Professional Documents
Culture Documents
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
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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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CHAPTER I
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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.
P.G. Diploma in Cyber Laws
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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.
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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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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By exchange of emails11 .
Electronic Agents15 .
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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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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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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 .
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a)
b)
c)
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:
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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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CHAPTER II
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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.
2.
3.
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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
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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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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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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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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.
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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.
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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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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.
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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:
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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.
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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.
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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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provide prima facie evidence that the record is a true copy of another
record;
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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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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.
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1.
2.
3.
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:
Integrity, via hashing and signing assures that messages sent are
received without alteration.
77
78
www.setco.org/setmark.html
www.wolrath.com/set.html
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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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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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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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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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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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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.
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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CHAPTER III
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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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.
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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106
White. Lawrence. H., Technological Revolution and Monetary Evolution, 14th Monetary
Conference CATO.
Ibid.
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Cash
(b)
Checks
(c)
Credit Cards
(d)
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.
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109
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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.
2.
Legal Issues
3.
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:
(b)
(c)
(d)
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(e)
(f)
(g)
(h)
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.
111
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112
113
114
115
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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
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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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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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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.
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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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A switch
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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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
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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Retailing systems
Credit cards (e.g., Visa or MasterCard)
Private label credit/debit cards
Charge cards (e.g., American Express)
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.
78
(i)
(ii)
(iii)
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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)
(iii)
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(ii)
(iii)
National Instruments
(i)
(ii)
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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
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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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CHAPTER IV
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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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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It is an Indian Company, or
(ii)
During that year the control and management of its affairs is situated
wholly in India
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
P.G. Diploma in Cyber Laws
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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:
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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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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).
94
Leave passage for the employee and his/her family subject to certain
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
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b)
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
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.
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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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.
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
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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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[2]
[3]
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)
(ii)
(iii)
(iv)
(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)
(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)
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(ii)
(iii)
Item No. 52 Tax of entry of goods into a local area for consumption
use or sale therein (usually called Octroi)
(iv)
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.
172
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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.
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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
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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)
Entertainment expenses;
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
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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)
(v)
178
179
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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.
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.
182
183
184
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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.
185
186
187
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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.
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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192
193
194
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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 formations/dissolutions.
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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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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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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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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208
209
210
211
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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)
(2)
(3)
212
213
214
215
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See, http://www/pvai.org/pvai-ethics.html
See, Ibid.
See, http://www.pvai.org/pvaimemo.html
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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)
(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)
(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.
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:
See, http://www.pvai.org/pvai-ethics.html
See, http://www.pvai.org/pvai-methods/valuation.html
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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.,
-
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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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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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231
232
See, http://www.ficci.com/icanet/engineers.htm
See, http://www/adrefmy.com/CCH.htm
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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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234
235
236
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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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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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2)
3)
4)
5)
6)
7)
8)
9)
240
241
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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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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)
(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
International Taxes: Internet use for Tax avoidance under Investigation, Daily Tax
Report, (Taxation, Budget and Accounting), February 16, 1996.
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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138
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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140
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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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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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
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a.
b.
c.
d.
e.
f.
g.
278
a.
b.
c.
d.
e.
f.
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b)
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
2.
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.
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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285
286
287
288
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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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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.
3.
4.
5.
293
Ibid.
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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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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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301
302
303
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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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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
International Taxes: Internet use for Tax avoidance under Investigation, Daily Tax
Report, (Taxation, Budget and Accounting), February 16, 1996.
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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307
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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.
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.
A tax credit for the tax levied in the state of source upto an amount
equivalent to its own tax charge309.
2)
3)
Allowance of exemptions311.
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.
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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162
314
315
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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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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)
4)
Residuary rule referring to income not dealt with in the foregoing three
categories.
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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
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(b)
Case-law
(c)
(d)
(e)
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
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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
(2)
(3)
(4)
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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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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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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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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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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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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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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357
http://lists.essential.org/1998/info-policy-notes/msg00049.html
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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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182
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3.
4.
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ANNEXURE 1
5.
6.
7.
8.
9.
184
ANNEXURE 1
19. Goldsmith, Jack L and Sykes, Alan O - The Internet and the dormant
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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
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24. Girard, Bruce- Radio broadcasting and the Internet: Converging for
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25. Rammanohar Reddy, C-Spreading Internet access: A question of
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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
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29. Nigam, Shalu - Human rights, civil society and Information Technology.
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30. Bakshi, P M - Information technology: Legal issues. SEBI and Corporate
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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
http://www.hindubusinessline.com/1998/08/20/stories/
11200774.htm
http://www.wwindia.com/groupious/bio.htm
http://www.hindubusinessline.com/1998/08/20/stories/
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
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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
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