CCI’s Rigid Approach in Holding Discount Control Policy Anti-Competitive

[Yagya Sharma is a 5th year BA LLB student at Institute of Law, Nirma University]

On 23 August 2021, the Competition Commission of India (CCI) in In Re: Alleged anti-competitive conduct by Maruti Suzuki India Limited in implementing discount control policy vis-à-vis dealers has imposed a penalty of ₹200 crores and passed a cease-and-desist order against Maruti Suzuki India Limited (MSIL). The penalty has been imposed for indulging in anti-competitive conduct of resale price maintenance (RPM) by way of implementing a discount control policy, pursuant to which the dealers were restrained from offering discounts to customers beyond those prescribed by MSIL.

This is only the second instance in Indian competition law jurisprudence where the CCI has found an anticompetitive RPM in violation of Section 3(4)(e) of the Competition Act. Before this, the CCI in Fx Enterprise Solutions India Pvt Ltd v Hyundai Motor India Limited (2017) found that Hyundai controlled the maximum amount of discount that its dealers could offer customers, thereby setting a minimum resale price in violation of the Act. Further, there was a mechanism for enforcing the policy by penalising dealers who breached the policy. Although the order was subsequently set aside by the National Company Law Appellate Tribunal (NCLAT) in Hyundai Motor India Ltd v Competition Commission of India (2018), the matter is currently pending before the Supreme Court of India.

This post seeks to critically analyze the CCI’s approach while dealing with the allegations pertaining to RPM in the MSIL case. Further, it highlights the change in the CCI’s position from its previous decisions.

Facts

The case was taken up suo motu by the CCI relying on an anonymous e-mail, wherein it was alleged that MSIL’s sales policy is such that the dealers of MSIL are not permitted to offer discounts to their customers beyond that prescribed by MSIL. In case of violation, a penalty is levied upon the dealer by MSIL. The CCI, relying upon communication between MSIL and dealers through e-mails, concluded that MSIL not only imposed the discount control policy on dealers, but also enforced the same by monitoring dealers and imposing penalties on them and threatening strict action.

The CCI also noted that the policy causes appreciable adverse effect on competition (AAEC) in terms of the factors stated in section 19(3) of the Competition Act. Specifically, the CCI observed that RPM can prevent effective competition both at the intra-brand level as well as at the inter-brand level. Further, the RPM led to denial of benefits to consumers in terms of competitive prices being offered by MSIL dealers. The policy laid down by MSIL also resulted in creation of barriers to new dealers in the market. While concluding, the CCI noted that the pro-competitive benefits of RPM do not “outweigh the harm caused to the market due to significant reduction in intra-brand competition and softening of inter-brand competition, leading to higher prices for the consumers.

Analysis

In Competition Commission of India v. Coordination Committee of Artistes and Technicians of West Bengal Film and Television, the Supreme Court has observed that the term ‘market’ under section 19(3) would be construed as ‘relevant market’ and hence, while conducting an analysis of anti-competitive agreements, the CCI is required to determine the relevant market in which competition was effected, prior to making an assessment of AAEC under section 3. By this judgment the SC has magnified the burden of proof on the CCI to define the relevant market.

Further, in its previous decisions where it did not find RPM, the CCI has highlighted the importance of having a significant market power for a conduct to cause an AAEC. In  Counfreedise v Timex Group India Limited (2018), the CCI specifically noted that even if a manufacturer controls the prices of its products in the market, such conduct would only cause an AAEC if such a manufacturer holds significant market power. In Karni Communication Private Limited v Haicheng Vivo Mobile (India) (2019), the CCI observed that an AAEC was unlikely due to low relative market share of the company concerned.

In the present case, the CCI noted that the anti-competitive impact of MSIL’s conduct is enhanced due to its significant market share, which will thwart intra-brand competition and inter-brand competition in the passenger vehicles market. However, here, neither the DG nor the CCI has formally defined a ‘relevant geographic market’ or a ‘relevant product market’ as required under section 19(6) and (7) of the Competition Act before finding that MSIL holds 51% market share. This finding of CCI is against the law laid down by the Supreme Court in the Coordination Committee Case as well as its past practices.

Further, it is a well-accepted fact that RPM can have pro-competitive effects. Car retailing is a high capital-intensive business and discounting regulators in absence of RPM can substantially reduce their margin, leaving no incentive for new dealers to enter the market, thereby raising entry barriers. Other pro-competitive justifications of RPM are that it prevents free riding and encourages investment in non-price parameters of competition. However, the CCI did not carry out any extensive investigation into these possible pro-competitive justifications. Instead, it merely observed that even if there are benefits resulting from RPM, it does not outweigh the harm caused to the market without even evaluating the harm and providing evidence for the same. Instead of adducing evidence to show how the arrangement was leading to higher prices, raising barriers to entry and reducing intra-brand and inter-brand competition, the CCI assumed that these aspects, in fact, were occurring in the market without examining the actual effect on competition. By assuming the anticompetitive effect of the discount control policy, the CCI has followed a per se standard, which is in contravention of the Competition Act.

Interestingly, in Jasper lnfotech Private Limited (Snapdeal) v. KAFF Appliances (India) Pvt. Ltd. (2019), the CCI accepted the similar contentions that were not acknowledged in the present case and observed that although RPM may affect price competition amongst retailers, “in situations where intra-brand price competition among retailers is likely to create an incentive to free ride in the short run and under-provisioning or complete eradication of such useful services in the long run, imposition of such vertical restraint may not only be desirable from the manufacturer-retailers’ point of view but also from the point of view of consumers.” Further, the CCI also observed that a “right of the manufacturer to choose the most efficient distribution channel ought not to be interfered with, unless the said choice leads to anti-competitive effects.

In the Jasper case, the CCI also noted that RPM may not necessarily be anti-competitive and rather may be “efficiency enhancing with sound economic justifications,” especially since the parties’ interests are “aligned to that of end consumer”. This in simple terms would mean that an increase in price due to RPM is not anti-competitive unless there is proof of the negative effect on competition in the market. However, in the present case, the CCI has significantly changed its stance by not taking the above factors into consideration.

Conclusion

The CCI’s order suffers from deficiencies as it has jumped to the conclusion after inadequate examination and without providing evidence of anti-competitive effects. The order disregards the business model in the automobile sector. There are chances that car manufacturers will now sell cars to dealers at a higher price in order to circumvent scrutiny under the Competition Act. The decision in all likelihood will be challenged before the appellate authority and it is hoped that the NCLAT takes these factors into account while deciding the case.

Yagya Sharma

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1 comment

  • This article needs a correction. The author, in para 1, has stated that there is a need to establish relevant market in the cases concerning cartel formation; however, the CCI need not ascertain the relevant market in cases concerning the violation of Section 3 of the Competition Act, 2002 (Act, 2002), rather it has to be established in the cases concerning Section 4 and Section 5 of the Act, 2002.

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