Simultaneous application of Section 3 and 4 of Competition Act, 2002 may not be as straight-forward as it appears.
Giving a ray of hope to car owners and independent car repair shops in the country, the Competition Commission of India (CCI) recently penalised 14 car manufacturers for entering into anti-competitive agreements and abusing their dominant position in their respective car aftermarkets.1
The CCI has rightfully garnered plaudits for taking on the practices carried on by the automobile manufacturers (who may understandably be full of scorn).
Essentially, the CCI found that car manufacturers enjoy a dominant position in the markets for spare parts and after-sales service of their respective brand of cars [Para. 20.5.70]. Consequently, among others, the restriction on original equipment suppliers against sale of spare parts and diagnostic tools and manuals to independent service providers constituted abuse of dominant position [Paras.20.5.83 and 20.5.84]. Further, it was held that the vertical agreements between manufacturers and their respective authorised dealers not to sell the parts over the counter had appreciable adverse effect on competition[in violation of Sections 3(4)(c) and 3(4)(d) of the Act][Paras 20.6.24 read with 20.6.29].
This article is not intended to be a summary of the Order. It only presents a few observations on the findings of CCI in its Order.
- CCI held that the agreement(s) between the car manufacturers and their overseas group suppliers is not covered under Section 3(4) of the Act since the overseas suppliers are part of the single economic entity. The principle flows from the decision of the CCI in Exclusive Motors Pvt. Ltd. vs Automobili Lamborghini SPA.2 The decision was upheld by the Competition Appellate Tribunal (CompAT).3
- The CCI then held that, among others, the agreement between car manufacturers and their authorised service providers is an anti-competitive vertical agreement. As observed in the Exclusive Motors decision, a vertical agreement can exist only between entities not part of the same group or economic entity. Hence, the finding has to be based on the premise that the manufacturers and their auth. service providers are separate entities.
The disposition of the CCI is completely understandable up to this point. Simply put, the CCI has held that the vertical agreement between related entities is exempt from scrutiny under Section 3(4) of the Act. Since, the agreements between the manufacturers and authorised dealers/service centers have been held violative of Section 3(4) of the Act, it should necessarily follow that the CCI consider them as separate entities.
However, the finding of abuse of dominant position raises more questions than answers, especially with regard to finding of violation of Section 4(2)(c) of the Act (denial of market access).
The CCI holds that the car manufacturers, by restricting the sale of spare parts and diagnostic manuals in the open market has denied market access to the independent service providers (ISPs) in violation of Section 4(2)(c) of the Act.[Para 20.5.83]
To understand the technicalities here, it would be pertinent to note the view of the CompAT in Fastway Transmission Pvt. Ltd. & Ors. vs Kansan News Pvt. Ltd. & Anr.4 where it was held that denial of market access under Section 4(2)(c) can only be against a competitor.5
The CCI's Order against car manufacturers(referred to as "OEMs" in the Order) begs the following question- How are car manufacturers and independent service providers be categorised as competitors in the present context? Per se, the car manufacturers make the cars and the ISPs service them. Clearly they aren't.
A statement of CCI merits mention in the present context:
"The independent repairers, who are not part of the official dealer network of the OEMs, do operate in the market for as purchasers of spare parts of the automobiles manufactured by the OEMs. Therefore, the independent service providers are customers of the OEMs in the aftermarket and further compete with the OEMs in the repairs and maintenance service aftermarket."[Para. 20.5.82]
While acknowledging that the independent service providers are customers of the OEMs, the CCI also states that the same ISPs also compete with the OEMs in the repairs and maintenance service aftermarket.
The CCI has already held that the auth. service providers are separate entities as discussed in the initial paras of this article. Here's our question then- Given such a finding- How does the CCI consider the manufacturers compete with ISPs in the aftermarket if the manufacturer and auth. service provider are separate entities?
The diagram on the right tries to further simplify the quandary:
As can be seen from the diagram, the ISPs cannot be considered competitors of manufacturers simply because they operate at a lower level (downstream) of the vertical chain. To consider the ISPs a competitor of the manufacturers, the manufacturers and the auth. service providers have to be considered a part of the same group/entity, which would consequently entail exemption from Section 3(4) of the Act.
Further, it may be argued that the car manufacturers and auth. service providers form part of a single economic entity, and hence the car manufacturers are competing with ISPs through their "control"6 over authorised dealers providing spare parts and maintenance services.7 However, the argument has already been discounted since the agreement between car manufacturers and authorised dealers/service providers has been held violative of Section 3(4) of the Act- thus implying that car manufacturers and auth. service providers cannot form a single economic entity.
As the Talking Competition team understands, Section 3(4) and Section 4(2)(c) of the Act should not be applied simultaneously in the present case. Arguments exists- validly so- for applying either of these, but not both
 CCI Case 03/2011 Shri Shamsher Kataria vs Honda Seil Cars India Ltd & Ors.
 CCI Case 52/2012
 CompAT Appeal No. 1/2013
 CompAT Appeal No. 116/2012
 Id, at Para. 21
 "Control" is the ability to exercise decisive influence over the management or affairs and strategic commercial decisions'. Such strategic commercial decisions have included annual business plans, budgets, recruitment and remuneration of senior management, and opening of new lines of businesses., CCI Case No. C-2012/09/78 Century Tokyo Leasing Corporation/Tata Capital Financial Services, Para. 3.
 See, for instance, Kessler, Friedrich, "Automobile Dealer Franchises: Vertical Integration by Contract" (1957). Faculty Scholarship Series. Paper 2727. Available at: (http://digitalcommons.law.yale.edu/fss_papers/2727)
This article was originally published on Talking Competition.
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