India: Discount Mechanism & Tie In Arrangement Anti‐Competitive For Hyundai

Last Updated: 6 November 2017
Article by S.S. Rana & Co. Advocates

Introduction

In a recent case between Fx Enterprise Solutions India Pvt. Ltd. (hereinafter referred to as the 'Informant') and Hyundai Motor India Limited (hereinafter referred to as the 'Opposite Party') (Case No. 36 of 2014), the Competition Commission of India declared that the conditions imposed by the Opposite Party upon its dealers penalizing them in case of giving discount beyond the recommended range and use products like oil/ lubricants from vendors other than specified companies only, amounted to Anti-Competitive practices thus violating the Competition Act, 2002.

Brief facts

The Opposite Party had been entering into dealership arrangements with its dealers, whereby:

  • The dealers were required to obtain prior consent from the Opposite Party before taking up dealerships of another brand.
  • The dealers were bound to procure spare parts, accessories and all other requirements, either directly from the Opposite Party or through vendors approved by them.
  • The Opposite Party imposed a "Discount Control Mechanism" through which dealers were only permitted to provide a maximum permissible discount and the dealers were not authorized to give discount above the recommended range.
  • The Opposite Party had 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 the Opposite Party designates sources of supply for complementary goods for dealers as well as, which result in a "tie-in" arrangements in violation of Section 3(4)(a) of the Act.

Decision

The Competition Commission of India elucidated that the practices being carried on by the Opposite Party were anti-competitive under the provisions of Section 3(4) read with 3(1) of the Competition Act, 2002 (hereinafter referred to as "Act") and ordered them to cease and desist from indulging in such conduct and also imposed a penalty at the rate of 0.3% of the average relevant turnover of the last three financial years of the Opposite Party turnover amounting to Rs. 87 Crores.

Rationale

The Competition Commission of India arrived at the aforesaid decision based on the following reasons:

  • The Commission interpreted that prior permission from the Opposite Party required under the agreement with the dealer did not impose an exclusive supply obligation in contravention of the Act.
  • The Commission observed that resale price maintenance according to Section 3(4) (e) of the Act is defined as any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it clearly stated that prices lower than those prices may be charged.
  • The Commission held that an agreement which includes monitoring of the maximum permissible discount level through a "Discount Control Mechanism" by the Opposite Party and a penalty punishment mechanism upon non-compliance of the discount scheme resulted in contravention of the provisions of Section 3(4)(e) of the Act, read with Section 3(1) of the Act. The said act of the Opposite Party was considered to result in creation of barriers for new entrants into the market and thus anti-competitive.
  • The Commission discussed Section 3(4) (a) of the Act wherein the "tie in arrangement" was defined as an agreement including any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods.
  • The Commission broadly elaborated the ingredients essential for a "tie-in-arrangement" namely:

    • Presence of two separate products or services capable of being tied.
    • The seller must have sufficient market power with respect to the tying product to appreciably restrain free competition in the market for the tied product.
    • The tying arrangement must affect a "not insubstantial" amount of commerce:
  • The Commission concluded that mandating the dealers to use particular oil/ lubricants by the Opposite Party and penalties imposed on the dealers in case a non-recommended oil is used, would amount to "tie-in arrangement" in contravention of Section 3(4) (a), read with Section 3(1) of the Act. The said act of the Opposite Party would cause hindrance in the improvement of production of goods or provision of services in relation to supply and use of lubricants in the cars particularly when as per the Commission other companies are manufacturing and marketing same grade of lubricants thereby amounting to anticompetitive practice.
  • The Commission clarified that binding to procure spare parts -CNG kits from a specific vendor did not contravene the provisions of the Act. It was formulated that the vehicle manufacturer could legitimately honor the warranties on the ground that the situation leading to the claim in question is causally linked to a failure of a specific spare part provided by an alternative supplier.
  • The Commission further analyzed that although the Opposite Party provides a list of preferred insurance companies, the customers are free to get any insurance from any company or through any other broker without any compulsion.

Conclusion

The Competition Commission of India in its pragmatic approach through this judgment has come to the protection of the honest dealers from the ambit of the big manufactures who may use arm twisting tactics to maximize their profits at their cost. With aim of "Fair Competition for a greater good", the Competition Commission strives to create just and favorable market conditions for all. It is essential for a healthy market to ensure that it is free from any anti-competitive trade practice which may take place between organizations at different levels of production (vertical agreements). Imposition of restriction on the discounts to be offered by dealers to the customers and preventing the use of products like oils/ lubricants from other than recognized vendors results in practices detrimental to the growth and development of fair market and thus should be prohibited.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
S.S. Rana & Co. Advocates
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