State authorities in alcohol procurement and distribution escape antitrust scrutiny

Introduction
Facts
Decision
Comment

Introduction

Through its decision on 19 September 2022, the Competition Commission of India (CCI) dismissed a complaint filed by an association of foreign alcohol manufacturers. The International Spirits and Wines Association of India (ISWAI) filed a complaint against the Prohibition and Excise Department (P&E Department) and the Andhra Pradesh State Beverages Corporation Limited (APSBCL) (collectively, the opposite parties), alleging abuse of their statutory dominance through:

• arbitrary procurement of "branded alcoholic beverages"(1); and
• imposition of unfair commercial terms on suppliers of branded alcoholic beverages (particularly, the ISWAI members).

The CCI dismissed ISWAI's complaint at the initial stage itself, holding that the evidence on record was insufficient to constitute a preliminary violation of the Competition Act 2002 (Competition Act).

For every antitrust complaint filed in India, the CCI is required to form an opinion on whether a preliminary violation of the Competition Act has occurred; if so, the CCI will thereafter direct its investigative wing, the Office of the Director General, to investigate the case. To formulate its opinion, the CCI typically assesses the evidence placed on record by the complainant. In this case, interestingly, despite considerable evidence submitted by ISWAI, the CCI found the complaint to be lacking sufficient substance to issue directions to investigate.

Facts

In its complaint, ISWAI contended that its members witnessed a steep fall in sales, directly attributable to the anti-competitive conduct of the opposite parties (ie, the P&E Department and APSBCL, the state authorities responsible for wholesale procurement, distribution and retail sales of branded alcoholic beverages in Andhra Pradesh). ISWAI argued that:

• the opposite parties distorted market dynamics to discriminate against its members, and preferred sales of a select few suppliers;
• there was a significant fall in sales volumes and market shares of its flagship members – Diageo, Pernod and Bacardi; and
• rate contract agreements (RCAs), between ISWAI members and the P&E Department/APSBCL, contained unfair contractual terms such as arbitrary payment timelines, penalties for slow-moving goods, and the unilateral right of the state authorities to cancel order for supplies placed.

The opposite parties, on the other hand, denied all allegations and stated that changes in state policy for alcohol procurement were largely on account of the Andhra Pradesh government's initiative to usher in a phased prohibition of alcohol consumption coupled with covid-19 suspensions on alcohol sales. To this end, in 2019, the state government adopted several measures for reducing alcohol consumption such as reducing liquor retail shops, establishing de-addiction centres and levying taxes. It was argued that these reasons were largely responsible for the decline in sales or shares of ISWAI members.

Decision

The CCI defined the relevant market as the "market for the wholesale procurement, distribution and retail sales of Branded Alcoholic Beverages in the State of Andhra Pradesh" and held that the opposite parties enjoyed a statutory monopoly. The CCI observed that the state of Andhra Pradesh follows the "corporation model" for procurement and distribution of alcohol. Under this model, the state government (through a fully owned beverage corporation or its excise department) assumes complete responsibility for the procurement, wholesale trade and distribution of branded alcoholic beverages. In this case, APSBCL had the exclusive right for wholesale trade for branded alcoholic beverages and was subsequently granted the exclusive right for retail sales and procurement as well.

The CCI noted that the decline in sales of ISWAI members was only for a limited period. The CCI concluded that ISWAI members were themselves placing smaller indents or purchase orders on the opposite parties and that ISWAI members had stopped supplies "for reasons best known to them". The CCI relied on the opposite parties' submission to attribute the reduction in market shares of ISWAI members to prohibition policies of the state government, the covid-19 pandemic and the entry of new players, which resulted in changed consumer preferences. Based on this, the CCI concluded that there was no arbitrariness in the procurement policies of the opposite parties.

Regarding allegations of unfair terms and conditions under the RCAs, the CCI noted that some clauses had been amended to alleviate concerns. The CCI recommended that the opposite parties make suitable amends to discriminating clauses and dispel any "take it or leave it" notion. In relation to the allegation that payments are significantly delayed, the CCI noted that this was on account of APSBCL's takeover of retail distribution, which was accompanied by glitches and delays. Noting that there were outstanding payments with 57 suppliers (and not just ISWAI members), the CCI advised the opposite parties to take earnest steps to clear dues. Since some of the impugned RCA clauses had been amended and allegations regarding arbitrary procurement could not be sustained, the CCI dismissed ISWAI's complaint and declined to investigate the case.

Comment

Although the CCI's dismissal of the complaint is largely premised on insufficiency of evidence, the available evidence could have been analysed more comprehensively. An independent assessment of the reasons for decline in sales or market shares, particularly for ISWAI members, was not carried out. The CCI also held that consumer preferences shifted due to entry of new players, which, in turn, led to a dip in sales of ISWAI members. This, however, has not been corroborated with robust analysis, especially since the CCI has previously held that consumers have high affinity for branded alcoholic beverages.(2) It is likely that the CCI's dismissal of the complaint was influenced by the state's avowed objective to phase-in a prohibition on alcohol consumption. However, it could be contended that, to date, there is no absolute prohibition on alcohol consumption and, therefore, any ongoing commercial activity in relation to alcoholic beverages in Andhra Pradesh should still be subject to the rules of fair competition.

This case stands in contrast to an earlier decision in the Uttarakhand case(3) where, on similar facts and allegations (ie, arbitrary and unfair procurement) and evidence placed on record (ie, steep fall in sales volumes and market shares), the CCI directed an investigation and found the Uttarakhand Agricultural Produce Marketing Board to be in contravention of the Competition Act. A penalty of 10 million rupees (approximately $123,600) was also imposed. In this case, it seems that the CCI has largely credited the impact of the covid-19 pandemic and state-sponsored prohibition as reasons for dismissing ISWAI's allegations. ISWAI may challenge these findings in an appeal. If it does, it remains to be seen whether the appellate tribunal will uphold the CCI's reasoning or overturn the decision.

For further information on this topic please contact Sonam Mathur, Dinoo Muthappa or Dhruv Dikshit at TTA by telephone (+91 11 46299999) or email ([email protected], [email protected] or [email protected]). The TTA website can be accessed at www.tta.in.

Endnotes

(1) "Branded alcoholic beverages" comprise:

• Indian-made foreign liquor;
• imported foreign liquor; and
• wine.

(2) See Diageo plc / USL – C-2012/12/97.

(3) See International Spirits and Wines Association of India v Uttarakhand Agricultural Produce Marketing Board – Case No. 2 of 2016.