India: Restricting Discounts Offered By Dealerships Amounts To Resale Price Maintenance: CCI Imposes Penalty Of INR 2 Billion On Maruti Suzuki India Limited

In the recent decision in Suo Motu Case No. 1 of 2019¹, the Competition Commission of India (CCI) imposed a penalty of INR 2 Billion (Rupees Two Billion) on Maruti Suzuki India Limited (MSIL). The CCI observed that MSIL indulged in resale price maintenance by imposing a discount control policy (DCP) across dealerships in India causing appreciable adverse effects on competition (AAEC) under Section 3(4)(e) and Section 3(1) the Competition Act, 2002 (Act). The present article briefly analyses the findings of the CCI in the above-mentioned case.

Brief Facts

Based on an anonymous e-mail received on 17 November 2017 from an alleged MSIL dealer, the CCI took up the instant matter in a Suo Motu case. The anonymous e-mail alleged that MSIL's sales policy was against the interest of the customers as well as provisions of the Act. It was stated that dealers of MSIL across India were not permitted to offer discounts to their customers beyond a prescribed limit. If a dealer was found giving extra discounts, a penalty was levied upon it by MSIL vide the DCP. The e-mail had attached copies of multiple emails where penalties were imposed on dealers for violation of the DCP. It was alleged that MSIL offered no reasons for imposition of penalty while regulating discounts offered by dealers. However, such was not the case for violation of any other policy of MSIL which would include the reason(s) for imposition of penalty. The e-mail alleged that MSIL would conduct regular mystery shopping audits. If a dealership was found to have offered discounts in contravention of the DCP without a clarification, a penalty would be levied, not only on the dealership, but also the sales executive and team leader making the sale.

Upon consideration of the anonymous complaint received against MSIL and MSIL's response thereto, the CCI on 4 July 2019 passed an order under Section 26(1) of the Act holding that a prima facie case of resale price maintenance was found against MSIL. Accordingly, the CCI directed the Director General (DG) to cause an investigation into the matter and submit a report.

Investigation by the DG

Upon investigating the matter, the DG came up with three broad findings as mentioned below:

I. MSIL was an enterprise within the meaning of Section 2(h) of the Act and operated in the upstream market while the distributors (dealers in this case) were dealing in the downstream market. According to the DG, an agreement on a principal-to-principal basis being an agreement amongst enterprises at different stages or levels of production chain in different markets could be examined under Section 3(4) of the Act.

II. Based on a large number of e-mails exchanged between MSIL and its dealers, it was evident that MSIL framed guidelines and gave instructions to its dealers not to offer discounts without its permission over certain pre-restricted levels. Further, MSIL appointed mystery shopping agencies to keep a track of the discounts offered by the dealerships. Thus, the DG opined that MSIL indulged in the practice of resale price maintenance through the DCP.

III. The implementation of DCP and consequent resale price maintenance by MSIL caused AAEC on the competition in India. It lowered inter-band and intra-band competition and led to products not being offered to consumers at best prices.

Submissions of MSIL before the CCI

MSIL submitted that there was no DCP in effect as alleged in the complaint. It was stated that the dealers had devised the DCP as an agreement to police themselves and MSIL had no role to play in the same. MSIL argued that the discounts offered by a large number of dealers (331 parent dealers and 3067 outlets) across India could not be regulated or controlled by any means. MSIL further stated that the DG failed to take note that at least 22 - 36 % of all sales made between 2016 to 2020 made by MSIL involved additional discounts offered by dealers to consumers.

MSIL stated that the mystery shopping audits were conducted to check adherence to MSIL guidelines for sales and to ensure courtesy, service, efficiency, etc. of each dealer. However, the mystery shopping audits never pertained to the issue of discounts offered by the dealers. Further, MSIL tried to distinguish the audits conducted by it against the mystery shopping audits conducted by dealers amongst themselves at some places to check any unfair discounts. It was submitted that MSIL being a third party had no relation to such agreements amongst the dealers and merely communicated the appropriate penalty to be levied by the dealers. MSIL stated that no direct/ indirect benefit accrued upon it due to the alleged restriction on discounts.

Lastly, MSIL argued that without prejudice to other submissions, the alleged conduct of MSIL did not lead to any AAEC and the DG failed to discharge the burden of proof under Section 3(4) of the Act.

Analysis of the CCI

I. On whether MSIL was involved in an agreement under Section 2(b) of the Act with the dealers

At the outset, the CCI noted that MSIL is the manufacturer dealing in the upstream market while its dealers are distributors dealing in the downstream market. Thus, any agreement between MSIL and its dealers could be examined within the scope of Section 3(4) of the Act being an agreement amongst enterprises at different levels of production chain in different markets.

The CCI then referred to the definition of 'agreement' under Section 2(b) of the Act. It was held that 'agreement' for the purposes of competition law may not necessarily be a formal agreement entered into in writing between two parties. Any kind of tacit and informal agreement or understanding between the parties or action in concert may qualify as an 'agreement' under Section 2(b) of Act. The CCI observed that it could not be said that the lack of any clause restricting discounts in the dealership agreements entered between MSIL and dealers would mean that there was no agreement under Section 2(b) of the Act. Such agreement, arrangement, or an understanding may exist dehors the dealership agreement.

The CCI then referred to the MSIL's e-mail dump analyzed by the DG. Based on the review of the e-mail dump, the CCI was of the view that there existed an agreement between MSIL and the dealers to control discounts, in terms of Section 2(b) of the Act. The CCI observed that each and every discount offered by dealers to customers had to be permitted by MSIL. If discounts were offered without prior approval, the imposition of a penalty was threatened. The CCI opined that the very act of MSIL of monitoring and controlling the discounts by the issuance of threats of penalties with or without the active participation of the dealers, tantamount to indulgence in resale price maintenance.

The CCI also noted that the amounts collected from the dealers in penalty were used by MSIL, inter alia, to pay the bills of advertisements. Thus, the penalty amounts were clearly imposed and utilized as per the instructions of MSIL. Hence, the MSIL's submission of being a mere third party in the enforcement of the DCP was completely struck down.

II. On whether any AAEC was caused in the market due to MSIL's agreement with its dealers

The CCI noted that resale price maintenance could prevent effective competition both at the intra-band level as well as at the inter-brand level. When a minimum resale price is imposed upon the distributors, they are prohibited from decreasing the prices beyond a limit preventing them to compete effectively on price. The mechanism stifles intra-band competition resulting in higher prices for end consumers. Thus, the CCI observed that in the instant case, the indulgence of MSIL in resale price maintenance has led to the denial of benefits to the consumers in terms of competitive prices and had eliminated the competition in the market. The anti-competitive effects of MSIL's practices were reinforced by the fact that MSIL had more than 50% of the market share in passenger vehicles segment.

Commenting on the inter-band effects, the CCI observed that when a significant player such as MSIL imposed a minimum selling price, the pricing pressure on competing manufacturers would decrease. When all dealers of MSIL are selling vehicles at similar prices, the prices of MSIL vehicle models can be easily comprehended by other players in market. The CCI opined that the awareness of pricing strategy of MSIL would soften the competition in the market.

Conclusion

Based on its analysis, the CCI concluded that MSIL entered into an agreement with its dealers across India for imposition of DCP which in turn caused AAEC within India. Thus, MSIL had acted in contravention of provisions of Section 3(4)(e) read with Section 3(1) of the Act.

Having considered the nature of the infringing conduct and post-pandemic phase of recovery of automobile sector, the CCI deemed it appropriate to impose a penalty of only INR 2 Billion (Rupees Two Billion) on MSIL under the provisions of Section 27(b) of the Act as against the prescribed penalty of up to 10% (ten per cent) of average turnover of last three preceding financial years. Accordingly, MSIL was directed to cease and desist from indulging directly, or indirectly in resale price maintenance.

Comments

The instant case is yet another instance where an automobile manufacturer was penalized for engaging in anti-competitive activity, especially, resale price maintenance. It is important for manufacturers to preserve their profit margins especially during the challenging pandemic times. However, in an attempt to preserve profits, the pricing strategies must not cross the thin line between healthy and unhealthy competition. The Indian market is price centric in nature where discounts and offers play a vital role in consumer choice. Thus, engaging in resale price maintenance in such a market would soften the competition and eliminate the choice offered to consumers. Manufacturers should have rigorous checks and balances in place to avoid engagement in any anti-competitive conduct. The instant case is the second instance where the CCI has levied penalty on an automobile manufacturer for resale price maintenance. In 2017, the CCI had passed an order² imposing a penalty of INR 870 Million (Rupees Eight Hundred Seventy Million) Hyundai Motor India Limited for engaging in similar discount control policies and resale price maintenance. However, the same was later set aside by the National Company Law Appellate Tribunal on procedural grounds.

Footnotes

1 In Re: Alleged anti-competitive conduct by Maruti Suzuki India Limited in implementing discount control policy vis-à-vis dealers, Suo Motu Case No. 1 of 2019.

2 In Re. Fx Enterprise Solutions India Pvt. Ltd. v. 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.

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