The February 2011 decision of the Federal Court of Australia in Roadshow Films Pty Ltd v iiNet Ltd [2011] FCAFC 23–exonerated Australia’s second-largest internet service provider (“ISP”) from claims that it authorized primary copyright infringement of the works of a 34-member rightsholder conglomerate called the Australian Federation Against Copyright Theft. The decision represents a significant breakthrough in the field of liability for an internet-based intermediary (essentially any entity that receives, transmits and/or provides other services with regard to an electronic message over the internet) since-the lead opinion by Judge Emmett puts forward an innovative set of criteria for evaluating intermediary liability of ISPs. Paragraph 257 of Judge Emmett’s opinion captures these criteria in the following words:

“[W]hile the evidence supports a conclusion that iiNet demonstrated a dismissive and, indeed, contumelious, attitude to the complaints of infringement by the use of its services, its conduct did not amount to authorisation of the primary acts of infringement on the part of iiNet users. Before the failure … to suspend or terminate its customers’ accounts would constitute authorisation of future acts of infringement, the Copyright Owners would be required to show that at least the following circumstances exist:

(a) iiNet has been provided with unequivocal and cogent evidence of the alleged primary acts of infringement …

(b) The Copyright Owners have undertaken:

(i) to reimburse iiNet for the reasonable cost of verifying the …infringement alleged and of establishing and maintaining a regime to monitor the use of the iiNet service … and

(ii) to indemnify iiNet in respect of any liability reasonably incurred by iiNet as a consequence of mistakenly suspending or terminating a service on the basis of allegations made by the Copyright Owner.”

These criteria form a good point of departure for Indian copyright law, which is still struggling to answer some basic questions on how liability for copyright infringement should apply to ISPs.

In India, intermediary liability is addressed by the Information Technology (IT) Act, 2000, Section 2(1)(w), whichincludes ISPs in its definition of -‘intermediaries’. Section 79(3)(b) of the IT Act holds ISPs liable only if they have actual knowledge of infringing content or have received a notification to that effect by a government agency and the threshold of due diligence in acting expeditiously to remove content or disable access to it. This permits ISPs to be painted with the same brush as other online intermediaries such as websites, social networking portals and the like, which perhaps answer more faithfully to the definition of intermediaries in this context. This is particularly damaging since it leaves the door open for generalizations and characterizations to be made of ISPs when, certainly in terms of business models and incentive structures, ISPs bear little resemblance to online intermediaries that better fit the definition.- Separating ISPs from other online intermediaries has been fairly successful under 17 U.S.C. § 512(k)(1)(A) in the United States, which segregates ISPs from other types of intermediaries within a broad framework which sets out the conditions in which content posted by intermediaries online will not be considered infringing.

Even allowing for the deliberate vagueness necessary to bring all of Section 2(w) within its sweep, Section 79(3)(b) of the IT Act remains rudimentary at best from a substantive perspective, primarily because it does not recognize the significant compliance costs incurred by ISPs and the genuine dilemma for such service providers of being caught between intellectual property enforcement efforts and potentially losing a large proportion of their customer.

Charting a balanced way forward for the Indian law on intermediary liability is vital in light of Super Cassettes Industries Ltd v. MySpace Inc. 2011 (47) PTC 49 (Del), India’s first substantive decision on intermediary liability, which found the social networking website MySpace liable for authorizing copyright infringement of works by its users on an interpretation of Section 51(a)(ii) of the Copyright Act, 1957. Section 51(a)(ii) saves from infringement an intermediary who is not aware and has no reasonable ground for believing that the communication of the work would be infringing. This “knowledge and reasonable belief” standard (paragraph 47) applied in MySpace highlighted the acute need for a robust substantive standard on intermediary liability.

ISPs need to be more proactive than reactive in confronting copyright infringement and – owe a general duty to assist in copyright enforcement. However, guided by iiNet, this general duty should only extend to cases where other stakeholders such as internet users and the State regulatory agencies are not unreasonably prejudiced, whether on legal, economic or moral grounds. The iiNet guidelines show ISPs a feasible way out of the enforcement problem, especially since the fallout of the decision appears to have enabled ISPs to protect their business interests while complying with the law but making few, if any, changes to their -copyright enforcement commitments.

1. The iiNet decision

The seemingly onerous demands required by Judge Emmett to be met by copyright holders in order to get ISPs to aid in copyright enforcement indicates that the threshold of ‘authorisation’ – which is understood to be the grant or purported grant of the right to do the act complained of – is being met increasingly easily by ISPs. Indeed, the ingredients of authorisation identified by Judge Emmett in the excerpt from his opinion provided above – (i) the power to-control the means of infringement, (ii) making that means available to others and (iii) failure to take reasonable steps to limit infringement — are more in line with those recently outlined in Twentieth Century Fox v. Newzbin Ltd. [2010] EWHC 608 (Ch) (involving a website service that made copyrighted content available to its users) than those provided over two decades ago in CBS Songs v. Amstrad [1988] 1 AC 1013 (involving tape recording facilities that allowed buyers to create copies of copyrighted musical works), where, arguably, elements of these ingredients were present and yet not held to constitute authorisation.

In place of authorisation, Judge Emmett- correctly recognizes that in order to expect ISPs to side with enforcement rather than infringement, two main concerns need to be addressed. First, the holders’ claims must be based on strong, cogent evidence and not infringement notices, which are assertive and speculative. To this end, they must provide indemnity to ensure that when the ISP pulls the plug on infringing users, it is not held liable for doing the holders’ bidding. This addresses the fact that infringement surveillance mechanisms remain unreliable and terminating internet connections on the basis of mere allegations would violate procedural fairness (P. Yu, ‘The Graduated Response’ (2010) 62 Florida Law Review 1373). Second, ISPs must be compensated for the considerable costs likely to be incurred in surveillance, policing and data retention for the purpose of enforcement. This responds to the concern that enforcing holders’ copyrights would unfavourably skew ISPs’ profit structure, making it difficult to offer low-cost and quality service to users (Yu).

Judge Emmett – also wisely leaves these requirements open-ended by using the words ‘at least the following circumstances’, allowing for flexibility to be built into these requirements over time. The overall standard required to be met by copyright holders is a justifiably high one, indicating judicial cognizance of the extreme (and often disproportionate) nature of the measure of disconnection as an enforcement action (Yu) and a more balanced approach to enforcement by requiring from full confirmation of an infringement before taking enforcement action (see H. Travis, ‘Opting Out of the Internet in the United States and theEuropean Union: Copyright, Safe Harbors, and International Law’ (2008)

84 Notre Dame Law Review 331 -).

2. Passive-reactive to active-preventive ISPs

The articulation of pre-enforcement requisites to be fulfilled by copyright holders in iiNet could also be seen as going some way towards stabilising the position of ISPs vis-à-vis enforcement obligations. It assumes greater significance in the context of the recent shift from clearly defined ISP safe harbours to a co-operative model of graduated sanctions, which responds to the evolution of ISPs from being passive carriers of information to active managers of content, possessing direct enforcement means (Annemarie Bridy, ‘Graduated Response and the Turn to Private Ordering in

Online Copyright Enforcement’ (2010) 89 Oregon Law Review 81; -; Jeremy de Beer and Christopher Clemmer, ‘Global Trends in Online

Copyright Enforcement: A Non-Neutral Role for Network Intermediaries?’

(2009) 49 Journal of Jurimetrics 375). Indeed, in the present scenario in the U.S. for instance, while there is no affirmative requirement for ISPs to implement technological/monitoring measures to claim safe harbour protection (Yu), it would be difficult to do so without implementing some policy against repeat infringers (Bridy).

Interestingly, this trend has not been instigated purely by pressure from copyright holders. ISPs’ self-interest has also played an important role in the voluntary assumption of these responsibilities in at least two ways—first, the burden imposed by infringers’ file-sharing on ISPs’ network resources and second, the scope for synergy between holders (content suppliers) and ISPs (distribution networks) in offering an integrated product (Yu; de Beer/Clemmer).

3. When should ISPs owe a duty to prevent infringement?

If indeed ISPs’ self-interest suggests that complying with enforcement demands of copyright holders may not be onerous under some circumstances, the next question is of what these circumstances are. Given that the law protects copyright per se (rather than making protection contingent on a feasibility-of-enforcement analysis), ISPs should owe a general duty of co-operation to assist in copyright enforcement. However, this duty should only extend in circumstances where enforcement does not unreasonably prejudice other parties on legal, moral or economic grounds.

Legal grounds

One set of situations where unreasonable prejudice may be caused to users is where their individual liberties are violated without any procedural safeguards in place (Yu). This would cover cases where a user is disconnected from the internet on the basis of merely alleged infringement, where such a measure is not preceded by a formal notice of infringement, where disconnection is not an ‘appropriate, proportionate and necessary measure’ (Yu) and where the individual does not have an opportunity for judicial redress.

These concerns are addressed by the Digital Economy Act, 2010 (“DEA”) in the UK, which incorporates two important procedural guarantees as part of a graduated response—inserting a three-stage notification process to subscribers under Section 124A of the UK’s Communications Act, 2003 (which, ideally, should coalesce multiple infringements over the relevant period into a single notice rather than direct separate notices for every individual infringement; Bridy) and measures for an independent system for appeals by users (which would ensure fairness by adjudicating each case on its merits; Bridy), including a right to anonymity (Ofcom, Online Infringement of Copyright and the Digital Economy Act 2010:

Draft Initial Obligations Code (28 May 2010) -).

As the DEA implementation strategy correctly acknowledges, the educative and rehabilitative functions of these procedures must also be taken seriously and preliminary infringement notices in particular must outline, in simple language, the nature of the alleged infringement, possible corrective measures and legal options in terms of challenging the alleged infringement (Ofcom Draft Code; Yu).

Further, in line with the iiNet conditions, the DEA recognises that procedural fairness also requires that allegations of infringement should be based on credible evidence and not mere allegations. This is this important from a procedural perspective and anchoring infringement allegations to credible evidence also increases the likelihood that the eventual enforcement measure will be proportional to the infringement (Yu).

To this end, a ‘quality assurance report’ for infringement reports has been proposed, which would require holders to reveal measures taken to assure the integrity, accuracy and legality of evidence of infringement (Ofcom Draft Code). This system would impart sufficient flexibility to allow copyright holders to develop the necessary technical measures while preserving scope for intervention vis-à-vis the substance of the reports, either by Ofcom or by the appellate body (Ofcom Draft Code).

Another legal safeguard that may need to be contemplated relates to the appellate body. Even where infringement notices are based on credible evidence, since the case against the user is of infringement, the adjudicating authority must be willing to consider defences to copyright infringement (Yu). Additionally, given the criticality of internet access to many ISP users, the adjudicating authority should give due weight to the absolute nature of internet disconnection and the possibility for alternative arrangements for internet access (Yu).

These provisions should go a long way towards placating concerns of procedural fairness in the enforcement process, especially if further reforms such as mandatory requirements for ISPs to disclose their copyright enforcement practices (including any invasive technological monitoring measures used) to their users (Bridy). ISPs could then be justifiably required to use the means at their disposal to assist in enforcement.

Economic and moral grounds

There is a further reason for requiring ISPs to assist in copyright enforcement—since ISPs benefit indirectly from infringement (through more users and greater usage) and exercise greater control than in the past over user content, they should also bear fair share of responsibility for assisting with enforcement (Yu; Bridy).

However, this responsibility depends on the ISP’s scale because as unreasonable as it is to allow large ISPs with several thousands of users to be unaccountable for infringement by those users, it is equally unreasonable to require, say, a small ISP to incur significant costs to comply with legislation designed to address infringement which it does not notably contribute to (Ofcom Draft Code).

A balance between these extremes could be attempted along the lines of Section 124C(5) of the UK’s Communications Act under which a moving target threshold can be set to identify ‘qualifying’ ISPs. The flexibility in this measure would ideally allow a regular review of the threshold to ensure that infringing users are not out of the reach of enforcement by migrating to smaller ISPs that perpetually remain below the threshold (Ofcom Draft Code). This is supplemented by Section 124M(3)(a) which allows scope for ISPs to claim costs of enforcement from copyright holders, reflecting another of the iiNet conditions.

While this threshold establishes a workable basis for determining which ISPs should owe a duty to assist in copyright enforcement, there remains the possibility that, in practice, enforcement actions by ISPs will disproportionately target small users. This is because the economic loss to ISPs resulting from these users being bumped off the network for infringement is likely to be far lesser than if large users with deep pockets are disconnected (Yu).

Even if such open discrimination is not practiced, there could be interference by ISPs with the principle of network neutrality (requiring no restrictions on internet content accessible to users) by using technological measures to restrict/prohibit certain types of bandwidth-intensive activities (de Beer/Clemmer). While such measures would broadly appear to be in aid of copyright enforcement, they would do so by unreasonably prejudicing that demographic of users.

To that end, there is a need to ensure that copyright enforcement by ISPs (though more an obligation than a duty in such cases) does not so discriminate between infringers, possibly by strengthening procedural safeguards for users and allowing a broad scope for the adjudicating authority to scrutinise ISPs’ enforcement policies.

Eashan Ghosh graduated with Distinction Honours on the Bachelor of Civil Law (B.C.L.) programme at the University of Oxford in 2011 and is a multiple gold medalist on the B.A. LL.B. (Hons.) programme at the National Law School of India University (NLSIU), Bangalore. He is currently an Associate with Fidus Law Chambers, a leading Indian intellectual property law firm, and practices intellectual property law at the Delhi High Court.

 

 

By Eashan Ghosh

FOREIGN TRADE POLICY

The Foreign Trade Policy of India, issued by the Ministry of Commerce and Industry, Government of India, contains provisions for the development and regulation of foreign trade by facilitating imports into, and exports from, India. In furtherance of this objective, the Foreign Trade Policy grants incentives in the form of special focus initiatives and sectoral initiatives. The Foreign Trade Policy also imposes restrictions on the import and export of certain categories of goods, services, and technologies. Export of dual use items is one such area where restrictions are imposed to protect India’s national security and foreign policy goals and objectives, objectives of global non-proliferation, and India’s obligations under treaties to which it is a State party.

In 2010, the Foreign Trade (Development & Regulation) Act, 1992 was amended to include a new chapter dealing with controls on export of specified goods and services. According to the new provisions, no goods, services or technology notified under the legislation shall be exported except in accordance with the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005. The relevant section of this legislation states that no person shall export any material, equipment or technology knowing that such material, equipment or technology is intended to be used in the design or manufacture of a biological weapon, chemical weapon, nuclear weapon or other nuclear explosive device, or in their missile delivery systems.

SCOMET LIST

Pursuant to the above, under the Foreign Trade Policy of India, dual use items have been given the nomenclature of SCOMET i.e. Special Chemicals, Organisms, Materials, Equipment and Technologies. Appendix 3 of Schedule 2 of the Export Policy has put in place a regulatory framework embodying an exhaustive list of goods, services and technology, export of which is subject to fulfilment of conditions contained therein.

The SCOMET list in Appendix 3 has been divided into 8 categories of items. Category 0 in Appendix 3 deals with nuclear material, nuclear-related other materials, equipment and technology. Category 1 deals with toxic chemical agents and other chemicals. Category 2 deals with micro-organisms and toxins. Category 3 deals with material, materials processing equipment and related technologies. Category 4 deals with nuclear related other equipment, assemblies and components, test and production equipment and related technology, not controlled under Category 0. Category 5 deals with aerospace systems, equipment including production and test equipment, related technology and specially designed components and accessories thereof. Category 6 is currently reserved, and Category 7 deals with electronics, computers, and information technology including information security. Each of these categories is further broken down into various sub-categories.

Any person in India desirous of exporting any item mentioned under the SCOMET list has to obtain the requisite license for export from the Director General of Foreign Trade (“DGFT”) unless export is prohibited or is permitted without licence subject to fulfilment of conditions, if any, as indicated for any specific category or item. The licensing authority for items in Category 0 under the SCOMET list is the Department of Atomic Energy and the applicable guidelines are notified by the Department under the Atomic Energy Act, 1962.

Apart from the license required for export of specified goods, services and technology, the SCOMET guidelines also make it mandatory for all companies and their subsidiaries registered in India, and all other business entities operating in India and involved in the manufacture, processing and use of SCOMET items, to obtain permission of the Central Government before entering into any arrangement or understanding that involves an obligation to facilitate or undertake site visits, on-site verification or access to records or documentation, by foreign governments or foreign third parties, either acting directly or through an Indian party.

LICENSE AND OTHER FACTORS

Application for licence to export items covered under the SCOMET guidelines are considered on a case-to-case basis. Some of the factors considered by the DGFT before granting an export license are the end use of the SCOMET items being exported, credentials of the end user, credibility of the declarations of end use and integrity of chain of transmission of the items from supplier to end user. Further, the DGFT also assesses the export control measures instituted by the recipient state, the capabilities and objectives of programmes of the recipient state relating to weapons and their delivery, applicability to an export licence application of relevant bilateral or multilateral agreements to which India is a party and assessed risk that the exported items will fall into hands of terrorists, terrorist groups, and non-State actors.

There are some exceptions to the requirement of end use certifications. Licences for export of items under the SCOMET guidelines, other than those under Category 0, 1 and 2, solely for purpose of display or exhibition does not require any end use or end user certifications. The guidelines also state that export licence shall not be granted for display or exhibition of technology for items under Categories 0, 1 and 2. Licences for export of items under the guidelines for display or exhibition abroad are subject to a condition of re-import within a period not exceeding 6 months. Exporters can apply for an export licence for such items exhibited abroad, if the exhibitor intends to offer that item for sale during the exhibition abroad, as such sale is not permitted without a valid licence.

The DGFT also has the power to impose additional end-use conditions as may be stipulated in licences for export of items that bear possibility of diversion to, or use in development or manufacture of, or use as, systems capable of delivery of weapons of mass destruction.

TECHNOLOGY UNDER SCOMET

One of the items under the SCOMET list on which there has been a lot of debate and discussion is Technology. Appendix 3 defines “Technology” as, follows:

Except as otherwise provided for against any item in the SCOMET List, information (including information embodied in “software”) other than information in the ‘public domain’, that is capable of being used in:

1. the development, production or use of any goods or software;
2. the development of, or the carrying out of, an industrial or commercial activity or the provision of a service of any kind.

Explanation: When technology is described wholly or partly by reference to the uses to which it (or the goods to which it relates) may be put, it shall include services which are provided or used, or which are capable of being used, in the development, production or use of such technology or goods.”

Technology under the SCOMET guidelines is not covered in a stand-alone category. While Category 7 does deal with information technology including information security, a review of the sub-categories of Category 7 cover only items like data processing security equipment, authentication and key loader equipment etc. There are references to technology under the other categories of the SCOMET guidelines. For example, under Category 0, technology refers to technology and software for the development, production or use of prescribed substances or prescribed equipment specified in sub-category OA and OB. Under Category 3 dealing with material, materials processing equipment, and related technologies, technology refers to technology for the development, production or use of items in 3A (dealing with stealth materials) and 3B (dealing with materials processing and production equipment, related technology and specially designed components and accessories therefor). Category 5 dealing with aerospace systems, equipment including production and test equipment, related technology and specially designed components and accessories thereof refers to technology related to the development, production, testing and use of items listed in some of the other sub-categories of Category 5.

From a perusal of the above provisions, it can be seen that the SCOMET provisions contain reference to technology is always in relation to development, production or use of a product listed therein. Thus, as mentioned, technology per se is not covered under a separate category but has to be read with a specified product category listed under SCOMET. Therefore, on a plain reading of the SCOMET provisions, it seems that if a product does not fall within the ambit of the SCOMET provisions, technology for the development, production or use of such product is not likely to fall within the purview of the SCOMET provisions.

However, any technology can have many uses. It is possible that an exporter, if a layman, is not likely to forsee all possible uses of the technology. In such a case, if the exporter does not obtain an export license for a certain technology that he is exporting, and one of the uses of that technology is for development of an item falling under the scope of the SCOMET guidelines, the DGFT has the power to impose strict penalties for export of items in contravention of the provisions of the Foreign Trade Policy, which may include confiscation of the items by the adjudicating authority and fines upto five times the value of the items.

The lack of clarity in the SCOMET guidelines on whether technology per se is covered, and how export of technology is to be dealt with, has lead to a lot of confusion amongst exporters. Although the Foreign Trade Policy provides a mechanism for making clarification applications for obtaining clarity on the provisions of SCOMET, clarification applications to the DGFT inevitably get held up for months without any progress or response. While the DGFT has stipulated a time line of 2 months for processing of export license applications, they have not prescribed any timeline for clarification applications. The lack of any obligation on the DGFT to revert within a stipulated time frame provides no relief to an exporter suffering due to the ambiguous nature of the provisions.

Considering the SCOMET guidelines have been included in the Foreign Trade Policy with the intention of protecting India’s national security, we can only hope that all ambiguity on what is included in the SCOMET list is cleared at the earliest.

Seema Sukumar is a Senior Associate, and Garima Jhunjhunwala is an Associate

With J. Sagar Associates, based out of Bangalore. Seema can be contacted at seema@jsalaw.com and Garima can be contacted at garima.jhunjhunwala@jsalaw.com.

By Seema Sukumar and Garima Jhunjhunwala

 

 

 

INTRODUCTION

Lord Salmon L.J., an eminent English jurist, in one of his judgements had stated the following –

The right to fair criticism is part of the birth right of all subjects of Her Majesty. Though it has boundaries, that right covers a wide expanse, and its curtailment must be zealously guarded against. It applies to the judgements of the courts as to all other topics of public importance.

News media and television journalism have been instrumental in propagating the volume of news and views in the world including India for most of the twentieth century. However, in recent years, social media platforms such as Facebook, YouTube, Twitter and blogs have grown in importance not only as an alternative news source but as an effective medium for individuals to post their own views and opinions. While Courts in India have always supported the cause of freedom of speech and expression, they have also emphasized the need for reasonable restrictions on this right to prevent misuse of such social media.

POSITION IN INDIA

FREEDOM OF SPEECH AND EXPRESSION IN INDIA

Article 19(1)(a) of the Constitution of India, 1950 (“Constitution”) provides that all citizens have the right to freedom of speech and expression. However, these fundamental rights are not absolute in nature and Article 19(2) of the Constitution imposes reasonable restrictions in the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality or in relation to contempt of court, defamation or incitement to an offence.

Over the years, the judiciary in India has usually scuttled all attempts to hinder this invaluable right of freedom of speech and expression. However, they have simultaneously emphasized that the Constitution does not confer an absolute right to speak or publish, without responsibility. It is not an unrestricted or unbridled license that gives immunity for every possible use of language and provides punishments for those who abuse this freedom.

SOCIAL MEDIA AND CENSORSHIP

The act of censorship involves the suppression of speech or other public communication which may be considered objectionable, harmful, sensitive, or inconvenient as determined by a government, media outlet, or other controlling body. While censorship of online content is imperative to prevent obscene, indecent, defamatory and disparaging information being made available on the internet, imposition of unreasonable restrictions will be violative of the fundamental right to freedom of speech and expression.

In December 2011, India’s Union Communications and Information Technology minister Kapil Sibal had instructed internet service providers and social media giants including Google, Facebook, Microsoft and Yahoo amongst others to pre-censor online content uploaded by their users.

This move by the Government of India led to widespread dissent and condemnation in the country. The Government later issued a clarification stating that it was committed to freedom of speech and expression and would not take any steps in violation of this fundamental right.

DISSENTERS IN THE JUDICIARY

While pre-censorship of mass media has been held to be constitutionally valid by the Supreme Court in the past, the apex court has also observed, in L.I.C. of India vs. Prof. Manubhai D. Shah, (1992) 3 SCC 637, that to stifle, suffocate or gag the fundamental right of free speech and expression would sound a death-knell to democracy and would help usher in autocracy or dictatorship.

The judiciary in the recent case of R. Karthikeyan v. Union of India, W.P. No. 20344 of 2009, a decision rendered by the Madras High Court on April 01, 2010 and in the case of Janhit Manch and Others v. Union of India, PIL No. 155 of 2009, rendered by the Mumbai High Court on March 03, 2010 ruled against the blocking of websites. They refused to direct the Government to take proactive steps to curb access to and police online content, stating that this would place an excessive burden on the right to freedom of speech and expression enshrined under Article 19(1)(a) of the Constitution.

In Secretary, Ministry of Information and Broadcasting, Govt. of India and others v. Cricket Association of Bengal and others, (1995) 2 SCC 161, the Supreme Court of India held –

For ensuring the free speech right of the citizens of this country, it is necessary that the citizens have the benefit of plurality of views and a range of opinions on all public issues. A successful democracy posits an ‘aware’ citizenry. Diversity of opinions, views, ideas and ideologies is essential to enable the citizens to arrive at informed judgment on all issues touching them. This cannot be provided by a medium controlled by a monopoly – whether the monopoly is of the State or any other individual, group or organisation.

The Supreme Court has held that the words ‘freedom of speech and expression’ must therefore be broadly construed to include the freedom to circulate one’s views by words of mouth or in writing or through audio-visual instrumentalities. It includes the right to propagate one’s views through the print media or through any other communication channel, L.I.C. of India vs. Prof. Manubhai D. Shah (1992) 3 SCC 637.

THE INTERMEDIARY RULES

In April 2011, the Government of India notified the Information Technology (Intermediaries Guidelines) Rules 2011 (“Intermediaries Rules”) that prescribe, amongst other things, guidelines for administration of takedowns by intermediaries. An intermediary has been defined under Section 2(w) of the Information Technology Act, 2000 (“IT Act”) as any person who on behalf of another person receives, stores or transmits an electronic record or provides any service with respect to that record and includes telecom service providers, network service providers, internet service providers, webhosting service providers, search engines, online payment sites, online-auction sites, online-market places and cyber cafes.

Social networking platforms like Facebook, Twitter, search engines like Google and Yahoo, all of which have revolutionised the online space are included within this definition.

The Intermediaries Rules provide for the standard of due diligence to be exercised by intermediaries, in order to be eligible for an exemption from liability for content hosted on such intermediaries’ websites, in terms of Section 79 of the IT Act, which provides:

“For the removal of doubts, it is hereby declared that no person providing any service as a network service provider shall be liable under this Act, rules or regulations made thereunder for any third party information or data made available by him if he proves that the offence or contravention was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence or contravention.

Explanation – For the purposes of this section –

“network service provider” means an intermediary.

“third party information” means any information dealt with by a network service provider in his capacity as an intermediary.

However, the IT Act also limits the liability of these intermediaries under Section 79 of the IT Act, which states that an intermediary shall not be liable for any third party information, data, or communication link made available or hosted by him if the intermediary exercises due diligence while discharging his duties under the IT Act and also observes such other guidelines as the Central Government may prescribe.

As per the Intermediaries Rules, the intermediary, on whose computer system the information is stored or hosted or published, upon obtaining knowledge by itself or been brought to actual knowledge by an affected person in writing or through email signed with electronic signature, about any objectionable information as mentioned above, shall act within thirty-six hours and where applicable, work with the user or owner of such information to disable such information that is in contravention.

Therefore, the Intermediaries Rules casts the onus of the intermediary to censor all material and information to be hosted and made available by them.

The Central Government can also block content under Section 69A of the IT Act. The Information Technology (Procedure and Safeguards for Blocking for Access of Information by Public) Rules, 2009 lays down the procedures, guidelines for blocking of the website or information generated, transmitted via internet for the general public.

RIGHT TO PRIVACY

The right to privacy has been interpreted as an unarticulated fundamental right under the Constitution. Privacy rights are protected under Article 21 of the Constitution. Article 21 states that no one shall be deprived of his life or personal liberty except by procedure established by law and this procedure must be reasonable, fair and just and not arbitrary, whimsical or fanciful.

Indian Courts upheld the right to privacy under Article 21 in the landmark case of Kharak Singh v. State of Uttar Pradesh, AIR 1963 SC 1295, where the Supreme Court held that the right of privacy falls within the scope of Article 21 and observed that the expression “right to life” was not limited to bodily restraint or confinement to prison only but something more than mere animal existence. In this case, the Petitioner was charged in a case of dacoity but was subsequently released as there was no evidence found against him. Thereafter, he was subjected to surveillance under U.P. Police regulations, wherein the police constables used to enter his house during night hours and thereby disturb him. The Supreme Court held that the U.P. Police regulations which authorizes domiciliary visits is void and unconstitutional and upheld the right to privacy of the Petitioner.

Since the concept of privacy is closely connected to data protection, in 2011, the Government of India also notified the “Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Information) Rules, 2011” (“Privacy Rules”) under Section 43-A of the IT Act. The Privacy Rules establish the standard of security practices and procedures to be observed by data collectors, and provides for the protection of the privacy of users disclosing data.

The Privacy Rules state that prior permission of the provider of information has to be obtained by the body corporate before disclosure is made to a third party and any third party receiving such information is not entitled to disclose it further.

However, they shall be obliged to share such information without obtaining prior consent from the provider of information, with Government agencies mandated under the law to obtain information including sensitive personal data or information for the purpose of verification of identity, or for prevention, detection, investigation including cyber incidents, prosecution, and punishment of offences.

While some may argue that because of the above mentioned exception, the Privacy Rules exempt the Government from its obligations, it must be pointed out that the legislation simultaneously also provides safeguards for this right. During the exercise of this exception, the Government agency is required to send a request in writing to the body corporate possessing such sensitive personal data or information stating clearly the purpose of seeking such information. The Government agency is also under an obligation to state that the information so obtained will not be published or shared with any other person.

Social media has been facing a lot of criticism by the governmental authorities in India lately. While some of the actions of the government may be politically motivated, others are because there are a plethora of laws in India that cover a vast variety of issues. Many of these are so ambiguous in nature that any content put up by the social media will get affected by these laws. Some of the laws that may be of concern are as follows –

The Indecent Representation of Women (Prohibition) Act, 1986

This legislation prohibits the “indecent representation of women” through advertisements, or in publications, writings, paintings, figures, or in any other manner. It defines “indecent representation of women” as depiction in any manner of the figure of a woman; her form or body or any part thereof in such way as to have the effect of being indecent, or derogatory to, or denigrating women, or is likely to deprave, corrupt or injure the public morality or morals.

Warnings by the government to social media sites like Facebook and YouTube, court notice to Bollywood actors and cricketers for indecent dancing at the cricket IPL in April 2012, Indian MPs proposing a ban on indecent representation of women on television at a discussion in the Indian Parliament are some incidents in the social media where indecent portrayal of women has been condemned.

The Indian Penal Code, 1860

The Indian Penal Code contains provisions dealing with sedition, obscenity, blasphemy, and defamation, which may be used to sanction those who generate and circulate objectionable content.

The Emblems and Names (Prevention of Improper Use) Act, 1950

This legislation prevents the improper use of certain emblems and names for professional and commercial purposes. It states that no person can use, or continue to use, for the purpose of any trade, business, calling or profession, or in the title of any patent, or in any trade mark or design, any name or emblem or any colourable imitation thereof without the previous permission of the Central Government.

The Prevention of Insults to National Honour Act, 1971

The legislation states that whoever in any public place or in any other place within public view burns, mutilates, defaces, defiles, disfigures, destroys, tramples upon or otherwise shows disrespect to or brings into contempt (whether by words, either spoken or written, or by acts) the Indian National Flag or the Constitution of India or any part thereof shall be liable to imprisonment.

CONCLUSION

Recent debates on internet censorship in India have focused on the allegedly free for all nature of the internet. There is no doubt that the above mentioned Indian laws prevail on the internet space as well and grants us our constitutional right to free speech and expression but with reasonable restrictions. While some may argue that the current mechanism of internet censorship in India is draconian and unconstitutional, they should also keep in mind that the internet should not be misused for their own private interests, which may be detrimental to the interests of others or the country as a whole. This dichotomy between rights of the people and the statutes in force has to be resolved by way of a harmonious interpretation of the provisions of these statutes. The government and the judiciary should take steps to provide clarifications to remove ambiguity in the above mentioned legislations, to prevent conflicting interpretations by different sections to suit their selfish motives.

Probir Roy Chowdhury is a Senior Associate and Garima Jhunjhunwala is an Associate with J. Sagar Associates, Bangalore. Their practice areas include work in the technology and education sector in India. They may be contacted at probir@jsalaw.com and garima.jhunjhunwala@jsalaw.com.

 

 

By Probir Roy Chowdury and Garima Jhunjhunwala

 

1. Background

General Anti-Avoidance Regulations (‘GAAR’) are aimed to target complex and / or peculiar tax avoidance arrangements not dealt directly by the provisions of tax laws. Such tax avoidance arrangements which are artificial i.e. having no commercial substance entered with the main motive of abusing tax provisions.

GAAR has also been termed as codification of the doctrine of substance over form with the objective of deterring occurrence of tax avoidance arrangements rather than per se revenue generation.

GAAR regulations intend to deal with tax avoidance arrangements and not tax mitigation or instances of tax evasion considering that tax avoidance is distinct from tax mitigation and tax evasion. Where, on the one hand, tax evasion is illegal or forbidden by law, tax mitigation is where tax payer takes advantage of a fiscal incentive offered to him by the tax legislation.

The above can be explained by way of an illustration, let us take a situation where Company incorporates its manufacturing division in Special Economic Zone (SEZ) so that it can take benefit of tax holiday offered by the tax statute. It being a fiscal incentive and taking its advantage would amount to tax mitigation. In the same situation, if the company were to manufacture in non-SEZ zone but diverts the manufactured products to SEZ, where no value addition is done, it would be regarded as tax evasion, emanating due to misrepresentation of facts.

Having suggested so, it has been variedly held that tax avoidance arrangements do otherwise affect economic efficacy, fiscal justice and revenue productivity.

With this given conceptual background, the concept of GAAR was first introduced in India through draft Direct Tax Code (‘DTC’), 2009. DTC was introduced with a view to replace the Indian Income Tax Act, 1961, aiming to achieve simplification in terms of language and structure vis-à-vis the extant direct tax provisions. The same along with a discussion paper was released on August 12, 2009 for public comments.

Subsequently, a Revised Discussion Paper was released in June 2010, based upon the initial feedback received and was again made available for public comments.

Thereafter, the Draft of Direct Taxes Code, 2010 (‘DTC 2010’) was placed by the Government of India before the Parliament on 30 August 2010. In specie, DTC 2010 did retain most of the GAAR provisions proposed by DTC 2009. Also other certain enabling provisions were incorporated to effectuate the proposed GAAR provisions.

2. GAAR-Evolution Process

The DTC 2009 introduced GAAR with a prime objective of its acting as a deterrent against tax avoidance practices. However, a reasonable distinction between legitimate tax minimization and abusive tax avoidance was conspicuously missing in DTC 2009.

The DTC 2009 proposals, inter-alia did suggest that an arrangement shall be presumed to have been entered into, or carried out, for the main purpose of obtaining a tax benefit unless the person obtaining the tax benefit proves that obtaining the tax benefit was not the main purpose of arrangement. The sweeping nature of such presumptive provision ought to have caused undue hardship to the taxpayers entering into genuine transactions and accordingly the entire scheme of GAAR was viewed as counterproductive vis-à-vis commercial efficiency. Also, such provisions would lead to a plethora of litigation, inconsistent with the objective of achieving deterrence of avoidance arrangements.

It was widely suggested that the initial burden of invoking GAAR should be shifted upon the tax authorities.

After receiving several representations from stakeholders, the revised draft DTC 2010 was issued. The 2010 version of DTC was, thereafter, referred to the Standing Committee on Finance headed by former Finance Minister, Yashwant Sinha, which gave its report on March 9, 2012 recommending amendments.

Eventually, the tax proposals for the year 2012 announced vide Finance Bill 2012 on March 16, 2012 introduced GAAR provisions in the existing scheme of Income Tax Act, 1961 (Act) effective April 1, 2012.

The said proposals enunciated vide Finance Bill 2012 were enacted on May 28, 2012.

3. Salient Aspects of GAAR Proposal
   

Chapter X-A of the Income Tax Act, 1961, now encapsulates the scheme of GAAR.

The said scheme like in DTC 2009, 2010 does provide wide discretionary powers to the revenue authorities in taxing tax avoidance arrangements’ including the power to disregard entities in a structure, reallocate income and expenditure between parties to the arrangement, alter the tax residence of such entities and the legal situs of assets involved, treat debt as equity and vice versa, etc.

The legislated GAAR provisions were once again criticised for providing wide discretionary power to tax authorities resulting in excessive tax and compliance burden on the taxpayer. Also, the said proposal , along with the retrospective amendments on taxation of indirect transfers did become a subject of intense debate.

Considering the same, implementation of GAAR was deferred by one year.

Subsequently, a committee under the chairmanship of the Director General of Income Tax (International Taxation) was constituted to give recommendations for formulating the guidelines for proper implementation GAAR provisions and to provide clarity on the provisions so as to safeguard taxpayers against their indeterminate use and curb abuse thereof.

The Committee released its draft recommendations on 28 June 2012, the following suggestions/recommendations were made by the committee:

Shifting of initial burden to prove, if, an arrangement leads to “tax avoidance” on the revenue authorities from the taxpayer.

Also, in order to provide relief to small taxpayers, it was suggested to provide a monetary threshold for invoking GAAR provisions. For the sake of consistency and transparency in the procedures, the committee also prescribed statutory forms for making references within the tax departments and time limits for completion of various actions under the GAAR provisions.

Further, it was clarified that GAAR would cover cases not covered by Specific Anti Avoidance Rules (‘SAAR’). Guidelines clarified that in case only a part of the arrangement is impermissible, the tax consequences under GAAR will be limited to only that part of the arrangement.

Various illustrative cases were recommended by committee for sake of clarity as to whether an arrangement would attract GAAR provisions or not.

The said guidelines were issued when there was a change of guard at the office of the Finance Minister with the finance portfolio getting vested with the Hon’ble Prime Minister.

It was somewhat a surprise to observe the reaction of the Prime Minister’s Office to the circulation of the draft guidelines in the public domain, suggesting that the rules were merely “draft guidelines to seek wide ranging feedback and for discussion purpose”. Further, the finance ministry officials did state “Do not read too much into the release of PMO. The PM has not applied his mind on GAAR issues”.

The Government of India constituted an Expert Committee on GAAR to undertake stakeholder consultation to finalize the guidelines for GAAR.

4. Shome Committee

The expert committee under the chairmanship of Dr. Parthasarathi Shome, noted economist was constituted by Government to undertake consultations and suggestions from stakeholders and general public on the first draft guidelines for GAAR.

The committee did receive suggestions from the stakeholders, professionals in tax advisory, chambers of commerce and industry, foreign investor associations, industrialists, and policy makers in relation to the above recommendations and on based on the feedback issued second draft guidelines for GAAR.

The draft report submitted by Shome committee has suggested deferring the implementation of GAAR by 3 years on the administrative ground as it would require trained tax officers. The tax officers would be required to have specific knowledge since GAAR requires deterrence of avoidance arrangement rather than revenue generation.

Further, the committee in its draft report has emphasized on “investment approach” by suggesting abolishment of tax on gains arising from transfer of listed securities and tax on business income of foreign investors in India. And in order to make good of tax loss, the committee has recommended increasing the rate of security transaction tax.

It recommended that the tax officer would be required to give a detailed reasoning before invoking GAAR, as such the onus of proving shall be of tax authorities.

In order to avoid ambiguity and uncertainty the committee has further recommended that until the tax is abolished as mentioned in the above paragraph, in case a Tax Residency Certificate is issued by government of Mauritius, GAAR provisions shall not apply to examine the genuineness of the residency of an entity set up in Mauritius.

Similarly, where the treaty itself has anti-avoidance provisions, for instance under Indo – Singapore tax treaty, the treaty provisions ought not be substituted by GAAR provisions under the treaty override provisions.

As discussed, the provisions of GAAR envisaged provision of wide discretion & authority to tax authorities, as such it has been constantly feared that it might result in tax exploitation.

It was also felt that tax avoidance should be distinguished from tax mitigation. An exhaustive negative list for the purposes of GAAR should also be specified.

The committee has also recommended introduction of a negative list, not exhaustive, to include:

• Amalgamations and demergers (as defined in the Act) as approved by the High Court.
• Intra-group transactions (i.e. transactions between associated persons or enterprises) which may result in tax benefit to one person but overall tax revenue is not affected either by actual loss of revenue or deferral of revenue.
• Selection of one option out of two or more options offered by law should not be considered to be tax avoidance. For instance:
• payment of dividend or buy back of shares by a company,
• setting up of a branch or subsidiary,
• setting up of a business unit in SEZ or any other place,
• funding through debt or equity, and
• purchase or lease of a capital.
• Timing of a transaction, for instance, sale of property in loss while having profit in other transactions.

To bring more clarity and fairness the committee has in its report has recommended that the investment made by residents or non-residents which are existing as on the date of commencement of GAAR should not brought under the scrutiny of GAAR provisions.

Other salient recommendations of the Shome committee inter alia are:

• Monetary threshold of Rs. 3 crores (equivalent to USD 5,00,000 approximately) of tax benefit to check the applicability of GAAR provisions.
• GAAR to cover only those arrangements which have the main purpose of obtaining tax benefit and not those whose one of the main objective is to obtain tax benefit.
• An arrangement lacking “commercial substance” shall be deemed to include arrangement not having significant business risks or net cash flows apart from tax benefit.
• In order to ensure high level of independence, the Approving Panel for the purposes of GAAR should have 5 members including chairman. The chairman should be retired judge of the High Court, two members from outside government and persons of eminence from the fields of accountancy, economics or business, two chief commissioner of income tax.
• As per the existing legislated provisions of GAAR under Finance Act, 2012, whilst determining the commercial substance of an arrangement following factors are considered irrelevant:
• Time period of existence of an arrangement,
• Fact of payment of taxes, directly or indirectly, under the arrangement,
• Fact that an exit route is provided by the arrangement.

The committee has recommended that these test should not discarded as totally irrelevant and may be considered in addition to the other aspects while evaluating the commercial substance of an arrangement.

• GAAR provisions would not be invoked while processing application for lower tax deduction at source where the taxpayer gives an undertaking to pay taxes in case it is found that GAAR provisions are applicable in relation to remittance during the course of assessment proceedings.

Apart from the above, the committee has also recommended that tax avoidance schemes to be considered for reporting purposes as more likely than not as impermissible avoidance arrangement and be reported in the voluntary tax filing done by the taxpayer.

By and large the Industry and all the stakeholders have hailed the recommendations of the Shome Committee as a welcome relief.

5. TAKEAWAYS

The timing of introduction of GAAR regulations in the given international as well as domestic scenario is viewed regressive. Seemingly, there has been an instantaneous sense of realization that, in the present challenging times, sound tax competitiveness is required.

The policy makers are extremely conscious of flow of International Capital and perhaps have understood that the tax regime has to be conducive with the global environment and the need of the hour is to achieve increase of net Foreign Direct Investment flows into the country. When compared with the 2009 version, significant changes have taken place in the GAAR regulations, which itself suggests that tax policy is being correctly configured at this given juncture.

A variety of measures can be undertaken including initiating structural reforms in the tax system and administration, which can add to revenue productivity.

 

 

INTRODUCTION

Indian companies have been making aggressive inroads into foreign territories, whether in the form of joint ventures or outright buy-outs. To manage their operations abroad, Indian workers are being heavily deputed abroad by their companies. The payment of social security contributions by these deputed workers and their companies has become an increasingly contentious issue.

The deputation period of Indian workers may range from a few months to a few years, but is often not long enough to ensure that the contributions made by them towards social security funds is realizable when they have finished their deputation period to return home; nor do they become eligible for any benefits there under. In the United States, for example, where a significant number of Indian workers are deputed on a regular basis, a person is entitled to social security coverage only when there is a minimum period of contribution for 10 years. However, the current United States visa regime does not permit a worker to stay in the United States for a period beyond 6-7 years. Therefore, the Indian worker who has contributed towards the social security fund for several years, but for a period of less than 10 years, fails to derive any benefit from such contribution. Furthermore, in most other countries the social security benefits are not exportable. This inequity towards the deputed worker and the company deputing such persons has meant that many Indian workers and Indian companies have to incur an additional cost towards such deputation and receive no benefit in lieu thereof.

SOCIAL SECURITY AGREEMENTS: THE RHYME & REASON

In October 2011, the Indian and the German governments signed a comprehensive Social Security Agreement (“SSA”), which subsumed the earlier agreement signed in October 2008. From the Indian perspective, this agreement would immediately benefit thousands of Indian workers working in Germany either as professionals or self employed. This is not the first SSA signed between India and a second state, and the government hopes that it will not be the last. The first such SSA was signed between India and Belgium in November 2006. Thereafter, India has entered into similar agreements with France, Switzerland, the Netherlands, Luxembourg, Hungary, Denmark, Czech Republic, the Republic of Korea and Norway. These countries may not have the largest diaspora of Indian workers, but the thinking is that as more and more countries agree to enter into an SSA with India, India would be able to convince countries such as the USA, UK, Canada and Australia to enter into similar comprehensive social security agreements benefitting the multitude of Indian workers deputed therein.

One reason behind this spurt of SSAs has been the Indian government’s increasingly aggressive stand on the issue of social security contributions made by foreign workers deputed to India. The Ministry of Labour and Employment through the Employees’ Provident Fund Organisation, amended the provisions of the Employees’ Provident Funds Scheme, 1952 (“Scheme”) on October 2008 and then again in November 2010 to impose stringent obligations and restrictions on workers deputed to India by foreign companies. The amendments were meant to ensure that the benefits availed in India by such foreign companies and their deputed workers under the then existent Scheme are curtailed so as to spur their respective governments to consider the inequities meted out to Indian companies and their deputed workers elsewhere.

Until October 2008, foreign nationals on deputation to India were required to contribute towards the Indian social security funds only if their salary was less than Rs.6500/- per month. However, since almost all such foreign nationals were drawing a salary in excess of the amount so prescribed, they did not have to make any social security contributions in India and continued to pay such contributions in their home country and accrue the benefit therefrom. The 2008 amendment introduced the concept of an International Worker (“IW”) and the limit of Rs.6500/- per month was done away with. The 2010 amendment imposed further restrictions on the withdrawal of pension funds vis-à-vis the IWs.

INTERNATIONAL WORKER & EXCLUDED EMPLOYEE

An ‘International Worker’ is defined in the Scheme as (1) an Indian employee who has worked or will work in a foreign country with which India has entered into a social security agreement and is eligible to avail the benefits under a social security programme of that country, or (2) an employee other than an Indian employee, holding something other than an Indian passport, working for an establishment in India to which the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 applies, which includes, any establishment employing 20 or more persons. Pursuant to the amendments, every IW, other than an Excluded Employee (explained below), employed as on the first day of October, 2008, in any establishment to which the Scheme applies shall be entitled and required to become a member of the fund with effect from the first day of November 2008.

An Excluded Employee is defined under the amended Scheme as an IW who is contributing to a social security programme, either as a citizen or resident, of his country of origin with which India has entered into a social security agreement on reciprocity basis, and such person is enjoying the status of detached worker for the period and terms as specified in such agreement. The Excluded Employees and the company employing such employees, when deputed to India, do not fall in the ambit of the Scheme and are therefore not required to become a member of any Indian social security fund for the time period as mentioned in the respective agreement. The benefits, in monetary terms, work out to be a saving of up to 24% of the annual salary drawn by such deputed workers, as both the IW and its employer are each required to contribute 12% of the salary towards the social security contributions in India. The Indian government is hoping that this will become the prime reason why other countries – especially those having significant deputations to India – will be encouraged to sign the SSAs and thereby provide similar reciprocal benefits to Indian companies deputing workers abroad.

GENERAL BENEFITS OF SOCIAL SECURITY AGREEMENTS

The general benefits arising out of the majority of SSAs signed by India are that of detachability of employee, exportability of pension, and totalisation of insurance periods. Detachability relates to those employees who have been deputed abroad, and who continue, by virtue of an SSA, to contribute to the social security funds in their home country. Exportability means that the benefits accrued upon contributions made to social security fund are available to the employee irrespective of whether such employee is situated in the home country or elsewhere. Totalisation benefits account for the total period of service of the employee (irrespective of the territory where such services were rendered) to determine his eligibility for benefits.

Under most SSAs signed to date, workers who have been sent to India to work for a period of up to 60 months are exempt from making social security contributions in India provided they continue to make such contributions in the home country, and vice versa. In the case of the SSA signed with Germany this period stands as 48 months with an additional extension of 12 months, whereas with Switzerland, this period is for a total of 72 months. Furthermore, workers who are deputed to the host country for a period in excess of that prescribed in the respective SSAs and that therefore are required tomake social security contributions in the host country instead of the home country shall be entitled to export the benefits accruing from the same to their home country upon the completion of their assignment in the host country or on retirement. (Note, however, that this provision of export is not available in the SSA with Germany.) Additionally, the period of service rendered by the deputed worker in the host country shall be considered towards determining the eligibility of social security benefits in the event such periods are a determining factor in claiming such eligibility and benefits in the home country. Totalisation benefits are not available for IWs from Denmark, Germany, Netherlands and Switzerland. Moreover, only the SSAs with Germany, Belgium, Switzerland, Luxembourg and France are currently in effect, while agreements negotiated with other countries are awaiting ratification by their respective governments. Thereby, the companies and employees deputed from countries which haven’t signed the SSAs with India, or whose SSAs have not yet become effective continue to be bound by the contribution requirements under the Scheme.

NON-SSA COUNTRIES: DISADVANTAGEOUS POSITION

-Before 2010, an IW could withdraw the contributions made by him to the Indian social security funds after attaining the age of 55 years, or at the time of termination of service or upon migration from India for permanent settlement/ taking of employment abroad. However, post the amendments, the IW may withdraw the contributions made by him to the Indian social security funds only under the following circumstances: (1) On retirement from service in the establishment at any time after the attainment of 58 years; (2) On retirement on account of permanent and total incapacity for work due to bodily or mental infirmity (3) On suffering from tuberculosis, leprosy, or cancer. The amount, in any of the aforesaid cases, shall be credited to the bank account maintained by the IW in India.

The issues plaguing IWs from non-SSA countries are manifold. Obligations towards dual-payment of social security contributions – in the home as well as host country – restrictions on withdrawal of accumulated contributions, maintenance of bank account in India are some of the issues haunting IWs and companies alike. Furthermore with effect from April 2011, a Provident Fund account becomes inoperative after 36 months from the date it becomes payable where no request for withdrawal or transfer has been made. Since the contributions are eligible to be withdrawn only after the IW has completed 58 years of age, such accounts will become inoperative and no further interest on such amounts in the account will be payable. In the event a divided payroll is being provided to the IW – where the salary is being paid both in the home and the host country – the calculation of contribution towards Provident Fund shall be made on the total salary earned by the IW. Also, in case the IW has multiple country tasks, and the IW spends some part of his deputation abroad, his full salary shall be considered for computation for the contribution for Provident Fund.

CONCLUSION

Depending upon the terms and conditions contained in individual SSAs already signed, and those that are under negotiation, the limitations imposed upon the IWs and the companies deputing them may differ. However, broadly, the benefits of detachment, exportability, and totalisation are available in the majority of SSAs signed till date. And as more and more countries opt to sign the SSAs – as per the available information, negotiations with the governments of Sweden, Australia, Canada and the USA are currently on – the loss due to unclaimed benefits on social security contributions made by Indian workers deputed abroad is expected to decline, and with that, the cost incurred by companies making such deputations. On a reciprocal basis, the cost incurred by foreign companies deputing IWs in India will also decline.

The global workforce pool is a significant asset that requires careful management and assimilation, and isessential for achieving economic integration. Cross-border movement of workers has seen a gradual increase in the past few years, and it appears that this increase is not of a temporary nature. Lately, it has been observed that workers are being deputed abroad for relatively short periods of time – mostly for project-specific assignments. In this arena of globalised workforce movement, it is therefore increasingly necessary to have globally harmonized social security laws, and specific international treaties aimed at making it easier for companies to depute workers abroad.

It is therefore important that the governments of respective countries who have a significant number of its citizens deputed to India make an urgent effort to negotiate and execute the SSAs with India and thereby ensure that an equitable and mutually beneficial environment of cross-border worker deputation is put in place. The mantle should, however, be taken up by companies, who will benefit the most from reduced worker deputation costs, to lobby vigorously with their respective governments to negotiate and arrive at an equitable consensus on social security laws.

Sunil Tyagi is a Senior Partner and Sayanhya Roy is an Associate at ZEUS Law Associates (‘‘ZEUS’’). ZEUS is a corporate commercial law firm based in India. One of its areas of specialization is employment law related transactional and litigation work. The authors can be contacted on zeus@zeus.firm.in.

 

 

By Sunil Tyagi and Sayanhya Roy

 

 

Despite a global economic downturn, India has remained an‘attractive’ destination for inbound investment (http://emergingmarkets.ey.com/wp-content/uploads/downloads/2012/03/india-attractiveness-final-version1.pdf). Based onextant foreign direct investment policy, released by the Ministry of Commerce & Industry, foreign entities may either invest in Indian entities upto a permissible percentage or may establish 100% wholly- owned subsidiaries. Typically, forease of administration,such foreign investor companies prefer to retain certain data pertaining to their local companies on a common server located in the said foreign parent/investorcompany’s jurisdiction. Such data may, inter alia, range from employee related details to customer databases.For clarity, hereinafter persons who have provided bodies corporate with data pertaining to themselves have been referred to as “data subjects”). The local company collects relevant data from data subjects and transfers the same to the foreign parent/groupcompany.

Given the lack of a data protection regime in India till mid-2011, such collection and/or transfer of data from India to an overseasjurisdiction did not throw up a major challenge. While Indian Parliament did enact a legislation, particularly the Information Technology Act, 2000 (the “Act”), the same did not provide for a structured data protection framework.

In April 2011, the Ministry of Communications and Information Technology (“Ministry”) notified the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (“Rules”) under section 43-A of the IT Act. Section 43-A, inter alia, states that:

where a body corporate possessing, dealing or handling any sensitive personal data or information in a computer resource which it owns, controls or operates, is negligent in implementing and maintaining reasonable security practices and procedures and thereby causes wrongful loss or wrongful gain to any person, such body corporate shall be liable to pay damages by way of compensation to the person so affected.

It defines a ‘body corporate’ to mean “any company and includes a firm, sole proprietorship or other association of individuals engaged in commercial or professional activities”.However, Section 43-A failed to provide watertight definitions of either of the terms of ‘sensitive personal data’ or ‘reasonable security practices and procedures’, thereby making its implementation ineffective. The Rules delineate certain practices and procedures that an Indian company must adhere to, in orderto, inter alia, collect and/ortransfer certain categories of data.

This article attempts to discussprovisions of the Rules regardingcollection of data by an Indian company and subsequent transfer of such data to its parent/group company in a foreign jurisdiction. However, before we delve into the details regarding the steps a company must implement to be in consonance with the requirements of the Rules in this regard, it would be interesting to note the applicability of the Rules.

Applicability of the Rules

A common question that arises in situations of cross-border data transfer is regarding the applicability of the Rules.If data is being transferred to or retained by the foreign company, would such foreign companybe required to be in compliancewith the Rules?

The Rules, read with Section 43-A of the IT Act, seem to be applicable to any company possessing, handling or dealing with ‘sensitive personal data’ (as has been defined and discussed hereafter). A subsequent press note dated August 24, 2011 (the “Press Note”) released by the Ministry clarified the situation: the Rules are applicable only to Indian body corporates. In other words, foreign companies do not fall within the ambit of the Rules and therefore do not necessarily have to be compliant with the Rules.

Kinds of data

The Rules deal with two categories of data viz. sensitive personal data and personal data. The Rules define these categories of data, as has been discussed hereafter.

(i) personal data, being data which by itself, or in conjunction with other data is capable of identifying a person (“personal data”) (Rule 2 (1) (i) of the Rules); and

(ii) sensitive personal data, such as data relating to passwords; financial information such as bank account . credit card, or debit card details ; physical, physiological and mental health condition; sexual orientation; medical records and history; biometric information i.e. technologies that measure and analyse human body characteristics, such as ‘fingerprints’, ‘eye retinas and irises’, ‘voice patterns’, “facial patterns’, ‘hand measurements’ and ‘DNA’ for authentication purposes; and any detail relating to the above as provided to a company for providing service: provided that, any data that is freely available or accessible in public domain or furnished under the Right to Information Act, 2005 or any other law for the time being in force is not be regarded as sensitive personal data) (“sensitive personal data”, Rule 3 of the Rules).

There are compliance requirements that are common to both personal and sensitive personal data. However, in the case of sensitive personal data, there are additional compliance requirements. Therefore, determining the category of data being handled would be the first step towards compliance with provisions of the Rules.

Compliance vis-a-vis collection, transfer, retention or use of personal or sensitive personal data

In this section we, we will deal with various stipulations to be adhered to by an Indian company with regard to collection and/or transfer of personal or sensitive personal data to a foreign company.

Maintenance of Privacy Policy (Rule 4 of the Rules)

If the Indian company determines that it is handling either personal or sensitive personal data, it must drafta privacy policy, which is to be amdeavaialbe to all. For ease of administration, it is advisable to post the said privacy policy on the Indian company’s website.

The Rules clearly set out the contents of the said privacy policy. Among other items, the following has to be addressed in the privacy policy:

• purpose of data collection/receipt/retention/use;
• category of data being handled;
• security procedures maintained to secure suchdata from wrongful dissemination; and
• circumstances under which such data may be disclosed to third parties (together with such third party’s details).

Below, we shall highlight the other important contents of a privacy policy.

Reasonable Security Practices and Procedures

This is probably the most important highlight of the Rules. , The international arena has time and again expressed concern over the lack of security standards in India for security of data. The Rules specifythat a company collecting/using/storing/transferring personal or sensitive personal data must adopt reasonable security practices and procedures not lower than standards of IS/ISO/IEC 27001 on “Information Technology – Security Techniques – Information Security Management System- Requirements”.

In order to establish compliance with such security requirements, it is recommended that the Indian company maintainscomprehensive documentation highlighting the security programmeand policies implemented by it. Such documents may contain details on managerial, technical, operational and physical security control measures.

Referring back to the privacy policy, it is recommended that it address the issue of data security, stating that security procedures implemented by it are not lower than the IS/ISO/IEC 27001 standards.

Transfer of Information(Rule 7 of the Rules)

There may arise a situation where the personal or sensitive data may require to be transferred to a foreign jurisdiction.The Rules provide for specific conditions, upon the satisfaction of which, a company may transfer personal or sensitive personal data. An Indian company proposing to transfer personal or sensitive personal data to a foreign company may proceed with such transfer, provided:

• the transferee entity maintains the same level of data protection as is stipulated in the Rules i.e. not lower than the standards of IS/ISO/IEC 27001; and
• the transfer is necessary for the performance of any lawful contract between the said Indian company and data subject

However, an exception from the above conditions has been carved out for transfer of personal or sensitive personal data with prior consent of data subject. Therefore, the aforementioned privacy policy of the Indian company should ideally state that it is compliant with the above provisions vis-a-vis transfer of personal or sensitive personal data.

Additional compliance with regard to sensitive personal data

Let us assume a situation when the Indian company determines that it handles sensitive personal data. The following are additional measures that would be required to be undertaken in such a scenario:

Collection of Sensitive Personal Data and Mode of Obtaining Consent

If the Indian company determines that it is collecting and/or transferring sensitive personal data from data subjects, it will be under the obligation to obtain prior consent of such data subjects for the same (Rule 5(1) of the Rules). Such consent may be obtained through letter or fax or email. Electronic consent vide tick box or ‘I Agree’ tab is also permitted. In order to make the process of obtaining consent easier, the privacy policy of each body corporate may contain an ‘I Agree’ tab at the end of the text. A click on the tab by data subject would constitute valid consent.

However, prior to such collectionof sensitive personal data, the Indian company must ensure that:

• itinformsdata subjects of the purpose for which data is being collected, that the data so collected may be transferred, the intended recipients of the data and names/addresses of the agencies collecting and retaining this data (Rule 5 (3) of the Rules).
• thatsensitive personal data is beingso collected for lawful purposes, connected with an integral activity of the company (Rule 5(2) of the Rules).
  

Right to Opt Out

A practical concern that hasbeen raised with regard to collection of data is the availability of an option to withdraw consent. As per the Rules, the Indianentity collecting/using/transferring/retaining sensitive personal data must be provided an option to opt-out of the consent so given at any point in time (Rule 5 (7) of the Rules).

While seeking consent of data subject, the privacy policy of the Indian company must also mention data subject’s right to opt-out of such consent. In terms of procedure, the right to opt-out must be exercised through a written requisition to that effect, duly submitted to the Indian company.

Disclosure and Transfer of Data

Since the concerned data is sensitive personal in nature, the Indian company is precluded from disclosingit to any third party (including group companies), without prior permission of data subject (Rule 6 of the Rules). However, if data subject has provided the Indian company with prior permission for suchdisclosure by executinga contract between the Indian company and data subject, then the same acts as exception to the above rule. To further protect sensitive personal data, the third party is restricted from further transferring sensitive personal data.

A practical way to address this stipulation would be to include sufficient language in the privacy policy stating that data subject consents, not only to collection, but also disclosure of his sensitive personal data to a third party However, the onus remains on the Indian company to ensure that such third party implements reasonablesecurity practices and procedures, as explained above.

Retention and Use

The Indian company must ensure that sensitive personal data collected by a company from a data subject is not retained for longer than is required to fulfill the purpose for which such data was collected or is otherwise required under law to be retained. The data so collected must be used only for the purpose(s) for which is has been collected.

The privacy policy of the Indian company may be drafted in a manner to assert that sensitive personal data is collected for valid purpose and the same will not be abused by retaining it for longer than required.

In order to provide data subject with sufficient control over his sensitive personal data, the Rulesmandate that a data subject be provided with a right to access and review his sensitive personal data (Rule 5(6) of the Rules). However, the Rules have not provided a structured procedure to be adopted for review of databy data subject. Apart from being compliant with the Rules, provision of this right would also ensure that a companyis not held responsible for the authenticity of data supplied by data subject.

Grievance Officer (Rule 5(9) of the Rules)

Every company dealing with sensitive personal data must appoint a grievance officer to address complaints/queries regarding data subjects’ sensitive personal data. The name and contact details of such grievance officer must be made available to data subjects. The intent is to have a designated person to address any issues that may arise with regard to sensitive personal data, within one months’ time. Given the absence of any directive from the Ministry regarding qualificationsfor the position of grievance officer, the Indian company may designate one of their existing employees as the ‘grievance officer’.

Conclusion

While the move to induce a stricter data privacy framework by means ofthe notification of the Rules has been appreciated, various industry bodies are skeptical about the implementation of the same: for example, while the Rules provide for an audit of data protection practices prevalent in a company, there is no clarity as to who should perform this audit and based on what parameters. In the absence of any clarification from the Ministry regarding implementation of the Rules, the privacy policy of an Indian company is of utmost importance. In the event of an investigation, it is one document which may form strong evidence of the Indian company being compliant with the Rules. Therefore, until the Ministry releases further notifications regarding the implementation of the Rules, it is recommended that Indian companies frame their privacy policies wisely and generally, adhere to the Rules.

Ankita Ray is an Associate with J. Sagar Associates, Bangalore, India. She can be contacted atankita.ray@jsalaw.com.

 

 

By Ankita Ray

 

A constitutional amendment bill for the introduction of a harmonized GST in India at the federal level and its 28 provinces and 7 centrally administered territories was introduced in the parliament in March, 2011. The bill is now before a parliamentary committee for detailed examination. The procedure requires passing of the Bill by special majority in both houses of parliament and ratification by at least half the states, making it necessary to achieve some broad-based consensus.

While the stakeholder consultations by the parliamentary committee are not yet concluded, there are some indications that the Bill may not see passage in the present form. Practically, all states are pitching for explicit autonomy in the fixation of tax rates within a reasonable band. Some states have argued the need to protect their existing revenues from origin-based taxation on inter-state movement of goods that has already been reduced from 4% to 2% and is expected to be completely eliminated in the GST. Many sections of the business are advocating a more comprehensive GST by including petroleum, electricity and alcohol, which presently are left out.

While these discussions are underway, the central government has been moving fast to bring its own legislation as close as possible to the impending GST. This is expected to reduce the lead time after the constitutional bill is passed as well as acclimatize both the businesses as well as tax administrators to the impending changes.

An important component of these changes has been some path-breaking changes in service tax, introduced during the budget presented by the Union Finance Minister, which have come into effect from July this year.

NEGATIVE LIST OF SERVICES

The foremost amongst these changes has been the introduction of negative list of services, replacing the selective taxation of specified services that were being incrementally added year-after-year since the introduction of service tax in 1994.

Many fiscal experts believed that despite a fairly long positive list of nearly 120 heads at the last count, service sector contributed only about 25% to the consumption taxes, far less than its potential evident from its close to 60% contribution to GDP. The innumerable legal disputes due to possible overlaps and conflicting interpretations between various taxable services had accentuated the problem to a level where a one-time streamlining appeared to be the only sensible solution.

The negative list comprises seventeen heads capturing both the services that are beyond the taxing powers of the Union under the present constitution and a variety of other services justified on socio-economic or administrative grounds. The list covers formal education, public transport, renting of a residential dwelling, services related to cultivation of agriculture (which includes animal husbandry) or marketing of agricultural produce, margin-based financial services, core activities of government and funeral or burial services. Though the list may appear a little unwieldy, it will stand pruned once the constitution is amended allowing both the centre and states to levy tax on all services at the time of GST.

The negative list is supplemented by a list of exempted services. This list comprises mainly such services that are presently outside the tax net but may need a closer look at the time of introducing GST. The list covers transportation of essential items of mass consumption, construction services in the areas of basic infrastructure or low-cost housing, and services by intermediaries that do not make any net contribution to revenue but add significantly to administrative burden. Additionally it includes many social sector services such as health and animal care, recognized sports, classical and folk arts, activities of charities and public libraries.

The relative long list of exemptions needs to be seen in the light that the government still does not have a comprehensive data base of the national identity of a vast majority of its poor, together with the problem of their financial inclusion, to be able to offset the burden of taxes as is commonly prevalent in many developed countries.

Of greater concern at this stage are exemptions at intermediate stage that break the tax credit chain and add to cascading. The GST will be backed with very advanced IT, making it possible to reduce the cost of compliance and phase out many such exemptions.

PLACE OF PROVISION RULES

The introduction of negative list required elimination of service-specific provisions in a number of areas. Two such areas relating to import and export of services have now been replaced with the place of provision of services rules, which determine the geographical location where a service will be deemed to be provided.

As the service tax is today entirely handled by the federal government, the rules for the present will mainly address cross border services and to a minor extent transactions with the State of Jammu and Kashmir, where the present statue does not apply. However they provide the required setting for GST where the distribution of revenue from services amongst states will depend on the place of their consumption.

The rules are aligned largely with international best practices. The default rule, which covers a large majority of B2B transactions, is entirely based on OECD guideline that the place of supply is the location of the recipient. The transactions under global arrangements are all well explained in the Education Guide that was released together with these changes making the task of understanding the mammoth changes quite easy.

One major difference from similar rules elsewhere is contained in rule 7 which applies to performance and location-specific services when provided in multiple locations within India and outside. This rule retains the place of performance in taxable territory even when the portion performed outside outweighs the former. Primarily the rule is aimed as an anti-avoidance provision in location-specific services, where there could be a tendency to reflect invoicing from establishments located in non-taxable territories even though it would be desirable to issue independent invoices for services rendered from different locations.

The other significant deviation from global practice is rule 8 which holds that the service will be provided at the location of the recipient where both the service provider and service receiver are located in the taxable jurisdiction even when the service could otherwise fall elsewhere under another rule. As a mirror image an exemption has also been granted where both the parties to the transaction are located outside India.

The rules may undergo some changes at the time of GST in the light of suggestions from the states but principally provide the basic framework for taking the discussion further.

POINT OF TAXATION RULES

Point of Taxation Rules were introduced in 2011 to align the time of taxation of services with international practices and to a considerable extent with accrual based taxation in the case of goods.

Put in simple words, the rules provide that the time of taxation of services will be the time of issue of invoice or time of payment, whichever is earlier. A period of 30 days (45 days for banking industry) is provided to issue an invoice from the date of completion of service, failing which the date of completion of service will reckon as the time of taxation.

Budget 2012 has further streamlined the provisions to remove some of the irritants that industry had pointed out. Here again the rules are aligned with global practices making the task of adaptation to the new changes quite easy.

INPUT TAX CREDITS

OECD guidelines relating to neutrality advise that the burden of taxes should not be borne by business but recovered from the end consumer. Failure to do so distorts business practices in a variety of ways.

Budget 2012 has removed cascading in a number of services like hotel accommodation, restaurants, construction, life insurance, transportation by railways by permitting utilization of tax credits that were earlier blocked by a rather complex system of taxation of partial values of such services.

GST RELATED CHANGES

Besides the above changes, there are some changes which are meant to send a strong signal about the federal government’s seriousness to move towards the GST at a quick pace. A common goods and service tax return: a one page return replacing the nearly 15 pages of the two separate returns earlier, alignment of registration formalities and appellate remedies between goods and services are some of the specific measures that have been taken in this area.

TAX REFUNDS

Another change relates to streamlining the system of refunds relating to export of both goods and services.

The new method provides for refunds of services electronically at a specified rate on the export of goods, which are automatically credited to the account of the exporter on the lines of drawback.

The other procedure allows refunds of input services used in export goods or services in the ratio of export turnover to total turnover, doing away with the earlier system of establishing nexus between the exports and such input services.

COMMITTEE ON COMMON CODE FOR GOODS AND SERVICES

While considerable convergence has been achieved in the tax law relating to goods and services, there remain many areas where the two provisions can be further aligned. Many tax experts have been advocating that the Central Government could consider one common law for goods or services or a Central GST that could lead the journey for the eventual introduction of GST on a nationwide basis.

As the situation stands the Excise Act 1944, which applies to goods, is applicable for the whole of India, whereas the Finance Act 1994, which deals with service tax, cannot be made applicable to the State of Jammu and Kashmir unless ratified by the legislature of that State.

Complete convergence between the two taxes will therefore have to await the introduction of a comprehensive GST. But at the same the Central Government has set up a working group to suggest a common tax code that could form basis for maximum possible convergence under the existing constitutional constraints. The report of this group is awaited by the end of September, 2012.

On the whole, despite some delay in meeting the deadline to usher GST, India is much closer to the eventual GST and the both the business and tax administrators far more confident to handle it whenever it finally arrives. By the recent indications that date does not appear to be too far.

 

 

The author is Joint Secretary with the Ministry of Finance, Government of India and heads its Tax Research Unit (“TRU”). He is also a key member of the team assigned with the task of implementing GST in India. An officer of the Indian Revenue Services, he has nearly 30 years of experience in the design and implementation of indirect tax laws in India and is the recipient of the President of India Award for distinguished record of service. The views expressed are personal.

 

 

By Mr V K Garg