Net Rules

Net Rules

Legal & Compliance

STOrai Magazine

STOrai Magazine

468 week ago — 11 min read

The e-commerce sector is in the news almost every day. The sector’s huge strides have drawn not just media attention but also the attention of factions affected by it. While it is clear that e-commerce is growing at a phenomenal pace in India, there is a lack of clarity on the various laws applicable to the e-commerce space, even among e-commerce start-ups.

The e-commerce business in India is subject to a wide array of laws and regulations relating to issues from contractual enforcement to consumer protection to intermediary regulations and data protection to exchange control to payment processing.


  1. Online contracts
    There is no denying that online contracts are enforce- able in India. However, issues arise when standard form online contracts contain one-sided provisions. Such provisions in online contracts may establish unconscionable bargain since there is no, or very little, scope of negotiation between the e-commerce entity and the consumer. Courts in India have time and again held un-fair standard form of contracts to be void on account of being against the public policy of India. Therefore, it is extremely important that the terms and conditions governing the usage of the e-commerce platform and the sale and purchase of products and services therefrom are set out in a thoughtful manner.

  2. Consumer protection
    The Consumer Protection Act, 1986 (the “CPA”), provides for a separate adjudication system for settlement of consumer disputes. Consumer disputes generally arise in cases of: (a) unfair or restrictive trade practice adopted by a trader or service provider; (b) supply of defective goods or provision of deficient services; (c) charging of excessive price by a trader or service provider; and (d) supply or provision of hazardous goods and services. Forums under the CPA are entitled to award compensation including punitive damages.

    The CPA is applicable only when the disputes are with a consumer. A consumer is a person who has bought goods or availed services for a consideration (whether paid, promised or partly paid and partly promised, including under a system of deferred payment) and includes the user or beneficiary of such goods or services. However, any person who obtains goods or services for resale or for any commercial purpose is excluded from the definition of consumer. Applicability of the CPA de-pends on the person/entity selling goods or providing services. Distributors, manufacturers and packers are also included within the purview of the CPA.

  3. Data protection and privacy

    Transacting on e-commerce platforms results in the flow of certain personal information from the buyer to the seller. Therefore, privacy and data protection issues are of extreme relevance while operating in this sphere. The Information Technology Act, 2000 (the “IT Act”), and the rules, regulations and guidelines framed thereunder govern the usage of the personal and sensitive personal information. The Information Technology (Reason-able Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (the “Data Protection Rules”), define personal information as any information in relation to a natural person which, either directly or indirectly, in combination with other information available (or likely to be available) with a body corporate, is capable of identifying such person. Further, the Data Protection Rules define sensitive personal data or information to include passwords, financial information, physical, physiological and mental health condition, sexual orientation, medical history and biometric history. The Data Protection Rules impose certain obligations on entities, which include formulation of privacy policy, maintenance of reasonable security practices and procedures, obtaining specific consents from the provider of sensitive personal data before making any disclosure thereof and providing the option of not sup-plying the information.

  4. Intermediary regulations
    Any person who on behalf of another person receives, stores or transmits any electronic record or provides any service with respect to such electronic record is an intermediary in relation thereto. Intermediaries include online payment sites, online auction sites and online marketplaces.

    The IT Act exempts intermediaries (including on-line marketplaces) from any liability in relation to third party information, data or communication link made available or hosted by intermediaries if: 

    a) the intermediary’s function is limited to providing access to a communication system over which third party  information is transmitted, temporarily stored or hosted;

    b) the intermediary is neither engaged in initiating the transmission of information nor in selecting the receiver of  transmission nor is it selecting or modifying the information contained in the trans-mission;

    c) the intermediary is exercising adequate due diligence and complying with the requirements prescribed in the  Information Technology (Intermediaries Guidelines) Rules, 2011;

    d) the intermediary has not conspired in, abetted, aided or induced, the commission of any unlawful act, in any manner  whatsoever; and

    e) after becoming aware of any unlawful act, the intermediary expeditiously removes or disables access to any information, data or communication link residing in or connected to a computer resource controlled by the intermediary, which is being used to commit such unlawful act, without vitiating the evidence in any manner

    However, the aforementioned exemption to intermediaries is not applicable in case of copyright and patent infringements on ac-count of Section 81 of the IT Act. The High Courts of Delhi and Madras have also affirmed this position.

  5. Payment Processing
    Payment for e-commerce trans-actions can be done in numerous ways including by way of credit cards, debit cards, online banking, cash on delivery and electronic wallets. The Reserve Bank of India (RBI) is authorised under the Payment and Settlement Systems Act, 2007 (PSSA), to issue directions and circulars concerning payment systems and settlement mechanisms. Pursuant to the directions issued by the RBI, additional authentication/validation system is required to be put in place based on the information not visible on credit and debit cards for all on- line/interactive voice response ‘card not present’ (CNP) transactions. Further, banks are required to have an online alert system to intimate the cardholders for all such CNP transactions. Consequently, it is impossible to have a recurring payment option, using credit and debit cards, for e-commerce transactions. 

    The RBI is also authorised under the PSSA to allow any person to commence or carry on payment system activities including operating electronic wallets. Therefore, prior authorisation under the PSSA may be required (depending on the nature of wallet system) for any e-commerce company to start an electronic wallet for facilitating payments.

  6. Foreign direct investment
    Currently, Foreign Direct Investment (FDI) in e-commerce is permitted up to 100% through automatic route for B2B activities. Entities having foreign investment are prohibited from engaging in B2C e-commerce. All restrictions that are applicable on FDI in domestic trading are also applicable to e -commerce. Violation of the FDI policy, which is also a part of the exchange control regulations of India, may entail a fine of up to three times the amount involved in the violation, and further fine of Rs5,000 per day if the violation is a continuing one.

    In light of these restrictions, Indian entities have structured their e-commerce businesses in very creative ways. One of the common ways of structuring e-commerce business is by adopt-ing a marketplace model. Since the entity receiving foreign in-vestment is merely operating an online marketplace, and is not engaged in any retail or B2C sales, FDI non- compliance issues would not arise.

    Another model that various entities have used in the past is to have a back to back B2B and B2C structure. Under this structure, the B2B entity receives foreign investment, which holds all the inventory and has back-to- back supply arrangements with the B2C entity. The B2C entity in turn sells the goods to end customers. However, this structure is not tax-efficient and has also attracted the scrutiny of various regulators.

  7. Taxation
    Cross border e-commerce activities in India may lead to two major taxation issues:

     (a) characterization of income; and
     (b) permanent establishment

    Other issues may pertain to transfer pricing in case of transactions between related entities.Taxation of income of non-resident e-commerce entities would broadly fall under the head of business income, royal-ties or professional services fees, depending on the nature of ser-vices and goods provided. For instance, income from the sale of digital products such as e-books, music and online subscriptions fall within the ambit of royalty. E -commerce activities may also give rise to permanent establishment issues based on the nature and the extent of activities carried out by a foreign entity. If a foreign entity carries out business in India using its website, it may constitute a permanent establishment in India, and the sums received by such entities may be liable to be taxed in India as business income.

    Further, e-commerce transactions also attract levy of indirect taxes such as service tax, value added tax/sales tax and customs duty. Service tax is applicable in cases of sale of digital goods. Value added/sales tax comes into play for tangible goods. Any import or export of goods via e-commerce may also attract levy of custom duty.

  8. Finally
    Like any other sector, the boom in e-commerce has led to a highly competitive growth. It is important to be in compliance with laws, especially when markets are bullish. However, it is often observed that legal and regulatory compliance issues are usually not top priority items. There is a need for harmonizing the laws and regulations governing e-commerce activities such that there is a level playing field which takes into account not only the interests of the consumers but also that of the retail industries that face stiff competition from e-commerce players.  


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