India: Hyundai NCLAT Decision: The Lack Of Evidence Or Not?

The National Company Law Appellate Tribunal ("NCLAT")1 set aside the order of the Competition Commission of India ("CCI") 2 which penalized Hyundai Motors India Ltd. ("Hyundai") with a fine of INR 870,000,000 i.e. 0.3% of its average relevant turnover for indulging in resale price maintenance and tie-in agreements.

The NCLAT set aside the order mainly claiming the CCI relied upon the report of the Director General ("DG Report") alone without conducting an inquiry under Section 27 of the Competition Act, 2002 ("Competition Act") based on appreciation of relevant evidence.

In this article, we analyse the CCI order in light of the NCLAT order to determine the shortcomings pointed by the NCLAT and the remedies now available to the parties.

Relevant Markets Analysis

The NCLAT observed that the CCI failed to take into consideration the factors mentioned under Section 19(6) and 19(7) of the Competition Act for the determination of the relevant geographic market and product market, respectively. The NCLAT placed reliance on the decision of the Supreme Court in Competition Commission of India v. Coordination Committee of Artistes and Technicians of West Bengal Film and Television and Ors.3 to hold that the CCI did not take into consideration the physical characteristics or end use of goods, including price of goods or service; consumer preferences as required to be taken under sub-section (7) of Section 19 for determination of 'relevant product market'. The factors such as the consumer preferences, transport costs, distribution facilities are the corner stone for determining whether a geography/area could be considered as a separate market from both consumer and the producer's point of view.

While the CCI delineated the upstream market as the market of sale of passenger cars, the downstream market was delineated as the market for dealership of Hyundai cars alone. As such it is not clear from the analysis on the relevant market by the CCI, the reasons behind not considering the substitutability of different passenger cars by the dealers.

Findings based on various Allegations

The CCI observed that the Dealership Agreement of Hyundai requires the dealers to take prior permission from it before taking up the dealership of a competing brand. However, based on the evidence placed on record by Hyundai that around 100 dealers operated dealerships of competing brands and such permission have not been sought by dealers from Hyundai as a matter of practice, the CCI held that the relevant clause in the Dealership Agreement does not result in imposition of de facto exclusivity.

The NCLAT set aside the above finding of the CCI on the ground that the CCI did not conduct any analysis of its own amounting to an independent inquiry.

It is noteworthy that the DG had concluded that Hyundai indulges into refusal to deal/ exclusive supply agreements and it appears from the CCI order that the CCI conducted an independent analysis from the evidence gathered by the DG and the oral deposition of few of the dealers to reach to the conclusion that such a stipulation is in fact not enforced by Hyundai.

With respect to Resale Price Maintenance ("RPM")4 allegations, the CCI observed that Hyundai restricts the maximum discount which a dealer can give, thereby effectively fixing the minimum resale price. Based on Hyundai's admission the CCI held that Hyundai enforces this strictly by appointing mystery shopping agencies for policing its dealers and wherever a dealer is found to be violating the discount control mechanism, a fine is imposed on them.

The NCLAT was of the view that the CCI failed to mention any evidence for concluding an admission by Hyundai. As per NCLAT, the CCI order is silent on the evidence relied upon to show that fines were imposed on dealers under the discount control mechanism.

With respect to the third allegation regarding tying in, the CCI observed that for tie- in to take place, there must be two separate products capable of being tied together and the seller must have sufficient economic power in the tying market to leverage into the market for the tied product.

The CNG kits made by the designated manufacturer were specifically designed for Hyundai approved car models. The CCI observed that these CNG kits compliment Hyundai cars better than the others. Accordingly, it was observed that the cancellation of warranty by Hyundai if some other CNG kit is used is objectively justified and would not amount to tying in.

In contrast to the above, with respect to tying in of oils and lubricants, the CCI observed that the practice followed by Hyundai to get the lubricants supplied by two specified dealers- IOCL and Shell only and that too at pre-fixed price resulting in price discrimination is not accruing any benefit to the dealers as well as the consumers/ purchasers of the cars. Further, the practice of taking royalty by these two oil companies and threatening termination of dealership in case of non-compliance by the dealers was anticompetitive.

The NCLAT was of the view that the CCI has not relied upon any evidence to prove that dealerships were terminated on account of using other lubricants. The NCLAT stated that while the CCI noted that warranties were not cancelled for using other lubricants/oil but it came to the conclusion without any evidence that there are threats to terminate dealerships.

In view of the above, the underlining finding by the NCLAT on all the aspects of the CCI's order pertain to failure of the CCI to place any reliance on evidence and conduct an inquiry.

Unanswered questions

While the NCLAT set aside the order claiming absence of an independent inquiry by the CCI, without exercising its powers to modify the CCI order as per Section 53B5 of the Competition Act, it now remains to be seen whether the Supreme Court (in case the order is appealed), would go into the determination of the relevant market and other allegations on merits or would remand the matter to the CCI.

Further, it is not understood from the decision of NCLAT as to what should be the standard of inquiry to adopted by the CCI. Under the scheme of the Competition Act, the CCI can rely upon the evidence adduced by the DG and conduct an independent analysis to reach its conclusion.

The Supreme Court order in matter of Steel Authority of India Ltd. Vs. Competition Commission of India has defined the scope of the word "inquiry" while defining the powers of the CCI under Section 33 of the Competition Act which deals the powers to grant interim relief to the parties. Though, not in the same context the definition afforded in the SAIL order would be helpful. The Supreme Court observed thus:

"...The word 'inquiry' has not been defined in the Act, however, Regulation 18(2) explains what is 'inquiry'. 'Inquiry' shall be deemed to have commenced when direction to the Director General is issued to conduct investigation in terms of Regulation 18(2)..... Then the Commission has to consider such report as well as consider the objections and submissions made by other party. Till the time final order is passed by the Commission in accordance with law, the inquiry under this Act continues. ..."

In this case, the question of merits of the allegations and the evidence adduced in support thereof has been left open by the NCLAT. Pursuant to the order of the NCLAT, it remains to be seen as to how the word "inquiry" appearing in Section 27 of the Competition Act was interpreted by the NCLAT differently than what was being done by the former COMPAT.

As per Section 53T of the Competition Act, any order of the Appellate Tribunal is appealable to the Supreme Court. Thus, in cases where an order is set aside for want of an independent analysis by the CCI, it remains to be seen whether the onus would lie on the Supreme Court to conduct an independent inquiry on the merits of the case, in the absence of such an analysis by the Appellate Tribunal. The Supreme Court may also close the matter for lack of an independent inquiry or sufficient evidence, in which case the merits of the case would remain to be unresolved. 

In such cases, it would be interesting to be seen whether the Supreme Court would like to penetrate into the specificity of the evidence considered by the CCI, while deciding whether an independent inquiry has been conducted as raised by the NCLAT.

Further, the NCLAT order is silent on the economic analysis of the vertical restraints on the market which is akin to the CCI order which remained silent on the impact of the restraints on the market, the impact on the inter-brand, intra-brand competition, the role of competitors in delineating the relevant market, demand substitutability and supply substitutability which could challenge the stringency of the alleged condition imposed by Hyundai. Thus, the case throws up grey areas to the Supreme Court not only on the question of law but also on the question on the merits of the case, which since not decided upon by the NCLAT now remains in silos. The result could be throwing open the floor of the highest court with questions of fact-finding exercise.

Footnotes

1. Hyundai Motor India Ltd. Vs. Competition Commission of India & Ors.; Competition Appeal (AT) No. 06 of 2017; Decided on: 19.09.2018

2. In Re: Fx Enterprise Solutions India Pvt. Ltd. And Hyundai Motor India Limited, Case No. 36 of 2014 With In Re: St. Antony's Cars Pvt. Ltd. And Hyundai Motor India Limited, Case No. 82 of 2014; Decided on: 14.06.2017 ("CCI Order")

3. (2017) 5 SCC 17

4. In a resale price maintenance restriction, the seller imposes a restriction on the buyer at the price at which the buyer could resell the product ahead. The restriction in this case is that the sellers can resell the product below a certain price level.

5. Per Section 53B(3) of the Competition Act, the Appellate Tribunal has the powers to confirm, modify or set aside the findings of the CCI.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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