CL Module III

E-C
OMMERCE AND TAXATION

TAXATION
E-COMMER
OMMERCE
G. Aruna Kanthi
Faculty, NALSAR Proximate Education
NALSAR University of Law, Hyderabad
Series Editor
V.C. Vivekanandan
MHRD IP Chair Professor- NALSAR University of Law, Hyderabad
Coodinator - NALSAR Proximate Education
P.G. Diploma in Cyber Laws
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Contents
Page No.
1.
CHAPTER I
E-Commerce -Salient Features .......................................... 05
2.
CHAPTER II
Security and Evidence in E-Commerce ............................... 23
3.
CHAPTER III
E-Banking and Legal Issues ............................................... 60
4.
CHAPTER IV
Taxation Issues in Cyberspace ........................................... 86
5.
CHAPTER V
International Taxation in E-Commerce ............................. 149
6.
ANNEXURE 1
REFERENCE MATERIAL
List of Books .................................................................. 181
List of Articles................................................................. 183
6.
ANNEXURE 2
List of Websites ............................................................ 187
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E-COMMERCE - SALIENT FEATURES
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CHAPTER I
E-COMMERCE SALIENT FEATURES

Introduction
The advent of e-commerce and the use of the digital
medium as an alternative to the physical have created some
novel legal issues where there are no clear answers. In the
physical world today, there are requirements for documents
to be in writing and for hand-written signatures. Such
requirements need to be translated into the electronic realm.
For communication and transactions occurring over a
faceless network, there is a need for reliable methods to
authenticate a persons identity and to ensure the integrity
of the electronically transmitted documents.
The Internet has taken its place beside the telephone
and television as an important part of peoples lives.
Consumers use the Internet to shop, bank and invest online.
Originally the domain of academicians, scientists, and the
techno-elite, the Internet now offers an infinite array of ideas,
entertainment, and commercial products to every consumer
with a computer and modem. The installation of faster lines,
better search engines, and more security for online
transactions surely will prompt even more consumer use.
The World Wide Web is, as its name implies, is worldwide,
hence businesses that sell online can potentially reach billions
of customers in every country of the world. That presents
new challenges to sellers who have never dealt in overseas
trade and may have little experience with the taxes, duties
and customs laws involved. It also raises questions about
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consumer protections. When buying from an overseas vendor, what, if any,

protections do consumers have if they run into problems? How safe is it to
transmit credit information overseas via the Internet? How long will it take
for an order to be delivered? Are unexpected taxes or duties routinely added
to the price?
The number of direct, international business-to-consumer transactions
involving electronic commerce is expected to increase significantly in the
future. Global networks have the potential to offer consumers substantial
benefits, including convenience and access to a wide range of goods,
services, and information at lower cost. But these benefits cannot be realized
fully until consumers develop confidence in commercial activities conducted
over global networks and businesses are assured of a stable and predictable
commercial environment. Accordingly, the present challenge is to encourage
the development of a global marketplace that offers safety, transparency,
and legal certainty.
One of the firmest stakes within this emerging Information Society,
and one of the areas that is generating the most doubts from within the
legal point of view is electronic commerce1 . The providers of goods and
services have seen in Internet an extremely efficient medium to make their
products know to other providers and the end consumer, and these have
seen a new and easy way to acquire these goods and services in the
comfort of their homes.
There are many and very varied definitions of electronic commerce. In a wider sense,
it can be understood as any electronic data interchange, regardless the commercial
operation. Nevertheless, and as emphasised by MARTNEZ NADAL, Apollnia,
Comercio electrnico, firma digital y autoridades de certificacin, we must chose
the definition of electronic commerce in the strict sense as that that covers two types of
activities: the order of material goods to be delivered via traditional channels such as
postal mail, or couriers (indirect electronic commerce, which depends in external
factors such as the efficiency of the transport system), and the order, payment and
delivery online of intangible goods and services, such as computer programs, electronic
magazines, entertainment services and information (direct electronic commerce, that
takes advantage the full potential of the world electronic markets).
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Online Contracts
Electronic commerce presents new challenges to existing contract
principles in several areas. Issues such as offer and acceptance, the location
of the contract, and implied terms and conditions offer new scope for disputes
between contracting parties. These issues which have been resolved to certain
extent through codified rules in the physical world are surfacing again in
Cyberspace since ambiguity about applicability of these laws in cyberspace
still exists. The present section endeavours to throw some light on these
issues in cyberspace applying present contractual principles to the examples
below.
A contract is formed when one party (the offeror) makes an offer that
is accepted by the other party (the offeree). An offera proposal to form
a contractcan be as simple as the words, a verbal contract, I am willing
to pay x amount for this product or this service provided and an
acceptancethe offerees assent to the terms of the offercan be as simple
as, I accept. Sometimes acceptance can be shown by conduct rather than
by words. When an offer has been made, no contract is formed until the
offeree accepts the offer. Contractual liability is based on consent.
E.g. X offered to pay Y a professional photographer Rs.500/- for a
photograph taken by Y in Xs Web portal on Real Estate Business. Y agreed
to consider the offer saying let me see. X, assuming that Y would accept
the offer, used the photo. Subsequently Y rejected Xs offer as they could not
agree upon the price. Here X has infringed Ys reproduction and public
display rights by using the photograph, unless he can justify it on the basis
of fair use. X cannot act on the presumption of acceptance since agreements
have to have express consent. Neither can he claim to an implied licence to
use the photograph.
Likewise it cannot be assumed that an offer will remain open indefinitely.
In general, an offeror is free to revoke the offer at any time before acceptance
by the offeree. Once the offeror terminates the offer, the offeree no longer
has the legal power to accept the offer and form a contract.
E.g. A freelancer offered software development services to a web-based
business. The Company responded back by agreeing to consider the offer.
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The Company then entered into a contract with a prospective client for the
development of a software product assuming the freelancer is available to
do the software development work. Before the company could communicate
to the freelancer about its acceptance of this offer, he mailed back Leaving
for USA on a project, will get back to you. Here the Company cannot sue
the freelancer for the loss of business, as it does not have a contract with
him for the development work. Thus the company cannot base its claim on
the assumption that the services were still available.
It must also be borne in mind that prior to acceptance, there is no
contract. An offer can be accepted by starting performance only if the offer
itself invites such acceptance. Until an offer is accepted, the offeror is free
unless he has promised to hold the offer opento revoke the offer.
E.g. X Pharma Ltd, a leading Pharma Company decides to go online
with an interactive web-portal on the company profile, product development,
and product sales on the Net. X Pharma approaches Y Netservices Worldwide
for the development of the website offering to pay Rs.2 lakhs for the same.
Before Y Netservices notifies X Pharma of its acceptance of the offer, X
Pharma sends an email which says that, Due to budget cuts at X Pharma,
were canceling the project. In the meantime, Y Netservices staff had begun
preliminary work on the project. X Pharma and Y Netservices did not have
a contract, hence Y Netservices has no legal recourse against X Pharma for
loss of the deal or for the costs of the preliminary work.
Similarly On Aug.1st, X Pharma Ltd., offered to hire Y Netservices Worldwide
to create an interactive training softwarae for X Pharma. On Aug.5th (before
acceptance by Y Netservices), X Pharma notified Y Netservices that it was
giving the contract to Y Netservices competitor. X Pharma has terminated the
offer to Y Netservices. Y Netservices has no legal recourse against X Pharma.
A wise move on the part of Y Netservices would have been for it to
commit X Pharma to hold the offer open for certain period before it decides
to take up the project or reject the offer. Once an offeree rejects an offer,
the offer dies and the offerees legal power to accept the offer and form a
contract terminates.
E.g. Publisher offered to buy the e-book rights to Authors book for a
price. Author, hoping for a better offer, rejected it. Subsequently the Author
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realized that Publishers offer was the best that he could get. The Authors
attempt to accept the rejected offer cannot result in a contract.
It generally takes more than one round of negotiations to form a contract.
Often, the offeree responds to the initial offer with a counteroffer. A
counteroffer is an offer made by an offeree on the same subject matter as
the original offer, but proposing a different bargain than the original offer.
A counteroffer, like an outright rejection, terminates the offerees legal power
of acceptance.
E.g. The Publisher in the previous case offered to buy all electronic
rights in Authors book for x amount. Author responded by saying that he
would be open for a contract for x amount and he would be ready to give
an exclusive right of distribution of the book to the publisher for next three
years for that price. Authors response to the offer was a counteroffer. Author
no longer has the legal power to form a contract based on Publishers offer
to purchase the electronic rights in the work.
Mail Box Rule

Here it is relevant to talk of the mailbox rule to determine the acceptance
of an offer in case of online contracts. According to the Mailbox Rule, an
acceptance that is mailed is effective when it is deposited in the mail. When
is an emailed acceptance effectivewhen the sender pushes the send
button, when the email message is available for the recipient to open, or
when the recipient opens it? This is as yet ambiguous and would have to be
corroborated with other facts to arrive at a conclusion in each case.
A contract is formed through the exchange between the parties to the
contract of an offer and an acceptance of that offer 2 . In electronic
transactions, it may not always be clear which party is making an offer, in
the contract sense, and which one is accepting. For example, an
advertisement is generally not viewed as an offer to sell but as an invitation
to treat or a willingness to consider offers to purchase. The prospective
buyer makes the offer when he or she offers to buy the advertised goods or
I.R. Kerr, Providing for Autonomous Electronic Devices in the Uniform Electronic
Commerce Act, p.18, online: http://www.law.ualberta.ca/alri/ucl/current/ekerr.htm.
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services. This may be done in person, for example in a retail store, or remotely,
when a person fills in the order form in a mail-order catalogue. Or it may
be made when someone enters his or her name in an electronic order form
on a computer network.
In each of those instances, acceptance of the offer occurs when the
retail merchant, mail-order house or on-line service provider receives the
offer and processes the order. If the customer is offering to pay with a credit
card, for example, acceptance of the offer may be given only when the
credit card Company has authorized the transaction3 .
The contract is completed when confirmation of acceptance is
communicated to the offeror. Until that time, the offer may be withdrawn. In
face-to-face transactions, acceptance may be communicated instantly by
receiving payment and handing over the goods.
However, various forms of communication have given rise to problems
determining when and where acceptance has been communicated to the
offering party. The general rule is that the contract is not complete until the
acceptance has been received by the offeror. The principle exception to the
rule arises in the postal acceptance or mailbox cases, in which acceptance
has been held to be complete upon posting a letter or dispatching a telegram,
even if the letter or telegram is delayed or lost4 . However, the courts have
held that with modern forms of instantaneous communication, the rationale
behind the mailbox rule does not apply. Therefore, acceptance by
telephone, telex and facsimile is effective only when it is received5 .
See T. Allen & R. Widdison, T. Allen & R. Widdison, Can Computers Make Contracts?,
(1996) 9 Harvard Journal of Law & Technology, p. 25. Also see, I.R. Kerr, Providing
for Autonomous Electronic Devices in the Uniform Electronic Commerce Act, p.18,
online: http://www.law.ualberta.ca/alri/ucl/current/ekerr.htm
In the U. K. this rule goes back at least as far as Adams v. Lindsell (1818) 1 B. & Ald
681; it has been followed in Canada and its scope enlarged to include courier
companies in R. v. Commercial Credit Corp. (1983), 4 D.L.R. (4th) 314 (N.S.C.A.)
See Entores v. Miles Far East Corporation [1955] 2 Q.B. 327 (C.A.) and Brinkibon v.
Stahag Stahl and Stahlwarenhandelswgesellschaft m.b.H [1983] 2 A.C. 34 (H.L.);
Entores has been followed in Canada in Re Viscount Supply Co. (1963) 40 D.L.R. (2d)
501 (Ont. S.C.)
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According to one view, the mailbox rule is a limited exception, based

on the practical limitations and delays inherent in conducting commercial
transactions by mail. It was introduced to accommodate the new postal and
telegraph technologies of the 19th century and should not be extended
further than necessary. However, the view has also been expressed that the
general rule requiring actual receipt of notice of acceptance should apply
where the means of communication is instantaneous and bi-directional (for
example, by telephone), but that the postal exception should apply where
communication is time-delayed and unidirectional (which would include
facsimile and telex, as well as mail and telegram)6 .
If this understanding of the rationale behind the rule is correct, courts
may apply the general rule to situations where acceptance is communicated
instantaneously, such as Internet transactions, but adopt the mailbox rule,
perhaps in some modified form to adapt it to the new technology, where
acceptance is communicated by electronic mail or via a third-party EDI
network.
Issues may also arise when use of electronic commerce results in
situations where acceptance is communicated and received by a computer,
rather than a person7 . When the exchange of messages making up the
offer and acceptance have been made entirely automatically, have the parties
really agreed? Who bears the risk of communication errors?
The United States case Corinthian Pharmaceutical Systems Inc. v. Lederle
Laboratories8 serves as a guide. In that case, an order tracking number
issued by an automated telephone ordering system was found to be
Waddams, The Law of Contracts, (3d. ed.) Toronto: Canada Law Books Inc., 1993,
pp. 73-74; see also, Macchione, Overview of the Law of Commercial Transactions
and Information Exchanges in Cyberspace - Canadian Common Law and Civil Law
Perspectives, (1996) 13 C.I.P.R. 129, at 133-134 (1989) 724 F. Supp. 605 (S.D. Ind.)
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By exchanging e-mail communications, the parties can create a valid contract. Offers
and acceptances may be exchanged entirely by e-mail, or can be combined with
paper documents, faxes, and oral discussions. Since the traditional legal principles
regarding contract formation are extended to the electronic contracting environment
also, validation issues will be decide on the same basis.
8
(1989) 724 F. Supp. 605 (S.D. Ind.)
6
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merely an acknowledgment of the order, rather than an acceptance

which formed a binding contract. Applying the same reasoning to
common electronic commerce practices, this could mean that a
computer-generated message acknowledging receipt of an electronic
order might not be sufficient to create a binding contract. The
purpose of the message may be solely to confirm receipt of the
order. It does not necessarily signify acceptance 9 .
In some circumstances, the requirement for communication of
acceptance may be waived, expressly or by implication. For example,
conduct such as delivery of goods or services or payment of money
has been held to constitute acceptance. Similarly, a course of dealing
between the parties over time may lead one party to reasonably
expect that an order has been accepted unless it is expressly rejected.
Electronic trading partner agreements typically contain provisions
that sending a specific message or the failure to send a specific
message within a stated period of time constitutes acceptance of
the proposed contract 10 .
10
For example, in a case involving a computer order entry system, orders were placed
by touch-tone phone, and the system automatically generated a tracking number for
each order. When the seller refused to fill the buyers order, the buyer sued. The court
held that no contract had been created, since the tracking number was merely for
administrative convenience, and not a clear acceptance. This issue will certainly arise
in EDI transactions, where a computer can automatically acknowledge receipt of an
electronic purchase order. However, this type of acknowledgment usually only means
the computer received the message in a form it could read. It does not necessarily
mean the order was accepted. Ibid.
Timing can be important when a contract sets a deadline for acceptance. For example,
in one case, a fax transmission was not effective notice, because it was started before
the deadline passed, but not completed until afterwards. Electronic transmissions may
pose similar problems, especially since there can be a delay between sending and
receipt.
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Formation of Online Contracts

There are a number of ways in which contracts are formed online:
By exchange of emails11 .
By merchant acceptance of orders entered on e-commerce Web

sites12 .
Through online conduct, such as clicking on an I accept the

terms button13 .
Through Electronic Data Interchange (EDI), electronic exchange

of purchase orders, and other standardized business documents
between computers in a computer-processable format14 .
Electronic Agents15 .
11
12
13
14
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By exchanging e-mail communications, the parties can create a valid contract. Offers
and acceptances may be exchanged entirely by e-mail, or can be combined with
paper documents, faxes, and oral discussions.
This is a case where a Web site operator offers goods or services for sale, which the
customer orders by completing and transmitting an order form displayed on screen.
Once the vendor accepts the order, a contract is formed. The goods and services may
then be physically delivered off-line.
As a general rule, contracts can be created and accepted by conduct, if reasonable
under the circumstances.
EDI involves the direct electronic exchange of information between computers; the
data is formatted using standard protocols so that it can be implemented directly by
the receiving computer. EDI is often used to transmit standard purchase orders,
acceptances, invoices, and other records, thus reducing paperwork and the potential
for human error. These exchanges (which are sometimes made pursuant to separate
EDI trading partner agreements) can create enforceable contracts.
According to Russell & Norvig, An agent is anything that can be viewed as perceiving
its environment through sensors and acting upon that environment through effectors.
A human agent has eyes, ears, and other organs for sensors, and hands, legs, mouth,
and other body parts for effectors. A robotic agent substitutes cameras and infrared
range finders for the sensors and various motors for the effectors. A software agent
has encoded bit strings as its precepts and actions. see S.J. Russell & P. Norvig,
Artificial Intelligence: A modern approach, Prentice Hall, 1995, p. 31 Electronic
Agents and the Formation of Contracts Emily M. Weitzenboeck, NRCCL ECLIP EP
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Certain contracts must be in writing to be valid. Electronic records are

being now made equivalent to hard copy written records with the
recognition of online contracts in most countries. These laws take three
different approaches:
The automatic equivalence approach (electronic records
are the equivalent of hard copy records).
The by agreement approach (electronic records are the
equivalent to hard copy records if the parties to the transaction have so
agreed).
The digital signature approach (electronic records are the
equivalent to hard copy records if they are signed with digital signatures
using special encryption technology).
Consideration, in legal terminology, is what one party to a contract
will get from the other party in return for performing contract obligations.
E.g. To take the example of the Photographer Y and, X above, the
promise of Rs.500/- for the photograph to be used in the web-portal is the
consideration that Y gets from X and the permission to use the photograph
is the consideration that X gets from Y. This set of promises between X and Y
is what brings about the contract between them.
According to traditional legal doctrine, if one party makes a promise
and the other party offers nothing in exchange for that promise, the promise
is unenforceable. Such a promise is known as a gratuitous promise.
Gratuitous promises are said to be unenforceable for lack of consideration.
X told Y, When I decide to launch my new product I shall give you the
overseas franchise for it. X launched the product but did not give the
27028 3. Such electronic agents display characteristics that are very close to human
characteristics such as intelligence, autonomy and pro-activeness. The idea of having
intelligent systems to assist human beings with routine tasks, to sift through the enormous
amount of information available to a user and select only that which is relevant, is not
new and a lot of work and results have already been achieved in the field of artificial
intelligence (AI).
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franchise to Y. According to traditional legal doctrine, Xs promise to give Y

the franchise is an unenforceable gratuitous promise. Y gave nothing to X in
exchange for Xs promise to give Y the franchise.
Contracts in most cases incorporate provisions regarding the following:
Duties and Obligations The duties and obligations section of a

contract is a detailed description of the duties and obligations of the
parties and the deadlines for performance. If one partys obligation is
to create a Web site design or online product or software or content
for a Web site design or online product, detailed specifications should
be stated.
Warranties and Indemnities A warranty is a legal promise that certain

facts are true. Typical warranties in contracts concern such matters as
ownership of the contracts subject matter (for example, copyrights)
and the right to sell or assign the subject matter. In Web development
agreements and content licenses, warranties of ownership of intellectual
property rights and noninfringement of third parties intellectual property
rights are common. For contracts involving the sale of goods, certain
warranties are implied under state law unless specifically disclaimed
by the parties. A warranty provision is usually accompanied by an
indemnity in which the warranting party promises that if the warranty
is breached, the warranting party will pay the other partys costs arising
from the breach.
Termination Clauses These clauses ensure that either or both parties

have the right to terminate the contract under certain circumstances.
Generally, termination clauses describe breach of contract events that
trigger the right to terminate the contract (for example, nonpayment
of royalties). Termination clauses also describe the methods of giving
notice of exercise of the termination right, and whether the breaching
party must be given an opportunity to cure the breach before the
other party can terminate the contract.
Remedy Clauses These clauses state what rights the non-breaching

party has if the other party breaches the contract. In contracts for the
sale of goods, remedy clauses are usually designed to limit the sellers
liability for.
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Arbitration Clauses An arbitration clause states that disputes arising

under the contract must be settled through arbitration rather than
through court litigation. Such clauses generally include the name of
the organization that will conduct the arbitration, the city in which the
arbitration will be held, and the method for selecting arbitrators.
Merger Clauses Merger clauses state that the written document

contains the entire understanding of the parties. The purpose of merger
clauses is to ensure that evidence outside the written document will
not be admissible in court to contradict or supplement the terms of the
written agreement. In complex contracts, the parties often go through
several rounds of negotiations before they reach their final agreement.
When a contract contains a merger clause, the final outcome of all
previous discussions and drafts is considered to be merged into the
written document.
E.g. X created a Web site design for Y pursuant to a written development

agreement containing a merger clause. When Y received the trial version of
the Web site design, he was unhappy because the design did not include a
feature for accepting email inquiries from site users. Nothing in the
development agreement or specifications mentions this feature, but Y claims
that he and X discussed such a feature. Because the agreement has a merger
clause, Contracts Law provides that the written document contains the entire
understanding of the parties. Even if X and Y did discuss the additional
feature, evidence of that discussion would not be admissible in court. X
does not have to add the feature.
Offer and acceptance is important, not only to determine when a
contract has been completed, but also to determine where it is made. In
the absence of an agreement to the contrary, the law of the jurisdiction
where the contract is concluded (the location of the accepting party) will
govern the contract. In an electronic commerce environment, where a seller
may be dealing with potential buyers from around the world, it may be
advantageous for the seller to control the jurisdiction of the contract. By
selecting a favorable jurisdiction, the seller may be able to exclude or limit
implied warranties and to limit its liability.
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When the transaction takes place over an international computer

network, neither party may know where the other is located. The potential
for legal uncertainty increases when one considers that either or both of the
contracting parties may be using an independent service provider to deliver
and process the electronic message.
Types of Internet Contracts

There are various types of Internet Contracts
(a) Chat and Videoconferencing Contracts
Chat and videoconferencing provide tools for synchronic and interactive
communication and for this reason may be governed, Mutatis mutandis, by
the same rules as telephone contracts16 .
(b) E-mail Contracts17
E-mail requires the collaboration of technical third parties, the servers,
who both provide the contractors with e-mail accounts and addresses and
store their messages until they are downloaded. We can imagine pure email contracts (the offer which may be sent to an individual or to a large
mailing list, acceptance and acknowledgement of receipt are all sent by
e-mail) and mixed formulas (the offer on a webpage and the acceptance by
e-mail). There is no great concern about contracts of this kind, perhaps
because it is thought either that the letter rule may be easily applied to email contracts or that the use of this tool for contracting will be scant (only
consumer-to-consumer contracts and an insignificant fraction of businessto-business contracts), because mass commerce will prefer other technical
tools, such as the Web.
16
17
A Williams, D Calow & N Higham, Digital Media - Contract Rights and Licenses
Licenses,
Sweet and Maxwell, 1998.
echnology LLaw
aw
S Saxby, Encyclopaedia of Information TTechnology
aw, Sweet and Maxwell, 199096.
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(c) Web-Contracts
Web contracts are the heart of e-commerce. Two technical elements
distinguish them from their predecessors, EDI contracts18 .
-
The Internet, particularly the Web, is a universal open system providing

communication by everyone with everyone. Electronic commerce hence
widens the field of EDI to include consumers, and permits not only
ongoing commercial relationships but also single and non-repetitive
contracts.
Second, web electronic commerce functions on client/server basis.

This means that one of the parties to the contract acts from his or her
own computer, but through the software and interface of the others
webpage.
The symmetrical relationship that the parties to an EDI contract have in

relation to the communication infrastructure (where each party prepares his
messages in his own computer with his own programs) is replaced by an
asymmetrical distribution of technical roles. Geographical considerations
therefore becomes irrelevant to the Internet for any legal effect. Interfaces
(screens, webpages) will be the centre of gravity of the legal approach to
modern electronic commerce. Web technology allows commerce to be
conducted by intelligent electronic agents19 .
The way web contracts run may be described in this manner: The
suppliers webpages (which are located on the suppliers server or hosted
on a third partys server) hold a description of products or services and a set
of self-contracting pages that enables the web visitor to request these
products or services. Customers must provide personal information and
sometimes a credit card number. Then,
18
19
P Klinger & R Burnett, Drafting and Negotiating Computer Contracts

Contracts, Butterworths,
1994. Also see R Morgan & G Steadman, Computer Contracts
Contracts, Longman, 1987 and
M T Rennie, Computer Contracts Handbook
Handbook, Sweet and Maxwell, 1989, D I Bainbridge,
Software Licensing
Licensing, Central Law Publishing, 1995.
i.e., a program that uses stock information or other internal information to elaborate
responses, involved in the ontractual process.
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a)
For online products, the buyer is allowed to download them.
b)
For physical products, delivery is made to the consumers home;

payment charged to the consumers credit card account or it
may be paid by e-money on smart cards.
c)
For services, the supplier prepares to provide them to the

consumer at the time and place established; the payment method
is usually the same as for b).
But web contracts are usually more complex, as parties other than the
contractors may participate in them. This is the case of authentication parties
(digital certificate providers), financial firms that facilitate payments within
the web, label grantors who certify (usually by means of a button on the
webpage) that a page is secure or that the provider adheres to some code
of conduct, and especially shopping malls.
We must also turn our attention to the holder of the mall or shopping
galleries where the suppliers webpages are hosted. The goal of the shops is
to reduce costs by sharing some elements of the e-commerce platform. At an
early stage, the only cost to be reduced was that of posting commercial
information on the Internet and therefore the main function of the mall holder
was to provide a hosting service. But while on the one hand the cost of hosting
service becomes less and less significant, mall holders offer on the other hand
new services. They may provide, for example, the e-commerce application not
only the customers interface, but also the internal running of the application,
including the electronic agents, and they may provide the electronic payment
kit, especially if the mall holder is a financial institution. They may also provide
a common platform for several shops, that is, a single shopping cart for all of
them, allowing the customer to make a shorter shopping round.
Privity of Contracts
No one but one of the parties can go to court and enforce the contract
even if the contract was to operate to a third partys benefit. This is known
as the privity of contract rule. There are exceptions to it:
Agents, or employees who accept or offer a contract on another

persons or a corporations behalf. In these situations, the contract is
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said to be signed by an agent. The person employing the agent is

called the principal and the principal could sue or be sued under
contracts entered into by his or her agent even though the principal
did not sign the contract directly.
Another exception allowed under special laws is cheques and
promissory. In these cases, enforcement rights are created by special
laws between non-signatories as the cheque exchanges hands, from
one bank to another or from one person to another.
Contracts that restrict or impact upon the use of land (eg. An easement)
may be enforceable upon the next land-owner, even though they were
not privy to the original contract. This is an old exception to the rule of
privity of contract that is still applicable today.
The law of trusts, where a person may contract to the benefit of another,
operates to convey certain rights to the third party even though, in
fact, this third party was not party to a contract which created the trust.
Jurisdictional Issues in E-Commerce

Jurisdiction as such is the first requirement to be satisfied in any legal
proceeding against anyone. It is this very requirement, which is found to be
very difficult to be satisfied in case of cyberspace20 . There are no geographic
demarcations on the net, with which to ascertain or divide jurisdictional
limits. As a result violations on the net are largely going unpunished. The
whole judicial machinery of any state is based on the recognition of its
jurisdictional limits ascertained by the natural geographic boundaries of the
State. It is these geographic limits, which are found to be inadequate to
measure the limits of jurisdiction on the Net.
It has been said the only two sure things in life are death and taxes. But
due to recent rapid technological advancement, at least for the moment,
there appears to be one place where the latter is in question, especially for
international businesseson the Internet. Taxing authorities are perplexed
20
Conner. Cheryl L., Compuserve v. Patterson: Creating Jurisdiction Through Internet

Contacts, 4 RICH. J.L. & TECH. 9, (Spring 1998) <http://www.richmond.edu/~jolt/
v4i3/conner.html>.
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over which country should have taxation rights in complex international

electronic transactions. The problem centers around the issue of whether,
due to the decentralized and mobile nature of the Internet, the commercial
activity-taking place in Cyberspace21 fits within conventional international
tax system definitions and rules followed by most countries and taxing
jurisdictions.
Electronic Data Interchange

EDI is defined as the inter-process of communication of business
information in a standardized electronic form. EDI in its expanded form is
Electronic Data Interchange. EDI communicates information pertinent to
business transactions between the computer systems of companies,
government organizations, small businesses and banks22. The traditional
forerunner of EDI was the postal service. In absence of EDI purchase orders,
acknowledgements and invoices depended on postal systems. And
communication between businesses remained limited to the working hours
of the businesses which the overlaps of time zones allowed. The EDI has just
simplified the whole system of communication. The EFTs use EDI as the
basis for development of communications between the customer and the
banks and financial institutions as the case may be.
Although what can now be called traditional E-commerce has not been
limited to EDI and has included business practices built around computerto-computer transmissions of variety of message forms, bar codes, and
files, the use of EDI has arguably led to the most significant organizational
transformations and market initiatives. Electronic integration, supported by
EDI and other information technologies, drastically reduces time and space
buffers that shelter a firm, but that also limit its competitive opportunities.
Electronic integration has led to dramatic shifts in the definition of a firm,
21
22
The term cyberspace was originally coined by William Gibson, in his short story
Burning Chrome. William Gibson, Burning Chrome, 4 OMNI 72 (1982). However,
the word did not gain public recognition until it appeared in Gibsons science fiction
novel, Neuromancer, where it was used to describe the world of computers and the
society that gathers around them. WILLIAM GIBSON, NEUROMANCER 51 (1984).
Mitrakas, A., Open EDI and law in Europe, a regulatory framework, The Hague
1997, pp. 156-163, 268-272.
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with the emergence of virtual companies, whose capabilities to deliver their

products to the market are defined largely by their ability to organize and
maintain a network of business relationships, rather than by their ability to
manufacture a product or deliver a service. Relying on this form of integration
extensive business networks have formed23 .
The main advantage of EDI was that it created a paper free system of
inter-business communication, linking companies such as manufacturers,
suppliers and transport providers. For example, the manufacturers computer
would identify that supply of a particular part was running low and send an
electronic order to the parts suppliers computer for a shipment of that
particular part. This created considerable savings in terms of employee time,
wasted stock, lost customers, stationery and fax and phone bills. However,
its use was limited by cost and compatibility problems. All parties involved
in the transaction needed to have the same system installed. Nevertheless,
EDI demonstrated that enormous cost savings could be made in the design,
ordering, processing and warehousing of products, particularly in the areas
of stationery, employee time and postage. With the emergence of the Internet,
more businesses and smaller businesses can access the advantages offered
by EDI without expensive proprietary systems.
23
Butt. H.E., Grocery Company: A leader in ECR implementation, (1994). Harvard

Business School, Case 196-061.The local and global business communities using
Trade-Net in Singapore can serve as an example (and have done so - to the authorities
of the Port of Rotterdam in Netherlands, for instance). Entire industries are being
radically changed; the U.S. grocery retailing, for instance, is being reshaped by the
EDI-based Efficient Consumer Response initiative, expected to save tens of billions of
dollars in the distribution channel. To understand and rationalize the operations of an
individual firm, it is now necessary to study the business networks in which the firm is
embedded.
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CHAPTER II
SECURITY AND EVIDENCE IN

E-COMMERCE
Introduction
The World Wide Web being an open trading
environment, one of the first things that will be of concern to
consumers and traders is security in transactions. Encryption
is an important tool in this process. Encryption may itself of
be of various kinds. Ranging from a simple password
protected key to complicated software for data protection,
encryption is a widely used mechanism today.
Emerging computer and communications technologies
have radically altered the ways in which we communicate.
Along with the speed, efficiency, and economy of the digital
revolution come new challenges to the security and privacy
of communications and information traversing the global
communications infrastructure
In response to these challenges, the security mechanisms
of traditional paper-based communications media envelopes and locked filing cabinets - are being replaced
by cryptographic security techniques. Through the use of
cryptography, communication and information stored and
transmitted by computers can be protected against
interception. Until recently, there was little non-governmental
demand for encryption capabilities. Modern encryption
technology - a mathematical process involving the use of
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SECURITY AND EVIDENCE IN E-COMMERCE
formulas (or algorithms) - was traditionally deployed most widely to protect

the confidentiality of military and diplomatic communications. With the advent
of the computer revolution and recent innovations in the science of encryption,
a new market for cryptographic products has developed. Electronic
communications are now widely used by everybody and have become an
integral component of the global economy24 . Computers store and exchange
an ever-increasing amount of highly personal information, including medical
and financial data. In this electronic environment, the need for privacyenhancing technologies is apparent. Communications applications such as
electronic mail and electronic fund transfers require secure means of
encryption and authentication features that can only be provided if
cryptographic know-how is widely available and unencumbered by
government regulation25 .
Dual Key Encryption Digital Signatures, Encryption and

Certification Authorities
Several different methods exist to sign documents electronically26. These
electronic signatures vary from very simple methods (e.g. inserting a scanned
image of handwritten signature in a word processing document) to very
advanced methods (e.g. using cryptography). The sub-set of electronic
signatures based on public key cryptography is often called digital signatures.
The basic nature of digital signatures is that the author of an electronic
document can sign his or her electronic document by using a secret
cryptography key. This key must be kept private at all times by the user. The
signature can only be verified with the associated public key of the author.
This public key is widely known.
The idea behind this form of authentication is the confirmation of identity
by proving the possession of a secret key. The author encrypts the message
24
25
26
http://www2.epic.org/reports/crypto2000/overview.html#Heading6
European Commission, Towards a European Framework for Digital Signatures and
Encryption, COM (97)503. www.ispo.cec.be/eif/policy.
Edwards. Lillian, & Charlotte Waelde,(Eds.), Law and the Internet: Regulating
Cyberspace, Hart Publishing: Oxford 1997.
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or a part of it with his or her secret key. The recipient of the message can
check the identity of the author by decrypting the information with a public
key of the presumed author. If the decryption is not successful, the recipient
will not validate the message. This process of authentication relies on the
public keys of the users that are accessible to all the communication partners
and on a trusted relationship between the identity of the users and their
public key27 .
Like the signature used on written documents today, digital signatures
are now being used to identify authors of e-mail or other information objects
of electronic data. Digital signatures can provide three important
functions28 :
1.
Authentication - to authenticate the identity of the person who

signed the data so it is known who participated in the transaction.
2.
Integrity - to protect the integrity of the data so it is possible to know

the message read has not been changed, either accidentally or
maliciously.
3.
Non-repudiation - to allow it to be proved later who participated

in a transaction so that it can not be denied who sent or received the
data.
It should be noted that in order to create a signed message, it is not

necessary to send the message itself in encrypted form. The digital signature
can be appended to the message and can be verified irrespective of the
form of the message itself.
Cryptography is a highly important instrument for achieving secure
electronic commerce. There are a number of ways that cryptography can
work in an electronic environment29 . The most popular method being used
today is where the encoding and decoding of the message is performed by
27
28
29
Information Technology Unit of the Centre for Commercial Law Studies, Queen Mary
& Westfield College, University of London. <http://www.ccls.edu/itlaw/index.html>
Gringras. Clive, The Laws of the Internet, Butterworths: London 1997.
Rayson. Richard & Peter Brown, Electronic Banking Developments.
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using two keys: (i) a public key which is publicly know and (ii) a secret key
which is only known by the sender or the recipient or both. This cryptography
technique is often known as public key encryption. The public key can be
used by anyone to encrypt a message. Only the owner of the secret key can
decrypt it. Thus, if two parties want to send information to each other, they
exchange their public keys. The public keys could also be retrieved from a
database, which is open to the public. When X sends to Y a message, X
enciphers the message using the public key of Y. Only Y can decipher the
message using his secret key.
The primary advantage of public key cryptography is increased security30.
The secret keys do not have to be transmitted or revealed to anyone. Another
advantage of the system is that the public key and the secret key can both
be used for encoding as well as for decoding. Their functions are
interchangeable. This means that X can encode a message with his own
secret key, which Y can decode by using the public key of X. On first sight,
this seems a silly method, because everybody has access to the public key
of X and can thus decrypt and read the message. This is, indeed, true. On
the other hand, Y can be sure that the message can only originate from X,
since he is the only one who knows the secret key. Without having contacted
X before, Y can trust on the authenticity of a message. It is on this technology
of sharing a public key that digital signatures are based. The key pair can
be generated by the user himself by running specific cryptography software.
Even the recent versions of the most popular Internet communication software
such as MS Internet Explorer and NetScape Communicator, allow the user
to create his own key pair.
Temporarily, secret keys are being stored on the hard disc of the users
computer. The user gains access to the secret key by entering a password or
pass phrase. This type of storage, however, has the disadvantage of nonmobility. The user always needs his own computer in order to put his digital
signature on an electronic file. Therefore, the storage of the secret key on a
30
Murphy. Maureen. M. Encryption and Banking, 12 p. CRS Report 97-835 A. September

15, 1997.
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removable carrier, such as a smart card, is getting more popular. The user
simply inserts his smart card into a reader by which he can sign digitally31.
Once a person has generated or received his public and private key, it
is extremely important to keep the secret key free from access by others. If
someone gains access to the secret key, that person will be able to counterfeit
the key and, thus, to create digital signatures. Protection of the secret key is,
however, for the user a local matter under his control or the control of a
responsible site security officer. Every person bears responsibility for his own
signature and should protect it from loss, theft or illegal use. Neither should
the user forward his secret key to other people such as his secretary or
colleague.
The user needs the public key of his partner in order to check the
authenticity of his digital signature. His public key can be delivered by the
partner himself but can also be retrieved from a data base which is publicly
accessible. Normally, the communication software of the user will
automatically check the digital signature by retrieving previously stored public
keys or accessing the relevant public database.
Certification Authorities
The authentication procedure is based on the presumption that the public
key really belongs to the signer. This presumption is, however, not selfevident. The risk exists that somebody creates a key pair, places the public
key in a public directory under somebody elses name and thus signs
electronic messages in the name of somebody else. Furthermore, a public
and private key pair has no inherited association with any identity, it is
simply a pair of numbers. Therefore, the assurance should exist that the
public key really belongs to the claimed identity. The answer is to rely on
third parties to certify public keys. A third party can guarantee the relationship
between the identity and the public key. This association is achieved in a
certificate that binds the public key to an identity. These third parties are
31
Best. Richard A., & Keith G. Tidball. Encryption Debate: Intelligence Aspects, CRS
Report 98-905 F. 6 p. November 4, 1998.
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known as Certification Authorities (CAs) and must be accepted by all users

as impartial and a Trusted Third Party (TTP)32. In addition, the process of
key certification must be full proof and should be afforded the highest level
of security. The act of using a registered digital signature to sign an electronic
message becomes very similar to appearing in front of a notary public to
manually sign a paper.
The CA can check the identity of the user by for example passing out the
certificates after a simple e-mail address check33. This type of assurance is
minimal, and only good for establishing a consistent presence, not for
guaranteeing someone is a real person. Other certificates could be issued
after receiving third party proofing of name, address and other personal
information provided in the online registration34. Usually this would be a
check on some consumer databases. The best identification is, of course,
the personal appearance. CAs could require someone to personally take
their application to a notary, who will check identification before endorsing
it. This adds an additional layer of credibility to the certificate.
Digital certificates could contain every type of information necessary to
identify the creator of the digital signature. Usually they contain the owners
public key, the owners name, and the expiration date of the certificate, the
name of the Certification Authority that issued the digital certificate, a serial
number and perhaps some other information. CAs sign information and
thereby add credibility to the certificate. People who receive the certificate
check the signature and will believe the attribute information/public key
binding if they trust that certifying authority. In order to allow an automated
checking of the certificates it is important that the certificates are built up in
the same form. It is therefore necessary that standards are being followed,
describing the elements that the certificate should contain.
32
33
34
Schneier, Bruce. Applied Cryptography: Protocols, Algorithms and Source Code in C,

John Wiley & Sons, 1996, 2nd ed.
Stallings, William., Cryptography and Network Security, Prentice-Hall, 1999
Tanenbaum, Andrew S., Computer Networks, Prentice-Hall, 1996
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Difference between Traditional and Digital Signatures

The concept signature has a long tradition and is normally easy to
describe. It gives basic mechanisms for secure traditional information
management. A hand written signature is physically tied to a carrier (the
sheet of paper) which gives borderlines and structure to the information in
an immediately readable format35. This lock for the information, provided
by the carrier and the signature representing the issuers unique patterns of
handwriting, gives the reader reasons to believe that the object originates
from the individual who is seen to be the originator and the identity tribute
is inherent, not given to the signatory.
Digital signatures are not immediately readable and the signature, the
carrier and the signed object are not physically related to each other in the
same locked and durable form. A manipulation of the data normally leaves
no such traces as a manipulation in the traditional environment and portions
of a signed information object may be stored on different locations for
example a hard disc. The visual aspect of a traditional example is replaced
by technical verification of a signed information object, stored in a computer
readable format and logically tied to the signature36. As the digital attribute
making the signature unique for the individual is assigned, not an inherent
characteristic of the signatory, the signature process may be performed by
any one who has access to the secret and the procedures.
The hand written signature furnishes the information with a physically
unique sign of authenticity - it is an original example. Such signed objects
may be in a persons possession and can thus be a carrier of authority (e.g.
power of attorney) or a certain right (e.g. bills of lading and other negotiable
instruments). However, the unique aspect of a digital signed object has to
be related to a pattern of data, which may easily be copied and the duplicate
will have exactly the same qualities as the template. Consequently, unique
existence of IT material is built upon the storing and transmittal of original
35
36
Ghosh. Rishab Aiyer, 1995. Paying your readers, Electric Dreams, (31 July).
See Michael L. Closen & R. Jason Richards, Notaries Public-Lost in Cyberspace, or
Key Business Professionals of the Future?, Computer & Info. L. 703, 749-750 (1997).
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contents and certain IT applications such as shipping documents demands

some sort of registration.
The management of traditionally signed objects may in name be replaced
by digital equivalents. By making use of security techniques, such as digital
signatures, the authenticity of the information can be maintained. The need
for protection of such objects is already carefully considered in the traditional
environment. An examination of electronic commerce, electronic handling
of cases by administrative agencies and similar routines shows the same
need for protection in the IT environment. However, the changes relate to
the transition from original examples to original context has to be noticed
where appropriate. Consequently, current issues are in principle traditional
matters of legal protection and security, which give basic mechanisms for
the information management. Instead of creating a complete new legal
framework, existing achievements should be advised, as far as they are
compatible with IT.
Authentication and Integrity: Digital Signatures

Transmitting data in electronic form has many advantages compared
with traditional methods. Documents can be made available almost instantly
and in any quantity and the recipient is able to work on them directly.
Transmission is considerably cheaper and faster - documents can be sent
around the globe in a matter of seconds, without delay. However,
authentication and integrity services are needed for secure and trustworthy
data transmission and communication over open networks37.
The speed of technological progress implies that many of the potential
application fields for authentication and integrity services are difficult to
ascertain at this stage. New application areas (e.g. protection of intellectual
property rights, stored data, network security or electronic cash) are
developing continuously. In particular for electronic communication digital
signatures are considered to play a significant role.
37
Ishman. Mark, & Quincy Maquet, A Consumers Analysis Of The Electronic Currency System
And The Legal Ramifications For A Transaction Gone Awry, John Marshall Law School, E Law
- Murdoch University Electronic Journal of Law, Vol 6, No 3 (September, 1999).
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Legal recognition of digital signatures

When signing a contract using a digital signature, one is confronted
with different questions: does a declaration of intent have a legal value?
Does the signature meet legal requirements? Is a digitally signed document
recognized as evidence in court?
a) Declarations of intent
Legal practices have emerged over the years in connection with
declarations of intent. These cannot simply be translated into the context of
electronic communication since the way to make a declaration of intent
differs substantially from the traditional form in some respects. For example,
the delivery of a document in paper form requires more time than in the
electronic form. One has to put the document into an envelope, apply a
postage stamp and post it. In so doing, one still has time to reconsider
ones decision. An electronic document on the other hand is delivered by
simply pressing a key or button. In particular in order to guarantee an
appropriate protection against hasty decisions, authorities should examine
whether specific requirements are needed regarding the binding character
of declarations of intent. In addition, technical solutions must be found to
make sure that users sign a document in the version, which is actually visible
on their screen. E.g. technically, substantial differences may exist between
the document visible on the screen and the document, which is actually
signed or printed, e.g. if the programme works with associated files38.
b) Non-repudiation of digital signatures

Even when a key pair has been assigned in total trust to a certain person,
this does not prove that this person has actually signed a given document.
While the normal situation is that the key owner signs the document, a
digital signature can in fact only be associated with certainty to a given
private key. This presumption will only hold if it is certain that only the owner
of the secret private key has full and unique control over his private key. Key
38
The European Commissions Communication A European Initiative in Electronic

Commerce (COM (97) 157.
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escrow of private keys would endanger this presumption. E.g. Unlike

conventional signatures, where the signatory signs with his own hand, digital
signatures also allow a third - authorized or unauthorized - person to sign
the document if this person is in possession of the private key, so-called
undisclosed delegation. Assignment is however possible if it can be legally
presumed that the key owner signed himself. In that case the owner might
wish to be legally liable only to a certain extent (e.g. within a limit, as with a
credit card). Countries should therefore consider appropriate legal rules39.
Ensuring equivalent legal effects for conventional hand-written and digital
signatures is not easy to realize considering their different characteristics
and their different ways of being materialized. Because:
Unlike conventional signatures, it is not possible in the case of digitally

signed documents to distinguish between an original and a copy.
Each person only has one hand-written signature. However, a given

person can have several key sets. Digital signatures are also different
for each document signed.
However, these differences do not by any means prevent digital
signatures from enjoying equivalent legal value for certain legal or
judicial purposes. The legal effects of documents signed with digital
signatures are implicitly linked with trustworthiness of CAs and are an
indispensable condition for the development of legal electronic
transactions. The starting points are:
Recognition as evidence in legal proceedings

In some legal systems (e.g. Belgium, France, Greece) electronic
documents, even if they digitally signed, could not be accepted as
evidence in legal proceedings, because written evidence is required
as soon as the value of, for instance, a selling contract is beyond a
certain limit. Such restrictions are clearly detrimental to the use of
digital signatures.
39
Vartiovaara. Markus, Non-Repudiation in Electronic Banking, Journal of Information,

Law and Technology, June 98.
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Recognition as an equivalent to written form

The use of a written form can fulfil several functions, e.g. warning,
proof or authenticity. Documents provided with a digital signature can
likewise fulfil these functions provided that digital signatures are safe
and reliable. If documents provided with a digital signature match the
requirements of a written form, this will have a very favourable impact
on their implementation in the legal framework.
Confidential electronic communication: Encryption

a. The economic and societal importance of encryption
40
An encryption algorithm transforms a plaintext into an unreadable

ciphered text (encryption) and vice versa (decryption) using a special
key. The economics behind encryption is to transform the problem of
keeping thousands of messages secret into the problem of keeping a
single key secret. A useful distinction can be made between symmetric
and asymmetric encryption algorithms. Symmetric algorithms use the
same key for encryption and decryption. This means that
communicating parties have to agree on a secret key in advance. The
disadvantage is that they have to find a secure way to exchange this
key. This is particularly cumbersome in an open environment with
many participants that may not know each other beforehand. This
disadvantage is avoided in asymmetric encryption methods that use
different keys for encryption and decryption. At present, encryption
provides the most important tool to keep electronic communication
and electronically stored documents confidential. Although new
technologies will emerge sooner or later, it can be expected that
encryption will remain the cornerstone for most confidentiality services
on open networks for the foreseeable future. Encryption has a long
tradition in the defence area. However encryption technologies are
increasingly integrated into commercial systems and applications40.
Examples:
Digital mobile telephones enjoy, thanks to encryption, stronger protection .
Banks use strong encryption for financial messages (e.g. the S.W.I.F.T system).
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The above examples already show that the exclusive character of

encryption belongs to the past. They also show that increasingly
encryption technology is integrated into products primarily to protect,
for example, Intellectual Property Rights or to avoid fraud. Moreover,
the fast growth of the Internet will create a fundamental change in the
use of encryption: it will become an integral part of personal and
business computing. Computer stores sell cryptographic products and
more and more people simply download encryption software from
the Internet, which can be easily installed on a normal PC. The
integration of complete cipher machines on smart cards is a reality.
PCs could be delivered with standardized smart card readers and fast
crypto-chips41.
Electronic commerce and many other applications of the information

society will only expand and unfold their economic and social benefits
if confidentiality can be assured in a user-friendly and cost-efficient
way42. Cryptographic technologies are flexible, support a wide range
Pay-TV can only function commercially +thanks to encryption which can then be
decrypted on payment of a subscription fee. [ The protection of such encryption systems
against piracy varies in Member States. The Commission has presented a proposal
for a Directive aiming at establishing a Community-wide equal level of protection
(COM(97)356, 9.7.97)]
Digital versatile disks (DVD), which will replace the previous video cassettes, use
encryption techniques to prevent piracy in order to protect intellectual property rights.
Various universities in the world teach cryptology and hundreds of companies in Europe
and even more world-wide develop, produce and sell products and systems to be
used for encryption.
Examples:
When using services such as tele-shopping or tele-banking, the consumer needs to
be ensured that personal data such as credit card numbers are kept confidential.
Data protection laws require safeguards like encryption to ensure privacy.
In storing secret data and in carrying out sensitive business communication (project
details, bidding information, research results, etc.) over open networks, companies
wish to be protected against industrial espionage.
Health care telematic applications must not allow for disclosure of medical histories
of patients to unauthorised persons.
41
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of applications and minimize transaction costs on open networks.

Continuous progress in digital technologies will make computing
crypto-algorithms even more cost-efficient43. Furthermore, the
application of cryptographic products and services will have an
enabling effect in all sectors of economic and social activity. Without
this widescale deployment, the ability to create new, more competitive
forms of business and new forms of social interaction will be
substantially inhibited.
International treaties, constitutions and laws guarantee the fundamental

right to privacy including secrecy of communications44. Consequently,
in the current shift from off-line to on-line information flows, the public
needs to have access to technical tools allowing effective protection
of the confidentiality of data and communication against arbitrary
intrusions. Encryption of data is very often the only effective and costefficient way of meeting these requirements. Therefore, the debate
about the prohibition or limitation of the use of encryption directly
affects the right to privacy, its effective exercise and the harmonization
of data protection laws in the Economy.
b. Regulation of encryption: Potential impact on the

Economy
1. Export control measures
Concerns over foreign threats to national security have been the primary
motive for export controls. Whilst countries want to protect their own military
and diplomatic communication through encryption, the objective of export
control is precisely to deny similar benefits of cryptography to foreign
43
44
European companies have developed substantial capabilities to integrate high-quality

cryptographic features into their products and services. As demand for products with
encryption is now growing very fast worldwide, it provides substantial opportunities for
the industry and job creation in Europe.
Art. 12 Universal Declaration of Human Rights, Art. 17 International Covenant on
Civil and Political Rights, Art. 8 European Convention on Human Rights, Art. F(2)
Treaty on EU, EU Data Protection Directive
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opponents, in particular if they do not have equivalent technical means.

Therefore, export controls are in general designed to prevent international
proliferation of certain encryption technologies45.
2. Domestic control measures

Law enforcement authorities and national security agencies are
concerned that wide-spread use of encrypted communication will diminish
their capacity to fight against crime or prevent criminal and terrorist activities.
For this reason, in several countries consideration is being given to how
their encryption policy could develop in the future. This has led to national
and international discussions about the need, technical possibilities,
effectiveness, proportionality and privacy implications of such a regulation46.
45
46
E.g. Within the European Union, the Dual-Use Regulation of December 1994
establishes a common framework for exports of dual-use goods [Council Regulation
(EC) 3381/94, 19.12.94 setting up a Community regime for the control of exports of
dual-use goods, OJ L 367/1, 31.12.94. Council Decision 94/942/CFSP, 19.12.94
establishes the lists of dual-use goods covered by the Regulation, OJ L 367/8,
31.12.94.] . Certain encryption products may only be exported on the basis of an
authorization. In order to establish an Economy for dual-use goods, such export
authorisations are valid throughout the Community. Moreover, according to Article
19 of this Dual-Use Regulation, Member States exercise a licence procedure for a
transitional period also for intra-Community trade for certain particularly sensitive
products. For the time being this also includes encryption products. This means the
Regulation obliges Member States to impose not only export controls (i.e. controls on
goods leaving Community territory) on dual-use goods, but also intra-Community
controls on cryptography products shipped from one Member State to another. The
Dual Use Regulation however does not fully specify the scope, content and
implementation practices of national controls. Consequently, a large variety of domestic
licensing schemes and practices exists. These divergences can lead to distortion of
competition.
OECD.. Whilst export control
Existing regulation within the European Union and the OECD
measures are internationally widely applied, up to now, domestic control of encryption
is quite exceptional. In fact, currently only one Member State of the European Union
(France), applies a comprehensive cryptographic regulation [ Loi N 90-1170 of
29.12.90, JORF 30.12. 90; Decret N 92-1358, 28.12.92, JORF 30.12.92 ;. Delivery,
exportation and use of cryptography are subjected to previous declaration if the
cryptography can have no other object than authenticating communications or assuring
the integrity of transmitted messages, and previous authorisation by the Prime Minister
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Regulation of use would mean to rule the use of encryption without an

authorization as illegal. Alternatively or additionally, supply and import of
encryption products and services could be brought under an authorization
scheme. Authorizations would either be denied or granted under certain
conditions, for instance to use only weak encryption or to sell only approved
software. These conditions are scaleable to satisfy any perceived needs of
law enforcement and national security agencies. Such regulations could
limit the use of encryption. In addition, divergence between regulatory
schemes might result in obstacles to the functioning of the Economy, in
particular for the free circulation47. Today, nobody can be totally prevented
from encrypting data48.
Firstly, access to encryption software is relatively easy, for instance

by simply downloading it from the Internet.
Secondly, it is difficult to prove that a specific person has sent an

unauthorised encrypted message. Electronic communication on
open networks is not like an end-to-end telephone conversation
where people can be identified for instance by their voice.
Thirdly, encryption is also possible using steganographic methods.
47
48
in all other cases. This law is currently being modified. Although there have been
discussions in other Member States, only the United Kingdom has so far launched a
Public Consultation on the regulation of TTPs for the provision of encryption services
(but not for use of encryption) [Licensing of TTPs for the provision of encryption services
- DTI Public Consultation Paper on detailed proposals for legislation, 3.1997] .
Example: If an encryption software company which can freely develop its products in
its home country, must comply with specific technical or legal requirements in other
Member States, this company has to produce at least two, if not more, different versions
of its encryption software. The same situation occurs if enterprises want to offer crossborder encryption services.
Criminals or terrorists also can use encryption for their activities. Most of the (few)
criminal cases involving encryption that are quoted as examples for the need of
regulation concern professional use of encryption. It seems unlikely that in such
cases the use of encryption could be effectively controlled by regulation; see also
Encryption and Evolving technologies as tools of organized crime and terrorism by
D.E. Denning and W.E. Baugh, Jr.
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These methods allow one to hide a message in other data (e.g. images)
in such a way that even the existence of a secret message and thus the use
of encryption cannot be detected. As a result, restricting the use of encryption
could well prevent law-abiding companies and citizens from protecting
themselves against criminal attacks. It would not however prevent totally
criminals from using these technologies.
3. Lawful access to encryption keys

The underlying principle of this approach is to require that products
and services incorporating encryption allow access to the respective keys.
This would permit government agencies to decrypt a ciphered text otherwise
difficult or impossible to crack. Different technical and institutional ways to
provide key access are being discussed. The two most known concepts are
key escrow and key recovery. Broadly speaking, these concepts imply that
copies (escrow concept) or information (recovery concept) about relevant
keys are given either directly to government agencies or to TTPs.
Key access schemes are considered by law enforcement agencies as

a possible solution to cope with issues like encrypted messages.
However these schemes and associated TTPs raise a number of critical
questions that would need to be carefully addressed before introducing
them49. Furthermore, substantial and unknown costs would occur
through the need for scaleability of key access schemes, i.e. making it
49
The ongoing discussion of different legislative initiatives in the US is an illustrative

example of the implied controversy. The most critical points are vulnerability, privacy,
costs and effectiveness:
Inevitably, any key access scheme introduces additional ways to break into a
cryptographic system [See for a comprehensive analysis the recently published study
The risks of key recovery, key escrow, and trusted third party encryption] . More
people will know about secret keys and system designs leading to higher risks of
insider abuse and the TTPs itself can become target for attacks.
These new vulnerabilities are complex and need to be understood as substantial
liability and privacy questions are implied. The costs associated with key access schemes
can be very high. Up to now, questions on costs and who would bear them have not
been addressed by policy makers. Important cost factors would be the specific
requirements put on TTPs, e.g. response time to deliver keys, storage time for session
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work in a multi-million user environment. Up to now, such systems

have at best been developed for small scale use50.
50
Any involvement of a third party in confidential communication

increases its vulnerability. The main reason for involving a third party in
the management of keys for confidentiality is to allow that party to
make the keys available to other than the two communicating parties,
for example, to law enforcement. Users may therefore not see many
advantages in using TTPs for confidential communication, and probably
not even for stored information. Regulators would thus need to offer
incentives to convince users to use licensed TTPs for confidentiality
purposes, for instance through a public security label or even by
introducing a mandatory scheme. Such a mandatory scheme would
make any publicly available offer of encryption services subject to a
licence that inter alia would demand key escrow/recovery. The
acceptance of such a system remains to be seen, but given its implied
overheads, can not be regarded as an incentive for electronic commerce.
In any case, restrictions imposed by national licensing schemes,
particularly those of a mandatory nature, could lead to Economy
obstacles and reduce the competitiveness of the European Industry.
keys, authenticate requesting government agency, secure transfer of recovered keys,
internal security safeguards, etc.
The costs to make them work on an economy of even global wide scale need to be
looked at carefully.
Key access schemes can be easily circumvented - even if, hypothetically speaking,
everyone would be forced to pass through these systems.
Users could first encrypt the data with an unrecoverable key and later use a licensed
escrowed encryption system. Unless encryption as such is forbidden, this would even
be legal. Anyhow, such an operation could only be detected when an agency actually
tries to decrypt the data. It is impossible to scan the network to detect the use of nonescrowed encryption. Therefore use of non-escrowed encryption would not even be
able to act as a general indicator for possible illegal activities.
Users could encrypt a relatively large number of session keys in a way that the previous
key encrypts the next one, always using one or several official escrow/recovery systems.
Only the last key would be used to encrypt the message. An agency would need to
reverse this process and to obtain all keys in order to read the message; although
technically feasible, this task would be extremely difficult to manage. To be noted, the
users would have fully complied to a key recovery scheme.
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4. Privacy
Privacy considerations suggest not to limit the use of cryptography as a
means to ensure data security and confidentiality. The fundamental right of
privacy has to be ensured, but may be restricted for other legitimate reasons
such as safeguarding national security or combating crime, if these restrictions
are appropriate, effective, necessary and proportionate in order to achieve
these other objectives. The EU Data Protection Directive harmonizes the
conditions under which access to personal data, their processing and transfer
to third countries is lawful51. Cryptography is one important technical means
by which data integrity and their confidentiality can be ensured. To ensure
also the secure flow of personal data throughout the economy, such technical
means must be able to travel with the personal information they are
securing. Any regulation hindering the use of encryption products and services
throughout the Economy thus hinders the secure and free flow of personal
information and the provision of related goods and services.
c. Assessment
Proposals for regulation of encryption have generated considerable
controversy. Industry expresses major concerns about encryption regulation,
including key escrow and key recovery schemes52. Although there is a lack
of experience, as electronic communication and commerce have begun to
penetrate and impact the global economy and society, it is necessary to
arrive at common understanding on this subject, as countries may have
different views on security issues implied. Such an understanding could be
founded on the following points:
51
52
Problems caused by encryption to crime investigation and the finding

of evidence are currently limited, but they may increase in the future.
As with any new technology, there will be abuse of encryption and
As regards data security the Directive requires Member States to provide that a data
controller must implement appropriate technical and organisational measures to
protect personal data against accidental or unlawful destruction or accidental loss,
alteration, unauthorised disclosure or access, in particular where the processing
involves the transmission of data over a network, and against all other unlawful
forms of processing.
See Industrial Declaration of the Bonn conference, July 97.
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criminal investigations will be hindered because data was encrypted.

However, widespread availability of encryption can also prevent crime53.
Therefore, there are considerable economic and legal benefits
associated with encryption.
Criminals cannot be entirely prevented from having access to strong

encryption and from bypassing escrowed encryption. Benefits of
regulation for crime fighting are therefore not easy to assess and often
expressed in a fairly general language. However control measures
could make use of encryption for criminal activities more difficult and
cumbersome.
In the information society, citizens and companies will increasingly

carry out more aspects of their lives and business on-line. Through
teleconferencing, tele-shopping, teleworking, electronic payment, email, etc. a huge amount of information will be available electronically,
in a way never experienced before. Therefore, if citizens and companies
have to fear that their communication and transactions are monitored
with the help of key access or similar schemes unduly enlarging the
general surveillance possibility of government agencies, they may prefer
remaining in the anonymous off-line world and electronic commerce
will just not happen54.
Key escrow or key recovery raise a number of practical and complex

questions that policy makers would need to solve, in particular issues
of privacy, vulnerability, effectiveness and costs. If at all required,
regulation should be limited to what is absolutely necessary. Regulation
would also need to distinguish between a multitude of possible key
types (storage keys, session keys, authentication keys, etc.) as there
are important differences in their functionality.
In the context of electronic commerce using open and global networks,

the international availability, interoperability and choice of various
53
Already today, the damage caused by electronic crime is estimated in the order of
billions of ECUs (industrial espionage, credit card fraud, toll fraud on cellular
telephones, piracy on pay TV encryption).
See Eurobarometer opinion survey 46.1 on privacy in the information society, January 1997.
54
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encryption products and services is necessary. Any regulation hindering

the use of encryption products and services throughout the economy
hinders the secure and free flow of personal information and the
provision of related goods and services55.
The ultimate objective for government agencies is to see plaintext and

not necessarily to have access to keys. Furthermore traffic analysis
(e.g. who communicates with whom?) is also important and would
benefit from increased electronic communications. Information, even
encrypted for communication, can often be found unencrypted at the
source, just as with traditional forms of communication, for instance
with banks, shops, travel agencies involved in communication with a
suspect, or can be tapped unencrypted at certain points in a
communication link. Therefore existing regulation on traditional forms
of lawful access to data and communication could be explored with a
view to effectively applying it to access to encrypted data and
communication, e.g. regulation could require access provision to
encrypted information upon legally authorized request.
A fundamental problem lies in international relations, i.e. how to ensure

global communication in case key escrow/recovery regulation is
introduced in some countries. Countries would probably insist that
only national TTPs could hold keys of their citizens. For instance, in
case of a session key recovery scheme that is linked to an e-mail
communication, only the country of the sender could decrypt the
message unless there is a special arrangement between the two
countries.
Irrespective of the compatibility of restrictions with the Treaty provisions

on the free circulation of goods and services, specific national controls
on the use of encryption could also have a secondary effect on the
free circulation of persons56.
55
Refer to EU Data Protection Directive.

Similar to those already identified by the Veil Panel, [Report of the High Level Panel on
the free movement of persons, chaired by Mrs. Simone Veil, presented to the
Commission, 18.3.97].
56
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With the advent of public-key cryptography technology and the legal

recognition of digital signatures at both the state and federal level, the full
potential of the Internet is just beginning to be discovered. With adequate
security and an appropriate legal and service infrastructure, the Internet
may now be used as a Global Area Network (GAN)57.
The ultimate objective for this GAN is to enable real-time electronic
transactions with strangers that are reliable, provable, and enforceable.
While the Internet and public key cryptography have been around for
decades, the legal and service infrastructure to support their widespread
implementation has not. With the establishment of such a legal framework
and infrastructure now underway, the GAN - and the elimination of paper is finally becoming a reality.
Thus the position as regards e-money and commerce can be summarized
thus:
the lack of a legal infrastructure supporting a secure, consumer friendly

environment is likely to be an impediment to electronic commerce,
particularly in the context of larger transactions;
the development of reliable, easy to use electronic payment systems is

fundamentally important to the efficiency of Internet markets;
electronic commerce will increase the number of businesses engaged

in international trade and reduce the average transaction size;
in the short term, electronic commerce may adversely affect business,

but this trend could be reversed in the longer term; some electronic
payment systems, such as digital cash, have significant potential for
tax evasion because it facilitates rapid global anonymous transactions.
1. ELECTRONIC SIGNATURES
Before we get to the actual issue of electronic signatures it would be
worthwhile to consider the reasons for the evolution and development of
the system of authentication through the system of signatures.
57
ey to Information TTechnology
echnology Security
Bell . Michelle Jolicoeur, Digital Signatures: The K
Key
Security,
Digital Signature Trust Company for the American Bankers Association.
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Historical Policy Objectives of Writing and Signature Requirements

Any discussion of whether an existing legal rule (such as form
requirements for manual signatures or writing on physical media) should be
retained requires an examination of the principles upon which the rule was
created and the objectives the rule seeks to achieve58. Broadly, there are
four historical policy objectives for legislative writing and signature
requirements. They are: evidentiary, cautionary, channelling and recordkeeping. These functions are not discrete, indeed they are intimately
connected59. Generally speaking what tends to accomplish one function
also accomplishes the others60.
(i) Evidentiary Function
Formalities such as signatures serve an evidentiary purpose by ensuring
the availability of admissible and reliable evidence. This helps to prevent
perjury61. In particular, signatures can perform the following evidentiary
functions:
identify the signer by name;
primarily identify a particular characteristic or attribute or status of the

signer, rather than the persons name (for example Legal Dept, Head
of a Department, company director);
provide evidence that the signatory has agreed to be bound by the

record by adopting62 or approving it;
provide evidence that the signatory has acknowledged63 or verified64 or

witnessed the record, but not necessarily agreed to be bound by its contents;65
58
59
60
61
62
63
64
65
M Szafran, A Neo-Institutional Paradigm for Contracts Formed in Cyberspace:

Judgment Day for the Statute of Frauds (1996) 14 Cardozo Arts & Entertainment Law
Review 491 at 500.
L Fuller, Consideration and Form (1941) 41 Columbia Law Review 799 at 803.
Ibid.
JW Carter, Outline of Contract Law in Australia, Butterworths (1990) at [2206].
Accepting.
Confirmed or ratified.
Ascertaining the truth or correctness of or to be stating to be true.
The information content in a document can be divided into at least two classes. The
first is information which can be objectively verified, such as a recital in a contract that
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provide evidence of the authenticity and voluntariness of another

signature (witnessing);
provide evidence that the record is the original;
provide evidence of the date, time or place of the signatorys signing;
provide prima facie evidence of the content of the record (such as

averment provisions);
provide prima facie evidence that the record is a true copy of another
record;
provide evidence that the document is complete and final; and
provide evidence that the documents information content has not be

altered subsequent to the signature.
Requirements for writing also perform evidentiary functions including

the provision of a durable record of information (including the terms of an
agreement) and discouraging reliance on oral statements or agreements
which are not permanently recorded and which can be more easily disputed
and more costly to prove in the event of a dispute.
(ii) Cautionary/Protective Function
Signature requirements have a protective effect by cautioning the
signatory. A signature requirement encourages deliberation and reflection
before action66. The need for a signature can warn the signatory that the
document has legal consequences, and encourage them to think about
whether they really want to be legally bound67. This function may be
66
67
states the financial position of one of the parties. In this case, the signature of that
party confirms that the information in the document in relation to that partys financial
position, at that moment in time, is correct. The second is information relating to the
intention of one of the signatories to undertake a contractual obligation, to verify the
content of a document without undertaking an obligation, to witness or verify another
persons signature.
C Douglas Miller, Will Formality, Judicial Formalism, and Legislative Reform: An
Examination of the New Uniform Probate Code `Harmless Error Rule and the
Movement towards Amorphism (1991) 43 Florida Law Review 167 at 261.
JW Carter, note 60 supra.
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particularly important in protecting consumers. For example, Victorian law

currently requires that (usually) a borrowers, mortgagors or guarantors
written signature is necessary to constitute a consumer credit contract68 and
a buyers signature to waive cooling off rights when buying a second hand
motor car69.
Signatures may also serve a protective function for people who receive
or rely on a document by providing some evidence that the maker of the
document had given his or her full attention to the document and, according
to the context, authored, adopted or verified its information content. This
was the argument of counsel for the defendants in Goodman v J Eban
Ltd70 , where it was argued that the requirement that bills be signed by the
solicitor, protected the lay client by assuring that the solicitor had personally
approved the Bill71. The protective function that the verification of the
information content of the document can serve clearly overlaps with the
evidentiary function.
(iii) Channeling Function
Formalities such as signatures serve a channeling function by clarifying
the line between intent to act in a legally significant way and intent to act
otherwise72. Parties are forced to use a particular form, and similar
agreements are given a similar form73. The channeling function also affects
the decision as to whether or not a document is legally binding by reducing
the need for evidence on the facts of a particular case74. In this sense it is
clearly related to the evidentiary function. Signatures indicate that the
68
69
70
71
72
73
74
Consumer Credit Code (Vic), ss 12, 38 and 50.

Motor Car Traders Act 1986 (Vic), s 43(2).
[1954] 1 QB 551.
That protection is lost if a bill can be stamped with a rubber stamp, since anyone can
place a rubber stamp on a bill. The client cannot now whether it has been placed
there by the solicitor himself or not. Evershed MR thought that this protective function
was important, although it did not determine the issue: ibid at 554-5.
C Douglas Miller, note 65.
JW Carter, note 60 supra.
C Douglas Miller, note 65 supra at 269.
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signatory intended the document to have legal status and effect according
to its terms and to be bound by the document. To a lesser extent, a
requirement of writing on physical media serves a channeling function
because people know that the information content is being durably recorded
rather than recorded only in human memory. That fact may caution people
in what information they record.
(iv) Record-keeping Function
Formalities such as signatures and requirements for writing also create
a durable record of the parties and the terms of arrangements. This facilitates
the execution of government regulation, such as licensing laws and taxation.
For example: stamp duty is imposed on written records that affect or record
the transfer of the ownership of assets or the creation of rights in respect of
assets. The law might require a written document to be brought into existence
in order to levy duty upon it; licences may be required to be on physical
media so they can be displayed at a business premises or carried by the
licence holder for ease of checking by the public or law enforcement
personnel75.
The law may require a signature on these writings to assist in the
identification and imposition of legal duties or powers on responsible or
authorized parties (for example the licensee or transferor of property must
sign). Audits typically involve the examination of documents and records,
and law enforcement and revenue authorities rely on the paper trail, an
expression used in this context, which suggests that physical documents and
records are contemplated.
Current Relevance of Signature and Writing Requirements

In general, all of these policy functions of signature and writing
requirements are still important today. Evidence in durable form is still required
of records and of the many facts that can be represented by a signature. A
requirement for a signature still cautions prospective signatories and provides
some protection to those who receive or rely on a record. For the same
75
National Institute Of Standards And Technology (NIST), Data Encryption Standard

(Des) (Fibs Pub 46-2) Dec 1993, NIST - Http://Csrc.Ncsl.Nist.Gov/Fips/Fips46-2.Txt
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reason, the requirement provides a channeling function. Modern society

seems to require more records not fewer, for private record-keeping purposes
and for audit, investigation, law enforcement and revenue collection
purposes76. The issues are:
Whether existing legislative requirements for manual signatures and

writing on physical media are still necessary to fulfil their original policy
function; and if so,
Whether some or all of the electronic equivalents of manual signatures and

writing on physical media can fulfil the policy functions implicit in legislative
requirements for manual signatures and writing on physical media.
2. Security Related Issues

Secured payment transaction system is critical to E-Commerce. Without
a secured payment transaction system, E-Commerce will be a castle built on
sand. Secure Socket Layer (SSL) and Secure Electronic Transactions (SET) are
two major players in the secured payment transaction market. E-Commerce
is built on web-based commerce applications with secured payment transaction
system over the world wide trustless, insecure Internet. The traditional Electronic
Data Interchange (EDI) system has been implemented within trusted network
for contracted buyers and suppliers only. EDI is not good for e-commerce
systems over wide-open, insecure Internet.
SSL and SET both use RSA public-key cryptography for encryption and
authentication. But SSL and SET are very different protocols to approach
payment transaction security. SSL is secured socket layer between HTTP and
TCP on web server. It is a transport layer security protocol. SSL provides a
simple encrypted connection between the clients computer and merchants
server over Internet. It also provides authentication for the merchants server
with its digital certificate from a certificate authority.
With the SET protocol, a transaction has three players: the customer,
the merchant and the merchants bank. SET protocol has three principle
features:
76
National Institute of Standards and Technology (NIST), A Proposed Federal Information

Processing Standard for Digital Signature Standard (DSS)., Aug 1991, NIST
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1.
All sensitive information sent between the three parties are

encrypted.
2.
All three parties are required to authenticate themselves with

certificates from the SET certificate authority.
3.
The merchant never sees the customers card number in plaintext.
This last feature actually makes Internet commerce more secure than
traditional credit card transactions, such as pay by credit card in-store, over
phone, or mail order form. It is also more secure than SSL.
SET basically is a system for ensuring the security of financial transactions
on the Internet77. The highlight that SET brings to on-line security systems is
the use of Digital Certificates. With SET a digital wallet is given to each
customer. Digital wallet is a file or set of records for a user that contains all
account information, such as credit-card numbers and digital certificate.
When the customer has the electronic wallet the payment transaction is
conducted and verified using a combination of digital certificates and digital
signatures among the purchaser, a merchant, and the purchasers bank.
Therefore, privacy and confidentiality is secured among all parties.
SET protocol provides enhancements mainly at three security areas78.
Therefore much more complete and better safety is achieved over other
payment methods. These are:
Privacy, via cryptography that renders intercepted messages

unreadable.
Integrity, via hashing and signing assures that messages sent are
received without alteration.
Authentication, via digital certificates which assures that the parties

involved in the transaction are who they claim to be, and prevents
them from denying that they sent a message.
77
78
www.setco.org/setmark.html
www.wolrath.com/set.html
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The privacy or confidentiality of transactions is achieved by cryptography.

There are two forms of cryptography used in SET protocol. RSA and DES.
RSA is an asymmetric algorithm used for signatures and public-key
encryption of symmetric encryption keys and bank card numbers. DES on
the other hand is symmetric and it takes care of the encryption of the data
that is to be transmitted during the transaction.
So the SET protocol combines two best two encryption methods to achieve
SET cryptography level. It does so by encrypting the message data using a
randomly generated symmetric DES encryption key. This key is, in turn,
encrypted using the message recipients RSA public key. The second one is
the digital envelope of the message and is sent to the recipient along with
the encrypted message itself. After receiving the digital envelope, the recipient
decrypts it using his own private key and obtains the randomly generated
symmetric key and then uses the symmetric key to unlock the original
message79.
The integrity is assured by using one-way cryptographic hashing
algorithms and digital signatures80. A hashing algorithm is a function used
to calculate a unique integrity value, called the hash value or message
digest, from the original data i.e. the message. But the hash function by it
self does not guarantee absolute data integrity. For this it needs to be
combined with a secret encryption key. Here is where digital signing comes
into the picture.
Digital Certificate and Digital Signature

Digital certificate is an electronic identification that proves the user is
really the one, who he or she claims to be 81. Its issued by a bank,
clearinghouse or a recognized Certificate Authority and contains information
about the user. Digital Certificates allows the customers transaction to be
individually authenticated by matching unique card numbers to customer-
79
80
81
www.wolrath.com/set.html
www.tda.ecrc.ctc.com/kbase/doc/update/setspecs.htm
www.visa.com/nt/ecomm/set/main.html#set, www.visa.com/nt/ecomm/set/
setsafe.html
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unique information like date of birth, mothers maiden name, and so on,
held within the PC. When there is no match the transaction is not authorized.
Digital Certificate also contains basic financial information, the issuers
financial information, and some encryption data.
For SET to work, not only cardholders but also merchants receive unique
Digital Certificates. In this case, with the certificate the transactions between
the merchant and the financial institution that issued the card are
authenticated. Certificates will be transmitted to merchants along with
purchase requests and encrypted payment instructions. The merchant can,
on receiving a certificate, be assured at a minimum that the account number
has been validated by the card sponsor or its agent.
It should be noted that, a certificate does not stand by itself. In fact,
related with every certificate granted by a Certification Authority (CA) there
is the CAs own digital signature - and behind that signature may be an
association signature, and so on, back to a root signature known and
acknowledged by all implementers of SET software82. This makes spoofing
of certificates extremely unlikely.
The digital signature on the other hand is a code that guarantees a senders
identity. Within the SET description it is noted that the Digital Signature that
applies to a particular cardholder will not change and it is permanent
information that is directly coupled with the physical card itself. Therefore if an
unauthorized person decrypts it, the digital signature will be altered and the
recipient will know of the intrusion. SET method for Digital Signatures first
encrypts only a digest (hash value) of a message with the senders private key,
and appends it to the original message. Then the whole message, including
the signature, is encrypted with the recipients public key.83
SET brings a new concept of Digital Signatures; that is the Dual Signatures.
When there are more than one message within a transaction which are to be
handled as separate steps, two signatures are generated at once to cover
each step. For example an order message linked with a payment instruction is
a very specific application area for this technique.
82
83
www.trintech.com/whatsnew/what_is_set.html
www.esartuphelp.com/privacy1.html
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3. Evidence Related Issues

Interpretation, and re-interpretation, of primary and secondary sources is
the foundation of much humanistic scholarship. Construction of a convincing
argument depends on an evaluation of the authenticity of source materials.
Judgments about authenticity are based on assessments of the origins,
completeness and internal integrity of a document. They may also draw from
the consistency and coherence that exists between a particular source and
others in the same context or of the same type.
Traditionally, when scholars encountered original sources (artifacts,
documents or works of art) many physical clues assisted in establishing their
authenticity. If sources are studied in the surrogate (in photographs, microfilm
or other reprographic form), all the questions concerning the authenticity of
the original are overlaid with additional questions about the methods of
representation. When the source is itself is distant from the original, such as a
transcription of selections from a census or a collation of statistics, the methods
employed and choices made in its creation are assessed by scholars along
with the interpreted results; these methods impinge upon its subsequent utility
for other kinds of analysis and interpretation.
Concerns about authenticity in sources, then, are not new. With the
ubiquity of digital representations and the proliferation of source information
on the Internet, these issues are further complicated. It is not unusual to find
resources purporting to represent the same thing at many different sites. But
we are without widely understood and employed methods of assessing and
establishing authenticity of digital sources. It is crucial for the ongoing
development of knowledge in many fields that it be possible to determine
the relative authenticity of a number of different representations, through an
analysis of the methods that have been chosen to transform the original into
a digital form, or through an assessment of the methods used to capture
original digital data. It is also essential that it be possible to establish the
integrity of a particular digital copy.
The community of users and creators of scholarly digital documentation
is not without proposed solutions to this problem. Many companies offer
technologies and a variety of institutions have established or proposed social
mechanisms of control which make promises to satisfy some part of the
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requirements for digital authenticity. We feel the appropriateness of these

solutions cannot be assessed until we are clearer about its needs in this area.
Further articulation of requirements is a necessary precursor to systematic
assessment of the degree to which different types of technical and social
offerings satisfy scholarly needs. This note calls for both such further definition
of requirements and the associated assessment of mechanisms being offered
in order to hasten the development of trusted and widely adopted solutions.
Forgeries and fakes have long been of great concern. The broadening of
the number of sources for information, the ease with which digital information
can be altered, and the likelihood of the existence of many digital copies of
the same work with slight differences. The underlying technology makes
purposeful fakery easier and more tempting. In addition, lack of understanding
of the distorting effects of specific methods of digitization makes the creation
and distribution of copies that were designed to be faithful, but are, in fact,
misleading in some manner, very common84.
4. UNCITRAL Model Law of E-Commerce

In June 1996 the United Nations Commission on International Trade
Law (UNCITRAL) adopted the Model Law on Electronic Commerce85. The
Model Law on Electronic Commerce (the Model Law) was drafted under the
auspices of UNCITRAL86. This is a specialized commission of the United
84
85
86
As we move from the actual to the reconstruction... we move into what are probably
the most controversial, if the most technologically exciting, aspects of the Project.... In
such an environment where damaged texts can be invisibly mended and the
circumstances of actual performance replicated, a decorum for signalling fakes has
to be carefully observed. There is a line that can be crossed ... whereby it is possible
to improve on the original, by increasing the contrast between darkened vellum and
faded ink, by restoring old paste-downs to their original position, or by tidying up a
particularly crabbed hand. Some of these techniques have no place in an archive
such as this. Other aspects of image manipulation, which involve speculative
reconstruction, however well-founded, must always be scrupulously and prominently
recorded.... Meg Twycross, Pamela King and Andrew Prescott, The York Doomsday
Project, Towards the Digital Library, p. 56.
Publications on (draft) Model Law
About UNCITRAL: Yearbooks UNCITRAL, volumes I (1968-1970) - XXVI (1995), United
Nations (ed.); http://www.un.or.at/uncitral
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Nations, established in 1966. The UNCITRAL mandate can be summarized

as the promotion of the progressive harmonization and unification of the
law of international trade law87.
A model law itself is not legally binding. National legislators are free to
decide whether or not they will issue legislation based upon a model law.
The Model Law on Electronic Commerce explicitly permits a degree of
flexibility to national legislators to limit the model law provisions. For instance
various articles of this Model Law end with the following optional clause
(which an enacting state can make use of): The provisions of this article do
not apply to the following: [specific subjects]88. It would be in the interest of
an international uniform legal regime for electronic commerce that states
who decide to enact the Model Law, implement it as a single statute and try
to avoid national variations. The Model Law also contains a special provision
dealing with variation by agreement (article 4). This provision refers to
the possibilities the Model Law offers to parties to vary by agreement the
rules on communication of data messages laid down in chapter III of the
Model Law (articles 11-15)89.
The Model Law seeks to facilitate the use of modern techniques for
recording and communicating information in various types of circumstances
by providing principles and procedures90. It does not intend to cover every
aspect of the use of electronic commerce. Its purpose is to offer national
legislators a set of internationally acceptable rules in order to remove legal
obstacles to the use of information presented in a form other than a traditional
paper document.
87
88
89
90
See UN General Assembly Resolution 2205 (XXI), UNCITRAL Yearbook Vol. I (19681970), pp. 65-66.
Articles 6-8, 11, 12, 15, 17. See Guide to Enactment of the UNCITRAL Model Law on
Electronic Commerce, nos. 9, 29, 51.
See 3.8; Guide, nrs 44-45; Draft rules on electronic signature: note by the Secretariat,
A/CN.9/WG.IV/WP.
Hill, R., Walden, I., The Draft UNCITRAL Model Law for Electronic Commerce: issues
and solutions, Computer Lawyer 1996/3, pp. 18-22.
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Structure of the Model Law

The Model Law consists of two parts. Part one is devoted to electronic
commerce in general. Part two deals with specific areas of electronic
commerce. Chapter I (of part one) contains a number of general provisions,
i.e. provisions on the sphere of application (article 1), definitions (article 2),
interpretation (article 3) and variation by agreement (article 4). Chapters II
and III (of part one) are the core of the Model Law. Chapter II deals with
[t]he provisions contained in chapter II may, to some extent, be regarded
as a collection of exceptions to well-established rules regarding the form of
legal transactions. Such well established rules are normally of a mandatory
nature since they generally reflect decisions of public policy. The provisions
contained in chapter II should be regarded as stating the minimum acceptable
form requirement and are, for that reason, of a mandatory nature, unless
expressly stated otherwise in those provisions.
Chapter III deals with the legal effects of communication of data
messages between originator and addressee91. Originator of a data
message means a person by whom, or on whose behalf, the data message
purports to have been sent or generated prior to storage, if any. Addressee
means a person who is intended by the originator to receive the data
message92. According to the Guide the rules contained in chapter III may
be used by parties as a basis for concluding agreements. They may also be
used to supplement the terms of agreements in cases of gaps or omissions
in contractual stipulations. In addition, they may be regarded as setting a
basic standard for situations where data messages are exchanged without a
previous agreement being entered into by the communicating parties, e.g.,
in the context of open-networks communications.
91
92
Both originator and addressee do not include a person acting as an intermediary with
respect to that data message. See article 2, sub c-e, Model Law
In earlier drafts the notion data record was used. See the discussion about the final
choise for data message in Report Working Group on EDI, 28th session (1994), A/
CN.9/406, UNCITRAL Yearbook 1995, pp. 111-137, no. 133
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Principles expressed in the Model Law 93

The Model Law contains the following principles:
*
Legal recognition of data messages (article 5). Information shall not

be denied legal effect, validity or enforceability solely on the grounds
that it is in the form of a data message. It should be noted that this
rule does not establish the legal validity of any given data message or
of any information contained therein. The rule does indicate that the
form in which information is presented or retained cannot be used as
the only reason to deny legal effectiveness, validity or enforceability of
that information.
Legal recognition of a functional equivalent of information in writing

(article 6). Where the law requires information to be in writing, that
requirement is met by a data message if the information contained
therein is accessible so as to be usable for subsequent reference.
National laws may specify exceptions.
Legal recognition of a functional equivalent of a handwritten signature

(article 7). Where the law requires a signature of a person, that
requirement is met in relation to a data message if a reliable method
is used to identify that person and to indicate that persons approval
of the information contained in the data message; and that method is
as reliable as was appropriate for the purpose for which the data
message was generated or communicated, in the light of all the
circumstances, including any relevant agreement. National laws may
specify exceptions. According to the Guide this rule does not imply
that the mere signing of a data message by means of a functional
equivalent of a handwritten signature is not intended, in and of itself,
to confer legal validity on the data message. Whether a data message
that fulfilled the requirement of a signature has legal validity, is to be
settled under the law applicable outside the Model Law.
93
Caprioli, E.A., Sorieul, R., Le commerce international lectronique: vers lmergence

de rgles juridiques transnationales, Journal du droit international 1997, 323-393.
UNCITRAL sites and documents on electronic commerce, http://www.un.or.at/uncitral,
http://www.un.or.at/uncitral/sessions/wg.ec/wp.71.htm#top
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Legal recognition of a data message as an original document (article

8). Where the law requires information to be presented or retained in
its original form, that requirement is met by a data message if there
exists a reliable assurance as to the integrity of the information from
the time when it was first generated in its final form, as a data message
or otherwise, and that the information can be displayed if required.
Legal recognition of admissibility and evidential weight of data

messages (article 9). In any legal proceedings, nothing in the
application of the rules of evidence shall apply so as to deny the
admissibility of a data message in evidence: on the sole ground that it
is a data message, or, in case it is the best evidence obtained, on the
grounds that it is not in its original form. Information in the form of a
data message shall be given due evidential weight.
Legal recognition of retention of data messages (article 10). Where

the law requires that certain documents, records or information be
retained that requirement is met by retaining data messages, provided
that the prescribed conditions are satisfied.
Formation and validity of electronic contracts (article 11, 1). In the

context of contract formation, unless otherwise agreed by the parties,
an offer and the acceptance of an offer may be expressed by means
of data messages. Where a data message is used in the formation of
a contract, that contract shall not be denied validity or enforceability
on the sole ground that a data message was used for that purpose.
Recognition by parties of data messages related to the performance of

contractual obligations (article 12). Between originator and addressee,
a declaration of will or other statement shall not be denied legal effect,
validity or enforceability solely on the grounds that it is in the form of
a data message. National laws may specify exceptions.
The attribution of data message (article 13). Basic rule is: a data
message is that of the originator if it was sent by the originator itself.
Under specific circumstances prescribed by the Model Law, it may be
assumed that the data message is that of the originator.
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Acknowledgement of receipt (article 14). The Model Law provides rules

for the situation in which, on or before sending a data message, or by
means of that data message, the originator has requested or has
agreed with the addressee that the receipt of that message be
acknowledged.
Time and place of dispatch and receipt of data messages (article 15).
The Model Law contains rules on when and where a data message
has been or is deemed to be dispatched or received. National laws
may specify exceptions.
The acceptance of the Model Law will depend on how close its provisions
are to commercial reality94. According to one view the approach adopted
by the Model Law is pragmatic and corresponds well to both current practices
and to the thinking of leading scholars95. Though it is premature to pass a
final judgment on the success of the Model Law, there are various indications
that national legislators do consider enacting the Model Law.
5. Indian Legal Position on E-Commerce

The passage of the Information Technology Act-2000 (ITA-2000) has
been a major development in India as far as E-Governance is concerned.
With the passage of this Act, Electronic Documents have come to be
recognized as equivalent to written documents for the purpose of law.
Similarly, Digital Signatures affixed as per the provisions of the ITA-2000
will be considered equivalent to written signatures. It is therefore envisaged
that Electronic Documents such as E-Mails and Web Pages will be potential
evidences to prove contracts by any party to a contract.
The Indian Evidence Act has also been suitably amended by the ITA2000 to provide for presentation of evidences of Electronic Documents
either in the electronic form itself or as certified print outs. Lack of Legally
94
95
Heinrich, G.C., Harmonised global interchange? - UNCITRALs Draft Model Law for
Electronic Data Interchange, WEB JCLI 3/ 1995, http://www.ncl.ac.uk/~nlawwww/
articles3/ hein3.html. Heinrich, G.C., UNCITRAL und EDI-Einheitsrecht, Aktuelle
Entwicklungen, Computerrecht 2/1994, pp. 118-121.
Hill/Walden, l.c. ( 3.12), p. 22; see also Mitrakas, o.c. ( 3.12), p. 162
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Acceptable Digital Signature Facility If however, a person has to produce an

E-Mail as an irrefutable evidence in the Court of law, it should be digitally
signed using a Digital Certificate issued by a Certifying Authority licensed in
India. At the time of launching this service, no valid digital certificate issue
service is available in India to the individuals. Hence, despite the law having
been passed nearly two years ago, it is still not practically feasible for a
member of the public to send a digitally signed e-mail and keep it as evidence
for future reference in a court of law.
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E-BANKING AND LEGAL ISSUES
CHAPTER III

E-Cash: Cant Live With It, Cant Live Without It! 96
Introduction
Electronic banking aims to provide easy access to
banking services for customers. Both banks and customers
stand to benefit from the introduction of electronic banking
schemes, since the bank can offer its services at much lower
cost, while the customer can access the services from any
location at any time97. Indeed, these benefits can obviate
the need for branches or tellers altogether, resulting in the
emergence of so called virtual banks, who conduct business
purely on an electronic basis98.
The transition from a paper-based monetary system to
an electronic payments system will reduce transaction costs,
expand markets, and empower individuals. The speed of
that transition and the expected benefits, however, will depend
on creating a legal infrastructure that penalizes failure and
rewards success99. The rules that govern the new monetary
96
97
98
99
Post. David G., E-Cash: Cant Live With It, Cant Live Without It, American Lawyer,
February 1995.
Lynch, A. (1997) Secure banking a reality Article. The Australian. Tuesday, May 20,
1997.
Atkins, D. et. al. (1996) Internet Security Professional Reference. New Riders
Publishing, Indianapolis
Hickman, B. (1997) Internet banking services to soar Article. The Australian. Tuesday,
April 8, 1997.
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universe will have to be transparent, equally applied, and consistent with

individual freedom if people are to have trust and confidence in cybermoney
and cybercommerce.
Money is an important commodity to all alike. And all commercial
transactions involve money. It is the single thing that all mankind in interested
in the most acute fashion. This is what motivates a person to exert himself
and excel himself in his vocations. The assurance that his labour shall be
rewarded justly in monetary terms is the crux of all industrious activities.
Unless one is a philantrophist with no interest in material benefits.
The first question, which should be raised at this juncture, is what is
money? At first sight the answer to this question seems obvious. The general
public would agree on coins and banknotes, but would they accept them
from any country? What about cheques? They would probably be less willing
to accept them than their own countrys coins and notes but bank money
(i.e. anything for which you can write a cheque) actually accounts for by far
the greatest proportion by value of the total supply of money. What about
IOUs (I owe you) credit cards and gold? The gold standard belongs to
history but even today in many rich people in different parts of the world
would rather keep some of their wealth in the form of gold than in official,
inflation-prone currencies. The attractiveness of gold, from an aesthetic
point of view, and its resistance to corrosion are two of the properties which
led to its use for monetary transactions for thousands of years. In complete
contrast, a form of money with virtually no tangible properties whatsoever electronic money - seems set to gain rapidly in popularity. All sorts of things
have been used as money at different times in different places100.
The traditional dimensions of market are fast disappearing with the advent
of the cyberspace. Ever since the Internet has facilitated the conduct of transactions
and commerce on the Net, the nature of businesses has changed, the market
conditions are changed, the variety of products available is unlimited and the
quality of products improved due to stiff competition from rival businesses and
100
Davies, Glyn. A history of money from ancient times to the present day, rev. ed.
Cardiff: University of Wales Press, 1996. Paperback. The first, hardback, edition was
published in 1994.
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the services offered by the cyberspace unlimited101. With this has arisen the
problem of the currency in which a transaction is to be conducted the exchange
rates that are to be applicable in case of a transaction on-line etc.
The need for e-money is thus justified to indicate that traditional forms
of money are unsuited for transactions on the net102. Digital cash brings
benefits as well as problems. One major advantage of digital cash is its
increased efficiency opening new opportunities, especially for small
businesses. On the other hand, it will encourage potentially the worsening
of problems over taxation and money laundering. In turn, these problems
may alter foreign exchange rates, disturb money supplies, and encourage
an overall financial crisis.
The transnationality of digital cash - the ability of digital cash to flow
freely across national borders - encourages these benefits and problems,
and could have significant repercussions internationally. From an economic
view, this transnationality is the most important characteristic of digital cash.
If digital cash behaved like traditional currencies, circulating within a national
border and controlled by a central monetary authority, there would be few
economic implications that would be worth analyzing. In this scenario, digital
cash would be nothing more than a convenient transaction method such as
a credit card103. Digital cashs very transnationality has the potential to cause
conflict between cyberspace and nation states. If digital cash spreads
successfully in the next century, its history may be written as a transcript of
economic battles between nation states104.
1. Regulating E-Transactions - Impact Of Digital Money

On Various Agencies
The term digital money encompasses stored-value cards based on
chips, plus net-based payment mechanisms. It is set to have substantial
101
102
103
104
Hickman, B. (1997) Internet banking services to soar Article. The Australian. Tuesday,
April 8, 1997.
Konvisser, J. B. (1996), Coins, Notes and Bits: A Case for Legal Tender on the Internet,
University of Texas at Austin Press. Texas.
Tanaka. Tatsuo, Possible Consequences of Digital Cash, First Monday.
Ibid.
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impacts on financial services industry, plus flow-on effects on society as a

whole. Depending on a whole host of factors, these may be evolutionary, or
utterly revolutionary.
Digital money or spendable balances represented solely by digits on
a banks balance sheet is not new. Banking historians have found that
merchants in Genoa, Italy, were making payments by transferring bank
account balances back in 1200 AD. It doesnt really matter whether the
digits on the banks balance sheet are displayed in ink or in pixels. What
has been changing over the centuries is the usual method of authorizing the
transfer of balances from one account to another105.
In 1200, when a payment had to be made by deposit transfer, one or
both of the parties would have to meet in person with a banker to authorize
the transfer orally. Paper checks authorization by written order came
along later, first appearing in the 1300s and becoming common in the
1600s. Remote, paperless, and instantaneously executed authorization of
funds transfer, in the form of wiring money from one account to another,
has been around at the wholesale level since the mid-1900s, following the
introduction of the electric telegraph. Wire transfer today accounts for the
vast majority more than six-sevenths of the dollar volume of payments in
the United States106. What is called electronic funds transfer or EFT, wherein
an individual accesses the payment system by means of a debit card reader
or a personal computer, basically brings the wiring of money down to the
level of the retail transaction.
Payment is the ultimate step in any transaction. A book to be bought, a
car to be made, a meal to be served, or a distance to be travelled. All
involve this final step of payment. Because everything has a price, and for
any transaction to be complete legally this price has to be paid. Of course
there are things, which do not have a price and are free for anyone to enjoy,
like the sunshine, or the air etc. But these are not subjects of any commerce.
Once they enter this sphere they too may have a price. All contracts have
105
106
White. Lawrence. H., Technological Revolution and Monetary Evolution, 14th Monetary
Conference CATO.
Ibid.
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the stipulation of a valid consideration for the contract to be complete. This

is an indispensable part of a valid contract107.
Having thus established that payments are a necessary part of every
day commercial transactions, it becomes necessary to recognize the various
modes of payments that are in use. There are principally four modes of
payments:
(a)
Cash
(b)
Checks
(c)
Credit Cards
(d)
Electronic Fund Transfers
These are all modes of payments as are prevalent today. For modes of
payments to reach this advanced stage, the concept of money and the
kinds of money have undergone a series of changes.
2. Role of RBI and Legal Issues - Transition to Digital

Currency
At present digital money as a means of exchange is being developed by
many firms, banks and governments. The list of existing digital money system
is growing fast and at the moment it includes: CAFE, CheckFree, CyberCash,
DigiCash, Financial Services Technology Consortium, First Virtual Holdings,
Internet Keyed Payment Protocols, JEPI, Millicent, Mondex, NetBill, NetCash,
NetCheque, SET and Magic Money. Though its use is still restricted to market
niches and on the Internet an extensive use of it in the near future is
foreseeable.
What are the economic consequences of digital cash? What are its
implications from the view of economics? In recent years, several proposals
for electronic cash have appeared in cyberspace. In several cases, forms of
digital cash are already in use. The economic consequences of these
transactions have not yet been fully examined.
107
Refer to Chapter One for Contracts.
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To some observers, one important economic consequence of electronic

cash is the free issue of private currency by commercial banks or other nonfirms. However, if we look at the history of money, it is not easy to make
privately issued currency credible in the eyes and wallets of the public. As
long as there is competition between banks, private banks will sometimes
become bankrupt. Nothing is more debilitating to the credibility of privately
issued currency than bankruptcy. The most important characteristic of digital
cash is its transnationality. Digital cash does not recognize national borders.
It is not controlled by any central bank of any nation state. The unprecedented
efficiency of international payments with digital cash may indeed increase
the instability of the global monetary system. This efficiency indeed may
lead to conflicts between digital cash providers and users and the central
banks of nation states.
Role of Regulatory Agencies in the Information Age

Since financial institutions are subject to various forms of regulation108 ,
it is necessary to define what I mean by supervision and regulation:
Supervisors restrict the types of assets in which firms under their

jurisdiction may invest.
Through examinations supervisors assess the quality of the firms assets

and the capacity of their managers to manage risk.
Supervisors have authority to require changes in the behavior of firms,

including authority to require them to increase their capital or cease
operations.
The Market Discipline Argument for Exemption from
Supervision and Regulation
One argument for exempting non-bank providers of payment services
from supervision and regulation rests on the assumption that market discipline
will ensure the safety and soundness of the payments system. This market
discipline argument rests on the following four assumptions109:
108
109
Goodhart, C.A.E. (1985) The Evolution of Central Banks: A Natural Development?

London: London School of Economics and Political Science.
Hayek, F.A. (1976) Choice in Currency: A Way to Stop Inflation. London: Institute of
Economic Affairs.
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Market discipline will force the non-bank providers of payment services

to hold cash to satisfy the demands of their customers who wish to
cash out of their payment systems.
These non-bank firms will arrange credit lines with banks to guarantee
that they always have access to enough cash to meet their
commitments. The banks offering credit lines will impose market
discipline on the activities of those firms.
Non-bank providers of payment services will limit their investments to

high quality earning assets, to maintain the confidence of their
customers.
Customers would be able to distinguish accurately among payment

providers on the basis of the risk they assume. Failure of one nonbank provider of payment services would not undermine customer
confidence in the other non-bank providers; failure would not trigger
contagious runs by the customers of the other non-bank providers of
payment services.
Are these assumptions valid? Is there evidence to support them? Such

evidence must be derived from examining periods with a variety of experiences
with payment-system stability, and a variety of relationships among providers
of payment services.
Internet Banking in India Guidelines 110

India is no stranger to regulation of E-Commerce. As the use of Internet
banking increases the necessity for regulation arises. Accordingly RBI has
set certain standards for regulation. They are categorized as:
1.
Technology and Security Standards
2.
Legal Issues
3.
Regulatory and Supervisory Issues
As regards Technology issues, the security for transactions conducted

on the Net is the main issue. The measures to be adopted by banks are all
110
http://www.banknetindia.com/banking/ibguide1.htm
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centred around this point. Having a security policy with an information systems
officer and a Information Technology Division with Dual key Encryption for
transactions being implemented, data protection, with user ids passwords,
smart cards and other biometric technologies, firewalls for databases with a
real-time security alert etc are some of the measures suggested for secure
Internet Transactions.
PKI (Public Key Infrastructure) is the most favoured technology for secure
Internet banking services. Other alternatives suggested in its place are:
Secured Socket Layer SSL
File Transfer Protocol FTP
From a legal perspective, The existing regulatory framework over banks

will be extended to Internet banking also. In India, the Information Technology
Act, 2000, in Section 3(2) provides for a particular technology (viz., the
asymmetric crypto system and hash function) as a means of authenticating
electronic record. Any other method used by banks for authentication should
be recognized as a source of legal risk.
Under the present regime there is an obligation on banks to maintain
secrecy and confidentiality of customers accounts. In the Internet banking
scenario, the risk of banks not meeting the above obligation is high on
account of several factors. Despite all reasonable precautions, banks may
be exposed to enhanced risk of liability to customers on account of breach
of secrecy, denial of service etc., because of hacking/ other technological
failures. The banks should, therefore, institute adequate risk control measures
to manage such risks. Some of the measures that Banks have adopted in
regulation of E-Banking are:
(a)
Mandatory licensing and approval by RBI for Banks for providing

Internet Banking facilities.
(b)
Bilateral agreements between customers and banks for e-banking,

underlining the rights and liabilities of each other.
(c)
Products restricted to account holders only and should not be offered

in other jurisdictions.
(d)
Services to include local currency products alone.
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(e)
Failure or Breach of Security systems to be reported to RBI for audit

and inspection.
(f)
RBI Regulations for Banks made applicable to Internet Banking also.
(g)
Outsourcing guidelines by Banks to third parties for effective risk

management.
(h)
Inter-Bank Payment Gateways for settlement of transactions, with real

time settlements.
After Technology Act has paved the path for digital signatures and digital
contracts, Reserve Bank of India with the National Payment Council, is
finalizing the draft of the Payment Systems Regulations Act111 .
The proposed Act will bring in all electronic fund transfers/ entire ecommerce payments system in the country be it money orders or settlements
at payment gateways, stock and commodity exchanges or clearing houses
under the jurisdiction of the RBI. Even the payment gateways and commodity
exchanges will come under the RBI jurisdiction. The money order system run
by the department of posting alliance with Western Union Financial Services
Inc will also come under the RBI purview.
Payment systems legislation may include three Acts Payment System
Regulation Act, Payment System Netting Act and Electronic Fund Transfer
Act. Together, these Acts will cover all electronic fund transfers including
inter-bank payments, pay orders, remittances and transactions done through
ATMs, credit and debit cards besides money orders and other settlements in
clearing houses and stock exchanges.
3. Transnational Transactions of E-Cash

There are certain underlying theories, which expound the need for the
evolution and the acceptance of Digital Money. Its wide acceptance and is
based on three elements with regard to demand for digital money:
111
Inherent need for different types of money in the economy,

heterogeneous demand;
http://www.banknetindia.com/issues/efund.htm
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Cost transaction reduction;
Allowance of secure, private and anonymous large transactions.
The first is based on the explanation given by Hayek112. The government

supplies only one type of money; however, the market created different
types of money or quasi-money to satisfy the existing demands. Also, there
are quasi-currencies as checks, credit cards and others created by the market
in order to satisfy the demand. Thus, the existence of a heterogeneous
demand does generate needs for different moneys or quasi-moneys.
The second can be better viewed throughout history by changes in money
forms. According to North, changes in money happened only when it brought
a decrease in transaction costs to economic agents. Norths thesis seems
to prove Clowers theory that money demand is tied to cost reduction in
transaction. From the time of the conception of money till its present form
(paper money, credit and debit cards, checks etc.), its transformation has
been linked to reduction in the costs of transaction113. The electronic modality
of money leads to a more significant reduction in costs. A study done by
White shows that the cost of wiring money went down from two dollars to
two cents114. It may even allow transactions amounting less than a dollar
each. According to Graham, this is because the estimated transaction cost
of todays paper money in the banking system is around a dollar, while
using digital money through internet cost is reduced to one cent115. This
impressive cost reduction makes digital money a serious candidate for current
money, albeit not exclusively in its pure form as, for example, in smart cards.
112
113
114
115
Hayek, F. A. (1978). Desestatizao do Dinheiro. [Destatization of Money] Instituto

Liberal. Rio de Janeiro.
North, D. (1994), Transaction Costs through Time, Washington University Press,
Washington, D.C.; Clower, R. (1967). A Reconsideration of the Micro-foundations of
Monetary Theory . In: Money and Markets (1984). Cambridge University Press.
Cambridge.
White, L. H. (1996), The Technology and Monetary Evolution, Cato Institutes 14 th
Annual Monetary Conference. Washington, D.C.
Graham, G. (1996), Rise of Internet Threatens Traditional Banks Market, Financial
Times. New York.
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The third element worth considering apart from the demand aspect is
the possibility of increasing the number of safe transactions done
privately and anonymously. Increase in size and in quantity of private
transactions will make it hard for governments to track down. Therefore, tax
collection on digital cash transactions done anonymously will tend to
decrease. Furthermore, there will be an incentive for creating virtual banks
in countries where barriers and taxes on the financial system are extremely
low. If you add that to the fact that clients could move any amount of money
anonymously around the globe, then tax on the financial system collected
by government as it exists today may totally disappear116. Another critical
point is the possibility of private banks to issue digital money. This may
happen as long as the virtual banks have enough credibility to impose their
currency. Thus, currencies as are known today, guaranteed by governments,
will shift their ownership to banks. Competition among banks may arise
driving even further the transaction cost and the chance of clients losing
money because of bad economic policies. So, monetary policies as are
known at present will be no longer in the hands of policy makers of a
specific country, but controlled by private banks with influences not necessarily
limited to one single country117.
These three elements of demand for digital money will affect two
variables: the utility function and societys income118. Utilities will rise due to
the increase in the diversity of currencies caused by the digital money. Digital
money can be easily transformed into different forms of money to satisfy the
demand. Benefits to the income come from two sources. The first one is the
cost reduction in transaction; the second one is the reduction in taxes caused
by safe private anonymous transactions. The final result will be a welfare
improvement.
116
117
118
Mantonis, J. W. (1995), Digital Cash and Monetary Freedom, Libertarian Alliance,

London.
More, M. (1995). Denationalisation of Money. Extropy . Washington.
Berentsen, A. (1998), Monetary Policy Implications of Digital Money, International
Review of Social Science (Kyklos), Vol.51, 1 : 89-117. Bern.
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4. Credit Card and Internet

All forms of money that circulate today are forms of credit that also
serve as media of exchange. For example, currency is a credit instrument
because it is a liability of its issuer, the government. Technically, currency
is simply a small denomination, non-interest-bearing bearer bond of no
fixed maturity that governments issue for just one reason it provides
interest free debt financing. As a credit instrument, currency serves as a
store of value for its owner; as a medium of exchange, it facilitates
transactions. Specie i.e. gold and silver coins, is the only form of money
that is not credit, but such coins no longer circulate in the economy119.
Fundamentally, electronic money is no different than all other forms of
money that exist today.
Checkable bank deposits also are forms of credit they are liabilities of
a bank as well as a medium of exchange. Unlike currency, though, checking
account balances, along with non-checkable deposits, finance bank assets,
specifically loans and investments. Travelers checks likewise are credit
instruments used to finance the issuers assets. Debit cards, per se, are not
money; instead, they are keys that provide electronic access to checkable
bank deposits. Therefore, they can be used to issue what effectively are
electronic checks (technically value transfer instruments) that transfer
deposits from payer to payee.
Electronic money, which is the money balance recorded electronically
on a stored-value card, is also credit, for the balance on the card is a
liability of its issuer. The issuer uses funds paid by the cardholder to acquire
assets. However, the legal evidence of the issuers liability consists of electronic
bits and bytes recorded on the card. For currency, the legal evidence of
liability is the piece of currency itself. For bank deposits, the legal evidence
of a banks liability resided for a long time on paper ledger cards or savings
passbooks, now that liability almost always is evidenced by bits and bytes in
a banks computer.
119
Ely. Bert, Electronic Money and Monetary Policy: Separating Fact from Fiction, a
Conference paper prepared for CATO Insititutes 14th Annual Monetary Conference,
May 23rd 1996. Washington D.C.
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Electronic money will have to find a convincing answer to fraudulent

practices and lack of security and privacy on the net if its use is to increase.
Though it is one of the most convenient of the mediums of exchange available
the very issue of security of use of it hampers its progress. Given the frequency,
with which hackers penetrate supposedly secure computer networks, issuers
of stored-value cards will have to wage a constant battle to protect themselves
against fraud losses. Worse, they will not be able to respond quickly to a
subversion of the security measures on stored-value cards (such as encryption
algorithms) due to the time and expense that it will take to replace the
compromised cards120. Thus the potential for fraud will greatly constrain the
growth of electronic money.
Holders of stored-value cards will be reluctant to carry large balances
on their cards because of the loss that they will suffer if their card disappears
or the balance is erased. Hence, while stored-value cards will be used to
pay for small purchases, currency will still be preferred for large or illicit
purchases and in situations where currency is now held for store-of-value
purposes rather than for transaction purposes.
If we have a comparison between money e-cash and credit cards the
comparison would look something like this121.
To briefly put some of the problems encountered with digital cash:
Firstly there is the question of security. Unauthorized individuals may

view credit card numbers because the Internet is an open system. In
the real world, there are a number of means to minimize fraud. A
customer using a credit card will usually opt to carry out transactions
at trustworthy or familiar facilities, stores, and markets.
Second, credit cards can be used only at authorized stores.

Unauthorized small businesses or individuals generally cannot carry
out transactions with credit cards. In other words, credit cards cannot
120
121
Selgin, G.A., and White, L.H. (1994) How Would the Invisible Hand Handle Money?
Journal of Economic Literature 32 (December): 1718-49.
Baum. Jiri, Brief comparison of Cash, E-Cash and Credit Cards, Electronic Payments
Scheme.
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be used for peer-to-peer payment. Cash encourages peer-to-peer

payments.
Third, credit card payments usually charge a small fee. Although this
cost is low, it can be a significant cost when the payment itself is very
small, such as less than 20 cents. As a result, credit cards can not be
used for micro-payments. Cash payments are used for even the smallest
financial transactions.
Finally, receipts from credit card payments leave residual records of

expenditures. Those who issue credit cards know exactly what kinds of goods
and services have been purchased, as well as where and when they were
acquired. In other words, users expenditures by credit card can be traced
while cash payments are untraceable.
5. Laws Relating to Internet Credit Cards

Although the electronic money revolution has made an enormous
economic impact, it is the electronic cash revolution that has captured the
imagination, stimulating new interest in the nature of money. I shall discuss
in this chapter the first innings of electronic fund transfers (EFTs) starting with
a study of them by the Central banks to the present status of EFTs within the
existing legal frameworks, also dwelling on the kinds of electronic funds
transfer modes available in the modern context.
The first central banks to seriously study electronic cash have been smaller
West European institutions, such as the Nederlandsche Bank and the Bank
of Finland. The Dutch central banks attention to electronic cash is largely
due to the location of DigiCash and similar ventures and research centers
in the Netherlands122. In contrast to the cybersavvy smaller West European
central banks, the more powerful central banks, such as the Federal Reserve
and the Bundesbank, have gotten a relatively late start studying the new
technologies. For some time, the Bundesbanks reactions to electronic cash
fell somewhere between suspicion and disdain.
122
In an interesting instance of socialism or state entrepreneurship the Bank of Finland

actually has a corporate subsidiary, Avant Finland Ltd., developing that countrys
Avant cash-card system. See Mark Bernkopf, Electronic Cash and Monetary Policy,
First Monday.
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In the United States, the Domestic and International Monetary Policy

Subcommittee of the House of Representatives Banking Committee has been
holding occasional hearings on The Future of Money. These hearings feature
electronic entrepreneurs, bank executives; university professors; managers
of urban mass-transit authorities using closed stored value systems; Federal
law-enforcement officials, the U.S. Treasury executives, and a Vice Chairman
of the Federal Reserve Board.
The leading common technical standard for cash cards, EMV, was
developed by the private sector, specifically Europay, MasterCard
International, and Visa International. The private sector is also developing
security standards on its own, even challenging hackers to break their codes
for a reward.
The 18th century saw the birth of negotiable instruments with the marriage
of convenience between purchasing power and paper. Today another such
marriage to facilitate the computer age between purchasing power and
electronic media has produced an offspring Electronic money. An EFT is
defined as any transfer of funds initiated through an electronic terminal,
telephonic instrument or computer or magnetic tape so as to order, instruct
or authorize a financial institution to credit or debit an account.
There are essentially three types of transactions, which are performed
through EFTs:
Debiting or crediting ones own account
Transferring funds by issuing a credit instruction to ones own institution
Transferring of funds by issuing a debit authorization to another party
The first task is accomplished by the use of an ATM or an Automated
Teller Machine. The ATMs were the first of the electronic mechanisms
introduced into the field of monetary and banking transactions. The operation
of ATMs is simple. The customer must use a plastic card issued by the bank
and supply his personal identification number (PIN) which is assigned to
him by his bank. Though the system of ATMs started by banks initially for the
account-holders of their respective banks, now it has blossomed into shared
ATM networks.
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The second kind of transaction is called a credit transfer. It consists of

issuing a credit instruction to ones own institution. Such a transfer is also
called a wire transfer. In United States wire transfers are unique to EFTs,
wherein the credit instructions are given individually to sending banks and
in a batch to the Automated Clearing House (ACH)123 . Wire transfers are
now very predominant in corporate transfers124 .
The third kind of transaction is another of the important functions, which is
central to the issue of EFTs. Both cheques and credit cards can perform it. There
is another mechanism brought into vogue by the electronic media, called point
of sale payments (POS)125 . The POS transaction is also initiated by the use of
a plastic card which is a debit card, which operates only as long as the holders
account has the money required to close the transaction. The POS card
communicates with a central computer or switch which in turn communicates
with the customers bank. The communication links when establish the sufficiency
of funds in the customers account the card operates. Debit transactions and
Credit transactions alike can be batched and sent through ACH126 .
An EFT in its simplest form involves:
A sender
A receiver
A commercial transaction
123
124
125
126
See generally Scott on Corporate Wire Transfers and the New Payments Code, 83
Colum. L. Rev. 1664 (1983).
The two principal methods of wire transfer services in America are Fedwire and CHIPS
(Clearinghouse Interbank Payments System). A simple working example of ACH transfers
is that of payment of salaries to employees. The Employer may by a single credit
instruction delivered on a tape to the bank, ensure the payment of salaries to his
employees. The Bank on receipt of the instruction will debit the account of the employer
and transmit credits to the accounts of the employees accounts using the ACH. See
generally American Banker, July 20th 1987 at 1.
Belkin. N.J. & W.B. Croft, Information Filtering and Information Retrieval: The two
sides of the same coin, Communications of the ACM, Dec. 1992.
Johnson-Laird. Andrews, Smoking Guns and Spinning Disks, The Computer Lawyer,
Aug. 1994, p.1.
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Interface organizations, and
A switch
The sender gives an order to an interface organization, which belongs

to an EFT network, for a commercial transaction to initiate. This organization
then transmits the message in an electronic form to a computer facility or
switch. This switch sends the message to the receivers interface organization.
The receivers interface organization receives it and reciprocates in the same
manner to communicate to the sender. That is when a complete transaction
takes place127 .
Since the issue here involves banking and money, the message concerns
either a credit or a debit. The sender may give this message to his interface
organization in any form, either by paper, electronic signal or a telephone
call. This message if received by the interface in any form, which cannot be
transmitted directly in that form, then the interface organization encodes it
in a form, which can be understood by the switch. If the form is transmittable
then the interface may skip the encoding procedure. In the least that message
should be able to identify the receivers identity and his interface organization,
and state the amount to be credited or debited128.
Anyone with a computer and a telephone connection to the switch can
act as an interface organization, and likewise operate a switch also. Switches
come in two basic forms:
A Central Computer, and
A series of computers with interconnections
To function as a payment mechanism, the messages sent must result in

actual transfer of funds. This transfer is known as a settlement129 . And it
is separate from the communications function of the EFTs. Settlements are
127
128
129
Kim. B.G. & P. Wang, ATM Network: Goals and Challenges, Communications of the
ACM, Feb. 1995.
Williams. Frances, Taking the paper out of Trade the Quest for more efficient
Commerce, Financial Times, Oct. 13th 1994.
Chang. Richard, Businesses promote Smart Card as Computer in Wallet, The Reuter
European Business Report, Sept. 14th 1994.
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reached in case of conventional methods of transfers by the actual transfer

of cash from one account to another or by book entries. But in case of
electronic media the answer is not that easy. The interface organizations are
the ones who deal with the settlement, recording the appropriate debits and
credits in their customers accounts. But the problem of transfer of funds
between the interface organizations remains. There are essentially two ways
of achieving this.
The interface organizations have accounts with each other and so the
transfer can be effected by mere increase or decrease in the amounts
in their respective accounts according to the sums owed to each other
as a result of such transfers effected by them, or
Alternatively both the interface organizations may have accounts at a

third institution which can make the appropriate transfers between the
accounts.
One of the major issues with settlement is the time at which they are
effected. Transactions are settled usually at the end of the day, as they occur130
or some later time. This concept of real time is the whole charm of Online
Banking. Settlements that occur in real time must be computed on an
individual basis while transactions, which are settled at the end of the day,
can be combined. This is called netting, which is common feature with EFTs.
Netting is a process of aggregation of funds, which is not to be confused
with batching which is process of aggregation of messages131.
In most systems the switch plays the role of the central processor of
settlements as well as messages. Each member of the network keeps track of
its debits and credits and at the end of the day settles the net debit or credit
with the switch itself. There are multilateral and bilateral net settlements. Both
exist within the existing framework of EFTs, as well as a combination of them.
130
131
At real time. A concept that has caught on the fancy of most customers and one of
the major reasons why online banking is gaining fame. But this also undoubtedly
forms one of the major problems of Online Banking.
Devoney. Chris, The Unwired Nation, Windows Sources, Apr. 1994, p.106.
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Work on EFTs can be segregated into three broad areas:
Banking and financial payments

Large-scale or wholesale payments (e.g., bank to bank transfer)
Small-scale or retail payments (e.g., ATMs and Cash dispensers)
Home banking (e.g., bill payments)
Retailing systems
Credit cards (e.g., Visa or MasterCard)
Private label credit/debit cards
Charge cards (e.g., American Express)
Online electronic commerce payments

Token-based payment systems
Credit card-based payment systems
It is this last category which is of interest at this juncture. Firstly the

token-based payment systems. Electronic tokens in the form of
electronic cash/money or cheques are designed as electronic analogs of
various forms of payment backed by a bank or financial institution. In other
words electronic tokens are equivalent to cash that is backed by a bank.
Three are there types of electronic tokens:
Cash or real time where the tokens are used as a medium of exchange
in transactions as is the case with normal cash in non-electronic
transactions. E.g. Electronic Cash.
Debit or prepaid which act as a store of electronic money. E.g.

electronic purses, smart cards etc.
Credit or postpaid where the server authenticates the customers and

verifies with the bank of the availability of funds adequate for the purchase.
E.g. credit/debit cards and electronic cheques.
THE LEGAL FRAMEWORK FOR EFTs:

There are many legal issues in electronic transactions but the principal issues
which are retarding user confidence in conducting transactions electronically and
which could be remedied by appropriate law reform are as follows:
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(i)
Doubts as to the Legal Efficacy of Electronic Records and Electronic

Authentication.
Preferably, electronic records and electronic authentication should be
as effective as written messages and manual signatures, including for
contract formation. This means that they should:
satisfy legal form requirements for writing, signature and originals;
be admissible in evidence; and
satisfy statutory record retention requirements.
(ii)
Uncertainty of Application of Existing Legal Rules

This includes the time and place of receipt of electronic messages.
(iii)
Risk of Fraud and Error in Electronic Messages

This is sometimes described as the non-repudiation issue. As in paperbased transactions conducted at a distance, there are risks that a
message has not in fact been sent by the apparent sender, that the
message may have been altered in transit, and that the apparent
sender therefore may repudiate the message, leading to loss if the
message has been relied upon by a recipient. The technical
management of these risks requires a technical means to reliably
authenticate the message senders identity and the senders intent to
approve or otherwise associate himself or herself with the message
content and to guarantee message integrity. The legal allocation of
risk of loss caused by unauthorised or altered messages as between
the apparent sender and the recipient in paper-based transactions is
determined by the general law of agency and, in some cases, by
contract between the parties. The same legal mechanisms will operate
for electronic transactions and, in some law reform models, are
supplemented by new legal rules.
Types of Electronic Transaction Law Reform

Three types of electronic transactions law reform can be distinguished:
(i) Facultative laws

These are intended to make electronic records as legally effective as
written records and electronically authenticated records as legally effective
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as manually signed records. Laws of this type deal with issue 1 above and
sometimes with issues 2 and 3. These laws can be sub-divided into those that:
(ii)
are technology neutral, that is they do not seek to advantage or

disadvantage any particular technology for electronic records or
electronic authentication of records. While the laws may set
minimum standards for acceptable electronic records or
authentication systems, these standards are not tied to any
particular technology. Because of the commitment to technology
neutrality, the same legal consequences are assigned to all
electronic records or authentication systems which meet the
minimum standards.
distinguish between different technologies for electronic records

or signatures for the purpose of attributing different legal
consequences to the different types.
Laws which Regulate Particular Authentication Technologies and

Infrastructures.
Most, if not all, laws in this group regulate some aspect of digital
signatures based on public and private key encryption and the
supporting public key authentication framework (PKAF), for example:
(iii)
the establishment of a national peak body which may set standards

and policy for a national PKAF and be a root certification authority;
licensing and regulation of certification authorities;
cross-certification between authorities, including cross-border;

and
allocating or limiting the liability for unauthorised or altered

messages between key owners, recipients who rely on certificates
and certification authorities.
Laws which Extend or Adapt Existing Regulation of Transactions to

Cover Electronic Transactions
Examples include laws concerning electronic transactions in the context
of taxation, industry licensing and regulation, privacy, consumer
protection, law enforcement and interception of communications.
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MAJOR LEGAL INSTRUMENTS WHICH DEAL WITH EFTs

I shall only be giving a list of them, listing them as International Model
Instruments and Regional Instruments. Since the discussion until now has
been on the lines of the legal framework suggested by these very
instruments. So a separate discussion of the provisions of these instruments
would be only a repetition of the same.
International Model Instruments

(i)
UNCITRAL Model Law on E-Commerce
(ii)
UNCITRAL Model Law on Electronic Fund Transfers
(iii)
The European Community Directives on Electronic Digital Signatures
National Instruments
(i)
Information Technology Act, 1998
(ii)
RBI (Electronic Funds Transfer System) Regulation, 1996
Secure Electronic Transactions

The issue of secure Electronic transactions gains importance considering
the increase in the volume of internet trade but also the emergence of
various private moneys in the form of credit cards, smart cards, e-money
purses etc. With the click of the mouse customers are able to access a
wide variety of products and buy and sell them on the Net. The increase in
the volume of this kind of trade, increases the chances of anonymous
transacters and transactions. In this scenario of open networks, ensuring
security of transactions becomes very important.
Traditional money which is government-backed money has reached a
stage of maturity where a stranger may transact with another in a onetime transaction and unhesitantly accept money which is nothing but legal
tender. Whether in the form of a cash or cheque or any other negotiable
instrument, it is accepted in lieu of payment for any kind of transaction.
This acceptance comes from the concept of trust that a person has in that
money.
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Hence we can safely conclude that liquidity indeed has a strong

psychological variable, indeed its principal element is trust132. In the technical
world of cryptography, we talk about domains of trust. Let me suggest that
liquidity can only be produced from a domain of trust. And those domains
can be one of at least two types: a domain of actuarial trust or a domain of
guaranteed trust.
A Domain of Actuarial Trust133
Life insurance companies can trust they will have a certain investment
horizon for your policy, based on actuarial tables. The life insurance company
does not get any guarantee from anyone that you will live to a certain age.
The insurance company, sadly to say, is not even very concerned what age
you live to, except as it may affect their actuarial averages.
A major grocery chain is willing to accept checks from strangers because
the actuarial experience of grocers has shown that less than one half of 1
percent of those checks will go bad.
Obviously life insurance companies and grocery stores will try to tweak
the odds: with life insurance companies accepting only nonsmokers or grocery
stores rejecting checks with low check numbers. But fundamentally, the trust
comes from actuarial dynamics, not from some external guarantor.
A Domain of Guaranteed Trust134
The second type of trust domain is one that we are more familiar with:
the domain of guaranteed trust135. In this type of domain, the government,
the bank, or some other strong guarantor says, Trust me, I guarantee it.
Behind any guarantor there may be another guarantor, such as behind your
132
133
134
135
Melton. William, Electronic Liquidity and Domains of Trust, Future of Money in the
Information Age.
Drucker. Peter. F., The Theory of Business, Harvard Business Review, Sept-Oct. 1994.
Henderson. George. W., Vendor Express: A New Era in Government, EDI Forum,
Vol.4 (1994) p.40.
Kalakota. Ravi. & Andrew Whinston, Firewalls are not Fireproof, Information Week,
Dec. 1994.
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bank stands the RBI, and behind the RBI is the perceived strength of the
government. Thus, these guaranteed trust domains quickly become very
hierarchical.
Frequently, there is a mixing of actuarial and guaranteed trust domains.
For example, though you as employer may not personally know all of your
500 employees, you believe you have followed good hiring practices and
therefore you can authorize your bank for the extension of liquidity for travel
expenses to employees, wherein you personally assume liability for any
defaults for the same. You have made the actuarial assessment of trust
internally, then converted that into a guaranteed trust in dealing with the
bank. The bank does not have a clue about your employees; it is looking to
your guarantee for its trust136.
The distinction between liquidity based on actuarial analysis and on a
guarantor relation, although subtle, has substantial social, political, and
economic implications. The actuarial domain of trust is frequently found in
a market economy, while the guaranteed domain of trust is more at home
in hierarchical environments. Modern financial markets spring from the
sharing of risk and are actuarial by nature137. Even the largest guarantors
(governments) are subject to the statistical evaluations of those markets or
actuarial domains.
Electronic Liquidity
In case of E-money this reliance on its acceptance in trade transactions
is yet to be established with the same force as in case of traditional money.
Nevertheless e-money can also be brought into this purview, when coordinated and supported by other institutions in the market economy.
But a remarkable development in this case however has been the virtual
extinction of distribution costs. The cost of distribution (that is, the cost of
getting the liquidity to the consumer) is more expensive than evaluating and
136
137
Vetter. Ronald. J., ATM Concepts, Architectures and Protocols, Communications of

the ACM, Feb. 1995.
Wriston, W. (1995) Money: Back to Future? Wall Street Journal, 24 November: A8.
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granting the credit or liquidity. At the same time, using advanced actuarial
techniques it might cost much less to evaluate and complete the granting of
the credit or liquidity.
Thus, distribution and marketing costs have become an important
consideration on the road to providing consumer liquidity. Crudely explained,
if you were running a mint, and the cost of the precious metals or the cost of
printing were no longer significant, but rather the cost of distributing your
money was now 90 percent of your budget, you would obviously focus on
those costs. Moreover, if a competitive mint had zero costs of distribution,
its money may well, in a competitive market, gain market share. To a large
extent this is the situation in the consumer liquidity granting environment
today. As we move to the newer and ever evolving world of the Internet, the
relative distribution costs become even more extreme. In a traditional physical
world such complexity and convoluted relations would soon become too
costly to manage.
In an economic environment so complex, and probably highly leveraged,
breakage in any one area, unless contained, could be dangerous for the
whole system. Therefore, local reserves managed by the market experts,
whether those be traditional bankers or the stock market, will be used as
firewalls to contain actuarial mistakes within small local pockets.
Actuarial systems work well only when there can be reliable tracking
and statistical feedback continually updating the actuarial model. Such
tracking raises the issues of personal identity tracking and potential losses
of personal privacy. Without going into the details, suffice it to say that
maintaining most any degree of privacy is not contradictory to adequate
statistical feedback. In any transaction there is the identity of the guarantor,
the identity of the asset or account holder, the identity of the liquidity or
credit issuer, and the identity of the shopper or conveyer. Any or all of these
various identities can be exchanged, blinded, or proxied to provide whatever
level of privacy is appropriate for that type of transaction. Yet, because the
actuarial system is interested in the epidemiological behavior of the actuarial
group as a whole, rather than individual behavior, the benefits of an actuarial
domain of trust can be preserved while maintaining full privacy.
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As actuarial trust domains become more differentiated, filling many

niches that heretofore could not be envisioned, the total system will still be
able to manage these interacting complex identity sets in an efficient manner.
Digital certificates, digital signatures, private certificate authorities, and
increasingly capable actuarial evaluation and scoring systems will easily
manage complexity at lower costs than is possible today.
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TAXATION ISSUES IN CYBERSPACE
CHAPTER IV

Indian Tax System
The concept of jurisdiction in India has not undergone
the necessary to changes to accommodate E-Commerce
within its purview. Especially in the area of taxation. Tax
jurisdictions are very much dependent on the territorial nexus
principal and the status of a taxpayer. The present section is
aimed at giving an idea of tax jurisdiction in India as it exists
now. The necessary conceptual changes required of this are
to be dealt separately in another chapter.
1 Corporate taxation
Corporate businesses are subject to both Income tax
and Wealth tax. Returns have to filed by 31st of December of
that particular assessment year138. Estimated tax is payable
in respect of income tax in the financial year in which the
income is earned. As to calculation of tax the tax base is
determined in the following manner, first the taxable income
of the company is determined and then the allowable
expenditure from the receipts in revenue nature are
deducted139 . Thus the total tax liability of the company is
arrived at.
138
139
In case of advance tax, it is payable in three installments and in that case the tax shall
be due on three dates, viz., 15th Sept; 15th Dec; and 31st Mar. of that assessment year.
The Gross income of a company refers to the figure arrived at before allowing any
deductions from it. Gross income comprises of the total amount of income, profits
and gains whether accrued or received in the relevant previous year, excepting those
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When a resident Company makes a national investment abroad all the

income so derived from such a source is liable to tax140. The rates at which
that are specifically exempted; and these include income from property, profits and
gains of business or profession, capital gains and income from sources other than
ones mentioned above. The deductions that are allowed are as follows:
(a) Depreciation on buildings, machinery, plant or furniture owned and used in business
at prescribed percentage of written down value in case of any block of assets.
(b) Capital expenditure (excluding land) on scientific research related to business is fully
deductible subject to certain conditions.
(c) All Revenue Expenditure is allowed incurred in the course of business.
In addition the amortization of the following expenses is allowed:
i) Certain preliminary expenses subject to certain conditions/limits in 10 equal annual
installments.
ii) Expenditure on certain patent rights copyrights subject to certain conditions and
limits in 14 equal annual installments.
iii) Lump sum payments for acquisition of technical know-how in 6 equal installments.
As to expenditure which is ineligible for deduction is of the following categories:
(a) Entertainment and traveling expenses in excess of specified limits.
(b) Interest, royalties, fees for technical services paid/payable outside India if withholding
tax has not been deducted at source.
(c) Salaries payable outside India if withholding tax has not been deducted at source.
(d) Certain cash payments in excess of Rs. 10,000.
(e) Advertisement in souvenir, brochure, pamphlets, etc. of a political party.
(f) Expenditure on maintenance of guesthouse.
(g) Expenditure on presentation of articles in excess of specified limits.
140
A company is resident in India if it is an Indian Company incorporated under the
Indian Companies Act, 1956. It is also considered to be resident in India if during the
year the control and management of its affairs is wholly situated in India. Thus a
foreign company may be treated as resident in India for tax purposes when its affairs
are controlled and managed wholly from India.
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a company is subject to tax are different in case of different types of

companies141 . Certain losses of the company are also computed and set
off against the income or carried forward142 .
Now comes the important question as to how be the residence of a
company established, because this holds the key to the establishment of tax
liability in India. When the question is raised as to when is a Corporation
resident, the following conditions are applied to it and if it falls within the
purview of any of these conditions then it is considered to be resident in
India for tax purposes:
(i)
It is an Indian Company, or
(ii)
During that year the control and management of its affairs is situated
wholly in India
Once a Company is established to be resident in India, then its worldwide

income is subject to tax in India. If it has branches, the Branch income is
taxed as income if it is accruing or arising in India.
141
a.
b.
c.
142
As to the tax treatment of different companies, they are subject to three types of taxes,
Central, State and local, and Capital Gains tax. In case of federal tax
tax, for domestic
company the tax rates for widely held and closely held companies are 51.75% (45%
+ 15% of tax as surcharge) and 57.5% (50% + 15% of tax as surcharge) respectively.
In the case of foreign companies income other than certain specified ones, which are
liable to withholding tax, are subject to tax at 65%. Incomes specified below are liable
to withholding tax:
Dividends (payable by domestic company) - 25% of gross sum.
Interest from Indian sources - 25% of gross sum.
Royalties or technical service fees - 30%on gross.
State and local taxes shall be nil in this case and in case of capital gains tax
Capital gains on long-term capital assets are liable to tax at 40%. In the case of
foreign company, there is no surcharge. In the case of Indian Company there is
surcharge of 15% of the tax, which makes the applicable rate as 46%. Capital gains
on short-term capital assets (i.e. asset that is not held for more than thirty-six months)
are taxed as income and no concessional tax rate is provided in respect of the same.
The operating losses are computed in case the return is filed by the due date. They are
set off against other income and the balance of computed losses is allowed to be
carried forward for a period of 8 years. Capital losses are allowed to be carried
forward if they arise on transfer of capital assets. Other losses of capital nature are
disallowed.
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Another issue is that of Tax credits. Tax credits relate to legal dispositions
other than provisions in Double Taxation Treaties, on the possibility of
deducting taxes paid abroad, or any others. In case of countries with which
there are no tax treaties, there is system of unilateral relief under which the
person resident in India is entitled to deduction on tax, a sum calculated on
such doubly taxed income at the Indian tax rate or tax rate of the foreign
country whichever is lower.
Then comes the question of indirect taxes that a Company may be
liable to. The first of this kind is VAT or Sales tax. The company may be
liable to VAT or sales tax on the sales that it makes of its products. Sales Tax
levied by the State Governments, for which returns are to be filed in the
Office of the Sales Tax Department having jurisdiction over the territory
where sales take place. Next comes Tax on Capital, Wealth Tax is leviable
on companies @ 1% of the market value of assets other than exempted
ones, over and above it exceeds the sum of Rs. 15 lakhs (i.e. 1.5 million
rupees). With the advent of the liberalization era, licenses have been
abolished in a large number of cases. The other taxes that may be leviable
are the indirect taxes levied by Central Government, which include customs
and excise. The company will also be liable to registration duties on
incorporation.
Income arising from doing business in India, is taxable on the basis of
residential status of the person. However, in the case of foreign
institutional investors, the concessional rates of income tax are
provided in respect of income from investment as well as short-term and
long-term capital gains. While investment income from units purchased in
foreign currency is taxed at the rate of 20%, the long-term capital gains
arising from their transfer are taxable at 10%. The tax rate on short-term
capital gains for the foreign institutional investors is 30%. Wealth tax is
leviable but the productive assets are specifically exempted from wealth
tax, in addition to general exemption limit of Rs. 15 lakhs (1.5 million
rupees). There is gift tax payable on the value of gifts exceeding
Rs. 30,000/-, at the rate of 30%.
Withholding taxes are another issue. Dividends are taxed at the
rate of 25% of gross on dividends payable by domestic company. As to
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Rates on royalties, 30% of gross sum. Rates on interest, 25% of gross interest
payable from Indian sources. There is no withholding tax on profits realized
by foreign corporation. However, tax @ 65% is leviable on incomes other
than those mentioned at A, B and C above, if the same accrue or arise in
India. Long-term capital gains are liable to income tax @ 40% and they are
not subject to withholding tax.
Tax treaties with countries enable India to curb the amount of income
lost due to double taxation and also give double taxation relief to Indian
assesses. The withholding tax rates on dividends, interest, royalty, and fees for
technical services are determined in terms of the rates contained in Tax Treaties,
in case they happen to be the ore favourable to the taxpayers.
Tax incentives play an important part in the promotion of trade within
the economy both by domestic entrepreneurs as well as from foreign investors.
The full exemption is granted to the following to promote trade and commerce:
Expenditure on scientific research and development
Investments, which result in, export profits, viz., profits attributable to

earnings of hotels in convertible foreign exchange; profits from expertise
in softwares; profits from new industrial undertakings in Free Trade Zones
(FTZs); profits from new industrial undertakings which are 100% Export
Oriented Units (EOUs), etc.
Investments in industrial undertakings set up in the industrially backward

areas (profits thereof are wholly exempt from Income tax) and investments
in industrial undertakings engaged in generation and distribution of
powers, in case of profits resulting from such investments they are exempt
wholly for 5 years and 30% of the profits are exempt for the subsequent
5 years.
Partial exemptions are available in case of the following investments
Profits in respect of royalty, commission or other fees for transferring

patients, know-how, etc. abroad or for rendering service outside India 50% of the profits.
Profits of new industrial undertakings or hotel or ship other than the

items mentioned at (a) above where profits are totally exempt - 30% of
the profits for a period of 10 years.
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Profits from execution of foreign projects - 50% of profits.
Inter corporate dividends - 50% of the pay out.

In addition to the above the following are also exempted from tax
Interest payable by an industrial undertaking in India on - (i) Moneys

borrowed or debts incurred in foreign country for purchase outside
India of raw-materials/components/capital goods, if and to the extent
approved by the Indian Government; and (ii) Moneys borrowed under
Loan Agreement entered with the financial institutions in a foreign
country as approved by the Indian Government, is exempt from
income tax.
Fees for technical services received by specific foreign

companies for projects connected with the security of India are exempt
from income tax.
Payment by an Indian Company engaged in the operation of

aircraft, to acquire an aircraft from foreign Government or a foreign
enterprise under an agreement approved by the Government is
exempt from tax.
Exchange control regimes are meant to impose limitations on profit

remittances abroad by foreign investment and to the free possession of
foreign currency by residents. Remittance of profits by foreign firms and
companies (other than banks) incorporated outside India to their Head
Offices outside India requires prior approval of Reserve Bank. As for
remittance of dividends is concerned, the earlier distinction in procedure
relating to FERA and non-FERA companies has been dispensed with. In fact
FERA has been replaced by FEMA. The procedure regarding remittance of
dividend has been comprehensively revised and authorized dealers have
been given adequate authority for such remittance. The authorized dealer
will verify with reference to the documentary evidence that the permission of
Reserve Bank has been obtained by the non-resident shareholders, under
relevant sections of FEMA for purchase/holding of shares or by the Indian
Company for the issue of shares in favour of the non-residents and that the
terms of permission do not prohibit the remittance of dividends on the shares.
As regards the possession of foreign currency by the resident is concerned,
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they are permitted to hold foreign currencies up to a total value of US $500

for numismatic purposes without permission of the Reserve Bank.
There is a special provision relating to loss of closely held company.
Such a company may become disentitled to carry forward and set off earlier
years loss against the income of the accounting year of the accounting year
shares carrying at least 51% of the voting power are not beneficially held by
persons who beneficially held shares carrying at least 51% of the voting
power on the 1st day of the year in which the loss was incurred.
2 Tax on Individuals
Income Tax, Wealth Tax and Gift Tax Returns have to be filed by
individuals143. As to how the taxable base is determined in case of individuals,
it is determined in the same manner as in the case corporations, the incomes
from all the five heads of income are aggregated, then the allowable
deductions are deducted and the net income is arrived from the gross income
and the appropriate tax rate for that slab of income is applied and the tax
liability determined144. In additions to Direct tax liability, like Income tax and
143
144
The filing dates In the case of the income tax return, where the accounts of the
assessee are required to be audited, it is to be filed by 31st October of the year,
subsequent to the financial year (previous year) in which the income is earned. In all
other cases, it is to be filed by 30th June of that year. The wealth tax return has to be
filed by the same date on which the filing of the income tax return is due. The gift tax
return is to be filed by 30th June of the year, subsequent to the financial year in which
the gift was made. The returns are to be filed in the Income Tax Office which has the
territorial jurisdiction over the tax payers. Estimated tax is payable in advance (termed
as Advance Tax) in the financial year in which the income is earned. The advance tax
mentioned in column 1 is payable in three installments that are due on 15th September,
15th December and 31st March. Self assessment tax is payable based on income/
wealth/gift shown in the return, before filing of returns.
Income in excess of Rs. 30,000/- is taxable in the case of individuals at the rates
varying from 20% to 40% and the rate of 40% is applicable to incomes in excess of
Rs. 1 lakh. Surcharge is payable in case of tax payers whose income exceeds Rs. 1
lakh at the rate of 12% of income tax. Wealth Tax is payable @ 1% on net wealth
other than exempted assets, to the extent it exceeds RS. 15 lakhs. Gift Tax is leviable at
30% of the value of taxable gifts in excess of Rs. 30,000/-. State and/or other local
are Nil. Capital gains rates and base, if different Long-term capital gains are taxable
at the concessional rate of 20%. Long-term capital gain is levied on profits arising out
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Wealth tax, individuals may also be made liable to other taxes like indirect
taxes, inheritance and gift taxes etc145. Among other miscellaneous taxes of
any kind levied by the Central Government are customs and excise taxes,
which are important sources of revenue. State Governments levy Sales Tax,
which is the important source of revenue for them. Real estate or habitation
taxes are levied by the Local Governments.
145
a.
b.
c.
of transfer of the capital assets that has been held by the assessee for a period of 36
months or more. Short-term capital gains are treated as income and are taxed at the
rates applicable to other incomes.
Losses are handled in the following manner
Operating Operating losses are computed in case the return is filed within time.
They are set off against other income and the balance of computed losses is allowed
to be carried forward for a period of 8 years.
Capital Losses realized on transfer of capital asset are computed as loss under the
heads short-term capital gains and long-terms capital gains. Losses computed under
capital gains are also allowed to be carried forward for a period of 8 years and while
the short-term capital loss can be set off against short-term capital gains, the longterm capital loss can be set off against the long-term gains.
Sales Tax is levied by the State Governments at the rates, which vary from State to
State. The Central Government has introduced VAT some years ago but it is levied
only up to the manufacturing stage and is called MODVAT. Inheritance and gift taxes
Gift Tax is chargeable if transfers by way of gifts are made in India (except in the
States of Jammu and Kashmir) and the presence of donor is not material for the
purpose of the levy of gift tax, except to the extent indicated here. The movable property
situated outside India will not be exempt if the donor is a citizen of India and is
ordinarily resident in India. As to the kind of assets subject to Gift tax, Gift of all assets
other than what are specifically exempted, are liable to gift tax. Some of the exemptions
in respect of gifts pertain to the following:
When donor being an individual not resident in India makes a gift to any person
resident in India, of foreign currency or other foreign exchange by making a remittance
from a country outside India.
When the donor being a person resident outside India makes a gift out of the moneys
standing to his credit in a Non-resident (External) account in any bank in India.
When donor being a citizen of India, or a person of Indian origin, who is not resident
in India makes a gift to any relative of such person in India, of convertible foreign
exchange remitted from a country outside India in accordance with the provisions of
FERA, 1973.
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Now comes the important question of residence. The liability to tax

depends on the residential status of the taxpayers and the individual is resident
if either:
He has stayed in India for 180 days or more during the previous year;
or
he has stayed in India for 365 days or more during the preceding year
and stays in India for a period or periods amounting to 60 days or
more in that year (in the case of non resident Indians the period of 60
days is substituted by 150 days).
Resident individuals are liable to tax on their world income. Salary

is subject to withholding tax (tax deducted at source). Non Resident are
liable to pay tax only in respect of income which is received or is deemed to
be received or accruing or arising or deemed to accrue or arise in India
during the pervious year. It may be pointed out that income from services
rendered in India is regarded as income accruing or arising in India
irrespective of the fact where the contract of employment is entered.
There are certain incomes that are deemed to accrue or arise
in India and because of these deeming provisions, these incomes become
liable to tax in the hands of non resident individuals. Such deemed incomes
include income arising out of business connections, salary income which is
earned in India, dividend paid by the Indian Company outside India, income
by way of royalty and income by way of fees for technical services.
There are special provisions made for non-resident Indians i.e.
Non Resident persons of Indian origin or nationality. A Non Resident Indian
has the option to be assessed to tax at the flat rates - 20% on gross income
from any Foreign Exchange Asset and long-term capital gains from these
assets. A Foreign Exchange Asset means any specified asset acquired,
purchased or subscribed in convertible foreign exchange as per the Foreign
Exchange Regulation Act, 1973.
In the case of Foreign citizens the following incomes are exempt
from tax:
Interest on securities or notified bonds of the government including

premium on redemption of such bonds.
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Interest received on Non Resident (External) accounts.
Leave passage for the employee and his/her family subject to certain
conditions.
Remuneration received for being the official representative of a foreign

government.
Remuneration received by an employee of a foreign enterprise for services

rendered in India if the presence in India is less than 90 days. Further
the employer should not be engaged in any trade or business in India
and such remunerations are not deductible in computing employers
taxable income in India. The above period of 90 days is generally
extended to 183 days in case of a tax treaty.
Tax on salaries paid by the employer for services rendered as technician

in the employment of government or any companies engaged in business
in India, subject to certain conditions i.e. there is no tax on tax.
Remuneration received for services rendered in connection with

employment on a foreign ship if the total stay in India in a previous year
does not exceed 90 days.
Remuneration for teaching or pursuing certain research in India subject

to certain limits and conditions.
Transactions in E-Commerce
The Industry is important to the nations economic growth and to
individual states economic development in that it promises to grow
dramatically in the near future. Utilization of the Internet and proprietary
subscriber networks will provide increasingly significant consumer benefits,
including improved access to information, lower prices and increased
business efficiency. Much uncertainty exists as to the manner in which state
and local taxes should be applied to the Industry146 .
The uncertainty results from a lack of understanding of
a)
146
Internet and online service technology;
See, Taxation of Electronic Commerce the road ahead, http://www.in.kpmg.com/

ecommerce.htm
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b)
the nature of the various types of businesses providing Internet and/or

online services;
c)
the nature of the various types of transactions that take place over the
Internet and proprietary subscriber networks;
d)
the applicability, if any, of current state tax laws to this new and rapidly
evolving Industry;
e)
whether and how such laws can be implemented in the Internet and
online services environment; and
f)
what state tax approach would best serve the interests of the states
and the Industry147.
The Industrial Activity Conducted on the Net
A. Internet and Online Activities
Generally, members of the Industry are engaged in the sale of access

services and/or content.148
1. Access services are those services that enable a customer to get
onto the Internet and/or proprietary subscriber networks easily, for example,
by simply dialing a phone number. According to Industry vernacular, generally
An Internet Service Provider (ISP) is a business providing access to the Internet.
An Online Service Provider (OSP) is a business providing access to a
proprietary subscriber network. Many OSPs also provide their customers
the ability to access the Internet. ISPs and OSPs generally provide their
services in return for the payment of subscription and/or usage fees.
2. Content consists of information and services delivered electronically
via the Internet or proprietary subscriber networks to the public. Content is
made available to the public by OSPs, by some ISPs, and via the World
Wide Web sites of third-party Content Providers. The cost of most content
provided by OSPs and ISPs is included in their subscription and/or usage
147
148
See, http://www.kanoonindia.com/tax/taxlaw.htm
Flemington. Jr., J. Clifton, Taxation of Profits from Internet Software Sales An ECommerce Case-study, Tax Analysts, Worldwide Tax Daily, Aug. 16th 1999.
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fees. A limited number of Web site operators provide content for a fee
which they bill directly to the consumer. Some sales of content would be
treated as taxable sales of tangible personal property if delivered other than
electronically, e.g. downloaded videos, music, books. This market is extremely
limited at the moment.
Mail-Order Sellers
Retailers selling tangible personal property over the Internet and
proprietary subscriber networks are essentially mail order sellers who
deliver their goods to an identifiable address 149 . These people are using
their web page merely as an extension of their yellow-pages
advertisements. So understandably they are only using it as a means of
communication to communicate to a wider audience/clientele, and
soliciting customers on the net. They simply receive orders for goods by
e-mail and deliver the goods in their tangible form to the customers. So
only the orders to the goods are being placed on the Net. So here the
problem of tracing transactions is simplified as the transactions invariably
result in the physical delivery of the goods, so also is the problem of
identifying customers. The goods are supplied to definite subscribers of
the company and the web page.
Relationship to Telecommunications Carriers

Generally, customers of ISPs and OSPs purchase telecommunications
capacity from telecommunications carriers in order to gain access to the
Internet and online services. ISPs and OSPs also purchase underlying
transmission capacity from telecommunications carriers to operate their
businesses. All of these parties pay taxes on such telecommunications services
provided by the telecommunications carriers.
Locating Sales
Internet and online services, by their nature, are not designed with
geographical boundaries in mind. This severely limits the Industrys ability
149
ODonnell. Thomas. A., Mark. N. Levey, J. Pat Powers, International Tax Issues for
Cyberspace Transactions, 49 Tax Executive 476 (1997).
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to comply with tax administration requirements based upon locating either

the source or the destination of electronic transactions. When a sale is
delivered electronically, the ISP, OSP or Content Provider often cannot
determine the physical location of the sales destination150 . This can be true
even if the Provider itself happens to be subject to the taxing jurisdiction of
the state of the user.
SALES TAX AND USE TAX

Sales and Use taxes are transaction taxes151. This tax is determined by
applying a flat rate to the gross receipts from a taxable sale without reduction
for any expenses associated with that sale. In direct contrast to this Income
tax allows a netting of income and expenses or other deductions in
determining the tax base to which the tax rate applies, and usually provide
a progressive rate structure that imposes higher rates of tax on higher amounts
of net or taxable incomes.
Sales tax is charged on gross sales, and collected from the buyer by the
company making the sale. The company is responsible for paying the
collected sales tax to the state where the sale is made. A company may be
required to collect this tax regardless of whether that is company is based in
some other state or country.
Whereas Use tax is imposed on the consumer because of the consumers
taxable use of tangible personal property or taxable services within the taxing
state. The use tax is usually co-terminous with the sales tax. Thus as a general
rule, use tax is not due when a sales tax has been collected on a sale. As a
result use tax is generally imposed on the consumer only with respect to outof-state sales on which the use states tax was not collected. E.g. where a
sale tax is not charged on property that is ordinarily subject to sales tax, such
as in the case of an out-of-state seller, the vendor is required to collect the use
150
151
See, Bureau of National Affairs, Inc., Washington D.C., Vol.1 No.8 Aug 21st 2000,
Remote Sales Retail Chains looking to expand Services to Online Customers without
creating Nexus.
See, http://www.transaction.net/press/taxes/articles.html
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tax, if that vendor is liable to tax in that state152. If the vendor is not liable to tax
then the consumer must self assess the tax and pay it to the use state.
Whether a transaction is subject to tax or not depends on the laws of
each state. Generally each state imposes sales and use taxes on tangible
property and selected services. Whether an out-of-state vendor is required
to collect sales or use tax depends on whether the state in which the sale is
made is made has jurisdiction to tax that vendor. This in turn depends on
the issue of substantial nexus with the state in order to attract tax liability
in that state153. The substantial nexus requirement is met usually by the
physical presence of the company in the state. The fact that businesses are
not required to collect sales or use taxes in states where they do not have a
substantial nexus is a competitive advantage. Web-based businesses are
one this kind. But the novel and unique ways of doing business on the web
may expose these companies either a case of no tax liability or liability in
more than one tax jurisdiction. This is because web-based businesses sell
digital products that can be downloaded from the Internet. Though digital
products have not yet been included in the list of taxable goods, soon they
may also graduate to that level. In such a case a web-based company may
find itself liable to tax in more than one country.
Taxing Internet Commerce

In India as of now, the percentage of the population using Internet
services to purchase or sell goods is not much. This is due to the lack of
availability of these services in some parts of the country and also the lack
of wide spread computer literacy. But this situation is bound to improve and
with the passage of time. Times when a large quantum, if not all, of sales
and purchases of both goods and notably services shall be done on the Net are
not far off. As of now the Indian Govt. does not seem to pay much attention to
the problems that result from the wide spread use of the Internet for trade.
Though efforts will soon result in curbing the ills of the use of the Net154.
152
153
154
See, http://www.firstmonday.dk/issues/issue2_10/muscovitch.html
Supra note 166.
The upcoming bill on E-Commerce is one such kind.
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But countries like USA, UK etc are already facing a lot of problems. It is
estimated that forty-five percent of Internet users in the US look up information
about products on the Internet155. So far, many merchants use their Web
sites or spaces on a commercial on-line services network simply as extensions
of their Yellow Pages advertisements156. The more successful advertisements
reproduce their product lines in a kind of on-line catalog, complete with
prices, ordering, and delivery information157. The most effective ads also let
consumers buy directly from the merchant for instant gratification158 . While
not a large factor in commerce yet, commerce listings are exploding
exponentially.159
A study by Input, a California-based information services research firm,
estimated that in 1994, $20 million worth of business was conducted online; in 1995, the number grew to $40 million, and the 1996 estimate is a
staggering $260 million160. About 120 new companies each day are signing
up for Internet addresses161. The number of World Wide Web pages devoted
to ads for business or products is growing at a rate of 12 percent a month162.
If extrapolated on the global level, this same problem is faced by
numerous sovereign states trying to curb this erosion of their tax bases.
Sales taxes form one of the major grosser of incomes for the Govt. of India.
155
156
157
158
159
160
161
162
See World Wide Web User Statistics, supra note 166.

Supra note 170, at 87-88.
See id.
See ODonell, supra note 167, at 92.
Nathan Newman, Proposition 13 Meets the Internet: How State and Local Government
Finances Are Becoming Roadkill on the Information Superhighway, 95 STATE TAX NOTES
186-49, Sept. 26, 1995, available in LEXIS, Sttax Library, Stn File.
See Elizabeth Weise, What a Tangled Web We Weave, Associated Press, Dec. 29,
1995, available in LEXIS, News Library, AP File. Even more astounding, by other
estimates, the volume of sales generated by the Web in 1995 was $436 million, and
is predicted to rise to $46 billion in 1998. See World Wide Web User Statistics, supra
note 5.
See ODonell, supra note 167.
See id.
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As commerce grows over the Internet and on-line, so does concern

over revenue lost by National Govts.,163 because of uncollected sales taxes
on products sold over the Internet or on-line 164. In fact, National
Governmental authorities fear that their finances are being undone by rapid
changes in global commerce and information technologies, particularly the
rise of the Internet165. In particular, the concern is about an erosion of their
key revenue base: sales taxes166. At the touch of a button, consumers can
obtain access to the lowest-priced goods throughout the world, and at the
same time avoid sales taxes167. Thus, it is feared that interstate sales may
explode over the Internet, leaving government finances in tatters.168 As
commerce moves from the regular world to the virtual world, states need to
find a way to tax Internet sales169. Some assert that Internet or on-line sales
are too significant a part of the economy to suggest that they should be
exempt in the long-term from taxation170. The need for a coherent tax policy
which can be internationally applicable to such commerce since the nature
of it is also international is voiced strongly by all alike.
Indirect Taxes
The maintenance of huge governmental machinery requires a huge
income. This income is derived through taxes. The conventional division of
taxes into direct and indirect taxes marks the first of the divisions into which
taxes are divided. Direct taxes include Income Tax, Gift Tax and Wealth Tax,
while Indirect Taxes include, Sales Tax, Excise duties, and Customs duties.
163
164
165
166
167
168
169
170
Here States though in text seem to denote the individual federating units of a single
country, the same is true of the sovereign states in the community of nations, since
they too face the same kind of problems on a global scale.
See Newman, supra note 177.
Id.
See id.
See id
Id.
See Catherine Yang, New Tolls on the Info Highway?, BUS. WK., Feb. 12, 1996 at
96, 96 (quoting Multistate Tax Commission General Counsel Paull Mines).
Id.
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DEFINITION OF GOODS FOR THE PURPOSES OF INDIRECT

TAXATION
Defining goods is imperative for the purpose of imposing the correct
amount of tax since there are different rates of taxes and there are also
exemptions. To ward off controversies, statutory definitions have been
introduced in many cases. They are binding even if they are artificial in
nature. In fact they have to be artificial in many cases by the very nature of
the goods that they are trying to define. When there is no statutory definition,
we have to follow the definition in the market parlance. If there is no clear
definition in the market parlance then we have to follow the scientific
definition.
CONSTITUTIONAL PROVISIONS PERTAINING TO INDIRECT

TAXATION
Sales Tax
In the Indian Constitution, the basic scheme of taxation that is envisaged
is that:
[1]
The Central Govt. will get tax revenue from:

(a) Income Tax (except on Agricultural Income),
(b) Excise (except on alcoholic drinks), and
(c) Customs
[2]
The State Govt. will get tax revenue from:

(a) Sales Tax,
(b) Excise on Liquor, and
(c) Tax on Agricultural Income
[3]
Municipalities will get tax revenue from:

(a) Octroi and
(b) House Property Tax
The Central Govt. administers Income Tax, Excise and Customs, while
in case of Sales tax, the Central Govt. levies Central Sales tax and local
Sales tax is levied by the State Govts.
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Art. 246 of the Indian Constitution provides for the division of powers
to tax between the Central and State Govts171. The items in the Union List
relevant for Taxation are as follows:
(i)
Item No. 82 Tax on Income other than Agricultural Income
(ii)
Item No. 83 Duties of Custom including Export Duties.
(iii)
Item No. 84 Duties of Excise on tobacco and other goods

manufactured or produced in India except alcoholic liquors for human
consumption, opium, narcotics, but including medical and toilet
preparations containing alcohol, opium or narcotics.
(iv)
Item No. 85 Corporation Tax.
(v)
Item No. 92A Taxes on the sale or purchase of goods other than
newspapers, where such sale or purchase takes place in the course of
Interstate Trade or Commerce.
(vi)
Item No. 92B Taxes on the Consignment of Goods where such

consignment takes place during Interstate Trade or Commerce.
(vii) Item No. 97 Any other matter not included in List II, List III and any
tax not mentioned in List II or List III.
171
(1)
(2)
(3)
(4)
Art. 246. Subject matter of laws made by the PParliament

arliament and by the LLegislatures
egislatures of the
States.
Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to
make laws with respect to any of the matters enumerated in List I in the Seventh
Schedule (in this Constitution referred to as the Union List).
Notwithstanding anything in clause (3), Parliament, and, subject to clause (1) the
Legislature of any State also, have power to make laws with respect to any of the
matters enumerated in List III of the Seventh Schedule (in this Constitution referred to
as the Concurrent List).
Subject to clauses (1) and (2), the Legislature of any State ahs exclusive powers to
make laws for such State or part thereof with respect to any of the matters enumerated
in the List II of the Seventh Schedule (in this Constitution referred to as the State List).
Parliament has power to make laws with respect to any matter for any part of the
territory of India not included [in a State] notwithstanding that such matter is a matter
enumerated in the State List.
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As regards the relevant entries in the State List pertaining to Taxation,

they are as follows:
(i)
Item No. 46 Taxes of Agricultural Income
(ii)
Item No. 51 Excise duty on alcoholic liquors, opium and narcotics
(iii)
Item No. 52 Tax of entry of goods into a local area for consumption
use or sale therein (usually called Octroi)
(iv)
Item No. 54 Tax on Sale or purchase of goods other than

newspapers except tax on interstate sale or purchase
As regards the Concurrent List, both the Central and State Govts can
legislate for these subjects. They consist matters like, Criminal law and
Procedure, Trust and Trustees, Civil Procedures, Economic and Social
Planning, Trade Unions, Charitable Institutions, Price Control, Factories etc.
The Constitution also imposes limitations on the taxation powers of
both the Central and State Govts, by Art. 265 and Art. 300A172.
The Central Sales Tax Act came into force in 1957. The basic features
of the Act are as follows:
Sales tax revenue to States the Act governs Inter-State Sales, the
revenue is collected by the Central Govt. But the concept of revenue
from sales tax to States has been retained. Thus the CST (Central
Sales Tax) collected in each state is kept by that State itself. It is
administered by the local sales tax authorities of each state.
Tax collected in the State where movement of goods commences

CST is payable in the State where the movement of goods commences,
i.e. the State from which the goods are sold.
Tax on Inter-State sale of goods CST is a tax on inter-state sale,

which means that the sale occasions the movement of goods from
172
Art. 265. TTaxes

axes not to be imposed save by authority of law
law.. No tax shall be levied or
collected except by authority of law.
law.. No
Art. 300A. PPersons
ersons not to be deprived of property save by authority of law
person shall be deprived of his property save by authority of law.
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one state to another; or the sale is effected by transfer of documents

during their movement from one State to another.
State Sales Tax applicable in many aspects the overall scheme of

administration of CST follows the State Sales Tax provisions. CST by
itself makes very few procedures and rules, in all other matters the
State Sales Tax is applicable.
Certain Concepts explained by CST the CST defines certain concepts,

which are peculiar to the sales governed by it. E.g. Sale outside the
State, Sale during the course of import/export etc.
Declared Goods some goods are declared as goods of special

importance and restrictions are placed on power of the State Govts to
tax such goods.
The Act envisages three types of sales, viz., inter-state sale; sale during
import/export; intra-state sale. In the first case the tax is levied by
Union Govt., in the second case the sale is exempt from tax and in the
third case the tax levied by the State Govt. according to the state Sales
Tax Act.
An inter-state sale is defined as one which occasions movement of

goods from one State to another, which is either necessitated by the
contract of sale or is inter-linked to the sale of goods. There should be
no break between purchase and movement of goods to another State.
The mode of transport is immaterial. The situs of sale is also immaterial.
State Govt. cannot impose tax on sale or purchase during imports or

exports or tax on sale outside the State. [Art. 286(1)]
Parliament is authorized to formulate principles for determining when

a sale or purchase takes place (a) outside a state (b) in the course of
import or export. [Art. 286(2)]
Parliament can place restrictions on tax on sale or purchase of goods

declared goods only subject to these restrictions. [Art. 286(3)]
Trade, commerce and intercourse throughout the territory of India

shall be free, subject to provisions of Art. 302 Art. 304 of the
Constitution
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Restrictions on trade and commerce can be placed by Parliament in

the public interest.
No discrimination can be made
CORPORATE TAXATION
The tax liabilities vary depending on whether a company or the individual
is a resident or non-resident in India and whether the company in a widelyheld or a closely-held one. A resident company is one, which is incorporated
in India, while a non-resident company is one, which is incorporated under
the laws of a foreign country173. A widely held company is one whose shares
are held by public and are listed on a stock exchange in India. India has
signed tax treaties with several countries and provision of these treaties
override provisions of domestic tax laws.
The tax year runs from 1st April to 31st March. Taxes are paid in advance
in three installments by 15th September, 15th December and 15th March
of the fiscal year. Any balance of tax, including interests for delay in filing
returns and defaults in payment of advance tax, must be paid before filing
tax returns. For companies tax returns must be filed by 31st December after
the end of the tax year; for individuals the last date for filing returns is 30th
June following the tax year174.
Wherever possible taxes are deducted at source for incomes accruing
to both companies and individuals. Tax disputes are usually referred in the
first instance to Commissioner (Appeals) and the Tribunal. Tax disputes may
thereafter go, on appeal, to the High Court and the Supreme Court of
India. Indian tax laws are being reformed to simplify procedures, lower the
rates and eliminate multiplicity of taxation.
(a) Status
Resident companies are taxed on their domestic and foreign incomes
while non-resident companies are taxed only on their Indian incomes175.
173
174
175
See Indian Companies Act, 1956, the Sec. 2 for definitions.

See, Income Tax Act, 1961, Sec. 2(9) generally.
See, Income Tax Act, 1961, Sec. 6 generally.
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(b) Tax Rate Structure

(i)
Taxation of Companies
The rate structure for taxation on income during Financial Year arising
in the hands of companies, both domestic and foreign is usually at the
as per the rates of tax as laid down in the Finance Act of that particular
year. The tax treatment differs as per the type of company.
(ii)
Assessing Taxable Income

In ascertaining taxable income, all expenditure incurred for business
purposes are deductible. This includes interest on borrowings paid in
the financial year and depreciation on fixed assets. Certain expenses
are specifically disallowed or their quantum of deduction is restricted176.
These include:
Entertainment expenses;
Interest, royalties, technical service fees, commission or any other

amounts paid to non-residents without deduction of applicable
taxes;
Provisions for expenses not actually incurred, and;
Indirect general and administrative costs of a foreign head office

in excess of 5% of taxable income (before depreciation).
Depreciation is normally calculated on the declining balance method

at varying rates and is available for a full year, irrespective of the actual
period of use of the asset in the year of the acquisition of the asset.
Depreciation is allowed at half the normal rate, if the as set is used for less
than 180 days in that year. No depreciation is available in the year of the
sale of the asset.
(iii)
Carry Forward177
In the absence of adequate profits unabsorbed depreciation can be
carried forward and set off against profits of the next assessment year,
176
177
See, Income Tax Act, 1961, Sec. 40 & 40A generally.

See generally Chapter VI of the Income Tax Act, 1961 which lays down provisions as
to Aggregation of Income, Set off and Carry Forward of Losses.
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without any time limit. Further, unabsorbed business loss of any year
can be carried forward and set off against the profits of a subsequent
year, subject to a limit of eight years. There are elaborate measures
prescribed for the calculation of Depreciation178.
(iv)
Special Tax Incentives

The Government offers a wide range of concessions to investors in
India to promote industrial growth and exports179.
(v)
Capital Gains Tax

Capital gains on transfer of capital assets situated in India and shares
in Indian companies are taxed as incomes. Long-term capital gains
178
179
Depreciation is calculated on the opening written-down value of the block of assets

plus the additions to the block less the sale proceeds/ scrap value of selections from
the block. Depreciation at 100% is allowed in respect of machinery and equipment
the unit cost of which does not exceed Rs. 5,000. No depreciation is allowed in
respect of motorcars manufactured outside India, unless they are rental cars for tourists
or where such motorcars are used outside India for the purposes of business. No
depreciation is allowed on plant and machinery if actual cost is otherwise allowed as
a deduction in one or more years under an agreement entered into with the Central
Government for prospecting, etc. of mineral, oil.
The important concessions include:
Deduction of preliminary and preoperative expenses in setting up a project.
Complete tax exemption for profits from exports.
Full or part exemption of foreign exchange earnings on construction projects, hotels
and tourism related services, royalties, commissions, etc.
Five-year tax holidays within the first eight years of commercial operations for 100%
EOUs and units in FTZs.
Tax exemption for income from export of computer software or technical services.
Deduction of 30% of gross total income for 10 years for new industrial undertakings
established by companies.
Deduction of capital research and development expenditure.
Tax holiday for profits from new power projects for first five years of operation.
Five-year tax holiday for entrepreneurs who builds maintains and operate infrastructure
facilities in areas of highways, expressways, new bridges, airports, ports, and rapid
mass transport system.
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are said to arise on transfer of assets held for over three years (one
year for shares). Gains on transfer of assets held for shorter periods
are treated as short-term capital gains180.
D. Tax Evasion in Cyberspace

Tax laws have not kept pace with the increasing trade in digital products.
Major problems will arise as a result, as tax laws do not adequately describe
the nature or character of digital products. The key characterization issue is
whether these products are tangible or intangible property. The problem is
that they are an entirely new category of property. In other words the problem
is whether these products would fall under the category of good or service?
The following are the most common cases where this problem arises181:
Electronically delivered software as tangible personal property for sales

and use tax.
Location of sale of electronically delivered product.
Electronically delivered product as tangible personal property for

international transactions.
Electronically delivered software as goods and services for VAT.
THE ARGUMENT FOR TAXING CYBERSPACE

(a) The lack of traceability
One problem with tracing intangible goods sold via the Internet, such
as an electronic newspaper or a software programme, is that the marginal
180
181
This again is dependent on the rates of tax laid down in the Finance Act of the
relevant assessment year. The expenditure incurred on transfer of assets and the
cost of acquisition of the asset and cost of improvement thereof are deductible from
sales realization for computing gains. For Non-Residents, capital gains are computed
in the original currency of acquisition to protect them against currency fluctuations.
Capital losses can be carried forward for eight years and can be set off only against
capital gains.
Howard Lambert, VAT and Electronic Commerce: European Union insights into the
challenges ahead, www.tax.org/international_readings
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cost of providing an extra unit is close to zero. Since no additional inputs are
required, tax authorities can no longer cross check a firms units of inputs with
its claimed units of output. The development of electronic cash as opposed to
credit card systems will probably further facilitate both electronic commerce
and tax evasion since payment no longer leaves a paper but is rather
anonymous and untraceable182 ..
The Internet may also reduce the role of these intermediaries - important
to tax authorities as they report financial transactions183. Such intermediaries
allow tax inspectors to compare interest income declared by the individual
with that paid out by banks. The Internet removes to some extent this middleman
and thus the source for cross-checking. Furthermore, it will be increasingly
easy for the average citizen to access offshore financial centres in Cyberspace.
These virtual tax havens are likely to further paralyse the tax collector.
(b) Taxing communication

The problem with taxing communication services lies within the fact that
the taxation rules were developed twenty years ago. A wide variety of IT
related goods and services have been developed more recently. As such,
the rules are based on certain assumptions, i.e a clear distinction between
information transmission and information provision, or between broadcasting
and entertainment. Different tax laws apply to these different services. Today,
due to the rapid convergence between the different forms of technology, it
is not always possible to make clear distinctions between these services. It
seems worth noting that out- dated VAT laws should be addressed in relation
to international taxation in the information society184.
(c) Searching for the new tax collector?

In the age of Internet commerce, the retailer as the tax collector no
longer seems appropriate. So one key question is: who should the new
182
183
184
1 See further Ganguly R., Taxation of Cyberspace Transactions: Working Towards

Solutions, April 1997.
Ibid.
Delta, George B. and Matsura, Jeffery H. Taxation., Law of the Internet, 626. Aspen
Law and Business 1999; Gaithersburg, NY. 1999
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tax intermediaries be? One proposal recently put forth is for financial
institutions to play this role185. The argument is as follows. Most present
payment transactions use banks, credit card companies or other financial
intermediaries that leave an audit trail. The development of electronic
payment systems (debt and credit systems) will also leave an audit trail as
both these systems involve intermediaries. With electronic debt systems funds
are stored in an account of a financial institution: electronic credit systems
simply use traditional credit card numbers that are encrypted186. The proposed
bit tax is another alternative but clearly should be considered as a tax of
last resort, applied only if other means are not feasible187. The proposed bit
tax is basically a tax on electronic information transmission. In order to
avoid distortions, any tax applied to the Internet should be introduced on a
world-wide basis. A bit tax would not be related in any direct way to the
actual value of a communication, rather it would focus on the transmission
of information. From this perspective it is the number of bits that count. In
practical terms a bit tax proposal would involve the introduction of bit
measuring equipment on all communication equipment (similar to electricity
meters) thus enabling consumers/users to monitor the volume of bits
transmitted by line or satellite.
(d) The need for thought and reflection

The aim should be to develop a tax system, which ensures that the tax
base does not (further) erode while at the same time realizing the full potential
of the electronic networks. This will require tax authorities from around the
world to jointly develop globally accepted principles of taxation. Industry
will also play an important role in developing technically feasible solutions
to tax electronic commerce. This whole process requires thought, reflection
and eventually concerted policy action. Hasty decisions about duty free
systems could very well lock countries in to inappropriate standards. This
185
186
187
See Soete and Ter Weel, 1998.

See further Van Aelst, L., Taxing Cyberspace, Information Strategy, June 1997.
Austan Goolsbee, In a World Without Borders: The Impact of Taxes on Internet
Commerce (visited Jan. 12, 2000) http://www.gsbwww.uchicago.edu/fac/
austan.goolsbee/research/intertax.pdf.
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must be avoided. Establishing and legally defining the location of the parties
to an Internet transaction and the location of the Internet transaction is
useful since a states power to collect sales and use taxes on the purchase
of goods or services depends on the presence of the purchaser or the location
of the purchase within the taxing state188. Location and presence are key
elements in determining the taxability of a transaction by a state. Leif Swedlow
has offered three paradigms of presence for establishing personal
jurisdiction via the Internet189. These three paradigms can be examined in
the context of commercial transactions via the Internet to determine how
such transactions might be taxed.
COMMERCE IN INTANGIBLES THE PROBLEMS OF

VALUATION
Intangibles are now a part of Businesses all over the world. And a trade
of these intangibles is now posing problems unprecedented before, more
so in case of E-Commerce190. It is generally conceded in the trade circles
today that information about a product is as important as the product itself191.
Agreed that information is an intangible and its valuation creates a lot of
problems, that shall be discussed at length in the succeeding chapter on
valuation of information and trade on it. For the present trade of intangibles
and their valuation shall be the focus of this chapter.
188
189
190
191
Leif Swedlow, Note, Three Paradigms for Presence: A Solution for Personal Jurisdiction
on the Internet, 22 Okla. City U. L. Rev. 337 (1997).
See E. Parker Brown, II, State Taxation of Telecommunications: The New York Experience,
47 Syracuse L. Rev. 987, 1019 (1997); see also Carl Middlehurst et al., 17th Annual
Institute on Computer Law: The Evolving Law of the Internet-Commerce, Free Speech,
Security, Obsenity[sic] and Entertainment, in Collection of Articles by Carl Middlehurst
of Sun Microsystems, Inc. 1997, at 549, 552 (471 PLI Patents, Copyrights, Trademarks,
and Literary Property Course Handbook Series No. G4-3987, 1997).. See id. Links
within a retrieved document will provide a connection to more documents on the
same topic.
See, Dov Wisebrod, Visions of the Future, http://www.catalaw.com/dov/docs/dwgovts.htm
Ibid., also see http://www.businessweek.com/1998/44/it100.htm
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INDIAN POSITION ON INTANGIBLES

The valuation of assets and businesses has gained importance in an
era of consolidations, acquisitions, collaborations, asset buyouts, and so
on192. While assets and businesses have traditionally been valued in India
for the odd acquisition and merger case or for the purposes of taxes (wealth
tax, estate duty and so on), valuation of intangible assets did not figure
prominently in the entire exercise. Intangible assets like patents, technological
know-how and related issues have come into the limelight and gained
relevance following global developments like WTO, GATT and Intellectual
Property Rights (IPRs)193.
The Indian industry today is simultaneously working on consolidating
operations and restructuring businesses even as it is going through the pains
of liberalization and an economic slowdown. Divestment of non-core
activities, international tie-ups for high-tech, capital-intensive business lines
and acquisitions in areas of core competence are some of the strategies
being adopted194.
Valuation of the concerned activity proposed to be divested, acquired
and spun off into a joint venture assumes critical importance and Indian
businesses have started looking seriously at their business valuations. Business
192
193
194
See, http://www.hindubusinessline.com/1999/09/10/stories/021018c1.htm, Gear

up for the Competition SMEs told.
Khor. Martin, The WTO and the South Implications and recent Developments,
Third World Network, (TWE No. 161, 16-31 May 1997), see http://
www.twnside.org.sg/title/pli-cn.htm
The argument for Disinvestment runs thus,
.Indian policy makers now must address the problem of public savings and fiscal
deficit. To improve the public savings performance, India needs to raise the efficiency
of its public enterprises. It can change the role of its large public sector by disinvesting
the majority of its enterprises. For improving productivity, India may not only disinvest
a large segment of its public enterprise, but also continue the process of liberalizing
its trade and tariff regimes: India can stimulate its industry by opening its economy to
international market forces. Disinvestment ought to be accompanied by the removal
of distortions and unnecessary Government interventions., see, Aditya Sapru,
Disinvestment in Public Sector Units, at http://iil.indiainfoline.com/bisc/dinv.html
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acquisitions and brand purchases, which were rare in the past, have become
common and Indian businessmen, when talking of what they bring to the
table now, also mention the intangible assets, which are valued and paid
for at the time of striking a deal195. Increasingly, entrepreneurs have begun
to realize that the real value of their business is much more than that reflected
in the balance sheet. The present scenario, therefore, requires a careful
look at ones intangible assets and valuing them appropriately to strengthen
ones negotiating position.
The motivations behind valuing an intangible asset (IA)196 could vary to
include:
Business valuation at which a going concern is to be hived off or

acquired.
Purchase or sale of a specific intangible asset, say, technical knowhow.
Raising finance/investment on the security of an IA.
Quantification of a secured creditor in case of liquidation.
Quantifying royalty payments.
Business formations/dissolutions.
Taxation of gift/transfer of IA.

The value of an IA depends on the objective for which it is valued and
the use the valuation will be subject to197. An IA can be defined as an asset
195
196
197
According to Mr. T. V. Mohandas Pai, Senior Vice- President (Finance and Administration)
of Infosys Technologies Ltd, the intangible assets of a company are, with increasing
frequency, turning out to be more valuable than its tangible assets. In a paper titled
Issues of Intangibles at a seminar held by the Institute of Chartered Accountants of
India in Calcutta, Mr. Pai argued that there is also a clear shift in the market perception
on the valuation of firms with more importance being given to intangible rather than
tangible assets. See, All-too-real-issues of intangible assets by Pratap Ravindran,
The Hindu, Jan 7th 1999. See, http://www.hindubusinessline.com/1999/01/07/stories/
12070012.htm
McLure., Charles E., Jr., Economic Perspectives on State Taxation of Multijurisdictional
Corporations Ch. I (Tax Analysts 1986).
Brand valuation exercises are usually undertaken for the following reasons :
The Income Tax Act now allows acquirers to charge depreciation on brands.
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which cannot be seen and does not have physical existence, but can be
specifically identified, legally protected and must have come into existence
at a specific time or as a result of an identifiable event198. While a tangible
asset can generate value on its own, an IA often needs the support of a
tangible asset to generate value. Often the tangible asset gains value because
of the intangible asset attached to it.
IA has commonly been categorized as technology, skill set, property,
marketing, or existence related. An IA has value if it possesses the following: it
can generate some economic benefit to the owner either in the form of a rise in
revenue or reduction in costs; benefit must be measurable; and it must enhance
the value of the other asset with which it is associated. The term value is used
flexibly with varying prefixes such as fair value, fair market value, insurable
value, investment value, and so on199. The different connotations are based on
three different valuation bases: cost of acquiring/ creating the asset; income
from the use of the asset and market perception of the assets value.
198
199
Structuring special purpose vehicles for ownership of brands to protect business interests.
Mergers and acquisitions in the present liberalised and globalised scenario-to enter
the market or enhance market share or kill competition.
Providing additional information to shareholders.
Securitisation of the brands-to leverage the brands with financial institutions and banks.
Licensing or franchising brands.
Litigation-to calculate damages on infringement of goodwill/rights associated with
the brand.
Usually, the factors which are considered are:
Degree of volatility of the market for the brand.
Period for which the brand is established.
Whether the brand is a leader or not.
The long term growth in the brand.
Level and consistency of investment support for the brand.
Geographic spread.
Level and nature of legal protection
For further details see, Brand Valuation, The Quarterly Flash, at http://
www.deloitteap.com/pubs2000/indi0300.html
Ibid.
Ibid. In practice there are few directly comparable brand sales, and even if comparable
transactions have taken place, it is likely that market and financial information would
not be publicly available.
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Rationalization of valuations It is normal to value a given asset using

multiple approaches or multiple methods within an approach. In such a case,
one ends up having a set of valuations, which need to be rationalized to
arrive at a single valuation. To decide the weightage to be given to each
valuation, one goes back to the basic issues of the objective of the valuation;
who is going to use it and which asset is subject to valuation. Depending on
the answers to these questions, one can attribute a higher weight for the more
appropriate approach and arrive at a valuation200. It is also a practice to
determine a valuation range within which the transaction would be negotiated.
If India has any strategic advantages in the global scenario, it is the vast pool
of creative and innovative brains and a huge and hungry domestic market.
Should a value be placed on these intangibles while valuing India Inc, the
stock should soar.
A recent amendment in the Income-tax Act, 1961201 , has removed an
anomaly bringing the law in line not only with business reality but also with
recent times. In several cases, it would also bring a windfall in terms of
higher or special depreciation with consequential lower taxes. The
Ibid.
Before this amendment, there was no specific provision for claiming depreciation on
such in-tangible assets. However, there were three dif-ferent Sections, which dealt
separately with such expenses incurred by the assessee :
(1) S. 35A dealing with capital expenditure on acquisition of patent rights or copyrights;
200
201
(2) S. 35AB dealing with any lump sum consideration for acquiring know-how;
(3) S. 35ABB dealing with expenditure for obtaining licence for operating
telecommunication services.
These three provisions allowed the assessee to amortise such expenses over a specified
period. Unfortunately, the nature of expenses to be allowed under the aforesaid three
Sections was entirely different e.g. S. 35A allowed the assessee to claim expenses if
expenses are only of capital nature, whereas S. 35AB does not lay down any such
stipulation. Again S. 35ABB, allows the assessee to claim such expenditure, if it is
capital in nature. Further the amortisation periods provided in these three Sections
were different. There were other inconsistencies in the aforesaid Sections. Further, any
capital expenditure incurred on intangible assets, which did not fit into the definition
of patents and copyrights or know-how or telecom licences, could not be claimed at
all by the assessee.
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amendment relates to allowance of depreciation on intangible assets202 .

Broadly speaking, till now, depreciation was allowed only on tangible
assets such as buildings, plant & machinery and furniture. Amortization
was also allowed on assets such as patents, know-how, etc. However,
other than this, expenditure on acquisition of other intangible assets could
not yield into any tax deduction though such items depreciate as any
other perhaps faster in some cases. Now, such assets are a separate
group of assets and depreciation can be claimed. The amendment has
come into force from assessment year 1999-00 that is, from the current
accounting year ending on 31st March 1999, itself.
The definition of intangible assets is fairly broad and, while items such
as patents, licences, franchises, know-how, etc are specifically included,
any other asset, which is business or commercial right of similar nature,
would also be eligible203. Since certain assets such as know-how and patents
were eligible for amortization, assets acquired earlier to 1-4-1998 would
be eligible for amortization and assets acquired thereafter will be eligible
for the new scheme of depreciation204.
202
203
204
The Finance (No. 2) Act, 1998 has introduced a very novel concept in the Act by
amending certain Sections, whereby depreciation has been allowed on intangible
assets like know-how, patents, copyrights, trademarks, licences, franchises or any
other business or commercial rights of similar nature. This has been done by amending
Sec. 32 and Sec. 2(11) of the Income-tax Act. Clause (11) of Sec. 2 of the Income-tax
Act has been amended to change the definition of Block of Assets.
Intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises
or any other business or commercial rights of similar nature. Explanation 4 to Sec. 32
has defined the word know-how in the context of intangible assets and it provides that
For the purposes of this sub-section, the expression know-how means any industrial
information or technique likely to assist in the manufacture or processing of goods or in
the working of a mine, oil-well or other sources of mineral deposits (including searching
for discovery or testing of deposits for the winning of access thereto). This definition has
been bodily lifted from Sec. 35AB which is now being withdrawn.
Sec. 32 of the Income-tax Act has also been amended to enable assessees to claim
depreciation on such intangible assets. The rate of depreciation in respect of these
intangible assets has since been prescribed at 25 per cent, vide Notification S.O. No.
781(E), dated 4-9-1998. As a consequence of this amendment, the deductions
allowable u/s.35A of the Income-tax Act in respect of any expenditure of a capital
nature incurred on the acquisition of patent rights or copyrights and u/s.35AB in respect
of expenditure on know-how have been withdrawn with effect from the assessment year
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Business restructuring transactions such as joint ventures, acquisitions,

mergers and take-overs lead to acquisition of brands, know-how, etc. Other
commercial rights such as non-compete agreements may also arise and,
depending upon the facts of each case, most of these assets will now be
eligible for depreciation.
What about assets, which are self, acquired or acquired at a low price
but are now very valuable? As per the scheme of the law, unless one has
paid something, it cannot be included in the cost and, hence, depreciation
on the current higher market value cannot be claimed205.
Mere revaluation of the existing assets at its higher market value will not
help. Another hurdle is that since such assets may have been acquired
prior to April 1, 1998, these may not be eligible for depreciation206. Can
such assets be transferred to, say, a group concern. This would overcome
both the hurdles. The transfer can be at a higher value and thus depreciation
can be claimed on such amount. Further, since the acquirer would have
acquired it now, the other hurdle would also be overcome. However, at
least two issues would have to be considered. One is capital gains in the
hands of the seller. However, there may be a way out. It is well settled law
that self generated assets for which the cost of acquisition cannot be
determined cannot be subject to capital gains per the ruling of the Supreme
Court in Srinivasa Settys case207.
While an amendment has barred goodwill from being eligible for this
benefit, most other intangible assets are left out and hence exemption from
205
206
207
1999-2000. These amendments will take effect from 1-4-1999, and will, accordingly,
apply in relation to the assessment year 1999-2000 and subsequent years.
The Kerala High Court in the case of Cochin Refineries Ltd., (1982) 135 ITR 278, has
held that : In order to apply S. 35A, it is necessary that there should be an expenditure
of a capital nature, .... and such expenditure should be incurred on acquisition of
patent rights or copyrights used for the purpose of the business. Only when all these
conditions are satisfied, the question of deduction u/s.35A would arise. Otherwise,
when an expenditure of a capital nature is incurred, there would be no question of
deduction at all.
Supra note 253.
128 ITR 294.
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capital gains is possible. The other problem is that a specific provision in

Section 43 states that if an asset is transferred with the intention to claim
higher depreciation, the assessing officer can make suitable adjustments and
hence disallows such claim208. However, it has been repeatedly held that
these provisions apply only to those cases where the value has been artificially
been inflated far beyond its true market value with a collusive intent209. It is
submitted that if the transfer is at the fair market value, this provision cannot
be applied unless the sole objective of the transfer was to claim higher
depreciation. The acquirer may be well advised to carry out a professional
valuation of the asset in such cases or generally, to avoid litigation.
To summarize, transfer of the asset may help the acquirer in claiming
higher depreciation but this should be done with care. Another aspect to
take care of in transfer of such assets is stamp duty. This may vary from
state to state and in individual circumstances or, by proper planning, it
could be avoided.
What are the intangible assets eligible for depreciation? Assets specifically
mentioned are know-how, patents, copyrights, trademarks, licences, and
franchises. However, any other business or commercial right of similar
nature would also be eligible210. Doubts have been expressed as to whether
goodwill could be included. It seems wherever it can be established that it
represents predominantly a right, depreciation should be allowable. Note
that in an amalgamation, the transferee company gets depreciation on the
written down value of the assets of the transferor company and not the
actual amount paid. This is not so in acquisition of a running business. One
should also be well aware of the disincentives of claiming depreciation if
the asset might be sold in the future211. Section 50 specifically treats such
assets as short-term assets by which the benefit of lower taxes through
indexation, lower rates, etc, are lost. However, wherever possible, the assessee
208
209
210
211
Supra note 253.

Jogta Coal Co Ltd vs. CIT (1965) 55 ITR 89 (Cal.); Guzdar Kajora Coal Mines Ltd
(1972) 85 ITR 599 (SC); CIT vs. Dalmia Dadri Cement Ltd (1980) 125 ITR 510 (Del).
Ibid.
Ibid.
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could still argue that, in view of Srinivasa Settys case212 cited earlier, there
could be no capital gains.
To conclude, a whole new dimension has been introduced in the
provisions for depreciation and in an era where brands, know-how, patents
are set to reign supreme, tax law is coming slowly in tune with times213.
Valuing now encompass three classes of operations, namely,
(1)
The estimation of the cost of producing or replacing physical assets,
(2)
The forecasting of monetary earning power of certain classes of assets,
(3)
The valuation or determination of worth of assets.
Because of the specialized knowledge and abilities required of the valuer

which are not possessed by the layman, there has now come to be established
a fiduciary relationship between the valuer and those who rely upon his
findings. The PVAI214 occupies a unique position amongst the professional
valuers, in that, it recognizes and is concerned with all classes of assets:
real, personal, tangible, and intangible, including real estate, machinery
and equipment, buildings and other structures, furnishings, works of art,
natural resources, public utilities, gems and jewellery, investment securities,
and so forth. It is also unique in that it recognizes the threefold character of
the valuation function.
In recognizing the need for the highest professional competence amongst
valuers, the PVAI actively supports recognized institutions of higher learning
in their scholastic programs which are designed to provide the necessary
academic background to both valuer aspirants and to the qualified
professionals who desire to update and broaden their professional skills215.
The association has established an Educational Foundation to assist those
212
213
214
215
128 ITR 294

See, Benevolent all the way, at http://www.hindubusinessline.com/1999/05/22/
stories/12220641.htm
Practicing Valuers Association (India).
Ibid.
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institutions of higher learning, which actively provide scholastic training and

research in various valuation disciplines. The necessity for a set of authoritative
principles and a code of professional ethics, broad enough to cover all
classes of assets as well as the complexities of the various valuation
procedures, is a pressing one. Previous statements of principles have dealt
almost exclusively with real estate assets. Existing codes of ethics are, in
large measure, couched in such general moralistic terms that they are
impractical for a specific application in valuation practice216.
First, because there are several kinds of values and several kinds of cost
estimates, each of which has a legitimate place as the end point of some
class of valuation engagement, it is the valuers obligation to ascertain
which one of these is pertinent to the particular undertaking. In meeting this
obligation, the valuer may consider his clients instructions and/or may obtain
legal or other professional advice, but the designating of the apposite value
or estimated cost is the valuers sole responsibility217. Also, it is his obligation,
in this connection, fully to explain and describe what is meant by the particular
value or cost estimate, which he has determined, in order to obviate
misunderstanding and to prevent unwitting or deliberate misapplication.
For example, a valuation engagement which calls for the determination
of the replacement cost of a merchants inventory of goods, for insurance
purposes, would not be properly discharged by a valuation of its retail
market value; and an engagement which calls for the determination of the
current market value of a multi-tenant office building leasehold estate, would
not be properly discharged by a determination of the depreciated new cost of
replacement of the improvements.
The Association recognizes that different kinds of assets may have different
kinds of values depending on the particular attendant circumstances and,
further, that there are both basic and subordinate kinds of values218. Good
professional practice requires that the valuer describe in sufficient detail, in
each case, the nature and meaning of the specific value that he is determining.
216
217
218
See, http://www/pvai.org/pvai-ethics.html
See, Ibid.
See, http://www.pvai.org/pvaimemo.html
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The procedure and method for determining the particular value in

question is a matter for the valuer himself to determine; he cannot be held
responsible for the result unless he has a free hand in selecting the process
by which that result is to be obtained219. However, good valuation practice
requires that the method selected be adequate for the purpose, embrace
considerations of all the factors that have a bearing on the value, and be
presented in a clear and logical manner.
Certain classes of assets (real estate, business enterprise, collections of
goods/materials, for example) can be considered as made up of components
(for example, in the case of real estate: land and buildings; in the case of a
business enterprise: land, buildings, machinery and equipment, contracts,
and goodwill). If an element is considered as an integrated part of the whole
asset, its value, in general, is different from the value the same element has if
considered as a fraction separated from the whole asset220. A valuation of an
element of a whole asset, considered by itself and ignoring its relation to the
rest of the whole asset, is called a fractional valuation.221 There are legitimate
uses for fractional valuations (valuation of buildings for fire insurance purposes;
valuation to determine the value of land as if cleared of existing improvements:
valuation in connection with public utility rate-making, etc.) but good practice
requires that a fractional valuation be labeled as such and that the limitations
on its use by the client and/or third parties be clearly stated222.
In many instances the validity of the valuers conclusions as to the value
of a subject asset is contingent upon the validity of statements, information,
and/or data upon which he has relied, supplied to him by member of other
professions or secured by him from official sources223. Such material may
be obtained, for example, from architects, engineers, lawyers, accountants,
government officials, government agencies, etc. It is proper for the valuer to
rely upon and use such material provided
219
220
221
222
223
Ibid.
Ibid.
See, http://www.pvai.org/aboutus.html
See, http://www.pvai.org/homepage.html
See, http://www.constnindia.com/cidc/surveyors/intro.htm
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(1)
He states in his report that he has done so,
(2)
He stands ready to make his sources and/or the material itself available
for any required verification, and
(3)
He does not pass to others the responsibility for matters that are, or
should be, within the scope of his own professional knowledge.
Standard valuation practice requires that the valuer state any other
contingent or limiting conditions which affect the valuation, such as, for
example, that the value is contingent upon the completion of projected
public or private improvements, etc
A hypothetical valuation is a valuation based on assumed conditions
which are contrary to fact or which are improbable of realization or
consummation224. The Association takes the position that there are legitimate
uses for some hypothetical valuations, but that it is improper and unethical
to issue a hypothetical valuation report unless:
(1)
The value is clearly labeled as hypothetical
(2)
The legitimate purpose for which the valuation was made is stated,
and
(3)
The conditions which were assumed contrary to fact are set forth.
A hypothetical valuation showing the value of a company, which it is

proposed to form by merging two existing companies, would he deemed to
serve a legitimate purpose. On the other hand, a hypothetical valuation of
a projected apartment house, based on an assumed rate schedule which is
so much above the market that it is practically impossible for it to be realized,
would not serve any legitimate purpose and its issuance might well lead to
the defrauding of some unwary investor.
Situations sometimes occur in which data that the valuer considers
pertinent to the making of a valid valuation are in existence but access to
them is denied to the valuer, either by the client or some other party (for
example: the past production records of an oil field: the records of prior
224
Ibid.
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revenue and expense of a hotel asset: etc.). In such a case, the valuer, at his
option, may properly decline to carry out the assignment In the event he
considers such data essential to the making of a valid valuation, he may not
properly proceed with the assignment.
Some valuation engagements call for the determination of a probable
range of values or estimated costs, either with or without a collateral statement
of the most probable figure within that range. It is entirely within the scope
of good valuation practice to give a range of values or estimated costs225.
In as much as the valuers determination of the amount of a value or an
estimated cost cannot, by its very nature, be exact, it is good valuation
practice to append to such numerical results a statement as to the degree of
reliability to be accorded thereto. Such reliability estimates are usually
expressed as plus and minus percentages.
The objective of a valuation undertaking may be the determination of
different values or different cost estimates based on different hypotheses. It
is entirely within the scope of good valuation practice to give such differing
numerical results, provided the valuers adhere to the principles set forth.
The valuation of assets is a procedure based on an analysis of all the
characteristics of the assets which contribute to or detract from its value;
good valuation practice requires that the valuers inspection, investigation,
and study be thorough enough to uncover all of the pertinent characteristics.
Good valuation practice requires that the description of the asset, tangible
or intangible, which is the subject of a valuation, cover adequately:
Identification of the asset
Statement of the legal rights and restrictions comprised in the

ownership, and
The characteristics of the asset, which contribute to or detract from its

value226.
In the case of land and prospective real estate improvements,

identification is particularly important in order to prevent unscrupulous
225
226
See, http://www.pvai.org/pvai-ethics.html
See, http://www.pvai.org/pvai-methods/valuation.html
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persons from representing the valuation as applying to substituted inferior

assets. In general, the legal rights of the ownership of land plots may be are
obvious and need not be stated, but, in the case of real estate, statements
of zoning restrictions, building codes, easements, leases, etc., are essential
elements of the description. It is understood, however, that the legal rights
of the ownership of an interest in real estate are matters of legal, not valuation,
opinion, and that the valuer discharges his obligations in this regard by
stating the sources of these data. In the case of intangible assets (patents,
contracts, franchises, etc.) the documentary provisions not only define what
the asset is, they also set forth the legal rights and descriptions.
The physical condition of land plots or real estate is an element
contributing to or detracting from their value; good valuation practice requires
adequate inspection and investigation to determine it.
METHODS OF VALUATION
The valuation of intangibles is at best speculative. A qualified appraiser
does valuation of intangibles such as software, know-how, and trademarks.
They follow various standards that include the Uniform Standards of
Professional Appraisal Practice (USPAP)227.
There are three methods that are commonly followed in case of valuation
of intangibles, viz.,
-
The Cost Method
The Market Method
The Income Method
(a) The Cost Method

The Cost Method values intangibles based on the cost to reproduce.
The basic idea is that a company would not pay more for an intangible than
227
The USPAP is a product of the uniform standards followed in case of valuation of

intangible in the US. Another example of such a standard is the American Society
of Appraisers (ASA) Business Valuation Standards. For more see, Electronic
Commerce, Taxation and Planning, by David E. Hardesty, Warren, Gorham and
Lamont Group, (2000).
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it would cost to reproduce an intangible that will provide the same economic
utility. The underlying assumption being that there is a possibility of
reproducing such an intangible. E.g. a company owns the rights to a legal
services software program or a banking service software program. A valid
starting point for an appraisal of such software is the cost to produce that
software. And the assumption here is that it would cost the other companies
an equivalent amount to produce a product of equal utility.
The cost of a product can be estimated by looking at different aspects
of the cost incurred in the production of such a product228. There is a big
difference for instance in the cost to reproduce an existing product as against
the actual cost to produce an original product. Ordinarily the cost of
producing an original would be more, if the fact of a lot of trial and error
processes are taken into consideration before the actual product comes
forth, since there will be neither precedents or guidelines to follow or deduce
from in such a case.
The cost method also takes into consideration the issue of depreciation
or obsolescence. The cost of an intangible has to be reduced to take into
account the loss of economic value of an asset229. For instance the useful
life of a software product may be only three to five years. However much a
software product costs to produce or reproduce, the value of it decreases
as newer products come into the market.
In the world of e-commerce, the cost method may be appropriate in the
valuation of such assets like domain names, trade names, and trademarks.
For instance, the cost of advertising necessary to build name recognition for
the name, www.amazon.com undoubtedly cost millions of dollars. This
advertising cost may be an important factor in valuing the name
amazon.com.
The weakness of the cost method is that it does not take into account
the expected economic benefit of an asset. For instance, the company may
228
229
See, http://www.detya.gov.au/tenfeilds/business/7/unisa.html
See, http://www.hkis.org.hk/publication/surverying/V616/qs.html
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spend scores of money attempting to build a name recognition for a website,

only to find that there is no potential profit to be made from that site. This
was the case with many heavily promoted websites built on promising
concepts, but which failed to make money and were abandoned230.
(b) Capitalization and discounting of Expected Income

used in both Market and Income Methods
Both the Market and Income Methods depend on the capitalization or
discounting of expected income. Capitalization is used to determine the
value of a perpetual income flow. This is a useful method for valuing goodwill
and other intangibles where the expected useful life is not limited in time.
The value of a perpetual income stream is determined by dividing the income
stream by an appropriate capitalization rate. Discounting method is used
the income stream is expected to have a limited life. The expected yearly
income is forecast and discounted using an appropriate rate. The value of
the subject asset is the present value of discounted cash flows.
Now comes the question as to what is the Capitalization or discount
rate? It is the rate at which an investor would have to earn on an investment
with similar terms and similar risk. Such a market discount rate is useful in
discounting the earnings of a business to determine the overall value of a
business. Where a discount or capitalization rate takes risk into account,
there must be some way of evaluating the risk. Risk is defined differently
depending on the context in which it is discussed. From an investment point
of view risk means the possibility of loss.
For most investments risk is quantifiable, based on historic returns on
assets. For example the risk of owning a mutual fund may be determined by
reviewing its investment returns over a ten-year period. This tells a potential
investor the risk of loss involved based on historical performance. In the
world of Internet, there is currently no history upon which to evaluate risk.
Internet based businesses do not have a long history behind them, at best
these businesses may have a few years of experience behind them on the
230
See, Micheal Wolff, Burn Rate (1998), for an insightful look into web-based startups
that burnt millions of dollars of venture capital money only to abandon those sites.
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Internet. But Internet-based businesses are subject to enormous technology

risk. This is because there are few established standards used to conduct
business. For instance, e-money is an intricate part of e-commerce, and
there is currently no standard for electronic money231. Web-merchants are
likely to adopt several payment systems until a standard is established or
settled upon.
A capitalization or discount rate can also be based on the cost of capital
for a particular type of asset. This is a useful approach where a company is
trying to determine the value of an avoided cost, such as an avoided royalty.
The cost of capital is the weighted-average cost of capital based on the cost
to carry debt, and the cost of equity. Whatever the type of discount rate that
is used; it is critical that the rate match the asset being valued. In addition,
discount rates are stated both pre-tax and after-tax. Whatever rate is used,
pre-tax or after-tax, the income being discounted or capitalized has to be
stated on the same basis.
(c) Market Method

The Market method is based on the value of competing products. Value
is indicated by actual sales or licensing of similar products. This is a common
method of valuation of such assets as real estate etc. It is much more difficult
for intangible assets where the intangibles are not ordinarily traded or subject
to licence agreements232.
Many intangibles like domain names, and proprietary technology are
very difficult to value. This stems from the individualized nature of such
assets, and the lack of comparable assets that can be used to set values.
Valuing a trademark for instance is not like valuing a house, where sales of
similar houses in the neighbourhood can be used as a basis for valuation.
Intangibles are usually valued as part of a business owning many different
assets. Seldom are intangibles traded separately, and even where a separate
transaction occurs, the price is rarely disclosed. The market approach is
231
232
See, http://www.ficci.com/icanet/engineers.htm
See, http://www/adrefmy.com/CCH.htm
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most useful when there is information on transactions involving similar

intangibles. Unfortunately such information is rare233.
As to whether an Internet Company can be valued using a Market
Approach, the key to the market approach is the existence of comparable
products. At present there are few licensors of Internet-based technology,
and none of these have much history, the concept of Internet-based businesses
itself being very recent. One precedent, which exists, is licensing. Technology
Licensing is common in the software industry. And software licensing may
share many of the characteristics of e-commerce licences. The most important
characteristic is the relatively short span of life. Technologies used in software
are comparatively very short-lived. This is as much likely to be the case in ECommerce related technologies.
Important in the market analysis of the value of licensing income are
the rights owned in the intangible, the expected useful life of the intangible,
and the market capitalization or discount rate. The expected useful life may
the legal life. However, for intangibles that become obsolete quickly, it is
more often the expected useful economic life. The market method takes
into account prices for which similar intangibles are sold. The market method
also takes into account licensing or royalty fees. This is a good approach
where this information is available.
The value of an intangible based on royalty or licensing fees can be
determined by discounting the income stream. The goal is to determine the
present value of the income to be received from the asset. A commonly
used variation on this method is the royalty-avoided method. If a company
owns a copyright or has certain proprietary technology or know-how, it
might estimate what it would have to pay in licence or royalty fees to use the
copyright or technology.
233
AUS Consultants, Intellectual Property: Valuation and Royalty Rates, 9th Annual Institute,
Cyberspace Licensing in the Electronic Age (Glasser Legal Works, 1998).
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(d) Income Method

The income method is based on the present value of the expected
income to be earned from the intangible asset234. The Income Method is
similar to the Market Method, except that it is based on the income actually
earned by the intangible. According to this method net income earned by
the asset is capitalized using an appropriate discount rate235. Sometimes
there is no way of directly determining the income earned by the intangible.
This is often the case in goodwill, know-how, trademarks and trade names.
A common approach to deal with this problem is to capitalize or discount
excess earnings. This approach capitalizes the excess of a companys actual
earnings over the earnings that would be expected from the companys
identified assets236.
In a technology company, proprietary technology is transitory. Goodwill
in technology companies tends to be more enduring. However, Goodwill
cannot be said to be perpetual in technology companies. Bad products
can prove detrimental to the goodwill of a company. Many Internet-based
companies have goodwill and name recognition and these have been
234
235
236
For a complete discussion of this method of valuation see John A. Bodanski.

E.g. A Company owns the copyright in certain web-based content. The company
estimates gross sales from this asset of Rs. 1,00,000/- per annum for three years. The
total cost of producing and selling this product is 35% and the Income Tax rate is
40%. The percentage of net after-tax income is 39%. The company chooses an aftertax rate of 10% to discount the income. Using a 10% discount rate, the present value
of Rs. 39,000/- per annum for three years is Rs. 96,987/-. For more see, Weiss on
Determining Rights in Intangibles and their valuation, The Books: Minimizing Risk in
Information Technology M &A Through due Diligence, J. Intl Tax (July 1999).
Taking the same example as before, if the Company has fixed assets and working
capital of Rs.5,00,000/, then based on published industry averages, these assets
should result in after-tax income of 15% or Rs.75,000/- per annum. The corporations
actual after-tax income is Rs.1,25,000/-. The reason for this is that the company has
proprietary technology that allows it to earn a premium of its products. The company
discounts this Rs.50,000/- in excess earnings at an after-tax rate of 10%, for a fiveyear period, resulting in a Rs.1,89,539/- value for the proprietary technology. For a
detailed discussion see, Electronic Commerce: Taxation and Planning, by David E.
Hardesty, (Warren, Gorham & Lamont) (2000), Chapter on Website Valuation.
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given high values in the marketplace, as evidenced by the stock prices of

some of the companies237. It is unclear however as to how long these
values will last.
Goodwill is a combination of customer goodwill and name or brand
recognition. Internet-based companies like Yahoo! and Amazon.com have
tremendous name recognition, resulting in higher advertisement prices and
increased sales respectively. However the truth of the matter is that Internet
has no history. There is no way to tell what new technology will come along
to destroy the goodwill built up by companies such as Yahoo! or
Amazon.com. Accordingly, since the capitalization method assumes a
perpetual income stream, the use of such a method may not be appropriate
for Internet Companies.
Another problem is when there no net income or expectation of the
same in the near future in case of new E-Commerce Companies. It is
unlikely that a company may be appraised on the basis of the intangibles
incorporated into the web page that the company uses or intends to use
to generate business, more so when the value of these intangibles is based
on gross sales.
(e) Residual Method of Determining Goodwill

A final variation of the income method of valuation and the method
mandated for tax purposes is the residual method238. This method subtracts
from the total value of a business, the value the identified business assets.
The remainder is the value of the subject intangible. This method is usually
used to determine the value of goodwill. The key to the residual method of
valuation is the determination of the overall business value. Valuation of the
overall business is done using several methods. Value of the overall business
can be done using the market data. Market data includes the value of
237
238
Some examples of such companies being, Apple, Microsoft, Oracle, Compaq, Intel
etc.
This reflects the US Tax systems standpoint as regards valuation of Goodwill goes.
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similar businesses based on actual transactions. Businesses can also be

valued based on discounted earnings239.
(f) Evaluation of Methods

Of the three methods detailed above, each may be appropriate to a
peculiar situation. So the facts of the case dictate as to which may be an
appropriate method of valuation of the intangible involved therein. For
instance when there is no market information and where the intangible
does not generate income the cost of the internally produced intangible
may be the best indicator as to the value of the intangible. Using cost as a
value measure is most appropriate where it is possible to identify the cost to
produce an asset. However, some intangibles are developed over a period
of time through a process of trial and error. In such cases cost of developing
such an asset may not always be easy to determine. Then the market
approach may the best to determine the value in such a case. But if the
intangible products are not fungible assets and finding comparables is not
easy, then the income method is the best in this case. But this method also
has its failings. The income approach works well for assets that generate
income. It does not work for assets used internally. For instance, know-how
is a valuable asset, but it seldom generates royalties. If sold at all, knowhow may be the subject of a one-time payment.
(g) Court Cases involving Valuation of Intangibles

The issue of Web-based Companies is yet to be addressed by the Courts,
but the US Supreme Court has examined the issue of Valuation of Intangibles
in other contexts in certain cases.
239
E.g. NetCo has an overall market value of $10 million based on the market data
available for similar corporations. The appraised value of its identified Assets totals
$12 million and it has Liabilities of $4 million. The residual value assigned is $2
million ($10 million - $12 million - $4 million). This value is assigned to various
assets the company was to able to value, including Goodwill, Trade names, Proprietary
Technology and Know-how etc. For more see, Chapter on Website Valuation, Electronic
Commerce: Taxation and Planning, Ibid.
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In Provitola vs. Commissioner240 , the Tax Court addressed the question

of valuing software. Because software is such a big part of the value of a
web-based business, this case has direct relevance. In this case, the court
evaluated the relative merits of the income approach versus the cost
approach. In this case, the taxpayer, who developed software in-house,
attempted to value the software (for purposes of a charitable contribution)
based on the cost to produce the software. The cost method used by the
taxpayer resulted in a $650,000/- value of the software. However, because
the software was developed for sale, an income approach was found by the
court to be more appropriate. The income method in this case resulted in a
value of $0/-. The Court elected to use the income approach.
Patents are a key element in e-commerce; patented technology such
as transaction processing systems can mean the success or failure of a webbased business. A case that illustrates many of the approaches taken to
patent valuation is Sandvik vs. Commissioner241. In this case experts appraised
the value of patents by a discounting method basing it on the future expected
income from the patents. The factors of importance in the appraisal of the
patents included:
1)
The patent royalties that were expected to be received from other

companies
2)
The royalty cost avoided by Sandvik
3)
The expected useful life of the patent
4)
The appropriate discount rate
5)
The market for the patented product
6)
Other competing products
7)
Prior sales of the patented product
8)
The uniqueness of the patent
9)
The size of the royalty
240
241
Provitola vs. Commissioner, 1990 RIA TC Memo.

Sandvik vs. Commr, P-H TC Memo, (1986).
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10) Use of an increasing discount versus a constant discount rate to account

for additional risk the farther in the future the income was projected
11) Share of the market that the companys product could command
12) Future obsolescence of the product or technology
13) The validity of the patent
14) The effect of litigation concerning the validity of the patent
In this case the Tax court considered the testimony of several expert
appraisers. The Court used its own judgment in determining how much
weight to give each appraisal. The Courts valuation was based on the
preponderance of the evidence.
In Nestle Holdings242 , the Court considered the appropriate method for
valuing the transfer of trademarks. In this case, a corporation sold intangible
assets, including trademarks, trade names, patents and technology to its parent.
The court considered the propriety of using the relief-from-royalty (RFR)243
method to value the transfer of trademarks in that case. The Court determined
that the RFR method is not appropriate and instructed the Tax Court to consider
other valuation methods. It found that RFR method was appropriate to
Nestle Holdings Inc. vs. Commr, 152 F3d 83 (2d Cir. 1998).
The RFR method used by the IRS in this case was explained by the Nestle Court as
follows:
Underlying this methodology is the view that the only value a purchaser of a mark
receives is relief from paying a royalty for its use. Using this model, the fair market
value of a trademark is derived by calculating the net present value of the stream of
royalty payments from which the purchaser of a mark is relieved. This stream is
calculated by:
(a) determining if the trademarks are profitable or capable of being licensed,
(b) picking a royalty rate for each trademark, and
(c) multiplying this rate by the estimated revenue stream of the product associated with
the mark.
The Commissioners expert concluded that most of the marks were profitable and that
the range of royalties in the food industry was 0% to 5%. He then assigned royalty
rates to the trademarks and calculated the net present value of the estimated royalty
payments.
242
243
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determine an infringers profit from misuse of a trademark244. However, the

Court determined that where more than the use of a trademark is transferred
a different valuation method must be used. Accordingly, use of the RFR method
is not appropriate in the case of a sale because it is the fair market value of a
trademark, not the cost of its use, that is at issue in such instances.
INFORMATION ITS TRADE AND VALUATION PROBLEMS

Information technology evolves today at a very rapid rate245. Such rapid
evolution means that the range and the sophistication of what people can
do with information technology increases, and further that small organizations
and even individuals have access to quite powerful computing and
communications capabilities. In this environment, it is commonplace to
observe that national governance today is affected by increasingly ubiquitous
international deployments of information technology in areas relating to
public safety, national security, economics, foreign policy, and maintenance
of national cultures and identity246.
5The technologies underlying the information revolution are evolving
at a very rapid rate, with two consequences. One is that both the range and
the sophistication of what people can do with information technology are
increasing dramatically. The second is that the cost per unit of capability is
dropping rapidly247. Consequently, deployments of highly capable (even if
not state-of-the-art) information technology are occurring on a large scale
in nations that have previously been unable to afford them248. In addition,
244
245
246
247
248
See generally 35 USC Sec.284; Pandit Corp. vs. Stahlin Bros. Fibre Works, Inc., 575
F2d 1152 (6th Cir. 1978). Resorting to a royalty model may seem appropriate in such
cases because it estimates fairly the cost of trademark. Also see, Sands, Taylor &
Wood vs. Quaker Oats Co., 34 F3d 1340, (7th Cir. 1994) where it was held that this
model can under-compensate even the victims of infringement.
Muscovitch. Zak, Taxation of Internet Commerce, Firstmonday, at http://
www.firstmonday.dk/issues/issue2_10/muscovitch.html
See, http://www.indiainformer.com/browse/news-bs/date/bsd01700.htm
See, http://www.economictimes.com/270600/27poli06.htm
See, http://www.indiacybercart.com/cyber98.html
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dropping costs mean that small organizations and even individuals have
access to quite powerful computing and communications capabilities249.
Computational power at low cost gives a much wider range of actors
the same capacity to analyze information in real time as governments have250.
Databases become more accessible and useful when powerful computerbased search tools can be employed with them251; indeed, computationally
transformed databases add sufficient value to the original data that such
databases are often assigned intellectual property rights.
Communications technologies are of special concern because they
enable trans-border as well as domestic information exchange252. The wider
proliferation of highly capable communications technology means that large
volumes of information cross national borders much more easily and at
much faster rates than in the past253. Clearly, the Internet is a major element
in this new communication environment, but it is only one of many. Other
networks (private intranets and single purpose networks) are proliferating
and are likely to continue to do so because of the added reliability, availability
and security they provide. Furthermore, a number of other technologieswired and cellular telephony, facsimile, direct broadcast satellites, to name
a few-supplement Internet-like communications, with various kinds of bidirectional and uni-directional information flows254.
Society has entered an information age. This phrase has different
connotations for different aspects of how we do business and how we function
socially255. Foremost among these is the simple fact that information, how it
249
250
251
252
253
254
255
See, http://www.ficci.com/times/up/html
International Taxes: Internet use for Tax avoidance under Investigation, Daily Tax
Report, (Taxation, Budget and Accounting), February 16, 1996.
Arnold/McIntyre, International Tax Primer, Kluwer Law International, Den Haag, 1995,
page 21. Also See Digicash, a brand of electronic currency issued by First Virtual
(www.digicash.com).
Ibid.
Ibid.
Ibid.
Burnstein. Matthew R., Conflicts on the Net: Choice of Law in Transnational
Cyberspace, Vanderbilt Journal of Transnational Law, January 1996, page 42
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is processed and how it is used, has increasing value and influence in our
economy. Information is an asset at the forefront of current technological
development and commercial investment. It will remain there for the
foreseeable future.
Law of Taxation and Intellectual property law should jointly foster, rather
than impede, investment in information and technological assets256. To do
this, there must be a coherent and stable body of law applicable to
information asset financing and taxation. Current law falls far short of this
requirement. This Chapter begins to define how and where coordination
can be achieved in the laws governing intellectual property and tax. It also
identifies current issues important to the structure of contemporary credit
financing of information assets257.
Commercial and intellectual activity in technological areas is intense
and cannot continue to be burdened by uncoordinated and uncertain law258.
Therefore, reconciling commercial finance law with intellectual property law
is not an elective question. We have no choice. The integration of law and
practice in these two fields will occur in one form or another. The issue
today is when this integration will occur and according to what policy themes.
It is proposed that the proper goals in information asset financing law are:
(1)
To provide clearly articulated rules around which transactions can be

planned, and
(2)
To establish a system that minimizes the costs and limits the risks in
creating and maintaining interests in intellectual property assets259.
256
257
258
259
Takach, Synopsis of presentation: The Internet and Online Services: Exploring the
Legal Implications of Doing Business Electronically, Quicklaw, Law/Net News, DB
LNTC, page 1.
Secured Financing And Information Property Rights, Raymond T. Nimmer, Patricia A.
Krauthaus, Copyright 1988 by the High Technology Law Journal; Raymond T. Nimmer
and Patricia A. Krauthaus
Murphy . M., Cooling the Net Hype, Wired, Sept. 1996, at 86, Companies selling
information over the Internet can call any place home, and the savvy ones are choosing
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THE INDIAN POSITION

The real property security law is substantially covered by legislation.
Under Indian Law, the law recognised immovable property, moveable
property in corporate property, and intellectual property. The law relating to
immovable mortgages and charges is found in the provision of the Transfer
of Property Act, 1882, (hereinafter TP Act) the provisions of Registration
Act 1908, and the provisions of Code of Civil Procedure 1908. The property
law in India relating to security was developed in over time when and modern
day banking was not in view. The TP Act regulates and deals with transfer of
property inter vivos rather than transfer by operation of law. It does not deal
with the law of succession nor with Government grants. The TP Act is not
exhaustive and only consolidates the law. Consequently, the Courts in exercise
of their jurisdiction as courts of equity do lay down principles, not inconsistent
with the TP Act. It is in this respect that the Indian Courts are different from
those in England. In India there are no separate courts of equity (as in
England) and are both courts of law and equity. Accordingly, on some of
the important concepts, where equitable doctrines apply, Indian courts have
taken a different view. Generally, the TP Act deals with subjects such as
essentials of a valid transfer, doctrine of notice, special types of transfer, law
relating to priorities, sales, mortgages, lease, exchanges and gifts. The law
relating to assignment of actionable claims is also of the TP Act.
The system of ownership rights in respect of immovable law is reasonably
states and certain. There are separate laws for agricultural lands and land
ceiling laws and land reform acts by each State which impose ceilings on
land holding and use of land holding. When industrial user is to be ensured
conversion of agricultural land to non-agricultural land is required and the
land rent as an annual rental value or ground rent changes. Consolidation
of holdings and conversion of ribbon rights for industrial purposes requires
sanction from the Collector or the authority designated under local laws.
The system of land ownership and rights is sufficiently developed to deal
with the security lending on land rights. Provisions for lessors, as state
authorities giving consent to the lessees lenders for creating mortgage over
leasehold properties and for step-in rights are will known in India.
In relation to movable property and incorporeal or intangible assets
and intellectual property the law in India is equally well developed. The
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filing requirements for registering a charge in relation to such property is

different than that in relation to immovable property. There are separate
authorities constituted under the Trade Marks Act, the Copy Right Act and
the Patents Act which would be relevant for securing an interest in intellectual
property. Goodwill as an intangible asset and non-compete rights can also
be charged by assigning these in favour of the security agent acting on
behalf of the lenders/ the lenders under either a deed of assignment or a
hypothecation. Documented rights are treated as movable property and
are capable of being charged by a floating charge under hypothecation.
The type of security and mechanisms for taking over assets of a corporate
borrower are described as under:
(a) Security over real property
The Transfer of Property Act of 1892, governs all transactions involving
the transfer of immovable, movable, tangible and intangible properties in
India. There are various modes of transfers which are covered by the Act260.
The most common form of security over real property as against any loan
would be mortgage261.
jurisdictions with low or no taxes, financial privacy, governmental stability, and decent
communications systems. Also see L. Eaton, Wall Street Without Walls, N. Y. Times,
Nov. 11, 1996, at A1; L. Eaton, Initial Public Offerings, Coming Your Way over the
Internet, N.Y. Times, Oct. 23, 1996, at D10.
260
Viz., Mortgages, Pledges, Liens, Hypothecation, etc.
261
Under the Indian Transfer of Property Act, 1982 the term mortgage is defined under
Section 58(a) as follows:
A mortgage is a transfer of interest in specific immovable property for the purpose of
securing the payment of money advanced or to be advanced by way of loan, an
existing or future debt or the performance of an engagement which may given rise to
a pecuniary liability.
Forms of a mortgage recognised in India are(1) Simple mortgage
(2) Mortgage by conditional sale
(3) Usufructuary mortgage
(4) English mortgage
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Security in respect of hired assets

Hiring of assets, as a form of asset finance has manifested itself basically
in the form of equipment leases and hire purchase contracts, both being
forms of bailment262. Despite stiff levies of sales tax, and recently, even on
stamp duty for leases of movable property, these instrument remains popular
particularly since it provides almost the entire finance for the asset. Subject
to furnishing of security deposit or margin payments. The Hire Purchase Act,
1972 was enacted, but an account of vociferous objection by the transport
lobby and others is not notified till date, (though there are indication that
the same may be brought into effect shortly)263.
With flourishing hire purchase and leasing finance activity, leasing and
hire purchase companies themselves are significant borrowers from banks
and financial institutions264. The nature of security which can be given by a
leasing company (a borrower to the bank/ financial institution) has several
problems attached to it. Whilst the leasing company is the legal owner of
the asset, it does not have possession and the asset is subject to the terms of
(5) Mortgage by deposit of title deeds (Equitable mortgage)

(6) Anomalous mortgage.
Property law attaches different rights and liabilities in each of the six cases
262
Bailment of Goods is governed by the Indian Contracts Act, 1872 u/s 148, Bailment
is the delivery of goods by one person to another for some purpose, upon a contract
that they shall, when the purpose is accomplished, be returned or shall be otherwise
be disposed of according to the directions of the person delivering them. The person
delivering the goods is called the bailor. The person to whom they are delivered is
called the bailee.
263
The law relating to hire purchase and equipment leases continues to be a branch of
law of bailment, (part of the law of contract). There are obvious practical problems
in recovery of lease rentals and for resuming possession of leased property in the
event of the transaction becoming a default case. Except assets such as motor
vehicles or other stand-alone items like computers, typewriters, etc., industrial
equipment leases in relation to plant and machinery or other such items are most
problematic for recovery of physical possession as are inextricably linked with the
rest of the factory, and frequently also are special purpose assets, not easily saleable
nor reusable by other lessees or hires.
264
See, http://www.economictimes.com/270600/27poli06.htm.
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the hire purchase /lease agreement and therefore to rights of third parties
(possessory rights)265 .
Security for the Lenders of the Lessor Company in respect of such
transactions have usually been structured as a hypothecation of the underlying
tangible assets owned by the leasing company (subject to the lease/hire
purchase agreement), together with a separate hypothecation of the
receivables on the lease/ hire purchase contracts, such security may either
be taken by the bank directly or by trustees acting on behalf of the bank or
the lenders particularly as this offers some advantage in relation to stamp
duty in some state266. The enforceability and recoverability of the banks
advances from such assets, and the two-fold security on the underlying
assets and the receivables, has not adequately tested and there are no
major judicial pronouncement and a number of practical problems could
arise. In the recent securities scam, a few prominent leasing and financial
services companies have become insolvent and their various properties
attached under special legislations introduced on that behalf as they had
traded in securities with notified persons. The effect of the transactions of
security between the lender and the lessees/ hirers, are pending consideration
and judicial determination in recovers proceedings where a number of highly
complex legal issues are to be determined.
The Companies Act, which has also prescribed filing particulars of a
company charge proceed on the doctrine of notice, as such charges are
subject to public inspection, and constitute proof of creation of the charge
against the Official Liquidator or receiver.
265
266
The leasing company has documented covenants regarding actual control in respect
of the location of the assets but since the asset is moveable it may frequently be
mobile on a continuing basis without adequate reporting to the Lessor.
Under the Constitution of India, the power to legislate relation to stamp duty is distributed
between the Union and the State Governments. The Indian Stamp Act, 1899 is the
Central Legislation, which applies all over India, and on certain types of documents,
with local amendments. Each state has also enacted its own laws. The taxable event
or subject is the execution of the instrument and not the transaction. There is no
residual entry, in any of this legislation and therefore a document for which no rate of
duty is prescribed is not stampable.
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In so far as charge or security interests created properly believed to

be movable, but in fact immovable in nature, non registration of documents
can be fatal to the enforceability of the security transactions267. Certain
provisions of the General Clauses Act, 1963, also contain important
definitional matters relating to description of movable and immovable
properties and to that extent need to be read with these legislations.
If so far as transaction relating to lending by bank and financial institutions
are concerned, the compulsorily registrable nature of certain types of
mortgages and creation of security interests, is relevant. Moreover, priorities
of different mortgagees and security, interest are also regulated by the Act,
based on registrability and time of registration268.
When a corporate borrower is in financial difficulty and a secured debt
has become due, the secured creditor through its monitoring division normally
invites the corporate borrower to propose a mode by which the accounts
can be regularized and the delays in payment, or non-performance of the
contractual obligations in relation to the financing agreements or the security
documents in relation to the security are performed or regularized269 .
This would result in a novation of the schedule of payments or some of
the terms and conditions of the financing agreements or the security
agreements. It is also likely that the interest could be funded as a funded
debt with a zero coupon rate, compound interest waived, penal interest
267
268
269
The Indian Registration Act, 1908 provides both for compulsory and optional
registration. Compulsory registration operates as public notice. Compulsory registration
essentially pertains to interests in immovable properties and documents which are
compulsorily registrable, which if not so registered do not affect rights in the immovable
property and are inoperative. The Registration Act concerns documents and not the
transaction. The Indian Registration Act concerns registration of a document and not
the transaction. The Indian Registration Act does not deal with registration of company
charges which is dealt with under the Companies Act. The Registration Act provides
for a method of public registration of documents so as to inform the public regarding
legal rights and obligations arising and affecting particular properties and to perpetuate
documents which may afterwards be of legal importance, and also to prevent fraud
For further details see The Indian Registration Act, 1908. Ibid.
See, http://www.corporateindia.com/debtfinancing/articles.html
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waived and rescheduling of principle and interest done in a rearranged

financing agreement270.
Refinancing of secured lenders occurs only when one of the secured
lenders in a consortium does not agree to continue with the lending and
seeks to move out of the consortium271. Refinancing, is rarely done by the
same set of lenders unless there is an enhanced facility or an augmented
project which is being done by way of balancing equipment being added or
a new unit being added to achieve technical parameters.
In cases which are covered by Schedule-I of the Industries Development
and Regulation Act, 1951, the Board of Industrial and Financial
Reconstruction appoints an operating agency from one of the public financial
institutions or the senior nationalized banks, to prepare a scheme of novation
or arrangement whereby the banks could reschedule their debt or refinance
the corporate borrower instead of enforcing their charges or liquidating the
company272.
The normal recovery procedures are available under the Code of Civil
Procedure for enforcement of the contractual rights under a mortgage,
hypothecation, pledge, lien, debenture trust deed etc273. For certain notified
banks and financial institutions, the Recovery of Debts Due to Banks and
Financial Institutions Act of 1993 is a summary remedy available. There are
public money recovery acts or State Financial Corporation Acts which are
recoursed by the State Financial Corporations and banks for summary
procedures for recovery of money claims secured by the corporate borrower.
The various remedies available to security holders to enforce their
securities under the Indian law are as follows.
1.
270
271
272
273
274
Private Sale274.
Ibid.
See, http://www.ficci.com/idra/articles.htm
See, http://www.zeenext.com/legal/laws/tp/articles/liquidation.html
For further details see Indian Civil Procedure Code.
The right of private sale though a very limited remedy, is conferred on the mortgagee
under certain circumstances mentioned in Section 69 of the Transfer of Property Act.
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2.
Private Receiver275
3.
Sale by Pledge276
275
276
The remedy is unavailable if any of the parties is a Hindu, Mohammedan or Buddhist

or a member of any other race of a prescribed tribe. Further, the mortgaged property
should be in a notified area and it is necessary for the mortgage deed to confer a
power of sale. In any case, a notice to recall or demand of the outstanding is required.
A mandatory statutory notice period of three months has also to expire before the
power can be validly exercised. These procedures are usually set out in the documents
of loan and security executed between the borrower and the power should usually be
exercised with care so as to obviate any subsequent challenge on the grounds that the
creditor did not act with care, or in breach of the law.
The procedure for the sale of realisation would involve and advertising for or inviting
purchase bids in case of sale by public auction or may be conducted by private treaty
if a suitable buyer is located. In the case of movable properties, the mortgagee creditor
will give delivery of the property and pass title to the same extent that the mortgagor
could do in exercise of such a power of sale. The same is usually adequate for conferring
the ownership on the purchaser. In so far as the sale of immovable properties in
exercise of a right of private sale is concerned, it would be necessary for the mortgagee
to execute a conveyance/ deed of indenture duly stamped/ registered for transferring
title. The mortgagee will give only such covenant in relation to title as the mortgagee
can give including, in respect of mortgagees actions in the meanwhile.
The danger in exercise of this power is that the Defendant could challenge the right of
sale on the ground that the same was improperly exercised and can further claim
damages. Moreover, from a purchasers point of view any Court sale in a mortgage
action offers, (at least as a matter of perception), more certainty as to title and therefore
also fetches the seller (mortgagee) a better price too.
Section 69A of the Transfer of Property Act confers the power of appointing of a
private receiver in an English mortgage. The person who is to be appointed as Receiver
must be named in the mortgage deed, or an appointed as Receiver must be named in
the mortgage deed, or an application needs to be made to the Court for such
appointment. the powers of a private receiver are limited to receiving income of the
mortgaged property generally or in part thereof. A private receiver being an agent of
the mortgagor as such, the mortgagor is liable for the receivers acts and defaults,
unlike in the case of a court receiver who, being an official of the Court, is not an
agent of any of the parties. Nonetheless, the private receiver is technically accountable
to the mortgagee rather then mortgagor. His powers are very limited and he is
considerably disadvantaged by not being in a position to exercise wide powers conferred
on a Court Receiver as prescribed under Order 40, Rule 1 of the CPC.
Under the Indian Contracts Act, 1872 and the Transfer of Property Act, 1882.
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In Indian conditions, lenders themselves appear to be reluctant to resort

to their power to take possession of their collateral without court
intervention277. But the advantages that a Court Receiver enjoys are
numerous278.
The Recovery of Debts due to Banks and Financial Institutions Act
disappoints in as much as it does not even provide for the appointment of a
receiver, nor is there any arrangement for preservation and realization of
the property. There is clearly a need for a provision in the legislation or, for
the separate flotation of a corporation, conferring specialized receivership
services, (much on the lines in Western countries). If such a body is state
sponsored, its shareholding would probably be held by the financial
277
a.
b.
c.
d.
e.
f.
g.
278
a.
b.
c.
d.
e.
f.
In practice, some of the difficulties perceived by the lenders with reference to a

private receiver are as follows:
lack of availability of persons to act as private receivers and fixing their remuneration,
even those which are available are inexperienced,
employee abuse, violence and harassment by labour
possibility of court actions against the lender by defendants contending that the private
receiver has acted in excess of authority.
reluctance of law enforcement agencies such as the police to readily assist the private
receivers in controlling unruly behaviour of taking possession. (Police authorities readily
assist court appointed receiver)
high fee of the receiver.
other co-lenders who may approach a court may obtain a court receiver, who would
then immediately displace the private receiver.
On the other hand a Court Receiver has the advantage of:
Court protection and backing
the appointment is respected by the Borrower and its employees as also by third
parties.
the Court Receiver is an effective tool of a secured creditor when it seeks the appointment
of Receiver, who will hold to the exclusion of official liquidator and remain outside the
winding-up.
greater ability of the Court Receiver to seek police help
interference with the possession of a Court Receiver would be construed as interference
with the possession of the courts since the property is custodian legis.
availability of existing institutions such as the Court Receiver attached to the Bombay
High Court with experienced staff (unlike in the case of private receiver)
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institutions. In such a case conflict of interest would arise since, these

institutions and banks would have cases pending with such bodies.
However there are special remedies available for specific creditors,
whose list is as follows:
a)
State Financial Corporation Act, 1951 (SFC Act)279
b)
The Industrial Reconstruction Bank of India Act, 1984 (now renamed

as Industrial Investment Bank of India)280
279
State Financial Corporation (SFC) have certain special remedies in case their borrower
(being an industrial concern) is in default in repayment of any loan, advanced or
guarantee. Accordingly, the SFC shall have the right to take over the management or
possession of the concern including the right to transfer the secured property by the
lease or sale. This power is exercisable without the intervention of the Court. Under
Section 31 of the SFC Act, if the borrower (an industrial concern) or a guarantor are
in default in respect of any payment obligation towards the SFC then it can apply to
the Court for an order for the sale of the secured property, and for enforcement of the
liability of any surety, for transfer of management of the concern to the SFC and also
for injunctive reliefs restraining the concern from transferring or removing the plant
and machinery. Section 32 of the SFC Act which has to be read conjuctively with
Section 31 there of provides for a summary mode of trial with a show cause notice
procedure being followed and also a hearing. The court is empowered to aggregate
and adjudicate upon the claim in accordance with the provisions of the Civil Procedure
Code. After investigation, the Court may pass appropriate orders the legal effect of
proceedings under Sections 31/32 of the SFC Act has been construed by the Supreme
Court as constituting proceedings for speedy summary recovery but are not suit
proceedings. Accordingly, the power of a court when deciding cases under Section
31/32 of the SFC Act cannot be extended for conferring reliefs in favour of other colenders, as can be done in a mortgage suit. A separate suit by pari passu lenders
requires to be instituted.
The IRBI (Now IIBI) which set up under the IRBI Act (now IIBI Act) with a view to enable
it to function as a principal credit and reconstruction agency for industrial revival, has
been conferred certain special powers. These special powers include the following:Creation of a declaratory charge by operation of law (Section 37 of the IRBI Act;
Power to take over the management or possession of the industrial concern and to
transfer the same by way of lease or sale of the property secured (similar to Section 28
of the SFC Act);
Enforcement of claims by approaching a court under a special petition (section 40
being similar to Sections 31 and 32 of the SFC Act).
280
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c)
Nominee Directors281
A secured creditor does not normally participate in a winding up282.

Under the rules of insolvency it has three rights:1.
A secured creditor can remain outside winding up.
2.
A secured creditor can relinquish its security and participate in the

winding up; or
3.
A secured creditor may value its security and offer the official liquidator
to make payment for such valued security before placing the same in
the hotch-pot and the secured creditor can then prove for the residue
as an unsecured creditor in winding up.
Under Indian law and the Companies Act, workers statutory charge has
also been created whereby the unpaid wages in arrears, also receive a
prorated payment along with secured creditors. They statutorily participate
in the security to the extent of unpaid wages till the date of winding up when
they are discharged by operation of law. The official liquidator represents
their interest in any security claim.
COMPETING SOURCES OF LAW AND THE DEVELOPMENT

OF INFORMATION ASSETS
The development of information assets requires a confluence of creative
work and adequate resources283. Spontaneous development or sudden insight
innovation rarely happens, yet the popular notion that it does often obscures
the effort and resources involved in developing information assets. As a
matter of business policy we cannot afford to continue to let this fallacy
281
282
283
Some special powers are also conferred on some institutions including powers to
appoint nominee directors, on the board of the borrower companies. Statutory DFIs
such as IDBI, IRBI (now IIBI) are conferred such powers by law, whereas other non
statutory DLFs like ICICI, exercise this power as a matter of contract.
It is only such a secured creditor who does not have a valid security or is short of security,
who attempts a winding up of a corporate borrower. Winding up as an option rarely
resorted to by a secured creditor as it normally prefers to remain outside winding up.
See, http://www.beemanagement.com
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diminish the importance of actively encouraging development of intellectual

property284.
The goals of an ideal legal system governing intellectual property should
to be stimulating development of information assets and create an environment
in which the confluence of creative effort and resources is planned for and
implemented285. A legal framework that encourages technological and
information-based investment must reward both the creative party and the
one who supplies the resources to find, make, market, or otherwise exploit
the information. These two parties must be able to understand and manipulate
their relative legal positions and the position of third parties making claims or
seeking access to the product.
In broad outline, intellectual property laws deal with rewarding the creative
party for his or her creatively per se, while commercial finance law deals
primarily with the rights of resource providers. Intellectual property law is
fundamentally designed to reinforce incentives for artistic and scientific
achievement. It balances the rights of the developer against the interests of
others desiring to use the technology. This balance entails defining the exclusive
rights of one party and the means for their enforcement against others286 . In
contrast, credit finance laws distribute financial risks and provide a framework
for conducting transactions that establish the secured partys rights of access
to the debtors property if the debtor fails to voluntarily pay its debts287.
The coordination of these two bodies of law is vital at the product
development stage where, without appropriate levels of financial investment
and support, important advances may be retarded or lost288. Access to financing
is equally important for placing products in commerce and for postdevelopment marketing.
284
285
286
287
288
See P. DRUCKER, INNOVATION AND ENTREPRENEURSHIP (1985) (arguing that

innovation can be approached as a systematic rather than purely fortuitous undertaking).
Ibid.
See, http://www.lexmundi.org/ipr/articles.htm
See, http://www.in.kpmg.com/ecommerce_repo.doc.html
Prest, A.R (1975), Public Finance in Developing Countries, Weidenfield and Nicolson,
London.
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CHAPTER FIVE
INTERNATIONAL TAXATION IN
E-COMMERCE
Understanding International Taxation
Electronic commerce and globalization are, and will
continue to be a challenge to tax collectors throughout the
world. The art of taxation, advised Louis XIV`s treasurer,
Jean Babtiste Colbert, consists in so plucking the goose to
obtain the largest amounts of feathers, with the least possible
amount of hissing. Today, the problem lies not in obtaining
the most feathers but in getting hold of any at all. In fact, the
real problem is getting hold of the goose: ... geese have
gone virtual289.
At the consumer end, E-commerce makes the tracing of
transactions and thus the taxing of goods and services sold
and distributed via the Internet almost impossible. As a result,
state and national governments tax bases are, or are at risk
of, being eroded. Historically, the goods we consumed were
physical and therefore the production, distribution and
consumption of these goods were easily taxable. Physical
goods were produced at a manufacturing plant, shipped off
to wholesalers and boxed on retailers shelves, with the final
consumer walking away with a paid for (and taxed) product.
Tax collection has traditionally been the job of retailers. The
retailer charges the consumer VAT or sales tax and then
remits this to the government.
289
Ibid.
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INTERNATIONAL TAXATION IN E-COMMERCE
(a) The difference between the US and Europe

In the US, it is by and large by accident the mail order companies
local sales tax exemption that electronic distribution might further erode
local sales tax revenues. It is not, however, a concern that is specific to
electronic commerce. In Europe, the growth of global electronic commerce
is questioning the economic integration policy principle pursued so far within
the EU; that is shifting VAT from destination (consumption taxes are levied
where goods or services are consumed) to origin290. In addition the particular
issue of how to levy VAT on services (banking, insurance, telephone, content
providers, etc.), which can be easily avoided because of global access and
footloose location possibilities of such service providers through Internet is
of increasing importance. US suppliers of telecommunications services, for
example, are able to supply long distance telephone services at lower rates
than Europes telecommunication operators can. There may be several
reasons why this is the case, but one reason must be that no VAT (or sales
tax) is paid by their foreign customers.
(b) Policy Responses by Europe and the US on taxation in

the electronic age
In the US, the Clinton Administration proposed making the Internet a
duty free trading zone for all products and services delivered across the
Internet291. It appears that the FCC has also taken this viewpoint. In Europe,
the EC has, to some extent, acknowledged the taxation problems that member
countries currently face. For Telecom and Internet services, at least, they
have amended their supply of services rules. Thus, after 1998 non-EU
suppliers of telecom and Internet services will have to include VAT charges
to their European customers292.
290
291
292
The distination principle requires, the monitoring of cross border goods and services
flows, something which one wants precisely to avoid in an integrated economic area.
Giussani, Bruno, Internet Transmissions Should Remain Duty Free, U.S.Tells World
Body, CyberTimes, New York Times On the Web, February 20, 1998.
EU Committee, Position Paper on the Taxation of Electronic Commerce,
www.eucommitee.be/pop/pop2000/fisc/fisc7.htm
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At the same time, the European Commission has formally rejected the
idea of a bit tax 293. They do so on the basis of the five arguments
summarized below:
1.
The bit tax triggers double taxation - Communications activities

on the Internet are taxed in the same way as communications services
and equipment are. The bit tax would thus lead to double taxation.
3.
A tax on physical transactions is extremely difficult to

implement - Here the term physical transactions refers to bit
throughput as opposed to the actual value of the transaction. The
Commission points out that bits are difficult to count and could be
hidden by encryption. Counting bits, they argue, will tend to cost more
than the revenue raised. They also point out that the bit tax could
create incentives for tax avoidance through, for example, compressing
data or keeping it in analog form. Also, some online goods and
services such as browsing through a virtual bookstore, are not priced
at all. A tax on such goods and services therefore seems unfair.
4.
A bit tax would inevitably produce very inefficient

distortions - Since the Internet offers new forms of goods and
services, at times with implicit quality differences (e.g. updated
information or customised presentation), Internet suppliers will most
likely practice some type of price discrimination. Degrees of
substitutability or demand elasticity may vary considerably, for example
between software CD and distribution on line. Any taxation on the
Internet will induce distortions, but quantity taxes, such as the bit tax,
will induce even larger ones.
5.
Taxation or subsidy and other Internet development

problems? - The main argument here is that Europe is lagging
behind the US in terms of Internet development; for this reason the
prospect of taxation is considered inappropriate. In addition, other
issues, such as security issues, should be addressed first before
considering taxation problems.
293
Ibid.
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Fixed Place vs. Website

Income is taxed on the basis of both the source of the income and the
residence of the person earning that income. Source of income concepts
play a central role in international taxation since the country of source
generally has a right to tax income and residence countries generally avoid
double taxation through either a credit system or an exemption system.
Source of income principles are generally similar worldwide.
Tax Treaties play an important part in developing general rules of
international law which shall be applicable in the area of international
taxation. One of the most important concepts in tax treaties is that of a
permanent establishment. Source countries tend to give up their sourcebased taxing rights over business profits if they are not attributable to a
permanent establishment or fixed base in their jurisdiction. Treaties
generally limit the rate of taxation at source that can be applied to interest,
dividends, and royalties paid to a resident of a treaty partner.
Most countries assert jurisdiction to tax based on principles of both
source and residence. If double taxation is to be avoided, however, one
principle must yield to the other. Therefore, through tax treaties, countries
tend to restrict their source-based taxing rights with respect to foreign
taxpayers in order to exercise more fully their residence-based taxing
rights294. This occurs in a number of ways. The permanent establishment
concept represents a preference for residence-based taxation by setting an
appropriate threshold for source-based taxation of active business income.
By setting a threshold, in most cases it is not necessary to identify the source
of active business income and the income is only subject to tax in the country
of residence. In the case of interest, dividends, and royalties, the income is
still potentially subject to source-based taxation but in many cases is effectively
subject to only residence-based taxation because of a nil rate of withholding.
The country of residence also agrees to take appropriate steps to ameliorate
any possible double taxation resulting from the limited source-based taxation.
294
Leif Swedlow, Note, Three Paradigms for Presence: A Solution for Personal Jurisdiction
on the Internet, 22 Okla. City U. L. Rev. 337 (1997).
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The growth of new communications technologies and electronic

commerce will likely require that principles of residence-based
taxation assume even greater importance 295 . In the world of
cyberspace, it is often difficult, if not impossible, to apply
traditional source concepts to link an item of income with a
specific geographical location. Therefore, source based taxation
could lose its rationale and be rendered obsolete by electronic
commerce. By contrast, almost all taxpayers are resident somewhere. An
individual is almost always a citizen or resident of a given country and all
corporations must be established under the laws of a given jurisdiction.
However, a review of current residency definitions and taxation rules may
be appropriate296.
In situations where traditional source concepts have already been
rendered too difficult to apply effectively, the residence of the taxpayer has
been the most likely means to identify the jurisdiction where the economic
activities that created the income took place, and thus the jurisdiction that
should have the primary right to tax such income.
Taxation of non-resident aliens and foreign corporations.
Non-resident aliens and foreign corporations are generally only subject to
tax on the source principle297. In many cases, it is clear that a foreign person
is engaged in a trade or business but it is not clear whether they are so
engaged the relevant territorial jurisdiction. However, a foreign person not
physically present in the host country who merely solicits orders from within
the host country only through advertising and then sends tangible goods to
the host country in satisfaction of the orders is unlikely to be engaged in a
295
296
297
Internet addresses are logical in that they reveal the identity and nature of the
addressee. There are usually no geographic indicators in an Internet address. For
example, <http:// www.ustreas.gov > identifies the addressee only as the U.S. Treasury
Department, a governmental organization
See id.; John D. Podesta, Unplanned Obsolescence: The Telecommunications Act of
1996 Meets the Internet, 45 DePaul L. Rev. 1093, 1109 (1996); Internet Symposium:
Legal Potholes Along the Information Superhighway, 16 Loy. L.A. Ent. L.J. 574 (1996).
See generally Kathryn L. Moore, State and Local Taxation of Interstate and Foreign
Commerce: The Second Best Solution, 42 Wayne L. Rev. 1425, 1437-41 (1996).
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trade or business in the host country even though such a person is clearly
engaged in a trade or business. If however the foreign person conducts
business through an agent he shall be deemed to be in business in the host
country and therefore liable to tax in that country.
Permanent establishment concept. Tax treaties adopt a different
and generally higher threshold for source basis taxation of active income. A
permanent establishment is a fixed place of business through which the business
of an enterprise is wholly or partly carried on. It has come to be accepted in
international fiscal matters that until an enterprise of one State sets up a
permanent establishment in another State it should not properly be regarded
as participating in the economic life of that other State to such an extent that
it comes within the jurisdiction of that other States taxing rights298.
(i) Tax jurisdiction in the context of electronic commerce.
The concept of trade or business was developed in the context of
conventional types of commerce, which generally are conducted through
identifiable physical locations. Electronic commerce, on the other hand,
may be conducted without regard to national boundaries and may dissolve
the link between an income-producing activity and a specific location299.
From a certain perspective, electronic commerce doesnt seem to occur in
any physical location but instead takes place in the nebulous world of
cyberspace. Persons engaged in electronic commerce could be located
anywhere in the world and their customers will be ignorant of, or indifferent
to, their location. Indeed, this is an important advantage of electronic
commerce in that it gives small businesses the potential to reach customers
all over the world300.
298
299
300
Steven C. Salch & Alvin L. Thomas, II, Taxation of Internet Services and TransactionsA Few FAQS, 34 Houston Lawyer, 33, 34 (1996).
Tracking Internet commerce may be easier and therefore more lucrative than doing
so for mail-order activity. See Daniel J. Langin, First Annual Internet Law Institute, in
The Economics of the Internet: Ins. and Risk Mgmt., Adver. and Other Bus. Models,
Valuation and Tax Issues 1997, 447, 462 (482 PLI Patents, Copyrights, Trademarks,
and Literary Property Course Handbook Series No. G4-4007, 1997). AVP Taxware
has created software that tracks the state in which the consumer is located when
purchases are made through a cybermall. See Internet Symposium, supra note 36,
at 575-76.
See Samuel Slutsky, Trend to Internet Commerce Will Lead to Cyberspace Taxation,
Financial Post, Aug. 1997, at 13, available in 1997 WL 4101498.
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Another example is the treatment of foreign persons who maintain or

utilize a computer server in the host country. Computer servers can be located
anywhere in the world and their users are indifferent to their location. It is
possible that such a server, or similar equipment, is not a sufficiently significant
element in the creation of certain types of income to be taken into account
for purposes of determining whether a trade or business based in the host
country exists301 . It is also possible that if the existence of a host-countrybased server is taken into account for this purpose, foreign persons will
simply utilize servers located outside its territorial jurisdiction since the servers
location is irrelevant.
Telecommunications or computer equipment owned or used by a foreign
person engaged in electronic commerce raises a question as to whether
this equipment could constitute a fixed place of business of the foreign
person in the host country, taking into account that there would not necessarily
be any employees present302. It will be necessary to consider whether a
foreign person who owns or utilizes a computer server located in the host
country should be deemed to have a permanent establishment there. Again,
it is useful to review the treatment of existing, traditional commercial activities
and consider whether any existing exclusions from permanent establishment
treatment should apply in this situation. For example, a permanent
establishment generally does not include the use of facilities solely for the
purpose of storage, display, or delivery of goods or merchandise. . . . For
a business which sells information instead of goods, a computer server
might be considered the equivalent of a warehouse303. Examination and
interpretation of the permanent establishment concept in the context of
electronic commerce may well result in an extension of the policies and the
resulting exceptions to electronic commerce.
301
302
303
Todd H. Flaming, The Rules of Cyberspace: Information Law in a New Jurisdiction, 85

Ill. B.J. 174 (1997).
See generally Mark M. Maloney, Specific Personal Jurisdiction and the Arise From or
Relate to Requirements . . . What Does it Mean?, 50 WASH. & LEE L. REV. 1265
(1993).
David R. Johnson & David Post, Law and Borders-The Rise of Law in Cyberspace, 48
STAN. L. REV. 1367, 1370 (1996)).
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(ii) Trade or business or permanent establishment by imputation:

telecommunications and Internet service providers.
A host country based trade or business or permanent establishment
can also arise by imputation from an agents activities304 . Agency issues
arise from the relationship between a foreign person and a computer
online service or telecommunications service provider. Even if a person
engaged in electronic commerce does not maintain a computer server
or similar equipment in the host country, issues of host-country-based
trade or business or permanent establishment would also arise. In most
cases, information will be transmitted to the customers computer through
telephone lines. For example, a foreign person who operated a
computerized research service might contract with a host-country
telecommunications company to provide local dial access service so
that the foreign persons host-country customers can access its
computerized databases. Alternatively, the host-country customers might
access the foreign information sellers Web site using a host-countrybased Internet service provider. Presumably, the foreign persons
relationship with a local telecommunications service provider is such
that the telecommunications service provider would not even be
considered an agent of the foreign person. Even if an agency relationship
were deemed to exist, the service provider would likely be considered an
independent agent, with the result that a host-country trade or business
or permanent establishment would not arise. Nevertheless, it may be
necessary to further clarify the applicable principles in this area and
seek to create an international consensus on this issue.
304
See E. Parker Brown, II, State Taxation of Telecommunications: The New York Experience,
47 Syracuse L. Rev. 987, 1019 (1997); see also Carl Middlehurst et al., 17th Annual
Institute on Computer Law: The Evolving Law of the Internet-Commerce, Free Speech,
Security, Obsenity[sic] and Entertainment, in Collection of Articles by Carl Middlehurst
of Sun Microsystems, Inc. 1997, at 549, 552 (471 PLI Patents, Copyrights, Trademarks,
and Literary Property Course Handbook Series No. G4-3987, 1997).
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(iii) Taxation of telecommunications service providers.

The principles used to determine whether a person is engaged in a
host-country trade or business or maintains a host-country permanent
establishment might differ if the person is primarily engaged in providing
telecommunications services, in contrast to a business which is primarily
engaged in selling goods or services for whom the telecommunications
services are merely incidental305. A distinction is generally recognized between
activities that contribute to the productivity of the enterprise and activities
that involve the actual realization of profits. In the case of a foreign
telecommunications service provider, the operation of a computer server in
the host-country or the sale of computing services and Internet access to
host-country and foreign customers is clearly integral to the realization of its
profits, in contrast to the case of a foreign person who is primarily engaged
in selling data which is stored on a host-country-based server.
Permanent Establishments
The concept of Permanent Establishment has evolved with the necessity
of establishing a link with incomes earned outside the taxing jurisdictions of
the home countries by assessees who are liable to home country tax as per
status jurisdiction. It is the amalgamation of the source and the status
principles. The endeavours of the UN Model for Double taxation are all for
the broad basis for permanent establishments in the host countries. On the
other hand the OECD and US Models try to minimize the effect of this
principle. Nevertheless this remains one of the guiding principles for
establishing tax liability for Corporates.
Under the tax treaties306 based on the OECD Model Tax convention, an
enterprise providing services abroad is taxable in that country where it
conducts business only if it has PE there. According to the article 5 Para 1 of
305
306
OECD Model Tax Convention (2000), The Application of The Permanent Establishment
Definitions In The Context of Electronic Commerce: Proposed clarification of the
Commentary on Article 5 of The OECD Model Tax Convention, Revised Draft for
Comments, 3 March 2000. <http://www.oecd.org>.
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OECD MC, a PE presupposes the fixed place of business, which may

include premises, facilities or installations. A permanent establishment is
generally defined as a fixed place of business, including an office, a branch,
a factory or a similar location. This definition excludes places of business
that are mobile. And the definition is similar in many respects to the definition
of a trade or business. However, a taxpayers activities often must rise at
least slightly above the trade or business standard in order to result in a
permanent establishment.
There are three tests in determining whether a permanent
establishment307 exists:
The first test, the assets test, is an objective test, which focuses on the
tangible and intangible assets of the activity. The difficulties with E-commerce
activities under the asset test are that E-commerce involves non-physical
elements and E-commerce transactions are carried out electronically. One
question is whether having a server in a country is enough to establish a
permanent establishment. Warehouse and storage facilities are not
considered permanent establishments due to their passive nature.
Thus, by analogy, many believe that a server should not qualify as a
permanent establishment. Many also feel that treating a server, as a
permanent establishment is inappropriate because the server is merely
incidental to the underlying transaction.
Agency Test: A permanent establishment will result if a non-resident
employs a dependent agent having contracting ability in the taxing
jurisdiction. Some argue that agreements and transactions with Internet
service providers create a dependent agency situation. However, because
the services performed by the Internet service provider do not include
the contractual authority that is normally associated with a dependent
agency, the Treasury Paper concludes otherwise. Article 5(5) and 5(6) of
OECD MC.
307
Calvert, Walter R (2000), Taxation of Internet Commerce. <http://www.venable.com>

(path: Internet/tax.html#international)
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Activities Test: This is perhaps the most widely applied test. Under the
activities test, certain activities result in a permanent establishment while
others clearly will not. The physical presence of a server might also have an
impact under the activities test. Many feel; as discussed above, that the
presence of a server simply acts like a warehouse storing information and
processing orders. Others, however, believe that the presence of a server
may constitute a permanent establishment.
The Treasury Paper308 cites the example of a foreign citizen clicking on
an US retail website and buying a product from that site. The Treasury Paper
treats the sale to the foreign person via the Internet the same as a sale to a
foreign customer via a phone call. In other words, the paper will look to
substance of the transaction instead of method of consummating the
transaction. E-commerce will not result in a permanent establishment in
most circumstances under the analysis of the Treasury Paper because the Ecommerce place of business is likely to be too mobile to be sufficiently
fixed. Moreover, based on the warehouse and storage analogy, treating
the E-commerce place of business, as a permanent establishment is not
appropriate. Many also believe that the mere solicitation of customers in
the US by electronic means is not enough to constitute an US trade or
business.
Double Taxation Models for Double Taxation Treaties

The issue of Double Taxation arises with the growth of commerce and
the movement of goods, services and manpower across the national
boundaries. Hence many instances arise where the income belongs to one
national domain while the earner belongs to another. The conflicting claims
to that income is what results in Double Taxation. If a country wants to
improve its economic standing in the international scene, then interstate
commerce is what is to be encouraged, and this will occur only when the tax
regimes are flexible enough to accommodate the problems of foreign
308
1996 Treasury Paper. November 1998 Selected Tax Policy Implications of Global
Electronic Commerce, A Discussion Paper. United States Treasury Department Office
of Tax Policy. <http://www.ustreas.gov/>
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incomes and evolve a system which is in the best interests of the taxpayer.
Otherwise if interstate commerce proves to be burdensome to the taxpayer,
then other undesirable repercussions may result in the form of tax-avoidance
and evasion, which is but a loss to the exchequer.
Hence at the international level various efforts have been at work to
evolve a tax structure, which is in the interest of interstate commerce and its
just taxation. The various models of double taxation agreements are but an
expression of these efforts.
THE EVOLUTION OF DOUBLE TAXATION TREATIES

Avoidance can be achieved either unilaterally or bilaterally. Double
Taxation can be avoided unilaterally if one of the states involved withdraws
its tax claim. This practice is developed under Anglo-American Law whereby
the state of residence if it is not the state of source allows
1)
A tax credit for the tax levied in the state of source upto an amount
equivalent to its own tax charge309.
2)
Lumpsum to be deducted instead of exact equivalent of the foreign

tax paid310.
3)
Allowance of exemptions311.
Then bilateral treaties and agreements for avoidance of double taxation

came into vogue by the end of 19th century. Though to start with only federally
related or closely allied states were involved, following the World War 1 an
extensive treaty network developed in Central Europe312. The League of
Nations contributed substantially to an assimilation of existing bilateral treaties
309
310
311
312
U.S. Law pursuant to Sec. 901 to 908 IRC; U.K. Law pursuant to ICTA 1988, Sec.790;
German Law pursuant to Sec.34c Einkommensteuergesetz (Income Tax Law)
German Law pursuant to Sec.26 Korperschaftsteuergesetz (Corporate Tax Law)
Switzerland exempts income from permanent establishments and real property abroad;
Netherlands and Australia exempt foreign source incomes generally if they are taxed
in the country of source.
Germany entered into its first Double Taxation Treaty with Italy I 1925; Britain with
Ireland in 1922/28; US with France in 1932; US with Canada in 1936; US with
Sweden in 1939 etc.
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and to the development of Uniform Model Treaties. The efforts of the OECD
to develop a system of avoidance of Double Taxation picked up from where
the League had left off. The OECD Committee on Fiscal Affairs (1956) drafted
a complete model treaty and appended an official commentary to it in 1963.
The OECD Council recommended member states to adopt the model treaty
format in Double Taxation Agreements signed by them. With the passage of
time a number of changes were made to the OECD MC, finally in 1977 a
Revised Version of the Model Treaty and commentary were published.
The opposing model shaped more according to the special interests of
developing countries and was adopted in 1971 by the member states of the
Andean Group, viz., Bolivia, Chile, Ecuador, Columbia, Peru and Venezuela.
The UN published another model treaty intended to serve the interests
of the developing countries in 1980. This treaty was the culmination of the
efforts of the ECOSOC over a period of 10 years. Its structure corresponds
to the OECD MC but its content diverges in certain important aspects.
THE OECD MODEL FOR DOUBLE TAXATION IN BRIEF

The Organization for European Economic Cooperation (OEEC) worked
right from the beginning for a convention for the avoidance of Double
Taxation with respect to taxes on income and capital. The work of the OEEC
lasted from 1948 to 1961 in this direction after which it was taken over by
the Organization for Economic Cooperation and Development (OECD).
The work of the organization consisted mainly of bringing out model drafts,
which were followed by its members in signing double taxation agreements
with each other and also third parties. The OECDs membership was
characterized as one of the developed countries. The first of such model
draft treaties prepared by the OECD was in 1963, which was later revised
in 1977. The latest of these revisions occurred in 1992 after which the
OECD model draft treaty stands today.
The important features of the OECD Model can be summed up as,
those benefiting the developed world rather than the developing313. The
313
Consider for example A.1 of the Model Convention, wherein the United States reserves
the right to tax its citizens and residents without regard to the Convention. In all other
circumstances the Convention provides that it shall be applied only if the parties are
residents of the Contracting Parties. See Convention for further reference.
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Convention applies to all taxes on income and capital irrespective of the

authority on behalf of which the taxes are imposed. It applies to residents of
the contracting states. The kinds of taxes covered by the Convention are
taxes on income, taxes on capital, taxes on gains from alienation of movable
or immovable property, taxes on total amount of wages or salaries, taxes
on capital appreciation. There are two methods of double taxation relief
provided under the Convention, exemption method and credit method. The
OECD Model gives primacy to the residence principle. The Convention
while committing to the principle of double taxation avoidance ensures that
the tax bases of the contracting parties are not substantially reduced, by
commitments on an international plane.
THE UN MODEL FOR DOUBLE TAXATION IN BRIEF

As opposed to the OECD model the UN model on double taxation
avoidance agreements developed. In 1968 the UN Secretary General
set up an adhoc group of experts on the tax treaties between the
developed and developing countries. The experts hailed mostly from the
developing world, namely Latin America, Africa and Southeast Asia and
the Far East, though they were experts from UK and US also. All these
experts worked in their personal capacity and not as the representatives
of their respective countries.
This group of experts drafted the UN Model Convention on Double
Taxation Avoidance and Relief. This model convention was published in
1980. This model has so to say come to be used predominantly in the
tax treaties between the developed and the developing countries. All the
tax agreements that India has concluded in the recent past have been
based on this model with suitable modifications made for the Indian
conditions.
The following can be said to the main features of the UN model. This
model represents a compromise between the source and the residence
principle. It gives more weightage to the source principle than the OECD
model. Its provisions are based on the recognition of the contribution of
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source countries in the process of income generation 314. The model

recommends that the country of residence give a tax relief equivalent to the
foreign tax paid. Taxation of income from foreign capital would have to
take into account expenses allocable to the earning of the income so that
such income would be taxed on net basis. The idea of the Convention is to
provide an atmosphere conducive for investments, taxation should not be
so high as to discourage investment. Income from a foreign source may be
shared with the country providing the capital or technology. The methods of
double taxation relief provided under the convention resemble the OECD
model. In fact most of the provisions of both the Models are similar, except
for certain provisions, like for example the permanent establishment concept
where the UN model is more elaborate and comprehensive.
LEGAL FRAMEWORK FOR DOUBLE TAXATION TREATIES

The objective here is to give a general idea as to the form, content and
basic framework for double taxation treaties. In the process various issues
are discussed, which pertain to their conclusion, implementation,
interpretation, comparison with rules of international law, both private and
public etc.
A. CONCLUSION OF DOUBLE TAXATION TREATIES AND

THEIR IMPLEMENTATION IN THE DOMESTIC SPHERE
Double Taxation Treaties are International agreements. Their
creation and consequences are determined according to the rules contained
in the Vienna Convention on the Law of Treaties315. The Convention
314
315
Its provisions run thus:

that taxation of income from the foreign capital would have to take into account
expenses allocable to the earning of the income so that such income would be taxed
on net basis,
that taxation should not be so high as to discourage investment, and
that it would be appropriate for them to share their from foreign source with the
country providing the capital or the technology.
Vienna Convention on the Law of Treaties, 23rd May 1969, w.e.f. Jan. 1980.
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to a large extent only codifies existing norms of Customary International

Law316. Supporting this view the US Dept of State has on several occasions
stated that as regards particular articles of the Convention as codifying
existing International Law.
All treaties are preceded by negotiations. The Executive generally
conducts the negotiations. During the negotiations a treaty draft is prepared
initially only in one language. A final protocol may also be separately
prepared for negotiation results that are less important or have effects on
only one of the parties involved. And it is distinguished from the main text.
At the conclusion of the negotiations the leaders of both delegations
authenticate two copies of the treaty by initialing at each page.
The negotiation phase is followed by the conclusion of the treaty. Mere
initialing does not actually commit the contracting state to conclude the
treaty. A commitment to that albeit a limited one does not come into operation
until the text of the treaty is signed. By signing the treaties, the contracting
parties commit themselves to initiate the procedures necessary under domestic
law for the binding conclusion of the treaty. Thus the signing of the treaty
does not constitute a binding commitment to conclude it.
In Parliamentary democracies the Executive must ordinarily obtain the
consent of the Parliament to conclude important agreements317. The absence
of parliamentary consent where necessary, would constitute a clear
and fundamental infraction and would pursuant to A. 46(2) of the Vienna
Convention cause the treaty to be invalid in International Law.
As regards US the Secretary of State formally submits the treaty to the
President who in turn submits it to the Senate accompanied with a Presidential
message. The senate Committee on Foreign Relations then considers it. The
Senate is then asked to pass a resolution giving its advice and consent. The
final vote on the resolution of ratification requires 2/3rd majority of the Senators
present for approval. The Constitution does not prescribe a quorum. Then
the treaty is returned through proper channels to the President for ratification318.
316
317
318
House of Lords, Fothergill vs. Monarch Airlines, 3, W.L.R.

UK and the remaining members of the Commonwealth form the notable exceptions.
Senate Committee on Foreign Relations, 98th Cong. 2d, Sess. Committee Print (1984) at 25.
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In UK where parliamentary consent is not required for conclusion of a

treaty, the treaty becomes applicable internally only when a special law is
passed to this effect by the parliament after the treaty enters into force under
International Law319.
In Germany internal applicability of the treaty generally is achieved
through enactment of implementing legislation, as provided under A.59,
Abs. 2 Grundgesetz (Federal Constitution)320.
Under the Dutch Constitutional Law, the treaty becomes applicable
domestically at the same time as it enters into force internationally, reflecting
the monist theory of International Law321.
For the purposes of International Law a treaty comes into existence
upon the declaration of consent by both contracting states322. The method
by which the contracting states declare their consent is left to them323.
Important treaties however shall be concluded and effected only through
ratification324. Ratification however is distinguished from parliamentary
consent, one is the act of the Executive while the other is that of the Legislature.
B . DOUBLE
TAXATION
TREATY
INTERNATIONAL LAW OF TREATIES
RULES
AND
The point at which a treaty enters force internationally and the point at
which it becomes applicable under the domestic law must be distinguished
from the point at which material consequences of the treaty begin to take
effect, or in other words, the taxable period or the date at which taxation
shall be limited by the treaty. Usually the initiation of treaty effects is established
by explicit treaty rules. In general the material effects of a treaty apply
319
320
321
322
323
324
McNair, A.D., The Law of Treaties (1961); J.D.B. Oliver, BTR 388 (1970).
The implementing legislation is signed by the Federal President according to A.82
Grundgesetz, and promulgated in the Federal Law Gazette (Bundesgesetzblatt).
Raad. K. Van, 47 MBB 49 (1978).
A. 9(1) Vienna Convention on the Law of Treaties.
A.11ff Vienna Convention on the Law of Treaties.
A.14 (1) Vienna Convention on the Law of Treaties.
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retrospectively. Through the mandate of the legislature treaties in most

countries most states obtain the same authority as internal law.
C. STRUCTURE AND APPLICATION OF DOUBLE TAXATION

TREATIES
Generally treaty models are structured and organized into 7 chapters325 .
Chapters 1 & 2 deal with requirements for application of the treaty, i.e. the
scope of the Convention and definitions of the treaty terms etc. Chapter 3 is
the most important of all, as contains the distributive rules regarding income
taxes. Chapter 4 contains the distributive rules for capital taxes. Chapter 5
provides for additional legal consequences supplementing the rules of
chapters 3 & 4. Chapter 6 contains additional provisions regarding nondiscrimination. Chapter 7 contains provisions, which regulate the entry into
force and the termination of the treaty. This broadly is the structure of the
Double Taxation Treaty models.
Distributive rules in Chapter three and their content are of major interest
at present. As regards their content different types can be distinguished.
1)
2)
325
Rules referring to income from the certain activities there are four
such activities.
(i) business
(ii) independent personal services
(iii) dependent personal services
(iv) agriculture and forestry
Rules referring to income from certain assets.
(i) dividends
(ii) interest
(iii) royalties
(iv) immovable property
This comment is made chiefly with the models of the OECD and UN treaties in mind.
Because these are two of the major treaties governing double taxation worldwide.
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3)
Rules referring to capital gains326.
4)
Residuary rule referring to income not dealt with in the foregoing three
categories.
D. INTERPRETATION OF DOUBLE TAXATION TREATIES

International agreements like domestic law require interpretation. A need
for interpretation arises from a difference of opinion between two countries.
Either the countries may resolve this problem by interpreting it themselves or
they may subject themselves to the jurisdiction of the ICJ. In most countries
the courts are authorized to interpret treaties.
The interpretation of international agreements even by domestic courts
of interpretation cannot be based on the domestic rules of interpretation. In
interpreting an International agreement for domestic application, domestic
courts must be particular that their interpretations do not conflict with the
international obligations of the state in question. For the effective
interpretation of international treaties therefore it is necessary to reconcile
the various national methods of interpretation.
There are two rules of interpretation, which are applied in the
interpretation of international agreements:
Sec 13 of OECD MC reads

(a) Gains derived by a resident of contracting state, from alienation of Immovable property
situated in other contracting state which may be amenable to taxation there
(b) Gains derived form alienation of Movable property situated in other contracting state
but belonging to the business property of permanent establishment of contracting
state, or, gains derived form alienation of Movable property belonging to fixed base
of Resident of Contracting state situated in other contracting state used for performing
independent personal services, including alienation of permanent establishment of
such fixed base.
(c) Gains from alienation of ships or aircraft operated in international traffic, beats engaged
in inland waterways, transport or movable property pertaining to the operation of
such ships, aircraft or boats, shall be taxable only in the contracting state in which the
effective management of the enterprise is situated.
(d) Gains from alienation of any property other than those in 1,2, &3 shall be taxable
only in the contracting state of which alienator is resident.
326
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1) Lex Causae the essence of this rule being that every legal rule
takes its classification from the legal system to which it belongs. In other
words the treaty countries would interpret the terms and expressions in the
agreement in accordance with the laws in regard to income which accrues
or arises in their respective countries called as source country qualification.
2) Lex Fori this means that the each state qualifies the agreement
terms according to the requirements of its own domestic law327.
Various rules of interpretation have been formulated for the interpretation
of International agreements. The text of the treaty is of prime importance,
i.e. the ordinary meaning of the terms is to be taken first and interpreted
within the framework of the treaty. In United Kingdom the judge is bound
strictly by the wording of the statute, especially so in case of tax law. In
principle he is not allowed to consider the intention of the legislators or the
equity of the matter328. A teleological interpretation and even more so a
development of the law would be considered as a usurpation of the rights
of the legislators329. To an extent however the above has to be viewed in the
light of new approach of the British Courts in the limited instance of tax
avoidance treaties. In US however the interpretation of tax law became
liberal only after the 1930s to be specific after the Supreme Courts decision
in White vs. United States330 . Canada again follows the British practice of
strict interpretation of Tax treaties and avoidance and relief agreements.
According to the French and Belgian practices tax laws are to be interpreted
against the fiscal authorities in case of doubt331 .
327
328
329
330
331
It is clear that there is no uniformity in the interpretation of international agreements

and the need for the same has been felt, as observed by the AP High Court in the case
of CIT vs. Vishakapatnam Port Trust (1983) 144 ITR 146. It shall be seen that the
Indo-US DTA improves on many such issues, in the subsequent chapters.
Cape Brandy Syndicate vs. Commissioner of Inland Revenue, 12 Tax Cases 358 1920.
See the House of Lords decision in Buchanan vs. Babco, Ltd., 3 W.L.R. 907 1977.
White vs. United States, 305 U.S. 281: 1938.
See generally Klaus Vogel on Double Taxation Conventions, Kluwer Law and Taxation
Publishers, Deventer, Boston.
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There are specific rules, which are applicable to the Interpretation of

treaties. Interpretations of treaties should not give rise to obligations, which
are not implied by the treaty document itself, as it would mean an additional
burden on the country. Nor should it absolve the state from any obligations,
as there would be difficulty placing the responsibility for the discharge of
that obligation in the International sphere. There are certain factors, which
govern and control interpretations:
(a)
Statutory text or statutory purpose
(b)
Case-law
(c)
Authentic interpretation of the text (mostly followed by Germany)
(d)
Ordinary meaning of the words of the text
(e)
Accompanying materials in the treaty and Technical Explanations332
The importance of the above rules of interpretation cannot be overemphasized but they are essential to avoid disputes in the administration
and application of the treaty. Common interpretations and consistent
interpretations will solve half of the problems that are encountered in the
application of DTAAs.
The two Model Conventions on Double Taxation Avoidance Agreements
have many common aspects. Their overall structure is similar, their treatment
of various concepts involved in computing tax and establishing tax liability
is similar, their dispute resolution mechanisms are similar, their methods of
double taxation avoidance are similar etc. Despite this problems of
interpretation crop up, because even though the provisions are similar, the
manner in which they are interpreted are different. This is probably because
they cater to different kinds of contracting states. The OECD model is more
attuned to the interests of the Capital-exporting countries, who want to
encompass all the activities of their nationals wherever they may operate
and the same time not exempt any non-nationals within their jurisdiction
from tax. The developing countries on the other side need precious capital
for the development of their economies, but in the process cannot afford to
332
Ibid.
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loss their tax base which is the essential for their own revenues. In all these
interpretations of provisions of the agreement can establish or remove the
legitimate basis for taxation by the domestic taxing authorities.
Role of ISPs
Any type of information that can be digitized, such as computer programs,
books, music, or images, can be transferred electronically333. For example,
a person could, via the Internet, communicate with a computer located in a
foreign country and download a computer program or digitized image or
video in exchange for a fee. The purchasers rights in the information
transferred could vary depending on the contract between the parties.
The purchaser of a digitized image could obtain the right to use a single
copy of the image, the right to reproduce ten copies of the image for use in
a corporate report, the right to reproduce the image for use in an academic
work that is expected to have a limited press run, or the right to reproduce
the image in a mass-circulation magazine334. Depending on the facts and
circumstances, some of these transactions may be viewed as the equivalent
of the purchase of a physical copy or copies of the photograph, which
would probably not subject the seller to domestic taxation, while other of
these transactions would result in royalty income because they involve
payments for the use of or the privilege of using copyrights or similar property
in the host-country, which could be taxable there.
Technological developments have necessitated a re-examination of
existing income classification principles in light of the ease of perfectly
reproducing and disseminating digitized information 335. Classifying
transactions involving digitized information may require a more complex
analysis that disregards the form of the transaction without regard to
whether tangible property is involved in favor an analysis of the rights
333
334
335
Dov Wisebroads, Controlling the Uncontrollable: Regulating the Internet, 1996,

Quicklaw Document, DB LNTC Document 13.
Fleming Jr., J. Clifton TAXATION OF PROFITS FROM INTERNET SOFTWARE SALES AN ELECTRONIC COMMERCE CASE STUDY. (Release Date: JUNE 29, 1999)
Ibid.
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transferred. This is necessary to ensure neutrality between the taxation of

transactions in digitized information and transactions in traditional forms of
information, such as hard copy books and movies, so that decisions regarding
the form in which information is distributed are not affected by tax
considerations.
(ii) Classification of income issues.

Information that can be digitized is generally protected by copyright
law. Payments made for the use of or for the privilege of using copyrights
are considered royalties. Similarly the Model Tax Conventions define
royalties as payments of any kind received as consideration for the use
of, or the right to use, any copyright of literary, artistic or scientific work
including cinematograph films . . . .336 It is not always clear how this
definition applies to the sale of digitized information. Yet, it is clear that
some of these transactions, such as the electronic purchase of computer
programs, are merely substitutes for conventional transactions involving
physical objects.
Digitized information also presents unique issues because it can be
perfectly reproduced, often by the purchaser337. Although someone desiring
to purchase ten copies of a bound book will generally purchase ten copies
from a publisher, someone wishing to purchase ten copies of an electronic
book may simply purchase one copy and acquire the right to make nine
additional copies. This transaction might literally be considered to create
royalty income, at least in part, since the right to make reproductions is a
right reserved to the copyright holder and by allowing a third party to make
reproductions, the payment is, at least in part, in consideration for the use
of the copyright. However, this transaction may also be viewed as merely a
substitute for the purchase of ten copies from the publisher in which the
purchaser has undertaken to make the copies, a process which would not
be feasible were the information not digitized. Therefore, it is necessary to
336
337
See, Model Conventions on Tax Treaties. Model Tax Conventions: Four related
Studies, Issues in International Taxation, no.4, 1992.
Forst, The Continuing Vitality of Source-Based Taxation in the Electronic Age, 97
TAX NOTES INTL 212-17 (1997).
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apply the definition of royalties in a manner that takes into account the
unique characteristics of digitized information.
(iii) Proposed
transactions.
regulations
on
computer
program
The proposed regulations on the classification of income from

transactions involving computer programs represent an initial attempt to
resolve this issue. Although these regulations are proposed to be limited to
transactions involving computer programs they may establish a framework
applicable to any type of digitized information, at least to the extent it is
protectable by copyright. These proposed regulations do not seek to make
determinations based on whether property is tangible or intangible
because those concepts do not properly capture the unique features of
digitized information338. For example, when a computer disk containing a
program is transferred, that would appear, on its face, to be a transaction in
a tangible object. When the same program is transferred by means of
electronic impulses transmitted over a telephone line, it would seem to be
an intangible. Both of these classifications, however, ignore the substance
of the transactions and the analysis of the proposed regulations avoids this
confusion, in part by treating the means of transfer as irrelevant.
The proposed regulations treat transactions involving computer programs
as being either:
(1)
transfers of copyright rights,
(2)
transfers of copies of the copyrighted program,
(3)
the provision of services for the development or modification of a

computer program; or
(4)
the provision of know-how regarding computer programming

techniques.
338
Department of the Treasury, Office of Tax Policy, Selected Tax Policy Implications of
Global Electronic Commerce 7.1.3 (1996).
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Because computer programs are protected under copyright law and

the rights that transferees of computer programs obtain are primarily rights
created by copyright law, the proposed regulations take copyright law rights
as the starting point for the analysis. They demonstrate that an understanding
of these rights makes it possible to analyze computer program transactions
in the framework of existing principles of tax analysis339.
The primary distinction established by the proposed regulations is
between transfers of copyright rights and transfers of copyrighted articles.
The proposed regulations use copyright law principles to determine whether
the rights transferred are rights in the underlying copyright or are rights in a
copyrighted work340. However, the proposed regulations depart from
copyright law when appropriate to take into account the special characteristics
of computer programs. Tax law principles are then applied to determine
whether or not there has been a partial or complete transfer of these rights,
which will determine the tax classification of the resulting income. If a
transaction is considered to involve copyright rights, it is either a sale or
exchange of the copyright, or a license, depending on whether all substantial
rights in the copyright have been transferred. If the transaction is a transfer
of a copyrighted article, then it is either a sale or exchange, or a lease of the
copyrighted article, based on an application of the benefits and burdens
test. Because this comprehensive framework is based on an analysis of the
underlying rights, it may be flexible enough to handle transactions in computer
programs and other types of digitized information that are yet to be invented.
These concepts and distinctions can, of course, be found in existing
law . The novel aspect of the proposed regulations is that they take into
account the unique characteristics of digitized information. For example,
for copyright law reasons, computer programs are generally sold pursuant
to license agreements342. Software developers transfer rights in computer
341
339
340
341
342
Ibid.
Field, Tax Experts at Amsterdam Conference Differ on Extent and Nature of Internet
Threat, 97 TAX NOTES INTL 214-216 (1997).
Ibid.
Ibid.
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programs to individual users through licenses, rather than sales, to prevent

transferees from claiming the rights that would be provided under copyright
law to purchasers of copies of the program. Therefore, the proposed
regulations seek to determine whether the rights obtained by a licensee
are copyright rights or are substantially equivalent to the rights that would
have been obtained had the transferee acquired a program copy. As indicated
above, the proposed regulations take the unique characteristics of digitized
information into account in departing from a strict copyright law analysis.
For example, computer programs are frequently distributed through site
licenses. Under a site license, a licensee might obtain only one disk
containing the program but also obtains the right to make a certain number
of copies for internal use343. Notwithstanding the term applied to the
transaction or the grant of a copyright right the regulations propose to treat
this transaction as a sale of goods for tax purposes. Although the right to
reproduce a computer program is a right granted to the owner of the
copyright, which would make the transaction a license (resulting in royalties)
under a pure copyright law analysis, the proposed regulations recognize
that the bare right to copy a program is not relevant for purposes of this
analysis. Since digitized information can be perfectly copied at little cost,
the bare right to reproduce is disregarded for tax purposes344. The proposed
regulations provide that the right to reproduce is only relevant when it is
coupled with the right to sell the copies so made to the public. This is a case
where existing tax principles have been adapted to take into account the
unique features of electronic commerce.
(iv) Definition of services income.

Digitized information may also further complicate existing difficulties in
defining services income, as distinguished from sales of goods income or
royalties. This distinction is important for purposes of determining the source
343
344
Australian Government Publishing Service, Tax and the Internet (1997). For further
discussion regarding taxation of global electronic commerce, see Mall, Taxation of
Cross-Border Internet Transactions in Australia, Japan, and Singapore, 97 TAX NOTES
INTL 36-2 (1997).
See, e.g., Electronic Commerce Tax Study Group Comments to U.S. Treasury, 97
TAX NOTES INTL 177-16 (1997)
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of income. Therefore, whether a transaction is deemed to result in sale of

goods income, as distinguished from services income, may affect whether
such income will be subject to current tax.
The distinction between services income and other types of income is a
pervasive issue345. For example, in many cases, the distinction between service
contracts and other arrangements is unclear. Although many commercial
transactions involve elements of both the provision of tangible property and
the performance of services, these transactions are generally classified in
accordance with their predominant characteristic 346. For example, a
transaction involving the performance of professional services may result in
the provision of a letter or other document. The aspect of the transaction
consisting of the provision of the tangible property is treated as incidental to
the performance of the services. In contrast, if a retail establishment sells a
suit to a customer but agrees to make slight alterations as part of the purchase
price, the performance of services would be viewed as an integral part of a
transaction consisting of the sale of goods.
In the proposed regulations regarding the classification of computer
program transactions, an attempt is made to clarify the distinction between
the sale of goods and the provision of services in the context of computer
programs347. For example, if a software developer agrees to provide upgrades
of a computer program when they become available, the proposed
regulations provide that the developer is not treated as having provided
services to its customers. In contrast, if the person commissioning the creation
of the program bears all of the risk of loss associated with its creation and
will own all of the copyright rights in the underlying program when it is
completed, the proposed regulations provide that the developer is treated
as providing services348. The proposed regulations clarify that, even if a
transaction involving a computer program has a de minimis service
345
346
347
348
Ibid.
Ibid.
Mozelle W. Thompson, Address to the Assn for Computing Machinery Computers,
Freedom and Privacy 1999 Conf. (visited Apr. 7, 1999) http://www.ftc.gov/speeches/
thompson/cmp464.htm.
William M. Daley, FTC Workshop on U.S. Persp. On Consumer Protection in the Global
Electronic Marketplace (visited June 8, 1999) http://www.ftc.gov/opa/1999/9906/
990608.htm.
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component, it may nevertheless be classified as the transfer of copyright

rights or copyrighted articles349.
A further example of where new technologies will blur these distinctions
involve transactions in digitized information over the Internet. For example,
a reference work, such as an encyclopedia, would previously have been
sold only as a set of bound volumes and the sale of the bound volumes
would have resulted in sale of goods income, notwithstanding the fact that
the cost of printing and binding represented only a fraction of the
encyclopedias value350. Now, instead of purchasing a bound volume, a
potential purchaser might be able to choose between a set of CD-ROMs
and a computer on-line service through which the encyclopedias content
can be accessed. If the customer has a sufficiently fast modem connection,
there may be little practical difference between accessing the on-line service
and the CD-ROMs on the customers personal computer. The sale of the
CD-ROMs may result in sale of goods income while the classification of the
income arising from the on-line service is not clear. The on-line service may
result in services income although in some circumstances it could be
characterized as a means of distributing copies of copyrighted works351.
However, a distinction between sales of goods and services income may still
be appropriate in this area taking into account the frequency at which the
on-line service will be updated and the fact that the user of the online
service must continue to make periodic payments, as contrasted with the
fact that the purchaser of the CD-ROM may acquire the right to use the disk
in perpetuity for a single payment. It will be necessary to consider the principles
to be applied in these situations that will best implement the policy of taxing
Cyber commerce.
349
350
351
Can Fair Use Survive our Information-based Future? An Interactive Media Lab Technical
Report. At http://www.picard.dartmouth.edu/fairuseinfofuture.html
Alchian, A. and H. Demsetz, Production, Information Costs, And Economic
Organization. American Economic Review, 62, (1972), 777-795.
Hayek, F.A., The Use of Knowledge in Society. American Economic Review, 35, 4
(1945).
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(v) Source of Services Income

Geographic basis. Income derived from the performance of labor
or personal services only constitutes source income if the person performing
the services is physically present in the host country. This is also a generally
accepted international principle. This requirement is based on the view that
there is generally an independent, substantial significance to the location
where the person rendering the services is located with the result that it is
reasonable for that country to tax such services. As travel and communications
have become more efficient and less expensive, the relationship between
the service providers location and the service consumers location has
weakened. For example, it is now possible for physicians to remotely diagnose
certain diseases through telecommunications links and videoconferencing
has eliminated the need for many face-to-face meetings352 .
Role of existing concepts. These technological developments are
generally extensions of existing communications devices. For example, a
video conference is likely to be a substitute for a conference telephone call.
Although these communications developments may pose some base erosion
potential since service providers will find it easier to relocate to low-tax
jurisdictions, it may be the case that the base erosion potential is not so
significant as to require review of the current general principles of residencebased taxation applicable to services353. In devising rules to source this type
of income, it may also be necessary to consider the relationship between
the service-providers physical location and other potential indicia of source,
such as the location of a computer server or communications link.
Furthermore, to the extent the source of this income is becoming both less
meaningful and increasingly difficult to determine, residence-based taxation
should necessarily play a larger role.
352
353
See Gene Koprowski & Heather Page, E-Reality, Entrepreneur Mag., May 10, 1999,
(visited Sept. 17, 1999) http://www.entrepreneurmag.com/builder/ereality/er1.html.
See Jeri Clausing, Netscape Chief Replaced on Internet Tax Panel, N.Y. TIMES, Apr.
28, 1999 (visited Jan. 12, 2000) http://search.nytimes.com/search/daily/bin/
fastweb?getdoc+site+site+83137+0+wAAA+internet%7Etax%7Enetscape
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(vii) Global Services: Allocation of Income and Expenses

Global collaboration. The foregoing section discussed the problem
of determining the source of income derived from the performance of services.
A related issue arises from increases in global collaboration arising from
modern telecommunications. One example is global dealing354. As discussed
above, global dealing refers to the capacity of financial intermediaries,
mainly banks and securities firms, to execute customers orders and to
take propriety positions in financial products in markets around the world
and around the clock. Global dealing could not take place without
modern computers and communications, which permit a firms trading
position to be transferred around the world as markets open and close.
Similarly, certain scientific and engineering projects are now being worked
on twenty-four hours a day as laboratories in one region electronically
hand-off the project at the end of the day to a laboratory where the day
is beginning. This type of global collaboration is expected to increase.
General principles of allocation. Global collaboration is not
a new concept. When goods are manufactured in one country and
marketed and distributed in another, the overall transaction could be
characterized as global collaboration in the sale of goods. Global
collaboration requires transfer pricing and source of income principles,
to correctly allocate the resulting income between the countries
involved 355. Current transfer pricing principles are focused on global
collaboration in the manufacture and sale of goods and the creation
and transfer of intangibles.
By contrast, global dealing income has been allocated through caseby-case negotiations between the competent authorities involved,
although a guidance project on global dealing is currently developing
rules of general application 356. As the ways in which companies
collaborate globally to provide services continue to grow, it may be
354
355
356
See Orson Swindle, E-Commerce: Tomorrows Economy - Taxing and Regulating The
Old Fashion Way, (Aug. 11, 1999).
M. Murphy, Cooling the Net Hype, Wired, Sept. 1996, at 86
See, O. Suris, Behind the Wheel, Wall Street Journal, Nov. 18, 1996, at R14.
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appropriate to consider the creation of general principles for the arms

length allocation of broader categories of services income based on
each situations particular facts. To the extent that capital is not a material
income-producing factor in this situation, it would be expected that the
place where the component services were performed would be of primary
importance in allocating such income.
OECD Initiatives in International Taxation

One of the first of the Initiatives of the OECD on E-Commerce was a
ministerial conference held by member-states at Ottawa in 1998 on Electronic
Commerce, the main focus of the conference being on defining new forms
of governance for the Internet. The thrust was on harmonization of laws or
co-ordination of enforcement. The specific issues for debate were privacy,
consumer protection, governance of domain names and IP addresses. The
Conference arrived at a Global Action Plan on the issues of Consumer
Empowerment/ Marketing and Advertising Ethics.
The Global Action Plan says, Governments should avoid mandating
unnecessary standards that could be led by Business. On questions of
Internet governance, governments should continue to support the proposed
transfer of administration of the Internet name and address system to the
private sector, consistent with protection of existing trademarks.
Governments should remove existing barriers for workers to share in the
new and different employment generated by electronic commerce. On the
issue of privacy, governments were encouraged to recognize the validity
and adequacy of effective self-regulation augmented by the use of privacyenhancing technologies357.
Internet technology is changing very rapidly, and regulatory systems
based on the rules used for traditional communications may not be
appropriate, said Richard Beaird, the Chairman of the OECDs Committee
on Information, Computer and Communications Policy and Deputy Chief
Co-ordinator for telecommunications in the U.S. State Department. An
357
http://lists.essential.org/1998/info-policy-notes/msg00049.html
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increasing number of emerging-market and developing countries have found

as have OECD countries that opening markets to competition encourages
investment and generates benefits for consumers and business, he
observed358.
358
http://www.oecd.org/EN/home/0,,EN-home-29-nodirectorate-no-no29,00.html
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ANNEXURE 1
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Sons Ltd., 1994.
19. The future of law: Facing the challenge of Information Technology /
Richard Susskind. - Oxford: Clarendon Press, 1996.
20. Concise encyclopedia of Information Technology /Adrian V Stokes. Hants: Wildwoods House Ltd., 1986.
21. Information technology for development / Ed. by P Sadanandan and
R Chandrasekar. - New Delhi: Tata Mac-Graw-Hill, 1987.
22.
IT encyclopedia Vol. I: Fundamentals of Information Technology /

Ed. by Parag Diwan, R K Suri and S Kaushik. - New Delhi: Pentagon
Press, 2000.
23. Globalization on trial: The human condition and the information

civilization / Farhang Rajaee. New York: Kumarian Press, 2000.
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ANNEXURE 1
24. Indian Penal Code 1860: Law and practice. as amended by Information
Technology act 2000 / Taxman. New Delhi: Taxman Allied Services
(P) Ltd., 2000.
25. Information technology Law / Ian J Lloyd. - 2nd Ed. - London:
Butterworths, 1997.
26. Indian Evidence act 1872: Law and practice, as amended by
Information Technology Act 2000 / Taxman. - New Delhi: Taxman
Allied Services (P) Ltd., 2000.
27. The Information Technology act, 2000 / Ed. by Ravi Puliani and
Mahesh Puliani. - New Delhi: Bharat Law House Pvt. Ltd., 2000.
28. The global political economy of communication: Hegemony,
telecommunication and the information economy - Edward A Comor.
London: Macmillan Press Ltd., 1996.
29. Data protection and the media - Strasbourg: Council of Europe, 1991.
30. Harmonisation of laws relating to the requirement of written proof
and to the admissibility of reproductions of documents and recording
on computers /. -Strasbourg: Council of Europe, 1982.
31. The introduction and use of personal identification numbers: The data
protection issues /. - Strasbourg: Council of Europe, 1991.
SELECT ARTICLES
1.
Jambholkar, Lakshmi - Cyber law: Issues and perspectives. Indian

Journal of International Law. Vol.40, No.03, July-Sept, 2000. p.559562.
2.
Rout, Pranam Kumar - Cyber law is the need of the time - Happy
2000 you pathetic fools. Cuttack Law Times. Vol.89, No.10, 15th
May, 2000.
3.
Mulwad, V H and Chalam, Gopal Global e-commerce and cyber

laws. Corporate Law Cases. No.06, June, 2000. p.273-278.
4.
Paul, Isac - Permanent establishment in e-commerce scenario - An

analysis in the background of the Indo-US, Indo-UK and Indo-Mauritius
double taxation avoidance agreements. Taxman. Vol.116, No.1-8,
May-June, 2001. p.1-11.
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ANNEXURE 1
5.
Ryder, Rodney - Development of e-commerce laws in India. Corporate

Law Adviser. Vol.37, No., April- June, 2000. p.54-56.
6.
Srinivasan, R - E-commerce and taxation. Taxman. Vol.116, No.1-8,

May-June, 2001.
7.
Kulkarni, B K - E-commerce and the role of chartered accountants.

Corporate Law Cases. No.07, June, 2000. p.238-260.
8.
Williams, Huw - E-commerce is more than a dot com address. Journal

of Planning and Environmental Law. No. Suppl, 2000. p.73-77.
9.
Pareek, O P - EDI and e-commerce. Taxman. Vol.110, No.03, 27th

May, 2000. p.90-92.
10. Mulwad, V H and Chalam, Gopal - Global e-commerce and cyber

laws. Corporate Law Cases. No.06, June, 2000. p.273-278.
11. Rawell, Sanjiv and Kudrolli, Shakeel - Legal issues in e-commerce.
Management Review. Vol.12, No.03, Sept, 2000. p.85-94.
12. Shivaram, K and Tralshawala, Reepal G - Taxation of e-commerce : A
critical study of Indian scenario. Income Tax Reports. Vol.247, No.16, 20th Feb, 2001. p.121-120.
13. Gillespie, Alisdair - Children, chatrooms and the internet. Criminal
Law Review. No.06, June, 2001. p.435-446.
14. Roy, Arun - Domain name related disputes on the Internet: Emerging
trends. SEBI and Corporate Laws. Vol.29, No.1-8, Jan-Feb, 2001.
p.43-0.
15. Gupta, L N - Internet and public sector organisations. Indian Journal
of Public Administration. Vol.46, No.03, July-Sept, 2000. p.338-.
16. Wells, Matthew G - Internet business method patent policy. Virginia
Law Review. Vol.87, No.04, June, 2001. p.729-780.
17. Rao, Raagini - Pornography on the internet. Lawyers Collective. Vol.16,
No.03, March, 2001. p.11-12.
18. Singh, Manmeet - The Internet and money laundering. Lawyers
Collective. Vol.15, No.05, May, 2000. p.24-25.
NALSAR Pro
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ANNEXURE 1
19. Goldsmith, Jack L and Sykes, Alan O - The Internet and the dormant
commerce clause. Yale Law Journal. Vol.110, No.05, March, 2001.
p.785-828.
20. Ryder, Rodney D - The legal challenges of Internet banking. Corporate
Law Adviser.Vol.37, No., April - June, 2000. p.97-100.
21. Chandy, Mathew and Lakhotia, Gitanjali - The liability of Internet
services providers. Corporate Law Adviser. Vol.38, No., July-Sept,
2000. p.214-219.
22. Krishnan, Deepa - Using the Internet: can the Internet stand-alone?
Voices.Vol.04, No.02, Oct 2000. P.40-41.
23. Agawam, Sub hashes Ch and Agawam, Sashimi - Will the Internet
juggernaut roll on? Taxman. Vol.112, No.06, 7th Oct, 2000. p.221226.
24. Girard, Bruce- Radio broadcasting and the Internet: Converging for
development and democracy. Voices. Vol.04, No.01, April, 2000.
p.6-8.
25. Rammanohar Reddy, C-Spreading Internet access: A question of
priorities. Voices. Vol.04, No.01, April, 2000. p.3-5.
26. Gupte, Aamod - The Information Technology Act 2000. Lawyers
Collective. Vol.15, No.09, Sept, 2000. p.4-9.
27. Shah, V R and Shah, P R - A glance at Information Technology Bill
1999. Corporate Law Adviser. Vol.37, No., April-June, 2000. p.6570.
29. Nigam, Shalu - Human rights, civil society and Information Technology.
Legal News and Views. Vol.16, No.06, June, 2001. p.44-46.
30. Bakshi, P M - Information technology: Legal issues. SEBI and Corporate
Laws.Vol.29, No.1-8, Jan-Feb, 2001. p.116-0.
31. Malviya, R N - Information technology act 2000. Legal News and
Views. Vol.15,No.04, April, 2001. p.41-43.
NALSAR Pro
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ANNEXURE 1
32. Srinivasan, K - Information Technology Act, 2000 - Law radicalized by

technology. Corporate Law Adviser. Vol.38, No., July-Sept, 2000.
p.1-7.
33. Kapur, J C - Information technology and good governance. Indian
Journal of Public Administration. Vol.46, No.03, July-Sept, 2000.
p.386-.
34. The Information Technology Act 2000 : Some Excerpts. Lawyers
Collective. Vol.15, No.09, Sept, 2000. p.10-12.
35. Sen, Abhijit - The Information Technology Act, 2000. All India Reporter.
Vol.87,
36. Rothboeck, Sandra - Information technologies and late development:
Innovative capacity or hidden reproduction of core-p. Science,
Technology and Society. Vol.05, No.01, Jan-June, 2000. p.35-60.
37. Rammanohar Reddy, C - Spreading Internet access : A question of
priorities. Voices.
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ANNEXURE 2
LIST OF WEBSITES
http://www.setco.org/setmark.html
http://www.wolrath.com/set.html
http://www.wolrath.com/set.html
http://www.tda.ecrc.ctc.com/kbase/doc/update/setspecs.htm
http://www.visa.com/nt/ecomm/set/main.html#set,
http://www.visa.com/nt/ecomm/set/setsafe.html
http://www.trintech.com/whatsnew/what_is_set.html
http://www.esartuphelp.com/privacy1.html
http://www.law.upenn.edu
http://www.kanoonindia.com/tax/taxlaw.htm
http://www.transaction.net/press/taxes/articles.html
http://www.firstmonday.dk/issues/issue2_10/muscovitch.html
http://www.sec.gov/archives/edgar/data/1108627/000092701600-001159.txt
http://www.economictimes.com/india/taxation/faqs.htm
http://www.indiainfoline.com/bisc/vat/issues.html
http://www.hindubusinessline.com/1999/01/14/stories/
12070012.htm
http://www.brint.com/india.htm
http://www.ficci.com/taxation/reforms.html
http://www.taxationindia.com/indirect/issues/articles.htm
http://www.economictimes.com/india/tax/faqs.htm
11200774.htm
http://www.wwindia.com/groupious/bio.htm
11200774.htm
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ANNEXURE 2
http://www.indiainformer.com/browse/mews-bs/date/bsd01700.htm
http://iic.nic.in/vsiic/ii3_jhtm
http://www.wuarchive.wustl.edu/coombspapers/subj-biblio-clearinghouse/indiaeconomic-reforms-bibl.txt
http://www.news.sawaal.com/06-Mar-2000/business.6.htm
http://www.expressindia.com/ie/daily/19990522/ige22129.html
http://www.epw.org.in/contents.htm
http://www.in.kpmg.com/taxation/contents.htm
http://www.taxationindia.com/issues/indirecttax.htm
http://www.epi.org.in/contents.htm
http://www.kanoonindia.com/tax/taxlaw.htm
http://www.kanoonindia.com/newsletter.htm
http://www.vyapaaraisa.com/india/trade/tr1.html
http://www.etinvest.com/ettax/taxschemes.htm
http://www.businessweek.com/1998/44/it100.htm
http://www.hindubusinessline.com/1999/09/10/stories/021018c1.htm
http://www.hindubusinessline.com/1999/01/07/stories/12070012.htm
http://www.deloitteap.com/pubs2000/indi0300.html
http://www.hindubusinessline.com/1999/05/22/stories/12220641.htm
http://www/pvai.org/pvai-ethics.html
http://www.pvai.org/pvaimemo.html
http://www.pvai.org/aboutus.html
http://www.pvai.org/homepage.html
http://www.constnindia.com/cidc/surveyors/intro.htm
http://www.pvai.org/pvai-ethics.html
http://www.pvai.org/pvai-methods/valuation.html
http://www.detya.gov.au/tenfeilds/business/7/unisa.html
http://www.hkis.org.hk/publication/surverying/V616/qs.html
http://www.ficci.com/icanet/engineers.htm
http://www/adrefmy.com/CCH.htm
http://www.indiainformer.com/browse/news-bs/date/bsd01700.htm
NALSAR Pro
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ANNEXURE 2
http://www.economictimes.com/270600/27poli06.htm
http://www.indiacybercart.com/cyber98.html
http://www.ficci.com/times/up/html
http://www.economictimes.com/270600/27poli06.htm.
http://www.corporateindia.com/debtfinancing/articles.html
http://www.ficci.com/idra/articles.htm
http://www.zeenext.com/legal/laws/tp/articles/liquidation.html
http://www.beemanagement.com
http://www.lexmundi.org/ipr/articles.htm
http://www.in.kpmg.com/ecommerce_repo.doc.html
http://www.uspto.gov/web/offices/com/doc/ipnii.html
http://www.eucommitee.be/pop/pop2000/fisc/fisc7.htm
http://www.picard.dartmouth.edu/fairuseinfofuture.html
NALSAR Pro
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said to be signed by an agent. The person employing the agent is