Introduction
The Competition Commission of India (hereinafter referred to as “CCI”) on June 14, 2017 delivered its maiden decision penalizing the manufacturer for monitoring the discount to be given by its dealers in the case of Fx Enterprise Solutions Pvt. Ltd. and Anr. v. Hyundai Motor India Pvt. Ltd.[1] wherein it found Hyundai Motor India Pvt. Ltd. (hereinafter referred to as “HMIL”) guilty of anti-competitive practice, in violation of Sections 3(4)(e) and 3(4)(a) read with Section 3(1) of the Competition Act, 2002 (hereinafter referred to as “Act”) and imposed upon it a penalty of INR 87 crores. It was for the first time that CCI had passed an order against a company indulged in resale price maintenance. Here we critically analyze all the major issues involved this judgment.
Facts of The Case
The Fx Enterprise Solutions India Private Limited and St. Anthony’s Cars Private Limited had filed the information against the Hyundai Motors India Ltd (HMIL) alleging a contravention of Section 3(4) (e) read with section 3(1) of the Competition Act, 2002. It was alleged by the informant that the aforementioned HMIL had restricted the informants from acting as dealers of competing brands by of their dealership agreement. It also fixed the maximum retail price and the maximum discount which could be offered by the dealers through its Discount Control Mechanism (DCM). It was further alleged that HMIL tied the purchase of popular cars to the sale of high-end unwanted cars and also, designated certain companies as the preferred suppliers of complementary goods. This led to the HMIL carrying out restrictive trade practices with their authorized dealers and thus denying market access to them.
On finding a prima facie case against HMIL, CCI directed the Director General (DG) to investigate the alleged contravention of Section 3 of the Act.
Following this, the Director General investigated into the case. On investigation, the DG concluded that HMIL had contravened the provisions of Section 3(4) of the Act on account of the above, except in respect of the allegation of tying in the sale of high end cars with fast moving cars. In addition, the DG also concluded that HMIL, being a dominant entity in the aftermarket for services of its cars, had violated Section 4 (relating to abuse of a dominant position) of the Act.
Issues in Question
The current case involves three apposite issues determined by the commission:
Whether clause 5(iii) of the Dealership Agreement falls within the purview of “exclusive supply agreement” or refusal to deal contravention?
Whether Hyundai imposes (maximum) resale price maintenance?
Whether Hyundai imposes a tie-in arrangement with respect to
Sale of CNG kits
For Lubricants
In relation to obtaining car insurance.
Order of the Commission
The Commission was of the considered view that HMIL has contravened the provisions of Section 3(4)(e) read with Section 3(1) of the Act through arrangements which resulted into Resale Price Maintenance. Such arrangements also included monitoring of the maximum permissible discount levels through a Discount Control Mechanism. In addition to the above contravention, HMIL had also contravened the provisions of Section 3(4)(a) read with Section 3(1) of the Act in mandating and penalizing its dealers for the use of non-recommended lubricants.
Directing the HMIL, CCI ordered it to cease and desist from indulging in conduct that has been found to be in contravention of the provisions of the Act[2], to allow dealers to sell product with the discount at which market. The Commission imposed a penalty of INR 87 crore on HMIL for the impugned conduct at the rate of 0.3 % of its average relevant turnover of the last three financial years.
Critical and Multidimensional Analysis of the Order
Refusal to Deal [Section 3(4)(d)]
Refusal to deal includes any agreement which restricts or is likely to restrict, by any method the persons or classes of persons to whom goods are sold or from whom goods are bought.[3]
The Commission noted that the Act defines an “exclusive supply” agreement as including “any agreement restricting in any manner the purchaser in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person”.[4] Informant alleged that Clause 5 of the dealership agreement amounts to “exclusive supply agreement.” On the contrary, after analyzing the facts the commission was of the view that clause 5 does not strictly set out any exclusivity obligation or prevent a dealer from dealing with competing dealerships or other businesses; it only requires the prior written permission of the OP in order for the dealers to do so.”
Relevancy of alleged clause was only limited to ensure that HMIL dealers do not free ride on facilities and services provided by HMIL, not using financial resources for other purposes.
Therefore, the Commission held that Clause 5(iii) does not impose an exclusive supply obligation in contravention of Section 3(4)(b) or a refusal to deal in contravention of Section 3(4)(d) read with Section 3(1) of the Act.
Resale Price Maintenance [Section 3(4)(e)]
“Resale price maintenance” is defined as including “any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.”[5]
CCI observes that HMIL through dealership agreements advises the dealer on margin to be allowed on maximum selling price defined in standard provision and this margin to be revised on sole discretion of HMIL. Hyundai ensured compliance of its policy of discount control mechanism by engaging “mystery shopping” agencies for policing its dealers through fake customers. On this aspect commission is of the opinion that fixing of a maximum retail price and maximum permissible discount which could be given by dealers, effectively amounts to setting a minimum resale price and hence, restricts competition. The imposition of upper limits on discounts that dealers may offer to final consumers through the discount control mechanism of the OP, leads to loss of intra-brand price competition. RPM can also lead to loss of inter-brand price competition since it decreases the pricing pressure on competing manufacturers when a significant player such as the OP (Hyundai) imposes minimum selling price restrictions in the form of maximum discount that can be offered by the dealers who are in interlocking relationship with multiple manufacturers.
Upon a scrutiny of the submissions made by the parties, it was found by the CCI that HMIL’s Discount Control Mechanism is in contravention of the provision on RPM under the Act. This monitoring mechanism (“Discount Control Mechanism”) by the Hyundai did not result in any consumer benefits. The Commission held that “undoubtedly, once RPM is enforced, it leads to reduced intra-brand competition and overall higher prices for consumers.”[6]
Tie-in Arrangement
The term “tie-in arrangement” has been defined as including “any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods”.[7] A tying arrangement occurs when, through a contractual or technological requirement, a seller conditions the sale or lease of one product or service on the customer’s agreement to take a second product or service.[8]
CNG Kits
On the allegation raised by the informant that the HMIL has handpicked certain companies for the supply of CNG kits, finding of DG were that the HMIL has tied the purchase of CNG kits from CEV. Further substantiating its argument DG stated that CNG kits supplied by CEV are not distinct from the kits of other agencies, and denying warranty services if installed from other agency lead to tie-in arrangement.
The Commission dismissed abovementioned finding, and it was observed that running of Hyundai cars with CEV CNG kits are much smoother in comparison to that of other agencies. On this matter Commission opinioned that in cases where warranty is cancelled for use of non-CEV CNG kits, the same may be objectively justified. Hence, cancellation of warranty upon use of non-CEV CNG kits does not, as a general rule, amount to a contravention of Section 3(4)(a), read with Section 3(1) of the Act.
Lubricants & Oils
To the alleged conduct of imposing unfair discriminatory conditions in the sale and supply of lubricants, HMIL took the stand that it only recommends the brands / types of lubricants and oils that are to be used and warranty is not cancelled when other brands of lubricants / oils are used. To the above arrangement commission was of the view that supply of lubricant by IOCL and Shell at a pre-fixed price results in price discrimination and the arrangement threatening termination of dealership by invoking the terms and conditions of the dealership agreement is not accruing any benefit to the dealers or customers.
Therefore the commission was of the view that such actions of HMIL would amount to “tie-in arrangement” in contravention of Section 3(4)(a), read with Section 3(1) of the Act.
Insurance Policy
Above allegation has its roots in the arrangement formed between the HMIL and ABIBL which restricts the dealers in their offering of insurance services to the end-consumer to only the select companies of ABIBL.
Commission dismissed the above allegation and noted that that there was no such clause in the agreement that dictates that the informants could take up dealership only on the condition that they deal only with the list of empanelled insurance companies. , After analyzing the statements given by the third parties, the commission came to the conclusion that the mere recommendation of the insurance companies partnered with the HMIL will not amount to tie-in arrangement. Hence HMIL has not violated Section 3(4)(a) of the Act with respect to the allegation raised.
Total Turnover vs. Relevant Turnover
So far as imposition of monetary penalty is concerned, the crucial question in the case was whether the penalty under section 27(b) of the act, has to be on ‘total/entire turnover’ of the company covering all the products or ‘relevant turnover’, relating to the product in the question in respect whereof provisions of the act are contravened.
Addressing this question CCI referred the recent decision of Hon’ble Supreme Court of India in Excel Crop Care case[9], where SC opined that, “adopting the criteria of ‘relevant turnover’ for the purpose of imposition of penalty will be more in tune with ethos of the Act and the legal principles which surround matters pertaining to imposition of penalties”. The Commission noted that anti-competitive conduct of HMIL in the instant case included an arrangement, resulting in RPM by way of monitoring of maximum discount which is permissible at this level through a Discount Control Mechanism and a penalty mechanism for non-compliance of the discount scheme. Such conduct pertains to and emanates out of sale of motor vehicles. Hence, for the purposes of determining the relevant turnover for this infringement, revenue from sale of motor vehicles alone has to be taken into account.[10]
Conclusion
Inquiry into an anti-competitive agreement initiates from determination of existence of prima facie case.[11] The Commission is expected to form such prima facie view without entering upon any adjudicatory or determinative process.[12] And in the process of forming a prima facie view, the CCI should back its finding by providing a detailed reason which will express its mind in no uncertain terms on which such opinion is formed.[13]
Agreements that have an Appreciable Adverse Effect on Competition (“AAEC”) are void. For the test of AAEC, the Act presumes that horizontal agreements are not per se violation but are rebuttable presumptions[14] and thus passes the burden on the party which has entered into the horizontal agreement to prove that the agreement does not result in AAEC[15]. However the burden of proof shifts to the party alleging the AAEC in the case of vertical agreement. From the above principle it is fair to deduce that in the present case onus lies on the CCI to determine prima facie AAEC. But there was sheer neglect of this principle in the present case as there was no examination, leave alone prima facie evaluation of AAEC.
Hyundai case raised a very interesting question on the approach of the CCI in determining Resale Price Maintenance.
The CCI should have demonstrated AAEC according to parameters provided under Sec. 19(3) instead they merely ruled that the RPM was in practice and as a result prima facie concluded that there is an AAEC.
Further, it is pertinent to note that the CCI had previously held in the Intel Case[16] that monitoring of downstream prices of one’s own product is not illegal. Also, In the case of Shubham Sanitarywares v Hindustan Sanitarywares & Industries Ltd. and others, [17] it was held that the discount policy in the present case did not seem to have an AAEC. Hence, it is a stark contradiction to the holding of the present case and calls for elaborate examination.
In cases dealing with RPM issues, the CCI has used market share of the infringing party as the center piece in its analysis and had found that where the market in question was generally competitive, the RPM was less likely to cause an appreciable adverse effect on competition.
CCI ignoring the aspect of “rule of reason”[18] did not deem it necessary to treat RPM cases in a different light, and similar to other vertical arrangements. Above analysis raises the following questions on CCI’s judgment:
While evaluating AAEC under the set parameters of Section 19(3), how will the CCI apply the accrual benefits to the consumers? –
Will CCI’s approach to eliminate price competition among the dealer bring benefits to the customer?
It will be interesting to note how the CCI will answer the above question(s).
This post has been authored by Kartikey Pandey and Aditya Singh, both 3rd Year students of Dr Ram Manohar Lohiya National Law University, Lucknow.
[1] Fx Enterprise Solutions Pvt. Ltd. and Anr. v Hyundai Motor India Pvt. Ltd., 2017 S.C.C. OnLine C.C.I. 26
[2] Fx Enterprise case, supra note 1, ¶117.
[3] O.E.C.D., Refusal to Deal, (Jul. 29, 2017, 10:04 AM), https://www.oecd.org/daf/43644518.pdf.
[4] Competition Act, 2002, § 3(4).
[5] Competition Act, 2002, § 3(4).
[6] Fx Enterprise case, supra note 1, ¶ 89.
[7] Competition Act, 2002, § 3(4).
[8] Sonam Sharma v Apple & Ors., 2013 S.C.C. OnLine C.C.I. 25.
[9] Excel Crop Care Limited v Competition Commission of India & Anr., 2017 S.C.C. OnLine S.C. 609.
[10] Fx Enterprise case, supra note 1, ¶ 24.
[11] Competition Act, 2002, § 26.
[12] C.C.I. v Steel Authority of India and anr. (2010) 10 S.C.C. 744.
[13] Id. at 787.
[14] Sodhi Transport Co. v State of Uttar Pradesh, A.I.R. 1986 S.C. 1099.
[15] Id.
[16] Case No. 48/2011 decided by C.C.I. on Jan 16, 2014.
[17] [2015] C.C.I. 31.
[18] Leegin Creative Leather Products, Inc. v. P.S.K.S., Inc. 551 U.S. 877 (2007).
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