Online advertising is a double-edge sword. There is always a thin line of demarcation

between a ‘legitimate and illegitimate information’. E-commerce sites are in a hurry to maximize their

profits and often they use questionable means in the form of questionable technologies to gain

knowledge about consumers choices and preferences.62

6.3.1 Surveillance Technologies63

Whenever a person browses, visits a site, sends an email or chats online, he leaves his

‘distinctive’ IP address behind. It is possible either by searching IP registration databases or by

conducting a trace route, to determine an approximate physical location of an IP address. Other

surveillance technologies being widely used are Cookies, Globally Unique Identifier, “GUID”, Web

bugs, Email or document bugs, Spyware and Online digital profiling, Disintermediation and

Reintermediation etc.

6.3.1.1Globally Unique Identifier (GUID)

GUID is software that is embedded in the computer’s hardware. It can be read remotely from across

the network. For example, one may find GUID embedded on Ethernet cards, used in Local Area

Network (LAN). The result would be eavesdropping of all the computers connected through LAN.

6.3.1.2 Web Bugs

Web bugs are being increasingly used by online advertisers to create a users’ database. It could be a

part of a banner ad on a website’s web page that a person is viewing. The embedded instructions

would cause the person’s browser to transmit to the advertiser’s server, the URL of the page the

person is visiting, whether the person has clicked or not on the banner ad. 65

6.3.1.3 Email & Document Bugs

62 Robert I. Berkman et al. Digital Dilemmas: Ethical Issues for Online Media Professionals:Iowa State Press,

2003. 63

Supra note 31 64

Ibid 65

Ibid

20

It is a good tool in the hands of a sender of an email and documents to know whether the recipient has

read the email or opened the document. As these electronic messages /documents could be laden with

web bugs and they “call home” and report the time and date the message was opened.66

6.3.1.4 Spy ware

Some software developers have included code (Trojans, Backdoor Santas, Adware or Drive-by-

Downloads etc.), within their applications that cause the user’s computer to transmit information back

to the software developer via Internet67

. One use of technology is to deliver advertising content to the

user that is tailored to the information that the spy ware gathers and another is to scan the user’s hard

drive to see what other software he has installed, adding this information to a profile of the user that

will be used for marketing purposes.68

6.3.1.5 Online Digital Profiling

International online 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 to another. This is

how the advertising companies, known as profilers build a comprehensive profile of the user’s surfing

habits and use it to put ads targeting him on their partner sites, using profiling software tool(s).69

7. Disintermediation and Reinter-mediation

Intermediation is one of the most important and interesting e-commerce issue related to loss of

jobs. The services provided by intermediaries are :

i) matching and providing information which can be fully automated, and is likely to be in e-

marketplaces that provide free services.

ii) The value added service requires expertise and this can only be partially automated.

The phenomenon by which Intermediaries, who provide mainly matching and providing

information services is called Disintermediation.70

The brokers who provide value added services or

who manage electronic intermediation or infomediation, are not only surviving but may actually

prosper, this phenomenon is called Reintermediation. The factors that should be considered here are

the enormous number of participants, extensive information processing, delicate negotiations, etc.

They need a computer mediator to be more predictable.71

8. Online Payment System

66 Ibid

67 Kavita Arumugam,Demographics of Adware And Spyware A Thesis available at

http://etd.auburn.edu/etd/bitstream/handle/10415/192/SANYASI_ARUMUGAM_58.pdf?sequence=1 accessed

on 17th

December 2013at 1.30 AM. 68

Zittren Jannathan. The future of the internet and how to stop it . Yale University Press and

New Haven, 2008. 69

Supra note 43 70

Turban Efraim et al. Information Technology For Management : Transforming Organizations In The Digital

Economy.6th

JohnWilley and Sons India Edition, 2008. 71

Case Study On E Governance System Of India available at

http://share.pdfonline.com/404ef648d6864f089043c37f891ca8a6/Final%20E-Com%20Print.htm accessed on

15th

December 2013 at 2AM.

21

For effective growth of e-commerce, a secured online payment system is a necessity. Often online

payment system is being referred to as Electronic Fund Transfer (EFT). EFT means transferring

money from one bank account to another in the same (intra bank) or different bank branches

(interbank). EFT has been in use since 1960s when banks first started using proprietary EDI network

to share banking information. This was later converted into automated clearing houses. At global

level, to facilitate faster fund transfer between the remitter and beneficiary, the payment instructions

are sent through telex, SWIFT (Society for Worldwide Interbank Financial Telecommunications),

Wire Transfer, CHIPS (Clearing House Interbank Payment System) etc. 72

In E/I-commerce,

customers are generally unknown, hence the payments are to be ensured before delivery of goods and

services through EFT.

In India, electronic fund transfer system has got a fillip when the Central Government brought in

forth the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002, by

introducing the 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 the course of a

clearing cycle, either by the clearing house or by the bank whether paying or receiving

payment, immediately on generation of an electronic image for transmission, substituting the

further physical movement of the cheque in writing.

As evident from the aforesaid section, the truncation process involves replacing physical cheques with

their electronic images, which will travel through the stages of the clearing cycle. During the whole

process of truncation the instrument would remain with the collecting bank. Over the period of time,

the Reserve Bank of India (RBI) has taken various initiatives to introduce technology to facilitate

electronic fund transfer at both corporate and retail banking level. For example, electronic settlement

in the form of the electronic funds transfer services – Electronic Clearing Services (ECS), i.e., Credit

Clearing and Debit Clearing and retail Electronic Funds Transfer(EFT).

Electronic payment may be made through Debit Card, Credit Card, Electronic Cash, and

Electronic Cheques etc. Electronic Payment System is not free from risk. Only a well-designed

electronic payment system can minimize the risk.73

72 Ms. Deshmukh Vaishnavi.J. ET AL: “Payment Processing Systems and Security for E-Commerce: A

Literature Review.” 2:5International Journal of Emerging Research in Management &Technology ISSN: 2278-

9359. 73

Supra note 2

22

( Image 5 : Describing : Online payment process)

(Source : http://businesstoday.intoday.in/story/start-ups-challenege-to-online-payment-gateway-

segment/1/196305.html)

9. Electronic Taxation

As e-commerce occurs in various forms and between various entities in the market, the

question is how to tax it , if the taxing good or service is a digital download. The Governments’ have

always been taxing brick and mortar businesses as per the statutory provisions, businesses are being

taxed on the principles of physical presence or ‘substantial nexus’ criteria;74

in a state where their

product is delivered. Presumably the point of sale is the state to which the goods are shipped, and

thus, the consumer owes sales taxes to this state.75

It is important that transactions should not be

immune from taxation solely because the sale is conducted through a medium distinct from that of a

traditional brick-and-mortar retailer. Similarly, it is not prudent to tax these e-commerce models

purely on the basis of traditional approach to ‘brick & mortar’ taxation as they have their own unique

features.

9.1 Uniqueness of E-Commerce Taxation

Tax revenues are a major source of income to the Governments. One major concern in

Ecommerce is which taxing authority has the right to collect the revenues.76

It is the nature of the

‘technology based transactions’ which has given rise to:

(i) the lack of ‘physical’ connection between a consumer and a seller located in different state;

74 Swain John A.:“State Income Tax Jurisdiction: A Jurisprudential and Policy Perspective.” 1:45 William and

Mary Law Review, Article 5. 75

Ibid 76

Lukas Araon: “Draft Copy: Tax Bytes: A Primer On the Taxation of Electronic Commerce” available at

https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CC4QFjAA&url=ht

tp%3A%2F%2Fgovinfo.library.unt.edu%2Fecommerce%2Fdocument%2FAaronLukasFedReg.doc&ei=1hzDU

sCiE4TqiAfP5YGoDA&usg=AFQjCNHIohodi2EfnnniMUgguaTcb9Iw1g&sig2=fN-

UvxTr942DNBiaScepCA&bvm=bv.58187178,d.aGc accessed on 11 November 2013 at 4 PM.

23

(ii) changing location of web servers hosting the E-commerce website;

(iii) which country has the right to tax the transaction, and at what rate?;

(iv) non-taxation of digital goods, like software, music and data (or information);

(v) export and import of digital goods across international borders without paying customs duty

(or tariffs), bypassing the existing policies, regulations and tax system;

(vi) a parallel channel of transactions, ignoring the traditional documents based banking practices;

It is the nation state’s constitutional prerogative to levy taxes on any online economic activity

and has a right to define its own e-commerce taxation principles. Moreover, it is a myth that electronic

tax is ‘additional’ tax burden – the fact is it is a new tax, which is applicable in lieu of other indirect

taxes. Hence, new tax system is required to be redefined77

9.2 Taxing E-Commerce in India

The term “taxation” has been defined in Article 366(28) of the Constitution of India as:

‘taxation’ includes the imposition of any tax or impost, whether general or local or special, and ‘tax’

shall be construed accordingly;” it should be read along with Article 265, which states that: “no tax

shall be levied or collected except by authority of law”. 78

Thus while introducing any taxation regime

to tax e-commerce in India on domestic or international e-commerce merchants, it would be

interesting to see whether the tax laws in India, define business connection, the Permanent

Establishment, Online supply/delivery of goods (intangible) goods and services.

9.2.1 Establishing Business Connection

A business connection usually means an existence of business relationship between the

‘business entities’. The Income Tax Act, 1961 has not provided any exacting definition to the

expression “business connection”.79

As per section 9(1)(i), the said expression has often been used to

denote business relationship between a resident and a non-resident, also, even as an agent, any person

in India may have any business connection with the non-resident [section 163(1)(b)]. Almost 40 years

later, the Finance Act, 2003 has inserted Explanations 2 & 3 in sub-section (1), in clause (i) of section

9 of the Income Tax Act (effective from April 1, 2004), to identify what constitutes a ‘business

connection’ rather than physical ‘permanent’ location of ‘businesses. However, the Finance Act 2003

made no reference to applicability of the term ‘business connection’ vis-à-vis e-commerce.

It was held by the Supreme Court in CIT v. R.D. Aggarwal & Co.80

, that “A ‘business

connection’ must be real and intimate, and through or from which income must accrue or arise

whether directly or indirectly to the non-resident.

9.2.2 Establishing Permanent Establishment (PE)

The concept of PE took time to develop in India. In fact, it was DTAA81

with the U.S., when

for the first time in 1989 the term PE (Article 5) was first defined.

77 Supra note 43

78 Ibid

79Circular No. 1/2004, dated 2-1-2004: SECTION 9-Income Deemed To Accrue Or Arise In India

[Corresponding To Section 42 Of The 1922 Act available at

http://law.incometaxindia.gov.in/Directtaxlaws/act2005/sec_009.htm accessed on 23rd December 2013 at 9 PM. 80

[1965] 56 ITR 20 (SC).

24

The term permanent establishment shall include especially:

(a) a place of management;

(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop;

(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;

(g) a warehouse in relation to a person providing storage facilities for others;

(h) a farm, plantation or other place where agricultural, pastoral, forestry or plantation activities are

carried on;

(i) premises used as a sales outlet or for receiving or soliciting orders;

(j) an installation or structure, or plant or equipment, used for the exploration for or exploitation of

natural resources;

(k) a building site or construction, installation or assembly project, or supervisory activities in

connection with such a site or project,

An enterprise shall not be deemed to have a permanent establishment merely by reason of :

(a) the use of facilities solely for the purpose of storage or display of goods or merchandise

belonging to the enterprise ;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the

purpose of storage or display ;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the

purpose of processing by another enterprise;

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or

merchandise, or of collecting information, for the enterprise; or

(e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply

of information, for scientific research, or for similar activities which have a preparatory or

auxiliary character, for the enterprise.

A PE postulates the existence of an enduring and permanent nature of a foreign enterprise in

another country.82

The Finance Act, 2002 has introduced the definition of Permanent Establishment

(PE) in the IT Act, 1961. It shall mean to include a fixed place of business through which the business

of enterprise is wholly or partly carried on [section 92F(iiia)], a wide variety of arrangements, like a

place of management, a branch, an office, a factory a workshop or a warehouse etc. 83

The definition of PE as introduced by the Finance Act, 2002 is similar to The OECD Model Treaty,

which defines PE as ‘a fixed place of business through which the business of an enterprise is wholly

or partly carried on.’ [Art. 5(1)]. According to the New OECD Commentary, on the ‘OECD Model

81 Double Taxation Avoidance Agreement - an Agreement for the avoidance of double taxation and the

prevention of fiscal evasion with respect to taxes on income. India has so far signed DTAAs with 76 countries. 82

Edwin van der Bruggen, “International Tax Aspects of Providing Consulting Services on the Premises of the

Client” available at http://www.journal.au.edu/abac_journal/2001/may01/international.pdf accessed on 24th

December 2013 at 6AM. 83

Guidance Note on Report Under Section 92E Of The Income-Tax Act, 1961 (Transfer Pricing) [Based on the

law as amended by the Finance Act, 2012]

25

Treaty’ issued on January 28, 2003, a website is ‘a combination of software and electronic data” and

“does not in itself constitute tangible property’.84

Paragraphs 42.1 to 42.10 have been added

immediately after paragraph 42 of the Commentary on Article 5. It further clarifies:

(a) whether a website constitutes a “place of business”?

(b) whether location of a server constitutes a permanent establishment (PE):

- when an ISP hosts a website of the company, would it give rise to a PE where the ISP

server is located? Or

- when the company owns (or leases) and operates the server on which the website is

stored?

(c) whether the location of a computer equipment constitutes a permanent establishment when

functions performed through that computer equipment exceeds the preparatory or auxiliary

threshold?

In India, the concept of PE though defined, till date no clarification(s) has been issued regarding

extension of the concept of PE to include e-commerce and related activities. It is thus imperative that

a clear reference to e-commerce taxation must be given in statute books.

9.2.3 Taxing Digital Goods & Services

In India, under Article 366 (13) of the Constitution the expression good includes all materials,

commodities and articles. Different enactments over the years have further enlarged the definition of

goods. By virtue of Articles 286(2) Parliament may by law formulate principles for determining when

a sale or purchase of goods takes place in any of the ways mentioned in clause (1) and by Article

269(3) Parliament may by law formulate principles for determining when a sale or purchase of goods

takes place in the course of inter-State trade or commerce. This led to the enactment of the Central

Sales Tax Act, 1956. Subsequently, Parliament, inserted clause (29-A), defining the expression “tax

on the sale or purchase of goods” in expansive terms in Article 366 of the Constitution85

.

There is no Constitutional provision, Central or State tax legislation, which specifically define

“intangible goods”, it would be difficult to extend the expression “sale or purchase of goods” to cover

the “intangible goods” as well. However, the Constitutional Bench of five judges in Tata Consultancy

Services v. State of Andhra Pradesh86

, it was held by the Hon’ble Supreme Court that in India, the test

to determine whether a property is “goods”, for purposes of sales tax, is not whether the property is

tangible or intangible or incorporeal. The test is whether the concerned item is capable of abstraction,

consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed etc.

e.g., copyright, and software, bringing them within the purview of state taxation.

Nevertheless, in India, law is yet to distinguish between a digital ‘good and service’.

Downloading of MP3 music, streaming videos, films, software patches, applications may fall under

the category of digital goods, but if someone has subscribed to Value Added Services87

or any other

online service under a contractual arrangement then such a user will be charged with service tax. All

84Supra note 43

85 Constitution (Forty-sixth Amendment) Act, 1982

86 AIR 2005 SC 371

87 A Content Service Provider in arrangement with the Carrier (telecom service provider) under the National

Numbering Plan (short code) provides SMS based content, including content, interactive, & information

services

26

the ISPs in India are charging service tax on net connectivity and byte downloads making Internet

access/digital downloads under the ambit of service tax, which may be referred to as bit tax.

9.2.4 Applicability of VAT88

No State in India has defined ‘digital goods’ in its VAT regime till date. Nevertheless, e-

commerce service providers providing physical delivery of goods have obtained Tax Payer’s

Identification Number (TIN) under VAT and charging the applicable VAT from the individuals/users,

who have used their website/portal and ordered goods online. The Centre and the States are now

embarked on to design and implement a ‘Dual’ Goods and Services Tax (GST), to be levied

concurrently by both levels of government89

. The multi-stage value-added taxes that the GST would

replace are the CENVAT, the Service Tax levied by the Centre and the VAT levied by the States.

Under this regime of GST, both goods and services would be subject to concurrent taxation by the

Centre and the States90

. The advent of e-commerce involves online delivery which will affect taxes on

commodities and services in a crucial manner91

. Given the rapid growth of e-commerce in India, the

tax administration will have to review the existing tax procedures.

9.3 Tax issues in Cross-Border e-Commerce

9.3.1 Residence based taxation:

The concept of 'place of effective management' is not used in the Indian tax laws and has a limited

role to play in determining residential status. As per section 6(3) of the ITA, a company is treated as a

resident of India for Indian tax purposes and taxed in India in respect of its worldwide income only if

it is either incorporated under the laws of India or wholly managed from India. Whereas, as per the

provisions of Article 4 of the DTAA, the residential status of a person would have to be determined in

accordance with the domestic laws of respective countries. 92

Further, if a company is regarded as a

resident under the domestic laws of both the member nations to a DTAA, then the residential status

would be determined by its place of effective management.93

The key decision makers through video

conferencing and other like facilities could participate in control and management of a non-resident

company,94

but only a part of the control and management would be situated in India as opposed to

whole control and management to be situated in India as required under section 6(3) of the ITA.95

9.3.2 Source based taxation:

Where the ‘place of effective management' concept cannot be applied, the source rule of

taxation should be applied. Since it requires a fixed place of business, in an e-commerce environment,

implementation of the source rule will face complexities. Certain e-commerce transactions change the

mode of delivery from physical to electronic form, which may raise characterization issues. The

above contradicts with the characterization of income should not change with the change in mode of

88 Supra Note 5

89 Announced by the Empowered Committee of State Finance Ministers in November 2007.

90 As decided by the Empowered Committee of State Finance Ministers, 2008.

91 Purohit, Mahesh C. Sales Tax and Value Added Tax in India.Gayatri Publications, New Delhi, 2001.

92 Nishith Desai et al,.Taxation of Electronic Commerce in India.Taxmann Allied Services (P.) Ltd., 2002.

93 Ibid

94 Prof. S. M., Imamul Haque. E-Commerce in India: Issues & Remedies. 1:3:Business Spectrum : January --

June 2014 95

Desai Nitish et al, “Taxation of Electronic Commerce in India presented to Central Board of Direct Taxes,

India in response to the Report of the High Powered Committee by The eCom Taxpert Group” available at

http://www.taxmann.com/bookstore/professional/taxation-of-electronic-commerce-in-india.aspx 25 October

2012 at 12 am

27

delivery from physical to digitised form. In the case of cross border commerce, income derived by a

person may be taxed in the source country ‘having connection with generation of income’. 96

A

sufficient connection for this purpose would require the foreign enterprise to have a Permanent

Establishment in the host jurisdiction.97

9.4 Challenges before Tax authorities

At global level, Taxation authorities need to enhance technical knowledge to mach up to

electronic reality as procuring information from taxpayers and certifying tax compliance in an e-

commerce is a sever issue .Some major challenges are :

(i) Identifying the tax payer, in Ecommerce.

(ii) Obtaining access to verifiable information and documents.

(iii) Obtaining access to encrypted data

(iv) Developing a response to the advent of electronic money (e-cash) and ensuring efficient

mechanism for collecting tax especially from non-resident tax payers.

(v) Need for initial inter-government and multi-jurisdictional co-operation and agreement to

synchronize the taxation treatment.

(vi) Need to monitor cross-border business activities on the Internet.

(vii) Privileges such an extended filing dates for tax returns could be granted to tax payers

who conduct their dealings with the tax authorities electronically.

(viii) General legislations and domain registration requirements and investment attraction.98

The revenue authorities should not simply focus upon taxation of e-commerce per se. Rather, their

analysis should extend more broadly to ensure a deeper understanding of the nature of e-business as it

is today and as it will develop tomorrow.

10. Conclusion and Suggestions

The e-commerce is the backbone for new economy, which is revolutionary and dynamic in

nature; whether it is E-commerce or M-commerce, it creates opportunities for both the entrepreneurs

and the consumers. However, there are some challenges to strike a balance between improvement in

technology and legal frame work. Hence, based on above study, the following findings and

recommendations can be suggested :

E-commerce in India includes broadly three areas, software exports, web-enabled services, &

e-trade. Hence agenda inculcating ecommerce should be prepared for the future multilateral

trade.

96 Ibid

97 Ibid

98 Mr. Dayana M.k, “E-commerce And Taxation”, available at

http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=2cf77603-926f-43c0-86b8-

6842bcd1de7b&txtsearch=Subject:%20Taxation accessed on 22nd

October 2012 at 2 pm.

28

With respect to the privacy and data protection, it is essential to have appropriate Terms of

Service and Privacy Policy for all e-commerce and m-commerce practices.

The concept of electronic taxation is still in the budding stage. There is a need to recognize

the prospective of e-commerce and to introduce new e-taxation practices. The government

should prepare a policy to deal with the challenges in Ecommerce at both the central and the

state VATs.99

Future tax policy on e-commerce should be consistent with the principles of

international taxation to regulate E-commerce and its development.

As the e-commerce laws are fundamentally targeted to protect the citizens, and challenges in

implementation strategy, the awareness among the citizens is required to be done. Adequate

training should be provided to the relevant government officials who would draft and

implement policies relating to e-commerce.100

Parallel to IT Act, Certifying and authentication authorities have to be fully operational to sort

out the issues of security and payments. Banking laws and regulations thus need to be

adjusted to the new formats and requirements so that EFT and plastic money can work

without any hassle and fraudulent activities.

Summary:

Module began with the brief introduction about the E-commerce stating that with the technological

advancement, the acceptance of e-commerce has enormously improved owing to its fast and

expedient way of trading goods and services. India is providing a base for e-commerce business

models. The module covered topics such as concept and development of Ecommerce ,differences

between electronic commerce and M-commerce, concept of online payment along with types, uses

and issues involved, Ecommerce and online advertising: its types, advantages and disadvantages and

lastly taxing ecommerce in India: concept, principles, issues and suggestions. Lastly, all in all it is

concluded that ecommerce is backbone of economy and creates opportunities to all investors

involved. Some recommendations are also provided to meet challenges vis-à-vis issues involved in

the process of Ecommerce through specific policy making, implementation strategy and awareness.

99 Mahesh C Purohit, Vishnu Kanta Purohit et el.E-commerce and Economic Development (A Study Sponsored

by the South Asia Network of Economic Research Institutes) available at

http://saneinetwork.net/Files/06_08.pdf accessed on 23rd

October 2012 at 1 am. 100

Radha krishan , “Law in online business with special focus on India” available at http://webuser.hs-

furtwangen.de/~heindl/ebte-08ss-law-in-business-Krishan.pdf accessed on 27th October 2012 at 2 pm