TMI Blog2017 (6) TMI 1316X X X X Extracts X X X X X X X X Extracts X X X X ..... HELD THAT:- The downstream geographic market may be taken as the territory of India, as the conditions of competition for the distribution and dealership of Hyundai cars are uniform across the country. Though there may be price differences in terms of road tax and registration, Hyundai has distributorships and dealerships across the country and its cars are sold across the territory of India. Accordingly, the relevant (downstream) geographic market may be defined as territory of India. Refusal to Deal [Section 3(4)(d)] - HELD THAT:- The Commission is of considered opinion that Clause 5(iii) of the Dealership Agreement has not restricted, in form or in practice, any dealer in any manner from operating other OEM dealerships. The avowed objective of the clause appears to ensure that HMIL dealers do not free ride on facilities and services provided by HMIL. Further, such stipulation ensures that HMIL is kept posted with the financial and investment activities of its dealers to ensure that funds meant for functioning of the dealership business are not diverted elsewhere. No evidence has been adduced by the parties to demonstrate that HMIL restricted its dealers from acquiring deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) of the Act with respect to the allegation that the OP has tied the sale of its cars with selected insurance vendors only. Tie-in arrangement [Section 3(4)(a)] - Tying the sale of premium vehicles to non-premium - HELD THAT:- The DG, did not find contravention of the provisions of Section 3(4)(a) of the Act by HMIL having any arrangement of selling both segment (premium and non-premium) cars. The Commission is in agreement with the conclusion of the DG on this count as the Informants could not adduce any credible evidence to support this allegation. To conclude, The Commission is of the considered view 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 - HMIL is directed to cease and desist from indulging in conduct that has been found to be in contravention of the provisions of the Act Imposition of monetary penalty - HELD THAT:- The starting point of determination of appropriate penalty should be to determine relevant turnover and therea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 1 and Information - 2 filed by the Informants with the Commission, may be briefly noted: 4. HMIL was incorporated under the provisions of the erstwhile Companies Act, 1956, on 06.05.1996, at Irrungattukottai, Sriperumbudur Taluk, Kancheepuram District, Tamil Nadu, India, pursuant to the approval granted to Hyundai Motor Company (HMC) by the Foreign Investment Promotion Board on 11.03.1996, for setting up a wholly owned subsidiary in India. HMIL is engaged in the sale and distribution of motor vehicles and its parts in India. HMIL is a 100% owned subsidiary company of HMC. HMC was incorporated in 1967 under the laws of Republic of Korea. It manufactures and distributes motor vehicles and their parts. The shares of HMC have been listed on the Korea Stock Exchange since 1974, and its global depositary receipts have been listed on the London Stock Exchange and Luxembourg Stock Exchange. 5. HMIL has an installed capacity of 6,30,000 cars per annum and an annual turnover of about INR 27,000 Crores, as on 31.03.2015.It has approximately 14,000 direct and indirect employees and its car manufacturing factory is located at Sriperumbudur, Tamil Nadu. 6. Informant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. St. Antony or Informant-2 is a private limited company involved in, inter alia, distribution of passenger cars, having its registered address at XII/268, Mundakkal, S. N. College Junction, Kollam Main Post Office, Kollam, Kerala -69100. Informant-2 had entered into a dealership agreement dated 24.08.2009 with the OP. Under the terms of the said agreement, Informant-2 was appointed as a non-exclusive dealer of HMIL in the territory of Kollam, Trivandrum. The term of the Dealership Agreement (Dealership Agreement) was for a period of three years from the date of execution. It is stated that Clause 5(iii) of the agreement prohibited the dealer from investing in any other business, particularly in dealerships with competitors of the OP. It has been further submitted that, pursuant to the said clause, the dealers of the OP could not take dealerships of competitors of the OP, even if the dealership was a completely separate entity from the dealership of the OP. It has been alleged that Clause 5(iii) of the Dealership Agreement amounts to refusal to deal in contravention of the provisions Section 3(4)(d) of the Act. 9. Based on the above averments and allegations, the Infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NG kits, the DG defined the relevant market as Sale of CNG Kits for Hyundai Brand of Cars in Delhi and NCR ; (b) For determining whether the OP imposes a tie- in arrangement for lubricants, the DG defined the relevant market as Sale of Lubricants for Hyundai Brand of Cars in India ; and (c) To analyse whether the OP imposes a tie-in arrangement in relation to obtaining car insurance, the DG defined the relevant market as Insurance for Hyundai Brand of Cars in India . (iv) Finally, relying upon the Commission's decision in Shamsher Kataria v. Honda Siel Cars India Ltd. (Case No. 03 of 2011) (CCI), 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 Hyunda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d discriminatory conditions in the sale of CNG kits and prefixed the prices of CNG Kits and retrofitting thereof at discriminatory higher prices and also indulged in practices resulting in denial of market access to other duly approved CNG kits suppliers, in contravention of Sections 4(2)(a)(i), 4(2)(a)(ii) and 4(2)(c) of Act, respectively; and (ii) imposed unfair and discriminatory conditions in the sale and supply of lubricants and also indulged in practices resulting in denial of market access to other oil companies dealing with recommended grade of lube oils, in contravention of Sections 4(2)(a)(i) and 4(2)(c) of Act, respectively. 19. The DG, however, did not find any contravention of the provisions of Section 3(4)(a) of the Act in respect of the allegations that HMIL was mandating purchase of high-end cars as a condition for purchase of fast moving cars by the dealers. 20. Based on the evidences/material/statements of parties discussed in the DG Report, it was concluded by the DG that the OP has violated the provisions of Sections 3(4)(a), 3(4)(b), 3(4)(d) and 3(4)(e) read with Section 3(1) of the Act, and Sections 4(2)(a)(i), 4(2)(a)(ii) and 4(2)(c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld by the Commission that Clause 5 (iii) of the Dealership Agreement is in compliance with the Act. This decision of the Commission has achieved finality and therefore should not be interfered with. 27. Objection was also taken to reliance on e-mails provided by the Informants without annexing the mandatory certificate under Section 65B of the Evidence Act, 1872. 28. Further, it was argued that order of the Commission in Shamsher Kataria (supra) cannot be relied upon as the matter is sub judice. It was prayed that any observations made on relevant market or specific conduct based on the above case must not colour the mind of the Commission in the present cases. 29. It was alleged that the Informants have not approached the Commission with clean hands as they have not produced the communications between the Informants and HMIL which clearly shows mala fide conduct of the Informants. 30. It was contended that the issues raised in the present cases are contractual in nature and the remedy, if any, for the Informants lies under the provisions of the Indian Contract Act, 1872. Further, it was pointed out that the Dealership Agreement entails a provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... healthy dealership network for HMIL, so that the dealers have the ability to invest in sales, services, and promotion of new and existing products and also to avoid providing discounts of a predatory nature which are detrimental to their finances. As a result, HMIL often monitors discounts provided by the dealers to keep any predatory practice by dealers in check. 36. It was argued that the financial health of various HMIL dealers was being jeopardised in the NCR of Delhi due to unscrupulous activities of some selective dealers. To remedy such issues, HMIL considered it necessary to place a mechanism which dissuaded the dealers from offering predatory discounts. Because of the above, mystery shopping agencies were appointed to conduct unannounced visits to the dealers' showrooms. The entire amount collected by the mystery shopping agencies was distributed amongst all non-violating dealers in equal proportion. Sometimes, such penalty amounts were also utilised to pay for the dealers' share of advertisement expenditure. 37. With regard to CNG Kit, it was submitted that HMIL did not mandate customers to fit HMIL approved CNG kits. It was argued that HMIL only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of contravention of the provisions of section 3 of the Act, as detailed above, is made out against the opposite party and the Director General (DG) is directed to cause an investigation to be made into the matter (emphasis added). Similarly, the Second Prima Facie Order of the Commission states the Commission opines that prima facie the Opposite Party has contravened the provisions of section 3(4) read with section 3(1) of the Act Accordingly, the DG is directed to cause an investigation into the matter (emphasis added). Thus, it is observed that the Commission had not directed the DG to investigate whether the OP has abused its dominant position in contravention of Section 4 of the Act. Further, both Information - 1 and Information - 2 filed by the Informants, only allege contravention of Section 3(4) read with Section 3(1) of the Act. No allegations of abuse of dominance have been put forth by the Informants. 44. In this regard, it may be observed that the Hon'ble Supreme Court of India in CCE v. Steel Authority of India Civil Appeal No. 7779 of 2010 decided on 09.09.2010 has held that [t]he Director General is expected to conduct an investigation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commission would use the terms upstream and downstream markets while analysing the alleged anti-competitive vertical restraints in the present cases. 48. With this caveat, the Commission notes that the DG has considered separate market(s) for each contravention of Section 3(4) of the Act: (i) Exclusive Supply Agreement/Refusal to Deal: Market for Inter-Brand Sale of Passenger cars in India ; (ii) Resale Price Maintenance (RPM): Market for Intra Brand Sale of Hyundai Brand of Cars in Delhi and NCR ; (iii) Tie-in arrangement for CNG kits: Market for Sale of CNG Kits for Hyundai Brand of Cars in Delhi and NCR ; (iv) Tie-in arrangement for lubricants: Market for Sale of Lubricants for Hyundai Brand of Cars in India ; and (v) Tie-in arrangement for car insurance: Market for Insurance for Hyundai Brand of Cars in India . 49. To analyse the vertical restraint allegations, it would be first appropriate to define the upstream and downstream markets. Upstream Market 50. It may be noted that the DG's approach in considering the product market is based on the contraventions alleged - i.e., a different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eam level of distribution and sale of Hyundai passenger cars to end consumers. The relevant product concerning the OP is therefore manufacture of passenger cars. 54. In Shamsher Kataria (supra) the Commission did not address the primary market for the manufacture and sale of cars, as the issues under consideration in that case pertained to the aftermarket prices/behaviour of the Opposite Parties. The Commission held that even if the primary market is subdivided into various segments the competitive constraints or effective competitive pressure in the aftermarket remains unchanged In this context [i.e., for assessing aftermarket practices], it is irrelevant whether the primary market is considered to be a single monolith relevant market for a particular brand of car or is divided in separate relevant markets depending upon characteristics of a particular model of a brand of car, its price or its intended use . 55. Similar to Shamsher Kataria case, it must be noted that the alleged anti-competitive behaviour pertains to the dealership and distribution of the OP's motor vehicles. In this regard, it is noted that the OP is present in multiple segments of the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship of Hyundai cars are uniform across the country. Though there may be price differences in terms of road tax and registration, Hyundai has distributorships and dealerships across the country and its cars are sold across the territory of India. Accordingly, the relevant (downstream) geographic market may be defined as territory of India. Anti-competitive Vertical Agreements 62. The DG has identified the following three types of anti-competitive vertical agreements: (i) Exclusive Supply Agreement Refusal to Deal; (ii) Resale Price Maintenance; (iii) Tie-in arrangements for the sale of : a. CNG kits; b. Lubricants; and c. Car Insurance. 63. Each of these is dealt in seriatim below. Refusal to Deal [Section 3(4)(d)] 64. The DG has found that the OP, through Clause 5(iii) of the Dealership Agreement, imposes an exclusive supply obligation and refusal to deal upon its dealers/distributors, in contravention of Sections 3(4)(b) and 3(4)(d) of the Act respectively read with Section 3(1) of the Act. 65. Clause 5(iii) of the Dealership Agreement provides that except with prior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found that the contention of the OP that 120 dealers operate competing dealerships of multiple brands is not true. The Dealership Agreements entered into prior to 2009 did not contain any specific clause comparable to the current Clause 5(iii), in which the dealers are under a specific obligation to seek prior permission of OP for acquiring a competing brands dealership. 68. Finally, the DG has stated that the OP has submitted that none of its dealers has sought permission and the OP has also not granted any permission to any of its dealers for having multiple competing dealerships, even though certain dealers (the list of which was provided by the OP) also have multiple dealerships. 69. The Commission notes that Explanation (b) to Section 3(4) of the Act defines an exclusive supply agreement as including any agreement restricting in any manner the purchaser in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person . Further, Explanation (d) to Section 3(4) of the Act defines refusal to deal as including any agreement which restricts, or is likely to restrict, by any method the persons or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated. St. Antony/Informant-2 was issued a show cause notice twice, once in 2012 and then in 2013, on account of high customer complaints, poor Customer Satisfaction Index, Sales Satisfaction Index, instances of cheque bouncing and opening of unauthorised sales outlets etc. The dealership was terminated by Hyundai in August 2013. In case of FX/Informant-1, the dealer was issued show cause notice, inter-alia, on grounds of poor Customer Satisfaction Index/Sales Satisfaction Index, lack of adequate man power, serious deficiencies in operations of workshops and low involvement in business by the dealer-principal. FX submitted its voluntary resignation from HMIL business on 25.04.2014. Further, pursuant to the statements made under examination on oath of the Informants, neither Informant-1 nor Informant-2 had requested the OP for operating a competing dealership and were never prevented by the OP from doing so, under Clause 5(iii) of the Dealership Agreement. 74. As stated above, it is noted that Clause 5(iii) of the Dealership Agreement does not mandate exclusivity but only requires the prior permission of the OP in order for dealers to operate competing dealerships. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 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 DG has found that the OP itself maintains certain schemes through which various discounts are offered to the customers (such as on Diwali or schemes for teachers). It has been found that the maximum discount which can be offered by a dealer to the end-customer during the operation of the schemes launched by the OP from time to time is also fixed by the OP. 80. The OP has admitted to have engaged various mystery shopping agencies for policing its dealers and monitoring the abovementioned arrangements. 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. Where a dealer is found to be deviating from OP's Discount Control Mechanism, the OP imposes a penalty on the dealer in terms of a minimum penalty per violation of INR 2 lakh, upto a maximum of INR 80 lakh for the six ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which varies for different models of the vehicles. Further, the OP has admitted to appointing a 'mystery shopping agency' that collects, inter alia, data on the levels of discounts offered by different Hyundai dealers all over the NCR. This agency then reports its findings to the OP which in turn shares this information with the dealers in a group email thread. Pursuant to the findings of the agency, various types of penalties are levied on the dealers to prevent them from providing any further discounts to the customers. 86. The OP, in its submissions to the DG, has admitted that such a scheme was conducted, but it has denied that the said Discount Control Mechanism was strictly followed. The OP has stated that there are distributors who have been repeatedly providing discounts well above the recommended limit and that notwithstanding the Discount Control Mechanism, dealers still continue to provide discounts of their own accord. It is stated that the scheme is recommendatory in nature and is therefore, not mandatory on the dealers of the OP. 87. In this regard, it is observed that an agreement that has as its direct or indirect object the establishment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscount that can be offered by the dealers who are in interlocking relationship with multiple manufacturers. 92. It is known that RPM as a practice by multiple manufacturers is conducive for effective monitoring of cartel. Higher prices under RPM can exist, even when a single manufacturer imposes minimum RPM. This is 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. 93. Before concluding discussion on this aspect, the Commission notes that the DG has conducted an analysis of appreciable adverse effect on competition arising out of the afore-discussed arrangement of HMIL, which results in RPM in light of the factors enumerated in Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth segments (premium and non-premium) cars. 97. The Commission observes that Explanation (a) to Section 3(4) of the Act defines a tie-in arrangement as including any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods . 98. In Sonam Sharma v. Apple Inc. USA C. No. 24 of 2011 (CCI), the Commission held that a tying arrangement occurs when, through a contractual or technological requirement, a seller conditions the sale or lease of one product or service on the customer's agreement to take a second product or service. In other words, a firm selling products X and Y makes the purchase of product X conditional to the purchase of product Y. Product Y can be purchased freely on the market, but product X can only be purchased together with product Y. The product that a buyer is required to purchase in order to get the product the buyer actually wants is called the tied product. The product that the buyer wants to purchase is called the tying product . 99. The Commission further set out the following ingredients to be satisfied for a tie-in arrangement: (i) Presence of two separate produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the CNG kits supplied by CEV are neither distinct from the kits of other agencies nor is the fact denied that the kits supplied by other agencies can also be fitted in Hyundai cars. CEV's CNG kits are price approx. 80% more than the price of competing CNG Kits. The DG has observed that the OP's dealers and consumers are coerced into obtaining CNG Kits from CEV as they are denied warranty services if CNG kit are purchased and installed from any agency other than CEV. Further, where dealers sell Hyundai vehicles which are not fitted with CEV kits, the dealers are separately penalised. Accordingly, the DG has found that the OP has tied the purchase of its cars to the purchase of CNG kits from CEV. 102. In its response to the DG report, the OP has stated that one of the core elements for a tie-in is that the purchasers are forced to buy the tied product along with the tying product, but in this case, HMIL passenger cars are sold without CNG kits. Since it is possible to purchase an HMIL passenger car and install a CNG kit from a vendor other than the approved vendor, the OP has submitted that the same does not amount to a tie-in arrangement. However, the consequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warranties on the ground that the situation leading to the claim in question is causally linked to a failure of a specific spare part provided by an alternative supplier. In this case, the OP has stated that it merely recommends the brands/types of lubricants and oils that are to be used. From the oral depositions of various Hyundai dealers, it is further noted that customers do avail other supplies, and typically warranty is not cancelled when other brands of lubricants/oils are used. In terms of the OP's dealers, they use the recommended oils/lubricants of Shell/IOCL further to OP's circulars stating the same. It is noted that both Shell and IOCL make certain royalty payments to the OP. However, such royalty could be paid for the use of Hyundai trademark; as both IOCL and Shell manufacture certain Hyundai genuine oils . Further, such conduct causes or is likely to cause appreciable adverse effect on competition in light of the factors enumerated in Section 19(3) of the Act. 107. The DG conducted a competition assessment in this regard in the investigation report. The Commission notes that the practice/arrangements followed by the OP to get the lubricants suppli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the IRDA (Insurance Brokers) Regulations, 2002. 110. The DG is of the view that the OP has entered into MOU with ABIBL purely for its economic interests. Nothing stopped the insurance broker to directly approach the customers and dealers to present its services in the spirit of fair competition. On the other hand, OP has entered into this MOU which is bilateral in nature but thrusts upon the dealers by issuing of bulletins and circulars by the OP. The OP is well aware of its position of strength as the dealers are locked in with the OP and the fear of termination of agency looms large on their minds. The discriminatory conditions of providing cashless option in case of insurance services only when the insurance is availed from an approved insurance provider puts extra strength to the arrangement and so it is skewed in favour of ABIBL. The facility provided to ABIBL also creates an impression on the customers that ABIBL is the only approved insurance provider. The circulars and bulletins issued by the OP are used by the dealers to give extra confidence to the customers regarding approval status of ABIBL as if it is backed by some statutory recognition. However, the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey deal only with the list of empanelled insurance companies. There is no record to show that any dealership has been cancelled because the dealer failed to get the customers to take up insurance from the listed companies of the OP. 114. Also, the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that HMIL already has put in place a competition law compliance program and HMIL is a first time offender with no previous valid orders against it. 119. In this connection, it would be apposite to refer to a recent decision of the Hon'ble Supreme Court of India in Excel Crop Care Ltd. v. CCI Civil Appeal No. 2480 of 2014 decided on 08.05.2017 . One of the issues which fell for consideration before the Hon'ble Supreme Court in this case was as to whether penalty under Section 27(b) of the Act should be imposed on total/entire turnover of the offending company or only on relevant turnover i.e. relating to the product in question? 120. After referring to the statutory scheme as engrafted in Section 27 of the Act and analysing the case law at length, the Hon'ble Supreme Court opined that adopting the criteria of 'relevant turnover' for the purpose of imposition of penalty will be more in tune with ethos of the Act and the legal principles which surround matters pertaining to imposition of penalties. While reaching this conclusion, the Hon'ble Supreme Court recorded the following reasons: When the agreement leading to contravent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir penalty @ 9% of this figure would come to ₹ 6,94,26,000/-. That will be a penalty against M/s. United Phosphorous Limited. 123. An appeal preferred against the above-said order of the Hon'ble Competition Appellate Tribunal was dismissed by the Hon'ble Supreme Court of India vide its order dated 08.05.2017 in Excel Crop case (supra). 124. Coming to the facts of the present case, the Commission notes that the infringing anti-competitive conduct of HMIL in the instant case included putting in place arrangements, which resulted into Resale Price Maintenance by way of monitoring of maximum permissible discount level through a Discount Control Mechanism and a penalty mechanism for non-compliance of the discount scheme. Such conduct pertains to and emanates out of sale of motor vehicles. Hence, for the purposes of determining the relevant turnover for this infringement, revenue from sale of motor vehicles alone has to be taken into account. 125. Having determined the relevant turnover, the Commission now proceeds to calculate appropriate percentage of penalty. 126. It may be noted that the twin objectives behind imposition of penalties ..... X X X X Extracts X X X X X X X X Extracts X X X X
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