Industry organisations and legal experts have criticised the arrest of the head of eBay's Indian subsidiary Baazee.com in connection with the sale of a pornographic video CD on the site.

The case could also turn out to be a test of the Indian legal system to allow e-commerce to prosper in the country without hindrance, according to legal experts.

Delhi police arrested Avnish Bajaj for allegedly allowing the sale of VCDs that showed two minor students from Delhi in an oral sexual act. Bajaj appeared before a magistrate in Delhi on Saturday and was remanded to seven days judicial custody at the request of the police investigating the case.

Bajaj, a US citizen of Indian origin, was arrested under section 67 of India's Information Technology Act, which relates to transmission of obscene material through electronic media.

Key Indian industry organisations have protested about Bajaj's arrest. The National Association of Software and Service Companies said Bajaj's full cooperation with investigators and the availability of the evidence make his arrest unexpected and uncalled for in a mature democracy. "We urge the authorities concerned to immediately release Mr. Bajaj, even as the legal case proceeds," said Kiran Karnik, NASSCOM's president.

Baazee.com executives, including Bajaj, closely cooperated with Delhi police to trace the alleged seller, according to a statement from eBay in the US. The listing of the auction item violated Baazee.com's policies and user agreement and was removed after it was discovered, according to the eBay statement.

Bajaj cannot be held liable on grounds of vicarious liability, as the offense was not committed by an employee of Baazee.com, but by a third party using the auction site, according to Vaibhav Parikh, who heads the technology law practice at Nishith Desai Associates, a law firm in Mumbai.

Usually, the police ask that the person arrested be remanded to judicial custody if there is any apprehension that the evidence will be tampered with, or that the person may abscond, according to Parikh. "This is not the case with Avnish Bajaj, who has cooperated with the police," Parikh said.

The police could have held Bajaj liable if Baazee.com continued to auction the obscene material after police asked for its removal, according to Parikh.

The auction of the VCDs and the subsequent arrest of Bajaj is the latest twist to a scandal that started when an MMS clip of the sexual act was sent to mobile phones across Delhi last month. It was later copied to VCDs by some recipients of the clip and sold, according to the police.

On Sunday, the police arrested the student who allegedly made the video clip using a mobile phone, and who also participated in the recorded oral sex act. Earlier in the week police arrested a student from the Indian Institute of Technology in Kharagpur who it is claimed put the video clip on Baazee.com.

Paavan Duggal, a Delhi-based cyber law consultant and advocate in India's Supreme Court, refused to comment on Bajaj's arrest, but said that the Information Technology Act is "grossly deficient in tackling a variety of issues in the electronic medium".

The act, for example, does not conform with international jurisprudential trends when determining the liability of network service providers, Duggal said.

Section 79 of the act states that a network service provider is not liable for any third party information or data made available if the offense was committed without the provider's knowledge and despite its due diligence, according to Duggal. However, the network service provider must prove that it lacked knowledge of the violation, and that due diligence could not have prevented the offence, he said.

The international position, in contrast, is that the network service provider's liability begins only if it fails to remove the objectionable material after receiving user notification about the material. "The closest analogy to this case is that of a telephone service provider being held liable for an obscene telephone call made on its network," said a legal expert.

"Section 79 of the Information Technology Act will have to be modified to ensure that the police have proof of the service provider's gross negligence or knowledge of the crime, before they can arrest a network service provider," said Nishith Desai's Parikh.