Introduction COMPAT's decision Comment

Introduction

In a groundbreaking order dated December 9 2016,(1) the Competition Appellate Tribunal (COMPAT) upheld the earlier order dated May 28 2014 passed by the Competition Commission of India (CCI), which found that Ford India Pvt Ltd, Nissan Motor India Pvt Ltd and Toyota Kirloskar Motor Pvt Ltd (together, the appellants) had indulged in anti-competitive practices by not opening the spare parts and repair and maintenance markets to independent repairers and contravened the following provisions of the Competition Act 2002:

  • Sections 3(4)(b), (c) and (d) – the appellants imposed restrictions through their agreements and practice in order to:
    • limit original equipment suppliers from selling spare parts, including technical manuals and diagnostic tools, in the relevant aftermarkets to independent repairers and authorised dealers;
    • restrict independent repairers from sourcing spare parts from original equipment suppliers; and
    • prevent original equipment suppliers from dealing with independent repairers.

This conduct caused appreciable adverse effect on competition in India.

  • Section 4(2)(a)(1) – the appellants abused their dominant position in their respective markets by imposing unfair conditions on their authorised dealers and original equipment suppliers with regard to the purchase and sale of goods and services.
  • Section 4(2)(c) – the appellants indulged in practices which resulted in a denial of market access for independent repairers in the spare parts aftermarket.
  • Section 4(2)(e) – the appellants abused their dominant position in the spare parts aftermarket in order to enter into or protect their relevant market (ie, the repair and maintenance market).

However, COMPAT reduced the penalty imposed by the CCI – originally 2% of the average annual turnover of each company – to 2% of the average relevant turnover (ie, each company's average annual turnover in the spare parts aftermarket for the three years preceding the inquiry) and directed the CCI "to obtain relevant statistics and after verification determine the amount of penalty on the basis of this direction". The details of COMPAT's orders are as follows.

COMPAT's decision

COMPAT, while generally upholding the CCI's directions to the appellants (ie, to open the spare parts markets for their respective brands), also issued eight specific directions with regard to the opening of the spare parts and repairs and maintenance aftermarkets in India and directed each of the appellants to furnish a compliance schedule within 60 days of the order. COMPAT also stated that the order must be implemented within one year. To ensure implementation, COMPAT directed the CCI to review the progress of and actions taken by the parties to the order, including the government departments and ministries, every three months.

More significantly, COMPAT also directed the Ministry of Road Transport and Highways to:

  • develop voluntary standards for certification of independent repairers and garages and their corresponding conformity assessment and accreditation systems under the Motor Vehicle Act 1988 and the Central Motor Vehicle Rules 1989, with the help of the Quality Council of India, the Bureau of Indian Standards and other concerned automotive regulatory bodies, within one year of the issuance of the order; and
  • initiate a programme to standardise automobile spare parts, in consultation with other relevant government departments, agencies and industry organisations.

COMPAT's directions to open the relevant aftermarkets included instructions to make available in the public domain, and host on each appellant's website, information regarding:

  • the spare parts, including:
    • their maximum retail price;
    • options to purchase spare parts over the counter;
    • details of quality alternative parts;
    • maintenance costs;
    • provisions regarding warranty; and
  • any details which may be relevant for customers to exercise consumer choice and facilitate fair competition in the market.

Case overview This case was originally filed in 2011 by Shamsher Kataria against Honda, Fiat and Volkswagen. Kataria alleged that, in contravention of Sections 3(3)(a) and 3(3)(b) of the act, the three car companies had:

  • restricted the sale and supply of spare parts, technical information and diagnostic equipment and tools to independent automobile service providers; and
  • indirectly determined purchase and sale prices for vehicle spare parts, servicing, maintenance and repairs due to the monopoly maintained by them over the supply of genuine spare parts and the information and tools required for the servicing and repair of vehicles.

The matter was examined by the CCI and, after finding a prima facie case, it was referred to the director general for investigation. The director general broadened the investigation to include similar practices from other brands – in particular, Ford, Hindustan Motors, Fiat, Nissan, General Motors, Premier, Mahindra & Mahindra, Maruti Suzuki, Tata Motors, Hyundai, Skoda, Toyota and two premium brands, Mercedes Benz and BMW. After a detailed investigation, the director general concluded that each of these 17 car manufacturers and original equipment manufacturers had contravened Sections 3 and 4 of the act. After hearing objections from each party regarding the director general's investigation report (a copy of which was forwarded to each of them), the CCI issued a detailed order dated August 25 2014 upholding the director general's findings. After a series of oral hearings, the CCI imposed a penalty of 2% of the total average annual turnover of each party. The CCI also issued detailed directions to each original manufacturer to open the spare parts and repair maintenance aftermarkets by removing restrictions from their agreements with their authorised dealers and to make spare parts and technical manuals available to independent repairs, in order to generate competition in the aftermarkets of each brand (for further details please see "Commission issues notices to 17 carmakers for violating Competition Act").

In its 2014 landmark decision, the CCI found that the car manufacturers enjoyed a dominant position in the markets for spare parts and after-sales services of their respective car brands because there was a viable aftermarket for each car brand which was being restricted and abused through excessive pricing by each original equipment manufacturer. Among other things, the restriction on original equipment suppliers from selling spare parts, diagnostic tools and manuals to independent service providers constituted an abuse of dominant position. Further, it was held that the vertical agreements between manufacturers and their respective authorised dealers not to sell the parts over the counter had an appreciable adverse effect on competition.

Appellants' arguments COMPAT ultimately upheld the CCI's order and rejected the main arguments made by the appellants' counsel – in particular, that no aftermarkets existed for spare parts and repair and maintenance for each original manufacturer's brand, and instead that there was a single system market for cars and their genuine spare parts. Further, COMPAT rejected the appellants' counsel argument that consumers consider the lifetime costs associated with buying a costly foreign branded car. COMPAT stressed adopting a "liberal and pro-competitive approach".(2) It also referred to foreign jurisprudence and the regulatory framework governing competition in the automobile industry – most importantly, EU Regulation 461/2010 regarding vertical agreements in the EU automotive industry and the EU Block Exemption Regulation on Vertical Agreements (330/2010).(3)

COMPAT specifically rejected the argument that car manufacturers should not adopt the approach taken in developed countries on the basis that this was impractical in India. COMPAT held that the "Indian automobile sector has come a long way and this is the opportunity for us to bring the much desired leapfrogging in the regulatory framework while mandating removal of restrictions on the competitive framework".(4)

Comment

COMPAT's order is groundbreaking and somewhat unique, given that none of the car manufacturers or original equipment manufacturers were dominant in their primary markets (ie, the markets for their respective brands), yet each was found not only to be dominant in the secondary markets for spare parts and after-sale services and maintenance, but also to have abused their dominant position on the markets for their respective brands.

COMPAT's decision, if implemented by each party, will bring transparency and competition into the spare parts and after-sales and repair markets in India.

Notably, COMPAT's decision covers only Ford, Toyota and Nissan, as they were the only manufacturers to appeal the CCI's decision. The remaining car manufacturers have chosen to appeal the CCI's decision before the Delhi High Court, challenging the constitutionality of the Competition Act itself. The court's decision is eagerly awaited.

For further information on this topic please contact MM Sharma at Vaish Associates by telephone (+91 11 4929 2525) or email (mmsharma@vaishlaw.com). The Vaish Associates website can be accessed at www.vaishlaw.com.

Endnotes

(1) COMPAT order dated December 9 2016. For full text see http://compat.nic.in/Judgements.aspx.

(2) Paragraph 139.

(3) Paragraph 144.

(4) Paragraph 148.

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