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Indira Gandhi National Open University

School of Law
MIR-013
COMMERCE AND
CYBERSPACE
E-Commerce
1
Block
1
E-COMMERCE
UNIT 1
E-commerce: Evolution, Meaning and Types 5
UNIT 2
Payment Mechanism in Cyberspace 15
UNIT 3
Advertising and Taxation vis--vis E-commerce 25
UNIT 4
Consumer Protection in Cyberspace 36
Indira Gandhi
National Open University
School of Law
MIR-013
Commerce and
Cyberspace
Expert Committee
Prof. N.R. Madhava Menon
Chairman
Former Director, National
J udicial Academy, Bhopal
Member, Commission on
Centre States Relations
New Delhi
Prof. D.N. J auhar
Department of Law
Punjab University
Chandigarh
Dr. Dinesh Kumar Abrol
Senior Scientist, National
Institute of Science, Technology
and Development Studies
New Delhi
Dr. Raman Mital
Reader, Faculty of Law
University of Delhi
Delhi
Dr. B.K. Keayla
Secretary General and
Managing Trustee, Centre for
Study of Global Trade System
and Development
New Delhi
Mr. Zakir Thomas
Former Registrar
Copyrights
Government of India
Additional Director Income Tax
New Delhi
Ms. Kiron Prabhakar
Advocate
J . Sagar Associates
New Delhi
Dr. G.C. Bharuka
J udge Hight Court (Retd.)
New Delhi
Programme Coordinator: Ms. Gurmeet Kaur, SOL, IGNOU
We acknowledge our thanks to Prof. S.C. Garg, Former PVC and Director (I/c) SOL and
Prof. B.S. Saraswat, former Director (I/c), SOL for facilitating the development of the programme.
Block Preparation Team
Dr. Anirban Mazumdar
West Bengal National
University of J uridical
Sciences, Kolkata
Mr. Sanjay Parikh
Advocate, Supreme Court
New Delhi
Prof. Biswajit Dhar
International Institute of
Foreign Trade
New Delhi
Prof. Pandav Nayak
SOSS, IGNOU
Prof. Srikrishna Deva Rao
Director, SOL, IGNOU
Ms. Gurmeet Kaur
SOL, IGNOU
Ms. Suneet Kashyap
SOL, IGNOU
Mr. Anand Gupta
SOL, IGNOU
Unit Writer
Mr. Vakul Sharma
Advocate Supreme Court
New Delhi
Content Editor
Dr. Raman Mital
Reader
Delhi University
Course Coordinator: Ms. Suneet Kashyap, SOL, IGNOU
Print Production
Mr. Yashpal Word Processing
Section Officer (Publication) Sh. Mahesh Kumar, Shri Rishi Raj
School of Law Sh. Vishal Khatri, Ms. Manisha Saini
March, 2008
Indira Gandhi National Open University, 2008
ISBN: 978-81-266-3327-2
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other
means, without permission in writing from the copyright holder.
Further information on the Indira Gandhi National Open University courses may be obtained from the
Universitys office at Maidan Garhi, New Delhi-110 068 or the official website of IGNOU at www.ignou.ac.in
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IGNOU.
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Dr. Nandini Sahu
Reader in English
SOH, IGNOU
Ms. Suneet Kashyap
Lecturer
SOL, IGNOU
Format Editor
Prof. Basanti Pradhan
STRIDE, IGNOU
Ms. Suneet Kashyap
Lecturer
SOL, IGNOU
MIR-013 COMMERCE AND CYBERSPACE
Commerce in a cyberspace basically means E-commerce (also called E-business) is
just another term for conducting business over the internet. Whenever something is
bought or sold over the internet on sites, you tend to do E-commerce. Many a times the
desire to engage in commerce becomes a reason for all of us to enter cyberspace. In
the course we will examine some of the questions which we face concerning the use of
Cyberspace as a tool of commerce.
E-commerce has many advantages for E-consumers. By using the internet facility prior
to buying one can know the range, quality and price of the object desired to purchase.
However, when we conduct business in the internet we should also take care of the
things that our personal and financial information is safe.
Business can engage in E-commerce with each other through sites called B2B (Business
to Business) services. With B2B Services, one can save time and money by getting
quotes from a number of suppliers. Using a mobile device such as cellular phone or
PDA for E-commerce transaction is called m-commerce. The dangers of m-commerce
are similar to those of E-commerce. Thus m-commerce should have the same security
mechanism as E-commerce.
Whenever we enter into a transaction over the internet, we enter into a contract (online
contract) where there is a buyer and a seller. An online contract like any contract requires
two parties, a proposer and an acceptor.
There are a number of forms of online contract. Block 2 Unit 5 will explain the different
forms of online contracts. There are a number of abuses of E-commerce too. We will
be studying different form of abuses and how to guard ourselves from these abuses
while being on the internet.
Block 1 and 2 deals with E-commerce and online contracts. In this course we will
study the various form of E-commerce and online contracts.
Block 3 and 4 of the course is devoted to Intellectual Property Protection in Cyber-
space and Management of IPRs in Cyber space. This Course has attempted to elaborate
the different process of dispute resolution in cyberspace and the way of resolving the
disputes.
BLOCK 1 E-COMMERCE
The course on the theme of E-commerce has been divided into four Blocks
(comprising generally four Units in each Block) of which this is the first one. E-
commerce or Electronic Commerce consists primarily of the distributing, buying,
selling, marketing and servicing of products or services over electronic systems
such as the Internet and other computer networks.
Unit 1 of the Block emphasizes on the definition of E-commerce, explaining
the distinction between the E-commerce and E-business. Regardless of how
narrowly or broadly e-commerce is defined, e-commerce occurs in various
forms and between various entities in the market. In Unit 1 the different models
of e-commerce have been discussed. Payment mechanism in cyber space is
about paying for goods and/or services ordered or consumed using modern
means of information technology.
Unit 2 of the Block attempts to explain the various attributes. Various initiatives
of the Reserve Bank of India in the electronic fund transfer domain have been
discussed. The unit further looks into the various products and services, which
one being presently offered as online payment options to the discerning user.
As we know commercial transactions do not occur in vacuum. They require all
kind of support services in the form of advertising, marketing, sales, logistics,
insurance and banking.
Unit 3 of the Block deals basically with the concept of online advertising and
taxation. The unit looks into various forms of online advertising available to
online advertisers and explains the electronic taxation issue vis--vis digital
and non-digital goods.
The protection of consumers in cyberspace is an issue which boggles the mind
of an E-consumer. Unit 4 of the Block gives an overview of how law protects
the consumers at e-marketplace and whether a contract for sale of goods or
services made online will have the same effects of contract as a contract in the
physical world.
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UNIT 1 E-COMMERCE: EVOLUTION,
MEANING AND TYPES
Structure
1.1 Introduction
1.2 Objectives
1.3 E-commerce Evolution
1.4 Defining E-commerce
1.4.1 Difference between E-commerce and E-business
1.4.2 E-commerce Definitions
1.4.2.1 E-commerce: A Commercial Transaction
1.4.2.2 E-commerce & WTO
1.5 Types of E-commerce Models
1.5.1 Business-to-Business (B2B)
1.5.2 Business-to-Consumer (B2C)
1.5.3 Consumer-to-Business (C2B)
1.5.4 Consumer-to-Consumer (C2C)
1.6 E-commerce: The Future
1.7 Summary
1.8 Terminal Questions
1.9 Answers and Hints
1.10 References and Suggested Readings
1.1 INTRODUCTION
Electronic commerce is a process, which is happening with the help of Information
and Communication Technologies. In order to see its evolution it is important to
see how commerce itself evolved over a period of time.
1.2 OBJECTIVES
After studying this unit, you should be able to:
define the term e-commerce and make a distinction between e-commerce
and e-business;
explain how e-commerce is a commercial transaction;
make a nexus between e-commerce and the World Trade Organization;
explain the different models of e-commerce; and
analyse the future of e-commerce.
E-commerce
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1.3 E-COMMERCE EVOLUTION
As the society evolved the commercial practices also evolved. The barriers to
trade were broken chiefly by the language and later by transport. The barter trade
gave way to acceptance of bullion as the trading currency. With the passage of time
nation states emerged as new political units and with new technological developments,
like telegraph and telephone further facilitated the trade. For over a century these
telecommunication devices became an integral part of the commercial enterprises
all over the world.
Later, in the early 1960s, computers were increasingly used to disseminate information
across geographical space. Though telegraph, telephones, telex and facsimile were
still the relied upon options, nevertheless the big corporations opted for Electronic
Data Interchange (EDI). It refers to the process by which goods are ordered,
shipped, and tracked computer-to-computer using standardised protocol. EDI
1
permits the electronic settlement and reconciliation of the flow of goods and services
between companies and consumers. EDI saves money because the computer,
and not an office staff, submits and processes orders, claims, and other routine
tasks.
EDI began in the 1960s as a computer-to-computer means of managing inventory,
bill presentment, shipment, orders, product specifications, and payment. EDI is
made possible because trading partners enter into master agreements to employ
electronic messaging permitting computer-to-computer transfers of information and
validating computer-to-computer contracts.
2
The early adopters of EDI were companies running complex operations in the airlines,
shipping, railways and retail sectors. These companies developed their own
proprietary format for interchanging data messages. It led to development of
proprietary systems. These proprietary systems whether of a retail or automobile
company were operation specific. It was felt that a universal standard was impractical
and unnecessary. Consequently, the lack of universal standards made it difficult for
companies to communicate with many of their trading partners.
In late 1970s, the American National Standards Institute (ANSI) authorized a
committee called the Accredited Standards Committee (ASC) X-12 (consisting of
government, transportation, and computer manufacturers) to develop a standard
between trading partners. The standard was called ANSI X-12. Over a period of
time sectors like paper, chemical, warehouse, retail, telecommunications, electronics,
auto, metals, textile, and aerospace developed and started using sector specific
EDI standards, which are subset of X12 standards.
Under the aegis of United Nations, organizations from different sectors collaborated
and developed an internationally approved standard structure for transmitting
information between different trading partners, called the United Nations Electronic
Data Interchange for Administration, Commerce and Transport (UN/EDIFACT)
in 1986. It ensures transmission compatibility of electronic business documents
globally. In the US companies tend to use ANSI X-12 protocol while their European
counterparts prefer EDIFACT. Moreover, various industry sectors use their industry-
specific protocols.
The EDI was like a business-to-business (B2B) model involving a company and its
various vendors performing commercial transactions using proprietary networks.
By late 1980s computers acquired the status of personal computer, i.e. became
E-commerce: Evolution,
Meaning and Types
7
part of the private domain of an individual. It was EDI at the individual level supported
by the public networks known as Internet.
Hence, e-commerce evolved out of EDI and should be considered as a next logical
step in the development of commercial processes involving commercial transactions.
Thus e-commerce means doing business electronically across the extended enterprise.
It covers any form of business or administrative transaction or information exchange
that is executed using any information and communications technology.
Narrowly put, e-commerce is limited to specific initiatives, such as sales via the
Internet, electronic procurement, or electronic payment.
Please answer the following Self Assessment Question.
Self Assessment Question 1 Spend 3 Min.
Trace the evolution of E-commerce.
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1.4 DEFINING E-COMMERCE
It is important to note that phrases, like e-business, e-commerce, Internet business,
Net commerce etc. are commonly being used these days. Thus for the sake of
clarity e-commerce should be distinguished from e-business. In fact, e-commerce
is a subset of e-business.
1.4.1 Difference between E-commerce and E-business
E-business refers to all aspects of a business where technology is important. This
may include knowledge management, design, manufacturing, R&D, procurement,
finance, project planning, human resource planning and the related activities. E-
commerce is that part of e-business that relates directly to sales & marketing. That
is, e-commerce is part of the all-encompassing world of e-business.
E-business is a wider concept that embraces all aspects of the use of information
technology in business. It includes not only buying & selling but also servicing
customers and collaborating with business partners and often involves integration
across business processes & communication within the organization.
1.4.2 E-commerce Definitions
As the Internet makes way for new business transactions via its complex
telecommunications network, it is difficult to provide a single all encompassing
definition of e-commerce. It means different to different people. Thus it would be
prudent to look into various definitions of e-commerce to comprehend e-commerce
and its different characteristics:
E-commerce
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1.4.2.1 E-commerce: A Commercial Transaction
E-commerce defined simply, is the commercial transaction of services in an electronic
format. In general terms, e-commerce is a business methodology that addresses
the needs of organizations, traders and consumers to reduce costs while improving
the quality of goods and services and increasing the speed of service delivery. It
refers to all forms of transactions relating to commercial activities, including both
organizations and individuals that are based upon the processing and transmission
of digitized data, including text sound and visual images. A broad definition of e-
commerce is: The marketing, promoting, buying & selling of goods electronically,
particularly via the Internet, which encompasses, interalia, e-tailing (virtual shop
fronts), EDI, which is B2B exchange of data; e-mail & computer faxing; [and]
B2B buying and selling
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.
A narrower definition is the trading of goods and services in which the final order
is placed over the Internet. The Office of Tax Policy at the US Department of
Treasury defines e-commerce most broadly as any transaction that occurs with the
facilitation of electronic tools and techniques. The Internet Tax Freedom Act
(ITFA), 1998, on other hand provides the only legal definition of e-commerce as
any transaction conducted over the Internet or through Internet access, comprising
the sale, lease, license, offer or delivery of property, goods, services or information,
whether or not for consideration, and includes the provision of Internet access.
The US Census Bureau measures e-commerce by looking at the value of goods
and services sold online whether over open networks such as the Internet, or over
proprietary networks running systems such as EDI
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.
According to European Commission, e-commerce encompasses more than the
purchase of goods online. It includes a disparate set of loosely defined behaviours,
such as shopping, browsing the Internet for goods and services, gathering information
about items to purchase and completing the transaction. It also involves the fulfillment
and delivery of those goods and services and inquiries about the status of orders.
Like any other sustained business activity it also means conducting consumer
satisfaction surveys, capturing information about consumers and maintaining
consumer databases for marketing promotions and other related activities.
Interestingly, its Directive on E-commerce (2000/31/EC) defined the term
commercial communication instead of defining E-commerce. Article 2(f) defined
commercial communication as any form of communication designed to promote,
directly or indirectly, the goods, services or image of a company, organization or
person pursuing a commercial, industrial or craft activity or exercising a regulated
profession.
The Gartner Group
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defines e-commerce as an evolving set of:
(a) Home-grown or packaged software applications that link multiple enterprises
or individual consumers to enterprises for the purpose of conducting business.
(b) Business strategies aimed at optimizing relationships among enterprises and
between individuals and enterprises through the use of information technologies.
(c) Business processes (such as procurement or selling or order status checking
or payment) that, by definition, cross boundaries, and
(d) Technologies and tools that enable these applications, strategies and processes
to be implemented and realised.
E-commerce: Evolution,
Meaning and Types
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1.4.2.2 E-commerce & WTO
Interestingly, the World Trade Organization (WTO) Ministerial Declaration
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on E-
commerce defines e-commerce as the production, distribution, marketing, sales
or delivery of goods and services by electronic means. The six main instruments
of e-commerce that have been recognised by WTO are telephone, fax, TV, electronic
payment & money transfer systems, EDI and Internet. In other words, e-commerce
can be conducted over telephones, fax machines, automatic teller machines (ATMs),
electronic payment systems such as prepaid telephone cards, electronic data
interchange (EDI), television and the Internet. That means activities like, booking
an order over telephone, sending invoices over fax, ordering from shopping networks
as advertised on TV etc. amount to indulging in e-commerce activities.
It is laudatory on the part of WTO to have provided a very wide definition of e-
commerce; it is understandable as WTO member consists of developed, developing
and the least developed countries (LDCs).
The growing importance of electronic commerce in global trade led the Members
of the WTO to adopt a declaration on global electronic commerce on 20 May
1998 at their second Ministerial Conference in Geneva, Switzerland. The declaration
directed the General Council of the WTO to establish a comprehensive work
programme to examine all trade-related issues arising from electronic commerce,
and to present a report on the progress of the work programme at the third Ministerial
Conference of the WTO. The declaration setting up the work programme included
the statement that Members will continue their current practice of not imposing
customs duties on electronic commerce. The work programme was adopted by
the WTO General Council on 25 September 1998. Subsequently, under the auspices
of the General Council on J une 15, 2001, WTO Members Governments identified
three types of transactions on the Internet:
Transactions for a service, which is completed entirely on the Internet from
selection to purchase and delivery.
Transactions involving distribution services in which a product, whether a
good or a service, is selected and purchased on-line but delivered by conventional
means.
Transactions involving the telecommunication transport function, including
provision of Internet services.
That is, the stress is on using low cost technology application, i.e. Internet for
managing and facilitating the entire chain of commercial processes. Web makes it
possible to dispense with the normal value chain for retailing, through direct sales
by manufacturing to consumers. It can create new points on the value chain, such
as Internet portals that act as shopping malls or aggregators that offers a new way
of amassing buying power.
Please answer the following Self Assessment Question.
Self Assessment Question 2 Spend 3 Min.
What are the different modes by which e-commerce be conduced?
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E-commerce
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1.5 TYPES OF E-COMMERCE MODELS
Regardless of how narrowly or broadly e-commerce is defined, e-commerce occurs
in various forms and between various entities in the market. It is necessary to
consider the various forms that Internet commerce embodies in order to understand
the implications for taxation. E-commerce can be categorised in four ways:
(1) business to business (B2B); (2) business to consumer (B2C); (3) consumer to
business (C2B); and (4) consumer to consumer (C2C).
Table 1: E-commerce Models Matrix

Business Consumer
Business B2B
www.vendome.niit.com

B2C
www.indiatimes.com

Consumer C2B
www.makemytrip.com

C2C
www.ebay.in

These models represent online commercial transactions and are comparable to
their offline counterparts. In other words, all these online models have adopted
the functionalities of brick and mortar (offline) companies and are being identified
as click and mortar companies. Clicks have replaced the bricks for faster, efficient
and effective commercial transactions. Take a case of Dell computers. One can
purchase a Dell computer or a server by visiting the site: www.dell.co.in and clicking
on the desired computer or server configuration. Dell computers cannot be purchased
from physical shops. One has to visit its site to purchase. Dell in a way has done
away with bricks in favour of clicks.
Moreover, these new business models are creating immense economic value by
offering huge variety of products and service online. Amazon offers 57 times as
many titles as a typical large bookstore stocks. This is often referred to as long-
tail phenomenon: books that once lacked a market can be shifted at any time off
Amazons virtual shelves. It has been estimated that in 2000 the value of online
sales of books that were not available at a typical bookstore was $ 578 million.
1.5.1 Business-to-Business (B2B)
It is a new name given to EDI. As the name suggests, it is a business platform
involving two independent or even dependent business entities. In B2B version of
online transaction(s) the manufacturing organization takes a lead in setting up a
business platform. This platform acts a business communication channel between
the manufacturing/software developer entity and its vendors/suppliers, i.e., whatever
was being done earlier in offline manner are now being done online. This may
E-commerce: Evolution,
Meaning and Types
11
include registration of vendors, invitation of quotations, negotiations, price settlement,
contract finalisation, procurement, cargo tracking, and payments online. Thus a
B2B platform acts as a business facilitator, negotiator and dealmaker, which facilitates,
negotiates and clinches deal between independent or dependent business units.
1.5.2 Business-to-Consumer (B2C)
It refers to a business platform, involving a business entity and consumers. It is a
retail version of e-commerce known as e-tailing. Selling goods or services through
web based shops. It is the most popular model of e-commerce as it has helped
moving commercial transactions from public domain to private domain. B2C is
about creating a better offline shopping experience online.
It has benefit for both the business entity and consumer. E-tailing is a cheaper
option as it is cheaper to set up a single website and warehouse combination than
operate a chain of shops. From the point of consumer benefits are in the form of
convenience, wider choice and time saver. From the consumers point of view,
online shopping is a great leveler. One can shop at any time (247), from anywhere,
i.e. all consumers are to be treated equally online. It has made shopping a great
fun!
1.5.3 Consumer-to-Business (C2B)
It is an innovative retail-marketing platform, where a business entity offers a variety
of packages or options to entice the online customer. Here the business entity/
service provider bids for consumer. It is often referred to as reverse auction.
Such models are widely prevalent in tourism and travel industry. The tour operators,
hotels and airlines not only give deep discounts to the consumers but also give
them option to negotiate the prices. It is a pro-active version of e-commerce as it
offers deals, packages or bundle of products at competitive prices.
Interestingly, its major success has come by the adoption of this model by the
business entities mainly the manufacturers. This process of reverse auction has
resulted into major savings for the manufacturers, as suppliers bid for the purchase
orders, offering discounts in the process.
1.5.4 Consumer-to-Consumer (C2C)
It represents a consumer business platform, which is for the consumer, by the consumer.
It is referred to as online consumer-to-consumer auctions. Almost anything can
be offered on such online platforms. A buyer who wants a particular item enters the
maximum amount he is prepared to pay. This remains a secret to other bidders
while auction sites computers monitor the bidding. Highest offer is accepted until
the end of auction. Highly popular online auction sites, like eBay also provides
services where bidders may even check the reliability of a seller, how he has been
rated by other buyers by reading comments left by people who have done business
with him before. Once a bid has been won, the two sides contact each other, the
buyer pays and the seller sends the goods. Payments can be made online as well.
PayPal
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, an online payments company supports eBay buyers. This is an improvement
over traditional selling or auction processes in terms of convenience and volume of
goods being auctioned.
To begin with, these models were nothing but the online version of successful offline
E-commerce
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businesses. Apart from these pure business models, some necessity business
models have also occupied Internet space. These business models occupy the niche
service areas. For example, Yahoo! Hotmail, Rediff, AOL etc. fulfill the need of an
electronic post office; search engines providing directory services; and government
websites for facilitating better government-to-citizen or government-to-business
interface
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.
Interestingly, with the passage of time these online models have also matured. A
B2C model is no longer a business-to-consumer model, it is integrating functionalities
of other models like C2C or C2B also. It is far easier for a website that is successful
at selling one product to branch into others. For example, Amazon has moved from
selling books only to selling sea foods and other products as well. It is now hosting
auctions, and courting eBay traders. Similarly, eBay is no longer a C2C platform
but is also selling goods at fixed price, like e-tailer, B2C. Online market place is
more dynamic and ready for all kinds of innovation. Yahoo! has made so many
recent changes to its business that it is being called the new google, while Google
is using its advertising formula to steer specialist buyers straight to specialist online
sellers.
Online businesses have to keep on reinventing themselves to remain successful. E-
entrepreneurs have to have an open mind about the future. In a way, the Internet
has opened up opportunities to be very creative in the design of the business model.
The success of e-commerce models is built around managing supplies, partners
and customers effectively and efficiently. E-commerce is more customers oriented
than its offline counterpart. The offline world was one where producers said to
customers: I have made this; buy it from me at this price. In the online world,
customers are saying, I want this; sell it to me at this price.
Online world allows things like customer aggregation & auctions to be done in
ways that are impossible in the physical world. Internet as a strong price-deflation
mechanism: raising your prices is harder when your customers instantly compare
them with everyone else. Price & product comparisons have been made easier by
the development of shopping bots. Websites like, Mysimon.com & Dealpilot.com
enable buyers quickly to compare products, prices and availability.
Please answer the following Self Assessment Question.
Self Assessment Question 3 Spend 3 Min.
Mention the different models of E-commerce.
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1.6 E-COMMERCE: THE FUTURE
E-commerce is growing. It is a reality and part of everyday life. Economies of
scale and scope are also easier to obtain online than offline. The biggest boost of
E-commerce: Evolution,
Meaning and Types
13
e-commerce over the next few years will come not from snazzier websites or snappier
marketing but from the proliferation of broadband Internet connections. Mobile
phones and a host of other electronic devices are now being hooked to the web,
ousting the personal computer from its monopoly position in providing Internet
access.
As desktop (PC) access will increasingly migrate to the mobile environment, it
would be more of m-commerce (mobile commerce) than e-commerce. Technological
advances would make the commercial transactions further personalised. And as
the numbers of customers who shop, grow, the business will scale, bringing in a
lower cost structure.
Let us now summarize the points covered in this unit.
1.7 SUMMARY
E-commerce represents online transactions.
It is the retail version of the Electronic Data Interchange (EDI).
In general terms, e-commerce is a business methodology that addresses the
needs of organizations, traders and consumers to reduce costs while improving
the quality of goods and services and increasing the speed of service delivery.
In terms of types, it has four types: Business-to-Business (B2B), Business-to-
Consumer (B2C), Consumer-to-Business (C2B) and Consumer-to-Consumer
(C2C).
These models are dynamic business models and are changing as per the needs
of the e-consumers.
1.8 TERMINAL QUESTIONS
1. Traditional business models have found extension in the electronic medium.
Discuss this statement in light of various e-commerce models giving examples.
2. E-commerce business models are adapting themselves to the changing consumer
behaviour in an online environment. Is it a correct statement to make? Explain.
1.9 ANSWERS AND HINTS
Self Assessment Questions
1. EDI.
2. E-commerce can be conducted over telephone, fax machines, automatic teller
machine (ATMs), electronic payment system such as prepaid telephone cards,
electronics data interchange (EDI), televisions and the internet.
3. (1) Business to Business (B2B), (2) Business to Consumer (B2C), (3) Consumer
to Business (C2B), and (4) Consumer to consumer (C2C).
Terminal Questions
1. Refer to section 1.3 of the unit.
2. Refer to sections 1.3, 1.4 of the unit.
E-commerce
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1.10 REFERENCES AND SUGGESTED READINGS
1. Teitelman Robert and Stephen Davis. How the Cash Flows?. Institutional
Investor 58. Aug.1996.
2. Electronic Messaging Services Task Force. The Commercial Use of Electronic
Data Interchange: A Report and Model Trading Partner Agreement. 45 Bus.
Law 1645. 1990.
3. US Small Business Administration. Office of Advocacy. E-commerce: Small
Business Venture Online. at 3 J uly. 1999.
4. US Department of Commerce. US Census Bureau. E-Stat. at (Mar. 18. 2002).
5. www.gartner.com
6. www.wto.org
7. www.paypal.com
8. Sharma, Vakul. E-commerce: A New Business Paradigm. in Legal Dimensions
of Cyberspace Ed. Verma, S.K. and Mittal Raman. ILI Publications. 2004.
UNIT 2 PAYMENT MECHANISM IN
CYBERSPACE
Structure
2.1 Introduction
2.2 Objectives
2.3 Electronic Fund Transfer (EFT)
2.3.1 How Electronic Fund Transfer Works?
2.3.2 Different Mode of EFT Mechanism
2.3.3 The Electronic Clearing Services (ECS)
2.3.4 RBI EFT
2.3.5 INFINET
2.3.6 Structured Financial Messaging System (SFMS)
2.3.7 Real Time Gross Settlement System (RTGS)
2.4 Online Payment Mechanism
2.4.1 How Online Payment Mechanism Works?
2.4.2 Electronic Cash
2.4.3 Electronic Wallets
2.4.4 Smart Card
2.4.5 Digital Cheques
2.4.6 Digital Signature
2.4.7 Digital Certificates
2.5 Online Payments and the Information Technology Act, 2000
2.5.1 Online Payments and Negotiable Instruments
2.5.2 Establishment of Public Key Infrastructure (PKI)
2.6 Future of E-money
2.7 Summary
2.8 Terminal Questions
2.9 Answers and Hints
2.10 References and Suggested Readings
2.1 INTRODUCTION
Payment mechanism in cyberspace is all about paying for goods and/or services
ordered or consumed using modern means of information technology. Such payment
mechanism in order to be accepted must have all the attributes of a widely accepted
offline payment system.
2.2 OBJECTIVES
After studying this unit, you should be able to:
explain the meaning of electronic fund transfer (EFT) and how it works;
15
E-commerce
16
explain the different modes of EFT mechanism;
explain EFT as an important tool in online financial and banking networks and
its crucial role in electronic settlement;
discuss the online payment mechanism in the form of credit cards, smart cards,
electronic wallet, and digital certificates; and
describe the role of law in shaping the online payment mechanism.
2.3 ELECTRONIC FUND TRANSFER (EFT)
Electronic Fund Transfer means transferring money from one bank account to another
in the same (intra bank) or different bank branches (inter bank). EFT has been in use
since 1960s when banks first started using proprietary EDI network to share banking
information. This was later converted into automated clearing houses. At a global
level, to facilitate faster fund transfer between the remitter and beneficiary, the payment
instructions are sent through telex, SWIFT
1
(Society for Worldwide Interbank
Financial Telecommunications), Wire Transfer, CHIPS
2
(Clearing House Interbank
Payment System) etc. But when it comes to transfer of funds domestically, the options
have been restricted to demand draft, mail transfer or telegraphic transfer.
2.3.1 How Electronic Fund Transfer Works?
Electronic fund transfer implies transfer of money using Internet technologies. This
involves participation of payer and payee and their respective banks including an
automated clearing house.
Step 1: Payee submits the cheque to his bank
Step 2: Payees bank presents the cheque to the automated clearing house
Step 3: Automated clearing house informs the drawers bank
Step 4: Drawers bank clears the cheque
Step 5: Payee receives the payment

PAYEE
PAYEEs
BANK






INTERNET
DRAWERs
BANK
DRAWER
AUTOMATED
CLEARING
HOUSE
Figure 1: EFT mechanism using Internet
Payment Mechanism in
Cyberspace
17
In India, electronic fund transfer system has got a fillip when the Central Government
amended the Negotiable Instruments Act, 1881 and brought in forth the Negotiable
Instruments (Amendment and Miscellaneous Provisions) Act, 2002, and introduced
the concept of a truncated cheque in section 6 (b) of the said Act:
Section 6(a) a truncated cheque means a cheque which is truncated during the
course of a clearing cycle, either by the clearing house or by the bank whether
paying or receiving payment, immediately on generation of an electronic image for
transmission, substituting the further physical movement of the cheque in writing.
Explanation II. For the purposes of this section, the expression clearing house
means the clearing house managed by the Reserve Bank of India or a clearing house
recognised as such by the Reserve Bank of India.
As evident from the aforesaid section, the truncation process involves replacing
physical cheques with their electronic images, which will travel through the stages of
the clearing cycle. During the whole process of truncation the instrument would remain
with the collecting bank.
2.3.2 Different Mode of EFT Mechanism
Over the period of time, the Reserve Bank of India (RBI) has taken various initiatives
to introduce technology to facilitate electronic fund transfer at both corporate and
retail banking level. For example, electronic settlement in the form of the electronic
funds transfer services Electronic Clearing Services (ECS), i.e., Credit Clearing
and Debit Clearing and retail Electronic Funds Transfer (EFT) system has been a
great success. In 2003-2004, the value of cheque transactions shrunk 16%, while
settlements through the ECS
3
jumped 200%.
Further, it has introduced Centralised Funds Management System (CFMS), Securities
Services System (SSS), Real Time Gross Settlement System (RTGS) and Structured
Financial Messaging System (SFMS) to transform the existing systems into a state-
of-the-art payment infrastructure in India.
2.3.3 The Electronic Clearing Services (ECS)
The Electronic Clearing Services (ECS) credit scheme and the Electronic Clearing
Services (ECS) debit scheme are two activity lines, which have become important
vehicles for furthering improvements in customer services. In ECS credit, a series
of electronic payment instructions are generated to replace the paper instruments.
The system works on the basis of a single debit transaction triggering a large number
of credit entries. These credits or the electronic payment instructions which possess
the details of the beneficiarys account number, amount and bank branch, are then
communicated to the bank branches through their respective service branches for
crediting the accounts of the beneficiaries either through magnetic media duly encrypted
or through hard copy. ECS debit is meant for payment of charges to utility services
such as electricity, telephone companies, payment of insurance premia and loan
installments etc. by customers. ECS credit, has become popular and is being availed
of by most corporate entities and official bodies.
E-commerce
18
Please answer the following Self Assessment Question.
Self Assessment Question 1 Spend 3 Min.
The two activity lines which have become important vehicles for furthering
improvements in customer services are ......................and ......................
2.3.4 RBI EFT
RBI EFT a scheme introduced by RBI to help banks offer their customers money
transfer service from account to account of any bank branch to any other bank
branch has widened its reach to more than 150 centres in the country. RBI EFT
system is an inter-bank oriented system, wherein RBI acts as an intermediary between
the remitting bank and the receiving bank and effects inter-bank funds transfer. The
customers of banks can request their respective branches to remit funds to the
designated customers irrespective of bank affiliation of the beneficiary.
2.3.5 INFINET
The setting up of the apex-level National Payments Council in May 1999 and the
operationalisation of the Indian Financial Network (INFINET) by the Institute for
Development and Research in Banking Technology (IDRBT), Hyderabad have been
some important developments in the direction of providing a communication network
for the exclusive use of banks and financial institutions. INFINET members include
RBI, Public sector banks, Private banks, Foreign banks, Cooperative banks and
Financial Institutions.
2.3.6 Structured Financial Messaging System (SFMS)
At the base of all inter-bank message transfers using the INFINET is the Structured
Financial Messaging System (SFMS). It would serve as a secure communication
carrier with templates for intra-bank and inter-bank messages in fixed message
formats that will facilitate straight through processing. All inter-bank transactions
would be stored and switched at the central hub at Hyderabad while intra-bank
messages will be switched and stored by the bank gateway. Security features of the
SFMS would match international standards.
2.3.7 Real Time Gross Settlement System (RTGS)
It is significant to note that the RTGS system in banking sector has the potential to
emerge as a major payment mechanism in India. Through this system both processing
and final settlement of fund transfer instructions can take place in real time. It would
help banks to scale up transactions that they have been processing. When fully
implemented, RTGS would pave the way for a paperless money transfer mechanism.
It would facilitate payment/receipt of funds without going through the traditional mode
of pay order/demand draft/mail transfer/telegraphic transfer, which takes two to seven
days to real time transactions.
RTGS apart from providing a real time funds settlement environment has also become
critical to an effective risk control strategy. The risks inherent in a net settlement
system are well known. Payment system risks in a net settlement system are such
that the default by one bank may lead to a knock-on or domino effect to the system.
Gross settlement reduces the risk significantly, as transactions are settled one by one
on a bilateral basis in a real time mode.
Payment Mechanism in
Cyberspace
19
Presently, RBI is aiming to give legal sanctity to the whole EFT system by bringing
legislation on the Electronic Funds Transfer and its role in electronic settlement.
Moreover, it has suggested numerous amendments in the: Bankers Book Evidence
Act, the Negotiable Instruments Act, the Banking Regulation Act and the RBI Act.
2.4 ONLINE PAYMENT MECHANISM
Plastic money, i.e. credit cards has already made a presence in India and is fast
becoming online shoppers choice
4
. Credit cards have registered a slow but steady
growth in India. All the major banks, both public and private sectors, use the major
international brand names like VISA and MASTERCARD. The most recent trend is
to issue multipurpose cards which function as credit cards, debit cards or Automatic
Teller Machines (ATM) cards. This is essentially to enable the holder to exercise a
choice of payment option.
2.4.1 How Online Payment Mechanism Works?
Online business requires a website (Sub merchant) which acts as a kind of e-shop
for the users. It gives details of products (or services). A customer can buy any of the
products listed on such a website by making payment against the same either in cash
or cheque or through the route of online payment namely credit card/debit card/net
banking. The sub-merchants are linked to a Payment Gateway facility provided by
a Master Merchant, which works in association with a Payment Gateway Bank,
which is further linked to VISA or MASTERCARD the Credit Card Companies.
To illustrate the mechanism, when a prospective customer visits a website (of a Sub-
merchant) on Internet and selects a product he intends to buy, he is redirected to the
website of Master Merchant (Payment Gateway) where the customer feeds all his
details like name, credit card number, billing address etc. and completes the transaction
by making the payment online. The Master Merchant at its end analyse the details of
credit card holder (name, address, phone number, IP address etc.) and forwards the
request to the Payment Gateway Bank and to Credit Card Companies. Depending
on the report generated, the Master Merchant accepts or rejects the purchase order
of the customer. Acceptance would lead to the customer account being debited by
the same amount and the sub-merchant would be required to dispatch the ordered
goods to the customers address.
Sub-merchant
www.xyz.com
Master Merchant
www.abc.com
Payment Gateway Bank
Master/Visa Card
Figure 2: Online payment mechanism using credit card



E-commerce
20
Apart from credit card based transactions, other online payment systems include:
2.4.2 Electronic Cash
E-cash is a pre-paid system. Consumers buy electronic tokens and build up electronic
funds for use over the Internet. It is stored in an electronic device such as a chip card
or computer memory. The person who has purchased such cash can use it online for
making payments. It is also known as cyber cash
5
.
2.4.3 Electronic Wallets
E-wallets can be useful for making a series of micro payments online for example,
downloading MP3 music file, paying for an online article etc. A mechanism is necessary
that ensures that the transaction costs of collecting payment for such items do not
exceed the value of the transaction. A software wallet requires a user to set up an
online account to which heads an amount of money. When transactions are
undertaken, the wallet is debited
6
.
2.4.4 Smart Card
Smart cards use a micro controller chip embedded in the card. The cards can be
purchased and reloaded again and again. It works as an electronic purse storing
digital money, which could be used over public terminals (Websites, ATMs, Telephone
lines) etc. Another example of smart card is the Stored Value Cards (pre-paid SIM
cards for mobile phones).
2.4.5 Digital Cheques
It is a cheque in the electronic form. Here, the consumer uses his digital signatures to
sign an e-cheque. The consumer fills in the cheque online and then sends it via a
secure server to the recipient. The amount specified on the cheque is electronically
withdrawn from the senders account and deposited in the recipients account.
2.4.6 Digital Signature
It is a mechanism to ensure authenticity, message integrity, non-repudiation and
confidentiality of an electronic record. It is based on asymmetric crypto-system,
which uses a private key to encrypt, and a public key to decrypt messages. A digital
signature regime requires a trusted third party Certifying Authority (CA) to verify
and authenticate the identity of a subscriber (a person in whose name the Digital
Signature Certificate is issued). These days, even smart cards may contain digital
signatures of a subscriber.
Please answer the following Self Assessment Question.
Self Assessment Question 2 Spend 3 Min.
Define digital signature.
...................................................................................................................
...................................................................................................................
...................................................................................................................
...................................................................................................................
...................................................................................................................
...................................................................................................................
Payment Mechanism in
Cyberspace
21
2.4.7 Digital Certificates
Digital certificates are like trust certificates developed by a consortium led by Master
Card and Visa. These digital certificates provide Secure Electronic Transaction (SET)
to the users. SET allows a purchaser to confirm that the merchant is legitimate and
conversely allows the merchant to verify that a credit card is being used by its owner.
It also requires that each purchase request include a digital signature, further identifying
the cardholder to the retailer.
SET is an improvement over SSL (Secure Sockets Layer) encryption method. SSL
uses a private key to encrypt data that is then transmitted over the SSL connection.
It is used to encrypt customer and credit card information when it is transmitted
across the Internet. The message You are about to view information over a secure
connection, is an indication that SSL is in use. Websites protected by SSL also
carry a security symbol in the status bar, often in the form of a closed lock
7
.
A key difference between SSL and SET lies in the allocation of risk. SET makes the
buyer responsible for proving her credentials, whereas, with SSL, the merchant takes
responsibility for checking the buyers ability to pay and that the credit card account
being referenced belongs to the user initiating the transaction
8
.
Please answer the following Self Assessment Question.
Self Assessment Question 3 Spend 2 Min.
The difference between SSL and SET lies in .........................................
2.5 ONLINE PAYMENTS AND THE INFORMATION
TECHNOLOGY ACT, 2000
The Information Technology Act, 2000 is a facilitating as well as an enabling Act. It
facilitates e-commerce by enabling a digital signature regime. It is important to note
that a digital signature regime not only authenticates electronic records but also plays
an important role in electronic fund transfer.
2.5.1 Online Payments and Negotiable Instruments
When the Information Technology Act, 2000 came into effect on October 17, 2000
it was non-applicable to the negotiable instruments, like promissory note, cheque
and bill of exchange but subsequently to facilitate e-commerce related transactions,
the Central Government amended the Negotiable Instruments Act, 1881 and brought
in forth the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act,
2002 to recognise a cheque in the electronic form (e-cheque) and a truncated
cheque. Therefore, to facilitate e-commerce related transactions, creation and
acceptability of e-cheque (a signer uses his digital signatures to sign an e-cheque)
and payment or receipt on the basis of an electronic image of a truncated cheque
are now legally valid. Still, the negotiable instruments, like promissory note and bill
of exchange are considered non-applicable under the Act.
Further banking transactions in India are being regulated by the Indian Central Bank
the Reserve Bank of India (RBI). Banks, which are going for e-cheque and truncated
cheque facilities, have their secured proprietary IT networks in place conforming to
the guidelines issued by the RBI from time to time on network banking.
E-commerce
22
For example, Punjab National Bank (PNB) was among the first banks to deploy
the first image-based cheque clearing system in India. This provided clearance of
inter-city cheques within 48 hours after the cheque is presented, at selected centres
using cheque truncation, where there is image based cheque clearing system. Earlier
it took about 15-20 days for clearance of outstation cheques. PNB was the first
bank to launch the Intra Bank Inter City Cheque truncation project by using NCRs
ECPIX (Electronic Cheque Presentment with Image Exchange) technology. After a
successful pilot run the system was introduced by connecting MICR Centres located
at Lucknow, Nagpur, J aipur, Kanpur, Ludhiana, Chandigarh, J alandhar, Agra,
Allahabad and Varanasi.
2.5.2 Establishment of Public Key Infrastructure (PKI)
The Information Technology Act, 2000 gives a legal mandate to the use of digital
signatures to protect confidentiality of data protection. It is based on asymmetric
crypto system [Section 2(1)(f)], wherein two different keys are used to encrypt
and decrypt the electronic records. A private key is used to encrypt an electronic
record and a public key is used to decrypt the said record. Private key is kept
confidential and is to be used by the signer (subscriber) to create the digital signature,
whereas the public key is more widely known and is used by a relying party to verify
the digital signature and is listed in the digital signature certificate. The subscribers
public key and private key constitute a functioning key pair. In an asymmetric crypto
system, a private key is mathematically related to public key and it is computationally
impossible to calculate one key from the other. Hence the private key cannot be
compromised through knowledge of its associated public key.
It calls for establishment of a Public Key Infrastructure (PKI), which is based on
mutual trust involving subscribers, Certifying Authorities and the Controller of
Certifying Authorities (CCA). Public Key Infrastructure (PKI) represents a set of
policies, processes, server platforms, software and workstations used for the purpose
of administering Digital Signature Certificates (DSCs) and public-private key pairs,
including the ability to generate, issue, maintain, and revoke public key certificates.
The Information Technology Act, 2000 provides for a statutory environment for
establishment of a PKI to administer DSCs. It has provisions related to powers and
functions of the Controller of Certifying Authorities [Sections 17-34 of The Information
Technology Act], Certifying Authorities [Sections 35-39 of The Information
Technology Act] and Subscribers [Sections 40-42 of The Information Technology
Act]. The Controller of Certifying Authorities is a public body and acts as a regulator,
whereas the Certifying Authorities could be any person, who fulfills all the licensing
conditions put forth by the Controller of Certifying Authorities.
The success of this PKI model can be gauged from the fact that presently, in India
there are seven licensed Certifying Authorities, namely, Safescrypt, Institute for
Development & Research in Banking Technology (IDRBT), Tata Consultancy Services
(TCS), National Informatics Centre (NIC), Mahanagar Telephone Nagar Limited
(MTNL), (n) Code Solutions Ltd. and Department of Customs and Excise.
Moreover, it is important to note that most of these Certifying Authorities are quite
active in both businesse-to-consumer (B2C) and business-to-business (B2B) domain.
For example, TCS is issuing DSCs for online Tax Filing, Northern Railway e-
procurement, ONGC e-procurement etc.; MTNL is issuing free DSCs to MTNL
Broadband customers; Safescrypt is issuing DSCs for EXIM (Export-Import)
Payment Mechanism in
Cyberspace
23
purposes to vendors dealing with the Directorate General of Foreign Trade and (n)
Code Solutions Ltd. is issuing DSCs to Northern Railway vendors (e-procurement).
Please answer the following Self Assessment Question.
Self Assessment Question 4 Spend 2 Min.
PKI is based on ............................... system.
2.6 FUTURE OF E-MONEY
The growth of e-commerce depends on effectiveness and acceptability of online
payment mechanisms. Newer technologies are making online world a safer, convenient
and cost effective medium to do monetary transactions.
What would be the result of these technological advances, replacing money with
digital cash? This gradual e-monitisation can shrink cash demand and may affect the
money supply and rate of interest in the long term. It will also restrict RBIs ability to
conduct open market operations. The current trends, involving e-monitisation
transactions through credit cards and Internet will require monetary policy to take
not of the ongoing revolution in the payments and settlement system
9
. According to
RBI the spread of e-monitisation does not require monetary and financial aggregates
to be redefined, as long as transactions take place through the banking channel.
However, e-money instruments, like credit cards, debit cards and stored-value cards
have a potential to bypass the banking channels altogether and serve as parallel
money suppliers.
Let us now summarize the points covered in this unit.
2.7 SUMMARY
Online payment is fast emerging as a good alternative to physical mode of
payments.
Electronic fund transfer mechanisms are a reality now.
Financial institutions and banks have transformed themselves into huge financial
networks providing real time facilities to their customers.
The traditional brick-and-mortar banking model has given way to click- and-
mortar banking model which has made many online payment options available
to a consumer.
Significantly, the law also grants legal validity to such online payment instruments.
2.8 TERMINAL QUESTIONS
1. It is said that technology has made online world a safer, convenient and cost
effective medium to do monetary transactions. Do you agree with this statement?
Give reasons.
2. What is the role of public key infrastructure in creating trust in an online medium?
3. Explain the working of online payment mechanism?
E-commerce
24
2.9 ANSWERS AND HINTS
Self Assessment Questions
1. Electronic Clearing Services (ECS) credit scheme and Electronic Clearing
Services (ECS) debit scheme.
2. It is a mechanism to ensure authenticity, message integrity, non-repudiation and
confidentiality of an electronic record.
3. The allocation of risk.
4. Asymmetric crypto system.
Terminal Questions
1. Refer the unit and analyse the problem in your own way.
2. Refer to sub-section 2.4.2 of the unit.
3. Refer to section 2.4 of the unit.
2.10 REFERENCES AND SUGGESTED READINGS
1. SWIFT is a reliable. Secure. high-speed. global telecommunications network
owned by its bank participants and used to transmit financial instructions in
machine-readable formats worldwide.
2. CHIPS are a computerised funds transfer system operated by the New York
Clearing House Association. It is used primarily for high-value, cross-border
payments.
3. www.rbi.org.in
4. According to Power Shopper Report - IOAI Ecommerce Report 2005. 62%
of online shoppers have used credit cards for online purchase.
5. See: www.cybercash.com
6. See: www.ecoin.net
7. Rowley Jennifer. E-business Principles & Practice. p.249. Palgrave. 2002.
8. Ibid. p.252
9. Sharma Vakul. 2004 E-commerce: A New Business Paradigm. in Legal
Dimensions of Cyberspace. Ed. Verma. S.K. and Mittal Raman. ILI Publications.
UNIT 3 ADVERTISING AND TAXATION VIS-
-VIS E-COMMERCE
Structure
3.1 Introduction
3.2 Objectives
3.3 Online Advertising
3.4 Forms of Online Advertising
3.4.1 Banner Advertisements and Payment Models
3.4.2 Looking Beyond the Banner Ads
3.4.3 Cookies as an Advertising Tool
3.4.4 Google AdWords: Pay Per Click
3.4.5 Other Advertising Tools
3.5 Online Advertising: Boon or Bane?
3.6 E-commerce and Taxation
3.7 Tax Issues Emerging from Online Transactions
3.8 E-taxation: Problem Areas
3.9 An Overview of Developing E-taxation Practices
3.9.1 The Internet Tax Freedom Act (ITFA)
3.9.2 OECD Model Treaty
3.9.3 India: E-taxation Practice
3.10 Summary
3.11 Terminal Questions
3.12 Answers and Hints
3.13 References and Suggested Readings
3.1 INTRODUCTION
Commercial transactions do not occur in vacuum. They require all kind of support
services in the form of advertising, marketing, sales, logistics, insurance and banking.
If these support functions are considered essential for offline commercial transactions,
then these can also be taken as essential for online commercial transactions.
3.2 OBJECTIVES
After reading this unit, you should be able to:
explain the concept of online advertising and taxation and make a comparison
between traditional media and online media;
describe the different forms of online advertising and the way it works;
25
E-commerce
26
explain the merits and demerits of online advertising;
explain the relationship between e-commerce and taxation; and
discuss the tax issues emerging from online transaction.
3.3 ONLINE ADVERTISING
It is important to note that online advertising is still in its nascent stage of development.
It is still evolving and is often considered to be complementary of offline marketing
efforts. Any comparison of online advertising with offline advertising would be an
unequal comparison but nevertheless should be made.
Table 1: Comparison
1
between traditional media and online media
Traditional Media Online
Advertising space Expensive and limited Cheap and unlimited
Advertising time Expensive commodity
for marketers
Expensive commodity
for users
Image creation Image is everything
Information is
secondary
Information is
everything
Image is secondary
Communication Push, one-way Pull, interactive
Audience Mass Targeted
Links to further
information
Indirect Direct/embedded
Investment in design High Low, allows change
Interactivity Low Low to two-way
dialogue

Online advertising is specifically meant for online consumers. It is technology driven
promotion of products, people, businesses and events in a digital medium, which
primarily includes Internet, but of late even mobile telephones are also being included.
As compared to traditional media, online media is still new and its audience (e-
consumers) base is extremely low.
Please answer the following Self Assessment Question.
Self Assessment Question 1 Spend 1 Min.
Online advertising is meant for ......................................
3.4 FORMS OF ONLINE ADVERTISING
Online advertising is a part of e-commerce ecosystem. To begin with, the Internet
user population was extremely small, but with the passage of time, it has grown
exponentially. If the earliest version of e-commerce happened on proprietary networks
in the form of EDI, it is now happening at a public networks and these networks
have brought more and more consumers closer to businesses than ever before. Online
advertising has played an important role in bringing the consumer and the businesses
closer and like e-commerce it has also grown exponentially.
Advertising and Taxation
vis--vis E-commerce
27
3.4.1 Banner Advertisements and Payment Models
A banner advertisement is a small graphics link, sometimes called a hot link, placed
on a Web page. The banner is linked to the advertisers Web pages, so that clicking
it will transport the browser into the advertisers site.
A banner advertisement can be placed anywhere on a Web page. They look
deceptively similar to real-world magazine advertisements. The effect of such ads
is precisely measurable, as the advertiser collating click-throughs can easily count
the users who click on the banner.
The earliest banner advertisement payment model was based on a simple, flat rate
fee with little or no co-relation between the actual, or even the expected number of
visitors to the site and the cost. Later, this unrealistic model was replaced by payment
model based on the CPM model (cost per thousand impressions or page views),
whereby advertisers pay on the basis of impressions of an advertisement. That is,
advertising rates were calculated on the number of Web users accessing the Web
page holding the banner.
In most cases, the publishers owning and operating the sites selling the advertisement
space will guarantee a number of impressions per month, and either price on the
CPM basis, or provide a fixed monthly price with a quotation for the equivalent
CPM. For example, some of the most visited sites on the web would normally yield
around 2.25 million impressions per month, with CPMs around Rs. 1000.00 to
Rs. 1500.00 only depending on the location of web pages. If it is on a home page of
a popular site, the cost per month may even exceed Rs. 20,000.00.
The problem with CPM is that it is difficult to assess the impact of impressions in
terms of cost-benefit analysis. Moreover, technologically speaking, impressions are
difficult to assess because site visits the nearest Web has an impression not readily
recorded by the Web servers themselves. Web servers receive requests to transfer
page contents that is, they receive hits and each page might require several hits
to be satisfied, as different text or graphics elements are transferred. Now which of
these hits is to be recorded as the impression? Does an impression occur when the
first part of the page is copied to the browser, or when all of it is copied? What if the
user chooses to interrupt a transfer, having already received part of the page Does
this count as an impression or not? And if unique impressions are required i.e., a
count of unduplicated visits how is this to be achieved
2
?
A calculation based on impressions alone is not a good parameter and would be
unwise of an advertiser to rely on such a measure without an independent audit of
the numbers involved.
Proctor & Gamble, a global Fast Moving Consumer Goods (FMCG) company set
a precedent in April 1996 when they agreed with search-provider Yahoo! that they
would pay advertising fees based not on CPMs but on click-throughs themselves. It
is based on, Cost per click (CPC) the amount an advertiser pays for each visitor
who clicks on his or her online advertisement. Click rate is the percentage of visitors
who click on a banner ad. Click through is the number of people who click on a
banner ad and get to the advertisers Web site. The idea of paying for results, as it
were, rather than promises is today gaining wider credence among the advertisers.
In other words, inserting an advertisement on a well-focused Web page one that is
attracting the audience appropriate for the advertisement is clearly worth buying,
even at higher advertising rates.
E-commerce
28
3.4.2 Looking Beyond the Banner Ads
One of the simplest approaches to extend the value of a simple banner is to create an
interactive ad. It requires the programmability of the computer on which the
advertisement is displayed, so as to create new and interesting shapes, images or
messages whenever the banner is seen by using the facilities of Suns J ava or
Microsofts ActiveX applets.
An Applet is a small program or set of instructions copied from a web server on to
the local browser, just like the graphics and textual content fold. With these applets,
however, instead of merely fulfilling a simple display role, the browser can execute
the program logically. It allows several concurrent parts of the program to be executed
simultaneously; each part is called thread and can be used to gather information,
animate pictures or to perform the most complicated of software functions.
Web applets are used within the banners to provide engaging computer games
banner games. The use of J ava applets in the live banner allows images to move
and evolve as the mouse is moved around the screen.
3.4.3 Cookies as an Advertising Tool
When the online shopper does shopping it is necessary to maintain a record of these
shopping details. Holding this record on the server is problematic, hence the data is
stored on the browser or client end, available to the server for update as subsequent
shopping choices are made. When the shopping session is complete, the server needs
simply to examine the collected records and use this to place the order and invoice.
The data stored on the local browser is referred to as a cookie. In other words, a
cookie is a block of text (digital identification tags) which the website (accessed)
places in a file on a computer hard disk of a person to track his activity. While a code
in the cookie file enables the site to label the person as a particular user, it doesnt
identify the person by name or address unless the person has registered himself and
provided the site with such information or set up preferences in his browser to do so
automatically.
From the point of online advertisement, cookies can be used to record the location
of the browser, so that only advertisements for a specific country, city, or even individual
user are displayed. Also, cookies can be used to track the path through a series of
Web pages or shopping choices (known as click trail). Cookies help in creating a
profile of the user so that only those advertisements for a particular web page or site
those are relevant to the user are displayed before him. For example, international
online advertising companies insert ads on web pages with cookies tagged on them.
Once clicked, they start building up the users profile as he moves from one site to
another. This is how the advertising companies, known as profilers build a
comprehensive profile of the users surfing habits and use it to put ads targeting him
on their partner sites. Also there has been an increasing use of profiling software
tool(s) that reads the users on-line activity and recommends other similar
products.
3.4.4 Google AdWords: Pay Per Click
Credit should be given to the search engines to translate the search results into ads.
In 2000, Google introduced its first advertising programme called AdWords, which
allowed advertisers to place their ads alongside search results. These were not called
Advertising and Taxation
vis--vis E-commerce
29
advertisements, but sponsored links and appeared separately on the right side of
the search page, demarcated by a vertical line. Initially, AdWords advertisers paid
Google based on the number of times their ads showed up alongside the search
results. By 2002, it started charging advertisers per click.
It is an innovation from Google, which has pioneered pay-per-click text advertisement,
which appear alongside search results, triggered by keywords in the search query.
In this case, the advertiser will bid for keywords that he thinks would be used by
people to search the services and products he is providing. When a user searches
using these keywords then they will see a listing and brief description of the advertisers
site, known as Google AdWords which would appear to the right of its search
result. The advertiser will only pay if that user decides to click on the description and
follow the link to the advertisers actual site. These keywords cost not much for
relatively not-so-popular words but may cost on the high side if they relate to popular
products and services. The advertisement is displayed for free with the site owner
paying for those click throughs within a daily budget they have stipulated in advance.
The rank of AdWords displayed on the right of the Google screen is decided by
multiplying the maximum cost-per-click by the click through rate. Interestingly, majority
of AdWord advertisers are small and medium enterprises. Only a minimum of
Rs. 250.00 is needed to sign up for the service and money gets deducted from the
account based on the number of clicks.
In 2005, Google started AdSense, which extended Google and the advertisers reach
to other (but specified) sites, which are using Google search. Suppose a visitor on a
share and stock investment site runs a search (using Google search on the sites
webpage) for a tax advisor. The tax advising firms whose ads show up as sponsored
links will pay Google, which in turn will split some revenue with the website.
3.4.5 Other Advertising Tools
Blogger, Blogs and Forums
Blogger allows anyone to publish onto web instantly. It is like publishing ones own
diary. Blogging has grown with web users publishing what are called webblogs or
Blogs. This is a web page made up of usually short, frequently updated posts that
are arranged chronologically. The blog posts are like instant messages to the web.
These are being increasingly used to influence the viewers and many times these
blogs are used to promote products and services in a clandestine manner.
Micro sites
These are like magazine inserts and usually associated with infotainment sites. They
are placed in such a manner that they create interest to the visitor. These Microsites
have sometimes also been called brand modulus or even cuckoos, since they are
eggs placed in another birds nest.
Messenger Services
Search engines, like Yahoo!, MSN, Google, Talk etc. help users to connect to other
users instantly via messages or voice chat or webcam. These messenger alerts appear
like Pop-ups (term given to when a new browser window which opens up while the
user is viewing a website) on users display. These days they are one of the most
popular ways to advertise on the Internet.
E-commerce
30
Short Messaging Service (SMS)
Short Messaging Text is used in sending advertisements to mobile phone users. This
is commonly known as text messaging and usually involves a short message quite
often using shortened or abbreviated form of words. This is an example of intrusive
form of advertising.
Spyware
Spyware are malicious programs often hides insecurity holes in Windows, collecting
data for market research, and will sometimes announce it by parasitically attaching
an ad to the computer screen. This is known as adware. Sometimes spyware is part
of mainstream software and it is the price a gullible Net user pays for that free
download. Spywares are capable of not only generating annoying pop-up
advertisements but also collect passwords and credit card numbers.
Web casting
It is a push technology that delivers personalised information to the individuals
computer (even to his mobile number). For effective personalisation, web casting
needs to build a profile of the users interests. It comes in the form of NewsAlerts,
MessageAlerts, and StockAlerts etc.
Please answer the following Self Assessment Questions.
Self Assessment Question 2 Spend 3 Min.
Google is a .............................................
The full form of SMS is ...............................................
3.5 ONLINE ADVERTISING: BOON OR BANE?
From the Net advertiser perspective, online advertising is a boon for the advertisers.
It is low cost, fast and has the widest of the wide reach. It is a good investment of
money. From the Net user perspective, online advertising may become a nuisance.
He may not want it and yet he cannot do without it. It is intrusive and yet useful and
informative. It is the cost a Net user is paying for availing many services free of cost
over the Internet. Nevertheless, it eats into Net users Internet usage time and slackens
the speed of Internet. Also, the most disturbing aspect of online advertising is that it
could violate privacy of the Net user.
3.6 E-COMMERCE AND TAXATION
Tax revenues are a major source of income to the governments whether Central or
state. There have been numerous statutory provisions giving powers to the
governments to levy both direct and indirect taxes. Over a period of time, numerous
tax procedures and tax authorities have been created to streamline the tax collections.
The advent of e-commerce has opened up a Pandoras Box how to tax online
transactions? Is it possible to tax such transactions in view of nature of Internet?
Should e-commerce be taxed on lines of offline commercial activities? There are
more questions than answers.
The broad consensus that has emerged is: (i) Online transactions should not be immune
from taxation solely because the sale is conducted through a medium distinct from
Advertising and Taxation
vis--vis E-commerce
31
that of traditional offline businesses, and (ii) It is not prudent to tax these online
transactions purely on the basis of traditional taxation approach applicable to offline
businesses.
3.7 TAX ISSUES EMERGING FROM ONLINE
TRANSACTIONS
As e-commerce represent online transactions involving consumer(s) and business(es)
it is occurring instantaneously, which makes it difficult to determine who the buyer
and seller are and where they are respectively located. Question is how to tax such
online transactions? From a point of electronic taxation following issues may emerge
3
:
Who is the customer?
Where does the customer live?
Did the transaction constitute sale of tangible property, the performance of a
service, or the transfer of intangible property?
Which jurisdiction has the authority to tax the sale?
What online activities constitute sales for sales tax purposes?
What constitutes a business connection/substantial nexus within a taxing
jurisdiction?
Can Central and/or state Government(s) technologically capable to monitor all
online transactions?
What kind of record retention requirements is necessary for tax purposes?
Answers to these questions would lay down the ground rules of electronic taxation
vis--vis e-commerce. Until then, traditional tax rules must be utilized to address
these complex issues. Moreover, it is a myth that electronic tax is an additional tax
burden the fact is, it is a new tax which is applicable in lieu of other indirect taxes.
3.8 E-TAXATION: PROBLEM AREAS
Apart from the above-mentioned tax issues there are certain problem areas as well.
The problems are because of the very nature of Internet technology, which is seamless
and unobtrusive. It may lead to
4
:
a) the lack of physical connection between a consumer in one state and a seller
in another state;
b) absence of permanent establishment (PE) place of business;
c) ever changing location of web servers hosting the website, meant for online
transactions;
d) relocation of businesses in tax havens, like Bahamas, Monaco, etc.
e) general confusion regarding which country has the right to tax the transaction,
and at what rate;
f) non-taxation of digital (intangible) goods, like software, music and data (or
information);
E-commerce
32
g) export and import of digital (intangible) goods across international borders
without paying customs duty (or tariffs), thereby bypassing the existing export-
import policies, regulations and tax system;
h) a parallel channel of transactions, ignoring the traditional documents based on
banking practices;
i) the general lowering down of barriers to trade for the smaller and medium
business entities; and
j) complete disregard to accounting and audit procedures.
These problem areas constitute real threat to the establishment of an extensive platform
dealing with electronic taxation. It is thus imperative that in order to construct an
effective e-taxation regime the problem areas should be addressed and proper
guidelines must be framed to deal with such issues. But care should be taken not to
impose an overly strong regulation and tax regime as this could lessen the financial
attractiveness of conducting electronic commerce.
3.9 AN OVERVIEW OF DEVELOPING E-
TAXATION PRACTICES
World over the nation states are in the process of introducing e-taxation in a selective
manner. There have been legislative and treaty provisions unfolding the e-taxation
practices.
3.9.1 The Internet Tax Freedom Act (ITFA)
The Internet Tax Freedom Act was introduced in March 1997 in the US Senate and
was enacted into law on October 21, 1998. Its objective was to ensure the continued
growth of the Internet as well as to prevent multiple or discriminatory taxes which
could potentially stifle the growth of e-commerce. It further articulated
5
:
Jurisdictions are free to impose taxes on all e-business sales provided that the
tax rate is the same as that which would have been imposed, had the transactions
been conducted in a traditional manner, such as by mail-order.
States may impose taxes on sales of tangible personal property over the Internet,
just as if those sales were conducted in person.
A three year moratorium on multiple or discriminatory taxes on e-commerce.
The ITFA moratorium expired on October 22, 2001, and was retroactively extended
until November 1, 2003.
6
On December 3, 2004, Congress made the moratorium
on taxes on Internet access and multiple and discriminatory taxes on electronic
commerce imposed by Internet Tax Freedom Act permanent.
7
Even though the IFTA
imposes a moratorium on taxes, it still allows the imposition of a single
nondiscriminatory tax on goods and services sold on the Internet. In order to collect
a sales tax on Internet transactions, a State in the US must show that it has sufficient
jurisdiction over a company doing business over the Internet. Today many pure play
e-commerce companies (e-tailers), like Amazon.com and eToys, are paying sales
taxes as if their tax exposure is similar to catalogue businesses.
Advertising and Taxation
vis--vis E-commerce
33
3.9.2 OECD Model Treaty
The Organization for Economic Co-operation and Development (OECD), a 30
member organization has proposed that the basis of any online taxation system should
be equitable, simple, certain, effective, distortions free, flexible and dynamic. The
idea is to create a uniform mode of taxation whether offline or online. That is, any
online taxation system should completely harmonize with existing offline taxation
system. Broadly speaking, electronic commerce should be taxed neither more nor
less heavily than other commerce, and online sales should, to the extent possible, be
taxed at the state of destination of sales, irrespective of the fact whether the vendor
(seller) has a physical presence in the state or not.
The OECD Commentary, on the OECD Model Treaty issued on J anuary 28,
2003, clarified from an e-commerce perspective.
Whether a website constitutes a place of business?
The OECD Commentary mentions that a website, which is a combination of software
and electronic data, does not in itself constitute tangible property and hence cannot
be referred to as a place of business.
Whether location of a server constitutes a permanent establishment (PE)?
The OECD Commentary provides that if an enterprise owns (or leases) and operates
the server on which the website is stored and used, the place where that server is
located could constitute a permanent establishment of the enterprise.
It is evident that the OECD countries place a lot of emphasis on permanent
establishment from e-taxation perspective.
3.9.3 India: E-taxation Practice
With the growth of e-commerce in India, it was felt that India should also adopt the
concept of PE in view of rapid globalisation of commerce. The Finance Act, 2002
has introduced the definition of Permanent Establishment (PE) in the Income Tax
Act, 1961. It shall mean to include a fixed place of business through which the
business of an enterprise is wholly or partly carried on [S.92F (iii (a)]. It may include
a wide variety of arrangements, like a place of management, a branch, an office, a
factory, a workshop or a warehouse etc. The definition is similar to that of the OECD
model. Apart from statutory provisions defining PE, e-taxation in India is still a
developing area. In fact, online taxation regime is presently confined to development
of IT infrastructure facilitating online filing of tax returns. Once it is achieved, e-
taxation rollout would be the next logical step.
Further, it is obligatory to note that in Tata Consultancy Services v. State of Andhra
Pradesh[AIR 2005 SC.371], the issue before the Honble Supreme Court was
whether the canned software which were available off the shelf in the form of software
packages sold by the appellants can be termed to be goods and as such assessable
to sales tax. The Constitutional Bench of five judges opined that for the purpose of
sales tax, the term goods cannot be given a narrow meaning. In India, the test to
determine whether a property is goods, for purposes of sales tax, is not whether
the property is tangible or intangible or incorporeal. The test is whether the concerned
item is capable of abstraction, consumption and use and whether it can be transmitted,
transferred, delivered, stored, possessed etc. Admittedly in the case of software,
both canned and uncanned, all of these are possible.
E-commerce
34
It is important to note that under the Sale of Goods Act, 1930 goods means every
kind of movable property other than actionable claims and money; and includes
stock and shares, growing crops, grass, and things attached to or forming part of the
land which are agreed to be severed before sale or under the contract of sale [S.
2(7)].
The Honble Supreme Courts decision has further widened the tax regime to include
intangible property as well.
Please answer the following Self Assessment Question.
Self Assessment Question 3 Spend 1 Min.
The full form of OECD is .............................................................
Let us now summarize the points covered in this unit.
3.10 SUMMARY
Online advertising is aiding online marketing initiatives.
It has moved from a flat fee payment model to a more dynamic pay per click
model.
Over a period of time, online advertising has become intrusive and bane for the
Net users and it is thus imperative that online service providers should now opt
for self-regulation.
It is a myth that electronic tax is an additional tax burden. The fact is that it is
not! It is meant to tax e-commerce transactions but the process is not easy
because of the very nature of Internet technology, which is seamless and
unobtrusive.
Nevertheless, world over, the governments are coming to terms with the e-
taxation reality.
3.11 TERMINAL QUESTIONS
1. Online advertising is a necessary evil. J ustify the statement with the help of
examples.
2. What is so difficult about taxing e-commerce transactions?
3. Explain the different forms of online advertising?
3.12 ANSWERS AND HINTS
Self Assessment Questions
1. Online consumers
2. (a) Search Engine
(b) Short Messaging Service
3. Organization for economic co-operation and development
Advertising and Taxation
vis--vis E-commerce
35
Terminal Questions
1. Refer to section 3.2 of the unit.
2. Refer to section 3.7 of the unit.
3. Refer to section 3.4 of the unit.
3.13 REFERENCES AND SUGGESTED READINGS
1. J anal D. Online Marketing Handbook how to promote. advertise and sell
your products and services on the Internet. Van Nostrand Reinhold. 1998.
2. Armstrong Steven. Advertising on the Internet. Kogan Page. 2001.
3. Rustad L. Michael and Cyrus Daftary, E-business Legal Handbook. Aspen
Law & Business. 2002.
4. Sharma Vakul . Information Technology Law and Practice. Universal Law
Publishing Co.. 2004.
5. The Internet Tax Freedom Act. Pub. L. 105-277. S 1101.a, Oct. 21. 1998.
6. On November 28. 2001. President Bush signed H.R. 1552. the Internet Tax
Non-discrimination Act which simply amended the IFTA so that the moratorium
would not expire until Nov. 1. 2003.
7. Public Law 108-435. 108
th
Congress. Dec. 3. 2004.
UNIT 4 CONSUMER PROTECTION IN
CYBERSPACE
Structure
4.1 Introduction
4.2 Objectives
4.3 E-consumers
4.4 E-consumer Support and Service
4.4.1 E-mail Support
4.4.2 Newsgroups, Chat Rooms, Message Boards, Blogs
4.4.3 FAQs
4.4.4 Consumer Service Information
4.4.5 Feedback Forms
4.4.6 Help Desk
4.5 Caveat Emptor: Consumers Beware!
4.5.1 Private Policy
4.5.2 Terms of Service
4.6 Legal Remedies
4.6.1 The Consumer Protection Act, 1986
4.6.2 The Specific Relief Act, 1963
4.6.3 The Sale of Goods Act, 1930
4.7 Summary
4.8 Terminal Questions
4.9 Answers and Hints
4.10 References and Suggested Readings
4.1 INTRODUCTION
Today cyberspace represents an e-marketplace. It has got e-shops, e-malls etc.,
selling all kinds of goods and services. If there are e-sellers, then there are e-buyers
as well. These e-buyers, buying goods and/or availing services on the Internet should
be treated as the consumers as defined under the Consumer Protection Act, 1986.
4.2 OBJECTIVES
After reading this unit, you should be able to:
describe who is an e-consumer and how the general profile of e-consumer is
different from that of offline consumer in many ways;
explain the various kinds of support and service, which is being provided to the
e-consumers by the e-commerce service providers; and
explain the legal remedies and analyse whether the rights of e-consumers have
been protected or not.
36
4.3 E-CONSUMERS
E-consumers are consumers who are buying, consuming or selling
1
goods or services
using digital medium (Internet or any other electronic platform). It is interesting to
note that the e-consumers are consuming both tangible (physical) goods as well as
intangible (digital) goods. The digital medium helps e-consumers to place buy orders
for physical goods using e-commerce business models, like business-to consumer
(B2C), consumer-to-business (C2B) and consumer-to-consumer (C2C); it also helps
them to download digital goods in the form of MP3 music files, data, databases,
content, software etc.
Interestingly, the term e-consumer nowadays includes both e-commerce (electronic
commerce) and m-commerce (mobile commerce) consumers.
E- consumer: A Profile
The general profile of e-consumer is different from that of offline consumer in many
ways. An e-consumer is urban, young, technology savvy, educated, convenience
shopper and multiple choices oriented. Moreover, he is smart; he knows where to
look for discount on the Net. As compared to physical world, ease of price comparison
and greater choices are the biggest plus points in favour of e-consumers.
It is thus important to compare a physical shopping experience with that of online
shopping experience to understand the psyche of e-consumer his wants and needs.
Table 1: Comparison
2
between physical and online shopping
Physical Shopping Online Shopping
Shop/Supermarket/Mall Website
Display windows Home Page
Store layout Frames, browse and search
function, navigation buttons
In-store promotion/sales/discounts Special offers, discounts
Store atmosphere Interface consistency, graphics
quality
Number of branches Links to other similar sites
Product displays Menu buttons
Look and touch of the merchandise Look and feel of the merchandise
Footfalls (number of people entering
the store)
Number of unique visits to the
online store

As indicative from the aforesaid table, e-consumer shopping decisions are based on
look and feel factors, i.e. products which require low touch (which consumers
prefer to be able to see and feel before they buy). Nevertheless, the distinctions are
blurring, e-consumers are now even going for goods, which require look and touch,
for example dresses and diamond jewelry
3
.
37
Consumer Protection in
Cyberspace
E-commerce
38
Please answer the following Self Assessment Question.
Self Assessment Question 1 Spend 3 Min.
Who is an E-consumer? Are you an E-consumer?
...................................................................................................................
...................................................................................................................
...................................................................................................................
...................................................................................................................
...................................................................................................................
...................................................................................................................
4.4 E- CONSUMER SUPPORT AND SERVICE
E-commerce is more about personalised support and service. E-consumer is a seeker
of information before he makes a buy decision. Hence, the ability to collect product
information and make comparisons between the different product offerings from
different providers is often viewed as one of the main competitive challenges of e-
shopping and is therefore a key aspect of the online shopping experience. For
example, price and product comparisons have been made easier by the development
of shopping bots. Websites such as Mysimon.com and DealPilot.com enable buyers
quickly to compare products, prices and availability. In other words, e-consumers
are being assisted at every step by the technology.
Significantly, at e-marketplace, an e-consumer is not alone. There exists a community
of e-consumers helping each other in every possible manner. For example, eBay, an
auction site provides a platform for buyers to rank sellers on the basis of their business
dealings. Bad reviews against a particular seller would mean no further business
dealings with that seller on eBay platform. This is a self-regulating process. Similarly,
a site called Epinions.com provides an open source style of review for products of
all kinds, with visitor providing all the material. The company makes no attempt to
edit any of this, but once posted, the reviews themselves are rated by other users.
Consumer support and service in the digital medium is one of the means to protect
not only the organization reputation but also provide an opportunity to redress the
consumer complaints and grievances. Consumer service is concerned with giving e-
consumers the opportunity to talk to the organization and to receive personalised
responses.
There are a number of different avenues through which consumer service and support
can be delivered
4
: (a) E-mail support (b) Newsgroups, chat rooms, message boards,
blogs (c) FAQs (d) Consumer service information (e) Feedback forms (f) Help
desk support.
4.4.1 E-mail Support
E-mails are the best means of communication between the consumer and the
organization. If handled effectively, the consumer will be duly satisfied and the
organization will learn more about the types of difficulties that consumers have with
its products or services and evolve solutions to those problems.
Consumer Protection in
Cyberspace
39
E-mail services can be expensive to operate due to the personalised nature of the
response to begin with. But by incorporating technology, the system may be so
programmed to produce an answer from its databank automatically.
4.4.2 Newsgroups, Chat Rooms, Message Boards, Blogs
These services allow consumers to communicate with one another. These are often
being used to share knowledge and create a self-help group. In the present day
environment, such services help in creating awareness among consumers. Blogs are
the latest edition in this discussion centric online environment. Blogs
5
are a kind of
personalised e-diaries carrying views of the blogger; others may join and post their
views.
4.4.3 FAQs
Frequently Asked Questions are common consumer-service resources. They are
the most common questions posed by consumers, which are collected, together with
their answers, and can be viewed online. The only disadvantages with FAQs are that
they are not personalised.
4.4.4 Consumer Service Information
It provides relevant information to the consumer, which may include product
specifications, compatibility charts, pricing, warranty details etc. Such an information
resource helps the consumer not only in arriving at a decision, but also safeguards
him against any artificial price increase by a retailer.
4.4.5 Feedback Forms
These are the forms through which customers can complain or provide valuable
comments about the service and the products provided by the organization. These
forms are valuable assets from the point of view of consumer trust and retention.
4.4.6 Help Desk
Help desk support system in a form of toll free number, provides real time help to
consumers. It works 247, wherein call center executives listen to complaints and
grievances and try to solve problems.
It is thus imperative for any organization selling services or goods online to provide
to its consumers a system of online help. Such a system would resolve initial disputes
amicably, which may crop up between the consumers and the organization.
Please answer the following Self Assessment Question.
Self Assessment Question 2 Spend 3 Min.
Name the different avenues through which consumer service and support can be
delivered.
...................................................................................................................
...................................................................................................................
...................................................................................................................
...................................................................................................................
...................................................................................................................
...................................................................................................................
E-commerce
40
4.5 CAVEAT EMPTOR: CONSUMERS BEWARE!
E-consumers do have certain rights as consumers. But it is obligatory to note that the
consumers have certain obligations as well. It is expected that e-consumer are aware!
Any failure to protect their interests would be considered to be his own failing.
In the digital medium, it is natural for the consumer to read the privacy policy and
terms of service conditions posted on e-tailers website. Such policy statements
constitute online contracts between the consumer and the service provider (e-tailer).
4.5.1 Privacy Policy
Privacy policy posted on the website provides details of ways and means of protecting
users personal and not-so-personal information. It provides details
6
, like:
What kind of information is to be collected: e-mail address, name, phone number,
postal address, age, gender, occupation, credit card number etc?
What kind of technological tools will be used to collect information?
How the information thus collected will be used and for what purpose?
Whether information to be given to any third-party and for what purpose?
Whether a choice will be given to the individual to opt-out from collection and
distribution of online information.
What will be the business transaction consequences of an individual who has
refused to provide private information or has refused to accept a cookie or has
opted out of a particular use of such information?
How individually identifiable private information collected can be reviewed and,
if necessary, corrected or removed?
How frequent the privacy policy will be reviewed?
Whether the site will be independently verified to ensure that its security
adequately protects its customers from the risk of security breaches.
Privacy policy may exist in a form of Safe Harbor Agreement, which may provide
for terms such as:
(a) Notice to the consumer, i.e., data subject about what information is collected,
processed and used.
(b) Choice covers the ability for consumers to opt-out from direct marketing.
(c) Onward Transfer choice for consumers about the way in which a third party
could use their data.
(d) Security taking reasonable measures to protect data from loss, misuse etc.
(e) Data Integrity data to be kept accurate, current and complete etc.
(f) Access consumers to have reasonable access to information about them
derived from non-public sources.
(g) Enforcement assuring compliance with data protection; also readily available
and affordable independent recourse mechanisms by which consumers
complaints and disputes can be resolved.
Consumer Protection in
Cyberspace
41
4.5.2 Terms of Service
A posted term of service conditions is also an important statement on behalf of an e-
tailer. It signifies that the users use of this website constitutes users agreement to be
bound by these terms and conditions of use. It may contain following details:
(a) Notice
Please review these Site terms of use which govern your use and purchase of
products and services from our website. By accessing, browsing or using the site,
you signify your assent to these terms of use. If you do not agree to these terms of
use then please do not use this site.
(b) Membership Eligibility
Use of the site is available only to persons who can form legally binding contracts
under applicable law. Persons who are incompetent to contract within the meaning
of the Indian Contract Act, 1872 including minors, undischarged insolvents etc. are
not eligible to enter and execute financial transactions with the site.
In consideration of the use of the service, the user agrees to provide true, accurate,
current and complete information about himself as prompted by the User Registration
Form. It is the users obligation to maintain and promptly update the personal
information as requested in the User Registration Form in order to make it true,
accurate, current and complete.
(c) Website Limited License
As a user of this site you are granted a nonexclusive, nontransferable, revocable,
limited license to access and use this site and its content in accordance with these
Terms of Use. Provider may terminate this limited license at any time for any reason.
(d) Protecting Passwords
The user is responsible for maintaining the confidentiality of the password and user
name and is fully responsible for all activities that occur under his password.
(e) Price Offers
The prices advertised on this site are for Internet orders and is inclusive of all central/
local taxes and delivery and handling charges. Prices and the availability of items are
subject to change without notice.
(f) Modifications to Site
The service provider reserves the right, for any reason, in its sole discretion, to
terminate, change or suspend any aspect of the site, including, but not limited to,
content, features or hours of availability. The service provider may impose limits on
certain features of the site or restrict your access to part or the entire site without
notice.
(g) Disclaimer of Liability
This site is provided on an as is, as available basis. Provider expressly disclaims all
warranties, including the warranties of merchantability, fitness for a particular purpose
and non-infringement. Service provider disclaims all responsibility for any loss, injury,
claim, liability, or damage of any kind resulting from, arising out of or any way related
to the use of the site.
E-commerce
42
(h) Indemnification
You agree to indemnify, defend and hold harmless provider, its officers, directors,
employees, agents, licensors, suppliers and any third party information providers to
the site for and against all losses, expenses, damages and costs, resulting from any
violation of these Terms of Use by you.
(i) Governing Law and Jurisdiction
The Terms of Use are governed by and construed in accordance with the relevant
Indian laws. You agree that any action at law or in equity arising out of or relating to
these terms shall be filed only in the courts / tribunals and forums located in Delhi and
you hereby consent and submit to the personal jurisdiction of such courts and forums
for the purposes of litigating any such action.
All provisions in this Agreement regarding representations and warranties,
indemnification and disclaimers shall survive any termination of this Agreement.
Please answer the following Self Assessment Question.
Self Assessment Question 3 Spend 3 Min.
Explain the term Caveat Emptor?
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4.6 LEGAL REMEDIES
It does not imply from the aforesaid discussion that e-consumers rights and obligations
are confined to the privacy policy and term of service conditions only. Does he have
rights if he gets defective goods or services?
Consumer protection in cyberspace can be understood with the help of the following
statutes:
(a) The Consumer Protection Act, 1986
(b) The Specific Relief Act, 1963
(c) The Sale of Goods Act, 1930
4.6.1 The Consumer Protection Act, 1986
Recourse to consumer protection under the Consumer Protection Act, 1986 is taken
after the dispute has arisen. The Act applies to all goods and services unless specifically
exempted by the Central Government. It covers all the sectors of the economy
private, public and cooperative. Further, it provides for adjudication process, which
is simple, speedy and less expensive.
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Consumer is defined under section 2(1)(d) of the Act as a person who buys any
goods or services for a consideration, which has been paid or promised. Therefore
any person buying goods and/or availing services on the Internet will be a consumer
for the purposes of Act. It provides a very wide definition of service as service
of any description which is made available to potential users and includes,
but not limited to, the provision of facilities in connection with banking, financing
insurance, transport, processing, supply of electrical or other energy, boarding or
lodging or both, entertainment, amusement or the purveying of news or other
information, but does not include the rendering of any service free of charge or under
a contract of personal service [section 2(1)(o)]. This definition is capable of including
all online service providers since it is an inclusive definition.
According to section 2(1)(c) of the Act complaint means any allegation in writing
made by a complainant that the goods or services hired or availed suffer from
deficiency in any respect. The complainant can be a consumer or his legal
representatives, any registered voluntary consumer association, Central or State
Government [section 2(1)(b)].
But if a consumer in the digital medium faces any defects in goods or deficiency in
services, who are the persons against whom he can lodge a complaint? The term
deficiency means any fault, imperfection, shortcoming or inadequacy in the quality,
nature and manner of performance which is required to be maintained by or under
any law for the time being in force or has been undertaken to be performed by a
person in pursuance of a contract or otherwise in relation to any service [section
2(1)(g)]. A consumer has every right to file a complaint against all such service
providers, which may include information providers, websites owners, payment
gateways etc. in a District Forum.
Further, section 2(1)(j) of the Act, further qualifies a manufacturer as a person who
makes or manufactures any goods or parts thereof, or assembles them or puts his
own mark on any goods manufactured by any other manufacturer. A trader is a
person (including manufacturer) who sells or distributes any goods for sale. In other
words, a complaint can also be made against manufacturer and trader selling goods
online.
Please answer the following Self Assessment Question.
Self Assessment Question 4 Spend 3 Min.
Define consumer briefly.
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4.6.2 The Specific Relief Act, 1963
A mature legal system endeavours to provide not merely a remedy for every right
infringed, but also an adequate remedy. The Specific Relief Act provides that effective
remedial action.
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It provides preventive relief in the form of temporary and perpetual injunctions
[sections 37 and 38] to the plaintiff to prevent the breach of an obligation existing in
his favour, whether expressly or by implication. For example, a person can move
against any service provider, even an online service provider to a court and plead for
issuing injunction against a service provider, if he feels that the service provider is not
fulfilling his contractual obligations or preventing the breach of an obligation existing
in his favour. The court can perpetually enjoin the defendant (service provider) from
the assertion of a right, or from the commission of an act, which would be contrary
to the rights of the plaintiff.
Further, the plaintiff in a suit for perpetual injunction under section 38, or mandatory
injunction under section 39 of the Act, may claim damages either in addition to, or in
substitution for, such injunction and the court may, if it thinks fit, award such damages
[section 40].
4.6.3 The Sale of Goods Act, 1930
Under Article 366 (13) of the Constitution of India, the expression goods includes
all materials, commodities and articles. Different enactments over the years have
further enlarged the definition of goods. For example, under the Sale of Goods Act,
1930, goods means every kind of movable property other than actionable claims
and money; and includes stock and shares, growing crops, grass and things attached
to or forming part of the land which are agreed to be severed before sale or under
the contract of sale [section 2(7)].
A contract of sale is made by an offer to buy or sell goods for a price and acceptance
of such offer [Section 5 of Sale of Goods Act, 1930]. Now the question is is it
possible to make an online contract? Section 4 of the Information Technology Act,
2000 has accorded legal acceptance to electronic records. Therefore, an offer and
an acceptance through an electronic record will form a contract for the purposes of
the Sale of Goods Act, 1930. Thus a contract for sale of goods made online will
have:
(a) the same effects of contract;
(b) would require same level of performance of contracts;
(c) will give same rights and duties to the seller and buyer; and
(d) will have same consequences for breach of contract as a contract in the physical
world.
The Buyers Rights under the Sale of Goods Act, 1930
It is significant to note that the Sale of Goods Act has laid down a statutory provision
with respect to implied condition as to quality or fitness, i.e., if the buyer, expressly
or by implication, makes known to the seller the particular purpose for which the
goods are required, thereby relying on the sellers skill or judgment, (except in case
of sale an article under its patent or trade name) there is an implied condition that the
goods shall be reasonably fit for such purpose [section 16]. Further, a buyer has a
right to examine the goods, i.e. where goods are delivered to the buyer, which he has
not previously examined, he cannot be said to have accepted them until he has had a
reasonable opportunity of examining them. The seller is bound to give the buyer a
reasonable opportunity of examining the goods, on buyers request. Moreover, where
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goods have been delivered to the buyer and he intimates to the seller that he has
rejected the goods due to some defect; he is not bound to return them to the seller
[sections 41-43].
Also, the Act protects the buyer from any breach of contract arising out of sellers
actions, like where the seller wrongfully neglects or refuses to deliver the goods to
the buyer, the buyer may sue the seller for damages for non-delivery. The buyer may
also sue for specific performance, i.e., the buyer may apply to the Court to direct the
seller to deliver the goods. In case of breach of warranty the buyer may sue the seller
for damages for breach of warranty or set up against the seller the breach of warranty
in diminution or extinction of the price [sections 57-59].
It is thus evident from the aforesaid discussion that legal remedies are available to
the e-consumers in the form of statutory provisions. Nevertheless, e-consumer has
to be careful and vigilant in exercising their legal rights.
Let us now summarize the points covered in this unit.
4.7 SUMMARY
E-consumers are consumers who are buying, consuming or selling goods or
services using digital medium (Internet or any other electronic platform).
The digital medium helps e-consumers to place buy orders for physical goods
using e-commerce business models, like business-to consumer (B2C), consumer-
to-business (C2B) and consumer-to-consumer (C2C); it also helps them to
download digital goods in the form of music files, data, databases, content,
software etc.
A proactive website is the one which provides consumer support and service
functions in the form of e-mail queries, feedback forms, consumer service
information etc.
The knowledge of privacy policy and terms of use are also beneficial for e-
consumers.
From statutory perspective enactments, like the Consumer Protection Act, 1986,
the Specific Relief Act, 1963 and the Sale of Goods Act, 1930 play a critical
role in safeguarding the e-consumers interests in cyberspace.
4.8 TERMINAL QUESTIONS
1. Examine the role of privacy policy and terms of use statements vis--vis e-
consumers.
2. Do you think that the enactments, like Consumer Protection Act, 1986, the
Specific Relief Act, 1963 and the Sale of Goods Act, 1930 are adequate to
safeguard the interests of e-consumers in online environment?
4.9 ANSWERS AND HINTS
Self Assessment Questions
1. An E-consumer is one who buys, consumes or sell good or services using digital
medium, Yes.
2. (a) E-mail support
(b) News Groups, Chat Rooms, Message boards, Blogs
(c) FAQs
(d) Consumer service information
(e) Feedback forms
(f) help desk support.
3. The term Caveat Emptor means consumer be aware.
4. Consumer is defined under section 2(1)(d) of the Act, as a person who buys
any goods or services for a consideration, which has been paid or promised to
pay.
Terminal Questions
1. Refer to sub-section 4.4.1 of the unit.
2. Refer to section 4.5 of the unit.
4.10 REFERENCES AND SUGGESTED READINGS
1. Auction sites. like www.ebay.in represents a consumer-to-consumer C2C model.
2. Adapted from Lohse. G.L. and Spiller. Electronic Shopping: The Effect of
Customer Interfaces on Traffic and Sales Communications of the ACM, Page
1998.
3. The success story of www.baazee.com revolved around selling diamond jewelry
to e-consumers. Interestingly www.ebay.in sells all kinds of physical goods like
cameras. TVs. mobile phones. electronic devices and even automobiles.
4. Rowley J ennifer. E-business: Principles & Practice Palgrave. p. 130. 2002.
5. According to. www.technorati.com which tracks blogs on the Internet that there
are 30 million blogs and there number is growing everyday!
6. Sharma Vakul. Handbook of Cyber Laws Macmillan. India. 2002.
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