No allegation of abuse of dominance can be made against an entity which is not an "enterprise". Talking Competition gives a low-down on whether your business qualifies as an "enterprise" for the purpose of Competition Law analysis.
Seldom does a new legislation hope to have the impact on business conduct in the manner the modern Competition Law regime has in India.
Even though the law has been in force for less than six years, the hefty fines imposed by the Competition Commission of India (CCI) have made the business community sit up and take notice. In the last three years alone the competition regulator has imposed penalties in excess of INR 12,000 Crores on 322 entities. Unsurprisingly, corporates have been rudely awakened to the need for competition compliance and are scrambling to set up systems to include Competition Law in their due diligence and compliance audits.
Evading this obvious hurdle requires the awareness of whether the law affects one's business or not. True to our ethos of demystifying this law, the Talking Competition team attempts to decipher at least one part of the hurdle through this post.
Broadly, there are three limbs of the law from which all infringements flow- Anti-competitive agreements, Abuse of Dominance and Mergers & Acquisitions (legally termed "Combinations").
Out of the three, the provisions relating to abuse of dominance is an area which is the most ambiguous. Considering the novelty of the law, businesses may not be aware when they may be found dominant in a particular market and the ensuing liabilities for violative conduct. For instance, in its order in the case of Super Cassettes, the CCI may have exposed All India Radio (AIR) to potential antitrust liabilities by indirectly holding them a monopolist in its own market. Understanding whether an entity is an "enterprise" can go a long way towards solving this riddle. We deal with the concept of "enterprise" under the Indian Competition Act, 2002 (Act).
ENTERPRISE AND DOMINANT POSITION
Section 4 of the Act is the substantive provision concerning an abuse of dominant position. The Act provides that "No enterprise. . . shall abuse its dominant position". As such, the concept of "enterprise" is paramount in so far as an entity which is not an enterprise shall not be scrutinised for any alleged abuse of dominance.
'Enterprise' has been defined under Section 2(h) of the Act and brings within its ambit any firm or person engaged in activities relating to production, storage, supply, distribution, acquisition etc of goods. Rendering services (of any kind) is also a critical inclusion in the definition.
The term 'services' has a particularly wide meaning within the Act, encompassing sectors such as banking, communication, education, financing, insurance, chit funds, real estate, transport, storage, material treatment, processing, supply of electrical or other energy, boarding, lodging, entertainment, amusement, construction, conveyancing of news or information and advertising, etc.[Section 2(u) of the Act].
In its simplest form, an 'enterprise' (with the exclusion of the sovereign functions of the government) is any entity engaged in an economic activity. Whereas some activities of a particular entity are considered a sovereign function, not all functions can be sovereign. The functional aspects of an entity take precedence over its institutional aspects. For example: An entity may be established by a statute; it may be working not-for-profit; but that will not exclude it from the purview of Section 4. It is the nature of the activity which qualifies or disqualifies the entity as an "enterprise". For instance, fixation of electricity tariff by regulatory commissions does not make the regulatory commission an enterprise; collection of taxes does not make the Govt. Department an "enterprise";however where the Railway Board issues rate circulars for haulage charges for carriage of goods by private operators on the Indian Railways Network, the same is covered as a commercial activity. Thus, for the purposes of Section 4 of the Act, generation and distribution of electricity, construction of residential apartments, manufacture of cars and providing after-sales services, mining and supply of coal, services of stock exchange, organisation of sports leagues, etc. all constitute economic activities and make an entity liable under Section 4.
Therefore, it is the functional aspects and not the institutional aspects that are paramount in determining whether an entity is an "enterprise". A critical inclusion in the definition of the term 'enterprise' is a Government Department. For instance, Indian Trade Promotion Organisation (ITPO) has a dual role of license issuer for trade fairs organised in Pragati Maidan as well as the competing event organiser for the trade fairs in Pragati Maidan. It has been held to be an 'enterprise'. It is interesting to note that while certain functions of regulating a public activity may fall within the exercise of sovereign powers, others like conducting business or being engaged in economic activities may bring it within the definition of enterprise. A Department of Government engaged in any activity relating to provision of service or control of services including activities with respect to grant of licenses may be an enterprise for the purposes of Competition Law analysis. Furthermore, acquisition of goods or services through a competitive procurement process can qualify an entity as an "enterprise".
Lastly we deal with another important facet of industry- Trade Associations. While the constituent members can be an 'enterprise', associations primarily are meant to provide a platform to their constituent members. If the sole objective of an association is to provide a platform for their members to discuss matters of common interest, the association themselves shall not be considered an enterprise and their conduct shall be exempt from scrutiny under Section 4.
However, it should NOT be understood that trade associations have a blanket exemption from purview of Section 4. The Commission recently issued its first decision penalising an association for abusing its dominant position. It may be noted that the concerned association of truck operators in Kiratpur (Punjab) was involved in an economic activity in so far as it acted as an agent for its constituent members and charged commission for allotting the work to its members.
Exceptions and Contradictions - It is important to mention that there exist inconstencies in the orders of the CCI on what constitutes an "enterprise" under the Act. In one case, issuance of rate circulars by the Railway Board for haulage charges for carriage of goods by private operators on the Indian Railways Network, the same is covered as a commercial activity. However, in a subsequent case, it has been held that where the Ministry of Railways/Railway Board issues rate circulars for transport of carriage of commodities, its in exercise of its statutory functions and isn't an enterprise. Again, Department of Industrial Policy and Promotion(DIPP)- primarily responsible for formulation, promotion, approval, and facilitation of Foreign Direct Investment (FDI) has been found to be prima-facie an 'enterprise' in its function of issuing FDI policies.
Similarly, Public Works Department has been prima-facie held as not an 'enterprise' in performing the function of calling bids for a tender to construct a rail-over-bridge. However, in an earlier case, public works department has been prima-facie held as an 'enterprise' while performing the function of calling tenders for annual repair and maintenance of public buildings.
The CCI has held that the activity of appointing agents for distribution and marketing of lotteries by the State Government is not a sovereign function and hence is covered under the ambit of "enterprise".However, contrary to this finding, the CCI in another case, observed in its investigation order that State of Mizoram was prima-facie not an "enterprise" for appointment of lottery distributors and selling agents for the lotteries . The investigation order was quashed by the Gauhati High Court.
There is no doubting the fact that the interpretation of "enterprise" presents an extremely confusing understanding on the part of the CCI. One reason behind the same could be that a majority of the decisions of CCI are at the prima-facie stage and hence need to be taken with a pinch of salt. Nonetheless, based on the discussion above, we can draw the following conclusions:
- Enterprise- Any entity engaged in an activity relating to the manufacture, distribution, supply of goods or provision or services. Broadly speaking an entity engaged in an economic or commercial function is an "enterprise". It should be noted that "acquisition" of goods and services can also qualify as a commercial function.
- Government Departments- Yes, Government Departments qualify as an enterprise. However, exemptions do exist for performing sovereign functions such as collection of taxes, or for statutory functions such as determination of tariff by electricity commissions. However, the COMPAT recently ruled that the issuing of policy circular mandating co-operative societies to purchase from a particular seller did make the Government department an "enterprise" as the policy in question had the effect of regulating purchase of goods from a particular entity .
- Trade Associations- In most cases, NO. Associations generally provide a platform to its members to air its views and do not perform any commercial functions, hence are not an enterprise. Although, the constituent member of such associations may be enterprises. However, where a trade association performs a commercial function-such as charging commission from customers for distribution of work to its constituent members- such association does qualify as an "enterprise".
- Autonomous Bodies- Yes, such independent and autonomous bodies do qualify as "enterprise" if they perform an economic function. Sports organisation bodies like BCCI or Hockey India do qualify as an "enterprise" as they perform the dual role of a regulator as well as a commercial body.
This article was originally published on Talking Competition, 25 June 2015.
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.