Automobiles Dealers Association, Hathras, U.P. & Ors. Vs Global Automobiles Limited & Anr., 2012

Author: SHUBHANKAR DAS, Institute of Law, NIRMA University, Ahmedabad

Case Name: Automobiles Dealers Association, Hathras, U.P. & Ors. Vs Global Automobiles Limited & Anr., 2012

Case Number: Case No. 33 of 2011

Court: Competition of commission of India, New Delhi

Decided on: 3^rd July 2012

Relevant Acts/ section:  section 2, 3, 4, 19 and 26 of Competition Act 2012 (The Act)

Keywords: Appreciable adverse effect on competition (AAEC), letter of intent

FACTS

The informant, Association of Automobile Dealers is an association of 3 members M/s R.K Motors, Banda UP; M/s Patliputra Agro Pvt ltd, Patna Bihar and Kashish Automobile, Gorakhpur UP and registered under the society registration Act, 1860

The opposite party no. 1, Global Automobiles Ltd is a company incorporated under companies Act 1956 with its registered office at Hooghly West Bengal engages in the business of manufacturing, marketing and sale of two-wheelers like motorcycle and scooters. The opposite party no. 2, Pooja Expo India Private Ltd is a carrying and forward Agent (C&F) of Global automobile for the state of Haryana and UP.

GAL published an advertisement inviting dealers for marketing and selling of its manufactured two-wheelers like motorcycles and scooters. Members of the association were appointed as dealers and a ‘letter of intent’ (LOI) was signed between GAL and each member across India.

The informant members have complained that the conditions of the letter of intent are anti-competitive in nature as it is largely in favour of the opposite party No. 1 and included many restrictive clauses such as the area of operations, not to deal with competitors, etc.

The informant has raised points that the specific clause 6 to 17 of the letter of intent is anti-competitive in nature.

After listening to the issues raised by the informant, the commission found that a prima facie case existed in the matter and passed an order under section 26(1) of the Act directing the director general to conduct an investigation and submit a report on the same.

CONTENTIONS

ON BEHALF OF INFORMANTS

• Informant members have made huge investments while following specifications provided by GAL but received no reimbursement of those expenditures incurred.
• Quality of products supplied by GAL was defective. Despite making multiple requests to replace, GAL failed to replace the defective motorcycles, imposing a monetary burden on the dealers to avail mechanics for the same.
• GAL also failed to provide spare parts for replacement and did not provide training to their employees due to which the business of dealers had virtually stopped. Finally, GAL stopped the supply of products against express terms of the letter of intent.
• GAL is enjoying the dominant position and is abusing it by prohibiting the members from accepting dealership of other two-wheelers company without explicit permission from GAL, in such case they are threatened with cancellation of the dealership. 
• GAL is not allowing its members to do business properly and affecting the competition in the market.
• After signing of the letter of intent GAL introduced a new company opp. Party 2 as a carrying & forwarding agent and informed the dealers to deal directly from the said C&F Company, but on approaching them, the informant found that GAL had given no such instructions to them.

REPLY FILED BEFORE THE DIRECTOR GENERAL   

ON BEHALF OF GLOBAL AUTOMOBILE LIMITED (GAL)

• GAL stated that on November 2010, the management and control of GAL were taken over by the Saradha group of companies from the Xentis group along with all assets and liabilities. 
• GAL said that no anti-competitive activities were done by them.
• The exclusivity clause under clause 3 of the letter of intent was to build specialised expertise on the product, which in turn would give consumers better support and service and is desirable by the company.
• It did not enjoy any dominant position because it has less than 1 % of market share in 2 wheelers industry, hence cannot be said to have any dominant bargaining position against the dealers or distributors.
• GAL also submitted a report on 2 wheeler industries by Indian automobile industry that stated all India figures for 2 wheelers units sold by the companies in India. According to which the top players like hero Honda, Bajaj and TVS had sold of 25 lakh, 11 lakh, 5 lakh units and GAL only sold 50,000 units.
• Moreover, after the takeover by Saradha group only 611 units were dispatched and that also was sold to Nepal and some to the employees of the company itself.
• GAL stated that there is no production or manufacturing process taking place after the takeover and is even taking steps to redress the grievances of dealers, distributors, vendors etc. by inviting them for reconciling their relevant documents and redressing their grievances.

ON BEHALF OF POOJA EXPO INDIA PRIVATE LIMITED (opposite party 2)

• GAL has appointed it C&F for only one year and with limited powers such as receiving, storing, forwarding the products only on directions of GAL.
• It is a stranger to any MOU executed between GAL and it’s authorised dealers.
• It does not have any information related to any other C&F dealers appointed by GAL.
• Pooja Expo also mentioned that there was no direct relation between them with the authorised dealers of GAL, in an agency model the principal has the liability to indemnify the agent. In this case, Pooja expo was the C&F cum consignment agent.
• All technical aspects of the product were managed by GAL.
• It has sold no product to any member of the informant.

CONCLUSION OF THE DG REPORT

• The DG concluded that the said agreement between GAL and Dealers was in nature of “exclusive distribution agreement” under section 3(4)(c) of the Act.
• The said agreement restricted the informant from dealing with any other 2 wheeler agencies other than GAL.
• According to the DG, such agreements result in the creation of barriers to new entrants in the market because such exclusivity leads to putting the restriction in their business. 
• The agreement does not result in any accrual benefits to the dealers instead it restricts the choices available to the dealers and puts them in a disadvantageous position.
• GAL violates Section 3(4) of the Act since it didn’t fulfil its obligations with regards to reimbursement of expense towards free services of 2 wheelers incurred by dealers. At the same time, GAL created an exit barrier for dealers which is anti-competitive in nature and causing an appreciable adverse effect on competition (AAEC) in the market. Hence, the conduct of GAL including the company that take over the liabilities and assets of GAL – Saradha Reality India Ltd. 
• According to the DG with regards to abuse of dominance, GAL does not have any position of dominance in the relevant market on any of the parameters under section 19(4) of the Act. GAL does not enjoy a dominant position since its share is negligible or non-existent in the two-wheeler market. There is no violation of section 4 of the Act.

The commission thereafter sent a copy of the investigation report to the parties inviting replies and directed the informant and the opposite parties to appear for an oral hearing, but none appeared, hence the commission decided to proceed with the framing of issues and passing an order on the basis of materials on record.

ISSUES

• Whether the various clauses in the letter of intent between the dealers and GAL are anticompetitive in violation of section 3(4) r/w section 3(1) of the Act?
• Whether GAL is enjoying a dominant position in the relevant market? Whether it is abusing its dominance in contravention of section 4 of the Act?

FINAL ORDER

DETERMINATION OF FIRST ISSUE

• The commission has powers to enquire upon the merits of the case.
• The commission stated that to determine whether the agreement is in contravention of section 3(4) r/w 3(1) of the Act, 5 essential ingredients of section 3(4) has to be satisfied that are:-

1. There must be an agreement existing amongst the enterprises.
2. Parties should be at different levels of the production chain in respect of production, supply, distribution, storage, sale or price of, or trade-in goods or provision of the services.
3. The agreeing parties must be in different markets.
4. The agreement should be in nature as specified in section 3(4) (a) to (e)
5. The agreement should either cause or likely to cause Appreciable adverse effect on competition (AAEC)
6. The first essential ingredient is satisfied by considering the definition of the agreement provided under section 2(b) of the Act. 
7. The second and third essential ingredients are satisfied by because GAL is engaged in activities of production and marketing of two-wheelers whereas the dealers are engaged in the sale of the already manufactured 2 wheelers and sale services, this implies they are in different stages of the production chain and are in different markets.
8. The fourth essential ingredient is covered by reading the contents of clause 3 of letter of intent which is an exclusivity clause restricting the dealers from entering into a dealership agreement with any other 2 wheeler company, therefore it comes under exclusive distribution agreement under section 3(4)(c), hence the first 4 essentials are satisfied.
9. The commission stated factors to be considered while determining AAEC i.e. the fifth essential ingredient are laid down in section 19(3) of the Act. 
10. To explain the factors given in section 19(3), the commission stated that the presence of the first three factors would indicate AAEC while their absence will indicate the opposite. At the same time, the presence of the next three factors will indicate no AAEC because they area in nature of efficiency justification or exceptions, but their absence will neither establish efficiency justification nor determine AAEC. 
11. The commission stated that in the present case both the parties have an insignificant presence in the market of operation, so under any sort of agreement between the two parties, both of them are incapable of causing any appreciable adverse effect to competition in their markets.
12. Finally, concerning the first issue, the commission did not agree with the findings of the DG Investigation Report and held that even though the clause 3 was restrictive, but since the agreement does not cause any AAEC, hence there is no violation of section 3(4) of the Act.

DETERMINATION OF SECOND ISSUE

• Unlike the first issue, the commission agreed with the findings of the report of DG in this issue.
• The commission stated that the relevant market is the manufacturing of 2 wheelers in the capacity of 100CC to 150cc in Indian Territory.
• The commission observed that since GAL is an insignificant and negligible player in the relevant market, so it becomes impossible for it to dominate the market. 
• It also stated that, after the takeover of GAL by Saradha Group of companies, it sold only 611 units of 2 wheelers and no new production or manufacturing activity. Even the capital is negligible in comparison to big market players like bajaj has capital 4807 crores.
•  The commission held that GAL is not enjoying any position of dominance in the relevant market and does not satisfy any of the parameters given in section 19(4) of the Act. There lies no question of abuse of dominance in such a scenario and no violation of section 4 of the Act.
• The final decision of the commission is that there is no violation of section 3 or section 4 of the Act.

ANALYSIS

The core issues discussed in the case was concerning the determination of contraventions of section 3(4) r/w 3(1). The commission stated 5 essential ingredients that need to be satisfied to determine any contravention. These essential ingredients were that there exists an agreement between the enterprises, the parties to the agreement have to be at a different level in the production chain, for example, if one of the party is producing the product, the other party may be involved in selling or promoting of the same but not in production, the agreeing parties must be in separate markets, followed section 3(4)(a) to (e) and lastly, the agreement should cause or likely to cause an appreciable adverse effect on competition. Thereafter the commission also discussed the six factors enlisted in section 19(3) for the determination of AAEC, wherein the court mentioned an important point that the existence of the first three factors will confirm AAEC and the absence will normally confirm no AAEC. At the same time the presence of the next three factors will justify that there is no AAEC as they are exceptions or are in nature of efficiency justifications, however, the absence of the last three factors will give no outcome as such, hence, it becomes important to consider each of the factors while determining AAEC. The case also points out the situation in EU jurisdiction where vertical agreements are not given a second thought unless both parties possess at least 30 percent of their respective market share. In this case, the market share of both GAL and Automobile Association were negligible and their agreement was insignificant in comparison to the whole markets of automobile manufacture and automobile sale. Hence even though some clauses included by the opposite party were restrictive still there was no case of an Appreciable adverse effect on competition because such clauses only affect the contract and both the parties and not the market at large. Unless and until it affects the respective market of the parties there is no contravention.