Outsourcing To India: Cross- Border Legal Issues

Outsourcing to India: Cross-Border Legal Issues is a definitive reference guide to the wide range of issues under Indian law which should be considered by legal practitioners and in-house counsel, whether practicing in India or overseas, when drafting an outsourcing contract involving services rendered in India. In addition to providing comprehensive coverage of contract law, taxation, employment law, data protection and intellectual property rights applicable to outsourcing contracts irrespective of the lex contractus selected, the book addresses complex cross-border legal issues which are frequently faced by international lawyers, encompassing: Indian conflicts of laws rules, including status of injunctive relief obtained overseas and legality of clauses foreclosing jurisdiction in India; litigation versus arbitration and enforcement of foreign judgments and arbitral awards in India including judgments enforcing IP rights; acquisition of rights by employees vis-à-vis foreign outsourcing clients; multi-jurisdictional transfer of employees and ‘sweat shop issues’; taxation of foreign companies outsourcing to India, including permanent establishment issues; transfer of sensitive data, including ‘look-in’ situations and the new Indian jurisprudence on privacy rights in data, including medical and financial data; compliance with EC laws on data transfer to India, including contractual solutions and corporate privacy policies; ‘work for hire’ concepts under Indian IPR laws as well as licensing and assignment of intellectual property rights; and regulatory issues for outsourcing of financial services. This book is an essential source of reference for lawyers involved in outsourcing processes to India, whether through captives or third party service providers

Foreword .................................................................................................. vii
Preface ...................................................................................................... xi
Contents .................................................................................................... xv
Table of Cases ......................................................................................... xxix
CHAPTER 1
An Introduction to Outsourcing Contracts and
Relevance of Indian Law ......................................................... 1
INTRODUCTION ............................................................................ 1
TYPES OF OUTSOURCING SERVICES ................................................. 2
OFFSHORING VIS-À-VIS OUTSOURCING ........................................... 2
Risks to the Industry ................................................................... 3
RELEVANCE OF INDIAN LAW .......................................................... 5
CHAPTER 2
Conflict of Law Rules in India ...................................................... 7
INTRODUCTION ............................................................................ 7
VALIDITY OF CONTRACTUAL STIPULATIONS AND WHETHER
THEY ARE CONCLUSIVE ........................................................... 9
Limits on Express Contractual Stipulation ...............................11
CHOICE OF LAW RULES IN THE ABSENCE OF CONTRACTUAL
STIPULATIONS ....................................................................... 12
SCOPE OF THE APPLICABLE LAW .................................................. 15
PROVING FOREIGN LAW .............................................................. 18
CONCLUSION .............................................................................. 19

(A) FORUM SELECTION CLAUSES IN OUTSOURCING CONTRACTS
INTRODUCTION .......................................................................... 20
LIMITATIONS ON CHOICE OF FORUM CLAUSES ............................. 21
Limiting Jurisdiction to One Competent Court .......................22
What is a Court of Proper Jurisdiction ......................................28
Selection of a Foreign Court ......................................................31
VENUE SELECTION FOR ARBITRATIONS .......................................... 35
CONCLUSION .............................................................................. 35
(B) ENFORCEMENT OF FOREIGN JUDGMENTS
GROUNDS FOR INVALIDATION OF FOREIGN JUDGMENT ................. 38
COURT NOT OF COMPETENT JURISDICTION ................................. 40
FOREIGN JUDGMENT NOT ON MERITS ......................................... 42
JUDGMENT BASED ON INCORRECT VIEW OF LAW ......................... 45
JUDGMENT CONTRARY TO NATURAL JUSTICE ................................ 45
FOREIGN JUDGMENT BASED ON FRAUD ........................................ 45
CLAIM IS FOUNDED ON BREACH OF INDIAN LAW ........................ 48
CONCLUSION .............................................................................. 48
(C) ENFORCEMENT OF FOREIGN ARBITRAL AWARDS IN
OUTSOURCING DISPUTES
INTRODUCTION .......................................................................... 49
APPLICABILITY OF THE NEW YORK AND
GENEVA CONVENTIONS ......................................................... 49
WHAT IS A FOREIGN AWARD ....................................................... 50
Commercial Relationship ..........................................................52
Notified Countries ....................................................................52
CONDITIONS FOR EXECUTION OF THE AWARD ............................ 53
GROUNDS FOR NON-ENFORCEMENT OF FOREIGN AWARD ............. 54
Awards Under the New York Convention .................................54
Award Under the Geneva Convention .......................................55
Contrary to Public Policy ..........................................................57
CONCLUSION .............................................................................. 63
(D) REMEDIES FOR BREACH OF CONTRACT
EQUITABLE REMEDIES ................................................................... 64

Injunctive Relief ........................................................................64
Requirements for Grant of Injunction ......................................65
Prima Facie Case ........................................................................65
Balance of Convenience .............................................................66
Irreparable Injury ......................................................................66
Notice—Ex Parte Injunctions ...................................................66
Injunctions Where Foreign Law Applies ...................................67
SPECIFIC PERFORMANCE ............................................................... 67
Specific Performance of Contracts .............................................68
REMEDIES AT LAW ...................................................................... 70
Damages ....................................................................................70
Mitigation of Damages ..............................................................71
General and Special Damages ...................................................73
Loss of Profits .............................................................................74
Non-pecuniary Damages ...........................................................74
Aggravated and Exemplary Damages ........................................74
Liquidated Damages ..................................................................74
Actual Damage or Loss ..............................................................77
Reasonable Compensation ........................................................81
CONCLUSION .............................................................................. 82
CHAPTER 3
Taxation Issues ............................................................................ 83
(A) PROVISION OF OUTSOURCED SERVICES FROM A
SPECIAL ECONOMIC ZONE
INTRODUCTION .......................................................................... 83
ESTABLISHMENT OF A SPECIAL ECONOMIC ZONE .......................... 85
Acquisition of Land ...................................................................85
New Activity ..............................................................................86
Minimum Area and Processing Requirements ..........................87
Co-Developers ...........................................................................88
Sub-lease of Premises .................................................................88
INFORMATION TECHNOLOGY SPECIAL ECONOMIC ZONES ............... 88
Procedure for Setting up IT SEZ ..............................................89
ESTABLISHMENT OF A UNIT IN A SPECIAL ECONOMIC ZONE ......... 91
Factors to be Considered for Approval of LOA .........................92
EXPORT OBLIGATIONS ................................................................. 93
ITES Exports .............................................................................94
DIRECT TAX BENEFITS ................................................................. 94
INDIRECT TAX BENEFITS .............................................................. 95
OFFSHORE BANKING UNITS ......................................................... 96
INTERNATIONAL FINANCIAL SERVICES CENTRE ................................ 97
ADMINISTRATIVE AND JUDICIAL INSTITUTIONS ............................... 98
CONCLUSION .............................................................................. 98
(B) TAXATION OF OUTSOURCING: SOFTWARE TECHNOLOGY PARKS
INTRODUCTION .......................................................................... 99
ELIGIBILITY CRITERIA FOR AN STP UNIT ................................... 100
APPROVAL PROCEDURES ............................................................. 101
EXPORT OBLIGATIONS ............................................................... 103
Net Foreign Exchange ............................................................ 103
Export of Production .............................................................. 104
ADVANTAGES OF BEING IN AN STP ........................................... 105
Tax Holiday ............................................................................ 105
Duty Free Imports .................................................................. 107
Other Benefits ........................................................................ 108
SUB-CONTRACTING ................................................................... 108
CONCLUSION ............................................................................ 110
(C) TAXATION OF OUTSOURCING: EXPORT
ORIENTED UNITS (EOUS)
REQUIREMENTS FOR APPROVAL AS EOU..................................... 111
APPROVAL PROCEDURES ............................................................. 112
ADVANTAGES OF BEING AN EOI OR EPZ ................................. 113
Tax Holiday ............................................................................ 113
Duty Free Imports .................................................................. 115
Other Benefits ........................................................................ 115
EXPORT OBLIGATIONS ............................................................... 116
Net Foreign Exchange ............................................................ 116
Export of Production .............................................................. 117
EXIT PROCEDURE ...................................................................... 117
CONCLUSION ............................................................................ 118
(D) TAXATION OF FOREIGN COMPANIES OUTSOURCING TO INDIA
INTRODUCTION ........................................................................ 118
INCIDENTAL VIS-À-VIS CORE SERVICES ......................................... 119
BUSINESS CONNECTION ............................................................. 120
PERMANENT ESTABLISHMENT ...................................................... 122
Creation of Permanent Establishment ................................... 122
Captive BPOs—the Morgan Stanley Case ............................. 124
FIXED PLACE OF BUSINESS UNDER ARTICLE 5(1) ........................ 126
Article 5–Permanent Establishment ...................................... 126
AGENCY PE UNDER ARTICLE 5(4) .............................................. 127
SERVICE PE UNDER ARTICLE 5(2)(L) ......................................... 128
EXEMPTION FOR PREPARATORY OR AUXILIARY ACTIVITIES
UNDER ARTICLE 5(3) ......................................................... 130
ALLOCATION OF PROFITS .......................................................... 131
Business Profits ....................................................................... 132
CONCLUSION ............................................................................ 141
(E) SERVICE TAX ON OUTSOURCING CONTRACTS
INTRODUCTION ........................................................................ 141
WHETHER BPO SERVICES ATTRACT SERVICE TAX ........................ 142
Business Auxiliary Services ..................................................... 142
Business Support Services ....................................................... 144
Export of Services .................................................................... 146
Export of Service Rules 2005 ................................................. 147
TAXABILITY OF SECONDARY SERVICES ......................................... 150
CONCLUSION ............................................................................ 151
CHAPTER 4
Employment Law Issues.............................................................217
INTRODUCTION ........................................................................ 217
CONTRACT OF EMPLOYMENT ..................................................... 218
DISMISSAL ................................................................................. 219
Misconduct ............................................................................. 219
Domestic Enquiry .................................................................. 221
WORKING HOURS/HOLIDAYS ..................................................... 223
RESTRICTIONS ON WORKING HOURS OF WOMEN ...................... 223
FACTORIES ACT ........................................................................ 224
Proposed Amendments ........................................................... 225
Constitutional Challenges ...................................................... 226
SHOPS AND ESTABLISHMENTS ACT .............................................. 227
Karnataka ................................................................................ 227
Maharashtra ............................................................................ 229
Haryana .................................................................................. 229
LEAVE ....................................................................................... 230
Earned (Privilege) Leave ......................................................... 231
Casual and Sick Leave ............................................................. 231
Maternity Leave ...................................................................... 231
Encashment of Leave .............................................................. 231
BONUS ..................................................................................... 234
TRANSFERS ............................................................................... 236
STATUTORY BENEFITS ................................................................. 236
Provident Fund ....................................................................... 236
Contribution to Private Trust Fund ....................................... 237
Employees Pension Scheme .................................................... 238
Deposit Linked Insurance Fund ............................................ 239
Gratuity .................................................................................. 240
Employee’s State Insurance .................................................... 240
Workmen’s Compensation ...................................................... 240
CONTRACT LABOUR .................................................................. 241
VOLUNTARY RETIREMENT SCHEMES ............................................. 243
CONCLUSION ............................................................................ 245
(A) HIRE AND FIRE
DEFINITION OF ‘WORKMAN’ ..................................................... 246
Dismissal of a ‘Workman’ ....................................................... 247
WHAT IS AN INDUSTRIAL ESTABLISHMENT ................................... 249
DEFINITION OF FACTORY .......................................................... 251
Cholamandalam case—Learned Single Judge of the Madras
High Court ..................................................................... 251
Cholamandalam—Division Bench Judgment ........................ 254
Cholamandalam—Supreme Court Judgment ........................ 256
CONCLUSION ............................................................................ 257
(B) ENFORCEABILITY OF RESTRICTIVE COVENANTS IN
EMPLOYMENT CONTRACTS
INTRODUCTION ........................................................................ 258
RESTRICTIVE COVENANTS AS A RESTRAINT ON TRADE ................. 259
RESTRICTIVE COVENANTS DURING PERIOD OF SERVICE ................ 259
POST-SERVICE RESTRICTIVE COVENANTS ....................................... 261
Disclosure of Confidential Information/Trade Secrets ........... 265
Confidential Information and IPRs ........................................ 272
CONCLUSION ............................................................................ 274
(C) TORTIOUS INTERFERENCE WITH CONTRACTUAL OBLIGATIONS
(D) CONTRACT LABOUR LAW ISSUES RELATED TO OUTSOURCING
Whether the Contract Labour Act Applies to the Service
Context, in Particular, With Respect to Data
Processing, Computer Programming and Other
Back Office Services ........................................................ 282
Under what Circumstances Does a Contract Labourer
Become a Deemed Employee of an Establishment ........ 283
CONCLUSION ............................................................................ 285
CHAPTER 5
Privacy, Data Protection and IT Policy .......................................287
(A) INFORMATION TECHNOLOGY ACT 2000,
PRIVACY AND DATA PROTECTION
INTRODUCTION ........................................................................ 287
SCOPE OF APPLICABILITY OF THE ACT ....................................... 288
LEGAL RECOGNITION OF ELECTRONIC RECORDS ......................... 289
DIGITAL SIGNATURES ................................................................. 290
Asymmetric Cryptography ..................................................... 291
Certifying Authorities ............................................................. 291
Controller of Certifying Authorities ....................................... 292
Technological Neutrality and the Proposed Amendments .... 293
DATA PROTECTION AND THE PROPOSED IT BILL 2006 ............... 294
PROTECTION OF SENSITIVE PERSONAL DATA ............................... 298
OBSCENITY IN ELECTRONIC FORM ............................................. 300
PRIVACY AND IDENTITY THEFT ................................................... 301
CONCLUSION ............................................................................ 302
(B) PRIVACY RIGHTS UNDER INDIAN LAW
INTRODUCTION ........................................................................ 303
CONSUMER LAW AND PROTECTION OF DATA ............................. 303
COMMON LAW ......................................................................... 309
CUSTOMARY LAW ...................................................................... 310
CONSTITUTIONAL RIGHT TO PRIVACY ......................................... 310
Right to Privacy Against Domiciliary Visits .......................... 312
Disclosure of Information ....................................................... 316
Medical Records ..................................................................... 318
Financial Records .................................................................... 321
CONCLUSION ............................................................................ 325
(C) COMPLIANCE WITH EC LAW: CONTRACTUAL SOLUTIONS
AND CORPORATE PRIVACY POLICIES
LOOK-IN SITUATION .................................................................. 327
EC REGULATION OF EXPORT OF DATA ...................................... 329
Data Protection Directive ....................................................... 329
UK Data Protection Act 1998 ............................................... 330
EXEMPTIONS ............................................................................. 331
ADEQUACY FINDINGS ................................................................ 332
ADEQUACY ASSESSMENT ............................................................. 333
GENERAL ADEQUACY FACTORS ................................................... 334
Nature of the Personal Data ................................................... 334
Purpose of Data Processing .................................................... 335
Period of Data Processing ....................................................... 335
Security Measures ................................................................... 335
Country of Origin of Data ..................................................... 335
Country of Final Destination of the Data .............................. 335
LEGAL ADEQUACY CRITERIA ....................................................... 336
Law In Force In Country In Question ................................... 336
International Obligations ....................................................... 336
Codes of Conduct ................................................................... 337
EU Working Party’s Content Principles ................................. 337
CONTRACTUAL SOLUTIONS: CREATING A PRESUMPTION
OF ADEQUACY BY STANDARD CONTRACTUAL CLAUSES FOR
TRANSFER OF PERSONAL DATA TO OVERSEAS PROCESSORS ..... 339
Standard Contractual Clauses (Controller-Processor) ............ 342
Definitions .............................................................................. 343
Obligations of the Data Exporter ........................................... 343
Obligations of the Data Importer .......................................... 345
Liability .................................................................................. 346
Mediation and Jurisdiction .................................................... 347
Cooperation with Supervisory Authorities ............................. 348
Governing Law ....................................................................... 348
Post-termination Obligations ................................................. 348
‘BUSINESS CLAUSES’ ................................................................... 349
Obligations of the Data Exporter ........................................... 350
Obligations of the Data Importer .......................................... 352
Liability and Third Party Rights ............................................ 354
Applicable Law ....................................................................... 356
Resolution of Disputes with Data Subjects or
the Authority .................................................................. 356
Termination ............................................................................ 356
IMPLEMENTATION OF THE CONTRACTUAL SAFEGUARDS ................ 358
CORPORATE PRIVACY POLICIES .................................................... 360
CONCLUSION ............................................................................ 362
(D) STATE IT AND BPO POLICIES
KARNATAKA STATE GOVERNMENT BPO POLICY ........................... 363
Data Security .......................................................................... 364
Concession in Stamp Duty and Registration Charges ........... 364
Tax Exemptions ...................................................................... 365
Labour Laws............................................................................ 366
UTTAR PRADESH INFORMATION TECHNOLOGY POLICY 2004 ......... 367
Stamp Duty and Registration Charges .................................. 367
Incentives for Mega Investment Units ................................... 368
Tax Incentives ......................................................................... 368
Environmental Laws ............................................................... 369
Labour Laws............................................................................ 369
FAR Restrictions ..................................................................... 370
Other Concessions .................................................................. 370
MAHARASHTRA IT AND ITES POLICY 2003 ............................... 371
Labour Laws............................................................................ 372
Environmental Laws ............................................................... 373
Data Protection ...................................................................... 374
Stamp Duty and Registration Charges .................................. 374
Tax Incentives ......................................................................... 374
Land Related Issues ................................................................ 375
Other Legal Provisions ........................................................... 376
Infrastructure and Other Support to IT Sector ..................... 376
HARYANA—INFORMATION TECHNOLOGY POLICY 2000 ............... 377
Liberal Change of Existing Industry to IT ............................. 377
Land Related Issues ................................................................ 377
Registration and Stamp Duty ................................................ 378
Sales Tax Concessions .............................................................. 378
Financing ................................................................................ 378
Environmental Laws ............................................................... 378
Labour Laws............................................................................ 379
Special Incentives for Mega Projects ...................................... 379
TAMIL NADU—INFORMATION TECHNOLOGY ENABLED
SERVICES (ITEX) POLICY OF 2005 ..................................... 379
Labour Law ............................................................................. 380
Financing ................................................................................ 381
Land Related Issues ................................................................ 381
Stamp Duty and Registration Fees ........................................ 381
Self Certification ..................................................................... 382
Data Security .......................................................................... 382
ANDHRA PRADESH—IT POLICY 2005 ........................................ 382
Environmental Laws ............................................................... 383
Self Certification ..................................................................... 383
Labour Laws............................................................................ 383
Land Related Issues ................................................................ 384
Stamp Duty and Registration Fees ........................................ 385
Power Tariff ............................................................................. 386
Sales Tax .................................................................................. 386
Promotion of Tier-II Locations ............................................... 386
Special Package for Small and Medium
Enterprises (SMEs) ......................................................... 387
Mega Projects ......................................................................... 387
JUDICIAL CHALLENGE TO IT POLICY .......................................... 387
CONCLUSION ............................................................................ 389
 

CHAPTER 6
Licensing, Copyrights in Databases, Software and
Infringement Issues .............................................................425
LICENSING OF TECHNOLOGY ..................................................... 425
Exchange Control Regulations Applicable to Licensing
of Technology .................................................................. 426
Automatic Route .................................................................... 426
Procedure for Automatic Route .............................................. 427
PATENTS ................................................................................... 427
Definition of Invention; Patent Term ..................................... 427
Exclusion for Software Patents ................................................ 428
International Applications Under the Patent
Cooperation Treaty (PCT) .............................................. 430
TRADEMARKS ............................................................................ 430
Service Marks and Collective Marks ....................................... 430
Well-known Marks ................................................................. 431
Registration ............................................................................ 433
Trademark Infringement ........................................................ 434
Assignment of Trademarks ...................................................... 435
COPYRIGHT .............................................................................. 435
COPYRIGHT IN DATABASES AND COMPILATIONS ........................... 436
SOFTWARE COPYRIGHT .............................................................. 436
REGISTRATION AND DEPOSIT ..................................................... 437
Piracy and Infringement ......................................................... 437
Punitive Damages for Software Piracy .................................... 439
EXEMPTIONS ............................................................................. 443
CONCLUSION ............................................................................ 443
(A) WORK FOR HIRE DOCTRINE AND ASSIGNMENT OF
INTELLECTUAL PROPERTY RIGHTS
WORK FOR HIRE DOCTRINE ..................................................... 444
Copyright Law ........................................................................ 444
EMPLOYMENT AND THE WORK FOR HIRE DOCTRINE .................. 446
Mask Works ............................................................................ 450
ASSIGNMENT ............................................................................. 450
Assignment of Copyright ....................................................... 451
Assignment of Mask Works/Layout Designs .......................... 452
CONCLUSION ............................................................................ 452

CHAPTER 7
Regulatory Issues ........................................................................455
(A) TELECOM REGULATIONS APPLICABLE TO
OUTSOURCING SERVICE PROVIDERS
OUTSOURCING SERVICE PROVIDER REGISTRATION ........................ 456
General Conditions for OSP Registration .............................. 456
Technical Conditions for OSP Registration ........................... 457
Sharing of Infrastructure Between International OSP and
Domestic OSP ................................................................ 458
Security Conditions ................................................................ 460
Purchase of Equipment for International Call Centres .......... 460
CONCLUSION ............................................................................ 461
(B) REGULATION OF FINANCIAL SERVICES OUTSOURCING
INTRODUCTION ........................................................................ 461
OUTSOURCING OF FINANCIAL SERVICES BY INDIAN BANKS .......... 462
Prior RBI Approval ................................................................. 463
Prohibitions on Outsourcing ................................................. 463
Bank’s Role ............................................................................. 465
Risk Management Practices.................................................... 465
Role of Board and Senior Management ................................. 466
Risk Evaluation ....................................................................... 466
Evaluating the Capability of the Service Provider .................. 467
Outsourcing Agreement ......................................................... 468
Confidentiality and Security .................................................. 469
Business Continuity and Disaster Recovery Plan .................. 469
Monitoring and Control of Outsourced Activities ................ 470
Redressal of Grievances ........................................................... 470
Off-Shore Outsourcing of Financial Services .......................... 471
CONCLUSION ............................................................................ 471

Appendices
APPENDIX I
Government Of Andhra Pradesh Abstract .................................545
APPENDIX II
Information Technology Policy of Assam 2000 (India) ..............583
APPENDIX III
IT Policy of Chhattisgarh State (India) .......................................597
APPENDIX IV
IT Policy of Delhi State (India) ..................................................609
APPENDIX V
IT Policy 2005 Government of Goa ...........................................627
APPENDIX VI
Government Of Haryana Information Technology
Policy 2000 ...........................................................................641
APPENDIX VII
IT Policy of Himachal Pradesh State (India) ..............................661
APPENDIX VIII
Information Technology Policy for State of
Jammu and Kashmir ............................................................689
APPENDIX IX
Information Technology Policy ..................................................703
APPENDIX X
IT Policy of Madhya Pradesh .....................................................721

APPENDIX XI
IT and ITES Policy 2003 ............................................................733
APPENDIX XII
Information Technology Policy of Manipur 2003 ......................751
APPENDIX XIII
Information Technology Policy-2004 .........................................769
APPENDIX XIV
Information Technology Policy Government of Mizoram .........775
APPENDIX XV
Punjab Information Technology (IT) Policy–2001 .....................795
APPENDIX XVI
Information Technology Policy Government of Rajasthan ........819
APPENDIX XVII
Sikkim Government Gazette ......................................................835
APPENDIX XVIII
Information & Communication Technology Policy 2006 ..........841
APPENDIX XIX
West Bengal IT Policy 2003 .......................................................859
Index ................................................................................................ 875