Rules and Regulations Review
Draft Amendments to the Consumer Protection (E-Commerce) Rules, 2020
Key Features of the Draft Rules
- The Draft Rules expand the definition of an e-commerce entity to include two new categories— entities engaged by an e-commerce entity for the fulfilment of orders, and related parties (as defined under the Companies Act, 2013) of an e-commerce entity.
- A marketplace e-commerce entity will have a fallback liability in case of non-delivery of goods or services by a seller. Marketplaces may not list associated enterprises as sellers and use information collected by it for the unfair advantage of such enterprises.
- The Draft Rules prohibit the abuse of dominant market position by e-commerce entities.
- E-commerce entities must appoint certain personnel including a compliance officer and, a nodal person for coordination with law enforcement agencies . E-commerce entities have to provide information under their control or possession upon request by a government agency.
- The Draft Rules require e-commerce entities to make suggestions of alternatives to ensure a fair opportunity for domestic goods.
- The Draft Rules regulate mis-selling, cross-selling, and flash sale practices.
Key Issues and Analysis
- The Draft Rules may be going beyond the scope of the parent Act where they prohibit abuse of dominant position, mandate e-commerce entities to provide information under their control or possession upon request by a government agency, and make suggestions of alternatives to ensure a fair opportunity for domestic goods.
- The revised definition of e-commerce entities may create onerous obligations on small enterprises, as well as on entities which do not run e-commerce operations.
- Marketplace e-commerce platforms are intermediaries, which do not have any control over regulating cross-selling, misleading advertisements, and mis-selling on the platform. Regulating them for such behaviour may contradict the exemption for intermediaries under the Information Technology Act, 2000.
The Consumer Protection Act, 2019 provides for the protection of the interests of consumers and establishes consumer courts for settlement of disputes.[i] The Act empowers the central government to take measures for preventing unfair trade practices and protecting the interests and rights of consumers in e-commerce. The Act defines e-commerce as buying or selling goods or services over an electronic network. In July 2020, the Consumer Protection (E-Commerce) Rules, 2020 were notified under the Act to specify duties and liabilities of e-commerce entities and sellers on their platforms.[ii] In July 2021, the Department of Consumer Affairs released draft amendments to the 2020 Rules for public feedback.[iii] It noted that amendments are necessitated due to widespread cheating and unfair trade practices in the e-commerce ecosystem.[iv] These include practices such as preferential treatment to some sellers and reduction in consumer choice due to back-to-back sales.4
- Definition of e-commerce entities: The Consumer Protection (E-Commerce) Rules, 2020 define an e-commerce entity to include any person who owns, operates, or manages a digital or electronic facility or platform for e-commerce. The Draft Rules add that the e-commerce entity will also include: (i) any entity engaged by an e-commerce entity for the fulfilment of orders, (ii) any related party (as defined under the Companies Act, 2013) of an e-commerce entity.
- Fallback liability: In case of non-delivery of goods or services by a seller on a marketplace platform, which causes loss to the consumer, the marketplace will be subject to a fallback liability.
- Regulation of associated enterprises: Marketplace e-commerce entities are prohibited from: (i) listing associated enterprises as sellers on its platform, and (ii) sharing information for the unfair advantage of its associated enterprises. An associated enterprise is not allowed to do anything that is prohibited for the marketplace e-commerce entity itself. Associated enterprises include enterprises: (i) related through a common chain of managing directors, partners or shareholders, (ii) having 10% of more common ultimate beneficial ownership, or (iii) having a relationship of mutual interest, as may be prescribed.
- Use of name or brand associated with marketplace entity: Marketplaces may not use its name or brand for promotion or offer for sale of goods or services, to suggest that these offerings are from the marketplace itself.
- Abuse of dominant position in a market: An e-commerce entity is not allowed to abuse its dominant position in any market.
- Requirement to appoint certain personnel: All e-commerce entities are required to appoint: (i) a Grievance Officer to address consumer grievances, (ii) a nodal person for coordination with law enforcement agencies, and (iii) a Chief Compliance Officer for ensuring compliance with the Consumer Protection Act and Rules thereunder. These persons should be residents in India.
- Information requests by law enforcement: The Draft Rules require e-commerce entities to provide information under their control or possession upon request by a government agency. The government agency which is lawfully authorised for investigative, protective or cybersecurity activities may place such a request in writing. The request may be placed for verification of identity, or prevention, detection, investigation, or prosecution of offences under any law or for cybersecurity incidents.
- Country of origin of goods: The 2020 Rules require e-commerce entities to disclose the country of origin of goods. The Draft Rules add that e-commerce entities should: (i) provide a filter mechanism on their website based on country of origin, (ii) display notification regarding origin of goods at pre-purchase stage, and (iii) display suggestions of alternatives to ensure a fair opportunity for domestic goods.
- Flash sale: The Draft Rules prohibit e-commerce entities from organising flash sales. Flash sale is defined as a sale organised by fraudulently intercepting the ordinary course of business using technology means, to allow only a specified seller or group of sellers managed by the e-commerce entity to sell highly-discounted goods and services. Further, the sale would be termed a flash sale only if it is operational for a pre-determined period, on selective goods or services or otherwise, to draw a large number of consumers.
- Cross-selling: The Draft Rules define cross-selling as sale of goods or services which are related, adjacent, or complementary to a purchase made by a consumer at a time from any e-commerce entity, with an intent to maximise the revenue of such an e-commerce entity. The e-commerce entity engaging in cross-selling has to provide adequate disclosure to users about: (i) name of the entity providing data for cross-selling, (ii) data of such entity used for cross-selling.
- Mis-selling: The Draft Rules prohibit mis-selling of goods or services by e-commerce entities. Mis-selling is defined as a deliberate misrepresentation of information (by e-commerce entities) about such goods or services as suitable for the user who is purchasing them.
- Misleading advertisements: An e-commerce entity should not allow misleading advertisements on its platform. Under the Act, misleading advertisement is defined to include: (i) falsely describing product or service, (ii) falsely guaranteeing or misleading about nature, substance, quantity, or quality of product or service, (iii) representation which may be considered unfair trade practice, and (iv) deliberately concealing important information.
KEY ISSUES AND ANALYSIS
Consumer protection in case of e-commerce
E-commerce (commerce using internet platforms) is a fast-growing mode for the purchase or sale of goods and services. India’s retail market is highly unorganised. As of 2021, organised retail (physical shops) comprises 10% of the retail market, while e-commerce only accounts for about 3%.[v] E-commerce is expected to provide the following benefits: (i) increase in consumer choice, (ii) lower entry barriers for new firms (makes it easier to find customers online), (iii) improvements in efficiency and competitiveness of the industry.[vi],[vii]
However, there are certain enhanced challenges with consumer protection in e-commerce. The United Nations Conference for Trade and Development (2017) noted that in case of e-commerce, (i) the impersonal nature of the transaction weakens the relationship between providers and consumers, thereby increasing consumer vulnerability, (ii) information asymmetry is more prominent due to the nature of the internet, and complexity of terms and conditions to which consumers may not always have timely access, (iii) consumers are more vulnerable online to misleading and deceptive conduct, (iv) consumers may have difficulty reaching providers, or finding a means of communicating with businesses concerning liability and arrangement for delivery, return, and exchange of goods, (v) there are higher risks with data protection and privacy, and (vi) there may be issues of enforceability in case of cross-border transactions.6
A regulatory framework for consumer protection in e-commerce may also need to deal with the question – how should liability be shared among various stakeholders such as online marketplaces and logistics service providers, apart from the buyers, sellers, and product manufacturers. This is different from physical commerce where marketplaces and logistics services usually do not have any significant role in the fulfilment of a purchase by a consumer. Online marketplaces, which act as a facilitator of transactions between buyers and sellers, have gained a prominent role in e-commerce. Online marketplaces bring together multiple buyers and sellers on a single platform. They offer consumers more options to choose from, and provide sellers with an opportunity to reach a greater number of customers. Their role in a transaction may vary depending on their involvement in holding inventory, facilitating payments, and ensuring delivery, safety, or quality of products or services.[viii] The above challenges may necessitate certain changes in the approach to consumer protection in the case of e-commerce, as compared to other forms of commerce.
The 2020 Rules and the proposed amendments specify certain obligations for e-commerce entities, which are distinct from corresponding entities in physical retail. These include requirements to provide a grievance redressal mechanism, appoint certain personnel for compliance, and restrictions on related parties and associated enterprises.
The Draft Rules may be going beyond the scope of the Act
The Supreme Court has held that Rules cannot alter the scope, provisions, or principles of the parent Act.[ix],[x],[xi] Certain provisions under the Draft Rules may be going beyond the scope of the parent Act. We discuss these instances below.
Abuse of dominant position by an e-commerce entity
The Draft Rules add that no e-commerce entity will be allowed to abuse its dominant position in any market. In case an e-commerce entity enjoys a dominant position in a market, it may resort to underpricing its goods and services to make competing enterprises unsustainable. This may reduce consumer choice and thereby hurt consumer interest. Although factors related to the market position could affect consumer welfare, it may be argued that their regulation falls outside the purview of the Consumer Protection Act, 2019, and hence, the Draft Rules may be ultra vires the parent Act.
The Consumer Protection Act is aimed at the protection of consumers’ interests in the course of the act of purchase of goods or services. It addresses issues related to the quality of the goods and services promised to the consumer.[xii],[xiii] It provides for timely and effective administration and settlement of consumers’ disputes, and restricts unfair trade practices during the sale of goods or services such as misleading advertisements or refusing to take back defective goods. Competition-related issues such as abuse of dominant position are addressed by the Competition Act, 2002, which is aimed at sustaining fair competition in markets.[xiv],[xv] The 2002 Act established the Competition Commission of India (CCI), a regulatory body to inquire into competition-related issues including the abuse of dominant position by an enterprise.[xvi]
Promotion of domestic goods
The Draft Rules add that e-commerce entities will display suggestions of alternatives to ensure a fair opportunity for domestic goods. The Draft Rules have been framed using the powers to prescribe manners for preventing unfair trade practices and protecting the interests and rights of consumers in case of e-commerce.[xvii],[xviii] Unfair trade practices under the parent Act means the adoption of unfair or deceptive practices for sale, use, or supply of goods or services.[xix] These include: (i) misleading advertisement and misrepresentation of facts about quality or price of goods or services, (ii) not issuing bill or receipts for the goods or services sold, (iii) refusing to take back defective goods or discontinue deficient services, and (iv) unlawful disclosure of personal information. It may be argued that displaying suggestions of domestic alternatives is not related to the prevention of unfair trade practices. Promotion of domestic goods may be a legitimate aim under the industrial policy or trade policy of the State; however, the Consumer Protection Act does not deal with these policy matters. Also, a domestic good may not always best serve the consumer’s interests. Hence, this Draft Rule may be beyond the powers delegated under the Act.
Information requests by law enforcement
The Draft Rules require e-commerce entities to provide information under their control or possession on the order of a government agency. Such agency must be lawfully authorised for investigative, protective, or cybersecurity activities. Such information must be required for verification of identity, or prevention, detection, investigation, or prosecution of offences under any law, or, for cybersecurity incidents. The Consumer Protection Act, 2019 and the Draft Rules deal with consumer protection in relation to sale or purchase of goods and services over an e-commerce entity’s platform. The Objects of the Act do not include law enforcement. Provisions related to law enforcement for online platforms are handled under the Information Technology Act, 2000 (IT Act).[xx] The Draft Rules may be going beyond the scope of the parent Act by casting such a requirement.
The IT Act and the Rules under it provide for the obligation of intermediaries to share information under their control or possession for law enforcement, under certain conditions. Intermediaries are entities which facilitate the flow of data on internet. E-commerce entities, like other online platforms, are classified as intermediaries under the IT Act. Therefore, they also have similar obligations to share information for law enforcement under the IT Act, which is a more specific legislation than the Consumer Protection Act, 2019 in this regard.
The procedure for information requests lacks safeguards
The Draft Rules do not state any procedural safeguards or requirements for information requests by law enforcement agencies. In the case of intermediaries, the Information Technology (Procedure and Safeguards for Interception, Monitoring, and Decryption of Information) Rules, 2009 under the IT Act provide for procedure and safeguards subject to which interception, monitoring or decryption of information under its possession or control may be undertaken.[xxi] These safeguards include: (i) such order must be given by the union or state home secretary (some exceptions for unavoidable circumstances and remote regions stated), (ii) any such order is subject to review by a review committee (headed by cabinet secretary or the state’s chief secretary), and (iii) the authority issuing the order should first consider alternate means of acquiring information.21 Similarly, under the Code of Criminal Procedure, 1973, for retrieval of documents, parcels, or things in the custody of postal or telegraph authority, the orders must be issued by specified authorities including Chief Judicial Magistrate, Court of Session or High Court, or District Magistrate.[xxii] No such oversight or procedural safeguards have been specified under the Draft Rules.
The Draft Rules also do not restrict the extent or type of information that may be sought. For example, the information requested could be personal data of individuals such as details about their interaction with others. Such powers, without adequate safeguards such as those in the 2009 Rules, may adversely affect the privacy of individuals. The Right to Privacy has been recognised as a fundamental right by the Supreme Court.[xxiii]
Revised definition of e-commerce entities may create onerous obligations
The Consumer Protection (E-Commerce) Rules, 2020 define an e-commerce entity to include any person who owns, operates, or manages a digital or electronic facility or platform for e-commerce. The Draft Rules add that the e-commerce entity will also include: (i) any entity engaged by an e-commerce entity for the fulfilment of orders, and (ii) any related party (as defined under the Companies Act, 2013) of an e-commerce entity. Certain issues with the revised definition are discussed below.
The revised definition of e-commerce entities may include entities which do not run e-commerce operations
As per the revised definition, an e-commerce entity includes any entity engaged by an e-commerce entity for the fulfilment of orders placed by a user on its platform. Order fulfilment, in a general sense, will include activities such as the warehousing and packaging of goods, and delivery of goods or services to the buyer. In many cases, these activities may be carried out by contracting third parties which run logistics or warehousing, or such other specific operations. Thus, the revised definition may include entities such as warehousing and logistics companies whose nature of business is not e-commerce. For instance, a small neighbourhood shop may also set up a website as an alternative channel for receiving orders. The shop may partner with a local courier service for the delivery of orders placed through its website. Under the revised definition, both the shop and the local courier service will be classified as e-commerce entities. Consequently, as per the Draft Rules, the local courier service will need to: (i) appoint certain personnel such as a grievance officer, a nodal person for coordination with law enforcement, and a chief compliance officer, (ii) register itself with the Department of Promotion of Industry and Internal Trade, and (iii) become a partner in the convergence process of the National Consumer Helpline of the central government.
Further, as per the revised definition, an e-commerce entity includes any related party (as defined under the Companies Act, 2013) of an e-commerce entity. As per the Companies Act, 2013, related parties of a company include: (i) holding, subsidiary, or an associate company, (ii) an investing company, (iii) a firm or a private company in which a director, manager, or his relative is a partner, or member or director, respectively, and (iv) a public company in which a director or manager is a director and holds along with his relatives, more than two per cent of its paid-up share capital.[xxiv] It is possible that the nature of business of such related firms or companies is not e-commerce. Hence, it may be questioned whether it is reasonable to classify such a wide range of companies not running any e-commerce operation, as e-commerce entities.
Certain obligations under the Draft Rules may be onerous for small enterprises
Under the Draft Rules, there is no exception for small physical stores which also allow orders through a website. For example, a small bookshop, in addition to the physical shop, may have a website through which mail orders are booked. Since such entities will be classified as e-commerce entities as per the definition under the Draft Rules, they will be required to appoint a grievance officer, a nodal person for 24X7 coordination with law enforcement, and a chief compliance officer. These requirements may be onerous for such small entities.
Restrictions on certain selling practices may not be applicable to marketplaces
The Draft Rules place restrictions on following types of selling practices by e-commerce entities: (i) cross-selling, and (ii) mis-selling. However, these restrictions may apply only to inventory e-commerce entities, and not to marketplaces. This is because marketplaces only facilitate transactions between buyers and sellers by providing a platform. Marketplaces themselves are not sellers of any goods or services to end-consumers.
Further, the Draft Rules require that e-commerce entities should not allow misleading advertisements on their platform. Under the Act, misleading advertisement is defined to include: (i) falsely describing product or service, (ii) falsely guaranteeing or misleading about nature, substance, quantity, or quality of product or service, (iii) representation which may be considered unfair trade practice, and (iv) deliberately concealing important information.[xxv] It may be argued that these details will be made available on a marketplace platform by the seller of the product, and not the marketplace itself. A marketplace may not be aware of the details of the product as it does not hold inventory. This may make it practically impossible for them to ascertain whether an advertisement on its platform is misleading.
Note that the Information Technology Act, 2000 (and its Rules) provide immunity for intermediaries from liability for hosting or transmitting third party information; this would cover e-commerce marketplaces such as an auction website.[xxvi],[xxvii] This principle has been re-iterated by a judgement of the Delhi High Court.[xxviii]
Restriction on selling goods or services to sellers
The Draft Rules prohibit a marketplace e-commerce entity from selling goods or services to any person who is registered as a seller on its platform. However, as argued above, marketplaces only facilitate transactions between buyers and sellers by providing a platform. Marketplaces themselves are not sellers of any goods or services. Further, the FDI policy permits marketplace e-commerce entities to enter into transactions with sellers registered on its platform on a business-to-business (B2B) basis.[xxix] This provision in the Draft Rules may be in contradiction with the FDI policy.
Definition of Associated Enterprises
The Draft Rules prohibit marketplace e-commerce entities from: (i) listing associated enterprises as sellers on their platform, (ii) sharing information for the unfair advantage of its associated enterprises. It also prohibits an associated enterprise to do anything that is prohibited for the marketplace e-commerce entity itself. As per the Draft Rules, two enterprises will be associated entities if there exists any relationship of mutual interest, as may be prescribed. It is unclear why a clause under delegated legislation (Draft Rules) has a provision to be notified through further Rules.
[iii]. Draft Amendments to Consumer Protection (E-Commerce) Rules, 2020, Department of Consumer Affairs, June 21, 2021.
[iv]. “Proposed Amendments to the Consumer Protection (E-Commerce) Rules, 2020”, Press Information Bureau, Ministry of Consumer Affairs, Food, and Public Distribution, June 21, 2021.
[vii]. “Proposal for regulation of contestable and fair markets in the digital sector”, European Commission, December 15, 2020.
[ix]. Agricultural Market Committee vs Shalimar Chemical Works Ltd, 1997 Supp (1) SCR 164, May 7, 1997.
[x]. State of Karnataka v Ganesh Kamath, 1983 SCR (2) 665, March 31, 1983.
[xi]. Kerala State Electricity Board vs Indian Aluminium Company, 1976 SCR (1) 552, September 1, 1975.
[xxi]. The Information Technology (Procedure and Safeguards for Interception, Monitoring, and Decryption of Information) Rules, 2009, issued under the Information Technology Act, 2000.
[xxvii]. The Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021, issued under the Information Technology Act, 2000.
[xxviii]. Amazon Seller Services Pvt Ltd and Ors vs. Amway India Enterprises Pvt Ltd and Ors 2020 (81) PTC 399 (Del).
[xxix]. Sub-section (ii) of section 22.214.171.124.4, Consolidated FDI Policy (Effective from October 15, 2020).
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