Article by MM Sharma, Head Competition Law & Policy Practice, Vaish Associates, Advocates, New Delhi, India
The National Company Law Appellate Tribunal ("NCLAT"), vide judgement dated 05.03.2020, has upheld the order dated 03.07.2014 passed by the Competition Commission of India ("CCI/Commission") for abuse of dominant position by M/s Adani Gas Limited ("Adani') in the relevant market of supply and distribution of natural gas in Faridabad in contravention of Section 4(2) (a) (i) of the Competition Act, 2002 ("the Act") However, the NCLAT has reduced the quantum of penalty from the originally imposed 4% to 1% of the average of the turnover for the preceding three years considering the mitigating factors.
Proceedings before the CCI
Information before the CCI was filed by Faridabad Industries Association ("FIA") whose members were consuming natural gas supplied by Adani to meet their fuel requirements. It was alleged that the Gas Supply Agreement ("GSA") entered into with Adani was one sided, lopsided and heavily in favor of Adani.
Relevant Market and Dominance
The Commission identified various categories of consumers i.e. industrial, domestic, and commercial and transportation consumers and found that industrial consumers formed a category different and distinct from domestic, commercial and transportation consumers. The Commission noted that the price and intended use of natural gas by the different categories of consumers were different and the technical considerations in supply and distribution of gas was also different. In addition, the Commission observed that natural gas was distinct from other sources of energy as it was a flammable gaseous mixture which is clean, smoke free and soot free fuel as compared to liquid hydrocarbons.
As regards the relevant geographic market, the CCI noted that the government of Haryana had authorized only Adani to build and operate City Gas Distribution (CGD) network in district Faridabad. The Commission found that Adani held 100% market share in the relevant market being the only entity authorized by government of Haryana to setup and operate CGD Network in Faridabad.
Abuse of Dominance and Penalty
The Commission found that certain clauses of the GSA were abusive in nature. These clauses were: (i) Clause 11.2.1(Shutdown, Unplanned interruption and Disruption): even in the event of unplanned interruption and emergency shutdown of facilities calling for complete and partial off-take of gas by the buyer, the provisions relating to payment of Minimum Guaranteed Off-take (MGO) was made applicable to the buyer, (ii) Clause 13.5(Billing & Payment): despite specifying rate of interest to be levied in the event of delayed payment, the interest rate may also be 'any such rates as may be communicated by the Seller in future; (iii) Clause 13.7 (Billing & Payment): absolved Adani from paying any interest on excess amount paid by the consumers due to erroneous billing/invoicing by Adani; (iv)Clause 16.3 (force majure): Adani reserved the right at its sole discretion to accept or reject request of customers for force majeure; (v) Clause 17.2 and 17.4 (Expiry and Termination): Adani was empowered terminate the agreement in the event of Buyer's failure to take 50% or more of the cumulative Daily Contracted Quantity (DCQ) during a period of forty five consecutive days.
The Commission after arriving at a finding of violation of Section 4(2)(a)(i) by Adani imposed a fine of INR 2567.27 Lakhs and ordered Adani to modify the GSA suitably.
However, some of the clauses alleged to be abusive in nature in the information were not found to be discriminatory or unfair by the CCI.
Adani filed an appeal against the finding of abuse of dominant position and the penalty imposed by the CCI. On the other hand, FIA preferred a cross appeal against the finding of the CCI that certain clauses of the GSA were not abusive/discriminatory in nature.
Relevant Market and Dominance
NCLAT observed that a vital question for consideration of the appeal was whether there was any 'gaseous' substitute for the industrial consumers. It was observed that natural gas competes with most of the fuels available in the market like furnace oils, electricity, diesel, coal and naptha and the customers have the ability to switch over to the alternate fuels without incurring substantial costs. NCLAT noted that the industrial consumers can switch over to solid fuel (coal and lignite), liquid fuels (furnace oil), and grid electricity.
It was held that LPG is not a substitute for Industrial consumers though the same constitutes a substitute for natural gas with respect to other categories of consumers i.e. domestic, commercial and transport sector. NCLAT observed that FIA members were solely dependent on the supplies for Adani, being the only supplier of natural gas while IOCL, BPCL, HPCL competed for the supply of alternate fuels. Moreover, during the relevant period, there was no gaseous substitute of natural gas available to Industrial Units in Faridabad. Accordingly, NCLAT agreed with the finding of CCI qua the relevant market definition and the dominance of Adani.
Abuse of Dominance by Adani
The NCLAT, agreeing with the findings of the Commission, held that Clauses 11.2.1, 13.5, 13.7, 16.3 and 17.2 and 17.4 were abusive in nature on the same lines as observed by the CCI in its order. The NCLAT acknowledged that even Adani was conscious of such conditions in the GSA to be unfair which was inferable from its conduct in substituting the original GSA with revised one modifying the contravening terms and conditions. Moreover, Clause 17.4 was completely removed and not incorporated in the new GSA. Accordingly, the NCLAT confirmed the finding of the CCI with respect to abuse of dominant position by Adani.
As regards FIA' appeal, the NCLAT observed that Adani as a distributor enters into back to back agreements for supply of natural gas and the concerns raised by FIA were purely contractual in nature and merited no inference from competition law angle.
A question of law was considered by NCLAT while addressing this appeal. The question was whether the Commission can pass order singularly or with any other directions or pass all order under Section 27 of the Act as in the present case the CCI had imposed a fine and also a direction to amend the GSA. The NCLAT observed that a plain reading of the provision provides that the Commission is empowered to pass all or any of the orders envisaged under Clauses (a) to (g). The NCLAT emphasized that the term 'any' is all-encompassing and empowers the CCI to pass orders either singularly or coupled with any other discretion or pass all orders under Section 27 of the Act.
Quantum of penalty
The NCLAT noted that the GSA was revised by Adani during the course of investigation and enquiry before the Commission and the GSA was made more consumer friendly and protected the interests of the industrial consumers by removing disparities as regards revision of gas prices, payment obligation in case of shutdown of supply and for complete or partial off take of gas etc. The NCLAT acknowledged that such modifications eliminated the discrimination qua the industrial consumers and the fact that Adani came up with voluntary revision of GSAs even before conclusion of enquiry by CCI and was responsive to the advice of the erstwhile COMPAT were all mitigating factors in favor of Adani outweighing the only aggregator factor i.e. abuse of dominant position
Accordingly, the NCLAT reduced the quantum of penalty imposed on Adani from 4% of the average annual turnover of the relevant three years to 1%.
Comment: The order by NCLAT , which is well reasoned , restores confidence in the robustness of our judicial structure for review of antitrust violation cases and is a welcome decision.
Note: This article first appeared on the Antitrust & Competition Law Blog
on 17 March 2020.
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