By way of a June 14 2017 order, the Competition Commission of India (CCI) imposed a penalty of Rs870 million on Hyundai Motor India Limited for resale price maintenance and tie-in arrangement in violation of Sections 3(4), read with Section 3(1), of the Competition Act 2002.(1)
The informants, Fx Enterprise Solutions India Pvt Ltd and St Antony's Cars Pvt Ltd, alleged that Hyundai had entered into exclusive dealership arrangements and imposed a discount control mechanism to maintain its resale prices. Further, they alleged that Hyundai had tied the sale of desired cars to the sale of high-priced unwanted cars, and had designated sources for the supply of complementary goods for its dealers.
The CCI identified three types of anti-competitive vertical agreement:
- the exclusive supply agreement and refusal to deal;
- the resale price maintenance;(2) and
- the tie-in arrangement.(3)
Exclusive supply agreement and refusal to deal With regard to the allegations of exclusive supply and refusal to deal, the CCI observed that Clause 5(iii) of the dealership agreement, which provided that permission must be obtained from Hyundai before investing in new business, did not provide for de jure exclusivity. It noted that the clause may result in de facto exclusivity if Hyundai does not, in practice, permit its dealers to operate competing dealerships or other businesses. However, Hyundai had submitted a list of more than 100 Hyundai dealerships that also operated dealerships for competing brands. Therefore, the CCI concluded that Hyundai had not imposed an exclusive supply obligation or refusal to deal on its dealers. Instead, it held that Clause 5(iii) of the agreement did not mandate exclusivity, but rather required only Hyundai's prior permission in order for dealers to operate competing dealerships.
Resale price maintenance With regard to the allegations of resale price maintenance through imposition of a discount control mechanism, the CCI held that such arrangements denied consumers of due benefits as they were forced to pay high prices. Further, these prices were did not result in any improvements in the production or distribution of the goods or the provision of services. Hyundai's arrangements created barriers for new entrants in the market and restricted the dealers' ability to engage in intra-brand price competition. The CCI therefore held that Hyundai had imposed arrangements that resulted in 'resale price maintenance', which includes:
- monitoring the maximum permissible discount level through a discount control mechanism; and
- imposing a penalty mechanism for non-compliance with the discount scheme.
Accordingly, the CCI held that Hyundai's practice constituted resale price maintenance under Section 3(4)(d) of the Competition Act.
Tie-in arrangement With regard to the allegations that Hyundai had tied the sale of its passenger cars to the sale of compressed natural gas (CNG) kits, lubricants and oils, and car insurance, the CCI observed that Hyundai had nominated CEV Engineering Private Limited in order to have CNG kits fitted in its cars in Delhi. The CCI held that where a warranty is cancelled for use of non-CEV CNG kits, Hyundai may have a legitimate interest in ensuring that alternative brands of CNG kits are not used, as it would bear the costs of warranty. The CCI therefore held that nominating CEV to manufacture CNG kits did not violate Section 3(4) of the Competition Act.
However, the CCI observed that mandating dealers to use a particular brand of oil or lubricant and penalising dealers for the use of non-recommended oils was of no benefit to the dealers or the consumers of Hyundai cars. Further, it restricted new entrants in the market for the supply of lubricants for use in Hyundai cars. Accordingly, the CCI held that the practice constituted a tie-in arrangement under Section 3(4)(a) of the Competition Act.
Following the Supreme Court decision in Excel Corp, the CCI imposed on Hyundai a penalty of 0.3% of the "relevant turnover", amounting to Rs870 million.
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(1) CCI decision, June 14 2017. For the full text please see the CCI website.