Recently, the Competition Commission of India (“CCI”) found Maruti Suzuki, a household name in the automobile industry guilty of anti-competitive practices. A penalty of Rs.200 crores, the maximum monetary sentence possible under the Competition Act, 2002 (“Act”) was imposed in conjunction with a cease-and-desist order injuncting Maruti from indulging in the anti-competitive practice. In this Article, the author shall examine the order of the CCI in detail by analyzing the contested practice and arguments posited by Maruti to conclude that the CCI’s order has failed to examine several crucial components of competition law and the possible impact of its move on the automobile industry.
Facts
The alleged anti-competitive conduct of Maruti was taken up suo moto by the CCI based on an anonymous email received from a Maruti Suzuki India Limited (“MSIL”) dealer. The conduct being complained of was related to the ‘Discount Control Policy’ of MSIL whereby dealers are permitted to offer discounts to their customers, subject to a certain limit prescribed by MSIL in their ‘consumer offer’. If the discount exceeds the aforesaid limit, a penalty is levied on the dealer by MSIL. Per the email, it was alleged that, inter alia, such a policy operated to the detriment of consumer interest.
MSIL was given time to reply to the averments made in the email and upon perusal of MSIL’s reply and the contentions raised in the email, the CCI was of the opinion that prima facie violation of Section 3(4)(e) had occurred by MSIL and subsequently the Director General (“DG”) may institute investigation and submit a report.
Before proceeding to an analysis of the issue, it is important to note the pertinent provisions of the Act under which the discount control policy is being examined.
Relevant provisions under The Competition Act, 2002
- Section 3(4)(e) – This Section is applicable to agreements between enterprises at different stages or levels of production chain in different markets, in respect of production, supply, distribution, storage, sale of or price of, or trade in goods or provisions of services including, inter alia, “resale price arrangement” which relates to an agreement to sell goods subject to the condition that the prices be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.
Within the contours of Section 3(4)(e), the DG framed and analysed three issues that formed the basis of further proceedings:
- The Agreement between MSIL and its dealers falls under Section 3(4)(e) because MSIL operates in the “upstream” market of manufacturing automobiles and their dealers operate in the “downstream” market as distributors. Hence, an agreement entered into between MSIL, and its dealers attracts Section 3(4) by virtue of being an agreement amongst enterprises engaged at different stages of the production chain in different markets.
- Evidence (which shall be examined in the following sections) suggests that MSIL was the authority regarding the discount control policy. MSIL’s role was not limited to that of an independent-third party.
- The practice of resale price management by MSIL has caused an appreciable adverse effect on competition in India by lowering inter-brand and intra-brand competition because of products not being offered at the best possible prices. Therefore, MSIL is liable for transgressing Section 3(4)(e) of the Act.
Analysis by Competition Commission
The issues analysed by the CCI can primarily be broken down into three components:
- Whether there was an agreement between MSIL and its dealers within the meaning of Section 3(4) vis-a-vis restricting the discounts that can be offered by the dealers? MSIL contended that there was no explicit discount control policy agreement. The only relevant agreement was the “Dealership Agreement’ which specially permitted the dealers to offer discounts they deem appropriate. Further, they argued that they exercised limited control over the dealers. In response to their contention, the CCI examined several e-mails exchanged between the MSIL managers and dealers across various regions to arrive at the conclusion that there was in fact a discount control policy formulated and overseen by MSIL. Subsequently, if there was a contravention of the policy, individual penalties would be levied on employees. The CCI observed that an ‘agreement’ under the Act is not always akin to an ‘agreement’ under general contract law. The presence of a mutual understanding between the parties involved is sufficient to qualify as an agreement, and the definition is broad enough to include tacit and informal agreements as well. The exchange of emails reflects such mutual understanding and is an ‘agreement’ within Section 2(b) of the Act.
- Whether MSIL has played an active role in formulating the MSIL policy beyond enforcing it on behalf of the dealers as an independent third-party? The CCI observed that the email exchange clearly establishing MSIL’s role as the controller of the policy. All approvals for allowing additional discounts were to be sought from MSIL. Threats of prescribing penalties and stoppage of supplies in the absence of prior approval also reiterate MSIL’s active role monitoring the discount control policy. A stoppage of supplies can only be performed by MSIL and not amongst the dealers inter se. Further, MSIL would also conduct ‘Mystery Shopping Audits’ to gauge whether the policy was being followed. MSIL also contend that it did not appoint any mystery shopping agencies (“MSA”) to conduct the audit, and it was the dealers themselves who had agreed to the policies of MSIL. The CCI rejected such contention and held that from the email exchange, it is evident that MSIL had appointed the MSA’s and exercised autonomy over the MSA’s operation and frequency of visits. Additionally, there is evidence to show that the funds from the penalties collected in lieu of violating the discount control policy were employed in a manner deemed fit by MSIL. Therefore, MSIL is guilty of engaging in resale price maintenance proactively.
- Whether such an agreement has caused any appreciable adverse effects on competition in the relevant market or is likely to cause the same? Examining the circumstances under Section 19(3) of the Act, the CCI observed that the practice of a discount control policy stifles intra-brand competition by not allowing the distributors to compete effectively on price. Due to the ceiling imposed, all distributors under this policy are forced to sell the product at similar or same prices, thereby eradicating any price competition, to the harm of consumers. Further, inter-band competition amongst the passenger-vehicles market is also adversely impacted due to MSIlL’s policy considering its large market share. The CCI notes that because of the similarity of prices that emerge in practicing the discount control policy, the competition pressure vis-a-vis is softened as they can easily monitor MSIL’s prices and derive their price accordingly, which because of resale price management, can be greater than a competitively ascertained price. Additionally, resale price management is conducive to tacit collusion amongst manufacturers.Purely in terms of Section 19(3), the discount control policy does not result in accrual of any benefits to consumers, creates barriers to entry for newer dealers because of the inability to compete with MSIL’s price and hinders the distribution of goods and provision of services in relation to new cars. In conclusion, the CCI observed that the limited benefit of MSIL’s discount control policy is outweighed by the harm it causes to inter-brand, intra-brand competition and consumers qua higher prices.
Conclusion
Resale price maintenance in the form of a discount control policy operates as a vertical restraint. It is a settled position of law that engaging in resale price maintenance is not anti-competitive per se, it must be examined in light of the appreciable adverse effects it has on competition in
The CCI has defaulted in two regards – firstly, while analyzing the anti-competitive impact of MSIL’s policy, due weightage was not granted to its pro-competitive effects, as argued by MSIL. Similar facts have arisen in Fx Enterprise Solutions India Pvt. Ltd. and Ors. v. Hyundai Motor India Limited, the only other case to have dealt with this kind of a vertical constraint. The CCI in both has not given due to the possible positive impact of a discount control policy in terms of the unique nature of the automobile industry. The quality of services offered by dealers plays a large role in consumer interaction and engagement in the passenger vehicle industry. In light of this, a vertical restraint such as a discount control policy, can be employed as a tool to ensure that the dealers render their best possible distribution services and better the services offered, contrary to CCI’s finding that it hinders the provision of services. By not paying sufficient heed to the above, the CCI has followed a ‘per say’ standard in holding MSIL guilty, thereby violating the analysis required for a vertical restraint. Secondly, the CCI merely established MSIL’s market share without delineating the relevant market, contrary to the general practice followed. It is likely that the decision will be contested in light of the above unexamined factors, and the decision of the Appellate Body must reflect a more nuanced understanding of the facts.