CCI Probe: Will Amazon & Flipkart Pass Legal Scrutiny?

[Akshay Shrivastava is a 5th Year B.Com., LL.B. (Hons.) student at Gujarat National Law University, Gujarat]

Recently, the Supreme Court refused to stay the ongoing probe on e-commerce giants Amazon and Flipkart by the Competition Commission of India (CCI) for promoting specific sellers owing to exclusive arrangements and rendering them special treatment by offering heavy discounts, thereby indulging in anti-competitive practices. Amazon and Flipkart had approached the Supreme Court against the order of Division Bench of Karnataka High Court, wherein it dismissed the plea challenging the CCI probe concerning abuse of dominant position and refused to intervene in the investigation.

The Story So Far?

The legal tussle on the abuse of dominant position by Amazon and Walmart owned Flipkart began on 13 January 2020, when the CCI announced that it had initiated an investigation against the two e-commerce giants after taking cognizance of the information filed by the Delhi Vyapar Mahasangh (DVM) under section 19(1)(a) of the Competition Act, 2002. Therein, serious allegations were made against Amazon and Flipkart alleging, inter alia, the preferential treatment to selective sellers, deep discounting, exclusive tie-ups, and predatory pricing, thus constituting anti-competitive practices and abuse of dominant position under section 3(1) read with section 3(4) and section 4 of the Act.

In February 2020, Amazon India approached the Karnataka High Court by way of a writ petition and sought a stay on the inquiry. In the hearing, Flipkart was impleaded as a party, and an interim order granting an interim stay on the investigation was pronounced by the Karnataka High Court in favor of Amazon and Flipkart. Consequently, the CCI challenged the above order before the Supreme Court, which transferred the matter back to High Court for hearing. A single judge of the Karnataka High Court, after hearing the arguments of both the parties, dismissed the petition filed by Amazon and Flipkart on 11 June 2021 and, hence, allowed the CCI to move forward with the investigation. A writ appeal challenging the said order was filed before the Division Bench of High Court in Flipkart Internet Pvt Ltd vs. Competition Commission of India. The High Court, while dismissing the writ appeal, observed that at this stage the CCI cannot be precluded from conducting the investigation and enunciated as under:

In case, the appellants are not at all involved in violation of any statutory provisions of Act of 2002, they should not feel shy in facing an inquiry. On the contrary, they should welcome such an inquiry by the CCI. 

As the last ray of hope, Amazon and Flipkart knocked on the doors of the Supreme Court by filing an appeal against the aforesaid order. However, in a major setback to the e-commerce giants, the Supreme Court refused to intervene in the order of Division Bench and gave a green light to the CCI investigation. The three-judge bench in its order said that the two corporations should submit to the inquiry and must co-operate with CCI. 

Legal Basis for the Inquiry

Section 26(1) of the Competition Act, 2002 lays down the procedure for conducting an inquiry under section 19 of the Act. Moreover, it permits the CCI to direct the Director-General to conduct an investigation, when in its opinion there exists a ‘prima facie’ case of contravention of the provisions of the Act. Section 19 is the source of the CCI’s power to conduct an inquiry into a complaint concerning the violation of section 3(1) which deals with anti-competitive agreements and section 4 which provides for abuse of dominant position. The CCI has the authority to carry out an investigation suo motu or based on information received from any person or organization. 

Preferential Treatment

The allegations regarding preferential treatment stem from section 3(1) read with section 3(4) of the Act, which talks about agreements concerning supply or distribution of goods and agreements amongst enterprises at different stages of supply and distribution respectively, which is likely to prevent or drive out competition in India. The allegations levelled by DVM relate to the exclusive launch and sale of goods by Flipkart and Amazon by giving special treatment to particular sellers, thereby denying other sellers their fair share of the pie.

DVM claimed that the majority of the sellers to whom preferential treatment is offered are in some fashion or the other managed by or affiliated with Amazon and Flipkart. In the case of Amazon, it is alleged that it has exclusive tie-ups with Cloudtail and Appario Retail in which it maintains minority stakes, thereby making them the prominent sellers on Amazon India. Whereas, in the case of Flipkart, the allegation is that it actively works with certain sellers in domains of inventory control and pricing and, therefore, provides them with preferential treatment on its website.

Deep Discounting

Another allegation made by DVM is that Amazon and Flipkart indulge in deep discounting practices and deploy predatory prices to gain more customers and reap long-term benefits. DVM alleged that they have evidence that makes it crystal clear that Flipkart had promised some selective sellers that it would bear a portion of the cost during its flagship Big Billion Days Sale or other festive sales. On the contrary, no such offer was extended to other sellers which caused prejudice to their interest and reduced their bargaining capacity. Similar allegations have been made against Amazon and it is claimed that the communication details of the preferred sellers and Amazon is identical, which is a testimony of a clandestine accord between the two. Furthermore, the said act of deep discounting leads to predatory pricing which violates section 4 of the Act.   

Moreover, the study conducted by the CCI in January 2020 indicated that the basis for deep discounting, viz. sources of cost savings, could not be identified to account for the lower prices, which is a cause of concern. 

Rough Terrain Ahead for Flipkart & Amazon

After exhausting all the legal remedies to stall the ongoing antitrust probe, Flipkart and Amazon are in for a long ride. The allegations of preferential treatment to selective sellers primarily on the launch of smartphones and deep discounting practices are possibly in violation of provisions of the Competition Act, 2002 and require extensive examination from the CCI to arrive at a comprehensive conclusion. If Amazon and Flipkart are found guilty of entering into anti-competitive agreements under section 3 and abusing their dominant position in accordance with section 4, the CCI may, under section 27 of the Act, pass all or any of the below-mentioned orders:

  • Cease-and-desist order directing the enterprises to terminate and avoid entering into such agreements again; 
  • Imposing penalty which shall not exceed 10% of the average turnover of the enterprise for the previous three financial years;
  • Directing the enterprises to modify the existing agreement in the prescribed manner and to adopt transparent policies for discounting.

Analysis

Prima facie, the charges against Amazon and Flipkart are grave and the evidence presented by DVP thus far makes it a fit case to be pursued under sections 3 and 4 of the Act. The major area of concern is the deep discounting and preferential treatment practices by the two companies. Even though discounting is a healthy practice that gives the buyers bargaining power and varied options to choose from, the absence of a cogent basis for such discounting it could be used as a tool to eliminate competition. Unlike Walmart, which follows the principle of bulk procurement to reduce costs, there is no reasonable basis behind the deep discounts being given by Amazon and Flipkart, thus leading to anti-competitive practices, making other sellers’ products irrelevant, and impairing their market position.

In my opinion, a defence available to Amazon and Flipkart is to establish beyond doubt the source for their deep discounts and to show that sale prices are exclusively decided by the sellers and not them. So far as the allegations regarding preferential treatment are concerned, they can prove that the website search ranking results are based on consumer feedback and are unmanipulated.

Conclusion 

The Competition Act, 2002 was enacted to promote healthy competition in the Indian market by allowing more players to participate, thereby providing increased options to the consumers. The antitrust probe against Amazon and Flipkart has been ordered with the sole purpose of creating a level playing field for other sellers who are constrained to shut down their businesses due to the inability to compete by offering lower prices.  

The Indian competition watchdog has found satisfactory evidence to indicate that the two e-retail giants have entered into anti-competitive agreements and indulged in the practice of predatory pricing by offering deep discounts. The ball is in the CCI’s court and it is just a matter of time that the outcome of the investigation would be out in the public domain and the two e-commerce giants will have to ready their response as may be required. 

Akshay Shrivastava

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