India: Competition News Bulletin - August 2017

Last Updated: 10 August 2017
Article by Vaish Associates Advocates



CCI finds Container Trailer Owners Coordination Commission and its four participating associations guilty of anticompetitive conduct

The Competition Commission of India ("CCI") vide dated 01.08.2017 has found Container Trailer Owners Coordination Committee ('Committee') and its four participating associations, namely Cochin Container Carrier Owners Welfare Association, Vallarpadam Trailer Owners Association, Kerala Container Carrier Owners Association and Island Container Carrier Owners Association (collectively 'OPs') guilty of anti-competitive conduct and has directed the erring OPs to desist from indulging in anti-competitive conduct in the future.

Cochin Port Trust in a reference made to the CCI had primarily alleged that the imposition of a 'Turn System' by the Committee from January, 2014 till September, 2014 led to the unilateral fixation of prices. It was alleged that during the Turn System, the users and container trailers were obliged to book services only through this centrally controlled system and that the Committee was restraining outside transporters from lifting the containers which was impeding the ability of the users to hire trailers of their choice. Reliance in this regard was placed on the circular dated January 13, 2014 which was issued by OP-1 to all the members of the transporters' association. On finding a prima facie case, the CCI directed investigation by the Director General ("DG").

The DG upon investigation found that the 'Turn System' imposed by the OPs not only unilaterally fixed the prices for coastal container services, but also led to limiting and controlling of such services at the Informant port in contravention of Section 3(3)(a) and 3(3)(b) read with Section 3(1) of the Competition Act ('Act').

During the inquiry CCI noted that the OPs had not denied the existence of "Turn System" And rather it was sought to be justified on the basis that Firstly, it was not coercive or mandatory in nature. However, the CCI rejected the arguments holding that a mutually agreed upon collusive agreement is as much a contravention, if not more, as a coercive diktat imposed by a trade association.

Secondly, the OPs stated that the prevailing conditions during the period such as (i) under-quotation by certain container trailer owners. (ii) delay in payment by users of the container trailer transport services justified the imposition of the Turn System.

The CCI held that the first issue i.e. under quotation by certain container trailer owners is rather an outcome of a competitive market and that the said justification is rather antithetic to the basic principles of a competitive market. The second issue/justification given by the OPs that some of the users/consumers were delaying payments to the container trailer transporters and thus, to ensure timely payments, Turn System was adopted was also rejected being insufficient to justify the solution devised by the OPs. It was held that fixing prices under the newly introduced Turn System to ensure timely payment of transportation charges was, to say the least, an excessively restrictive remedy to meet the objective stated by the OPs.

Accordingly, the OPs were found to have indulged in price fixing in terms of Section 3(3)(a) read with Section 3(1) of the Act.

With regard to the allegation of limiting and controlling the services in contravention of Section 3(3)(b) of the Act, it was found that the total number of container trailers to which the users had access to was 900 (approx.) out of which 800 were owned by the OPs. However, the CCI noted that there was insufficient evidence to show that the remaining 100 trailers were denied an opportunity to operate in the Informant port. Further, there was no evidence to suggest that membership was denied to any of the transport operator or that the non-members were restricted to provide services to the users willing to avail the services of the independent trailers. Thus, the CCI noted that there was insufficient evidence to hold a contravention of Section 3(3)(b) read with Section 3(1) of the Act.

With regard to the imposition of penalty, the CCI was of the view that certain mitigating circumstances existed in favour of OPs in the present case namely that the Turn System, was in operation for a very limited time period, i.e. from January 2014 to September 2014 and the Turn System was discontinued even before the investigation was ordered in this case. Therefore, the CCI did not impose any penalty on the OPs and merely issued a direction to OPs to cease and desist from indulging in such anti-competitive conduct in future.

(Source: CCI decision dated August 1, 2017; for full text see CCI website)

CCI penalizes Hyundai for resale price maintenance and tie-in

The CCI vide its order dated June 14, 2017 imposed a penalty of INR 87 Crore (Rupees Eighty Seven Crores) on Hyundai Motor India Limited ('HMIL') for contravention of Section 3(4) read with Section 3(1) of the Act.

The Information before the CCI was filed by Fx Enterprise Solutions India Pvt. Ltd and St. Antony's Cars Pvt. Ltd., both dealers of HMIL in Case No. 36 of 2014 and Case No. 82 of 2014 respectively. It was inter alia alleged that the HMIL enters into exclusive dealership arrangements with its dealers and that HMIL also imposes a "Discount Control Mechanism". It was further alleged that HMIL has control over the sources of supply for the dealer's products and ties the purchase of desired cars to the sale of high-priced and unwanted cars to its dealers and that HMIL designates sources of supply for complementary goods for dealers as well which constitute a "tie-in" arrangement within the meaning of Section 3(3) of the Act. The case was referred by CCI to the DG for detailed investigation after CCI found a prima facie case for inquiry.

During the investigation, the DG identified 3 segments of automobile market, viz. : (a) the primary market consisting of manufacturing and sale of passenger cars, (b) the secondary market or aftermarket for each brand of spare parts and (c) an aftermarket for each brand of repair services and defined it as "after sales services of Hyundai brand of cars" . The DG found that HMIL was dominant with 100% market share in the aftermarket for after sales services of Hyundai brand of cars. DG then identified the following three types of anti-competitive vertical agreements. The findings of DG on each and the decision of CCI thereupon are explained below:

i) Exclusive Supply Agreement and Refusal to Deal:

DG findings - DG found that that Clause 5(iii) of the Dealership Agreement providing for permission to be obtained from HMIL before investing in new business amounted to an 'exclusive supply arrangement" in contravention of section 3(4)(b) and also as "refusal to deal' in contravention of section 3(4)(d) of the Act.

CCI decision – CCI held that the clause 5(iii) of the Dealership Agreement does not result in imposition of de facto exclusivity since HMIL does not, in practice, refuse such permission to its dealers to operate competing dealerships or other businesses. It was found that neither of the informants in both the cases ever asked for such a permission under this clause. Moreover, HMIL submitted a list of over 100 Hyundai dealerships that operate dealerships of competing brands. Hence, it was concluded that HMIL does not impose an exclusive supply obligation or refusal to deal on its dealers. It was held that Clause 5(iii) of the Agreement did not mandate exclusivity but only required the prior permission of the OP in order for dealers to operate competing dealerships and therefore it does not contravene section 3(4)(b) or section 3(4)(d) of the Act.

ii) Resale Price Maintenance [Section 3(4)(e)]

DG findings – DG found that HMIL has established and admitted "Discount Control Mechanism" by which the maximum discount which a dealer can offer to its end customers is maintained. DG found that HMIL itself maintains certain scheme through which various discounts are offered to the customers such as Diwali discounts or schemes for teachers. It was found that the maximum discount which can be offered by a dealer under the schemes launched by HMIL itself was also fixed by HMIL. Further during investigation, HMIL also admitted to have engage various mystery shopping agencies for policing its dealers and monitoring the abovementioned arrangements and where a dealer was found to be debiting from the discount control mechanism, HMIL imposes a penalty per violation of INR 2.0 lakhs upto a maximum of INR 80 Lakhs for the 6th violations. These penalties were to be deposited by the violating dealers in the name of its advertising agency (VIBGYOR). DG, therefore, found that through its discount control mechanism, HMIL maintained the resale price of Hyundai cars and these arrangements perpetuated the OP restricting intra-brand competition amongst Hyundai Dealers. This does not result in accrual of any consumer benefits and at the same time impairs the ability of dealers to compete in price competition. Therefore, DG concluded that HMIL contravene section 3(4)(e) of the Act for resale price maintenance.

CCI decision – CCI agreeing with the findings to the DG held that such arrangements resulted in denial of due benefits to the consumers as they were made to pay high prices. Further, they were not resulting into any improvements in production or distribution of goods or provision of services. The arrangements perpetuated by HMIL resulted in creation of barriers to new entrants in the market and restricted the ability of the dealers toengage in intra-brand price competition. Accordingly, the CCI held that HMIL has imposed an arrangement that results in Resale Price Maintenance, which includes monitoring of the maximum permissible discount level through a "Discount Control Mechanism" and a penalty punishment mechanism upon non-compliance of the discount scheme. It was accordingly held that HMIL contravened the provisions of section 3(4)(e) read with section 3(1) of the Act.

iii) Tie-in arrangement [Section 3(4)(a)]

DG findings – DG found that HMIL tied the sale of its cars to its dealers with the purchase of (a) CNG kits, (b) Lubricants and Oils, and (c) Car Insurance which result in "Tie-in" arrangement in violation of section 3(4) (a) read with section 3(1) of the Act.

Regarding (a)-DG concluded that dealers of HMIL and its customers are coerced in to purchasing CNG kits from its nominated CEV Engineering Pvt Ltd. ("CEV"). Dealers found selling Hyundai cars which are not fitted with CEV provided CNG kits were penalized and customers not obtaining a CNG kit from CEV were not provided with a warranty. Such an arrangement falls within the definition of "tie-in" arrangement and violated section 3(4) (a) of the Act.

Regarding (b)- DG found that HMIL has designated vendors for engines of its vehicles and mandates its dealers to purchase engine oil only from 2 designated vendors i.e. Indian Oil Corporation Limited (IOCL) and Shell Oil Company (Shell) and it recommended engine oil; of certain specification to be only used for its cars as "Hyundai genuine oil". DG found that this practice followed by HMIL to get lubricants supplied by IOCL and Shell only and that too at a pre fixed price resulted in price discrimination which did not accrue any benefit to the dealers as well as to the customers and that this practice was causing hindrance in the improvement of production or distribution of goods and provision of services in relation to supply and use of lubricants in the cars particularly, when other oil companies are also manufacturing and marketing same grade of lubricants. Such an arrangement falls within the definition of "tie-in" arrangement and violated section 3(4)(a) of the Act.

Regarding (c)- DG found that HMIL has entered into memorandum of understanding with an insurance broker, ABIBL, which in turn has an agreement with 6 insurance companies namely ICICI Lombard, HDFC Ergo, New India, Future Generali, Bharti Axa and Bajaj Allianz for selling insurance policies and restricted its dealers by issuing bulletins and circulars to offer insurance services of only these 6 selected companies to its customers. DG found that this resulted in the dealers and the end consumers getting "locked in" with the OP for fear of termination of agency. Such an arrangement falls within the definition of "tie-in" arrangement and violated section 3(4)(a) of the Act.

DG however, did not find any contravention of tie-in with respect to the allegation of selling non-premium segment cars with premium segment cars.

CCI decision - Regarding (a)- CCI did not agree with the DG findings and held that HMIL may have a legitimate interest in ensuring that alternative brands of CNG kits are not used as the OP would be bearing the cost of warranty. Accordingly, it was held that cancellation of warranty upon use of non- CEV CNG kits does not as a general rule amounted to contravention of section 3(4) (a) read with section 3(1) of the Act.

Regarding (b) - CCI agreed with the finding of the DG and held that the practice followed by the OP resulted in to creation of entry barriers for new entrants in the market with regard to the supply and marketing of lubricants for use in the cars manufactured by HMIL. Such arrangement are also against consumer welfare as the consumer are made to comparably a higher prices and are also denied freedom to make fair choices. Accordingly, it was held that this practice of HMIL mandating its dealers to use a particular brands of oil / lubricants and penalizing the dealers where non-recommended oils are used amounted to "tie-in" arrangement in contravention of section 3(4)(a) read with section 3(1) of the Act.

Regarding (c) –CCI did not agree with the DG findings as it noted that there was no clause in the dealership agreement that dictated that the informant could take up dealership only on the condition of that the deal with only the list of empaneled insurance companies. Further, there was no record to show that any dealership has been cancelled only because the dealer failed to get the customers to take up insurance of the listed companies only. According to CCI, mere recommendation that dealers consider / suggest the insurance companies partnered with OP does not amount to tie-in arrangement and held that this practice did not amount to contravention of section 3(4) (a) read with section 3(1) of the Act.

Further, with to the allegation of selling non-premium segment cars with premium segment cars, CCI agreed with DG findings.

The CCI while imposing penalty followed the decision of the Hon'ble Supreme Court in the Excel Corp case and therefore penalty was imposed on the "relevant turnover". Accordingly, a penalty of 0.3% of the "Relevant Turnover" was imposed on HMIL amounting to INR 87 Crores.

(Source: CCI decision dated June 14, 2017; for full text see CCI website)

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