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Law of E-Commerce
OUTSOURCING TO INDIA: LEGAL AND BUSINESS IMPLICATIONS FOR U.S.
SOFTWARE COMPANIES
Chuck Summers
A group of U.S. doctors have come to your firm for assistance in setting up a software
business to capitalize on either Hillary Clinton1
or Barack Obama‟s2
2008 Presidential campaign
promise requiring that all U.S. health care providers institute paperless health information
technology systems. These doctors are experts on how health care functions in the U.S. They
are confident that they can build a cost efficient electronic health care management system that
operates as a secure internet service for U.S. hospitals, physicians, and their patients. They
envision the system will be founded on innovative software protocols and record formats for
patient data interchange. U.S. customers will be sold licenses to use the service.
The doctors are not software developers or information technology experts. However, they
have some start-up money and have identified interested investors for potential funding. They
are confident they can provide enough of the high level details such that a software team can
implement the service and its underpinning intellectual property. They hope to establish a U.S.
corporate leadership position in what will be a lucrative and fiercely competitive segment of e-
commerce. As an internet based service offering, these doctors do not see how the location of
software development or the hosting of the service could impact their U.S. business plan. In fact,
they have already secured a world-wide domain name: http://www.healthcare.com. They have
heard India is the leading export of software development and services. They are very interested
in exploiting the cheapest workforce they can find to make their money go the farthest. Costs are
of foremost concern to them. Their primary goal is build up the business and cash out for
maximum profit.
I. INTRODUCTION
E-commerce came to life in the late 1990s. It evolved from the distributed computing
movement of the 1990s and was guided by the vision that “[t]he [n]etwork is the [c]omputer.”3
Its emergence brought new internet protocols and languages that changed the face of corporate
computing.4
Advancement in technology made the physical location of a company‟s storefront
and computer center far less important than ever before. Alternate forms of business models
arose, ones that had no physical store front. Access to the internet became the only firm
requirement to carry out e-commerce business on a world-wide basis.
1
Hillary Clinton, Hillary Clinton Announces Agenda to Lower Health Care Costs and Improve Value for All
Americans, http://www.hillaryclinton.com/feature/healthcare (last visited Mar. 22, 2008).
2
Barack Obama, Barack Obama’s Plan, http://www.barackobama.com/issues/healthcare (last visited Mar. 22,
2008).
3
Sun Microsystems, Company Profile, http://www.sun.com/aboutsun/company (last visited Apr. 15, 2008).
4
HTTP is the protocol and HTML, Java, JavaScript, XML are the languages of e-commerce systems.](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-1-320.jpg)
![Paper.doc Page 1 of 28 Last printed 5/7/2008 9:36:00 PM
Law of E-Commerce
OUTSOURCING TO INDIA: LEGAL AND BUSINESS IMPLICATIONS FOR U.S.
SOFTWARE COMPANIES
Chuck Summers
A group of U.S. doctors have come to your firm for assistance in setting up a software
business to capitalize on either Hillary Clinton1
or Barack Obama‟s2
2008 Presidential campaign
promise requiring that all U.S. health care providers institute paperless health information
technology systems. These doctors are experts on how health care functions in the U.S. They
are confident that they can build a cost efficient electronic health care management system that
operates as a secure internet service for U.S. hospitals, physicians, and their patients. They
envision the system will be founded on innovative software protocols and record formats for
patient data interchange. U.S. customers will be sold licenses to use the service.
The doctors are not software developers or information technology experts. However, they
have some start-up money and have identified interested investors for potential funding. They
are confident they can provide enough of the high level details such that a software team can
implement the service and its underpinning intellectual property. They hope to establish a U.S.
corporate leadership position in what will be a lucrative and fiercely competitive segment of e-
commerce. As an internet based service offering, these doctors do not see how the location of
software development or the hosting of the service could impact their U.S. business plan. In fact,
they have already secured a world-wide domain name: http://www.healthcare.com. They have
heard India is the leading export of software development and services. They are very interested
in exploiting the cheapest workforce they can find to make their money go the farthest. Costs are
of foremost concern to them. Their primary goal is build up the business and cash out for
maximum profit.
I. INTRODUCTION
E-commerce came to life in the late 1990s. It evolved from the distributed computing
movement of the 1990s and was guided by the vision that “[t]he [n]etwork is the [c]omputer.”3
Its emergence brought new internet protocols and languages that changed the face of corporate
computing.4
Advancement in technology made the physical location of a company‟s storefront
and computer center far less important than ever before. Alternate forms of business models
arose, ones that had no physical store front. Access to the internet became the only firm
requirement to carry out e-commerce business on a world-wide basis.
1
Hillary Clinton, Hillary Clinton Announces Agenda to Lower Health Care Costs and Improve Value for All
Americans, http://www.hillaryclinton.com/feature/healthcare (last visited Mar. 22, 2008).
2
Barack Obama, Barack Obama’s Plan, http://www.barackobama.com/issues/healthcare (last visited Mar. 22,
2008).
3
Sun Microsystems, Company Profile, http://www.sun.com/aboutsun/company (last visited Apr. 15, 2008).
4
HTTP is the protocol and HTML, Java, JavaScript, XML are the languages of e-commerce systems.](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/75/OUTSOURCING-TO-INDIA-1-2048.jpg)
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where contractual remedy for infringement or theft of software IP and data is not available, India
laws must be relied upon. The following subsections examine and analyze what relevant IP and
data protection laws India does and does not offer U.S. software companies.
A. No patents for software and business methods
The first missing prong in India‟s IP rights (“IPR”) regime is its lack of patentability for
software and business methods. In today‟s world, a patent portfolio is a requirement for any
software company looking to maximize its valuation. Patent protection is far more desirable
than copyright protection. First, the scope of infringement under patent law is broader under the
doctrine of equivalence. Second, patent rights are not subject to fair use exception as under
copyright law. In practice it is patent law that drives large damage awards in case of software
infringement, not copyright law.18
India‟s patent system is governed by the Patent Act of 1970. Under the original Act,
computer programs were not explicitly excluded from patentable subject matter.19
However,
later amendments have been made specifically to exclude “a business method or a computer
program per se or algorithm.”20
Back to the hypothetical problem, the U.S. doctors will need to seek software and business
method patents on any innovative patient data exchange protocols and formats developed in
India under U.S patent law. Any U.S. software or business methods patents they acquire in the
U.S. will not be enforceable in India to stop infringement by others there. Further, because their
electronic health care system directs its services at a U.S. customer base, the U.S. doctors will
also need to pay attention to the extraterritorial expansion of U.S. patent law. The holding of
has been on the Office of the U.S. Trade Representative‟s Priority Watch List since 2003. The 2007 Special 301
Review points out that “[p]iracy of copyrighted works remains rampant in India … criminal IPR enforcement
regime remains weak, with improvements needed in the areas of expeditious judicial dispositions for copyright and
trademark infringement, border enforcement against counterfeit and pirated goods, police action against pirates and
counterfeiters, and impositions of deterrent sentences for IPR infringers.”).
18
Noric Dilanchian, Patent Infringement Damages Skyrocket, DILANCHIAN LAWYERS & CONSULTANTS, Jan. 6,
2007, http://www.dilanchian.com.au/content/view/177/36 (last visited Apr 3, 2008) (Z4 Technologies wins $133M
in patent infringement damages from Microsoft and Autodesk); see also Saul Hansell, Microsoft Ordered to Pay
$1.52 Billion in mp3 Patent Lawsuit, INTERNATIONAL HERALD TRIBUNE, Feb. 23, 2007, http://www.iht.com/
articles/2007/02/23/ business/web-0223microsoft.php (last visited Apr. 3, 2008).
19
India Patents Act, 1970 § 3.
20
India Patents (Amendment) Act, 2002 § 3(k) (Subsequent to this amendment, specifically excluding business
methods and computer programs from patentable subject matter, a temporary presidential decree was issued in 2004
that widened the scope of patentable subject matter to include pharmaceuticals and embedded software to meet
India‟s January 1, 2005 TRIPS compliance deadline. 150 software patents came thru the India‟s patent office as a
result. India‟s parliament debated the widening of patentable subject matter under the 2004 decree. In 2005, the
parliament issued an amendment to the Patent Act that repealed the 2004 decree. This effect of the amendment was
to remove business methods and computer programs from patentable subject matter along with narrowing the scope
of patentable pharmaceuticals. The India patent office appears to have reversed any software patents that issued.);
see also Clean-up in India – Software Patents Slipped Through During Brief Period of Patentability, PROMOTE THE
PROGRESS, Mar. 30, 2005, http://www.promotetheprogress/archives.com/2005/03 (last visited Apr. 3, 2008).](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-5-320.jpg)
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NTP, Inc. v. Research in Motion, Ltd is applicable to them.21
In the U.S. Federal Circuit‟s view,
patent infringement is not precluded under 35 U.S.C. § 271(a) simply because an infringing
component in a system is located outside the U.S. when “control is exercised and beneficial use
of the system [as a whole] is obtained in the U.S.” Even though the U.S. doctors intend to
operate their electronic health care system entirely from India, they will need to develop it in
such a way that it does not infringe on pertinent U.S. system patent claims.
A relevant question is “are U.S. software and e-commerce companies doing strategic
software R&D in India?” A rough sense of this can be obtained via searches thru filings in the
U.S. patent office counting those software patents with and without India inventor(s). The
results are:
Table 3.
Software Patents (all companies)
1970-79 1980-89 1990-94 1995-99 2000-01 2000-02 2004-05 2006-08
Indian 0 0 3 15 26 46 11 0
Non-Indian 91 1027 2027 7163 4097 2809 1044 100
Software Patents (major U.S. software companies and e-commerce providers)
Microsoft Oracle BEA Adobe Autodesk Google Yahoo eBay
Indian 21 13 0 9 0 0 2 0
Non-Indian 8466 1078 149 469 275 84 106 30
This data suggests that there is not a significant amount of strategic software R&D done by
U.S. software companies via India outsourcing. A few possible reasons for this are, U.S.
software companies feel that India‟s legal challenges outweigh the cost savings it offers or
alternatively that outsourcing of U.S. strategic software R&D to India is still in its infancy.
B. Copyright laws for software poorly defined
The second missing prong in India‟s IPR regime is its lack of definition for what constitutes
software copyright infringement under India law. India‟s copyright laws are embodied in the
Copyright Act of 1957.
Like the U.S., India copyright law provides for the automatic ownership rights by the author
of a work arising upon creation.22
A work made for hire exception is recognized granting first
ownership rights to employers of authors of works created within the employment context.23
21
NTP, Inc. v. Research In Motion, Ltd., 418 F.3d 1282, 1317 (Fed. Cir. 2005) (35 U.S.C. §271(a) provides
“…whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or
imports into the United States any patented . . . infringes the patent.” In this case NTP alleged that Research In
Motion infringed its patent‟s system claim under § 271(a), despite the fact that the component involved in the
infringing activity was located in Canada. In the court‟s view, the location of component collectively used in a
system does not preclude infringement as a matter of law under § 271(a) when control and beneficial use of a system
is obtained in the U.S. One cannot avoid infringement under §271(a) simply by moving a component of an
infringing system outside of the U.S.) .
22
India Copyright Act, 1957 §17 (amended 1999).
23
Id. §17(c).](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-6-320.jpg)
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Films is a motion picture case. In that case, the India Supreme Court stated some guiding
principles. First, the Court said “there can be no copyright in an idea … copyright is confined to
the form, manner, and arrangement and expression of an idea.”35
Since India currently equates a
computer program to an idea under patent law, it is arguable Delux Films is not supportive of
strong copyright protection for source code. Second, any astute competitor that gets a copy of
other company‟s source code will quickly absorb the idea, modify, and rewrite it. If the basis of
your copyright claim is that the infringer‟s source code is substantially similar to your own,
Delux Film teaches that the way to differentiate between a literal and non-literal copy is by
ordinary observation.36
Any court applying Delux Film’s “ordinary observer” test will rarely
find an infringing source code copy in an astute competitor‟s hands. This test is so distant from
the modern day U.S. tests of “structure, sequence, and organization”37
or “abstraction, filtration,
and comparison”38
that it is unworkable. Gramophone Co. of India Ltd. v. Mars Recording Pvt.
Ltd. is a cover song case. In Gramaphone, the India Supreme Court held there is no copyright
infringement when others perform and re-record an original artist‟s song. The Court stated that
“only when the same signal has been kept, would there be a violation…[i]f another signal is
created, such as in the case of version recording, it is not an infringing copy.”39
This is a
completely opposite holding to what has developed under U.S. case law.40
Further, it is
completely unexpected under any plain language interpretation of India‟s Copyright Act.41
What
Gramaphone suggests is that under India copyright law the only copying that matters is of
physical things (i.e. the final CD recording of a song) not the copying of the ideas the physical
things originate from (i.e. lyrics and notes of a song). If the analogy of Gramaphone is strictly
applied to software, object code would be protected under India copyright law but source code
would be not.
Back to the hypothetical problem, at present it would be unwise for the U.S. doctors to count
on India copyright law to mitigate infringement or loss of any ideas embodied in the software
source code of their electronic health care system. It is inevitable that, snippets of their source
code and some former employees will turn up in the hands of India based competitors. If
35
R.G. Anand v. Delux Films & Ors., (1978) 4 SCC 118 (1978), at 1.
36
Id. at 3, 4 (“One of the surest and the safest test to determine whether or not there has been a violation of
copyright is to see if the reader, spectator or the viewer after having read or seen both the works is clearly of the
opinion and gets an unmistakable impression that the subsequent work appears to be a copy of the original. Where
the theme is the same but is presented and treated differently so that the subsequent work becomes a completely new
work, no question of violation of copyright arises.”)
37
Whelan Associates, Inc. v. Jaslow Dental Laboratories, Inc., 797 F.2d 1222, 1240 (3d Cir. 1986) (The court
develops structure, sequence, and organization test to decide between literal and non-literal copyright infringement
of software source code; court finds ordinary observer test to be of no value in this context.)
38
Computer Associates International, Inc. v. Altai, Inc., 982 F.2d 693, 706 (2d Cir. 1992) (The court proposes
abstraction, filtration, and comparison test instead of structure, sequence, and organization test under Whelan).
39
Gramophone Co. of India, Ltd. v. Mars Recording Pvt. Ltd., (2002) 2 S.C.C. 103, at 8.
40
Milene Music, Inc. v. Gotauco, 551 F.Supp. 1288, 1295 (D.R.I.1982) (The owner of a copyrighted musical
composition has the exclusive right both to perform the work publicly and to authorize the public performance of the
work).
41
India Copyright Act § 13 (works in which copyright subsists); § 14 (meaning of copyright), § 38 (performer‟s
rights).](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-8-320.jpg)
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possible, the U.S. doctors should design their software in independent segments. The India
outsourcing entity should implement physical security barriers between the segments. If email
or internet access is not required for software development, it should be removed from employee
accessibility. Email and internet traffic should be filtered to check for unauthorized source code
movement. Finally, a working copy of all software source code should be extracted from the
India entity on a daily basis as an integral part of a disaster recovery plan.
C. No trade secret protection
The third missing prong in India‟s IPR regime is its lack of national or state laws for
protection of trade secrets. The only form of protection for trade secrets place or developed in
India will be contract. The typical contracts used to contain or stop others from readily drawing
out trade secrets from a company are: non-disclosure, non-compete, and non-solicitation
agreements.
During the period of employment, India courts recognize negative covenants that are
“reasonable and necessary” for the protection of the companies interests.42
Once employment
ends, the courts will analyze those same clauses under § 27 of the India Contract Act of 1872.
This Act declares void every agreement which restrains anyone from exercising a lawful
profession, trade, or business.43
Whether a negative covenant is a restraint of trade is a decision
for the court as a matter of law.44
There is no exhaustive list of what constitutes restraint of
trade.45
However, the India Supreme Court believes this is a well settled area of law and has
provided the following guidance.46
Negative covenants outside of the period of employment are
viewed with disfavor and are to be construed narrowly.47
Regardless of each party‟s freedom to
contract, post-employment covenants that are unconscionable, unduly harsh or one-sided, that
drive the former employee to idleness, that are unreasonable and unnecessary, or injurious to
public interest will be viewed as a restraint of trade.48
Consequently, these kinds of covenants
will be held void and unenforceable. The doctrine of restraint of trade is not confined to just
42
Niranjan Shankar Golikari v. The Century Spinning & Mfg. Co. Ltd., (1967) 2 S.C.R. 378, at 20 (confidentiality
and non-use clause during employment period that are reasonable and necessary for the protection of the companies
interest are enforceable).
43
Percept D‟Mark Pvt. Ltd. v. Zaheer Khan, (2006) 4 S.C.C. 227, at 41 (“…the doctrine of restraint of trade does
not apply during the continuance for employment and it applie[s] only when the contract comes to an end.”).
44
Gujarat Bottling Co. Ltd. v. Coca Cola Co. (1995) 5 S.C.C. 545, at 21 (“The court has to decide, as a matter of
law, (i) whether a contract is or is not in restraint of trade, and (ii) whether, if in restraint of trade, it is reasonable.”).
45
Id. at 24-35.
46
Percept D‟Mark Pvt. Ltd. v. Zaheer Khan, at 38 (“The legal position with regard to post-contractual covenants or
restrictions has been consistent, unchanging, and completely settled in our country.”).
47
Superintendence Co. of India Ltd. v. Krishnan Murgai, (1982) 2 S.C.C. 246, at 62 (non-compete clause at issue….
Courts are to interpret the covenant under ordinary rules of construction with fair meaning to the parties. “If there is
any ambiguity in a stipulation between employer and employee imposing a restriction on the latter, it ought to
receive the narrower construction rather than the wider…”).
48
Gujurat Bottling Co. Ltd. v. Coca Cola Co., at 24-35.](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-9-320.jpg)
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employment agreements, rather it extends to all agreements.49
Temporary and permanent injunctions may be sought for contracted non-disclosure of
confidential information under the Specific Relief Act of 1963.50
In circumstances where the
existence of a non-disclosure agreement is unclear, precedence exists in India common law for
injunctive relief for breach of confidence based on equity.51
Further, other India laws may be
circumstantially applicable when trade secrets are stolen. However, these laws were not written
to take into consideration the valuation of trade secrets.52
Consequently, the remedies these laws
provide will likely be inadequate
Back to the hypothetical problem, the U.S. doctor‟s will need to rely exclusively on
contracts, physical security, and strict management oversight to safeguards any trade secrets
developed or placed in India. The steps required to affirmatively protect trades secrets via
contract will be no different in India than in the U.S. with respect to employees, subcontractors,
or any other entity exposed to them. The difference is that India law provides no backstop to
catch errors or omissions. Confidentiality clauses during and after employment are recognized
under India law.53
To be enforceable, the U.S. doctors should draft them to be no greater than
necessary, limited in scope and duration, and provide for payment if a former India employee
would have to sit idle to comply with them.54
These legal standards are similar to those by U.S.
49
Id. at 36 (“We find no rational basis for confining [the principle of restraint of trade] to a contract for employment
and excluding its application to other contracts. The underlying principle governing contracts in restraint of trade is
the same and as a matter of fact that courts take a more restricted and less favorable view in respect to a covenant
entered into between an employer and an employee as compared to a covenant between a vendor and a purchaser or
partnership agreements.”).
50
India Specific Relief Act, 1963 § 42 (injunction to perform negative agreement in contract).
51
John Richard Brady v. Chemical Process Equipment Pvt. Ltd., A.I.R. 1987 (Del.) 372 at 1-2, 5, 17, 21, 22, 39
(granting equitable injunction against defendant until final disposal of copyright infringement suit from the sale and
manufacture of machines allegedly re-created from plaintiff‟s drawings shared under strict confidentiality).
52
India Information Technology Act, 2000 §72 Penalty for breach of confidentiality and privacy (“…any person
who … has secured access to any electronic record, book, register, correspondence, information, document or other
material without the consent of the person concerned discloses such electronic record, book. register,
correspondence, information, document or other material to any other person shall be punished with imprisonment
for a term which may extend to two years, or with fine which may extend to one lakh rupees [$2493 US as of
03/06/08], or with both”); see also India Penal Code § 406 Punishment for criminal breach of trust (“Whoever
commits criminal breach of trust shall be punished with imprisonment of either description for a term which may
extend to three years, or with fine, or with both); see also § 420 Cheating and dishonestly inducing delivery of
property (“Whoever cheats and thereby dishonestly induces the person deceived to deliver any property to any
person, or to make, alter or destroy the whole or any part of a valuable security, or anything which is signed or
sealed, and which is capable of being converted into a valuable security, shall be punished with imprisonment of
either description for a term which may extend to seven years, and shall also be liable to fine”).
53
Niranjan Shankar Golikari v. The Century Spinning & Mfg. Co. Ltd., at 22 (court grants injunction against former
employee for violation of covenant to not use or divulge former employer secrets).
54
Id. at 21 (“There is also nothing to show that if the negative covenant is enforced the appellant would be driven to
idleness or would be compelled to go back to the respondent company. It may be that if he is not permitted to get
himself employed in another similar employment he might perhaps get a lesser remuneration…[b]ut that is no
consideration against enforcing the covenant. The evidence is clear that the appellant has torn the agreement to
pieces only because he was offered a higher remuneration. Obviously he cannot be heard to say that no injunction
should be granted against him to enforce the negative covenant which is not opposed to public policy. The](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-10-320.jpg)
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courts.55
U.S. styled legal confidentiality, non-compete, and non-solicitation should suffice.
Beyond legal matters, the U.S. doctor‟s should be made aware of the chaotic employment
environment they will be placing their trade secrets. In India, employee turn-over rates in
software companies average 35 to 40 percent annually.56
Further, the more market leading
offerings a software company creates, the higher the turn-over rate it can expect. Indian workers
are desperate for new technology exposure and training. Once trained, other Indian employers
are eager to entice them away to capitalize on the rapid growth of the IT-BPO and KPO industry.
Until IT-BPO and KPO industry growth stalls, this turmoil will likely continue.
High staff turn-over rates together with the ease in which source code can be sent across the
internet will mean that any software trade secrets placed or develop in India will be very hard to
contain. Once a trade secret is exposed in India, absent privity of contract, there will be no legal
recourse against competitors into whose hands it falls.
D. No privacy rights in data
In both India and U.S. there is no recognition of an individual‟s fundamental privacy rights in
personal data involved in the context of computer processing.57
In fact, in a 2004 U.S.-India
forum hosted by the U.S. Department of Commerce the U.S. private sector participants felt they
injunction issued against him is restricted as to time, the nature of employment and as to area and cannot therefore
be said to be too wide or unreasonable or unnecessary for the protection of the interests of the respondent
company.”); see also Superintendence Co. of India Ltd. v. Krishnan Murgai, at 63 (“The restraint may not be
greater than necessary to protect the employer, nor unduly harsh and oppressive to the employee.”).
55
Richard S. Gruner, Shubha Gosh & Jay P. Kesan, Intellectual Property in Business Organizations Cases and
Materials, 344, (LexisNexis 2006) (2006) (“A nonuse and nondisclosure agreement is enforceable if it (1) exists at
the time of the confidential disclosure, (2) is reasonable in scope, and (3) uses language that is clear and
unambiguous. If an agreement places too onerous of a burden on an employee, the agreement will be invalidated…
In general, the law disfavors agreements that tie the employee‟s too far or too broadly limits the scope of usable
information.” ); see also Nike, Inc. v. Eugene McCarthy, 379 F.3d 576, 584-5 (A contract in restraint of trade
“…must meet three requirements under Oregon common law to be enforceable: (1) it must be partial or restricted in
its operation in respect either to time or place; (2) it must be on some good consideration; and (3) it must be
reasonable, that is, it should afford only a fair protection to the interests of the party in whose favor it is made, and
must not be so large in its operation as to interfere with the interests of the public….[t]o satisfy the reasonableness
requirement, the employer must show as a predicate “that [it] has a „legitimate interest‟ entitled to protection.”).
56
Telephone Interview with Surku Sinnaduari, Chief Information Officer & Managing Director of i2 India, i2
Technologies, Inc. (Mar. 27, 2008) (The employee turn-over rates for the i2 Bangalore, India office averages 35-40
percent annually. Rates have been as high as 60 percent. Enforcing confidentiality, non-compete, and non-
solicitation agreements is “hopeless”. Even if an injunction is obtained, it takes 10 years for a court date. There is
no way to contain the damage done by relying on these agreements alone. To slow down turn over, i2 uses up-front
bonus payment for later performance. The receiving employee in i2 India is expected to pay back the money if they
accept other employment during the bonus period. Even this does not work that well. The future employers are
now paying back the money for exiting i2 employees. Unlike Infosys, Wipro, or Tata Consulting which are IT
“body shops”, i2 employees receive direct exposure to software development and tools. This rapidly increases their
skill set and value to others. This consequently increases i2‟s employee turn-over rate. )
57
In the U.S. any privacy rights in data must be drawn from federal or state statutes regulating specific industries or
common law based on factual circumstances.](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-11-320.jpg)
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would rather India not adopt European Union style regulations58
“…as its restrictive nature
would cause many [U.S.] companies to send data service work to markets other than India.” 59
There has been some recent movement in India to legally recognize electronic transactions. This
movement appears to be in response to industry pressure upon India‟s Ministry of Information
Technology to alleviate U.S. fears over alleged security breaches in its IT-BPO companies.
Fears that, left unaddressed, could irreversibly harm India‟s IT-BPO growth and kill off its
golden goose.
India cyber law is the Information Technology Act of 2000 (“IT Act”).60
The IT Act makes
hacking, physical damage to source code, data or computer systems, publishing of obscene
information, breach of confidentiality and privacy61
, and digital signature fraud punishable by
imprisonment, fines, or both. There are a few unique things about the Act. First, it makes
bringing a claim easier. It does so by bypassing congested India courts thru the establishment of
an independent tribunal to intake and adjudicate claims.62
Second, it makes high ranking police
officers responsible for investigation of offenses.63
Third, it holds companies as wells as every
person in charge liable for any wrongdoings that they consented to or were negligent in
preventing.64
Fourth, any judgments the tribunal makes are enforceable under India‟s Civil
Procedure and Penal Code.65
Back to the hypothetical problem, the U.S. doctors will not encounter any data privacy laws
preventing them from outsourcing U.S. patient data to India. However, because their electronic
health care system will be involved in the treatment, payment, or health care operation of U.S.
patients, they will be subject to industry specific U.S. federal and U.S. state health care provider
regulations. The Health Insurance Portability and Accountability Act (“HIPAA”) will apply
regarding the “use or disclosure of protected health information” (“PHI”) to any business
58
Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of
individuals with regard to the processing of personal data and on the free movement of such data § 2, 4, 57, Nov. 23,
1995, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31995L0046:EN:HTML (last
visited Apr. 4, 2008) (this broad directive requires that EU member states adopt legislation to “respect [the]
fundamental rights and freedoms” of natural persons “notably the right to privacy” with respect to the “processing of
personal data in various sphere and social activity” and prohibits the “transfer of personal data to a third country
which does not ensure an adequate level of protection.”).
59
Data Privacy Roundtable, HTCG Dialogue on Defense Technology, Data Privacy, and Export Licensing, Bureau
of Industry and Security U.S. Dept. of Commerce, Nov. 18, 2004, available at http://www.bis.doc.gov/
internationalprograms/htcg_dialogue.htm (last visited Apr. 4, 2008).
60
India Information Technology Act (India‟s cyber law).
61
Id. § 72 (this provision addresses breach of confidentiality and privacy by “any person who has secured access to
any electronic record… [who] without consent …discloses such electronic record …shall be punished with
imprisonment for a term which may extend to two years, or with fine which may extend to [$2349 US as of
03/06/08], or with both.”).
62
Id. §§ 48, 58.
63
Id. § 78.
64
Id. § 85.
65
Id. § 58(3).](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-12-320.jpg)
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Outsourcing data to an India entity is legally no more difficult than to a U.S. entity. Security
and privacy provisions applicable to any U.S. styled outsourcing arrangement should suffice.70
The enforceable protection that India‟s cyber law actually offers the U.S. doctors for breach of
confidentiality, damage to, or loss of U.S. health care data placed in India is unclear. There are
only three cases in the entire judgment database of the India Supreme and High Courts that cite
India‟s IT Act.71
None of these cases involve e-commerce data. No case illustrates how far
India courts are willing to go in imposing civil fines or damage awards. Under the IT Act, all
fines and awards are subject to court discretion. The Act currently limits the fine for breach of
confidentiality to $2349 and total damage award to $251,256 US.72
III. LAWS ARE HARD TO PRACTICE
Those U.S. software companies that decide to proceed with India outsourcing will take on the
hidden costs and legal challenges of enforcement of any laws in India. The current
recommendation from India legal authorities is easily summed up. Do not rely on the
overburdened India courts, contract for arbitration or mediation instead. The following examines
the political and legal climate India presents to U.S. software companies.
A. Legal system is in crisis
India is a democratic union of 25 states and 7 self-governing territories established under the
country‟s constitution adopted in January 26, 195073
. India gained independence from British
colonial rule in 1947.74
India has a parliamentary form of government and judiciary system
U.S., India has no export regulations concerned with nation security when it comes to technology or software
exchanged with U.S entities.).
70
Security and privacy provisions that should be written into a Master Service Agreement (“MSA”) by a U.S.
software company outsourcing work to any U.S. or India entities would include a: (1) requirement to deploy
industry standard physical and electronic system security measures regarding all access to their facilities; (2)
requirement to adopt and deploy an information privacy policy written and governed by the controlling party; (3)
requirement to allow the controlling party to monitor and terminate the contract at-will, if security standards or the
privacy policy are not met or being adhered to; (4) definition of the security standards and privacy policy to be
deployed; (5) requirement to allow the controlling party to re-define, thru contract amendment, the security
standards and privacy policy based on to changes in business need or applicable laws; and (5) disallows the
subordinate entity “use of” or “access by” subcontractors to any facilities, network, computer systems, work in
progress, data, information, …under the “scope of” or “used in” at any time in executing the outsourcing
agreement, without the explicit approval of the controlling party.
71
State of Punjab v. Amritsar Beverage Ltd., MANU/SC/3484/2006 (no discussion of IT Act); Fatima Riswana v.
State Rep. by A.C.P., Chennai and Ors., (2005) 1 SCC 582 (Supreme Court holds High Court unjustified in making
court transfer decisions on the basis of whether the presiding lady judge will be offended by pornographic material
to be presented); Dr. L. Prakash v. State of Tamil Nadu, MANU/TN/0676/2002 (no discussion of IT Act).
72
Information Technology Act, § 72 supra note 60; see also § 43 Penalty for damage to computer, computer system,
etc. (“If any person without permission … shall be liable to pay damages by way of compensation not exceeding one
crore rupees [$251,256 US as of 04/19/08] to the person so affected.”).
73
Sonia Baldia, Knowledge Process Outsourcing To India: Important Considerations for U.S. Companies, 1587
PLI/Corp 171, 179 (2007) (this article discusses the up-front legal issues for U.S. companies considering India
outsourcing and sets forth legal how-to‟s to manage with them.).
74
Id.](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-14-320.jpg)
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modeled after Britain‟s.75
India‟s judiciary branch of the government resembles English common law in terms of
procedure and court policy of stare decisis.76
The highest court is India‟s Supreme Court. Under
it reside 21 High Courts over a state or group of states. A hierarchy of lower courts of general
jurisdiction exists under each High Court.77
Lower court decisions are subject to review by the
High Court. The High Court decisions are review by the Supreme Court78
. Judgments from the
Supreme and several High courts are posted on India‟s Judicial Information System (“JUDIS”)79
.
India‟s laws are based on its Constitution, legislated statutes and regulations, and case law. The
common working language in public and private sectors is English. All official publications are
available in English.
Though they may appear structurally familiar to U.S. attorneys, India courts do not operate
the same as U.S. courts.80
The backlogs are horrendous. India‟s Law and Justice Minister, H.
R. Bhardwaj recently stated that in 2007 there were a total of 28,986,205 pending cases in
various district and subordinate courts, 3,700,223 in High Courts, and 49,926 in the Supreme
Court.81
It has been reported “…if there are absolutely no new cases, it will take 124 years to
clear the backlog”.82
In the High Courts, 40 percent have been pending for more than 5 years.83
75
Id. (“India‟s president is the constitutional head of the executive branch of government.… India‟s constitution
governs the sharing of legislative power between parliament and India‟s 25 state legislatures. The Parliament has
exclusive jurisdiction over matters of nation interest enumerated in what is known as the Union List. This list
includes defense, foreign affairs, currency, income tax, railways, shipping, posts and telegraphs. States legislatures
have exclusive jurisdiction over matters enumerate in what is known as the State List. This list includes public
order, police powers, public health, communications, and education. The Parliament and state legislature share
concurrent jurisdiction over matters enumerate in what is known as a Concurrent List. This list includes criminal
law, marriage and divorce, trade unions, and price controls”)
76
Id.
77
Indian Courts Home Page, http://www.indiancourts.nic.in.
78
Jurisdiction of the Supreme Court, India Courts, http://www.indiancourts.nic.in/courts/indian_jud.html (last
visited Mar. 23, 2008).
79
Indian Judgments Information System Home Page, http://www.judis.nic.in (last visited Mar. 23, 2008)
(Judgments are published in the official Supreme Court Reporter (“SCR”) and the All India Report (“AIR”)).
80
Jayanth K. Krishnan, Outsourcing and the Globalizing Legal Profession, 28 WM. & Mary L. Rev. 2007
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=910338 (in depth exploration of possible causes
why India‟s legal system is in crisis and suggesting that legal outsourcers help pay for its reform).
81
India Courts Grappling with Backlog of Over 3 Crore Cases, WEBINDIA123.COM, Mar. 3, 2008, http://news.
webindia123.com/news/Articles/India/20080303/899412.html (last visited Mar. 23, 2008) (“Law and Justice
Minister H R Bhardwaj said a total of 28,986,205 cases were pending in various district and subordinate courts as in
September last year out of which the High Courts accounted for 3,700,223. In the Supreme Court, the pending cases
touched a figure of 46,926 as on December 31 last year…The Allahabad High Court has the dubious distinction of
leading the high courts in pendency of cases (as on September 30, 2007) with a figure of 808226 -- 604450 civil
cases and 203776 criminal cases… followed by Madras High Court (426347 cases), Bombay High Court (367409
cases), Calcutta High Court (279318 cases), Punjab and Haryana High Court (255696 cases), Orissa High Court
(227752 cases) and Rajasthan High Court (214451 cases.”).
82
Bibek Debroy, Let’s Not Throw the Baby Out, THE INDIAN EXPRESS, DEC. 13, 2007, http://www. indianexpress.
com/story/249676.html (last visited Mar. 23, 2008) (“The backlog figures are horrendous… there is a back-of-the
envelope-figure that floats around ... [even] if there are absolutely no new cases, it will take 124 years to clear the](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-15-320.jpg)
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By itself, prominent foreign investment in jurisdictions where IT-BPO and KPO is
flourishing has not motivated India to improve the court backlogs there.84
See the table below.
Table 4.
City Firms Focus Jurisdiction
Cases Pending Time to
Hear
Appeal85
Lower
Courts
High
Court
Bangalore
Infosys, Wipro, Intel,
IBM, SAP, SAS, Dell,
Tisco, Texas Instruments,
Motorola, HP, Oracle,
Yahoo, AOL, E&Y,
Google, Accenture, i2
Technologies
Chip design, software,
call center, IT
consulting, tax
processing
Karnataka 1.08M 129,653 2.9 yrs
Delhi
GE, American Express,
STMicroelectronics,
Wipro, Spectramind,
Convergys, Daksh, ExL
Call center, transaction
processing, chip
design, software
Delhi 0.95M 113,785 2.52 yrs
Mumbai
TCS, MphasiS, i-flex,
Morgan Stanley,
Citigroup,
Financial research,
back office, software
Bombay 3.05M 366,495 8.1 yrs
Pune
MsourcE, C-DAC,
Persistent Systems,
Zensar
Call centers, chip
design, embedded
software
Chennai
Cognizant, World Bank,
Standard Chartered,
Polaris, EDS, Pentamedia
Software, transaction
processing, animation
Madras 3.55M 426,347 2.76 yrs
Hyderabad HSBC, Satyam, Microsoft
Software, back office,
product design
Andha
Pradesh
1.24M 148,512 3.29 yrs
Kolkata
PwC, IBM, ITC Infotech,
TCS
Consulting, software Calcutta 2.33M 279,318 6.19 yrs
backlog.” Two-thirds of civil cases involve the government as litigants, yet in 1997 it was supposedly decide that
government v. government cases should not end in court. The author asks “[w]hy wasn‟t this implemented?”).
83
Centre for Media Studies, India Corruption Study 2005 to Improve Governance, Vol. II (Eleven Public Services)
Corruption in Judiciary, available at http://www.cmsindia.org/cms/events/judiciary.pdf (last visited Mar. 27, 2008)
§ 6.2 Pending Cases (“87% of are pending in lower courts, while 12% of them are pending in High Courts. Of the
cases pending in High Courts, almost 40% [have been] pending for more than 5 years.”); see also Judge Me Not,
BUSINESS & ECONOMY, Feb. 23, 2006 (“[a]cording to the Ministry of Law and Justice, 650,000 case have been
pending in the High Courts for more than 10 years, while 630, 000 have been pending between 5 and 10 years.”),
http://www.businessandeconomy.org/tresult.asp?sin=Judge &pageno=1 (last visited Mar. 27, 2008).
84
The data for the table came from the following sources: Jayanth K. Krishnan, Outsourcing and the Globalizing
Legal Profession; Patna High Court does Bihar Proud, BIHAR CHRONICAL, Sept. 4, 2007, http://
biharchronicle.blogspot.com/2007/09/patna-high-court-does-bihar-proud.html (last visited Mar. 29, 2008); Rana
Ajit, With Low Backlog, Patna High Court does Bihar Proud, INDIA ENEWS, Aug. 26, 2007, http://indiaenews.com/
india/20070826/67219.htm. (last visited Mar. 29, 2008); India Courts Grappling with Backlog of Over 3 Crore
Cases, WEBINDIA123.COM.
85
India Needs 124 years for Clearing Pending Cases in its Courts, SUPER HINDUS AROUND THE GLOBE, May 3,
2007, http://superhindus.wordpress.com/2007/05/03/india-needs-124-years-for-clearing-pending-cases-in-its-courts
(last visited Mar. 29, 2008) (The “national Indian average is 188 cases disposed of among 21 high courts everyday.
The Madras High Court leads in terms of speedy disposal of 648 cases, on an average, each day.”).](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-16-320.jpg)
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Facing many years before coming to trial due to India court backlogs, U.S. software
companies will either give up or seek U.S. judgment.86
Unfortunately, India courts do not
recognize U.S. judgments.87
Further, even when some basis for jurisdiction of U.S. courts can be
invoked, the astute defendant will motion for dismissal of claims that arise under India law or
involve an India entity on the grounds of forum non conveniens. Under existing U.S.
precedence, the motion will likely be granted if the only opposing argument the respondent can
make is “the backlog of cases and continuing congestion [in India courts] will prevent
meaningful relief.”88
B. Legal system is corrupt
According to the largest corruption study ever undertaken in India there is widespread belief
that the India judiciary is corrupt.89
“[T]he former Chief Justice of Supreme Court Same Piroj
Bharachua has suggested that „up to 20 percent of judges in India were corrupt.‟”90
Bribes to
legal authorities are viewed as the way to get things done.91
Jolly Technologies, a U.S. software company, claims to have encountered this. After opening
an R&D facility in Mumbai one of the employees was caught uploading and sending both source
code and design documents outside the facility from her Yahoo e-mail account. When
confronted, the employee disappeared. Jolly immediately sought help from the cyber crime unit
of the Mumbai police force. They refused to investigate or register the crime. Jolly stated
“[w]e have learned that the police will not file a FIR [first information report] until they are
86
Usha (India), Ltd. v. Honeywell Int'l Inc., 2004 WL 540441, 5-7 (S.D.N.Y. Mar. 17, 2004) (The fact that a U.S.
corporation holds an interest in a India joint venture does not mean a U.S. court has interest in settling a dispute
based upon India law that might take 10-15 year in the alternate forum, the New Dehli High Court. Case dismissed
on grounds of forum non conveniens.).
87
Digital Filing Systems Inc. v. Akhilesh Agarwal and Anr., MANU/DE/0297/2005 at 9-10 (“…the Court in this
country may restrain person who actually recovered judgment in a foreignCourt from proceeding to enforce that
judgment.”); see also Sonia Baldia, Knowledge Process Outsourcing To India: Important Considerations for U.S.
Companies, at 15 (“Under the Indian Civil Procedure Code, a U.S. judgment is not directly enforceable in India.
Rather, it can only be enforced by filing a fresh lawsuit in an Indian court based on the U.S. judgment, which will be
treated as evidence, among other evidence, against the Indian defendant.”).
88
USHA (India), Ltd. v. Honeywell Int'l, 421 F.3d 129, 135 (2d Cir.2005) (The high backlog of cases in New Dehli
High Court not sufficient reason to overturn lower U.S. court‟s dismissal on grounds of forum non conveniens.)
89
India Corruption Study 2005, Transparency International, http://www.transparency.org/regional_pages/
asia_pacific/newsroom/news_archive__1/india_corruption_study_2005 (last visited Apr. 18, 2008) ("India
Corruption Study - 2005" is the largest corruption study ever undertaken in the country with a sample of 14,405
respondents spread across 20 States. More than 525 respondents were interviewed in each state. Designed and
conducted by CMS, the study covered 151 cities and 306 villages. It was based on a combination of research
methodologies, including exit polls at the public offices covered and household studies.”).
90
Centre for Media Studies, India Corruption Study 2005 to Improve Governance, at 1.
91
Id. § 6.4.2 (86% of those interacting with the India judiciary have paid bribes to get work done by the court); §
6.4.3 (23% paid bribe to get favorable judgment; 13% to manipulate the public prosecutor; 9% to advance or delay
the case); § 6.4.5 (5% of brides where paid to the judge, 59% to the lawyers, 30% to court officials, 8% to public
prosecutors).](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-17-320.jpg)
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heavily bribed, as they know that there has been a huge loss to the company."92
C. Does anyone try?
Despite backlogs and corruption allegations, two relevant questions are “do any software
companies try to use the India judicial system for enforcement of their IPR” and if they do “with
what outcome?”
The International Intellectual Property Alliance (“IIPA”) 2007 and 2008 Special 301 reports
provide some insight. These reports reveal that. “India is not viewed as a country with a damages
culture, there are few such examples in the copyright area.”93
From 1988 to 2006 there has only
been a total of 16 software copyright infringement cases filed in India.94
In 2006, there were 4
raids conducted for software copyright infringement by India authorities. Since then there has
been a significant decrease in all forms of copyright infringement raids.95
In 2007, the “software
industry [filed] ten civil end-user actions, the most ever in one year in India.”96
Finally, while
“[c]corporate end-user piracy…of business software…continues unabated in large and small
Indian companies…there were no software convictions in 2007—in fact, there has never been a
successful criminal conviction for software piracy in India.”97
Search results of the published India Supreme and High Court judgments are consistent with
the IIPA findings. Only five cases of software copyright infringement exist.98
All of the five
cases deal exclusively with the repeated unlicensed copying and distribution of Microsoft
products. All five decisions come from the Delhi High Court. The case of Microsoft v. Deepak
Raval is of interest. In that case, the court took specific note of the growing menace of software
92
John Ribeiro, Source Code Stolen from U.S. Software Company in India, COMPUTERWORLD, Aug. 5, 2004,
http://www.computerworld.com/softwaretopics/software/story/0,10801,95045,00.html (last visited Mar. 30, 2008);
see also John Ribeiro, Police Question Report of India Code Theft, COMPUTERWORLD, Aug. 31, 2004, http://www.
computerworld. com/printthis/2004/0,4814,95615,00.html (last visited Mar. 30, 2008); see also Karl Shoenberger,
Alleged Code Theft Highlights Foreign Risk, OFFSHORINGFORUM, Sep. 10 , 2004, http://www. Offshoringforum.
com/topic.asp?TOPIC_ID=69&FORUM_ID=15&CAT_ID=5 (last visited Mar. 30, 2008); see also Jolly
Technologies Announces Soaring Q1 Results, JOLLY TECHNOLOGIES, Oct. 30, 2007, http://www.jollytech.com/
company/press/release/10_30_2007.php (last visited Mar. 30, 2008) (announcing the shutting down of India
operations and shifting all development back to the United States).
93
IIPA 2007 Special 301 Report INDIA, INTERNATIONAL INTELLECTUAL PROPERTY ALLIANCE, Feb. 12, 2007, at 53,
available at http://www.iipa.com/rbc/2007/2007SPEC301INDIA.pdf
94
Id. at 52
95
Id.
96
IIPA 2008 Special Report INDIA, at 43.
97
Id. at 45.
98
Microsoft Corp. v. Yogesh Papat, MANU/DE/0331/2005 (compensatory damages for repeated copying of
Microsoft products); Microsoft Corp. v. Deepak Raval, MANU/DE/3700/2006 (compensatory and punitive damages
for repeated willful, intentional, and flagrant copying of Microsoft products); Microsoft Corp. v. Mayuri,
MANU/DE/2068/2007 (compensatory and punitive damages for blatant copying of Microsoft products); Microsoft
Corp. v. A. Jain, MANU/DE/8867/2007 (compensatory damages award for copying of Microsoft products);
Microsoft Corp. v. Mitesh Jain, MANU/DE/0450/2008 (accepting settlement between parties for copying of
Microsoft products).](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-18-320.jpg)
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piracy and opened the door to punitive damage awards in cases where software copying is shown
to be “willful, intentional, and flagrant”.99
At present, the Delhi High Court is the only India
court on record to have granted any form of damages for software copyright infringement.
Back to the hypothetical problem, a reasonable conclusion is that India‟s current legal system
will be of marginal utility to the U.S. doctors for enforcement of their IPR in software and data
when infringed or stolen from them in India by others. At present, Delhi appears to be best legal
jurisdiction to bring software copyright infringement claims.
D. ADR is recommended
It is commonly known by India judges and lawyers that the existing court system is not able
to keep up.100
Alternate disputed resolution (“ADR”) is their recommended alternative.101
Working together, the India Supreme Court and legislature enacted the Arbitration and
Conciliation Act of 1996. It is based on the international commercial arbitration model law
adopted by UNCITRAL in 1995. Under India laws, the parties subject to an arbitration
agreement are free to select the place of arbitration, the procedural aspects, the number of
arbitrators, and the substantive law to apply.102
There is a three year statute of limitation to bring
arbitration from the time of the cause of action arises.103
Arbital awards must be in writing and
signed by the tribunal.104
India is a member of the two main conventions that facilitate the enforcement of foreign
arbitral awards in the international commercial contract context. These are the Geneva
99
Microsoft Corp. v. Deepak Raval, at 24, 28-9 (“…in India, a positive trend has started … [c]ourts are becoming
sensitive to the growing menace of piracy and have started granting punitive damages even in cases where due to
absence of the defendant‟s exact figures of sales by the defendant‟s under the infringing copyright and/or trade
mark, exact damages are not available.” Court awards both compensatory and punitive damages for willful,
intentional, and flagrant violation by defendant of plaintiff‟s copyright in MS DOS, MS WINDOWS and trade mark
in “Microsoft.”).
100
Chief Justice Suggests Out-of-Court Settlement of Cases, THEEARTHTIMES, Dec. 03, 2007, http://www.
earthtimes.org/articles/show/152459.html (last visited Mar. 29, 2008) (“Expressing concern over the increasing
backlog of cases in courts and the slow rate of disposal, Chief Justice of India K.G. Balakrishnan Monday said
lawyers could try to settle most of the cases outside courts 'as the present establishment cannot keep up.'”).
101
Salem Advocate Bar Association of Tamil Nadu vs. Union of India, (2003) 1 SCC 49 (India Supreme Court order
committee formed to implement court ordered mediation, conciliation and arbitration under newly added § 89 of the
Code of Civil Procedure); see also Praveen Dalal, ADR: The Ultimate Solution of Backlog, IMCINDIA, May. 24,
2005, http://india.indymedia. org/en/2005/05/210588.shtml (last visited Mar. 28, 2008) (“The backlog of cases is
increasing day by day but …the backlog is a product of “inadequate judge population ratio” and the lack of basic
infrastructure. The government is not very keen in increasing and improving either. It has, however, been wise
enough to amend the existing provisions of [Civil Procedure Code, 1908 (CPC)] to take care of the requirements of
ADR in India. The CPC has been amended … to make ADR an integral part of the judicial process … [W]here it
appears to the court that there exist elements, which may be acceptable to the parties, the court may formulate the
terms of a possible settlement and refer the same for arbitration [or] conciliation…”).
102
India Arbitration and Conciliation Act, 1996 §§ 10, 11, 19, 20, 31, 34.
103
Id. § 43; see also India Limitations Act, 1936, sched. Period of Limitations.
104
Arbitration and Conciliation Act §31.](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-19-320.jpg)
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incentives that bypass its domestic income taxation laws for export-oriented foreign investors.
International taxation issues in the context of e-commerce are rapidly emerging in India. The
most troublesome of issues arising in the context of U.S. companies involved with India
outsourcing. India‟s taxing authorities have taken the position that all global income earned
from any software or services produced or sold in India is “deemed to accrue or arise in India”
under India‟s Income Tax Act of 1961.110
They argue that, unless an exemption applies, all non-
resident income earned directly or indirectly from software and IT services outsourced to India is
subject to India taxation first under the U.S.-India Double Taxation Avoidance Agreement of
1990 (“DTAA”).111
Based on this viewpoint, India taxing authorities have begun issuing notices of income tax
deficiency to U.S. companies outsourcing software driven activities to India WOS.112
The
amount assessed in these notices is the unpaid India taxes on any global income the taxing
authorities decide arose in India, plus penalties. Like in the U.S., the penalties for underpayment
of taxes can be very large. Over the span of years, cumulative tax deficiencies can erase a large
portion of the cost savings attributed to India outsourcing. Since this is an emerging and
unsettled issue in India, U.S. software companies engaging in India outsourcing must be cautious
how they characterize where their global income is earned. With few guideposts to follow, this
will be difficult.
Once the India tax authorities present a U.S. company with a notice of tax deficiency they
have two choices. They can pay the deficiency or they fight it out in India courts in hope of
establishing favorable legal precedence. Further, tax payments made to wrong government may
not be refundable due to statute of limitations. Ironically, because of refund limitations a
company could pay taxes on income twice.
Unplanned taxes will impact cash flow impact. Cash flow is a dominate factor in corporate
valuation. Small changes in cash flow can have large effect on a company‟s stock price and
credit worthiness. For a start-up software company, these effects could inhibit their ability to
obtain further investor funding. This could threaten their survival. These hidden cost and legal
challenges are not what U.S. software companies want or expect.
110
India Income Tax Act, 1961 § 9(1), amended by Finance Act, 2008 (“The following income shall be deemed to
accrue or arise India: (i) all income accruing or arising, whether directly or indirectly, through or from any business
connection in India, or through or from any property in India, or through or from any asset or source of income in
India, or through the transfer of a capital asset situate in India. Explanation For the purposes of this clause (a) in
the case of a business of which all the operations are not carried out in India, the income of the business deemed
under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the
operations carried out in India.”).
111
US-India Double Taxation Avoidance Agreement (Dec. 20, 1990), available at http://law.incometaxindia.gov.in/
TaxmannDit/IntTax/Dtaa.aspx (last visited Mar. 31, 2008).
112
Microsoft Asked to Pay Rs 700 cr Tax, THE TIMES OF INDIA, Apr. 3, 2008, http://timesofindia.indiatimes.com/
Microsoft_asked_to_pay_Rs_700_cr_tax/articleshow/2921327.cms (“Microsoft India has been asked to pay Rs 700
crore tax [$174M US as of 04/18/08] including penal interest for the financial year 1998-99 to 2003-04, by
Commissioner of Income Tax (CIT), dealing in international taxation cases, in its recent judgment.”).](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-21-320.jpg)
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The section will proceed as follows. Subsection A will establish the needed background to
comprehend Subsections B and C. Subsection B will examine, analyze, and evaluate the tax
impacts on U.S. software companies producing software or operating an e-commerce site in
India; Subsection C will examine, analyze, and evaluate the tax impacts for U.S. software
companies intending to sell software in or e-commerce services from India.
A. Background
A foreign company can commence operations in India by incorporating a wholly owned
subsidiary (“WOS”); by joint venture with India partners; by self-presence thru a liaison, project,
or branch office; by contract with an independent India entity; or by contracting to build, operate,
and transfer (“BOT”) the ownership interest in an India entity upon established operation.
Corporate forms in India are either private or public limited companies.113
The majority of U.S.
software companies involved in any form of India outsourcing do so thru establishment of a
WOS in India. This business form allows them to retain the tightest control over IP, data, and
operations placed in India.114
There have been are numerous articles written in the recent years
focusing on the up-front hidden costs and legal challenges in the establishment of U.S-India
outsourcing arrangements.115
Exploration of them is encouraged. However, this paper will not
focus on them further.
India corporate tax rates are an effective flat rate of 34 percent for domestic companies
earning over 1M rupees ($25,214 US as of 03/30/08) and 41.2 percent for foreign companies.116
In general, entities incorporated in India will be treated as domestic companies for the purposes
of taxation. In comparison, U.S. corporate tax rates vary between 15 to 35 percent based on the
amount of income earned.117
The DTAA‟s purpose it to avoid double taxation and prevent evasion of taxes by entities in
113
India Companies Act, 1956 § 3(1)(ii) (a private company is not open to the public and has up to 50 shareholders;
§ 3(1)(iv) (a public company not a private company).
114
See table 4.
115
Fred Greguras, Steven Levine & S.R. Gopalan, Legal Structures for Outsourcing, FENWICK & WEST LLP (2004),
http://www.fenwick.com/docstore/Publications/Corporate/Outsourcing.pdf; see also Sonia Baldia, Intellectual
Property In Global Sourcing: The Art of the Transfer, 38 Geo. J. Int‟l L. 499 (2007); see also John Funk, Risk
Mitigation in Sourcing, July 14, 2005, available at http://www.ismdallas.org/archive/200507_Risks
_and_Mitigation_ISM_Dallas_Pres.ppt (last visited Mar. 31, 2008).
116
Embassy of India Wash. D.C., Taxation System in India, http://www.indianembassy.org/newsite/
doing_business_in_india/fiscal_taxation_system_in_india.asp (last visited Mar. 25, 2008) (“Companies residents in
India are taxed on their worldwide income arising from all sources in accordance with the provisions of the Income
Tax Act. Non-resident corporations are essentially taxed on the income earned from a business connection in India
or from other Indian sources. A corporation is deemed to be resident in India if it is incorporated in India or if it‟s
control and management is situated entirely in India. Domestic corporations are subject to tax at a basic rate of 35%
and a 2.5% surcharge. Foreign corporations have a basic tax rate of 40% and a 2.5% surcharge. In addition, an
education cess at the rate of 2% on the tax payable is also charged. Corporat[ions] are subject to wealth tax at the
rate of 1%, if the net wealth exceeds Rs.1.5 mn (approx. $33333 [US]”)).
117
26 U.S.C. §11(b)(1); see also IRS, 2007 Instructions to Form 1120, available at http://www.irs.gov/pub/ irs-
pdf/i1120.pdf (last visited Mar. 25, 2008).](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-22-320.jpg)
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year period123
STPs are similar, except they offer a 10 year tax holiday on 100 percent of profits
on export-oriented “development of computer software, data entry and conversion, data
processing, data analysis and control, data management, call center, and consultancy services
over data communication lines.”124
B. When export-oriented tax incentives expire
The export-oriented tax incentives India offers will expire. Once that happens, moving into
another tax holiday is prohibited by interlocking provisions in the India income tax code.125
A
relevant question is “what impact does the expiration of an export-oriented tax holiday have on a
U.S. software company that has outsourced its entire software R&D and e-commerce site
operation to India?”
The majority of U.S. or India companies involved in IT-BPO and KPO activities are
established in STPs. The tax holiday for all STPs is set to expire on March 31, 2009.126
Morgan
Stanley sought an advanced revenue ruling on how this would change taxation of the WOS it had
established in India to perform back office services for U.S. Morgan Stanley‟s global financial
services.127
The India tax authorities responded that all global income that India helped to
generate should be taxed in India. Morgan Stanley disagreed and appealed this ruling thru the
India courts. In DIT (International Taxation), Mumbai v. Morgan Stanley & Co, Inc, the India
Supreme Court finally settled the dispute.128
The Court decided the back-office activities
Morgan Stanley‟s WOS performed in India were “preparatory and auxiliary in character” to U.S.
Morgan Stanley‟s front-office activities.129
The Court held that under the DTAA, resident
income (i.e. India income) that preparatory and auxiliary activities generate is taxable in India.
However, non-resident income (i.e. U.S. income) that preparatory and auxiliary activities help to
generate is not taxable in India.130
The Court stated the “economic nexus” in a US-India
123
India Income Tax Act §10(AA)(1) (provides an income tax deduction of such profits and gains as are derived by
a hundred per cent export-oriented undertaking from the export of articles or things or computer software of 100
percent for the first five years, 50 percent for next five years; and 50 percent in the next years for specified re-
investment).
124
Id. §10(B)(1) (providing income tax deduction of such profits and gains as are derived by a hundred per cent
export-oriented undertaking from the export of articles or things or computer software of 100 percent for the first ten
years).
125
India Income Tax Act §§ 10(AA), 10(B) (“this [export-oriented deduction] applies to an undertaking …
providing it is not formed by the splitting up, or the reconstruction, of a business already in existence… or formed
by the transfer to a new business of machinery or plant previously used for any purpose.”).
126
2008 Will Be a Crucial Year for the Indian BPO Industry, SILICONINDIA, Dec. 31, 2007, http://www.
siliconindia.com/print_article.php?38484 (last visited Mar. 31, 2008).
127
Morgan Stanley Comes Out on Top, INTERNATIONAL TAX REVIEW, July 12, 2007,
http://www.internationaltaxreview.com/default.asp?Page=9&PUBid=210&ISS=23959&SID=689609 (last visited
Apr. 24, 2008).
128
DIT (International Taxation), Mumbai v. Morgan Stanley & Co., Inc., (2007) 7. S.C.C. 1.
129
Id. at 8.
130
Id. at 12.](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-24-320.jpg)
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notices to other U.S. software companies selling software licenses to India customers.138
Back to the hypothetical problem, the U.S. doctor‟s will need to pay specific attention to
how India eventually decides how global income from software license sales is to be attributed to
under the DTAA. If the U.S. doctors make direct software license sales from their e-commerce
site in India, that income will be subject to India taxation. If the U.S. doctors make software
license sales first in the U.S. and then provide customer access to their e-commerce site in India
an independent second step, that income may be taxable in the U.S. or India—depending on
outcome of the Microsoft case. To avoid the uncertainty, the U.S. doctors might consider
operating their e-commerce site in the U.S. only. Under U.S. law, there is established
precedence that software license sales are equivalent to the sale of goods. Therefore, for a U.S.
operated e-commerce site the point of sale would be considered the U.S. and the income earned
from it would be taxed there also.
V. MOVING FROM PAPER TIGER TO REAL TIGER
From a U.S. software company‟s perspective, India is currently a paper tiger with respect to
IP protection for strategic software R&D and e-commerce site operation outsourced there. Jolly
Technologies sums it up best “[w]e were misled by lawyers we consulted before opening the
[Mumbai, India] facility...[w]e were told that there are patent, copyright, and IP protection laws
in India. They failed to mention the laws are impossible to enforce.”139
What must change to
make India become a more legally balanced outsource location?
A. IT-BPO and KPO growth must stall
India likely has a glass ceiling that limits the amount of strategic software development and
e-commerce site operation it can attract from U.S. companies. This limit is rooted in the legal
imbalance India‟s untested IP laws and in-crisis legal environment present to them.
Despite what U.S. software companies might want India to do, it is hard to see why India
would change. The majority of Indian IT and software professionals view things as not broken.
Growth in the IT-BPO industry has been undeniably successful. No India IP laws changed to
bring about this success. In fact, the only changes made were to a few income tax provisions.
This paper suggests that until the growth in the IT-BPO and KPO industry stalls out, India IP
laws and enforcement actions regarding infringement or loss of software and data will not
change either. There is no motivation to improve U.S. company interests until India‟s own
interests are put under pressure.
138
Interview with Surku Sinnaduari, Chief Information Officer & Managing Director of i2 India, i2 Technologies,
Inc., in Dallas, TX. (Apr. 18, 2008) (i2 Technologies has been presented a $250K US tax deficiency notice from
India‟s taxing authorities under the same reasoning as Microsoft recently was).
139
IDG New Service, Outsourcer Beware, ITWORLD.COM, Oct. 26, 2004, http://www.itworld.com/Man/2701/
041026indiaip (last visited Apr. 1, 2008).](https://image.slidesharecdn.com/bd744742-4ce3-4045-8bdc-5c76f8ab987f-160501161647/85/OUTSOURCING-TO-INDIA-27-320.jpg)
OUTSOURCING TO INDIA
- 1. Paper.doc Page 1of 28 Last printed 5/7/2008 9:36:00 PM Law of E-Commerce OUTSOURCING TO INDIA: LEGAL AND BUSINESS IMPLICATIONS FOR U.S. SOFTWARE COMPANIES Chuck Summers A group of U.S. doctors have come to your firm for assistance in setting up a software business to capitalize on either Hillary Clinton1 or Barack Obama‟s2 2008 Presidential campaign promise requiring that all U.S. health care providers institute paperless health information technology systems. These doctors are experts on how health care functions in the U.S. They are confident that they can build a cost efficient electronic health care management system that operates as a secure internet service for U.S. hospitals, physicians, and their patients. They envision the system will be founded on innovative software protocols and record formats for patient data interchange. U.S. customers will be sold licenses to use the service. The doctors are not software developers or information technology experts. However, they have some start-up money and have identified interested investors for potential funding. They are confident they can provide enough of the high level details such that a software team can implement the service and its underpinning intellectual property. They hope to establish a U.S. corporate leadership position in what will be a lucrative and fiercely competitive segment of e- commerce. As an internet based service offering, these doctors do not see how the location of software development or the hosting of the service could impact their U.S. business plan. In fact, they have already secured a world-wide domain name: http://www.healthcare.com. They have heard India is the leading export of software development and services. They are very interested in exploiting the cheapest workforce they can find to make their money go the farthest. Costs are of foremost concern to them. Their primary goal is build up the business and cash out for maximum profit. I. INTRODUCTION E-commerce came to life in the late 1990s. It evolved from the distributed computing movement of the 1990s and was guided by the vision that “[t]he [n]etwork is the [c]omputer.”3 Its emergence brought new internet protocols and languages that changed the face of corporate computing.4 Advancement in technology made the physical location of a company‟s storefront and computer center far less important than ever before. Alternate forms of business models arose, ones that had no physical store front. Access to the internet became the only firm requirement to carry out e-commerce business on a world-wide basis. 1 Hillary Clinton, Hillary Clinton Announces Agenda to Lower Health Care Costs and Improve Value for All Americans, http://www.hillaryclinton.com/feature/healthcare (last visited Mar. 22, 2008). 2 Barack Obama, Barack Obama’s Plan, http://www.barackobama.com/issues/healthcare (last visited Mar. 22, 2008). 3 Sun Microsystems, Company Profile, http://www.sun.com/aboutsun/company (last visited Apr. 15, 2008). 4 HTTP is the protocol and HTML, Java, JavaScript, XML are the languages of e-commerce systems.
- 2. Paper.doc Page 2of 28 Last printed 5/7/2008 9:36:00 PM Software applications were retooled to fit into the internet oriented world. This retooling made it possible to outsource a company‟s information technology (“IT”) need in part or in its entirety. Outsourcing was not unfamiliar. U.S. companies had been outsourcing labor intensive product manufacturing to lower wage rate countries for many years. Because of the advances in internet technology, it became feasible for U.S. companies to outsource labor intensive business computing to low wage rate countries also. IT and business process outsourcing (“BPO”) quickly emerged. India became the perfect outsourcing destination. India has a large pool of young, well educated, and English speaking IT professionals.5 IT professionals in India earn one fifth to one third of their U.S. counterparts and they are willing to work 12-hour days, six days a week.6 Across the internet, India workers can operate the computer systems and business processes for any U.S. companies willing to let them. In the early 2000s, many U.S. companies started to let them. According to NASSCOM7 , India‟s premier trade body and chamber of commerce of the IT- BPO industry, India is currently “…the nerve-center for global sourcing with 2/3rd of the Fortune 500 and a majority of Global 2000 firms leveraging global service delivery.”8 India‟s IT-BPO industry is targeting $60 billion in software and services exports and $73-75 billion in overall software and services revenue by 2010.9 Direct employment in India‟s IT-BPO industry is expected reach 2 million in 2008 (375,000 over the prior year) and yield a net-value add to India‟s gross domestic production of 3.3-3.9 percent.10 NASSCOM claims that clients that outsource their IT and business processes to India will realize a savings of 25-50 percent of U.S. costs.11 In the context of the hypothetical problem introduced in the beginning of this paper, corporate balance sheet projections at a $100M software license sales rate confirm NASSCOM‟s cost saving claim. The following reveals that by outsourcing the entire strategic R&D and operation of the U.S. doctor‟s envisioned electronic health care system to India they can increase their bottom line profit by $22.7M when compared to a U.S. only offering. 5 NASSCOM, Strategic Review 2008 (“the typical worker is 25 years or younger and English speaking from the legacy effects of British colonization”). 6 Interview with Madhu Ramarao, Finance Director, i2 Technologies India Pvt Ltd., in Dallas, TX. (Feb. 28, 2008) (a software engineer in India with 3-5 years of experience presently earns between $24K to 31K US with yearly wage increases of 15 percent as compared to U.S. wage increases of 4 percent); see also Naughton, Outsourcing: Silicon Valley East. 7 NASSCOM, About NASSCOM, http://www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=5365 (last visited Mar. 23, 2008) (“…NASSCOM is a global trade body with more than 1200 members, of which over 250 are global companies from across US, UK, EU and A-Pac. NASSCOM's member and associate member companies are broadly in the business of Services, Products, IT Infrastructure Management, R&D services, E-commerce & web services, Engineering services offshoring and Animation and gaming. NASSCOM‟s membership base constitutes over 95% of the industry revenues in India and employs over 2 million professionals.”). 8 NASSCOM, Strategic Review 2008, http://www.nasscom.in/Nasscom/templates/ NormalPage.aspx? id=53454. 9 Id. 10 Id. 11 NASSCOM, Strategic Review 2007, http://www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=50856.
- 3. Paper.doc Page 3of 28 Last printed 5/7/2008 9:36:00 PM Table 1. U.S. only U.S. parent India subsidiary* Gross Income $100 Gross Income $100 $15 (20% profit**) Cost of R&D and operations $50 Cost of R&D and operations $15 $12.5 (1/4 U.S. rate) Taxable Income $50 Taxable Income $85 $2.5 Taxes $17.5 (35% U.S.) Taxes $29.8 (35% U.S.) $0.8 (34% India) Profit $32.5M Profit $55.2M $1.7M *Assumed to be under income tax exempt economic zone * 20% over cost is arm‟s length price charged U.S. parent In addition, e-commerce businesses are based upon complex software systems. These systems take large numbers of people to create. For equivalent U.S. cost, the U.S. doctors can hire four times the number of software engineers in India to accelerate start-up if they need to. Consequently by outsourcing to India the U.S. doctors can bring their electronic health care system to market faster, at lower total cost of ownership, and subsequently they can offer lower license costs to customers when compared to a U.S. only alternative. NASSCOM claims that India is ready to move beyond the service oriented activities of IT- BPO.12 They claim the outsourcing of legal services, software research and development (“R&D”), medical diagnosis, pharmaceutical R&D, and investment analysis to India is next to occur in today‟s global economy. Referred to as knowledge process outsourcing (“KPO”), it presents U.S. companies with the potential to move the high priced work of lawyers, software engineers, doctors, research scientists, and investment analysts to the lowest global bidder. The worldwide revenue from KPO is expected to be $16.7 billion by 2010-2011 and it is growing at an annual rate of 39 percent.13 India is projected to drive $11.2 billion of this revenue.14 This paper argues that despite India‟s claims of readiness for KPO of software R&D and e- commerce site operation, India offers little asset protection to U.S. software companies who do so. Those who seek bottom line cost savings from cheap India labor must be “ready, willing, and able” to put their intellectual property (“IP”), data, and global income from India operations at unbalanced legal risk. This paper will proceed as follows. Section II will examine and analyze the relevant IP and data protection laws India offers U.S. software companies. Section III will examine the political and legal environment India presents for enforcement of its laws. Section IV will examine, analyze, and evaluate how India‟s interpretation of its income tax laws impacts U.S. companies producing software there. Section V will propose what must change to make India become a more legally balanced outsource location for strategic software R&D and e-commerce site 12 IT-BPO typically involves service oriented activities such as: system management, monitoring, and testing; back- office operation; call-center operation; data entry; and IT oriented consulting. 13 India to Dominate Global KPO Market, THE TIMES OF INDIA, Jul. 23, 2007, http://timesofindia.indiatimes. com/India_to_dominate_global_KPO_market/articleshow/2227383.cms (according to the study by business research and analytics firm Evalueserve). 14 Id.
- 4. Paper.doc Page 4of 28 Last printed 5/7/2008 9:36:00 PM operation. II. THE FEW RELEVANT LAWS ARE UNTESTED The source code for strategic offerings of a software company is particularly vulnerable to piracy. Characteristically, it is a form of IP that is of high value to competitors, very costly to create, usable as is by competitors, hard to prove when in use by others, readily copied, and easily transported. i2 Technologies, a software company, that has average annual revenues of $260M for license sales of software products and services.15 They have invested over $1 billion in development and acquisition of their software code base over the past 15 years. The entire source code can fit on four 250 GB disk drives. All 600 of i2 Technologies‟ software developers have unrestricted access to the internet, email, i2 facilities, and source code. Any one of them could email, FTP across the internet, or copy to CD and carry out of the facilities any portion of the source code they desire. i2 Technologies‟ open access policy for its R&D staff is not unusual. Many U.S. based software companies behave in the same way. IP theft is not unusual in India. India has maintained a steady business software piracy rate around 70 percent from 2003 to 2006 according to the Business Software Alliance (“BSA”) organization, a leading voice of the world's commercial software industry and its hardware partners.16 See the table below. Table 2. Piracy Rates Losses ($M) 2006 2005 2004 2003 2006 2005 2004 2003 India 71% 72% 74% 73% $1,275 $566 $519 $367 China 82% 86% 90% 92% $5,429 $3,884 $3,565 $3,823 U.S. 21% 22% 22% 23% $7,289 $6,895 $6,645 $6,496 European Union 36% 36% 35% 37% $11,003 $12,048 $12,151 $9,786 Total Worldwide 35% 35% 35% 36% $39,576 $34,482 $32,778 $28,803 Just because a country has established IP laws does not mean those laws are adequate, will be interpreted by its courts as plainly written, or enforced by legal authorities.17 In those cases 15 i2 Technologies, Inc., Financial Metrics, 2005-2007, http://www.shareholder.com/itwo/downloads/ FinancialmetricsQ42007.pdf (last visited Apr. 3, 2008). 16 Business Software Alliances, 2006 Global Software Piracy Study, May 2007, available at http://w3.bsa.org/ globalstudy/upload/2007-Losses-Global.pdf (last visited Apr. 3, 2008) (The data in Table 2 has been extracted from BSA‟s 2006 global software piracy study. BSA is the leading voice for the high tech industry in capitals around the world and before multilateral organizations, advocating innovation and competition in the commercial software industry, stronger intellectual property protection, cyber security, reduction of trade barriers, liberal use of encryption technology and other emerging technology issues.). 17 Office of the U.S. Trade Representative, 2007 Special 301 Report, available at http://www.ustr.gov/ Document_ Library/Reports_Publications/2007/2007_Special_301_Review/Section_Index.html (last visited Apr. 3, 2008) (India
- 5. Paper.doc Page 5of 28 Last printed 5/7/2008 9:36:00 PM where contractual remedy for infringement or theft of software IP and data is not available, India laws must be relied upon. The following subsections examine and analyze what relevant IP and data protection laws India does and does not offer U.S. software companies. A. No patents for software and business methods The first missing prong in India‟s IP rights (“IPR”) regime is its lack of patentability for software and business methods. In today‟s world, a patent portfolio is a requirement for any software company looking to maximize its valuation. Patent protection is far more desirable than copyright protection. First, the scope of infringement under patent law is broader under the doctrine of equivalence. Second, patent rights are not subject to fair use exception as under copyright law. In practice it is patent law that drives large damage awards in case of software infringement, not copyright law.18 India‟s patent system is governed by the Patent Act of 1970. Under the original Act, computer programs were not explicitly excluded from patentable subject matter.19 However, later amendments have been made specifically to exclude “a business method or a computer program per se or algorithm.”20 Back to the hypothetical problem, the U.S. doctors will need to seek software and business method patents on any innovative patient data exchange protocols and formats developed in India under U.S patent law. Any U.S. software or business methods patents they acquire in the U.S. will not be enforceable in India to stop infringement by others there. Further, because their electronic health care system directs its services at a U.S. customer base, the U.S. doctors will also need to pay attention to the extraterritorial expansion of U.S. patent law. The holding of has been on the Office of the U.S. Trade Representative‟s Priority Watch List since 2003. The 2007 Special 301 Review points out that “[p]iracy of copyrighted works remains rampant in India … criminal IPR enforcement regime remains weak, with improvements needed in the areas of expeditious judicial dispositions for copyright and trademark infringement, border enforcement against counterfeit and pirated goods, police action against pirates and counterfeiters, and impositions of deterrent sentences for IPR infringers.”). 18 Noric Dilanchian, Patent Infringement Damages Skyrocket, DILANCHIAN LAWYERS & CONSULTANTS, Jan. 6, 2007, http://www.dilanchian.com.au/content/view/177/36 (last visited Apr 3, 2008) (Z4 Technologies wins $133M in patent infringement damages from Microsoft and Autodesk); see also Saul Hansell, Microsoft Ordered to Pay $1.52 Billion in mp3 Patent Lawsuit, INTERNATIONAL HERALD TRIBUNE, Feb. 23, 2007, http://www.iht.com/ articles/2007/02/23/ business/web-0223microsoft.php (last visited Apr. 3, 2008). 19 India Patents Act, 1970 § 3. 20 India Patents (Amendment) Act, 2002 § 3(k) (Subsequent to this amendment, specifically excluding business methods and computer programs from patentable subject matter, a temporary presidential decree was issued in 2004 that widened the scope of patentable subject matter to include pharmaceuticals and embedded software to meet India‟s January 1, 2005 TRIPS compliance deadline. 150 software patents came thru the India‟s patent office as a result. India‟s parliament debated the widening of patentable subject matter under the 2004 decree. In 2005, the parliament issued an amendment to the Patent Act that repealed the 2004 decree. This effect of the amendment was to remove business methods and computer programs from patentable subject matter along with narrowing the scope of patentable pharmaceuticals. The India patent office appears to have reversed any software patents that issued.); see also Clean-up in India – Software Patents Slipped Through During Brief Period of Patentability, PROMOTE THE PROGRESS, Mar. 30, 2005, http://www.promotetheprogress/archives.com/2005/03 (last visited Apr. 3, 2008).
- 6. Paper.doc Page 6of 28 Last printed 5/7/2008 9:36:00 PM NTP, Inc. v. Research in Motion, Ltd is applicable to them.21 In the U.S. Federal Circuit‟s view, patent infringement is not precluded under 35 U.S.C. § 271(a) simply because an infringing component in a system is located outside the U.S. when “control is exercised and beneficial use of the system [as a whole] is obtained in the U.S.” Even though the U.S. doctors intend to operate their electronic health care system entirely from India, they will need to develop it in such a way that it does not infringe on pertinent U.S. system patent claims. A relevant question is “are U.S. software and e-commerce companies doing strategic software R&D in India?” A rough sense of this can be obtained via searches thru filings in the U.S. patent office counting those software patents with and without India inventor(s). The results are: Table 3. Software Patents (all companies) 1970-79 1980-89 1990-94 1995-99 2000-01 2000-02 2004-05 2006-08 Indian 0 0 3 15 26 46 11 0 Non-Indian 91 1027 2027 7163 4097 2809 1044 100 Software Patents (major U.S. software companies and e-commerce providers) Microsoft Oracle BEA Adobe Autodesk Google Yahoo eBay Indian 21 13 0 9 0 0 2 0 Non-Indian 8466 1078 149 469 275 84 106 30 This data suggests that there is not a significant amount of strategic software R&D done by U.S. software companies via India outsourcing. A few possible reasons for this are, U.S. software companies feel that India‟s legal challenges outweigh the cost savings it offers or alternatively that outsourcing of U.S. strategic software R&D to India is still in its infancy. B. Copyright laws for software poorly defined The second missing prong in India‟s IPR regime is its lack of definition for what constitutes software copyright infringement under India law. India‟s copyright laws are embodied in the Copyright Act of 1957. Like the U.S., India copyright law provides for the automatic ownership rights by the author of a work arising upon creation.22 A work made for hire exception is recognized granting first ownership rights to employers of authors of works created within the employment context.23 21 NTP, Inc. v. Research In Motion, Ltd., 418 F.3d 1282, 1317 (Fed. Cir. 2005) (35 U.S.C. §271(a) provides “…whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented . . . infringes the patent.” In this case NTP alleged that Research In Motion infringed its patent‟s system claim under § 271(a), despite the fact that the component involved in the infringing activity was located in Canada. In the court‟s view, the location of component collectively used in a system does not preclude infringement as a matter of law under § 271(a) when control and beneficial use of a system is obtained in the U.S. One cannot avoid infringement under §271(a) simply by moving a component of an infringing system outside of the U.S.) . 22 India Copyright Act, 1957 §17 (amended 1999). 23 Id. §17(c).
- 7. Paper.doc Page 7of 28 Last printed 5/7/2008 9:36:00 PM Present and future assignment of copyrights is allowed.24 An optional system of copyright registration is provided to secure a presumption of ownership.25 A fair use exception from infringement is granted upon copyrighted works.26 Civil remedies and criminal penalties are provided for copyright infringement27 . Unlike the U.S., India copyright law limits its work made for hire exception to only employee and not contractor created inventions.28 The only assignments that are valid are those in writing that identify the work, specify the rights assigned, specify the duration and territorial extent of the assignment, and are signed by the assignor or his authorized agent.29 Unless specified otherwise, an assignment will lapse if the assignee does not exercise the rights assigned him within one year.30 An author of a work retains an inalienable moral right that survives assignment. The author can exercise his moral right to seek civil remedy to restrain or claim damage for any distortion, mutilation, modification, or other act that would be prejudicial to his honor or reputation. 31 Fair use is broadly defined as any form of private use, including research. In the context of software, India‟s copyright statute provides protection for the “expressions embodied in a “computer programme.”32 However, there are no published India court opinions that illustrate how this statute would be applied to a claim of source code infringement. It is possible that India courts could narrowly interpret “computer programme” to mean object code. First, the India copyright office‟s definition of software piracy suggests they feel only object code falls under their copyright law.33 Second, India courts have not dealt with the complex legal determination of what constitutes an infringing copy of source code under copyright law like U.S. courts have. Third, there are only three relevant copyright infringement cases in the entire judgment databases of the India Supreme and High Courts to speculate on what India courts might decide when dealing with software source code. Microsoft v. Deepak Ravel is a software piracy case. This case is unenlightening. The Delhi High Court applied India copyright law to the copying of object code.34 R.G. Anand v. Delux 24 Id. §18. 25 Id. at ch. X, Registration of Copyright. 26 Id. § 52(a), (b). 27 Id. at ch. XII, Civil Remedies; ch. XIII, Offences; ch. XI, Infringement of Copyright. 28 Id. § 17(c). 29 Id. § 19(1)-(5) (the duration or territorial extent of an assignment to be only five years and is presumed within India, if not otherwise specified). 30 Id. § 19(4). 31 Id. § 5. 32 Id. § 2(ffc) (“‟computer programme‟ means a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result”). 33 Computer Piracy in India: Computer Software, Chapter V, India Copyright Office, Dec 15. 1999, available at http://www.copyright.gov.in/maincpract5.asp (last visited Apr. 6, 2008). 34 Microsoft Corp. v. Deepak Raval, MANU/DE/3700/2006, at 24, 28-9.
- 8. Paper.doc Page 8of 28 Last printed 5/7/2008 9:36:00 PM Films is a motion picture case. In that case, the India Supreme Court stated some guiding principles. First, the Court said “there can be no copyright in an idea … copyright is confined to the form, manner, and arrangement and expression of an idea.”35 Since India currently equates a computer program to an idea under patent law, it is arguable Delux Films is not supportive of strong copyright protection for source code. Second, any astute competitor that gets a copy of other company‟s source code will quickly absorb the idea, modify, and rewrite it. If the basis of your copyright claim is that the infringer‟s source code is substantially similar to your own, Delux Film teaches that the way to differentiate between a literal and non-literal copy is by ordinary observation.36 Any court applying Delux Film’s “ordinary observer” test will rarely find an infringing source code copy in an astute competitor‟s hands. This test is so distant from the modern day U.S. tests of “structure, sequence, and organization”37 or “abstraction, filtration, and comparison”38 that it is unworkable. Gramophone Co. of India Ltd. v. Mars Recording Pvt. Ltd. is a cover song case. In Gramaphone, the India Supreme Court held there is no copyright infringement when others perform and re-record an original artist‟s song. The Court stated that “only when the same signal has been kept, would there be a violation…[i]f another signal is created, such as in the case of version recording, it is not an infringing copy.”39 This is a completely opposite holding to what has developed under U.S. case law.40 Further, it is completely unexpected under any plain language interpretation of India‟s Copyright Act.41 What Gramaphone suggests is that under India copyright law the only copying that matters is of physical things (i.e. the final CD recording of a song) not the copying of the ideas the physical things originate from (i.e. lyrics and notes of a song). If the analogy of Gramaphone is strictly applied to software, object code would be protected under India copyright law but source code would be not. Back to the hypothetical problem, at present it would be unwise for the U.S. doctors to count on India copyright law to mitigate infringement or loss of any ideas embodied in the software source code of their electronic health care system. It is inevitable that, snippets of their source code and some former employees will turn up in the hands of India based competitors. If 35 R.G. Anand v. Delux Films & Ors., (1978) 4 SCC 118 (1978), at 1. 36 Id. at 3, 4 (“One of the surest and the safest test to determine whether or not there has been a violation of copyright is to see if the reader, spectator or the viewer after having read or seen both the works is clearly of the opinion and gets an unmistakable impression that the subsequent work appears to be a copy of the original. Where the theme is the same but is presented and treated differently so that the subsequent work becomes a completely new work, no question of violation of copyright arises.”) 37 Whelan Associates, Inc. v. Jaslow Dental Laboratories, Inc., 797 F.2d 1222, 1240 (3d Cir. 1986) (The court develops structure, sequence, and organization test to decide between literal and non-literal copyright infringement of software source code; court finds ordinary observer test to be of no value in this context.) 38 Computer Associates International, Inc. v. Altai, Inc., 982 F.2d 693, 706 (2d Cir. 1992) (The court proposes abstraction, filtration, and comparison test instead of structure, sequence, and organization test under Whelan). 39 Gramophone Co. of India, Ltd. v. Mars Recording Pvt. Ltd., (2002) 2 S.C.C. 103, at 8. 40 Milene Music, Inc. v. Gotauco, 551 F.Supp. 1288, 1295 (D.R.I.1982) (The owner of a copyrighted musical composition has the exclusive right both to perform the work publicly and to authorize the public performance of the work). 41 India Copyright Act § 13 (works in which copyright subsists); § 14 (meaning of copyright), § 38 (performer‟s rights).
- 9. Paper.doc Page 9of 28 Last printed 5/7/2008 9:36:00 PM possible, the U.S. doctors should design their software in independent segments. The India outsourcing entity should implement physical security barriers between the segments. If email or internet access is not required for software development, it should be removed from employee accessibility. Email and internet traffic should be filtered to check for unauthorized source code movement. Finally, a working copy of all software source code should be extracted from the India entity on a daily basis as an integral part of a disaster recovery plan. C. No trade secret protection The third missing prong in India‟s IPR regime is its lack of national or state laws for protection of trade secrets. The only form of protection for trade secrets place or developed in India will be contract. The typical contracts used to contain or stop others from readily drawing out trade secrets from a company are: non-disclosure, non-compete, and non-solicitation agreements. During the period of employment, India courts recognize negative covenants that are “reasonable and necessary” for the protection of the companies interests.42 Once employment ends, the courts will analyze those same clauses under § 27 of the India Contract Act of 1872. This Act declares void every agreement which restrains anyone from exercising a lawful profession, trade, or business.43 Whether a negative covenant is a restraint of trade is a decision for the court as a matter of law.44 There is no exhaustive list of what constitutes restraint of trade.45 However, the India Supreme Court believes this is a well settled area of law and has provided the following guidance.46 Negative covenants outside of the period of employment are viewed with disfavor and are to be construed narrowly.47 Regardless of each party‟s freedom to contract, post-employment covenants that are unconscionable, unduly harsh or one-sided, that drive the former employee to idleness, that are unreasonable and unnecessary, or injurious to public interest will be viewed as a restraint of trade.48 Consequently, these kinds of covenants will be held void and unenforceable. The doctrine of restraint of trade is not confined to just 42 Niranjan Shankar Golikari v. The Century Spinning & Mfg. Co. Ltd., (1967) 2 S.C.R. 378, at 20 (confidentiality and non-use clause during employment period that are reasonable and necessary for the protection of the companies interest are enforceable). 43 Percept D‟Mark Pvt. Ltd. v. Zaheer Khan, (2006) 4 S.C.C. 227, at 41 (“…the doctrine of restraint of trade does not apply during the continuance for employment and it applie[s] only when the contract comes to an end.”). 44 Gujarat Bottling Co. Ltd. v. Coca Cola Co. (1995) 5 S.C.C. 545, at 21 (“The court has to decide, as a matter of law, (i) whether a contract is or is not in restraint of trade, and (ii) whether, if in restraint of trade, it is reasonable.”). 45 Id. at 24-35. 46 Percept D‟Mark Pvt. Ltd. v. Zaheer Khan, at 38 (“The legal position with regard to post-contractual covenants or restrictions has been consistent, unchanging, and completely settled in our country.”). 47 Superintendence Co. of India Ltd. v. Krishnan Murgai, (1982) 2 S.C.C. 246, at 62 (non-compete clause at issue…. Courts are to interpret the covenant under ordinary rules of construction with fair meaning to the parties. “If there is any ambiguity in a stipulation between employer and employee imposing a restriction on the latter, it ought to receive the narrower construction rather than the wider…”). 48 Gujurat Bottling Co. Ltd. v. Coca Cola Co., at 24-35.
- 10. Paper.doc Page 10of 28 Last printed 5/7/2008 9:36:00 PM employment agreements, rather it extends to all agreements.49 Temporary and permanent injunctions may be sought for contracted non-disclosure of confidential information under the Specific Relief Act of 1963.50 In circumstances where the existence of a non-disclosure agreement is unclear, precedence exists in India common law for injunctive relief for breach of confidence based on equity.51 Further, other India laws may be circumstantially applicable when trade secrets are stolen. However, these laws were not written to take into consideration the valuation of trade secrets.52 Consequently, the remedies these laws provide will likely be inadequate Back to the hypothetical problem, the U.S. doctor‟s will need to rely exclusively on contracts, physical security, and strict management oversight to safeguards any trade secrets developed or placed in India. The steps required to affirmatively protect trades secrets via contract will be no different in India than in the U.S. with respect to employees, subcontractors, or any other entity exposed to them. The difference is that India law provides no backstop to catch errors or omissions. Confidentiality clauses during and after employment are recognized under India law.53 To be enforceable, the U.S. doctors should draft them to be no greater than necessary, limited in scope and duration, and provide for payment if a former India employee would have to sit idle to comply with them.54 These legal standards are similar to those by U.S. 49 Id. at 36 (“We find no rational basis for confining [the principle of restraint of trade] to a contract for employment and excluding its application to other contracts. The underlying principle governing contracts in restraint of trade is the same and as a matter of fact that courts take a more restricted and less favorable view in respect to a covenant entered into between an employer and an employee as compared to a covenant between a vendor and a purchaser or partnership agreements.”). 50 India Specific Relief Act, 1963 § 42 (injunction to perform negative agreement in contract). 51 John Richard Brady v. Chemical Process Equipment Pvt. Ltd., A.I.R. 1987 (Del.) 372 at 1-2, 5, 17, 21, 22, 39 (granting equitable injunction against defendant until final disposal of copyright infringement suit from the sale and manufacture of machines allegedly re-created from plaintiff‟s drawings shared under strict confidentiality). 52 India Information Technology Act, 2000 §72 Penalty for breach of confidentiality and privacy (“…any person who … has secured access to any electronic record, book, register, correspondence, information, document or other material without the consent of the person concerned discloses such electronic record, book. register, correspondence, information, document or other material to any other person shall be punished with imprisonment for a term which may extend to two years, or with fine which may extend to one lakh rupees [$2493 US as of 03/06/08], or with both”); see also India Penal Code § 406 Punishment for criminal breach of trust (“Whoever commits criminal breach of trust shall be punished with imprisonment of either description for a term which may extend to three years, or with fine, or with both); see also § 420 Cheating and dishonestly inducing delivery of property (“Whoever cheats and thereby dishonestly induces the person deceived to deliver any property to any person, or to make, alter or destroy the whole or any part of a valuable security, or anything which is signed or sealed, and which is capable of being converted into a valuable security, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine”). 53 Niranjan Shankar Golikari v. The Century Spinning & Mfg. Co. Ltd., at 22 (court grants injunction against former employee for violation of covenant to not use or divulge former employer secrets). 54 Id. at 21 (“There is also nothing to show that if the negative covenant is enforced the appellant would be driven to idleness or would be compelled to go back to the respondent company. It may be that if he is not permitted to get himself employed in another similar employment he might perhaps get a lesser remuneration…[b]ut that is no consideration against enforcing the covenant. The evidence is clear that the appellant has torn the agreement to pieces only because he was offered a higher remuneration. Obviously he cannot be heard to say that no injunction should be granted against him to enforce the negative covenant which is not opposed to public policy. The
- 11. Paper.doc Page 11of 28 Last printed 5/7/2008 9:36:00 PM courts.55 U.S. styled legal confidentiality, non-compete, and non-solicitation should suffice. Beyond legal matters, the U.S. doctor‟s should be made aware of the chaotic employment environment they will be placing their trade secrets. In India, employee turn-over rates in software companies average 35 to 40 percent annually.56 Further, the more market leading offerings a software company creates, the higher the turn-over rate it can expect. Indian workers are desperate for new technology exposure and training. Once trained, other Indian employers are eager to entice them away to capitalize on the rapid growth of the IT-BPO and KPO industry. Until IT-BPO and KPO industry growth stalls, this turmoil will likely continue. High staff turn-over rates together with the ease in which source code can be sent across the internet will mean that any software trade secrets placed or develop in India will be very hard to contain. Once a trade secret is exposed in India, absent privity of contract, there will be no legal recourse against competitors into whose hands it falls. D. No privacy rights in data In both India and U.S. there is no recognition of an individual‟s fundamental privacy rights in personal data involved in the context of computer processing.57 In fact, in a 2004 U.S.-India forum hosted by the U.S. Department of Commerce the U.S. private sector participants felt they injunction issued against him is restricted as to time, the nature of employment and as to area and cannot therefore be said to be too wide or unreasonable or unnecessary for the protection of the interests of the respondent company.”); see also Superintendence Co. of India Ltd. v. Krishnan Murgai, at 63 (“The restraint may not be greater than necessary to protect the employer, nor unduly harsh and oppressive to the employee.”). 55 Richard S. Gruner, Shubha Gosh & Jay P. Kesan, Intellectual Property in Business Organizations Cases and Materials, 344, (LexisNexis 2006) (2006) (“A nonuse and nondisclosure agreement is enforceable if it (1) exists at the time of the confidential disclosure, (2) is reasonable in scope, and (3) uses language that is clear and unambiguous. If an agreement places too onerous of a burden on an employee, the agreement will be invalidated… In general, the law disfavors agreements that tie the employee‟s too far or too broadly limits the scope of usable information.” ); see also Nike, Inc. v. Eugene McCarthy, 379 F.3d 576, 584-5 (A contract in restraint of trade “…must meet three requirements under Oregon common law to be enforceable: (1) it must be partial or restricted in its operation in respect either to time or place; (2) it must be on some good consideration; and (3) it must be reasonable, that is, it should afford only a fair protection to the interests of the party in whose favor it is made, and must not be so large in its operation as to interfere with the interests of the public….[t]o satisfy the reasonableness requirement, the employer must show as a predicate “that [it] has a „legitimate interest‟ entitled to protection.”). 56 Telephone Interview with Surku Sinnaduari, Chief Information Officer & Managing Director of i2 India, i2 Technologies, Inc. (Mar. 27, 2008) (The employee turn-over rates for the i2 Bangalore, India office averages 35-40 percent annually. Rates have been as high as 60 percent. Enforcing confidentiality, non-compete, and non- solicitation agreements is “hopeless”. Even if an injunction is obtained, it takes 10 years for a court date. There is no way to contain the damage done by relying on these agreements alone. To slow down turn over, i2 uses up-front bonus payment for later performance. The receiving employee in i2 India is expected to pay back the money if they accept other employment during the bonus period. Even this does not work that well. The future employers are now paying back the money for exiting i2 employees. Unlike Infosys, Wipro, or Tata Consulting which are IT “body shops”, i2 employees receive direct exposure to software development and tools. This rapidly increases their skill set and value to others. This consequently increases i2‟s employee turn-over rate. ) 57 In the U.S. any privacy rights in data must be drawn from federal or state statutes regulating specific industries or common law based on factual circumstances.
- 12. Paper.doc Page 12of 28 Last printed 5/7/2008 9:36:00 PM would rather India not adopt European Union style regulations58 “…as its restrictive nature would cause many [U.S.] companies to send data service work to markets other than India.” 59 There has been some recent movement in India to legally recognize electronic transactions. This movement appears to be in response to industry pressure upon India‟s Ministry of Information Technology to alleviate U.S. fears over alleged security breaches in its IT-BPO companies. Fears that, left unaddressed, could irreversibly harm India‟s IT-BPO growth and kill off its golden goose. India cyber law is the Information Technology Act of 2000 (“IT Act”).60 The IT Act makes hacking, physical damage to source code, data or computer systems, publishing of obscene information, breach of confidentiality and privacy61 , and digital signature fraud punishable by imprisonment, fines, or both. There are a few unique things about the Act. First, it makes bringing a claim easier. It does so by bypassing congested India courts thru the establishment of an independent tribunal to intake and adjudicate claims.62 Second, it makes high ranking police officers responsible for investigation of offenses.63 Third, it holds companies as wells as every person in charge liable for any wrongdoings that they consented to or were negligent in preventing.64 Fourth, any judgments the tribunal makes are enforceable under India‟s Civil Procedure and Penal Code.65 Back to the hypothetical problem, the U.S. doctors will not encounter any data privacy laws preventing them from outsourcing U.S. patient data to India. However, because their electronic health care system will be involved in the treatment, payment, or health care operation of U.S. patients, they will be subject to industry specific U.S. federal and U.S. state health care provider regulations. The Health Insurance Portability and Accountability Act (“HIPAA”) will apply regarding the “use or disclosure of protected health information” (“PHI”) to any business 58 Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data § 2, 4, 57, Nov. 23, 1995, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31995L0046:EN:HTML (last visited Apr. 4, 2008) (this broad directive requires that EU member states adopt legislation to “respect [the] fundamental rights and freedoms” of natural persons “notably the right to privacy” with respect to the “processing of personal data in various sphere and social activity” and prohibits the “transfer of personal data to a third country which does not ensure an adequate level of protection.”). 59 Data Privacy Roundtable, HTCG Dialogue on Defense Technology, Data Privacy, and Export Licensing, Bureau of Industry and Security U.S. Dept. of Commerce, Nov. 18, 2004, available at http://www.bis.doc.gov/ internationalprograms/htcg_dialogue.htm (last visited Apr. 4, 2008). 60 India Information Technology Act (India‟s cyber law). 61 Id. § 72 (this provision addresses breach of confidentiality and privacy by “any person who has secured access to any electronic record… [who] without consent …discloses such electronic record …shall be punished with imprisonment for a term which may extend to two years, or with fine which may extend to [$2349 US as of 03/06/08], or with both.”). 62 Id. §§ 48, 58. 63 Id. § 78. 64 Id. § 85. 65 Id. § 58(3).
- 13. Paper.doc Page 13of 28 Last printed 5/7/2008 9:36:00 PM associate they use in India.66 However, HIPAA provides no barrier to India outsourcing. HIPAA will not require the U.S. doctor‟s to get U.S. patient consent to transmit any PHI to business associates in India. HIPAA only requires the U.S. doctors to put business associates under contract that stipulate that they will “not use or further disclose” and will “use appropriate safeguards to prevent use or disclosure” of any PHI.67 The security standard for “appropriate safeguards” under HIPAA is reasonableness. Encryption of electronic health information is currently not required, rather it is merely needs to be addressable.68 Unregulated mass market commodity 64-bit key length encryption will exceed the current HIPAA requirement.69 66 Health Insurance Portability and Accountability Act of 1996, Pub. L. No. 104-191, 110 Stat. 1936 (1996) § 264 (codified as 45 C.F.R §§ 164.102-6, 164.302-18, 164.500-34) (The Health Insurance Portability and Accountability Act of 1996 (HIPAA) required the Department of Health and Human Services (HHS) to make recommendations with respect to privacy of certain health information. HHS promulgated privacy regulations requiring that a covered entity not use or disclose protected health information (PHI) except as necessary to carry out treatment, payment, or health care operations. Covered entities included a health care provide who transmits any health information in electronic form. HHS also promulgated security regulations requiring that a covered entity protect against any reasonably anticipated used or disclosures of electronic PHI that are not permitted or required under HIPAA regulations. These regulations do not specify particular technologies that must be used to comply. Rather, they set out standards that are to be met in the form of implementation specifications. The specifications are either required to be implemented, addressable (but not implemented), or may be implemented depending on reasonable and appropriate judgment of the covered entity. In the context of a business associate or subcontractor, the covered entities contract with them must provide that a clause that requires them to implement safeguards to reasonably and appropriately protect the confidentiality of the electronic protected information that it creates, receives, maintains, or transmits on behalf of the covered entity. Encryption of electronic PHI is not required under current the transmission security standard rather it is merely needs to be addressable. Non-compliance with HIPAA provisions carry the possible penalty of a civil fine and criminal charges for either the covered entity or any contracted business associate. There is no private right of action for breach of HIPPA privacy provisions. The authority to enforce them only lies with HHS. ). 67 45 C.F.R. § 164.504(e)(1)-(3). 68 Id. § 164.312(e)(1) (even if the HIPAA transmission security standard should change to require encryption, mass market commodity encryption up to 64-bit should suffice to meet its requirements as currently written without running into U.S. export restrictions on technology due to reasons of national security). 69 Export Administration Regulations (EAR) of the U.S. Department of Commerce, 15 C.F.R. §§ 7301.-774.1 (2007) (regulating the export and re-export of most commercial items, software, and technology); see also International Traffic in Arms Regulations of the U.S. Department of State, 22 C.F.R. §§ 120.1-130.17 (2007) (regulating export of defense articles and defense services); see also Office of Foreign Assets Control Regulations of the U.S. Department of Treasury, 31 C.F.R. § 500.101-500.901 (2007) (regulating financial and commercial transactions with foreign countries); see also U.S. Department of Commerce, Bureau of Industry and Security, Introduction to Commerce Department Export Controls, http://www.bis.doc.gov/licensing/exportingbasics.htm (last visited Mar. 7, 2008). (U.S. software companies that supply India affiliates with technology must be careful not to violate U.S. export regulations due to reasons of national security. Under U.S. laws, any item sent from the U.S. to a foreign destination is considered to be an export. “Items” include high performance computers, software packages, source code, design plans, and all forms of technical information irrespective of how it is transported (i.e. email, regular mail, communicated during a phone conversation, download from a website). If the item falls under regulation due to reasons of national security, a license is required before export is allowed. Encryption is specifically addressed by these regulations.); see also U.S. Department of Commerce, Bureau of Industry and Security, Review of Mass Market Encryption Commodities and Software Employing Symmetric Keys Greater than 64-bits under ECCNs 5A992, 5D992 and 5E99, http://www.bis.doc.gov/encryption/massmarket_keys64bitsnup.html (last visited Mar. 7, 2008) (The general guideline for mass market encryption commodities and software is that those employing a key length greater than 64 bits are subject to regulation, but, lesser key lengths are not.); see also India Foreign Trade Policy, 2007-2008 available at http://dgft.delhi.nic.in (last visited Mar. 25, 2008) (All software or services produced by and capital goods loaned or leased to an India affiliate fall under India‟s current foreign trade policy. Unlike the
- 14. Paper.doc Page 14of 28 Last printed 5/7/2008 9:36:00 PM Outsourcing data to an India entity is legally no more difficult than to a U.S. entity. Security and privacy provisions applicable to any U.S. styled outsourcing arrangement should suffice.70 The enforceable protection that India‟s cyber law actually offers the U.S. doctors for breach of confidentiality, damage to, or loss of U.S. health care data placed in India is unclear. There are only three cases in the entire judgment database of the India Supreme and High Courts that cite India‟s IT Act.71 None of these cases involve e-commerce data. No case illustrates how far India courts are willing to go in imposing civil fines or damage awards. Under the IT Act, all fines and awards are subject to court discretion. The Act currently limits the fine for breach of confidentiality to $2349 and total damage award to $251,256 US.72 III. LAWS ARE HARD TO PRACTICE Those U.S. software companies that decide to proceed with India outsourcing will take on the hidden costs and legal challenges of enforcement of any laws in India. The current recommendation from India legal authorities is easily summed up. Do not rely on the overburdened India courts, contract for arbitration or mediation instead. The following examines the political and legal climate India presents to U.S. software companies. A. Legal system is in crisis India is a democratic union of 25 states and 7 self-governing territories established under the country‟s constitution adopted in January 26, 195073 . India gained independence from British colonial rule in 1947.74 India has a parliamentary form of government and judiciary system U.S., India has no export regulations concerned with nation security when it comes to technology or software exchanged with U.S entities.). 70 Security and privacy provisions that should be written into a Master Service Agreement (“MSA”) by a U.S. software company outsourcing work to any U.S. or India entities would include a: (1) requirement to deploy industry standard physical and electronic system security measures regarding all access to their facilities; (2) requirement to adopt and deploy an information privacy policy written and governed by the controlling party; (3) requirement to allow the controlling party to monitor and terminate the contract at-will, if security standards or the privacy policy are not met or being adhered to; (4) definition of the security standards and privacy policy to be deployed; (5) requirement to allow the controlling party to re-define, thru contract amendment, the security standards and privacy policy based on to changes in business need or applicable laws; and (5) disallows the subordinate entity “use of” or “access by” subcontractors to any facilities, network, computer systems, work in progress, data, information, …under the “scope of” or “used in” at any time in executing the outsourcing agreement, without the explicit approval of the controlling party. 71 State of Punjab v. Amritsar Beverage Ltd., MANU/SC/3484/2006 (no discussion of IT Act); Fatima Riswana v. State Rep. by A.C.P., Chennai and Ors., (2005) 1 SCC 582 (Supreme Court holds High Court unjustified in making court transfer decisions on the basis of whether the presiding lady judge will be offended by pornographic material to be presented); Dr. L. Prakash v. State of Tamil Nadu, MANU/TN/0676/2002 (no discussion of IT Act). 72 Information Technology Act, § 72 supra note 60; see also § 43 Penalty for damage to computer, computer system, etc. (“If any person without permission … shall be liable to pay damages by way of compensation not exceeding one crore rupees [$251,256 US as of 04/19/08] to the person so affected.”). 73 Sonia Baldia, Knowledge Process Outsourcing To India: Important Considerations for U.S. Companies, 1587 PLI/Corp 171, 179 (2007) (this article discusses the up-front legal issues for U.S. companies considering India outsourcing and sets forth legal how-to‟s to manage with them.). 74 Id.
- 15. Paper.doc Page 15of 28 Last printed 5/7/2008 9:36:00 PM modeled after Britain‟s.75 India‟s judiciary branch of the government resembles English common law in terms of procedure and court policy of stare decisis.76 The highest court is India‟s Supreme Court. Under it reside 21 High Courts over a state or group of states. A hierarchy of lower courts of general jurisdiction exists under each High Court.77 Lower court decisions are subject to review by the High Court. The High Court decisions are review by the Supreme Court78 . Judgments from the Supreme and several High courts are posted on India‟s Judicial Information System (“JUDIS”)79 . India‟s laws are based on its Constitution, legislated statutes and regulations, and case law. The common working language in public and private sectors is English. All official publications are available in English. Though they may appear structurally familiar to U.S. attorneys, India courts do not operate the same as U.S. courts.80 The backlogs are horrendous. India‟s Law and Justice Minister, H. R. Bhardwaj recently stated that in 2007 there were a total of 28,986,205 pending cases in various district and subordinate courts, 3,700,223 in High Courts, and 49,926 in the Supreme Court.81 It has been reported “…if there are absolutely no new cases, it will take 124 years to clear the backlog”.82 In the High Courts, 40 percent have been pending for more than 5 years.83 75 Id. (“India‟s president is the constitutional head of the executive branch of government.… India‟s constitution governs the sharing of legislative power between parliament and India‟s 25 state legislatures. The Parliament has exclusive jurisdiction over matters of nation interest enumerated in what is known as the Union List. This list includes defense, foreign affairs, currency, income tax, railways, shipping, posts and telegraphs. States legislatures have exclusive jurisdiction over matters enumerate in what is known as the State List. This list includes public order, police powers, public health, communications, and education. The Parliament and state legislature share concurrent jurisdiction over matters enumerate in what is known as a Concurrent List. This list includes criminal law, marriage and divorce, trade unions, and price controls”) 76 Id. 77 Indian Courts Home Page, http://www.indiancourts.nic.in. 78 Jurisdiction of the Supreme Court, India Courts, http://www.indiancourts.nic.in/courts/indian_jud.html (last visited Mar. 23, 2008). 79 Indian Judgments Information System Home Page, http://www.judis.nic.in (last visited Mar. 23, 2008) (Judgments are published in the official Supreme Court Reporter (“SCR”) and the All India Report (“AIR”)). 80 Jayanth K. Krishnan, Outsourcing and the Globalizing Legal Profession, 28 WM. & Mary L. Rev. 2007 available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=910338 (in depth exploration of possible causes why India‟s legal system is in crisis and suggesting that legal outsourcers help pay for its reform). 81 India Courts Grappling with Backlog of Over 3 Crore Cases, WEBINDIA123.COM, Mar. 3, 2008, http://news. webindia123.com/news/Articles/India/20080303/899412.html (last visited Mar. 23, 2008) (“Law and Justice Minister H R Bhardwaj said a total of 28,986,205 cases were pending in various district and subordinate courts as in September last year out of which the High Courts accounted for 3,700,223. In the Supreme Court, the pending cases touched a figure of 46,926 as on December 31 last year…The Allahabad High Court has the dubious distinction of leading the high courts in pendency of cases (as on September 30, 2007) with a figure of 808226 -- 604450 civil cases and 203776 criminal cases… followed by Madras High Court (426347 cases), Bombay High Court (367409 cases), Calcutta High Court (279318 cases), Punjab and Haryana High Court (255696 cases), Orissa High Court (227752 cases) and Rajasthan High Court (214451 cases.”). 82 Bibek Debroy, Let’s Not Throw the Baby Out, THE INDIAN EXPRESS, DEC. 13, 2007, http://www. indianexpress. com/story/249676.html (last visited Mar. 23, 2008) (“The backlog figures are horrendous… there is a back-of-the envelope-figure that floats around ... [even] if there are absolutely no new cases, it will take 124 years to clear the
- 16. Paper.doc Page 16of 28 Last printed 5/7/2008 9:36:00 PM By itself, prominent foreign investment in jurisdictions where IT-BPO and KPO is flourishing has not motivated India to improve the court backlogs there.84 See the table below. Table 4. City Firms Focus Jurisdiction Cases Pending Time to Hear Appeal85 Lower Courts High Court Bangalore Infosys, Wipro, Intel, IBM, SAP, SAS, Dell, Tisco, Texas Instruments, Motorola, HP, Oracle, Yahoo, AOL, E&Y, Google, Accenture, i2 Technologies Chip design, software, call center, IT consulting, tax processing Karnataka 1.08M 129,653 2.9 yrs Delhi GE, American Express, STMicroelectronics, Wipro, Spectramind, Convergys, Daksh, ExL Call center, transaction processing, chip design, software Delhi 0.95M 113,785 2.52 yrs Mumbai TCS, MphasiS, i-flex, Morgan Stanley, Citigroup, Financial research, back office, software Bombay 3.05M 366,495 8.1 yrs Pune MsourcE, C-DAC, Persistent Systems, Zensar Call centers, chip design, embedded software Chennai Cognizant, World Bank, Standard Chartered, Polaris, EDS, Pentamedia Software, transaction processing, animation Madras 3.55M 426,347 2.76 yrs Hyderabad HSBC, Satyam, Microsoft Software, back office, product design Andha Pradesh 1.24M 148,512 3.29 yrs Kolkata PwC, IBM, ITC Infotech, TCS Consulting, software Calcutta 2.33M 279,318 6.19 yrs backlog.” Two-thirds of civil cases involve the government as litigants, yet in 1997 it was supposedly decide that government v. government cases should not end in court. The author asks “[w]hy wasn‟t this implemented?”). 83 Centre for Media Studies, India Corruption Study 2005 to Improve Governance, Vol. II (Eleven Public Services) Corruption in Judiciary, available at http://www.cmsindia.org/cms/events/judiciary.pdf (last visited Mar. 27, 2008) § 6.2 Pending Cases (“87% of are pending in lower courts, while 12% of them are pending in High Courts. Of the cases pending in High Courts, almost 40% [have been] pending for more than 5 years.”); see also Judge Me Not, BUSINESS & ECONOMY, Feb. 23, 2006 (“[a]cording to the Ministry of Law and Justice, 650,000 case have been pending in the High Courts for more than 10 years, while 630, 000 have been pending between 5 and 10 years.”), http://www.businessandeconomy.org/tresult.asp?sin=Judge &pageno=1 (last visited Mar. 27, 2008). 84 The data for the table came from the following sources: Jayanth K. Krishnan, Outsourcing and the Globalizing Legal Profession; Patna High Court does Bihar Proud, BIHAR CHRONICAL, Sept. 4, 2007, http:// biharchronicle.blogspot.com/2007/09/patna-high-court-does-bihar-proud.html (last visited Mar. 29, 2008); Rana Ajit, With Low Backlog, Patna High Court does Bihar Proud, INDIA ENEWS, Aug. 26, 2007, http://indiaenews.com/ india/20070826/67219.htm. (last visited Mar. 29, 2008); India Courts Grappling with Backlog of Over 3 Crore Cases, WEBINDIA123.COM. 85 India Needs 124 years for Clearing Pending Cases in its Courts, SUPER HINDUS AROUND THE GLOBE, May 3, 2007, http://superhindus.wordpress.com/2007/05/03/india-needs-124-years-for-clearing-pending-cases-in-its-courts (last visited Mar. 29, 2008) (The “national Indian average is 188 cases disposed of among 21 high courts everyday. The Madras High Court leads in terms of speedy disposal of 648 cases, on an average, each day.”).
- 17. Paper.doc Page 17of 28 Last printed 5/7/2008 9:36:00 PM Facing many years before coming to trial due to India court backlogs, U.S. software companies will either give up or seek U.S. judgment.86 Unfortunately, India courts do not recognize U.S. judgments.87 Further, even when some basis for jurisdiction of U.S. courts can be invoked, the astute defendant will motion for dismissal of claims that arise under India law or involve an India entity on the grounds of forum non conveniens. Under existing U.S. precedence, the motion will likely be granted if the only opposing argument the respondent can make is “the backlog of cases and continuing congestion [in India courts] will prevent meaningful relief.”88 B. Legal system is corrupt According to the largest corruption study ever undertaken in India there is widespread belief that the India judiciary is corrupt.89 “[T]he former Chief Justice of Supreme Court Same Piroj Bharachua has suggested that „up to 20 percent of judges in India were corrupt.‟”90 Bribes to legal authorities are viewed as the way to get things done.91 Jolly Technologies, a U.S. software company, claims to have encountered this. After opening an R&D facility in Mumbai one of the employees was caught uploading and sending both source code and design documents outside the facility from her Yahoo e-mail account. When confronted, the employee disappeared. Jolly immediately sought help from the cyber crime unit of the Mumbai police force. They refused to investigate or register the crime. Jolly stated “[w]e have learned that the police will not file a FIR [first information report] until they are 86 Usha (India), Ltd. v. Honeywell Int'l Inc., 2004 WL 540441, 5-7 (S.D.N.Y. Mar. 17, 2004) (The fact that a U.S. corporation holds an interest in a India joint venture does not mean a U.S. court has interest in settling a dispute based upon India law that might take 10-15 year in the alternate forum, the New Dehli High Court. Case dismissed on grounds of forum non conveniens.). 87 Digital Filing Systems Inc. v. Akhilesh Agarwal and Anr., MANU/DE/0297/2005 at 9-10 (“…the Court in this country may restrain person who actually recovered judgment in a foreignCourt from proceeding to enforce that judgment.”); see also Sonia Baldia, Knowledge Process Outsourcing To India: Important Considerations for U.S. Companies, at 15 (“Under the Indian Civil Procedure Code, a U.S. judgment is not directly enforceable in India. Rather, it can only be enforced by filing a fresh lawsuit in an Indian court based on the U.S. judgment, which will be treated as evidence, among other evidence, against the Indian defendant.”). 88 USHA (India), Ltd. v. Honeywell Int'l, 421 F.3d 129, 135 (2d Cir.2005) (The high backlog of cases in New Dehli High Court not sufficient reason to overturn lower U.S. court‟s dismissal on grounds of forum non conveniens.) 89 India Corruption Study 2005, Transparency International, http://www.transparency.org/regional_pages/ asia_pacific/newsroom/news_archive__1/india_corruption_study_2005 (last visited Apr. 18, 2008) ("India Corruption Study - 2005" is the largest corruption study ever undertaken in the country with a sample of 14,405 respondents spread across 20 States. More than 525 respondents were interviewed in each state. Designed and conducted by CMS, the study covered 151 cities and 306 villages. It was based on a combination of research methodologies, including exit polls at the public offices covered and household studies.”). 90 Centre for Media Studies, India Corruption Study 2005 to Improve Governance, at 1. 91 Id. § 6.4.2 (86% of those interacting with the India judiciary have paid bribes to get work done by the court); § 6.4.3 (23% paid bribe to get favorable judgment; 13% to manipulate the public prosecutor; 9% to advance or delay the case); § 6.4.5 (5% of brides where paid to the judge, 59% to the lawyers, 30% to court officials, 8% to public prosecutors).
- 18. Paper.doc Page 18of 28 Last printed 5/7/2008 9:36:00 PM heavily bribed, as they know that there has been a huge loss to the company."92 C. Does anyone try? Despite backlogs and corruption allegations, two relevant questions are “do any software companies try to use the India judicial system for enforcement of their IPR” and if they do “with what outcome?” The International Intellectual Property Alliance (“IIPA”) 2007 and 2008 Special 301 reports provide some insight. These reports reveal that. “India is not viewed as a country with a damages culture, there are few such examples in the copyright area.”93 From 1988 to 2006 there has only been a total of 16 software copyright infringement cases filed in India.94 In 2006, there were 4 raids conducted for software copyright infringement by India authorities. Since then there has been a significant decrease in all forms of copyright infringement raids.95 In 2007, the “software industry [filed] ten civil end-user actions, the most ever in one year in India.”96 Finally, while “[c]corporate end-user piracy…of business software…continues unabated in large and small Indian companies…there were no software convictions in 2007—in fact, there has never been a successful criminal conviction for software piracy in India.”97 Search results of the published India Supreme and High Court judgments are consistent with the IIPA findings. Only five cases of software copyright infringement exist.98 All of the five cases deal exclusively with the repeated unlicensed copying and distribution of Microsoft products. All five decisions come from the Delhi High Court. The case of Microsoft v. Deepak Raval is of interest. In that case, the court took specific note of the growing menace of software 92 John Ribeiro, Source Code Stolen from U.S. Software Company in India, COMPUTERWORLD, Aug. 5, 2004, http://www.computerworld.com/softwaretopics/software/story/0,10801,95045,00.html (last visited Mar. 30, 2008); see also John Ribeiro, Police Question Report of India Code Theft, COMPUTERWORLD, Aug. 31, 2004, http://www. computerworld. com/printthis/2004/0,4814,95615,00.html (last visited Mar. 30, 2008); see also Karl Shoenberger, Alleged Code Theft Highlights Foreign Risk, OFFSHORINGFORUM, Sep. 10 , 2004, http://www. Offshoringforum. com/topic.asp?TOPIC_ID=69&FORUM_ID=15&CAT_ID=5 (last visited Mar. 30, 2008); see also Jolly Technologies Announces Soaring Q1 Results, JOLLY TECHNOLOGIES, Oct. 30, 2007, http://www.jollytech.com/ company/press/release/10_30_2007.php (last visited Mar. 30, 2008) (announcing the shutting down of India operations and shifting all development back to the United States). 93 IIPA 2007 Special 301 Report INDIA, INTERNATIONAL INTELLECTUAL PROPERTY ALLIANCE, Feb. 12, 2007, at 53, available at http://www.iipa.com/rbc/2007/2007SPEC301INDIA.pdf 94 Id. at 52 95 Id. 96 IIPA 2008 Special Report INDIA, at 43. 97 Id. at 45. 98 Microsoft Corp. v. Yogesh Papat, MANU/DE/0331/2005 (compensatory damages for repeated copying of Microsoft products); Microsoft Corp. v. Deepak Raval, MANU/DE/3700/2006 (compensatory and punitive damages for repeated willful, intentional, and flagrant copying of Microsoft products); Microsoft Corp. v. Mayuri, MANU/DE/2068/2007 (compensatory and punitive damages for blatant copying of Microsoft products); Microsoft Corp. v. A. Jain, MANU/DE/8867/2007 (compensatory damages award for copying of Microsoft products); Microsoft Corp. v. Mitesh Jain, MANU/DE/0450/2008 (accepting settlement between parties for copying of Microsoft products).
- 19. Paper.doc Page 19of 28 Last printed 5/7/2008 9:36:00 PM piracy and opened the door to punitive damage awards in cases where software copying is shown to be “willful, intentional, and flagrant”.99 At present, the Delhi High Court is the only India court on record to have granted any form of damages for software copyright infringement. Back to the hypothetical problem, a reasonable conclusion is that India‟s current legal system will be of marginal utility to the U.S. doctors for enforcement of their IPR in software and data when infringed or stolen from them in India by others. At present, Delhi appears to be best legal jurisdiction to bring software copyright infringement claims. D. ADR is recommended It is commonly known by India judges and lawyers that the existing court system is not able to keep up.100 Alternate disputed resolution (“ADR”) is their recommended alternative.101 Working together, the India Supreme Court and legislature enacted the Arbitration and Conciliation Act of 1996. It is based on the international commercial arbitration model law adopted by UNCITRAL in 1995. Under India laws, the parties subject to an arbitration agreement are free to select the place of arbitration, the procedural aspects, the number of arbitrators, and the substantive law to apply.102 There is a three year statute of limitation to bring arbitration from the time of the cause of action arises.103 Arbital awards must be in writing and signed by the tribunal.104 India is a member of the two main conventions that facilitate the enforcement of foreign arbitral awards in the international commercial contract context. These are the Geneva 99 Microsoft Corp. v. Deepak Raval, at 24, 28-9 (“…in India, a positive trend has started … [c]ourts are becoming sensitive to the growing menace of piracy and have started granting punitive damages even in cases where due to absence of the defendant‟s exact figures of sales by the defendant‟s under the infringing copyright and/or trade mark, exact damages are not available.” Court awards both compensatory and punitive damages for willful, intentional, and flagrant violation by defendant of plaintiff‟s copyright in MS DOS, MS WINDOWS and trade mark in “Microsoft.”). 100 Chief Justice Suggests Out-of-Court Settlement of Cases, THEEARTHTIMES, Dec. 03, 2007, http://www. earthtimes.org/articles/show/152459.html (last visited Mar. 29, 2008) (“Expressing concern over the increasing backlog of cases in courts and the slow rate of disposal, Chief Justice of India K.G. Balakrishnan Monday said lawyers could try to settle most of the cases outside courts 'as the present establishment cannot keep up.'”). 101 Salem Advocate Bar Association of Tamil Nadu vs. Union of India, (2003) 1 SCC 49 (India Supreme Court order committee formed to implement court ordered mediation, conciliation and arbitration under newly added § 89 of the Code of Civil Procedure); see also Praveen Dalal, ADR: The Ultimate Solution of Backlog, IMCINDIA, May. 24, 2005, http://india.indymedia. org/en/2005/05/210588.shtml (last visited Mar. 28, 2008) (“The backlog of cases is increasing day by day but …the backlog is a product of “inadequate judge population ratio” and the lack of basic infrastructure. The government is not very keen in increasing and improving either. It has, however, been wise enough to amend the existing provisions of [Civil Procedure Code, 1908 (CPC)] to take care of the requirements of ADR in India. The CPC has been amended … to make ADR an integral part of the judicial process … [W]here it appears to the court that there exist elements, which may be acceptable to the parties, the court may formulate the terms of a possible settlement and refer the same for arbitration [or] conciliation…”). 102 India Arbitration and Conciliation Act, 1996 §§ 10, 11, 19, 20, 31, 34. 103 Id. § 43; see also India Limitations Act, 1936, sched. Period of Limitations. 104 Arbitration and Conciliation Act §31.
- 20. Paper.doc Page 20of 28 Last printed 5/7/2008 9:36:00 PM Convention on Execution of Foreign Arbitral Awards, 1927 and the New York Convention, 1958. Accordingly, a local or foreign award under either convention is generally binding on the parties.105 Back to the hypothetical problem, lawyers for the U.S. doctors drafting any agreements involving India entities (i.e. employees, subsidiaries, contractors, joint partners, vendors …etc.) should insert arbitration provisions in the agreements to avoid the backlog of India courts.106 The U.S. doctors can have the provisions drafted to allow them to retain the right to either arbitrate or litigate. The mechanics involved will be familiar to U.S. contract attorneys. A court in India can overturn an arbital award if it finds the subject matter of the dispute is not capable of settlement by arbitration under India law or if the award is in “conflict with a public policy of India”.107 In Oil & Natural Gas Corp. Ltd. v. Saw Pipe, Ltd., the Supreme Court of India broadly interpreted the definition of “public policy” to permit domestic award challenges if the relief in the award violates any India laws.108 In Venture Global Engineering v. Satyam Computer Services, Ltd., the Court extended the Saw Pipe holding to apply to foreign award challenges also.109 Back to the hypothetical problem, the recent India Supreme Court holdings mean the U.S. doctors cannot blindly draft in U.S. choice of law provisions into their outsourcing agreements and expect them to govern arbitration outcome. For example, if the India IT Act would limit breach of confidence by a person with access to an electronic transaction to $2346 US, then an arbital award granted under similar circumstances cannot exceed this amount either. All awards must be consistent with how India law would analyze and decide any issue subject to agreed ADR. IV. INCOME EARNED IN THE GLOBAL ECONOMY Taxation is always a concern for U.S. companies. India has not attracted foreign investment in its IT-BPO industry solely on an offer of cheap labor. India has also provided specialized tax 105 Id. pt. I ch. VIII (enforcement of local awards ); pt. II chs. I & II (enforcement of foreign awards under the New York and Geneva Conventions). 106 Kurian Mathew, Median India, http://www.kurianmathew.com/Mediation%20India.html (last visited Mar. 30, 2008) (Median India suggest the following provision be inserted into contracts “Any dispute or difference arising out of or in connection with this contract shall first be referred to mediation in accordance with the then current Indian Institute of Arbitration and Mediation (IIAM) Mediation Rules and as per the Arbitration & Conciliation Act, 1996. If the mediation is abandoned by the mediator or is otherwise concluded without the dispute or difference being resolved, then such dispute or difference shall be referred to and determined by arbitration as per the Arbitration & Conciliation Act, 1996 by IIAM in accordance with its Arbitration Rules.”). 107 Id. § 34(2)(b). 108 Oil & Natural Gas Corp., Ltd. v. SAW Pipes, Ltd., (2003) 5 S.C.C. 705, at 72 (public policy violations interpreted broadly under §34(2) of the Arbitration and Conciliation Act to allow courts to set aside domestic awards if they violate any India laws). 109 Venture Global Engineering v. Satyam Computer Services, Ltd., MANU/SC/0333/2008, at 29 ((public policy violations interpreted broadly under §34(2) of the Arbitration and Conciliation Act to allow courts to set aside foreign awards if they violate any India laws).
- 21. Paper.doc Page 21of 28 Last printed 5/7/2008 9:36:00 PM incentives that bypass its domestic income taxation laws for export-oriented foreign investors. International taxation issues in the context of e-commerce are rapidly emerging in India. The most troublesome of issues arising in the context of U.S. companies involved with India outsourcing. India‟s taxing authorities have taken the position that all global income earned from any software or services produced or sold in India is “deemed to accrue or arise in India” under India‟s Income Tax Act of 1961.110 They argue that, unless an exemption applies, all non- resident income earned directly or indirectly from software and IT services outsourced to India is subject to India taxation first under the U.S.-India Double Taxation Avoidance Agreement of 1990 (“DTAA”).111 Based on this viewpoint, India taxing authorities have begun issuing notices of income tax deficiency to U.S. companies outsourcing software driven activities to India WOS.112 The amount assessed in these notices is the unpaid India taxes on any global income the taxing authorities decide arose in India, plus penalties. Like in the U.S., the penalties for underpayment of taxes can be very large. Over the span of years, cumulative tax deficiencies can erase a large portion of the cost savings attributed to India outsourcing. Since this is an emerging and unsettled issue in India, U.S. software companies engaging in India outsourcing must be cautious how they characterize where their global income is earned. With few guideposts to follow, this will be difficult. Once the India tax authorities present a U.S. company with a notice of tax deficiency they have two choices. They can pay the deficiency or they fight it out in India courts in hope of establishing favorable legal precedence. Further, tax payments made to wrong government may not be refundable due to statute of limitations. Ironically, because of refund limitations a company could pay taxes on income twice. Unplanned taxes will impact cash flow impact. Cash flow is a dominate factor in corporate valuation. Small changes in cash flow can have large effect on a company‟s stock price and credit worthiness. For a start-up software company, these effects could inhibit their ability to obtain further investor funding. This could threaten their survival. These hidden cost and legal challenges are not what U.S. software companies want or expect. 110 India Income Tax Act, 1961 § 9(1), amended by Finance Act, 2008 (“The following income shall be deemed to accrue or arise India: (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Explanation For the purposes of this clause (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India.”). 111 US-India Double Taxation Avoidance Agreement (Dec. 20, 1990), available at http://law.incometaxindia.gov.in/ TaxmannDit/IntTax/Dtaa.aspx (last visited Mar. 31, 2008). 112 Microsoft Asked to Pay Rs 700 cr Tax, THE TIMES OF INDIA, Apr. 3, 2008, http://timesofindia.indiatimes.com/ Microsoft_asked_to_pay_Rs_700_cr_tax/articleshow/2921327.cms (“Microsoft India has been asked to pay Rs 700 crore tax [$174M US as of 04/18/08] including penal interest for the financial year 1998-99 to 2003-04, by Commissioner of Income Tax (CIT), dealing in international taxation cases, in its recent judgment.”).
- 22. Paper.doc Page 22of 28 Last printed 5/7/2008 9:36:00 PM The section will proceed as follows. Subsection A will establish the needed background to comprehend Subsections B and C. Subsection B will examine, analyze, and evaluate the tax impacts on U.S. software companies producing software or operating an e-commerce site in India; Subsection C will examine, analyze, and evaluate the tax impacts for U.S. software companies intending to sell software in or e-commerce services from India. A. Background A foreign company can commence operations in India by incorporating a wholly owned subsidiary (“WOS”); by joint venture with India partners; by self-presence thru a liaison, project, or branch office; by contract with an independent India entity; or by contracting to build, operate, and transfer (“BOT”) the ownership interest in an India entity upon established operation. Corporate forms in India are either private or public limited companies.113 The majority of U.S. software companies involved in any form of India outsourcing do so thru establishment of a WOS in India. This business form allows them to retain the tightest control over IP, data, and operations placed in India.114 There have been are numerous articles written in the recent years focusing on the up-front hidden costs and legal challenges in the establishment of U.S-India outsourcing arrangements.115 Exploration of them is encouraged. However, this paper will not focus on them further. India corporate tax rates are an effective flat rate of 34 percent for domestic companies earning over 1M rupees ($25,214 US as of 03/30/08) and 41.2 percent for foreign companies.116 In general, entities incorporated in India will be treated as domestic companies for the purposes of taxation. In comparison, U.S. corporate tax rates vary between 15 to 35 percent based on the amount of income earned.117 The DTAA‟s purpose it to avoid double taxation and prevent evasion of taxes by entities in 113 India Companies Act, 1956 § 3(1)(ii) (a private company is not open to the public and has up to 50 shareholders; § 3(1)(iv) (a public company not a private company). 114 See table 4. 115 Fred Greguras, Steven Levine & S.R. Gopalan, Legal Structures for Outsourcing, FENWICK & WEST LLP (2004), http://www.fenwick.com/docstore/Publications/Corporate/Outsourcing.pdf; see also Sonia Baldia, Intellectual Property In Global Sourcing: The Art of the Transfer, 38 Geo. J. Int‟l L. 499 (2007); see also John Funk, Risk Mitigation in Sourcing, July 14, 2005, available at http://www.ismdallas.org/archive/200507_Risks _and_Mitigation_ISM_Dallas_Pres.ppt (last visited Mar. 31, 2008). 116 Embassy of India Wash. D.C., Taxation System in India, http://www.indianembassy.org/newsite/ doing_business_in_india/fiscal_taxation_system_in_india.asp (last visited Mar. 25, 2008) (“Companies residents in India are taxed on their worldwide income arising from all sources in accordance with the provisions of the Income Tax Act. Non-resident corporations are essentially taxed on the income earned from a business connection in India or from other Indian sources. A corporation is deemed to be resident in India if it is incorporated in India or if it‟s control and management is situated entirely in India. Domestic corporations are subject to tax at a basic rate of 35% and a 2.5% surcharge. Foreign corporations have a basic tax rate of 40% and a 2.5% surcharge. In addition, an education cess at the rate of 2% on the tax payable is also charged. Corporat[ions] are subject to wealth tax at the rate of 1%, if the net wealth exceeds Rs.1.5 mn (approx. $33333 [US]”)). 117 26 U.S.C. §11(b)(1); see also IRS, 2007 Instructions to Form 1120, available at http://www.irs.gov/pub/ irs- pdf/i1120.pdf (last visited Mar. 25, 2008).
- 23. Paper.doc Page 23of 28 Last printed 5/7/2008 9:36:00 PM one country earning income in the other. Under the DTAA, income earned and taxed in India will avoid further taxation in the U.S. The DTAA is implemented in the U.S. income tax system by provision of a foreign tax credit in the amount of India income taxes paid by a U.S. taxpayer. The DTAA does not increase tax liability. Rather, it controls in what country different types of income is taxed.118 Consequently, how DTAA provisions are interpreted can directly impact where taxes on global income are paid—in India or the U.S. The DTAA is subject to interpretation by India‟s taxing authorities and its courts. The India Supreme Court has held that when there is conflict between the DTAA and the India Income Tax Act, the DTAA will prevail.119 To attract foreign investment, India has implemented numerous tax schemes specifically for export-oriented businesses.120 These tax schemes bypass all obstacles of the domestic India economic for limited duration, generally 10 to 15 years. A U.S. software company can either establish their India WOS in a Special Economic Zone (“SEZ”)121 or a Software Technology Park (“STP”).122 SEZs offer an income tax exemption (“tax holiday”) on profits from export- oriented production of “articles or things or computer software” spread out over a graduated 15 118 US-India Double Taxation Avoidance Agreement, art. 7. (controlling which country can tax different business profits in a US-India enterprise). 119 Commissioner of Income Tax v. P.V.A.L. Kulandagan Chettiar, (2004) 6 SCC 235, at 5-8. 120 India Foreign Trade Policy, 2007-2008, available at http://dgft.delhi.nic.in (last visited Mar. 25, 2008) (the India Ministry of Commerce and Industry has implemented many tax beneficial schemes that both local and foreign owned export-oriented businesses can establish themselves under. The schemes are: Export Oriented Units (EOU); Free Trade Zones (FTZ), Export Processing Zones (EPZ), Special Economic Zones (SEZ), Electronic Hardware Technology Parks (EHTP), Software Technology Parks (STP)). see also India Minister of Commerce and Industry, Manual on Foreign Direct Investment 2006, available at http://dipp.nic.in/manual/fdi_manual_11_2006.pdf (last visited Mar.17, 2008). 121 India Minister of Commerce and Industry, Investing In India, Foreign Direct Investment Policy & Procedure, Nov. 2006, available at http://dipp.nic.in/manual/fdi_manual_11_2006.pdf (last visited Apr. 14, 2008) (SEZs came about from the Special Economic Zones Act of 2005. The tax concessions are available to developers of the economic zones and export-oriented companies that located within them. SEZs are regarded as foreign territory for the purpose of duties and taxes and operate outside the domain of the custom authorities. SEZs enjoy duty free import on all types of capital goods, raw material, and consumables that may be needed by a manufacturer. SEZs also exempt a manufacturer from central government excise, sales tax, and service tax. SEZs offer a 15-year tax holiday on export profits: 100 percent for the first five years, 50 percent for the next five years, and up to 50 percent for further five years, subject to creation of reserves when manufacturing or producing “any articles or things or computer software” for exportation. Companies with a SEZ are expected to be a positive foreign exchange earner within 5 years from the commencement of production. Generally, all final production should be exported, except product rejects up to a prescribed limit. Any sales made within India are subject to an excise duty equal to the normal customs duty which would be payable on such goods, if imported.); see also India Foreign Trade Policy; see also India Ministry of Commerce and Industry, Background Note on Special Economic Zones in India, http:// sezindia.nic.in (last visited Mar. 25, 2008). 122 Id. (Unlike SEZs, a STP is unique in that it focused exclusively on one product sector, computer software. Within a STP a company can carry out export-oriented: development of computer software, data entry and conversion, data processing, data analysis and control, data management, call center, and consultancy services over data communication lines. Companies within a STP can import goods on loan from a client or parent company for a specified period. From a taxation perspective, STPs are similar to the EOU/SEZ scheme. They differ in that they have a 10 year tax holiday on profits from exports: 100 percent for all ten years. Currently, this tax holiday is set to expire March 31, 2009. In contrast, the tax regime under the SEZ scheme is open-ended.); see also India Foreign Trade Policy.
- 24. Paper.doc Page 24of 28 Last printed 5/7/2008 9:36:00 PM year period123 STPs are similar, except they offer a 10 year tax holiday on 100 percent of profits on export-oriented “development of computer software, data entry and conversion, data processing, data analysis and control, data management, call center, and consultancy services over data communication lines.”124 B. When export-oriented tax incentives expire The export-oriented tax incentives India offers will expire. Once that happens, moving into another tax holiday is prohibited by interlocking provisions in the India income tax code.125 A relevant question is “what impact does the expiration of an export-oriented tax holiday have on a U.S. software company that has outsourced its entire software R&D and e-commerce site operation to India?” The majority of U.S. or India companies involved in IT-BPO and KPO activities are established in STPs. The tax holiday for all STPs is set to expire on March 31, 2009.126 Morgan Stanley sought an advanced revenue ruling on how this would change taxation of the WOS it had established in India to perform back office services for U.S. Morgan Stanley‟s global financial services.127 The India tax authorities responded that all global income that India helped to generate should be taxed in India. Morgan Stanley disagreed and appealed this ruling thru the India courts. In DIT (International Taxation), Mumbai v. Morgan Stanley & Co, Inc, the India Supreme Court finally settled the dispute.128 The Court decided the back-office activities Morgan Stanley‟s WOS performed in India were “preparatory and auxiliary in character” to U.S. Morgan Stanley‟s front-office activities.129 The Court held that under the DTAA, resident income (i.e. India income) that preparatory and auxiliary activities generate is taxable in India. However, non-resident income (i.e. U.S. income) that preparatory and auxiliary activities help to generate is not taxable in India.130 The Court stated the “economic nexus” in a US-India 123 India Income Tax Act §10(AA)(1) (provides an income tax deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software of 100 percent for the first five years, 50 percent for next five years; and 50 percent in the next years for specified re- investment). 124 Id. §10(B)(1) (providing income tax deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software of 100 percent for the first ten years). 125 India Income Tax Act §§ 10(AA), 10(B) (“this [export-oriented deduction] applies to an undertaking … providing it is not formed by the splitting up, or the reconstruction, of a business already in existence… or formed by the transfer to a new business of machinery or plant previously used for any purpose.”). 126 2008 Will Be a Crucial Year for the Indian BPO Industry, SILICONINDIA, Dec. 31, 2007, http://www. siliconindia.com/print_article.php?38484 (last visited Mar. 31, 2008). 127 Morgan Stanley Comes Out on Top, INTERNATIONAL TAX REVIEW, July 12, 2007, http://www.internationaltaxreview.com/default.asp?Page=9&PUBid=210&ISS=23959&SID=689609 (last visited Apr. 24, 2008). 128 DIT (International Taxation), Mumbai v. Morgan Stanley & Co., Inc., (2007) 7. S.C.C. 1. 129 Id. at 8. 130 Id. at 12.
- 25. Paper.doc Page 25of 28 Last printed 5/7/2008 9:36:00 PM enterprise was an important aspect of attribution of profits.131 The Morgan Stanley decision was a welcome relief to U.S. companies outsourcing back- office operations to India. The decision was a setback to India taxing authorities seeking strict source based interpretation on taxability of non-resident income. Back to the hypothetical problem, the Morgan Stanley opinion should provide little comfort to the U.S. doctor‟s. Once their tax holiday expires, the India tax authorities will claim the entire global income earned by their electronic health care system should be taxed in India. The Court in Morgan Stanley gave no guidance on how to decide if an activity is “preparatory and auxiliary in character.” Further, the Court never explained how an “economic nexus” analysis should be conducted to properly attribute an international enterprise‟s global income to either US or India. Just by ordinary observation, the India taxing authorities will point out that by outsourcing all software R&D and e-commerce site operation to India the activities performed there are more than preparatory or auxiliary in character to the U.S. doctor‟s enterprise. They will argue the economic nexus of their enterprise is India, not the U.S. Therefore, global profits from operation should be taxed in India under the DTAA. Assuming the India taxing authorities are correct, corporate balance sheet projections on a $100M license sales rate after the U.S. doctor‟s tax holiday expires would be as follows: Table 5. U.S. only U.S. parent India subsidiary Gross Income $100 Gross Income $100 $85 (export sales) + $15 (20% profit*) Cost of R&D and operations $50 Cost of R&D and operations $15 $12.5 (1/4 U.S. rate) Taxable Income $50 Taxable Income $0 $87.5 Taxes $17.5 (35% U.S.) Taxes $0 (foreign tax credit applies) $29.8 (34% India) Profit $32.5M Profit $0M $57.7M * 20% over cost is arm‟s length price charged U.S. parent By comparing table 5 with table 1, one can observe that the overall profit and tax burden of the U.S. doctor‟s enterprise has not changed. This is as expected under the DTAA. However, from this point forward, all deducible expenditures must be taken in the India subsidiary, not the U.S parent, to reduce the overall international tax burden. Should the U.S. doctors not be prepared for this change, the impact will be very unsettling. Further, to what degree India taxing authorities will allow deduction by the India subsidiary for the salaries and bonus awards of highly compensated U.S. executives is uncertain. The DTAA allows for “reasonable allocation of executive … expenses” for the purpose of the business of the U.S. doctor‟s WOS in India.132 In the context of a global e-commerce business, this is uncharted territory. India‟s foreign 131 Id. at 34. 132 US-India Double Taxation Avoidance Agreement, art. 7. § 3.
- 26. Paper.doc Page 26of 28 Last printed 5/7/2008 9:36:00 PM investment incentives for IT-BPO and KPO came into existence in the late 1990s, no export- oriented tax holidays have every expired. Finally, until clear guidelines evolve in India the U.S. doctors might consider outsourcing only a portion of their software R&D to India and keeping the final assembly and operation of their electronic health care system in the U.S. That way they could retain a reasonable basis to argue against India taxing authorizes that the software R&D activities they are performing in their WOS in India are only “preparatory and auxiliary in character” to their overall e-commerce enterprise. Therefore, the non-resident income India helped to generate would not be subject to India taxation. C. Selling software in or e-commerce services from India It is undisputed that the income from selling of software by an India entity to India customers is “deemed to accrue or arise in India.” Therefore, subject to India taxation. To avoid this, U.S. software companies typically make the contractual sale of software in the U.S. and then provide it to India customers via the internet. Technically the income from the sale would not have accrued or arisen in India. Therefore, the income earned would be subject to U.S. taxation, not India. U.S. software companies do this to align their income and expenses under just the U.S. tax system to minimize their overall corporate tax burden. Unfortunately for India customers subject to sales in this manner, they have to pay India import tax upon receipt of the software. To cover the added import tax, U.S. software companies are willing to discount the software accordingly to keep the sale from occurring in India. India tax authorities do not like the above tactics. It defeats their strict source based interpretation on taxability of income. In 2008, the India tax authorities presented Microsoft a tax deficiency notice of $154M on $555M software sales to India customers.133 The India tax authorities reasoned that since Microsoft was selling a “license for use” of their software the income they earned was a royalty under a combined interpretation of India‟s income tax code and the DTAA.134 Under the India income tax code, royalty income earned by a non-resident thru payment by an India resident is deemed to accrue or arise in India.135 Therefore, the non- resident income Microsoft generated from software license sales to India customer is entirely taxable in India. Microsoft has gone thru administrative appeal of their notice of deficiency with the India tax authorities.136 So far, they have lost on appeal.137 Like in Morgan Stanley, the next step is appeal thru the India courts. The India tax authorities have begun issuing similar 133 Topic: Licensing: Microsoft Liable for Income Tax, SEARCHFORDATA, Mar. 31, 2008, http://www. searchfordata.com/forums/forum_posts.asp?TID=2228&PID=2485 (last visited Apr. 15, 2008). 134 S. Sivakumar, Microsoft Case Macro-Hard Implications!, ONEINDIA, Apr 7, 2008, http://news.oneindia.in /2008/04/07/microsoft-case-macro-hard-implications.html (last visited Apr. 15, 2008) 135 India Income Tax Act § 9(vi) (income deemed to accrue or arise in India by way of royalty). 136 S. Sivakumar , Microsoft Case Macro-Hard Implications! at 1. 137 Id.
- 27. Paper.doc Page 27of 28 Last printed 5/7/2008 9:36:00 PM notices to other U.S. software companies selling software licenses to India customers.138 Back to the hypothetical problem, the U.S. doctor‟s will need to pay specific attention to how India eventually decides how global income from software license sales is to be attributed to under the DTAA. If the U.S. doctors make direct software license sales from their e-commerce site in India, that income will be subject to India taxation. If the U.S. doctors make software license sales first in the U.S. and then provide customer access to their e-commerce site in India an independent second step, that income may be taxable in the U.S. or India—depending on outcome of the Microsoft case. To avoid the uncertainty, the U.S. doctors might consider operating their e-commerce site in the U.S. only. Under U.S. law, there is established precedence that software license sales are equivalent to the sale of goods. Therefore, for a U.S. operated e-commerce site the point of sale would be considered the U.S. and the income earned from it would be taxed there also. V. MOVING FROM PAPER TIGER TO REAL TIGER From a U.S. software company‟s perspective, India is currently a paper tiger with respect to IP protection for strategic software R&D and e-commerce site operation outsourced there. Jolly Technologies sums it up best “[w]e were misled by lawyers we consulted before opening the [Mumbai, India] facility...[w]e were told that there are patent, copyright, and IP protection laws in India. They failed to mention the laws are impossible to enforce.”139 What must change to make India become a more legally balanced outsource location? A. IT-BPO and KPO growth must stall India likely has a glass ceiling that limits the amount of strategic software development and e-commerce site operation it can attract from U.S. companies. This limit is rooted in the legal imbalance India‟s untested IP laws and in-crisis legal environment present to them. Despite what U.S. software companies might want India to do, it is hard to see why India would change. The majority of Indian IT and software professionals view things as not broken. Growth in the IT-BPO industry has been undeniably successful. No India IP laws changed to bring about this success. In fact, the only changes made were to a few income tax provisions. This paper suggests that until the growth in the IT-BPO and KPO industry stalls out, India IP laws and enforcement actions regarding infringement or loss of software and data will not change either. There is no motivation to improve U.S. company interests until India‟s own interests are put under pressure. 138 Interview with Surku Sinnaduari, Chief Information Officer & Managing Director of i2 India, i2 Technologies, Inc., in Dallas, TX. (Apr. 18, 2008) (i2 Technologies has been presented a $250K US tax deficiency notice from India‟s taxing authorities under the same reasoning as Microsoft recently was). 139 IDG New Service, Outsourcer Beware, ITWORLD.COM, Oct. 26, 2004, http://www.itworld.com/Man/2701/ 041026indiaip (last visited Apr. 1, 2008).
- 28. Paper.doc Page 28of 28 Last printed 5/7/2008 9:36:00 PM B. A globally valued software portfolio must arise It has been argued by one scholar that U.S. legal firms benefitting from legal outsourcing have an ethical obligation to help pay for the reform of India‟s in-crisis legal system.140 A similar argument would apply to U.S. companies benefiting from the cost saving of IT-BPO and KPO activities to India. A fraction of the tens of billions of dollars presently spent on India outsourcing would go a long way to fund improvement to India‟s legal system. However, it is likely a U.S. company‟s willingness to fund India‟s legal improvement will vary in direct relation to how much these improvements decrease the company‟s hidden costs India outsourcing actually presents to them. In general, U.S. software companies would be willing to fund more improvements since the IP value of strategic software is high and the IP asset protection India‟s legal system now provides to them is minimal. Whereas, U.S. legal outsourcing companies would be willing to fund less improvement since the IP value of legal documents is low and the IP asset protection India‟s legal system now provides them is likely irrelevant. This paper suggests that even if money was made available for judicial improvement, it is too early in India‟s global development to expect it to tighten up its IP laws and enforcement with respect to strategic software R&D and e-commerce site operation. This will not occur until India itself establishes a hefty portfolio of globally valued software IP and e-commerce services similar or what Microsoft, Oracle, Google, or Yahoo have. There is no motivation to improve U.S. company interests until India can compete against them. C. Wish list There are many things that would be helpful to U.S. software companies outsourcing work to India. The wish list is as follows. Statutory minimum copyright infringement damages that could be opted for on a fast track case management pathway. A dedicated judiciary path for IPR suits that bypasses the backlogs of India courts. A dedicated police force to assist U.S. companies in investigation and retrieval of stolen software, trade secrets, and data. An aggressive public prosecution campaign against all forms of software piracy. Adoption of more U.S. legal tests by India courts for analysis of software copyright infringement cases. Creation of national trade secret laws modeled upon U.S. law. Amendment of India‟s Patent Act to include software and business methods within the scope of patentable subject matter. Then again, maybe U.S. software companies should accept India for what it is, not what they want it to be. VI. CONCLUSION Today, India outsourcing offers significant economic reward for U.S. companies willing to take on its legal challenges. In the future, each legal challenge India eliminates will serve to directly increase its ultimate share of the global e-commerce economy. 140 Jayanth N. Krishnan, supra note 80.