India: Resale Price Maintenance : Has CCI Upped The Ante?

Last Updated: 27 November 2017
Article by Anshuman Sakle

Price fixing arrangements strike at the very heart of antitrust violations since they go against the accepted norm of price being determined by market forces. Such arrangements raise concerns in both horizontal and vertical markets. Under the scheme of the Competition Act, 2002 (Act), while horizontal pricing agreements (between competitors) are presumed to cause an appreciable adverse effect on competition (AAEC), there is no such presumption in the case of vertical agreements (between entities operating at different levels of the value chain), where the "rule of reason" approach is applied.

Interestingly, the treatment of vertical agreements and in particular resale price maintenance (RPM)1, has been long debated in many jurisdictions. Initially, antitrust authorities in mature jurisdictions were in agreement that RPM, in principle, was a per se violation and as such, not subject to any justification. However, acknowledging the need for relaxation, the US Supreme Court and the European Commission refrained from adopting a strict per se presumptive approach in cases of RPM to apply the "rule of reason" standard. On the other hand, national competition authorities in the European Union continue to take a hostile approach towards RPM without considering any pro-competitive effects that may arise. Moreover, in the Indian context, while the CCI had reiterated the statutory construct in dealing with RPM, by stating that AAEC needs to be determined on basis of the factors provided under Section 19(3) of the Act, until recently the treatment of RPM (including its scope and standard of proof) lacked clarity.

On 14 June 2017, the CCI imposed a penalty on Hyundai Motor India Limited (HMIL), engaged in the sale and distribution of Hyundai cars and its parts in India, for engaging in the practices of RPM2 and tying.3 Against the above backdrop, a discussion of this decision is not only interesting but also pertinent.

The CCI combined information filed against HMIL by authorised HMIL dealers, Fx Enterprise Solutions India Private Limited and St. Anthony's Cars Private Limited ("Informants"), alleging a contravention of Section 3 of the Act on the grounds that (i) HMIL had restricted the Informants from acting as dealers of competing brands by requiring prior consent of HMIL for investing in any new or existing business; (ii) HMIL had fixed the maximum retail price (MRP) of the cars (which included the pre-fixed margin of the dealers) and the maximum discount which could be offered by the dealers through its Discount Control Mechanism (DCM); and (iii) HMIL designated certain companies as the preferred suppliers of their complementary goods. The CCI found a prima facie case against HMIL and directed the Director General (DG) to specifically investigate the alleged contravention of Section 3 of the Act. On investigation, the DG concluded that HMIL had not only contravened the provisions of Section 3(4) but also Section 4 (relating to abuse of a dominant position) of the Act.

On merits the CCI's findings were as follows:

  1. Exclusive Supply Agreement and Refusal to Deal: The CCI observed that the requirement to get prior consent from HMIL for dealing with competing brands was not a prohibition. This was bolstered by the fact that over one hundred Hyundai dealers already operated other dealerships, without any objection from HMIL. Hence, the requirement did not amount to an exclusive supply agreement under Section 3(4)(b) and/or refusal to deal under Section 3(4)(d) of the Act.
  2. RPM: The CCI held that by designating the MRP and the maximum permissible discount which could be given by the dealers, HMIL had effectively set a minimum resale price, thereby engaging in RPM. The DCM was monitored by HMIL through its "mystery shopping agency", and the dealers were subjected to penalty for non-compliance with it. The CCI held that, such arrangement of setting minimum resale price and monitoring the same through a penalty mechanism, prevents the dealers from decreasing the sale prices, thereby stifling intra-brand competition. Further, higher prices resulting from RPM can decrease the pricing pressure on other competitors, marking a reduction in inter-brand competition as well.
  3. Tying:
    • CNG kits: The CCI held that cancellation of warranty for use of non-designated CNG kits may be objectively justified and did not amount to a contravention. Further, the CCI observed that HMIL may have a legitimate interest in ensuring that alternative brands of CNG kits are not used since ultimately HMIL would have to bear the costs of warranty.
    • Lubricants and Oil: HMIL mandated its dealers to purchase engine oil from its two designated vendors only, at the price indicated by HMIL. In case of non-compliance by the dealers, HMIL threatened to terminate the dealership agreement. The CCI noted that this resulted in price discrimination, without accruing any benefit to the dealers or the consumers, thereby contravening Section 3(4)(a) of the Act.
    • Car Insurance Services: The CCI noted that it was a business norm to have a tie-up with insurance companies and, hence, merely recommending that the dealers suggest designated insurance companies to consumers does not amount to a tie-in arrangement, since it is not mandatory for consumers to purchase the same.

On the procedural front, the CCI was of the view that the DG's investigation into contravention of Section 4 of the Act by HMIL went beyond the scope of investigation directed by the CCI and therefore deserved to be disregarded in entirety.

In terms of penalty, CCI, after considering mitigating factors such as proportionality, absence of supra-normal profits and voluntary introduction of a competition law compliance programme, imposed a penalty of INR 87 crore (approx. USD 13.54 million), i.e., 0.3 per cent. of the average turnover of HMIL in the past three years which accrued from the sale of motor vehicles.

Interestingly, the CCI has adopted a business friendly view and steered away from the approach in the Autoparts4 case by making a clear distinction between prudent/standard business practices and anti-competitive conduct. This is demonstrated through the CCI's approval of consumers' disentitlement to warranties for not using the manufacturer's designated products, thereby aiming to intervene only when necessary. Further, by adopting an "effects based approach", the CCI has affirmed the evolving undertone that exclusivity is not anti-competitive per se5 and may often be a fundamental part of doing business. Nonetheless, from an antitrust compliance perspective, this decision compels industry to review their vertical arrangements (with dealers/distributors/retailers) and re-visit seemingly routine business practices.

Being the first case to examine the issue of RPM in detail, the decision provides valuable insight in as much as it classifies the practice of setting a limit on maximum discount as RPM and demonstrates that any assessment in this regard should necessarily consider intra and inter brand competition as well as the factors stipulated under Section 19(3) of the Act. This decision evidences that the CCI does not deem it necessary to treat RPM cases in a different light, and similar to other vertical arrangements, will be tested on the touchstone of "rule of reason"- much like the approach adopted in mature antitrust jurisdictions. This is also the first instance where the CCI pursuant to the judgement in the Excel Crop case6 applied the principle of "relevant turnover" in the imposition of penalty. All in all, while this decision marks the CCI's first step towards providing clarity regarding RPM, it will be interesting to see the decision's impact on industry and the subsequent development of jurisprudence in this area, particularly with the introduction of the NCLAT7 as the appellate body.

* This piece was co-authored by Aishwarya Gopalakrishnan, Senior Associate. The authors were assisted by Twinkle Chawla, Associate.

Footnotes

1. RPM includes agreements and/or concerted practices, which have as their direct or indirect object the establishment of a fixed or minimum resale price or a fixed or minimum price level by the manufacturer which is to be observed by the buyer. Apart from explicit pricing arrangements, even sophisticated mechanisms such as fixed distribution margins, fixed levels of discounts, grant of rebates or reimbursement of promotional costs subject to the observance of a given price level, come within the purview of RPM.

2. Explanation (e) to Section 3(4) of the Act defines resale price maintenance to include "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 is clearly stated that prices lower than those prices may be charged."

3. In re: Fx Enterprise Solutions India Pvt. Ltd. vs. Hyundai Motor India Limited (Case No. 36/2014) and St. Antony's Cars Pvt. Ltd. vs. Hyundai Motor India Limited (Case No. 82/2014).

4. Shamsher Kataria vs. Honda Siel Limited & Ors., Case No. 03 of 2011.

5. Dr. L.H. Hiranandani Hospital vs. Competition Commission of India & Another, Appeal No. 19 of 2014.

6. Excel Crop Care Limited vs. Competition Commission of India & Another, Civil Appeal No. 2480 of 2014.

7. National Competition Law Appellate Tribunal has replaced the Competition Appellate Tribunal.

This piece was first published in the August 2017 issue of The Practical Lawyer [(2017) PL (Comp. L) August 80]

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions