2025 (5) TMI 1028 - SC - Law of Competition

Anti-competitive practices - abuse of dominant position by offering exclusionary volume-based discounts imposing discriminatory contractual terms and on occasions refusing supply - target-discount scheme of Schott India amounts to discriminatory or exclusionary pricing in contravention of Section 4(2)(a) and Section 4(2)(b) of the Act or not - functional-discount / no-Chinese scheme (including the later TMLA arrangement) imposes unfair or discriminatory conditions under Section 4(2)(a) and Section 4(2)(b) of the Act or not - production of margin- squeeze - tying or buundling NGA and NGC tubes thereby breaching Section 4(2)(d) of the Act - effects-based (harm) analysis is an essential component of an inquiry under Section 4 of the Act or not - investigation and the Commission s order are vitiated by denial of cross-examination and allied breaches of natural justice. Whether the target-discount scheme of Schott India amounts to discriminatory or exclusionary pricing in contravention of Section 4(2)(a) and Section 4(2)(b) of the Act? - HELD THAT - In the present case the record shows that for the relevant period Schott India circulated a single rebate ladder applicable to all converters. Four slabs of 2% 5% 8% and 12% were triggered exclusively by the aggregate tonnage of Neutral Glass Clear and Neutral Glass Amber collected within the financial year. Every customer who reached a slab whether by one purchase order or by several obtained the corresponding allowance on the entire year s turnover. The rebate therefore rose mechanically with volume and with nothing else; identity of the buyer was irrelevant. All converters were informed of the thresholds in advance and none has suggested that any hidden concessions existed outside the ladder. There is no evidence that the slab mechanism foreclosed alternative suppliers or throttled output in order to attract Section 4(2)(b)(i) of the Act. On the contrary uncontested data placed by the Economic Member of the Commission and reproduced by the COMPAT record that between 2007-08 and 2011-12 every major converter other than the informant increased both the tonnage purchased from Schott India and the tonnage sourced from imports or Nipro- Triveni. Container prices to pharma companies remained broadly stable. These market facts are inconsistent with the argument of exclusion or limitation - reliance is placed on the untested declarations of five converters alleging that Schott Kaisha received special terms. Those statements taken ex parte and never subjected to cross- examination cannot displace the documentary rebate circulars that bind the company nor alter the legal test that only unequal pricing for equal transactions contravenes Section 4(2)(a) of the Act. Thus the slabbed target-rebate scheme (i) employs a neutral volume-based criterion applicable to all purchasers alike; (ii) is objectively justified by demonstrable efficiency considerations; and (iii) has not been shown to restrict rival output limit imports or distort downstream prices. The charge of abuse under clauses (a) or (b) of Section 4(2) of the Act fails and the issue is answered in the negative. Whether the functional-discount / no-Chinese scheme (including the later TMLA arrangement) imposes unfair or discriminatory conditions under Sections 4(2)(a) and 4(2)(b) of the Act? - HELD THAT - To attract Section 4(2)(a) of the Act it must be shown that transactions which are equivalent in every commercially relevant respect are nevertheless subject to dissimilar conditions. The purchase ledgers for FY 2008-09 to FY 2011-12 collated in the COMPAT s own table disclose no instance in which two converters performing the same function received different net prices. The rate (8 per cent) was invariant; the only divergence lay in the timing of credit monthly for the joint-venture converter and annual for the others. That scheduling preference is rationally tied to the joint-venture s rolling audit cycle and to its undisputed order volume which averaged 30 per cent of the Jambusar melt. It must be emphasized that differential timing unaccompanied by differential rates does not amount to price discrimination. The allegation of a market-restrictive effect under Section 4(2)(b)(i) of the Act fares no better. Nipro-Triveni s share of neutral tubing rose from 12 per cent in 2008 to 14 per cent in 2009. Imports of NGC increased from 620 tonnes to 1000 tonnes during the same interval. Two new container plants Parenteral Glass and SVM Glass commenced commercial production in 2011 sourcing mixed tubes. In the Downstream market total output of ampoules and vials expanded by 38 per cent between FY 2008 and FY 2012 while the median EBITDA margin of independent converters improved from 11.4 per cent to 13.7 per cent. Therefore practices coincident with increasing volumes new entry and rising profitability cannot plausibly be branded capacity-restrictive. Every converter prepared to assume the same traceability and quality-promotion obligations received exactly the same economic consideration; the ancillary conditions are objectively justified; and the evidence shows no foreclosure of rivals or suppression of output. The functional rebate and its successor agreements therefore do not offend either Section 4(2)(a) or Section 4(2)(b)(i) of the Act. The issue is answered in the negative. Whether the LTTSA with Schott Kaisha produced a margin-squeeze proscribed by Section 4(2)(e) of the Act? - HELD THAT - The facts are not in dispute that under the LTTSA which Schott Kaisha undertook for three financial years commencing 1 April 2008 it would source at least eighty per cent of its aggregate requirement of neutral tubing clear amber and Fiolax from Schott India. In consideration it received (i) a two-percentage- point rebate over the public slab (ii) a freeze of base prices till 31 March 2011 and (iii) priority despatch in periods of constrained furnace capacity. It must be emphasized that no purchaser other than Schott Kaisha sought or was denied comparable terms. Absence of foreclosure effects- Section 19(3) of the Act requires consideration of actual or potential effects on competition. Imports of clear and amber tubing rose from 11 per cent to 18 per cent of domestic consumption during the enquiry window; Nipro-Triveni doubled its melt capacity; no converter exited. The structure and conduct indicators thus refute any suggestion of market foreclosure. Schott India is absent downstream; the wholesale-to-retail spread left rivals with sustainable margins; and the market exhibited neither exit nor price elevation. What remains is a commercially rational bulk-purchase rebate available in principle to any converter willing to match Schott Kaisha s volumes and planning horizon. The LTTSA does not contravene Section 4(2)(e) of the Act and the finding of CCI on this head cannot be sustained. The issue is answered in the negative. Whether Schott India tied or bundled NGA and NGC tubes thereby breaching Section 4(2)(d) of the Act? - HELD THAT - Objective justification even if coercion was made out is evident. NGA and NGC draw from a common furnace operating at 1600 C. Sharp month-to-month swings in the ratio jeopardise furnace integrity. Aggregating the two grades when calculating rebates as Schott India explained and the CCI recorded smooths demand and secures continuous load. Manufacturing efficiency is a legitimate business consideration and has not been shown to harm consumers. The essential elements of Section 4(2)(d) of the Act are not proved as NGA and NGC are not independent products; converters were never compelled to buy both; no foreclosure was demonstrated; and in any event the rebate design is objectively justified. The finding of tying cannot therefore stand and the issue is answered in the negative. Whether an effects-based (harm) analysis is an essential component of an inquiry under Section 4 of the Act and if so whether it was omitted in the present case? - HELD THAT - The majority ruling of the CCI professed to have analysed effects yet adduced no economic evidence of price increases output restriction or foreclosure. By contrast the CCI s minority Member after compiling converter sales EBITDA and price data for FY 2007-08 to FY 2011-12 found (i) that all independent converters expanded output and margins and (ii) that pharmaceutical buyers paid identical or higher prices for containers from the joint-venture than from other converters. The data thus falsify any allegation of competitive harm. The learned Counsel for CCI urged that Section 4(2) of the Act is a deeming provision ipso facto condemning the listed practices. The submission cannot stand. The very case on which Counsel relied Fast Way Transmission 2018 (4) TMI 916 - SUPREME COURT did not consider still less decide the present question. The Court was there concerned with a licensee that had already infringed statutory broadcast conditions. Moreover Section 32 of the Act empowers the CCI to investigate conduct outside India only where such conduct has or is likely to have AAEC in India . It would be absurd to demand an effects analysis for foreign conduct yet dispense with it for domestic conduct; the legislature cannot be taken to have intended such inconsistency. The omission of a proper harm analysis vitiates the CCI s order in limine. Because each of the alleged abuses has already been negatived on the facts the appeals must fail on this additional ground as well. The COMPAT s decision to set aside the CCI s directions and penalty therefore warrants affirmation. The issue is answered in the affirmative with respect to both the questions. Whether the investigation and the Commission s order are vitiated by denial of cross-examination and allied breaches of natural justice? - HELD THAT - The proceedings before the DG and the CCI were procedurally defective in a manner that by itself could have warranted dismissal of the complaint at the threshold. The fact that the COMPAT and this Court have for completeness entered into an effects-based merits analysis does not water down that conclusion; it merely furnishes an independent foundation for the same result ensuring finality should a higher forum take a different view on procedure. If the CCI had allowed cross-examination two courses were open either the allegations would have crumbled under questioning or a tested evidentiary record would have emerged on which a reasoned decision whichever way could rest. By electing to proceed on untested assertions the CCI deprived itself of the material needed for a legally sustainable finding and placed the respondent under an evidentiary handicap contrary to natural justice. The issue is answered in the affirmative. Conclusion - i) The slabbed target-rebate scheme does not impose unfair or discriminatory conditions. ii) The 8 per cent functional rebate whether in its original or TMLA form is objectively justified and uniformly available. iii) The LTTSA with Schott Kaisha neither effects a margin- squeeze nor forecloses downstream rivals. iv) No coercion or tying between NGA and NGC tubes is proved. v) An effects-based inquiry is integral to Section 4 of the Act and when properly undertaken discloses no appreciable adverse effect on competition in the present case. vi) The investigation by the DG is vitiated by the denial of cross-examination and by reliance upon pre-statute material a procedural lapse that would of itself have sufficed to invalidate the impugned findings. The order of the Competition Appellate Tribunal dated 2 April 2014 is affirmed. Having regard to the wholly unsubstantiated nature of the allegations and the prolonged litigation they have occasioned; Kapoor Glass shall pay costs of Rs. 5, 00, 000/- to Schott India within eight weeks from today - appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The appeals raised the following core legal questions under the Competition Act, 2002 ("the Act"):

(i) Whether Schott India's target-discount scheme constituted discriminatory or exclusionary pricing in violation of Sections 4(2)(a) and 4(2)(b) of the Act;

(ii) Whether the functional-discount scheme, including the "no-Chinese" clause and the subsequent Trade-Mark Licence Agreement (TMLA), imposed unfair or discriminatory conditions contrary to Sections 4(2)(a) and 4(2)(b);

(iii) Whether the Long-Term Tubing Supply Agreement (LTTSA) between Schott India and Schott Kaisha resulted in a margin squeeze proscribed by Section 4(2)(e) of the Act;

(iv) Whether Schott India engaged in tying or bundling of Neutral Glass Amber (NGA) and Neutral Glass Clear (NGC) tubes, thereby infringing Section 4(2)(d) of the Act;

(v) Whether an effects-based (harm) analysis is an essential component of an inquiry under Section 4 of the Act, and if so, whether such analysis was omitted in the present case;

(vi) Whether the investigation and the Competition Commission of India's (CCI) order were vitiated by denial of cross-examination and other breaches of natural justice.

2. ISSUE-WISE DETAILED ANALYSIS

Issue I: Target-Discount Scheme and Alleged Discriminatory or Exclusionary Pricing

Legal Framework and Precedents: Section 4(2)(a) prohibits unfair or discriminatory pricing by a dominant enterprise. The Court referenced the European Union jurisprudence, particularly British Airways plc v Commission, emphasizing that price discrimination is abusive only if materially equivalent transactions receive materially different treatment without objective commercial justification.

Court's Interpretation and Reasoning: The Court found that Schott India's rebate ladder was neutral and volume-based, with identical terms offered to all converters. The discounts increased mechanically with aggregate annual purchases of NGC and NGA, irrespective of buyer identity. The scheme was objectively justified by the technical necessity of stable furnace utilization at high temperatures, which required predictable and large volume orders.

Key Evidence and Findings: The rebate slabs (2%, 5%, 8%, 12%) applied uniformly; no evidence showed any converter with equivalent volume was denied the highest rebate. Market data showed all major converters, except the informant, increased purchases from Schott India and imports, contradicting claims of foreclosure or output restriction.

Application of Law to Facts: The Court held that the target-rebate scheme did not impose unfair or discriminatory conditions and was justified by efficiency considerations. The absence of foreclosure or harm to competition negated abuse under Sections 4(2)(a) and 4(2)(b).

Treatment of Competing Arguments: Allegations based on untested converter statements were rejected due to lack of cross-examination. The appellants' argument that quarterly crediting created a "retroactive claw-back" risk was found unpersuasive as no contractual prohibition on dual sourcing existed.

Conclusion: The target-discount scheme did not constitute abuse; Issue I was answered in the negative.

Issue II: Functional-Discount / "No-Chinese" Scheme and TMLA

Legal Framework: Section 4(2)(a) and (b) prohibit unfair or discriminatory conditions and limiting production or market access. Functional discounts are lawful if objectively justified and uniformly available.

Court's Interpretation: The functional rebate of 8% was uniformly available to converters meeting three conditions: purchase plan adherence, refraining from Chinese tubing, and compliance with traceability and fair-pricing obligations. The "no-Chinese" clause was based on chemical analysis showing quality concerns and was withdrawn in 2010. The TMLA granted a trademark license with inspection rights and bank guarantees, objectively linked to brand integrity.

Evidence and Findings: No evidence showed differential pricing among similarly placed converters. Market data indicated rising imports, new entrants, increased output, and improved EBITDA margins for converters, inconsistent with foreclosure.

Application of Law: The rebate and associated conditions were objectively justified by patient safety and brand protection. No evidence of output restriction or market foreclosure was found.

Competing Arguments: Kapoor Glass argued the conditions were exclusionary and the "mixing risk" was real; the Court found the risk speculative and the conditions proportionate and voluntary.

Conclusion: The functional discount and TMLA did not violate Sections 4(2)(a) or (b); Issue II was answered negatively.

Issue III: LTTSA and Margin Squeeze Allegation

Legal Framework: Section 4(2)(e) prohibits leveraging dominance in one market to enter or protect another. Margin squeeze requires (i) upstream dominance with downstream operation, (ii) insufficient wholesale-to-retail margin for equally efficient competitors, and (iii) resultant competitive harm.

Court's Reasoning: Schott India did not operate downstream; Schott Kaisha, the downstream converter, was a separate entity with distinct management and accounts. The price differential under LTTSA was about 5% below slab rates, but downstream prices of Schott Kaisha were comparable or higher than rivals. Independent converters showed positive EBITDA and growing volumes.

Evidence: Market data showed increased imports, capacity expansion by rivals, and no exit of competitors. The LTTSA's guaranteed volume allowed Schott India to optimize furnace utilization and justify capacity expansion.

Application: No margin squeeze or foreclosure was demonstrated. The LTTSA was a commercially rational agreement, not an abuse of dominance.

Competing Arguments: Appellants claimed the LTTSA foreclosed rivals; the Court rejected this based on financial and market data.

Conclusion: LTTSA did not contravene Section 4(2)(e); Issue III answered negatively.

Issue IV: Alleged Tying or Bundling of NGA and NGC Tubes

Legal Framework: Section 4(2)(d) prohibits tying where a dominant firm conditions sale of one product on acceptance of another, causing foreclosure.

Analysis: NGA and NGC tubes are produced from the same continuous furnace, with NGA differing only by added iron oxide. They serve different pharmaceutical needs (photo-sensitivity), making them alternative specifications rather than distinct products.

Evidence: No contractual clause made purchase of one grade conditional on the other. The rebate scheme aggregated volumes of both grades for discount calculation, a practice justified by manufacturing efficiency and furnace integrity.

Competing Arguments: Appellants relied on untested witness statements and an outdated circular predating the Act. The Court found these insufficient and emphasized the absence of foreclosure and coercion.

Conclusion: No tying or bundling was proved; Issue IV answered negatively.

Issue V: Necessity of Effects-Based (Harm) Analysis Under Section 4

Legal Framework: The Act prohibits abuse of dominance, not dominance per se. Abuse requires proof of appreciable adverse effect on competition (AAEC). Legislative history, the Act's Preamble, and Section 19(4)(l) emphasize effects-based inquiry. Comparative jurisprudence, including EU law and prior Indian decisions, supports this requirement.

Court's Reasoning: The CCI failed to produce credible economic evidence of harm such as price increases, output restriction, or foreclosure. The minority member's data showed growth in output, margins, and imports, negating AAEC.

Application: The Court held that effects analysis is mandatory and its omission vitiates findings of abuse. The CCI's reliance on untested statements and pre-Act material was inadequate.

Conclusion: Effects-based inquiry is essential; it was omitted here, invalidating the CCI's order. Issue V answered affirmatively on the necessity of effects analysis and negatively on its presence in this case.

Issue VI: Procedural Fairness and Denial of Cross-Examination

Legal Framework: Section 36(2) of the Act and Regulation 41(5) guarantee parties the right to cross-examine witnesses when necessary or expedient. Principles of natural justice require evidence relied upon to be open to challenge.

Court's Findings: The DG's investigation relied heavily on statements from converters hostile to Schott India, none of whom were cross-examined despite repeated requests. The CCI refused cross-examination on procedural technicalities without considering necessity or prejudice.

Precedents: The Court cited multiple judgments emphasizing that denial of cross-examination where findings depend on oral statements vitiates the decision and violates natural justice.

Consequences: The denial prevented testing of evidence that could have disproved allegations. The reliance on untested statements rendered the evidentiary foundation unsound. Subsequent regulatory amendments underscore the indispensability of cross-examination.

Conclusion: The investigation and CCI order were procedurally defective due to denial of cross-examination, warranting invalidation. Issue VI answered affirmatively.

3. SIGNIFICANT HOLDINGS

"The slabbed target-rebate scheme does not impose unfair or discriminatory conditions."

"The 8 per cent functional rebate, whether in its original or TMLA form, is objectively justified and uniformly available."

"The LTTSA with Schott Kaisha neither effects a margin-squeeze nor forecloses downstream rivals."

"No coercion or tying between NGA and NGC tubes is proved."

"An effects-based inquiry is an obligatory component of every inquiry under Section 4 of the Act."

"The investigation by the DG is vitiated by the denial of cross-examination and by reliance upon pre-statute material, a procedural lapse that would, of itself, have sufficed to invalidate the impugned findings."

Core principles established include:

- Dominance is lawful; abuse requires proof of unfair or exclusionary conduct causing appreciable adverse effect on competition.

- Price discrimination must be assessed by comparing materially equivalent transactions and requires objective commercial justification.

- Functional rebates and long-term supply agreements can be objectively justified by technical and commercial necessities.

- Tying requires coercion and foreclosure of competition; aggregation of volumes for discount calculation does not constitute tying if products are alternative specifications.

- Procedural fairness, including the right to cross-examination, is fundamental to the validity of competition proceedings.

- Effects-based analysis is indispensable to avoid penalizing mere success or size without demonstrable competitive harm.

Final determinations:

All allegations of abuse under Section 4 of the Act were rejected on facts and law. The CCI's order imposing penalty and cease-and-desist directions was set aside. The procedural violation of denying cross-examination independently invalidated the findings. The appeals filed by CCI and Kapoor Glass were dismissed; the COMPAT's order was affirmed. Kapoor Glass was directed to pay costs due to unsubstantiated allegations.