The appeal under Section 53B of the Competition Act, 2002 (hereinafter the act) was filed by the Appellant-‘Hyundai Motor India Limited’ against the order dated 14th June, 2017, passed by the Competition Commission of India in which the Commission had held that Hyundai Motor had contravened the provisions of Section 3(4)(e) read with Section 3(1) of the Act, 2002 through arrangements which resulted into Resale Price Maintenance. The Commission further held that Hyundai Motor had contravened the provisions of Section 3(4)(a) read with Section 3(1) of the Act, 2002 in mandating its dealers to use recommended lubricants and oils and thereafter issued direction of cease and desist on the Hyundai Motor from indulging in conduct that has been found to be in contravention of the provisions of the Act, 2002 and imposed penalty at the rate of 0.3% of its average relevant turnover of the last three financial years which has been rounded off at Rs. 87 Crores with direct on to deposit the same within the stipulated period.
‘Hyundai Motor’ was incorporated under the provisions of the Companies Act, 1956, on 6th May, 1996, for manufacturing and distribution of motor vehicles and their parts. ‘1st Informant’- ‘Fx Enterprise Solutions India Pvt. Ltd.’ had a Hyundai dealership for sale and service of Hyundai cars (being cars manufactured by the OP from May 2006 to May 2014) of which Shri Ankit Agrawal was the Managing Director. Pursuant to ‘Hyundai Motor’ advertisement calling for applications for Hyundai dealership in Faridabad territory in 2005, ‘1st Informant’- ‘Fx Enterprise Solutions India Pvt. Ltd.’ responded to the advertisement and submitted its application. After multiple meetings held with the officers of ‘Hyundai Motor’, ‘1st Informant’- ‘Fx Enterprise Solutions India Pvt. Ltd.’ purchased a plot in Faridabad to meet the standards required by ‘Hyundai Motor’ and commenced a dealership for sale and services of spare parts of Hyundai cars from May 2006. ‘1st Informant’- ‘Fx Enterprise Solutions India Pvt. Ltd.’ submitted a notice of termination of dealership to ‘Hyundai Motor’ on 25th April, 2014.
The allegation of ‘1st Informant’- ‘Fx Enterprise Solutions India Pvt. Ltd.’ was that the Opposite Party No-1 entered into exclusive dealership arrangements with its dealers, and dealers are required to obtain prior consent of the Appellant before taking up dealerships of another brand.
further alleged that the ‘Hyundai Motor’ also imposed a “Discount Control Mechanism” through which dealers were only permitted to provide a maximum permissible discount and the dealers were not authorised to give discount which is above the recommended range, and the same amounted to “resale price maintenance”, in contravention of Section 3(4)(e) of the Act, 2002.
‘Hyundai Motor’ is responsible for price collusion amongst competitors through a series of “hub – and – spoke” arrangements. ‘1st Informant’- ‘Fx Enterprise Solutions India Pvt. Ltd.’ has alleged that ‘Hyundai Motor’ perpetuates hub and spokes arrangement, wherein bilateral vertical agreements between supplier and dealers and horizontal agreements between dealers through the role played by a common supplier, results in ‘price collusion and unwanted cars’ to its dealers and ‘Hyundai Motor’ designated sources of supply for complementary goods for dealers, which results in a “tie-in” arrangement in violation of Section 3(4)(a) of the Act, 2002.
The allegation of ‘2nd Informant’- ‘St. Antony’s Cars Pvt. Ltd.’ is that the term of the Dealership Agreement (Dealership Agreement) was initially for a period of three years from the date of execution. It is alleged that Clause 5(iii) of the agreement prohibited the dealer from investing in any other business, particularly in dealerships with competitors of the ‘Hyundai Motor’. It was further alleged that, pursuant to the said clause, the dealers of the ‘Hyundai Motor’ could not take dealerships of competitors of the ‘Hyundai’, even if the dealership was a completely separate entity from the dealership of the ‘Hyundai Motor’. Therefore, according to ‘2nd Informant’- ‘St. Antony’s Cars Pvt. Ltd.’, Clause 5(iii) of the Dealership Agreement amounted to “refusal to deal” and is in contravention of the provisions Section 3(4)(d) of the Act, 2002.
The ‘DG’ after investigation, while observing that passenger cars manufactured and sold by different players are interchangeable and substitutable by consumers in view of their utility, defined a ‘broad relevant market’ as “Sale of Passenger Cars in India”. The ‘DG’ further sub-divided this ‘relevant market’ and defined ‘separate relevant market(s)’ for each of the contraventions identified as follows:
(i) Refusal to Deal: For analysing Clause 5(iii) of the Dealership Agreement concerning refusal to deal contravention, the DG defined the relevant market as “Inter-Brand Sale of Passenger cars in India”; violating section 3(4)(d).
(ii) Resale Price Maintenance (RPM): For the purposes of analysing whether the OP imposes a (maximum) resale price, the DG defined the relevant market as “Intra Brand Sale of Hyundai Brand of Cars in Delhi and NCR”; violating section 3(4)(a).
(iii) Tie-in arrangements:
(iv) The DG relying upon the Commission’s decision in Shri Shamsher Kataria v. Honda Siel Cars India Limited & Ors. (Case No. 03 of 2011), where the DG stated that the Commission has defined 3 segments of the automobile market, viz.: (a) the primary market consisting of manufacturing and sale of passenger vehicles; (b) the secondary market or aftermarket for each brand of spare parts; and (c) an aftermarket for each brand of repair services. As the issue of tie-in arrangement of the OP with regard to the sale of CNG Kits, lubricants and insurance policies and services also falls within the scope of aftermarket services, the DG defined the product aftermarket as “after sales services of Hyundai Brand of Cars”. However, for this relevant product market, the DG defined two different relevant geographic markets:
The ‘DG’ also held that the ‘Hyundai Motor’ has ‘entered into tie-in arrangements’ with regard to sale of cars and: (a) supply and retrofitting of CNG kits; (b) sale and supply of lube oils; and (c) sale of insurance policies and services incidental thereto. The ‘DG’ held that the aforesaid tie-in arrangements amount to exclusive supply agreement and refusal to deal and therefore, it found the ‘Hyundai Motor’ to have violated the provisions of Sections 3(4)(b) and 3(4)(d), respectively, read with Section 3(1) of the Act, 2002.
The ‘DG’ in its report noticed different (five sets) of ‘relevant market’, for contravention of different clauses of Section 3(4) of the Act, 2002, as follows:
1.CCI on Refuse to deal
The Commission was of the opinion that the impugned clause 5(iii) of the agreement, which prohibited the dealer from investing in any other business, particularly in dealerships with competitors of the OP keeps OEMs empowered to ensure that their dealers remain financially viable. From the record, it appears that over 100 dealers of HMIL are engaged in dealership business of competing manufacturers. Even otherwise, OP has not enforced the said clause despite knowledge of parallel dealerships acquired by its dealers of competing OEMs without even informing, much less seeking permission, HMIL. Thus, Clause 5 does not strictly set out an exclusivity obligation or prevent a dealer from dealing with competing dealerships or other businesses; it only requires the prior written permission of the OP in order for the dealers to do so. Thus, Clause 5 does not provide for de jure exclusivity. However, if OP does not, in practice, provide such permission to its dealers to operate competing dealerships or other businesses, Clause 5 may result in imposition of de facto exclusivity. Thus, the Commission was of the opinion that Clause 5(iii) does not impose an exclusive supply obligation in contravention of Section 3(4)(b) or a refusal to deal in contravention of Section 3(4)(d) read with Section 3(1) of the Act.
2. CCI on Resale Price Mechanism (RPM)
The RPM as a practice by multiple manufacturers was conducive for effective monitoring of cartel. Higher prices under RPM can exist, even when a single manufacturer imposes minimum RPM. That was more likely in case of multi-brand dealers who have significant bargaining power because of their ability to substitute one brand with another. Further, this leads to another likely anti-competitive effect of higher prices across all brands even if there is no upstream or downstream conspiracy, because preventing price competition on a popular brand would result in higher prices of competing brands as well, including those that have not adopted RPM. Thus, minimum retail price RPM has the effect of reducing inter-brand price competition in addition to reducing intra-brand competition.
The Commission noted that the DG had conducted an analysis of appreciable adverse effect on competition arising out of mystery shopping agencies arrangement [these mystery shopping agencies submit their reports to the OP, highlight the various violations committed by the dealers (in dealings with customers, test drives, etc.) and in particular, highlight the extra discount granted by the dealers to the customers] of HMIL, which results in RPM in light of the factors enumerated in Section 19(3) of the Act. These impugned agreements/ arrangements did not result into accrual of any consumer benefits; rather, the same resulted into denial of due benefits to the consumers as they were made to pay high prices. Further, the said arrangements and agreements did not resulted into any improvements in production or distribution of goods or provision of services.
The arrangements put in place by the OP also resulted in creation of barriers to the new entrants in the market as they also took into consideration the restrictions on their ability to compete in price competition in the intra-brand competition of Hyundai brand of cars. Hence, the arrangement perpetuated by the OP in fixing the resale price of Hyundai brand of cars the Commission was of the view that the OP has sought to impose an arrangement that results in RPM, which includes monitoring of the maximum permissible discount level through a “Discount Control Mechanism” and a penalty punishment mechanism upon non-compliance of the discount scheme. The level of discount was determined by the OP for each model and variant of the passenger cars and the OP had also appointed a Mystery Shopping Agency to collect data from dealers for such monitoring and reporting to the OP. Therefore, the Commission was of the opinion that the OP has contravened the provisions of Section 3(4)(e), read with Section 3(1) of the Act.
3.CCI on tie-in agreements
In this case, it is observed that the CNG kits made by CEV are for Hyundai’s purposes alone. CEV CNG kits are specifically designed for Hyundai approved car models and no alteration in any of the parts is required at the time of fitting. Further, CEV supplies kits to Hyundai alone. The running of Hyundai cars with CEV CNG kits are much smoother in comparison to the cars fitted with CNG kits of other agencies. On careful perusal of the matter, the Commission was of the considered opinion that in cases where warranty is cancelled for use of non-CEV CNG kits, the same may be objectively justified. The OP may also have a legitimate interest in ensuring that alternative brands of CNG Kits are not used, as the OP would be bearing the costs of warranty. Accordingly, cancellation of warranty upon use of non-CEV CNG kits does not, as a general rule, amount to a contravention of Section 3(4)(a), read with Section 3(1) of the Act.
The Commission notes that the practice/ arrangements followed by the OP to get the lubricants supplied by IOCL and Shell only (desire vendors of Hyundai) and that too at pre-fixed price resulting in price discrimination is not accruing any benefit to the dealers as well as the consumers/ purchasers of the cars. The practice and arrangements followed by the OP are causing hindrance in the improvement of production or distribution of goods and provision of services in relation to supply and use of lubricants in the cars particularly when other oil companies are manufacturing and marketing same grade of lubricants. The practice and arrangements followed by the OP also result into creation of barriers to the new entrants in the market with regard to the supply and marketing of lubricants for use in the cars manufactured by the OP. The practice and arrangement followed by the OP in charging royalty from the two oil companies and threatening termination of dealership by invoking the terms and conditions of the dealership agreement is foreclosing competition for other vendors/ manufacturers of lubricants. Such arrangements are also against the consumer welfare as the consumers are made to pay comparably higher price and are also denied freedom to make fair choices. Accordingly, in so far as the OP mandates its dealers to use particular oil/ lubricants and penalises its dealers where non recommended oils are used, it would amount to “tie-in arrangement” in contravention of Section 3(4)(a), read with Section 3(1) of the Act. However, for the reasons which were given in the context of CNG kits (objective justification and legitimate business interest), cancellation of warranty upon use of non-recommended oils/ lubricants does not amount to contravention of Section 3(4)(a), read with Section 3(1) of the Act.
OP’s arrangement with ABIBL, where the dealer is restricted in its offering of insurance services to the end-consumer to only the select companies of ABIBL. This issue that consumers are left with only limited choice due to such insistence from the OP holds no ground simply because of the fact that it is not mandatory for customers to take insurance from the list of companies given by the OP. From the statements given by third parties such as Hans Hyundai, Capital Hyundai and Koncept Hyundai, it is gathered that though it is acknowledged that the OP provides a list of preferred insurance companies, the customers are free to get any insurance from any company or through any other broker without any compulsion. Incentives are given if customers take insurance through dealers from the list provided by the OP, but the same is not mandatory and the customer will not be refused any other services if it opts for other insurance companies. Having a tie-up or arrangements with insurance companies is the usual business norm. For instance, representatives of Honda Cars India Ltd. and Maruti Suzuki India Ltd. have also stated that they have also executed agreements with insurance brokers or companies and customers have taken insurance from other companies not provided in their list. Their service levels remain the same for all customers and in no way they are prejudiced against such customers. Therefore, mere recommendation that the dealers consider/ suggest the insurance companies partnered with the OP will not amount to tie-in arrangement. It is opined that the OP has not violated Section 3(4)(a) of the Act with respect to the allegation that the OP has tied the sale of its cars with selected insurance vendors only.
The Commission held that HMIL has contravened the provisions of Section 3(4)(e) read with Section 3(1) of the Act through arrangements which resulted into Resale Price Maintenance. Such arrangements also included monitoring of the maximum permissible discount levels through a Discount Control Mechanism. Further, HMIL has contravened the provisions of Section 3(4)(a) read with Section 3(1) of the Act in mandating its dealers to use recommended lubricants/ oils and penalising them for use of non-recommended lubricants and oils.
A. NCLAT on Resale Price Mechanism & Discount Control Mechanism
The NCLAT, while dealing with the issue of resale price mechanism and Discount Control Mechanism observed that the DG has noted that the ex-showroom price of the cars sold by the OP to its dealers and by the dealers to the consumers, is fixed by the OP. The dealer’s margin is included in the ex-showroom price, which is also fixed by the OP; moreover the DG has also found that the OP has established an admitted “Discount Control Mechanism”, by which the maximum discount which a dealer can offer to its end consumers is maintained. Accordingly, by fixing the maximum resale price as well as the maximum amount of discount that can be granted to customers, the OP has been effectively found to have fixed the minimum resale price. the tribunal on this issue has stated that the ‘Commission’ held that, the Appellant has admitted to have engaged in various mystery shopping agencies for policing its dealers and monitoring the such arrangement, but has not cited any evidence for coming to such conclusion pursuant to which mere reference of one or other provisions such as Explanation (e) to Section 3(4) of the Act, 2002 will not constitute any offence, till it is found proved by the ‘Commission’ with the help of any evidence.
B. NCLAT on sale of oil Lubricants
The Hon’ble tribunal has noticed that CCI in the impugned judgment has made a self-contradiction in the judgment as in parah 108 it has been held by the commission that cancellation of warranty upon use of non-recommended oils/ lubricants does not amount to contravention of Section 3(4) (a) read with Section 3(1) of the Act, 2002, whereas in parah 116 of the judgement the commission has stated “HMIL has contravened the provisions of Section 3(4)(a) read with Section 3(1) of the Act in mandating its dealers to use recommended lubricants/ oils and penalising them for use of non-recommended lubricants and oils.”
The tribunal further stated that the finding that the Appellant has mandated its dealers to use recommended lubricants/ oils and penalised them for use of non-recommended lubricants and oils is also not based on any evidence. Nothing was brought on the record by the ‘DG’ or the ‘Commission’ to suggest that the Appellant penalised one or other dealer for not utilising the recommended lubricants and oils.
C. NCLAT on DG’s Report
The Hon’ble tribunal has observed that the ‘DG’s’ report is merely an opinion primarily to assist the ‘Commission’ for appreciation of evidence in arriving at a final conclusion during the inquiry. The ‘DG’s’ report is not binding on the ‘Commission’. The ‘DG’ report is merely an investigation report, in terms of subsection (3) of Section 26 but ‘DG’s’ report alone cannot be relied upon or cited for finding and the ‘Commission’ which is required to make independent analysis based on evidence brought on record. The tribunal also observed that in the impugned judgment, no specific evidence has been discussed including the evidence relied on by the Appellant. The impugned order is only based on findings of the ‘DG’s’ which is not permissible. Moreover, the tribunal stated that Section 26 of the Act, 2002 which prescribes ‘procedure for inquiry under Section 19’ but in the present case no such inquiry has been made in terms of Section 19.
D. NCLAT on “Relevant geographic condition” & “relevant product market”
1. The ‘DG’ as well as the ‘Commission’ has failed to decide the ‘relevant geographic market’ as also the ‘relevant product market’. As per the decision of the Hon’ble Supreme Court for inquiring into an alleged contravention, the factors mentioned in sub-section (3) of Section 19 is required to be taken into consideration. Hon’ble Supreme Court in “Coordination Committee of Artistes and Technicians of West Bengal Film and Television and Ors (2017) 5 SCC 17.
34. Market definition is a tool to identify and define the boundaries of competition between firms. It serves to establish the framework within which competition policy is applied by the Commission. The main purpose of market definition is to identify in a systematic way the competitive constraints that the undertakings involved face. The objective of defining a market in both its product and geographic dimension is to identify those actual competitors of the undertakings involved that are capable of constraining those undertakings behaviour and of preventing them from behaving independently of effective competitive pressure.
35. Therefore, the purpose of defining the “relevant market” is to assess with identifying in a systematic way the competitive constraints that undertakings face when operating in a market. The concept of relevant market implies that there could be an effective competition between the products which form part of it and this presupposes that there is a sufficient degree of interchangeability between all the products forming part of the same market insofar as specific use of such product is concerned.
37. The relevant market within which to analyse market power or assess a given competition concern has both a product dimension and a geographic dimension. In this context, the relevant product market comprises all those products which are considered interchangeable or substitutable by buyers because of the products’ characteristics, prices and intended use. The relevant geographic market comprises all those regions or areas where buyers would be able or willing to find substitutes for the products in question. The relevant product and geographic market for a particular product may vary depending on the nature of the buyers and suppliers concerned by the conduct under examination and their position in the supply chain. For example, if the questionable conduct is concerned at the wholesale level, the relevant market has to be defined from the perspective of the wholesale buyers. On the other hand, if the concern is to examine the conduct at the retail level, the relevant market needs to be defined from the perspective of buyers of retail products.
38. It is to be borne in mind that the process of defining the relevant market starts by looking into a relatively narrow potential product market definition. The potential product market is then expanded to include those substituted products to which buyers would turn in the face of a price increase above the competitive price. Likewise, the relevant geographic market can be defined using the same general process as that used to define the relevant product market
2. The ‘Commission’ has failed to inquire into the agreement in the light of sub-section (3) of Section 19. It has not taken into consideration whether the agreement creates any barrier to new entrants in the market; driving existing competitors out of the market or foreclosure of competition by hindering entry into the market. It has also failed to consider whether the said agreement accrual of benefits to consumers and improvements in production or distribution of goods or provision of services.
3. The ‘relevant geographic market’ and the ‘relevant product market’ having not been taken into consideration, the inquiry is incomplete being violation of sub-section (6) of Section 19. The ‘DG’ as well as the ‘Commission’ has not taken into consideration the regulatory trade barriers; local specification requirements and other factors for determining the ‘relevant geographic market’ nor has taken into consideration the physical characteristics or end use of goods, including price of goods or service; consumer preferences as required to be taken under sub-section (7) of Section 19 for determination of ‘relevant product market’.
Thus, the Hon’ble tribunal has held that the ‘Commission’ has failed to appreciate the evidence and the impugned order was not based on any specific evidence and had been passed merely on the basis of opinion of ‘DG’. The ‘DG’ as well as the ‘Commission’ also failed to decide ‘relevant geographic market’ or a ‘relevant product market’ as required under Section 19 (6) & (7) of the Act, 2002. The finding is against the law laid down by the Hon’ble Supreme Court in “Coordination Committee of Artistes and Technicians of West Bengal Film and Television and Ors.
 AIR 2017 SC 1449
Pareesh Virmani is a fourth year law student pursuing BBA-LLB (Hons.) from Delhi Metropolitan Education affiliated to GGSIP University. He is passionate for research writing and holds a very keen interest in it. He is currently serving as the Student Editor of Corporate Law Journal. He has also authored several articles which are published in reputed law journals.