India: Parallel Pricing By Itself Cannot Be Construed As Collusive Bidding: Supreme Court

Introduction

The Supreme Court, in a recent judgment in Rajasthan Cylinders Containers Ltd. vs. Union of India & Ors. on October 01, 2018, set aside the order passed by Competition Appellate Tribunal (COMPAT) wherein the Appellants/Suppliers of Liquefied Petroleum Gas (LPG) Cylinders were penalized for indulging in cartelization, thereby influencing and rigging prices in violation of Section 3(3)(d) of the Competition Act, 2002 (the Act). The Appellants are manufacturers of 14.2 kg LPG cylinders, which are required by only three oil companies in India i.e. Indian Oil Corporation Ltd. (IOCL) being the leading market player with 48% market share along with Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL). The suo-moto proceedings in the matter were started by the Competition Commission of India (CCI) after receiving complaints about unfair conditions in a tender floated by IOCL for supply of 10.5 lakh 14.2 kg LPG cylinders. The CCI instructed investigation by the Director General (D.G.) and subsequently CCI and COMPAT both held the suppliers guilty of collusive bidding. While allowing the appeal of the suppliers, the Apex Court observed that the market type and conditions are important factors which need to taken into consideration while analyzing anti-competitive practices and price parallelism, and strong evidence cannot, by itself, be identified as concerted practice.

Grounds taken against the suppliers in the impugned order by CCI

  • Identical Rates

The D.G. observed that the contract was awarded to a set of bidders with identical rates and that there was a common pattern of quotation depending upon the state, with highest rates in North East.

  • LPG Cylinders Manufacturers Association

It was also found that LPG Cylinder manufacturers had formed an association in the name of LPG Cylinders Manufacturers Association and the members interacted through this Association. The date for submitting the bids in the tender floated by IOCL was March 03, 2010 and in the two days prior - on March 01, 2010 and March 02, 2010 - meetings were held at Hotel Sahara Star in Mumbai for members of this association and 19 parties took part and discussed the tender.

  • Entry Barrier

The D.G. also stated that this behavior created an entry barrier and there were no accrual benefits to consumers. The D.G. concluded that there existed cartel like behavior on part of the bidders.

  • Other Factors taken into consideration

After considering these observations and submissions of the suppliers, CCI answered the issue against the Cylinder Manufacturers and inflicted penalties on the present appellants while taking into account various factors such as few new entrants, identical products, few or no substitutes, appointing of common agents, identical bids despite varying cost, active trade association, etc which collectively suggested collusive bidding.

Based on these admitted grounds, COMPAT also upheld the order of CCI and observed that as per Section 3 of the Act once agreement is proved there is a presumption about its appreciable adverse effect on competition and the onus shifts on the other side to prove otherwise.

Propositions of the appellants before the apex court

  • Inherent Nature of the market of Cylinder Manufacturers

The Act prohibits anti-competitive practices which implies that there has to be a competition in the market in the first place. However, in the present case there is no such competition. The market is an oligopsony market with extremely limited number of buyers and in the present case a sole buyer i.e. IOCL controls 48% of the market. IOCL thus, has tight control and regulation over the market, leaving hardly any scope of competition at the threshold. The counsel for the Appellants also placed reliance on a recent judgment of this Apex Court in Excel Crop Care Limited vs. Competition Commission of India and Anr. [(2017) 8 SCC 47] to state that price parallelism is inevitable in an oligopoly/ oligopsony market where the limited number of sellers/buyers have high degree of control on price, quantity and even identities of awardees at its discretion. Thus, the very nature of the industry cannot be used as a factor to presume collusion.

  • No collusive agreement

The Appellants also contended that the factum of meetings of an association before submitting of bids by itself cannot lead to conclusion of collusion and stated that the said approach is contrary to the fundamental right to form an association under Article 19 (1)(c)(g) of the Constitution. It was further contended that the meetings on 1st and 2nd March 2010 were hosted by individual members and the expenses for the same were not shared by all members who attended it. Further out of 45 members of the association only 12 persons representing 19 parties had attended those meetings.

  • No appreciable adverse effect on competition

It was contended that in an oligopoly industry, the identical quoting of price does not by itself lead to the conclusion of a concerted price. Moreover, in the instant case, number of new entrants had increased as 12 new entrants submitted their bid for the year 2010-11, thus the finding of CCI that there were barriers to new entrants was baseless.

Decision of the Apex Court

The Apex Court relied on the parameters laid down in the Excel Crop Care judgment which states that in an oligopoly situation parallel behavior may not, by itself, amount to a concerted practice. The Hon'ble Court further discussed the theory of oligopolistic market in detail and observed that in such a market, rivals are interdependent; they are aware of each other's presence and are bound to match one another's marketing strategy. As a result, price competition between them will be minimal or non-existent. It was thus concluded, that inferences drawn by CCI were duly rebutted by the appellant/suppliers of LPG cylinders and the appellants have been able to discharge the onus shifted upon them.

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