India: The Competition News Bulletin - December 2016

Last Updated: 16 December 2016
Article by Vaish Associates Advocates

I. CARTELS AND ANTI-COMPETITIVE AGREEMENTS

INDIA

Competition Appellate Tribunal (COMPAT) quashes CCI order and directs fresh investigation into alleged anti-competitive practices of International Air Transport Association (IATA)

COMPAT, by its order dated November 15, 2016, has set-aside the order of Competition Commission of India (CCI) which dismissed allegations of cartelization and abuse of dominance against International Air Transport Association (IATA) and its Indian subsidiary.

In the Information filed by Air Cargo Agents Association of India (ACAAI), it was alleged that air lines who are members of IATA have entered into anti-competitive agreements through IATA whereby IATA has issued directives through its resolutions to determine a uniform rate of commission payable by all IATA airlines to all cargo agents for the freight forwarding services rendered by them for the airlines. ACAAI had also alleged that IATA was abusing its dominant position by regulating the air cargo industry in India through its resolutions. It was alleged that, through the IATA resolutions, all member airlines had entered into agreements to restrict competition in the cargo transport industry by imposing unfair conditions for registration and accreditation of air cargo agents as IATA agents as well fixing the rate of commission payable to air cargo agents by the member airlines. Further, it was alleged that the Cargo Accounts Settlement System (CASS)-which provides for electronic settlement of accounts of airlines and freight forwarders- had various unfair conditions biased against the cargo agents and the joining CASS was mandatory for car agents but voluntary for airlines.

The CCI ordered investigation into the allegations for finding any violation of the "provisions" of the Competition Act, 2002(the Act). In the investigation report, the Director General (DG) found that the IATA resolutions as well as the CASS system were not in violation of Section 3 of the Act. However, the DG did not investigate the violation of Section 4 of the Act and did not return any findings thereto. ACAAI, in its objections raised before CCI, pleaded, among others, that the investigation should also have been conducted for violation of Section 4 of the Act for alleged abuse of dominance. However, the CCI ignored the plea and agreed with the DG and closed the case forthwith under Section 26(6) of the Act.

ACAAI challenged the same in COMPAT on this ground, among others. The COMPAT, agreeing with the contention of ACAAI, held that ". . . if the Commission does not specifically reject an allegation constituting violation of a particular provision of the Act and issues omnibus direction for investigation into the allegation of violation of the provisions of the Act, as has been done in the present case, then the DG is duty bound to record findings on each of the allegations made in the information or reference. In other words, in the absence of express negation by the Commission of any particular allegation made in the information / reference, the DG is under a statutory obligation to conduct investigation into all the allegations contained in the information or reference and record findings on each allegation."

The COMPAT held that the DG had failed to discharge his statutory duty under Regulation 20(4) of the CCI (General) Regulations read with Section 26(3) of the Act and failed to record finding on the allegation of abuse of dominant position by IATA and consequential violation of Section 4. At the hearing held by the CCI, this point was specifically argued by ACAAI but the CCI completely ignored the same and simply approved the negative finding record by the DG on the issue of violation of Section 3(3) of the Act.

The COMPAT noted that "The Commission too committed serious error by omitting to consider the specific plea taken by the appellant in the objections, which was also pressed during the course of oral hearing, that the DG had failed to make investigation into the allegation of abuse of dominant position and violation of Section 4 of the Act by Respondent Nos. 2 and 3."

Consequently, the CCI order has been set-aside and the DG has been directed to conduct fresh investigation into the allegations levelled by the ACAAI against the respondents and submit a report to the CCI within 60 days.

(Source: COMPAT Order dated November 15, 2016. For full text see COMPAT website)

COMMENT: The order is important for development in jurisprudence in competition law. The COMPAT has laid down that CCI is required under law to finally decide on every allegations raised in a complaint even though it may have referred only some of these allegation(s) for investigation at prima facie stage.

COMPAT sets aside penalty against GSK Pharmaceuticals Ltd. (GSK) and Sanofi Ltd. (Sanofi) for alleged bid-rigging in procurement of meningitis vaccine for Haj and Umrah pilgrims by Ministry of Health and Family Welfare

COMPAT by its order dated November 8, 2016, has set aside the penalty imposed by CCI on GSK and Sanofi for being guilty of acting in contravention of Section 3 (3) (d) read with Section 3(1) of the Act and imposed penalty at the rate of 3% of their turnover of last three financial years.

In the Information filed by Bio-med Pvt Ltd., an indigenous manufacturer of the QMMV vaccine, it was alleged that the Union of India had abused its dominant position by incorporating restrictive and exclusionary conditions like minimum annual turnover of INR 10 Crores initially, then INR 20 Crores and later INR 50 Crores in subsequent tenders, and a certificate in support of manufacturing and marketing for the last three years. Being an indigenous manufacturers, the Informant was supplying the vaccines to the Union of India at a price much lower than GSK/Sanofi. However, the introduction of these new conditions restricted the participation of the Informant even though it was fully licensed under the provisions of the Drugs and Cosmetics Act, 1940.

Further, the Informant alleged that GSK and Sanofi have adopted deliberate plan where only one of the companies plans to participate in a tender process. While from 2003 to 2008, only GSK participated in the tender or the tender offer by Sanofi was higher than GSK; the roles were reversed from 2008 onwards. In formant alleged the same as amounting to violation of Section 3(3) (d) of the Act.

The CCI ordered investigation against GSK and Sanofi for alleged bid rigging, while rejecting allegations of abuse of dominance. The DG Report noted that both Sanofi and GSK had failed to explain why they quoted half quantities in the tender of 2011 and why the prices quoted were higher than the approved prices of the last tender. The DG found that the documents produced by GSK and Sanofi did not show any constraint relating to supply of vaccines. Considering their regular global supplies, it was not explained with evidences as to how they were unable to supply full quantity in the tender of 2011. According to the DG, non-participation of GSK in tenders of 2012 and 2013 further established the collusion. Thus, the DG Report recommended that the conduct of GSK and Sanofi, sharing the tender quantity and having quoted very high price in the bids given for the year 2011, was in contravention of Section 3(3)(d) read with Section 3(1) of the Act.

The CCI approved the finding recorded by the DG that the GSK and Sanofi have acted in contravention of Section 3(3)(d) read with Section 3(1) of the Act and imposed penalty of INR 604,890,469.998 on GSK and INR 30,434,200.89 on Sanofi respectively.

Both GSK and Sanofi challenged the order of the CCI imposing penalty before COMPAT. It was contended that GSK did not participate in the tender of August 2011 because the time gap between the opening of tender and supply of the vaccine was very short and it was impossible to import the vaccine from Belgium and then undertake the exercise of putting stickers, testing and packaging. Sanofi argued that GSK did not participate in the first and the second re-tender, the question of collusive bidding or bid rigging is altogether ruled out, more so because no evidence was produced to show that non-participation of GSK in the first and second re-tender was a part of the arrangement made between the Sanofi and GSK

The COMPAT noted that in response to tender notice dated June 25, 2011, GSK had given bid for 1,00,000 doses @ INR 3000.90 per 10 doses vial and Sanofi had given bid for supply of 90,000 doses @ INR 2899/- per 10 doses vial. Both the GSK and Sanofi had given cogent explanation and produced voluminous records to show as to why they had given bids for limited quantity. Sanofi had explained that it did not give bid for the entire quantity because in the previous years, it remained unsuccessful and had to destroy the vaccine by incurring huge losses. GSK had explained that it was not plausible to import vaccine from Belgium, get the same tested at Kasauli, put stickers and do packaging in a short period of 11-12 days in response to the first re-tender and 2-3 days in response to the second re-tender. Notwithstanding this, the DG observed that the appellants had quoted identical quantity at the same price. Further, the bid price of Sanofi was not higher by 39.44% as compared to the last purchase as stated by the DG, but was only higher by 16.14% higher than the previous purchase price and that too was as a result of general increase in the price.

Consequently, the COMPAT held that the finding recorded by the CCI that the GSK and Sanofi are guilty of collusive conduct and violated Section 3(3) (d) read with Section 3(1) of the Act was legally unsustainable and the impugned order is liable to be set-aside in toto.

(Source: COMPAT Order dated November 08, 2016. For full text see COMPAT website)

II. ABUSE OF DOMINANT POSITION /MARKET POWER

INDIA

COMPAT orders investigation against producers of Hollywood movies

COMPAT by its order dated November 9, 2016 has ordered investigation against 6 producers of Hollywood films for the allegedly forcing a technology, called D-Cinema technology, for providing cinema screening under the auspices of Digital Cinema Initiatives, LLC, a joint venture between the 6 movie producers.

In an information filed by K Sera Sera Digital Cinema Pvt. Ltd. (Informant), it was alleged that the exhibitors who want to use non D-Cinema technology for screening of Hollywood films are not given the Hollywood films for release thereby getting them excluded from the line of business. The Informant itself propagates the technology of E-cinema for cinema screening. Informant alleged that by this conduct the respondents are excluding any other method of exhibition of Hollywood films and, therefore, have resorted to anti-competitive conduct.

Respondents have defended their act by stating that their technology is superior in nature, it provides piracy proof exhibition and the adoption of technology is entirely voluntary. They further state that in order to protect their intellectual property they release their films only to those who adopt this particular technology.

The CCI had initially dismissed the allegations. However, the COMPAT by its earlier order dated 08 December 2015 had remanded the matter back to the CCI for reconsideration stressing on the need to analyse as to at what point forcing standards can lead to pushing out competition. The COMPAT was of the opinion that as long as there is pluralism in the standards, all coexist and market demands determine their survival. By the COMPAT's earlier order, it was opined that such forcing of particular standards was by itself a good enough reason for the CCI to have directed an investigation into the matter.

However, upon reconsideration, the CCI again dismissed the matter holding that the technology propagated by Respondents was superior to the Informant's D-Cinema technology.

During the second appeal, the COMPAT noted that the CCI had done nothing by "way of value addition" in the CCI's second order. The CCI itself recognised that there would be foreclosure of competition if technology choices are severely constrained. The COMPAT also noted that in CCI's order the issue of cartel has been addressed to some extent, there is no prima facie examination of the question of dominance as alleged in the information. COMPAT disagreed with the respondents' claim that their technology is voluntary, when they themselves create potential entry barriers by releasing their films only to those who opt for digital technology.

COMPAT concluded that it would have saved time and efforts of all those involved in this matter if the CCI had ordered an investigation into the matter. Accordingly, the impugned order was set aside and the DG was directedby COMPAT to conduct investigation into the allegations contained in the Information filed by the Appellant.

(Source: COMPAT Order dated November 9, 2016. For full text see COMPAT website)

COMPAT orders investigation against Gas Authority of India Limited (GAIL) for abuse of dominance

COMPAT by order dated November 28, 2016 has set aside the order of CCI refusing investigation against GAIL for allegedly incorporating unfair terms and conditions in its gas supply agreements with power producers.

The Information was filed by Gujarat Industries Power Company Limited (GIPCL) which is engaged in the business of power generation and is operating on 310 MW power plant in Vadodara. GAIL is engaged in the distribution and marketing of gas in India and also other activities relating to gas including exploration, production, transmission, extraction, processing of natural gas and its related process, products and services. For running its plants, the GIPCL requires a continuous supply of gas of 1065 MMSCMD. It executed Gas Sales Agreement (GSA) with GAIL on February 12, 2004. Duration of that agreement was five years with a provision for extension at the instance of either party. After the termination of the GSA, the parties executed a fresh GSA on December 26, 2008 whereby GAIL agreed to supply RLNG to the GIPCL for 20 years subject to the terms and conditions contained in various Articles of the GSA. Article 14 of GSA dated December 26, 2008 contained "Take or Pay" Clause which provided for certain quantity of gas which shall be taken and paid for or paid for if not taken by GIPCL.

After seven years of the execution of GSA dated December 26, 2008, GAIL sent letter dated February 27, 2015 to GIPCL requiring it to pay INR 49.81 Crores towards 'Annual Take or Pay Deficiency'. The GIPCL replied requesting GAIL to waive the take or pay penalty imposed on GIPCL. When GIPCL did not comply with the demand of GAIL, the GAIL sent communication dated 22.06.2015 to the Branch Manager, ICICI Bank Ltd., Baroda seeking to invoke the Letter of Credit submitted by the GIPCL.

While adjudicating the matter, the CCI considered that the relevant product market would be the market of 'supply and distribution of natural gas (RLNG) to industrial consumers in Vadodara'. It further held that GAIL prima facie was in a dominant position in the relevant market. However, the CCI was of the opinion that the conduct of GAIL did not amount to abuse of dominance as safeguarding commercial interest or invoking contractual clauses which were not unfair per se cannot be termed as unfair just because they are invoked by one of the parties to the contract.

The COMPAT noted that instead of examining the allegations contained in the information and the documents filed by GIPCL from the point of view of forming an opinion about existence or otherwise of a prima facie case, the CCI assumed the role of an investigator and an adjudicator and unequivocally pronounced that the decision taken by GAIL to invoke 'Take or Pay' clause contained in GSA dated December 26, 2008 cannot be termed as arbitrary or abuse of dominant position as envisaged in Section 4(2) of the Act. The COMPAT held that within the scheme of the Act, the exercise required to be undertaken by the CCI for forming an opinion whether or not there exists a prima facie case which requires investigation, the CCI is required to take cognizance of the averments contained in the reference or an information and the documents supplied with the reference or information.

The COMPAT concluded that the exercise undertaken by the CCI to determine the issues like relevant market, dominant position enjoyed by GAIL in the relevant market and its conclusion that GAIL cannot be held to have abused its dominant position was clearly beyond the scope of the power required to be exercised under Section 26(1) of the Act. Consequently, the CCI order has been set aside and the Director General has been directed to conduct an investigation into the allegations contained in the information filed by the GIPCL.

(Source: COMPAT Order dated November 28, 2016. For full text see COMPAT website)

Comment: This is the second order by COMPAT laying down the limits of scrutiny by CCI while forming an opinion of existence of a prima facie case or otherwise under Section 26(1) of the Act . The first Order was dated 26.11.2015 in the appeal no. 51 of 2014.

CCI dismisses allegation of abuse of dominance against HP

CCI, by its order dated November 10, 2016, has dismissed allegation of abuse of dominance against HP for defective products and spurious spare parts.

In the Information filed by an individual, Dr. S.K. Mittal, who was essentially aggrieved by the alleged conduct of HP in selling a defective, spurious and sub-standard laptop to him and not providing the desired after-sale repair services for the said defective laptop.

The CCI observed that the dispute in question appears to be a purely consumer issue for which the Informant may approach the appropriate forum. It was observed that the allegations of the Informant relate to sale of a defective laptop and deficiency in the provision of after-sale repair services for the said laptop and there is no competition issue involved in the matter.

Nonetheless, the CCI considered that in the relevant market for "laptops including its spares and after-sale services in India.", even though OP is a major player besides many other leading players such DP, Lenovo, Apple, Sony, Acer, etc. are operating and exert competitive pressure on HP. HP does not enjoy a position of strength required to operate independently of market forces. Therefore, the CCI is of the view that HP does not hold a dominant position in the relevant market. In the absence of dominance of HP, the question of abuse of dominant position by it under Section 4 of the Act does not arise at all. The matter has accordingly been closed under Section 26(2) of the Act.

(Source: Order dated November 10, 2016. For full text see CCI website-www.cci.gov.in)

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© 2016, Vaish Associates Advocates,
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