Taxation of works contract services under Service Tax

Definition of works contract service: Service tax under works contract services has been imposed on the service element involved in the works contracts. It should be noted that unlike VAT laws in various States service tax is applicable only on a fewer kinds of works contract as defined in section 65(105)(zzzza). Works contracts relating to Roads, Airports, railways, transport terminals, bridges, tunnels and dams are outside the purview of service tax.

Definition of Works Contract under section 65(105)(zzzza) runs as under:

Any service provided or to be provided to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

Explanation. – For the purposes of this sub-clause, “works contract” means a contract wherein, -

(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and

(ii) such contract is for the purposes of carrying out, -

(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether prefabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or

(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

(c) construction of a new residential complex or a part thereof; or

(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or

(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects

It appears from the definition above that if a contract is treated as works contract for the purpose of levy of VAT/Sales tax, such contract shall also be treated as works contract for the purpose of levy of service tax.

However only fewer kinds of works contracts are leviable to service tax like works contract for carrying out erection, commissioning or installations; works contract for commercial or industrial constructions; works contract for the construction of residential complex, works contract for turnkey projects including EPC contracts i.e Engineering Procurement and Construction contracts etc.

Value of Taxable services: Since service tax is applicable only on the service element involved in works contract. Now the question is how service element is to be calculated in a works contract. Section 67 of the Finance Act, 1994 provides that value of taxable services involved in the execution of works contract provided or to be provided by any person shall be the gross amount charged for providing such services.

Thus it means that works contract will be vivisected into material part and service part and the service tax will be payable on such service element vivisected. The procedure of determining such service element in a works contract has been provided in Rule 2A of Service Tax (Determination of Value) Rules, 2006.

Schemes available: It should be noted hereby that there are two schemes for payment of service tax in a works contract service, one is paying service tax on actual value of services after determining the same as per section 67 read with Rule 2A of Service Tax (determination of values) Rules, 2006 and second is paying under Composite scheme under Works contract (Composition scheme for payment of Service Tax) Rules, 2007.

Payment of service Tax on actual value: Rule 2A of Service Tax (Determination of Value) Rules, 2006.provides that  Value of works contract service determined shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract.

Rule 2A(1)(ii) provides that Where Value Added Tax or sales tax, as the case may be, has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then such value adopted for the purposes of payment of Value Added Tax or sales tax, as the case may be, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service under clause (i).

Thus where the service provider is paying VAT/sales tax under the respective State VAT/sales tax  law on the actual value of goods in such works contract then such actual value of goods shall be deducted from the gross amount charged for such works contract to arrive at the service element on which service tax is payable.

However there may be a case that the service provider is paying VAT/Sales tax not on the actual value of goods involved in the execution of works contract but under a composite scheme then service element will consist of following(as per explanation (b) of the Rule 2A of said Rules):

(i) labour charges for execution of the works;

(ii) amount paid to a sub-contractor for labour and services;

(iii) charges for planning, designing and architect’s fees;

(iv) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;

(v) cost of consumables such as water, electricity, fuel, used in the execution of the works contract;

(vi) cost of establishment of the contractor relatable to supply of labour and services;

(vii) other similar expenses relatable to supply of labour and services; and

(viii) profit earned by the service provider relatable to supply of labour and services;

Comments: In State VAT laws usually a lump scheme for payment of VAT on works contract is also provided wherein a fixed percentage for deduction of labour charges from the gross value of works contract is provided, for those assesses who do not maintain proper books of account so as to determine the correct value of goods incorporated in such works contract. It is to be noted that no such scheme is being made available under service tax. If a person has not maintained proper books of accounts he has only option to go for composition scheme.

If the service provider wants to pay service tax on the actual value of service element involved in a works contract then he will have to maintain books of accounts so as to arrive at the service element liable for service tax as enumerated in explanation(b) above.

VAT/sales tax to be excluded from gross value: Explanation (a) to Rule 2A of the Service Tax (Determination of Value) Rules, 2006 specifically provides that VAT/sales tax paid on the transfer of property  in goods involved in the execution of the said contract shall not be included in the gross amount so charged.

It means that if gross value of a works contract is Rs. 1000 and the material value involved in it is Rs. 600 and the VAT paid is Rs. 100 then service tax will be payable on Rs. 300 only.

It should also be noted hereby that the word used is “paid” thus no deduction will be allowed for VAT/sales tax payable and only the deduction for actual tax paid will be allowed.

Composition scheme: Calculating service element by vivisecting the works contract may not be an easy task especially in cases where proper books of accounts are not maintained and it may give rise to litigation. To avoid such litigation and be on a safer side a composition scheme for works contract services is also available.

Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 have been legislated to introduce such scheme. The said Rules contain only 3 rules and Rule 3 of the said Rules primarily deal with such composition scheme. Rule 3 of the said rules starts with non-abstante clause i.e :

”Notwithstanding anything contained in section 67 of the Act and rule 2A of the Service (Determination of Value) Rules, 2006, the person liable to pay service tax in relation to works contract service shall have the option to discharge his service tax liability on the works contract service provided or to be provided, instead of paying service tax at the rate specified in section 66 of the Act, by paying an amount equivalent to 1[four per cent]. of the gross amount charged for the works contract.”

Thus Rule 3 of the said Rules overrides the provisions of section 67 and rule 2A of Service Tax (Determination of Value) Rules, 2006. Under the composition scheme the service provider in a works contract services has the option to pay service tax on the gross amount charged for the works contract @ 4% instead of paying at the normal rate on the actual service element.

In compostition scheme the gross amount charged for works contract includes: 

(i) the value of all goods used in or in relation to the execution of the works contract, whether supplied under any other contract for a consideration or otherwise; and

(ii) the value of all the services that are required to be provided for the execution of the works contract;

But excluding-

(i) the value added tax or sales tax as the case may be paid on transfer of property in goods involved; and

(ii) the cost of machinery and tools used in the execution of the said works contract except for the charges for obtaining them on hire:

No CENVAT credit of Inputs in composition scheme: Rule 3(2) provides that the assessee who opts for composition scheme shall not be eligible to take the CENVAT credit of excise duties and cess paid on “inputs” used in or in relation to the execution of such works contract under the CENVAT Credit Rules, 2004.

The Government in its Master Circular 96/7/2007-ST, dated 23-08-2007 in para 097.01 has clarified that” there is no restriction under notification No. 32/2007, Service Tax, dated 22-05-2007 to take CENVAT credit of duty paid on capital goods and service tax paid on input services”.

Thus CENVAT credit of inputs used in the execution of works contract is being debarred but credit of service tax paid on input services and that of excise duty and cess paid on capital goods will be available.

Sub-rule 2A of rule 3 of the said Composition scheme rules further limits the CENVAT credit of service tax paid on three taxable services namely Erection, commissioning, or installation service, Commercial or Industrial construction services and Construction of Residential Complex Services to the extent of 40% of the service tax paid on such services when service tax has been paid on the full value of the services after availing Cenvat credit on inputs..

Option once exercised cannot be changed/withdrawn afterwards: Rule 3(3) of the said Composition scheme rules further provides that the person who opts to pay service tax under these rules shall exercise such option in respect of a works contract prior to payment of service tax in respect of the said works contract and the option so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of the said works contract.

It means that option to pay under Composition scheme in respect of a works contract once exercised cannot be changed/withdrawn afterwards. 

The word used in rule 3(3) is “a works contract” which implies that one person may choose composition scheme for one works contract and may not choose for the other works contract.

To opt composition scheme declared value of contract should not be less than gross amount charged: Rule 3(4) of said rules provides that the option to pay composition scheme shall be permissible only where the declared value of the works contract is not less than the gross amount charged for such works contract. The said rule has been inserted to plugin the loophole wherein a contractor may bifurcate a single contract into contract for supply of material and contract for supply of material and labour and thereby reducing the gross amount of works contract for paying service tax under composition scheme.

For example: if a works contract of total value of Rs. 100 is bifurcated in such way that supply of value of goods in execution of such contract worth Rs. 30 is treated as seperate contract and remaining part of contract of value of Rs. 70 (including labour and some material also) is treated as works contract. In such case Rule 3(4) will come in picture and the service provider will have to pay service tax @ 4% on Rs. 100 and such bifurcation will not be allowed so as to pay service tax on Rs. 70/-.

Note at the end: The taxation of  works contract in service tax involves a lot of issues which might not have  been touched hereinabove. In this article an attempt has been made only to make understand the provisions relating to taxation of works contract services.

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Attachment of Property

I. Introduction

In case of a decree from a Court, the Court may require any person (known as the defendant) to pay any sum to the decree holder (or the plaintiff). In case the defendant fails to do so the Court can, in execution of its decree, attach the movable and immovable properties of the defendant and recover the amount due by disposal of these assets. However, certain assets are not liable to attachment under a Court decree. In last month’s issue relating to Debt Recovery Tribunals, we had seen that the Recovery Officer of the DRT can require any debtor of the defendant to pay any sum directly to him. This excludes any amount exempt from attachment in execution of a Court decree u/s. 60 of the Code of Civil Procedure, 1908. This Article examines some of the provisions relating to Attachment of assets in execution of a Court decree.  

II. Execution of a Decree

2.1 The Civil Procedure Code, 1908 (“the Code”) deals with the provisions relating to a court decree and its execution. S.2(2) of the Code defines a decree as the formal adjudication which conclusively determines the rights of the parties with regard to the controversial matters covered by the suit. The decree could be interim or final.

2.2 The judgment debtor is a person against whom a decree has been passed or an order capable of execution has been made.

2.3 The decree holder means a person in whose favour a decree has been passed or an an order capable of execution has been made.

III. Attachment

3.1 The property belonging to the judgment debtor, or property over which, or the profits of which, he has a disposing power which he may exercise for his own benefit, is liable to attachment and sale in execution of a decree.

3.2 The property liable to attachment may be lands, houses or other buildings, goods, money, bank notes cheques, bills of exchange, hundis, promissory notes, Government securities, bonds or other securities for money, debts, shares in a corporation and, other than the assets expressly excluded, all other saleable property, movable or immovable. The property may be held in the name of the judgment debtor or by a trustee for his benefit or on his behalf.

3.3 The following property of the judgment debtor shall not be liable to such attachment or sale :

3.3.1 Personal property

(i) clothes, cooking vessels, beds of the judgment debtor, his wife and children, and personal ornaments which as per religious usage, cannot be parted with by any woman

(ii) tools of artisans – court decisions have held that it only includes movable tools and not immovable equipment.

(iii) if the judgment debtor is an agriculturist, his implements of husbandry and such cattle and seed grain as the court deems fit to enable him to earn his livelihood as such, and such portion of agricultural produce or of any class of agricultural produce as may have been declared to be free from liability

(iv) houses and other buildings along with the materials and the land appurtenant thereto which is necessary for their enjoyment, which belongs to an agriculturist or a labourer or any domestic servant and is occupied by him

(v) all moneys payable under a policy of insurance on the life of the judgment debtor – no conditions have been stipulated as to when the money should become payable, i.e., policies which mature after a fixed term or after the death of the assured.  In certain circumstances, policies for the benefit of a judgment debtor’s wife and children under the Married Woman’s Property Act, 1874, are free from attachment.

(vi) tenancies in respect of a residential building covered by the provisions of any Rent Control Act

3.3.2 Salary

(i) stipends and gratuities allowed to pensioners of the Government or of a local authority or of any other employer, or payable out of any notified service family pension fund and political pension

(ii) the wages of labourers and domestic servants, whether payable in cash or kind

(iii) salary to the extent of the first Rs. 1,000 and 2/3 of the balance in execution of any decree other than a decree for maintenance. If any part of the attachable salary has been under attachment,  for 24 months, then such portion shall be exempt from attachment until the expiry of a further period of 12 months. Where the attachment has been made in execution of one decree, it shall, after the attachment has continued for a total period of 24 months, be finally exempt from attachment in execution of that decree

(iv) 1/3 of the salary  in execution of any decree for maintenance

(v) salary payable to persons covered by the Air Force Act, 1950, or the Army Act, 1950, or the Navy Act, 1957,

(vi) all compulsory deposits and other sums in or derived from any fund to which the Provident Funds Act, 1925, or Public Provident Fund Act for the time being applies, in so far as they are declared by the Acts to be not liable to attachment

(vii) any allowance forming part of the emoluments of any servant of the Government/ railway / local authority which has been notified to be exempt from attachment, and any subsistence grant or allowance made to any such servant while under suspension

(viii) any allowance declared by any Indian law to be exempt from liability to attachment or sale in execution of a decree

3.3.3 Incorporeal property

(i) a mere right to sue for damages

(ii) any right of personal service

(iii) an expectancy of succession by survivorship or other merely contingent or possible right or interest

(iv) a right to future maintenance

(v) where the Judgment debtor is a person liable for the payment of land revenue, any movable property which, under any law for the time being applicable to him, is exempt from sale for the recovery of an arrears of such revenue

(vi) books of account 

Notwithstanding anything contained in any other law, an agreement by which a person agrees to waive the benefit of any exemption under this section shall be void.

IV. Mode of Attachment

4.1 Rules 41 to 57 of Order 21 deal with the manner in which various properties are to be attached.  Rules 44 and 45 deal with the attachment of agricultural produce.

4.2 Rule 46 provides that where the movable property is

(i) a debt, the attachment would be by prohibiting the recovery of the debt or the debtor from making payment thereof; or

(ii) a share in a body corporate, the attachment would be by prohibiting the transfer of the shares or from receiving any dividend.

(iii) any other movable property, the attachment would be by prohibiting the person in possession of the property from giving possession to the judgment debtor.

4.3 In case the judgment debtor has a co-share in a movable property, then the attachment will be by a notice prohibiting him from transferring his share/interest or in any manner creating a charge on the share in the property.

4.4 In case the property is a negotiable instrument the attachment shall be made by way of an actual seizure and brought to the court.

4.5 Rules 49 and 50 provide for attachment of property of a partnership firm.

4.6 Under Rule 54, if the property is immovable, then attachment will be made by a order prohibiting any transfer or charge on the property. Any alienation after the attachment will be null and void against all claims enforceable under the attachment.

V. Effect of Attachment

5.1 An attachment does not create any title of the decree-holder to the property nor does it create a lien or charge over the property for the sum due to the decree-holder.

5.2 The judgment debtor continues to enjoy the attached property.

5.3 All that an attachment does is to prevent a private-transfer and that no person can benefit from a subsequent transfer of the attached property. S. 64 of the Code provides for such private alienation. Once a property has been attached, any private alienation of such property by private transfer or delivery and any payment to the judgment debtor of any debt, dividend, etc., contrary  to such attachment shall be void as against all claims enforceable under the attachment. S.64 applies whether the property stands in the name of the judgment debtor or any other person who is a name lender, i.e., benami property – Pradyut Shah, AIR 1979 Bom 166. However, if the transfer is by an operation of law or pursuant to a Court order, then s.64 does not apply. It only covers private transfers, such as, voluntary sales, gifts, mortgages.  It may be noted that the private transfers are not void ab initio but only void as against all claims enforceable under the attachment. There is a difference of opinion amongst various Courts as to whether or not any private transfer after attachment but in pursuance of a contract of sale executed prior to attachment is covered by s. 64. Various decisions have held that in order that an attachment renders a subsequent alienation as void u/s. 64, the attachment must follow the process laid down under the Code, e.g., Rules 41 to 57 of Order 21.

VI. Auditor’s duty

The Auditor should enquire of the auditee whether any attachment proceedings are pending against it. The Auditor can provide value added services to his clients by enlightening them about which assets are not attachable and what are the rights and obligations in respect of an attached property. It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’.  The Auditor should also enquire whether the entity has obtained ‘attachment’ in cases filed by it. This will enable the Auditor to assess the provisions for bad and doubtful debts. Though an ‘attachment’ does not create any rights in favour of the entity but the courts normally do not grant attachment unless the plaintiff establishes a prima facie case.

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Estoppel

Estoppel: (With illustrative cases)

The Principle of estoppel is often described as rule of evidence, but more correctly it is a principle or law. This principle applies to the Government, public authorities as well to private individuals. Executive agency must be rigorously held to the standards by which it professes its action to be judged. Whatever its activity may be, the government is still the Government and will be subject to certain restraints.

Appreciating estoppel, there must be a representation by a person or his authorized agent to another in any form, declaration, act or commission. Representation must have been of existence of a fact and not of promise de-future or intention that might or might not be enforceable in contract. The representation must have been taken to be relied upon and there must have been belief on the part of the other party in its truth. There must have been action on the faith of that declaration, act or omission, that is to say, the declaration; act or omission must have been acted upon. The misrepresentation of conduct or omission must have been the proximate cause of leading the other party to act to his prejudice. The person claiming the benefit of an estoppel must show that other side was aware of the true state of thing. If the other side was not aware of the true state of thing there can be no estoppel. Only the person to whom representation was made or from whom it was designed can avail himself of it. A person is entitled to plead estoppel in his own individual character and not as a representative of assignee. The Government claimed immunity from estoppel on different grounds that were considered by the Courts in various Judgments gradually rendered.

By now the law on this point is fully developed. Promissory estoppel is considered by the Courts to safeguard the equity and that Court would not hear the truth over justice. That Principle will bind the Government by its promises to prevent manifest injustice or fraud and will not make the Government a slave of its policy for all times to come when the Government acts in its Governmental, public or sovereign capacity. Principle does not apply when promise is ultra vires the statute or is in derogation of the legislative instrument. Plea of executive necessity was considered for some time in past, but the Government is obliged to disclose the executive necessity. They cannot simply plead and go away. Public bodies are as much bound as private individuals to carry out representations of facts and promises made by them, relying on which other persons have altered their position of their prejudice. Estoppel is a rule of equity. That rule has gained now dimensions in recent years. A new class of estoppel i.e. promissory estoppel has come to be recognized by the Courts in this country as well as in England.

Lord Denning observed that the Crown cannot escape by praying in aid the doctrine of executive necessity that is, the doctrine that the Crown cannot bind himself so as to fetters its future executive necessity. It only avails the Crown where there is an implied term to that effect or that is the true meaning of the contract. Thus the Crown cannot disown the pensioner’s benefits. In popular Anglo Afghan case the Supreme Court evolved the principle of estoppel against Government and executive necessity discarded. The Textile Commissioner published a scheme. The exporters were invited to be registered with Textile Commissioner for exporting the woolen goods. Under the Scheme the Commission had authority to reduce import and export certificate, if it appears to him to be fraudulent to secure an import certificate in excess of true value of the goods. The contention was taken by the Union of India that the Scheme was merely administrative in character and not enforceable at law and Government can be released from the promises made.

Court held that granting that it was executive in character, the Courts have the power in appropriate cases to compel performance of the obligations imposed by the Scheme upon the departmental authorities. It could not be said that the executive necessity releases the Government from honouring its solemn promises relying on which citizens have acted to their detriment. Under the Constitutional set up, no person can be deprived of his right or liberty except in due course of and by authority of law; if a member of the executive seeks to deprive a citizen of his right or liberty otherwise than in exercise of powers derived from the law-common or statute-the courts will be competent to, and indeed would be bound to protect the rights of the aggrieved citizens. Even assuming that the provisions relating to the issue of trade notification offering inducement to the prospective exporters were in character administrative, the Union Government and its officers were not entitled at their mere whim to ignore the promises made by the Government. It could not be said that Textile commissioner was the sole judge of the quantum of import license to be granted to an exporter, and that the Courts would not be powerless to grant relief, if the promised import license was not given to an exporter who acted to his prejudice relying upon the representation.

In Century case the Municipality by a resolution allowed the Company to be exempted from paying the Octroi for a period of seven years, under the directions of the Government, if the Company gears up the business in a particular area. Accordingly, the Company set up the plant and machinery. But, the District Municipality took over the affairs and by a subsequent resolution the benefit conferred upon the Company was withdrawn and directed to pay the Octroi Tax. The Municipality had entered into a solemn arrangement seeking to develop the area. The Supreme Court held that there is undoubtedly a clear distinction between a representation of an existing fact and a representation that something will be done in future. The former will be done in further. The former may, if it amounts to a representation as alleged at the time to be actually in existence, raise an estoppel, if another person alters his position relying upon that representation. A representation that something will be done in future may result in contract, if another person to whom it is truly made. But between a representation of a fact that is untrue and a representation express or implied- to do something in further, there are no clear antitheses. A representation that something will be done in future may involve an existing intention to act in further in the manner represented. If the representation is acted upon by another person it may, unless the statute governing the person making the representation provides otherwise, result in an agreement enforceable at law; if the statute requires that the agreement shall be in certain form no contract may result from the representation and acting therefore but the law is not powerless to raise in appropriate case in equity against him to compel performance of the obligation arising out of his representation. If our nascent democracy is to thrive different standards of conduct for the people and the public bodies cannot ordinarily be permitted. A public body is not exempt from the liability to carry out its obligation arising out of representation made by it relying upon which a citizen has altered his position to his prejudice.

In Lotus Hotels Private limited the Respondent before the Supreme Court was contesting the claim against the Gujarat State Financial Corporation for a grant of loan to construct the Hotel. The Respondent acted on the representation made by the Corporation. The Corporation, in fact, sanctioned the loan, but on certain complaints the same was postponed.

The Supreme Court held that instrumentality covered within the meaning of Article 12 cannot fall back on the promise held out upon which the Respondent had acted.

The Supreme Court of India approvingly quoted the observations of Lord Denning in various English cases and according to Lord Denning the parties need not be in any kind of legal relationship before the transaction from which the promissory estoppel takes its origin. The doctrine would seem to apply even where there is no pre-existing legal relationship between the parties, but the promise is intended to create legal relations or affect a legal relationship that will arise in future. Vide Halsbury’s Laws of England 4th Edition at page 1018 Para 1514. Motilal Padampat’s case (Supra) completely settled the law on the issue. The Courts observed that it is elementary that in a republic governed by the rule of law, no one, howsoever high or low, is above the law. Government is no exception. It is indeed the pride of constitutional democracy and the rule of law that the Government stands on the same footing as a private individual so far as the obligation of the law is concerned. The former is equally bound as the latter. Thus the Government committed to the rule of law cannot claim any immunity from the doctrine of estoppel. The Government must be fair to its citizens irrespective of any consideration and legal relationship. The Supreme Court said that the doctrine of estoppel could be used as a shield or a sword, the Government could not claim any immunity from such principle in contract, and executive necessity is mitigated.

In Jit Ram Shivkumar another bench of the Supreme court differed in view and observed that the ratio in Motilal Padampat is not correctly decided and the bench distinguished the view of Lord Denning, but the Jit Ram Shiv Kumar case itself was overruled in subsequent decision of the Supreme court.

Of Course there can be no promissory estoppel against the legislature in the exercise of its legislative functions nor can the government or public authority be debarred by promissory estoppel from enforcing the statutory prohibition. It is equally true that promissory estoppel cannot be used to compel the Government to or a public which is contrary to law or which was outside the authority or power of the officer of the Government or of the public authority to make. The doctrine of promissory estoppel being an equitable doctrine, it must yield when the equity so requires.

In Express Newspaper case the Delhi Development authority approved the plan submitted by the Newspaper Industry, but subsequently a notice was issued under the provisions of the Act. The adverse notice came to be challenged before the Supreme Court. The power that was exercised by the authority was malicious and politically motivated to harass the paper industry to subdue the voice of the newspaper industry. The Supreme Court checked the administrative action on the principle of estoppel and its specifically observed that this is fraud on power. The action was never bonafide as the notice was designed to abuse and misuse the power.

No estoppel against Statute:

In case of Amar Singhji V/s State of Rajasthan, the Petitioner Rajmata of the Ruler was granted monthly allowances by the State by a Resolution that was called Jagir. Subsequently a statute came to be enacted and by virtue of the provisions contained under Rajasthan Land Reforms and Resumption of Jagir Act, 1952, the assurance given to her was withdrawn by the State. The plea of estoppel was discarded by the Supreme Court holding that even if assurance not to resume an estate had been given, it would certainly not have been binding on the Government because its powers of resumption are regulated by the Statute, and must be exercised in accordance with its provisions. The Act confers no authority on the Government to grant exemption or undertaking against a statute. Pleading estoppel against the Statute was not held to be lawfully practicable.

In this connection Professor H.R.W.Wade says in this administrative Law that “in public law, the most obvious limitation on the doctrine of estoppel is that it cannot be invoked so as to give an authority powers which it does not in law possess”

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LAWLESS BUNCH

Middle class India comforts itself with the thought that if the whole country was educated, it would be more civilised and better run. The fallacy of this logic is proved to us several times, not least by the incidents in the Karnataka High Court and the Maharashtra legislature on Monday.

Lawyers created a ruckus in the Karnataka High Court forcing chief justice P Dinakaran to suspend proceedings. They were objecting to his continuing as chief justice in spite of the allegations of land-grabbing which has stalled his elevation to the Supreme Court.

The road which their objections took was not just contemptible but unacceptable. They swarmed into the hall, shouted slogans, prevented other lawyers from appearing in court, manhandled judges and media persons, locked two judges who were unaware of what was going on into their rooms and then cut off the power supply. On all counts, this is hardly what is expected of “educated” upholders of the law.

Sadly, in recent times lawyers have been at the forefront of unruly behaviour, across the country from Uttar Pradesh to Delhi to Tamil Nadu and now Karnataka. Ostensibly, they are advocates of the law and of jurisprudence. But often they are happy to forget the responsibility that comes with it and act in a reprehensible manner.

The question here is not about the suitability of Justice Dinakaran’s continuing as chief justice of the Karnataka High Court after corruption charges were raised against him. It is of the disruption created in court by lawyers. Much as the legislature is the temple for elected representatives, the courtroom is the sacred place for lawyers.

The least that is expected of them is that they do not desecrate it. The lawyers could have sued other forums available to them to launch their campaign against the judge. Instead, by their conduct, they have diminished the force and focus of their argument and shifted it away from Dinakaran to themselves.

Does it reflect or shed uncomfortable light on our national character when the more progress we make, the less we respect civilised norms? Some lawyers of Karnataka have tarnished the reputation of the entire bar in that state by their actions. Stern action is called for against the lawyers and the association to which they belong. They cannot take refuge under the excuse that their cause — Dinakaran’s supposed corruption — — is just, when their own actions are not.

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Workmen’s Compensation (Amendment) act, 2009

Workmen’s Compensation (Amendment) act, 2009 – amendment in long title, preamble, section 1, 2, 4, 20, scheduleII, insertion of section 25a and Substitution of references to certain expressions by certain other expressions

[Act No. 45 of 2009]

An Act further to amend the Workmen’s Compensation Act, 1923.

Be it enacted by Parliament in the Sixtieth Year of the Republic of India as follows:—

Short title and commencement

1. (1) This Act may be called the Workmen’s Compensation

(Amendment) Act, 2009.

(2) It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint.

Amendment of long title

2. In the long title to the Workmen’s Compensation Act, 1923 (8 of 1923) (hereinafter referred to as ‘the principal Act’), for the word “workmen”, the word “employees” shall be substituted.

Amendment of preamble

3. In the principal Act, in the preamble, for the word “workmen”, the word “employees” shall be substituted.

Amendment of section 1

4. In section 1 of the principal Act, in sub-section (1), for the word “Workmen’s”, the word “Employee’s” shall be substituted.

Substitution of references to certain expressions by certain other expressions

5. Throughout the principal Act, for the words “workman” and “workmen”, wherever they occur, the words “employee” and “employees” shall respectively be substituted, and such other consequential amendments as the rules of grammar may require shall also be made.

Amendment of section 2

6. In section 2 of the principal Act, in sub-section (1),—

(i)  after clause (d), the following clause shall be inserted, namely:—

“(dd) “employee” means a person, who is—

(i)  a railway servant as defined in clause (34) of section 2 of the Railways Act, 1989 (24 of 1989), not permanently employed in any administrative district or sub-divisional office of a railway and not employed in any such capacity as is specified inSchedule II; or

(ii)    (a) a master, seaman or other members of the crew of a ship,

(b) a captain or other member of the crew of an aircraft,

(c) a person recruited as driver, helper, mechanic, cleaner or in any other capacity in connection with a motor vehicle.

(d) a person recruited for work abroad by a company,

and who is employed outside India in any such capacity as is specified in Schedule II and the ship, aircraft or motor vehicle, or company, as the case may be, is registered in India; or

(iii) employed in any such capacity as is specified in Schedule II, whether the contract of employment was made before or after the passing of this Act and whether such contract is expressed or implied, oral or in writing; but does not include any person working in the capacity of a member of the Armed Forces of the Union; and any reference to any employee who has been” injured shall, where the employee is dead, include a reference to his dependants or any of them;’;

(ii)  clause (n) shall be omitted.

Amendment of section 4

7. In section 4 of the principal Act,—

(a)  in sub-section (1),—

(i)  in clause (a), for the words “eighty thousand rupees”, the words “one lakh and twenty thousand rupees” shall be substituted;

(ii)  in clause (b), for the words “ninety thousand rupees”, the words “one lakh and forty thousand rupees “shall be substituted;

(iii) after clause (b), the following proviso shall be inserted, namely:—

“Provided that the Central Government may, by notification in the Official Gazette, from time to time, enhance the amount of compensation mentioned in clauses (a) and (b).”;

(iv)  after clause (b), the Explanation II shall be omitted;

(b)  after sub-section (1A), the following sub-section shall be inserted, namely:—

“(1B) The Central Government may, by notification in the Official Gazette, specify, for the purposes of sub-section (1), such monthly wages in relation to an employee as it may consider necessary.”;

(c) after sub-section (2), the following sub-section shall be inserted, namely:—

“(2A) The employee shall be reimbursed the actual medical expenditure incurred by him for treatment of injuries caused during the course of employment.”;

(d) in sub-section (4),—

(A)  for the words “two thousand and five hundred rupees”, the words “not less than five thousand rupees” shall be substituted;

(B) the following proviso shall be inserted, namely:—

“Provided that the Central Government may, by notification in the Official Gazette, from time to time, enhance the amount specified in this sub-section.”.

Amendment of section 20

8. In section 20 of the principal Act, in sub-section (1), after the words “appoint any person”, the words “who is or has been a member of a State Judicial Service for a period of not less than five years or is or has been for not less than five years an advocate or a pleader or is or has been a Gazetted Officer for not less than five years having educational qualifications and experience in personnel management, human resource development and industrial relations” shall be inserted.

Insertion of new section 25A

9. After section 25 of the principal Act, the following section shall be inserted, namely:—

“25A. Time limit for disposal of cases relating to compensation – The Commissioner shall dispose of the matter relating to compensation under this Act within a period of three months from the date of reference and intimate the decision in respect thereof within the said period to the employee.”.

Amendment of Schedule II

10. In Schedule II to the principal Act,—

(i)  for the word, figures, brackets and letter “section 2(1)(n)”, wherever they occur, the word, figures, brackets and letters “section 2(1)(dd)” shall be substituted;

(ii)  in item (i), for the words “employed, otherwise than in a clerical capacity or on a railway”, the words “employed in railways” shall be substituted;

(iii)  in item (ii), the words “otherwise than in a clerical capacity” shall be omitted;

(iv)  in item (iii), the words “wherein or within the precincts whereof twenty or more persons are so employed” shall be omitted;

(v)  in item (v), the words “other than clerical work” shall be omitted;

(vi)  in item (vi),—

(a) clause (b) shall be omitted;

(b) in clause (c), the words, brackets and letter “or sub-clause (b)” shall be omitted;

(vii)  in item (x), the words “otherwise than in a clerical capacity” shall be omitted;

(viii) in item (xiv), the words “otherwise than in a clerical capacity” shall be omitted;

(ix) in item (xvi), the words “in which on any one day of the preceding twelve months more than twenty-five persons have been employed” shall be omitted;

(x) for item (xviii), the following item shall be substituted, namely:—

“(xviii) employed on any estate which is maintained for the purpose of growing cardamom, cinchona, coffee, rubber or tea; or”;

(xi) in item (xix), the words “otherwise than in a clerical capacity” shall be omitted;

(xii) in item (xxvi),—

(a) in clause (a), the words “and in which on any one day of the preceding twelve months ten or more persons have been so employed” shall be omitted;

(b)  in clause (b), the words “in which on any one day of the preceding twelve months fifty or more persons have been so employed” shall be omitted;

(xiii) in item (xxx), the words “otherwise than in a clerical capacity” shall be omitted;

(xiv) in items (xl) and (xli), the words “in which on any one day of the preceding twelve months more than twenty-five persons have been employed” shall be omitted;

(xv)      the Explanation occurring after item (xlix), at the end shall be omitted.

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Open Source in Biotechnology

Open source is the current buzzword in the field of biotechnology. The concept was borrowed from the innovative ideas of open source software which is an anti-thesis to proprietary software. Proprietary software is characterized by keeping source code secret together with contractual restrictions on the use of the software, plus a reliance on the negative right aspects of copyright and other relevant Intellectual Property law. Open source, to the contrary, rests on collaborative development and disclosure of source code, subject to various terms and conditions. Open Source licensing is a style of intellectual property management that has evolved in the past half-decade out of the Free Software movement, initiated in the early 1980s in response to restrictive copyright licensing practices adopted by commercial software developers. The Open Source approach seeks to preserve ongoing community access to proprietary software tools without precluding or discouraging commercial involvement in their development. Open source codes are becoming more and more common. They are used by companies involved in bioinformatics, but they are used in analytical programs and for other purposes by more standard biotech companies.[1] ‘Open Source Biotechnology’(OSB) refers to the possibility of extending the principles of commerce-friendly, commons-based peer production exemplified by Open Source software development to the development of research tools in biomedical and agricultural biotechnology. This idea was proposed as a feasible solution to the problems arising out of the complex relationship between Intellectual Property Owners and Intellectual Property Users. The open source approach to biotechnology requires participants to put self-interest aside in the pursuit of innovation and potential downstream benefits.[2] Scientists “are free to use the technique without commercial restrictions, but must share any improvements they make to this scientific ‘toolkit’”.[3] The penchant for innovation and development has paved way for the adoption of open source model to subjects other than computer software. Though the subject matter of software and biotechnology differ entirely, there is a common thread connecting them. Both software and biotechnology are emerging fields of study and there are some important parallels between the two fields.  Firstly, the application of computer software and methodologies to solve biological problems. Indeed, the open development movement in some areas of biotechnology, such as computational biotechnology, is largely an extension of the Free and Open Software Movement (FOSS).[4] Secondly, a move from the specific focus of the software interface to an effort to ensure that the biotechnology tools required for research and innovation are openly available. Though the former initiative would make biotechnology technologically sound and efficient the latter move would be a catalyst for development of the “under-served” communities.  Many key innovations in biotechnology are protected by patents, but software source code was historically not regarded as patentable subject matter, instead being protected under copyright law as original works of authorship. Both the OSB and FOSS movements are reactions to the proliferation of the Intellectual Property Rights and to concerns that Intellectual Property Rights may restrict research and access to new innovations. These concerns stem from a similar basis: both software and biotechnological innovation are often cumulative and sequential, and innovations in both areas often constitute research tools[5]. Comparison of the developments in biotechnology with the nowadays popular software, such as Linux and others, would easily suggest that the world is moving towards “open source” biological systems, i.e., they are available for modification by anyone.[6] Open source biotechnology appears as a response to the dissatisfaction of researchers with the limits placed on innovation today from the combination of restriction and secrecy. The approach of biotechnology toward open source is intended to abolish, or at least reduce, problems of access to scientific knowledge and research tools associated with the proliferation of intellectual property rights and high transaction costs[7]. A detailed, realistic model of open source biotechnology can only be developed by tapping into the ideas and experience not only of those who are already engaged in the field of research and development, but also of those who are not. Clarifying the relationship between the generic open source principles and realities of biotechnology research and development will also help debunk a number of common objectives to the feasibility of open source biotechnology that are based on either factual misconceptions or faulty logic.[8] The main idea behind open source biotechnology is to share the research with a wide community of scientists and they sign agreements that trade patents for permanent access to the tools of research and database. The benefits that could be reaped by the open concept include possibly diminished costs, greater research freedom, greater quality in the developed innovations and increased speed of making new products available to final consumers. “Patent transparency is the life blood of new open source”[9] Borrowing concepts from the open source software movement, the open source projects create cooperative exchanges in which life science inventions are openly available to a broad research community.[10] Open source biotechnology projects require participants to agree that advances in the technology must remain as openly available as the original technology. It allows patenting and obtaining of royalties from commercialization of a product but leaves the patented technology to open access. Access is open to all including private sector enterprises, with an obligation for royalty sharing in the event of commercialization of a research product using the patented technology, provided they do not restrict access to further research and improvement. This is facilitated by distributing the patented research tools along with an open general license incorporating these conditions. Open source makes the availability of technological innovations to the public at a rapid pace, thereby making it available for public benefit. The very objective of patent is being accentuated by this policy. In standard-setting, no open source mechanism exists in which the public can clearly see the process and is welcome to be part of it. This would assume an educated public, at least to some degree, so a truly open source mechanism could only be implemented upon the shoulders of a broader public education mechanism.[11] Open source patent systems share the goal of promoting free dissemination of biotechnological research. The aim is to foster an environment of sharing between inventors and the public rather than market place monopolies. Open source systems can be directed at end products or research tools used to develop products. Some consider open source to represent a grass root movement to return to pre-commercialization sensibilities about scientific research and development, where there was greater ethos of freely sharing scientific information among members of the scientific community.[12]

An Australian scientist, Richard Jefferson, who heads the non-governmental organization, Cambia (Centre for the Application of Molecular Biology to International Agriculture), has evolved an innovative open source solution to meet intellectual property constraints in   agbiotech[13]. CAMBIA develops and patents technologies for all needs of plant biotechnology. It licenses the use of their technologies, with a royalty free license, provided that any improvements on the technology be made publicly known and be license free. This is akin to open source Linux computer software. Having the technologies as “open source” leads to what they call “collaborative invention” as all biotechnologists working with the open source material further develop it for all and innovations are quickly disseminated, in stead of remaining proprietary knowledge within a company. This can be of distinct advantage to those trying to increase crop diversity, by further domesticating less-grown crops, especially those in the developing countries where resources are thin.[14]The open source agbiotech is not advocating against patents but preaches the use of patents to ensure that research is not hindered yet return on investment is ensured. It advocates patenting of research tools as leaving it in the public domain would enable a patent holder to command control over development of a product. The quid pro quoarrangement is that, in return of the open access there is an obligation to pay royalty in the event of commercialization of the patented technology and there should be no restriction on access to further research and improvement. This is facilitated by distributing the patented research tools along with an open general license incorporating these conditions. Open source agricultural research facilitates innovation by small biotechnology companies by promoting open access to technologies. This will enable development of locally suited technologies and reduce dependence on giant agribusiness conglomerates.

The BiOS (Biological Innovation for Open Society) Initiative is also known as Open Source Biotechnology. The BiOS model has resonance with the Open Source software movement-well known for the successes such as Linux and has spurred faster innovation, greater community and participation, and new robust business that break monopolies and foster fair competition.[15]

By analogy with FLOSS, Open Source Biotechnology (OSB) incorporates a distinctive approach to[16]:

• Developing new biotechnologies.

The characteristic mode of development of new biotechnologies is bazaar governance also termed as ‘commons based peer production’. Defining features of this mode of production include

(1)    Integration of contributions from a broad range of participants (individuals, commercial firms and state or private non-profit organizations);

(2)   Diverse motivations to contribute, none of which rely on exclusionary property rights.

(3)   Coordination of contributions through self-selection for tasks on the basis of freely accessible information about the object of production itself, as distinct from direction by superiors in a hierarchy or self-selection on the basis of price signals;

(4)   Low barriers to engagement: technology users are free to become developers according to their own incentives and capacities, irrespective of formal qualifications and without the necessity of making any long-term commitment; and

(5)   Sharing of contributions on terms that permit broad (though not necessarily unlimited) freedom of access and freedom to operate.

In real life OSB projects, bazaar governance would predominate but would coexist with firm, market and network structures enforcing a mix of other (private) incentives. These private incentives could be further supplemented by collective action style incentives and public subsidies of the kind that already support biotechnology research and development (R & D).

• Open Source Licensing

OSB is distinct from ‘open access’ or ‘public domain’ regimes in which innovators refrain from obtaining Intellectual Property Rights or other forms of proprietary or quasi-proprietary protection for their innovations. In OSB, as in FLOSS, contributions are legally owned by the innovators or their assignees but are licensed to all comers on terms that, at a minimum, offer a credible commitment to provide ongoing access to the licensed technology and guarantee a level playing field between licensor and licensee with respect to freedom to operate with the licensed technology.

Open Source licenses are intrinsically and radically pro-competitive. Optionally, OSB licenses may also impose an obligation on licensees to on-license improvements to the technology on the same terms as the original license. Such an obligation would normally apply only to a defined subset of improvements and would not apply to any improvements that are reserved by the licensee/developer solely for in-house use. This mechanism inspired by a subset of FLOSS licenses known as ‘copyleft’ or ‘reciprocal’ licenses, is designed to give both licensors and licensees (in their capacity as licensors of any improvement technologies) ongoing access to a dynamic, legally protected technology commons incorporating  updated versions of the original technology as well as any new technologies based on it.

• Commercialization

A key feature of the OSB approach that distinguishes it from pre-existing forms of bazaar governance (typified by the practices underpinning traditional publicly funded scientific research) is the nature of the relationship it fosters between the commercial and noncommercial contributors.

Traditionally bazaar-style production has frequently involved the transfer of commercially valuable technologies from public and nonprofit sectors without fair compensation and/or adequate recognition of the substantial public subsidy thereby indirectly provided to private/corporate players. In OSB, the relationship between commercial and noncommercial participants would be synergistic and symbiotic, not parasitic. In other words, non-commercial contributors would provide opportunities for commercial players to enhance their profits while commercial players would bring private resources to the production of public knowledge.

The objective of open source biotechnology is to break the grip and monopoly of huge multi nationals on the tools of innovation. Thus, the balance is shifted from the rich and powerful to the poor, underserved communities. If the multi nationals are allowed to hold the basic tools and gene sequence that are the operating systems of life, promising new sectors will be left undeveloped.[17]About 20 percent of the human genome is controlled by patents, of which about two-thirds are owned by private firms. Taking a collaborative open-source approach could speed efforts to reduce hunger and disease.[18] The patenting of ‘enabling technologies’ affects the development of crops by research institutions, whether private or public. Further, applied agricultural research involves derivative development on existing varieties and with each incremental improvement new Intellectual Property rights get added resulting in multiple Intellectual Property holders on innovations. The result is a situation where a single institution will not be able to provide freedom to operate with a particular technology or invention.[19] Research in the field of biotechnology is expensive, partly because researchers need to purchase even the right to research from a dozen related patent-holders, even when there is little chance of creating a marketable product from the research.

The notion of ‘copyleft’ which envisages free study, copy, distribution and modification of software is applicable only in the case of bioinformatics. But, the other research activities in biotechnology are subject to patent rights and hence ‘copyleft’ is not applicable. Although OSB entails fewer transaction costs than a conventional proprietary approach, it does not eliminate IP-related transaction costs altogether. Unlike a fully ‘public-domain’ or ‘open access’ approach, OSB does involve IP ownership and does require technology users to enter into a license contract. In addition, copyleft-style open source licenses place conditions on the distribution of downstream technologies that, despite their nonproprietary purpose, do limit freedom to operate with respect to those technologies.[20]

Patent is an incentive in the form of limited monopoly granted by the State to the inventor for the disclosure of his information. The limited monopoly grants the inventor economic rewards by way of manufacture, use, sell or import of a product or process for 20 years. The patent law recognizes the exclusive right of a patentee to gain commercial advantage out of his invention. This is to encourage the inventors to invest their creative faculties, knowing that their inventions would be protected by law and no one else would be able to copy their inventions for a certain period during which the inventor would have exclusive rights. Thus, patents grant economic rewards for the promotion of invention. The patent grant provides the owners of patents with a period of market exclusivity, during which they can include a royalty component to out-license their technology in exchange for upfront fees and/or royalty sharing. In this way, patents provide the necessary financial incentive to develop new technology commercially. However, patents also have the potential to deter rather than encourage innovation, particularly when they claim rights to inventions at the upstream end of the research-development continuum[21]. Open source in biotechnology makes this monopoly brittle, thereby reducing the economic reward. Thus, an argument could be advanced that it would reduce long term innovation. But open source would be a facilitator of downstream non- economic rewards.

Another important role of Open Source is its ability to infiltrate through the patent thicket in the patent regime. A patent thicket is “a dense web of overlapping intellectual property rights that a company must hack its way through, in order to actually commercialize new technology.”[22] Thus, it can also be a retaliation against the ‘Tragedy of the Anti-commons’. Patents often are cited as examples of tragedy of the anti-commons because a patent owner has exclusive rights over the use of patented technology. If the creation of a certain product involves the use many technologies and components patented by different people or different companies, then it can be very difficult to negotiate effectively with all the patent holders at once, and the result may be that one has to pay so many license fees that it becomes too expensive to create the desired product. Thus, a product that is in great demand may be produced because costs associated with patents are too high.[23] Anti commons tragedy in biotechnology is triggered by high transaction costs associated with assembling a ‘tool kit’ composed of multiple proprietary elements. If the owner of one of these proprietary elements were to adopt an OSB strategy, then the overall transaction costs would, in principle, be proportionally lowered because anyone, anywhere would be sure of obtaining permission to use, modify and distribute the relevant technology element for any purpose without ongoing obligations to the owner.[24]

One can think of open source licensing as a form of grantback clause, because the licensee is required to make its own intellectual property available to others, including the licensor, while open source licenses commonly compel licensees to turn to grant access to their intellectual property to others, thus extending the reach of the license beyond the scope of the intellectual property grant, there are several reasons to doubt that these agreements raise anti trust concerns. First, few open source licensors have market power. Second, the extent of the required grant is limited to intellectual property actually incorporated in products that use the licensed technology, rather than extending to unrelated or potentially competitive technologies. Finally, the openness that is required is always non-exclusive, rather than an assignment or exclusive license back to the licensor. Indeed, the requirement of openness permits anyone to benefit from the licensed technology, not just the original licensor. For these reasons, it seems unlikely that an open source license will constitute patent or copyright misuse.[25]

Due to the ease of patenting biological discoveries, it is likely that anyone working in biomedical research will have to use several patented procedures in order to create a marketable product. However, since those patents are short-lived and only a few patents result in marketable product, those developing new treatments or processes often find that negotiating a licensing agreement with the patent holders is prohibitively expensive and will result in product being unmarketable. In fact, a patent holder can often say that mere research is in infringing use, and demand a license fee even though the chance of developing a marketable product is slim.[26]

Patent owners who are effectively free to dictate the terms of use of an established test may choose to license it broadly, asking only a reasonable royalty from all laboratories that offer the test to patients. On the other hand, they may choose to restrict license to selected laboratories or even to a single test provider. In the latter case, the consequence can be severe. Monopoly control over a particular test tends to limit accessibility and increase costs, with obvious negative implications for the equitable provision of cheap health services. Quality assurance is also compromised: with only a handful of test providers, regulators may find it not cost effective to develop adequate proficiency testing[27].

Any contributor to an OSB project may be motivated by the anticipation of[28]:

• Process Benefits

In the FLOSS context, process benefits include fun, learning and social interaction with like minded peers. Biotechnology industry participants do sometimes invest in research and development activity solely or primarily for the sake of analogous process benefits. At the corporate level, potential process benefits of participating in OSB development include organizational learning, developing and maintaining a wide range of inter-organizational linkages and establishing a corporate reputation as competent and trustworthy collaborator. All are commercially relevant in biotechnology and related industries, where the ability to engage in productive collaborations across firm boundaries is crucial to retaining a competitive edge.

• User Benefits

The primary rationale for choosing OSB approach is that it permits prospective users to share the cost and risk of developing a new technology and depending on the chosen license terms, potentially gain free access to valuable downstream technologies. Further, an OSB approach may enhance the usefulness of the technology by expanding the number of people who can help eliminate design flaws and introduce new features.

• Non-proprietary Business Opportunities

Mainstream or conventional biotechnology business strategies typically rely on property rights as a means of excluding non-paying users from accessing or commercializing the technology. By contrast, non-proprietary business strategies are designed to exploit the enhanced value to a firm’s clients or customers of technologies whose use, modification and redistribution are relatively unrestricted and which are therefore likely to be cheaper, more readily available and of better quality.

• Restructuring Competition

A crucial feature of open source is that it promotes free and open competition with respect to the technology in question. Although commercial players generally prefer to protect themselves from competition wherever possible, they always want to ensure competition among their suppliers.  Other ways, an OSB approach might be used to restructure the competitive landscape in an industry sector to contributor’s advantage including creating the opportunity for several smaller firms to combine resources against a larger competitor or attracting customers away from established technology provider.

Peer review may play a crucial role in enhancing biotechnology, and safety concerns might reinforce preferences for open approach rather than proprietary secrecy. Companies using biotechnology to deliver other services, such as health care, rather than just selling genetic products might well prefer open source suppliers. It would appear that open source approaches might be relevant for many aspects of biotechnology, although there would likely still be major areas where proprietary approaches would retain advantages.[29]

At a minimum, open source approaches might offer some useful options concerning the regulation of intellectual property rights related to genetic resources. The example of computer code shows how collective open source efforts can thrive, even while knowledge is produced and used within commercial activities. Similar principles might apply concerning genetic codes. Rather than a purely proprietary or purely public approach to intellectual property in genetic resources, a more differentiated approach might be feasible. Such an approach might facilitate collective action to discover and make available genetic knowledge in ways that would be difficult through purely public or private approaches. In at least some cases, proprietary rights may be neither necessary nor even the best way to promote innovation, while dumps into sources of valuable materials.[30]

Despite the fact that OSB promotes access to research tools and encourages user innovation, there are deep concerns over the fact that it would actually curb the private returns that would have ensued by licensing the innovation. However, open source fits very well within a collaboration-strengthening pyramid because one of the attractions of open source methods for opening up information exchange is that they involve minimal upfront investment on the part of technology developers.[31] The open source group, however, is not trying to restrict the amount of core plus improvement technology available, by ensuring that the improvements remain openly available. Such an effect would be better described as ultimately increasing rather than reducing the supply of the downstream product.[32]

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