On 14 June 2017, the Competition Commission of India (CCI) imposed a penalty of INR 87 crore (approx. USD 13.54 million) on Hyundai Motor India Limited (HMIL), which is engaged in the sale and distribution of Hyundai cars and its parts in India. This was for engaging in the practices of resale price maintenance (RPM) and tying in, in contravention of the provisions of Sections 3(4)(e) and 3(4)(a) read with Section 3(1) of the Competition Act, 2002 (Act).

Facts

The CCI combined information filed against HMIL by authorised HMIL dealers, Fx Enterprise Solutions India Private Limited and St. Anthony’s Cars Private Limited (Informants), alleging a contravention of Section 3 of the Act on the grounds that:

  1. HMIL had restricted the informants from acting as dealers of competing brands by virtue of clause 5 of their dealership agreement, which required prior consent of HMIL for investing in any new or existing business which was unrelated to the Hyundai dealership.
  2. HMIL had fixed the maximum retail price of the cars (which included the pre-fixed margin of the dealers) and the maximum discount which could be offered by the dealers through its Discount Control Mechanism (DCM).
  3. HMIL tied the purchase of popular cars to the sale of high-end unwanted cars and also, designated certain companies as the preferred suppliers of complementary goods.

The CCI found a prima facie case against HMIL and directed the Director General (DG) to specifically investigate the alleged contravention of Section 3 of the Act. On investigation, the DG concluded that HMIL had contravened the provisions of Section 3(4) of the Act on account of the above, except in respect of the allegation of tying in the sale of high end cars with fast moving cars. In addition, the DG also concluded that HMIL, being a dominant entity in the aftermarket for services of its cars, had violated Section 4 (relating to abuse of a dominant position) of the Act.

In respect to the contravention of the provisions of Section 3(4) of the Act, the CCI’s findings were as follows:

  1. Exclusive Supply Agreement and Refusal to Deal: The CCI observed that the requirement to get prior consent from HMIL for dealing with competing brands was not a prohibition. Hence, it did not amount to an exclusive supply agreement under Section 3(4)(b) and/or refusal to deal under Section 3(4)(d) of the Act.
  2. Resale Price Maintenance: The CCI held that fixing of a maximum retail price and maximum permissible discount which could be given by dealers, effectively amounts to setting a minimum resale price, thereby resulting in RPM. Hence, HMIL’s arrangement of setting a minimum resale price and monitoring the same through a penalty mechanism contravened Section 3(4)(e) of the Act, since it stifled intra and inter brand competition.
  3. Tie-in Arrangement:
  1. CNG Kits: The CCI held that cancellation of warranty for use of non-designated CNG kits may be objectively justified. As such, this did not amount to a contravention of Section 3(4)(a) of the Act. Further, the CCI observed that HMIL may have a legitimate interest in ensuring that alternative brands of CNG kits are not used since ultimately HMIL would have to bear the costs of warranty.
  2. Lubricants: HMIL mandated its dealers to purchase engine oil only from its two designated vendors, at the price indicated by HMIL in its circular. In case of non-compliance by the dealers, HMIL threatened to terminate the dealership agreement. The CCI noted that this practice resulted in price discrimination, without accruing any benefit to the dealers or consumers, thereby contravening Section 3(4)(a) of the Act.
  3. Car Insurance Services: The CCI noted that it was a business norm to have a tie-up with insurance companies and, hence, merely recommending that the dealers suggest designated insurance companies to consumers does not amount to a tie-in arrangement, since it is not mandatory for the consumer to purchase the same.

On the procedural front, the CCI was of the view that the DG’s investigation into the contravention of Section 4 of the Act by HMIL went beyond the scope of investigation as directed by the CCI at the outset (since the DG was specifically directed to investigate only a Section 3 violation) and therefore deserved to be disregarded in entirety.

In terms of penalty, the CCI, after considering factors such as proportionality, absence of supra-normal profits, HMIL’s voluntary introduction of a competition law compliance programme into its business, and the penalty already imposed in the Autoparts case[1], imposed a penalty of INR 87 crore (0.3 per cent. of the average turnover of the past three years of HMIL which accrued from the sale of motor vehicles (i.e., the relevant turnover)).

 Key Takeaway

Interestingly, the CCI has adopted a business friendly view in this case. It has steered away from the approach in the Autoparts case by making a clear distinction between prudent/standard business practices and anti-competitive conduct. This is demonstrated through the CCI’s approval that consumers would be disentitlement to warranties and incentives if they did not use the manufacturer’s designated products, thereby aiming to intervene only when necessary.

Further, by analysing the effects in the relevant market for each allegation, not only has the CCI followed the principle laid down by the Hon’ble Supreme Court of India in the West Bengal Artists’ case[2], but it has also affirmed the evolving undertone that exclusivity is not anti-competitive per se [3] and may often be a fundamental part of doing business.

Also, being one of the few cases to examine the issue of RPM, the decision provides valuable insight in as much as it classifies the practice of setting a limit on maximum discount as RPM and demonstrates that any assessment in this regard should necessarily consider intra and inter brand competition as well as the factors stipulated under Section 19(3) of the Act.

While the CCI could have used this opportunity to distinguish between price and non-price-related vertical restraints, this decision suggests that the CCI does not deem it necessary to treat RPM cases in a different light, and similar to other vertical arrangements, will be tested on the touchstone of “rule of reason”. Pertinently, this is also the first instance where the CCI has applied the principle of “relevant turnover” in the imposition of penalty, on the similar lines as the Excel Crop case[4].

[1] Shamsher Kataria vs. Honda Siel Limited & Ors., Case No. 03 of 2011.

[2] Competition Commission of India vs. Coordination Committee of Artists and Technicians of West Bengal Film and Television and Others, Civil Appeal No. 6691 of 2014. The Supreme Court stressed on the requirement of defining a relevant market for an assessment under Section 3 of the Act and also widened the scope of the analysis to include “affected markets”, a concept not explicitly provided for under the Act.

[3] Dr. L.H. Hiranandani Hospital vs. Competition Commission of India & Another, Appeal No. 19 of 2014.

[4] Excel Crop Care Limited vs. Competition Commission of India & Another, Civil Appeal No. 2480 of 2014.

* The authors were assisted by Aishwarya Gopalakrishnan, Senior Associate

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Photo of Anshuman Sakle Anshuman Sakle

Partner in the Competition Practice at the Mumbai office of Cyril Amarchand Mangaldas. Anshuman advises on the full range of competition matters, including merger control, abuse of dominance and cartel enforcement. He can be reached at anshuman.sakle@cyrilshroff.com

Photo of Bharat Budholia Bharat Budholia

Partner in the Competition Practice at the Mumbai office of Cyril Amarchand Mangaldas. Bharat advises on the full range of competition matters, including cartel enforcement, abuse of dominance, merger control and competition audit and compliance. He can be reached at bharat.budholia@cyrilshroff.com