On 15th June, 2017, the Competition Commission of India (“CCI”) found Hyundai Motors Industries Limited (India) (“HMIL”) to be guilty of indulging in Resale Price Maintenance (RPM) having an appreciable adverse effect on market competition. The Final Order passed under Section 27 of the Competition Act, 2002 (the “Act”) is of significance by virtue of being the first order passed in the wake of the recent decision of the Supreme Court (“SC”) in which CCI’s penalizing power was considerably curtailed. The SC’s judgment in the case of Excel Corp. Care vs. The Competition Commission of India, by relying on the principles of equity and proportionality and on foreign competition jurisprudence vis-a-vis affected commerce, validated the concept of “relevant turnover” as introduced by the Competition Appellate Tribunal (“COMPAT”).
Section 27(b) of the Act authorizes the CCI to impose penalty in case of contravention of Sections 3 and 4. A conflict arose when the CCI decided to interpret this provision to imply a penalty on the total turnover of the contravening person or enterprise. On the other hand, on appeals before the COMPAT, the Hon’ble COMPAT would significantly reduce the quantum of penalty imposed by the CCI on the basis of relevant or affected turnover. Such a determination of penalty was also in sync with foreign competition law jurisprudence of affected commerce. One such decision of the COMPAT, in the above mentioned Excel Corp. Case, was challenged by the CCI before the Hon’ble SC. The CCI contended that COMPAT was overreaching its powers by inserting the term “relevant” in the statutory provision by way of interpretation. On the other hand, COMPAT countered this by contending that it was the CCI which was inserting the term “total” turnover in the relevant statutory provision.
Summary of the SC’s Decision
Without laying down any defined guidelines for computing penalties, the SC prescribed that a two-step test shall be conducted in order to ascertain percentage of penalty to be appropriated.
The SC upheld COMPAT’s decision by relying on the judgment of the Appellate Court of South Africa in the case of Southern Pipeline Contractors Contrite Walls (Pty.) Ltd. vs. The Competition Commission. The SC agreed that the penalty imposed should be in direct proportion to the damage caused to competition or to the profits earned by the cartel. It also mandated that the penal provisions of the Act were to be given a strict interpretation and, hence, in case of ambiguity, the balance of probability shall lie in favour of the infringer. Thus, the quantum of penalty test has been stipulated as follows-
- Ascertainment of Relevant Turnover: While clarifying that this definition of relevant turnover is not exhaustive, the SC has defined it to refer only to that portion of turnover of the contravening party which pertains to the product or services affected by the said contravention.
- Ascertainment of Appropriate Percentage of Penalty: Keeping in view the aggravating and mitigating circumstances that may affect the quantum of penalty to be imposed, the SC has given an illustrative list of factors, including but not limited to the nature, gravity and extent of the contravention, role played by the infringer (ringleader or the follower), the duration of participation, the intensity of participation, loss or damage suffered as a result of such contravention, market circumstances, nature of involvement and profit derived from such contravention.
CCI’s Decision in the Present Case
Having due regard to SC’s decision as analysed above, the CCI, while rejecting allegations of tying-in arrangement and exclusivity clause, held Hyundai to have been acting in contravention of Section 3(4)(e) read with Section 3(1) of the Act.
It stated 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.”
Hence, the CCI opined that “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. Based on the above, the Commission is of the opinion that the OP has contravened the provisions of Section 3(4)(e), read with Section 3(1) of the Act.”
While determining the amount of penalty to be imposed, the CCI analysed the SC’s judgment in detail. By applying the two-pronged test explained above, it noted 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.”
In order to calculate the appropriate percentage of penalty to be imposed, the CCI further noted that “the twin objectives behind imposition of penalties are: (a) to reflect the seriousness of the infringement; and (b) to ensure that the threat of penalties will deter the infringing undertakings. Therefore, the quantum of penalties imposed must correspond with the gravity of the offence and the same must be determined after having due regard to the mitigating and aggravating circumstances of the case. The Commission is also guided by the judgment of the Hon’ble Supreme Court of India in Excel Crop case (supra) which enunciates the principle of proportionality. Proportionality achieves balancing between two competing interests: harm caused to the society by the infringer which gives justification for penalising the infringer on the one hand and the right of the infringer in not suffering the punishment which may be disproportionate to the seriousness of the Act on the other.”
Further, the CCI took cognizance of the fact that HMIL had also been penalized previously in the famous Automobiles Case, i.e., Shamsher Kataria vs. Honda Siel Ltd. & Ors.,. The rate of penalty to be imposed was adjudged to be 0.3% of the average relevant turnover of the last three years and the total amount was worked out and rounded off to the tune of Rs. 87 crores.