India: Abuse of Dominance
The Competition Act, 2002 (Act) regulates the markets in India with the objective of promoting and sustaining competition in the market. The Competition Commission of India (CCI),1 established under the provisions of the Act, is the main agency entrusted with the duty to regulate and eliminate practices having an adverse effect on competition in India. The Act is largely patterned on the European Union (EU) competition law and governs three main areas: anti-competitive conduct, abuse of dominance and combinations. This article seeks to provide a broad overview on enforcement of provisions relating to the unilateral conduct of enterprises and explores the trends in different areas of Indian competition law jurisprudence relating to abuse of dominance.
Abuse of dominance under the Act
The substantive test and benchmark for analysis under the Act is to prohibit practices that have an appreciable adverse effect on competition in India. Section 4 of the Act deals with the regulation of abuse of dominance (ie, the regulation of unilateral conduct). The Act prohibits the abuse of a dominant position by any ‘enterprise’ or ‘group’, and defines dominant position as a position of strength enjoyed by an enterprise in the relevant market in India, which enables it to operate independently of the competitive forces prevailing in the relevant market or affect its competitors or consumers or the relevant market in its favour. In India, the determination of ‘dominance’ is based on a qualitative assessment of the prevalent market dynamics and the relative position of strength enjoyed by the market participants. Section 4 stipulates that practices such as imposition of unfair or discriminatory conditions on price in purchase or sale (including predatory pricing), limiting or restricting the production of goods, denial of market access, and leveraging market position in one relevant market to enter into another relevant market, shall amount to abuse of dominance. Evidently, section 4 of the Act is a welcome departure from the earlier competition law regime under the aegis of the Monopolies and Restrictive Trade Practices Act, 1969, wherein emphasis was placed on the size of the concerned player, rather than the actual abusive practice or conduct of such a player.
Abuse of dominance requires an analysis of the level of dominance of the concerned enterprise and its abusive conduct. While determining the abusive conduct of a dominant enterprise or group, the CCI scrutinises the abusive practices by way of the following three steps:
- determination of the relevant market;
- assessment of dominance of such enterprise or group; and
- assessment of its abusive conduct.
While determining dominance, the CCI is required to consider the following factors listed under section 19(4) of the Act:
- market share;
- size and resources of the enterprise;
- size and importance of competitors;
- economic power of the enterprise, including commercial advantages over competitors;
- vertical integration of the enterprises or sale or service network of such enterprises;
- dependence of consumers on the enterprise;
- legal monopoly or dominant position;
- entry barriers, including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high switching costs;
- countervailing buyer power;
- market structure and size of the market;
- social obligations and social costs;
- relative advantage, by way of the contribution to the economic development, by the dominant enterprise; or
- any other factor that the CCI may consider relevant for the inquiry.
CCI’s jurisdiction: definition of the term ‘enterprise’
The Act prohibits abuse of dominance by an ‘enterprise or group’. The CCI in Reliance Big Industries & Ors v Karnataka Film Chamber of Commerce & Ors2 held that only the conduct of an ‘enterprise’ can be examined under the provisions of section 4 of the Act. For the purposes of the Act, a person or a department of the government, engaged in any activity relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services, would constitute an ‘enterprise’.3
Notably, the Act provides an exemption to any activity that relates to the sovereign functions of the government, including those related to energy, currency, defence and space. For instance, an activity in relation to the collection of taxes (a purely sovereign function) would not fall within the purview of the Act and an entity discharging such functions would not constitute an enterprise (M/s Red Giant Movies v Secretary, Commercial Taxes & Registration Department, Government of Tamil Nadu and the Commissioner, Commercial Taxes Department, Government of Tamil Nadu).4 Accordingly, the CCI cannot scrutinise the conduct of such entities to determine any plausible contravention of section 4 of the Act.
The definition of the relevant market is pivotal to any abuse of dominance analysis, given that the dominance of an enterprise is always determined with respect to a particular relevant market. In addition to being the basis for determining whether an entity enjoys a dominant position, the definition of the relevant market is crucial in analysing the anti-competitive effects of the relevant entity’s behaviour.
The relevant market is an aggregation of the relevant product market and the relevant geographic market.5The relevant product market is defined as all those products or services that are regarded as interchangeable or substitutable by the consumer, on the basis of the characteristics of the product, its prices and intended use.6 The relevant geographic market is defined as a market comprising the area in which there exists distinct homogenous competitive conditions in terms of demand and supply of goods or services, which can be distinguished from the conditions prevailing in the neighbouring areas.7
In practice, the CCI’s definition of the relevant market varies from case-to-case, based on factual matrix. In the absence of specific guidelines for defining the relevant market, the CCI does not follow a consistent approach in delineating the relevant market. As such, the CCI has restricted the relevant geographic market to particular suburbs in some cases (such as Belaire Owners’ Association v DLF Limited8 and Mr Om Datt Sharma v M/s Adidas AG & Ors)9 and has, without any specific differentiation, defined the relevant market on an ‘all India basis’ in other cases. A narrow definition of the relevant market only facilitates establishing an entity’s dominance.
Interestingly, in Maharashtra State Power Generation Limited v Coal India Limited and Ors10 (Coal India), the CCI noted that defining a global market as the relevant market was contrary to the express provisions of the Act. The CCI reasoned that the explanation to section 4 of the Act indicated that the ‘dominant position’ is a position of strength enjoyed by an enterprise in the relevant market ‘in India’. Accordingly, the contention of the parties to define the relevant geographic market as the global market was held by the CCI as legally untenable. Though the facts of Coal India may have warranted restricting the relevant market to India, by concluding that a worldwide definition of the relevant market would not be permissible in any instance of abuse of dominance, the CCI has adopted a narrow and restrictive view. In doing so, the CCI has failed to consider products which are not affected by national barriers.
In terms of the product market definition, the CCI has primarily considered demand-side substitution as a determining factor in delineating the relevant product market. For instance, in Coal India, the CCI did not include imported coal as a part of the relevant product market since imported coal could not be used as a substitute to domestic coal as it was expensive, had different qualities and the boilers used by Indian thermal power plants had specifications suited specifically to domestically manufactured coal.
Further, in a recent decision, the CCI acknowledged the constantly increasing size of the Indian online retail industry and concluded that the online market and the offline brick and mortar market were in fact different channels of distribution of the same product and constituted the same relevant market. The CCI had based its analysis on demand-side substitution, noting that consumers weighed the options available in both markets and a significant price increase in the online market was likely to result in the consumers shifting towards the offline market and vice versa (In re Mr. Ashish Ahuja v Snapdeal.com and Ors).11
Recently, in Shri Shamsher Kataria v Honda Siel Cars India Ltd & Ors12 (Auto Parts), the CCI undertook a detailed analysis while delineating the relevant market. In this case, the information was filed against various automobile manufacturing companies or original equipment manufacturers (OEMs) on the basis that the OEMs were involved in activities leading to competition law concerns in India by restricting the availability of genuine spare parts of automobiles manufactured by them in the open market. It was also alleged that the car manufacturing companies controlled the operations of various authorised workshops and service stations that were in the business of selling automobile spare parts besides rendering after sale automobile maintenance services. The technological information, diagnostic tools and software programs required to maintain, service and repair the technologically advanced automobiles manufactured by each OEM were unavailable in the open market. Consequently, the repair, maintenance and servicing of such automobiles could only be carried out at the workshops or service stations of the authorised dealers of the OEMs.
The CCI did not accept the ‘unified systems market’ definition submitted by the OEMs and concluded that the automobile primary market and the aftermarket for spare parts and repair services did not constitute a unified systems market. The CCI noted that the consumers in the primary market (ie, the market for manufacture and sale of cars) did not undertake a whole-life cost analysis at the time of purchase of the automobile and, accordingly, the CCI bifurcated the relevant market into three separate markets, namely:
- the market for manufacture and sale of cars;
- the market for sale of spare parts; and
- the market for sale of repair services (the market for sale of spare parts and sale of repair services were held to be interconnected).13
The CCI was also of the view that a ‘clusters market’ existed for all the spare parts for each brand of car manufactured by the OEMs in the Indian automobile market.
Noting that each OEM had a 100 per cent market share in each of the relevant markets, the CCI held each OEM to be a dominant entity in the aftermarket for their brand’s genuine spare parts and diagnostic tools, and also in the aftermarket for the repair services for their brand’s automobiles. As such, the CCI considered each individual separate brand of automobiles as a separate relevant market, instead of considering the broader relevant market of the aftermarkets for the entire automobile industry. Based on this analysis, the CCI concluded that the OEMs held dominant positions in the respective relevant markets and considered each OEM to have abused its dominant position.
Assessment of dominance
As highlighted above, under the provisions of the Act, dominance refers to the ability of an enterprise to operate independently of market forces and its position of strength which enables it to affect competitors or consumers or the relevant market in its favour. While determining dominance, the CCI is required to consider the factors listed under section 19(4) of the Act. Consequently, an enterprise’s dominance is a multifaceted assessment and there is no bright line market share test. Reaffirming this view, in Mr Ramakant Kini v Dr L H Hiranandani Hospital, Powai, Mumbai,14 while assessing the dominance of the Hiranandani hospital in the relevant market for provision of maternity services by super speciality and high-end hospitals within a distance of 12 kilometres from the Hiranandani Hospital, the CCI clarified that the market shares of an entity is ‘only one of the factors that decides whether an enterprise is dominant or not, but that factor alone cannot be decisive proof of dominance’.
Similarly, in In Re M/s ESYS Information Technologies Pvt Ltd and Intel Corporation (Intel Inc) & Ors,15 in addition to the market shares of Intel, the CCI’s assessment of Intel’s dominance was based on other relevant factors such as the consumer preference owing to the brand name, the existence of strong entry barriers in the relevant market, the significant intellectual property rights of Intel and the scale and scope enjoyed by Intel.
Assessment of abusive conduct
In relation to the assessment of abusive conduct, the CCI’s scrutiny is limited to the statutory provisions under section 4 of the Act which enlists a number of practices that are considered to be abusive (if such practices are conducted by a dominant enterprise). The practices enlisted under section 4 can be broadly divided into two separate kinds of abuses: exclusionary abuses, which include practices of the dominant entity, having the effect of excluding other players in the relevant market; and exploitative abuses, which include practices of the dominant entity which tend to exploit the dominant entity’s position by imposing unfair or discriminatory restrictions on other players and consumers in the market.
Statutorily, an abuse of dominance is required to be treated as a ‘per se’ violation. However, in Dhanraj Pillai v Hockey India,16 the CCI brought in the effects test but subsequently disregarded its own precedent. For example, in Faridabad Industries Association v M/s Adani Gas Limited,17 despite Adani Gas Limited’s (AGL) good conduct by benefiting consumers and the ostensible clauses not being enforced, the CCI imposed a penalty on AGL.
Penalties and sanctions
The CCI has the power to impose the highest economic penalties in India. In case of contravention of section 4 of the Act, the CCI is empowered to levy a penalty of up to 10 per cent of the average turnover of the enterprise for the preceding three financial years18 or direct the division of a dominant enterprise. However, as there are no guidelines issued by the CCI in relation to the determination of penalties, the CCI currently has absolute discretion in relation the imposition of a penalty and there are no guidelines to assist in the determination of the quantum of penalty. Additionally, in most cases there is absence of coherent justification for the penalties imposed. For instance, in the Auto Parts case, all the OEMs were fined the same percentage quantum, despite differences in conduct, which ought to have been considered as a mitigant.
The CCI has, in very few instances, taken into account factors that may be regarded as mitigating factors for the determination of the penalty. For instance, in one of the recent cases, the CCI has considered the steps taken by the opposite parties in the interim period (between the informant filing information alleging an abuse of dominance and the CCI’s order), which may have an effect of reducing competition law concerns, while determining the penalty to be imposed.
In the case of Indian Exhibition Industry Association v Ministry of Commerce & Industry & Anr,19 the Indian Exhibition Industry Association (IIAA) filed an information against the Ministry of Commerce & Industry (Ministry) and Indian Trade Promotion Organization (ITPO) alleging the contravention of the provisions of section 4 of the Act based on the time gap restriction imposed by ITPO between two exhibitions/fairs. In 2006, the ITPO had reformulated certain guidelines imposing a ‘time gap restriction’ of 15 days between two events having similar product profiles and coverage for events that were not conducted by ITPO. However, in case of ITPO fairs, the time gap was 90 days before the start or 45 days after the close of an ITPO event. Further, in 2007, the concerned guidelines were reassessed and the time gap of 15 days was maintained. However, in case of ITPO and third-party fairs having similar product profiles, the time gap was 90 days before the ITPO’s event and 45 days after it. The CCI held that ITPO was ‘playing a dual role as a regulator as well as the organiser of exhibitions’ and, as such, considered the acts of ITPO to be an abuse of its dominant position. The penalty imposed by the CCI on the ITPO was limited to 67.5 million rupees (around 2 per cent of the average of the turnover for the preceding three years). The removal of discriminatory features and the differences in time gap restrictions by an amendment in 2013 was considered by the CCI as a mitigating factor.
Further, the ‘turnover’20 to be taken into account while imposing penalties under the Act has also been subject to debate. Though the Act does not stipulate that the CCI must only consider the turnover that can be attributed to the business relating to which the abusive conduct has occurred, the Competition Appellate Tribunal (COMPAT) has held that in the case of multi-product companies, (ie, a company engaged in various lines of the business), the ‘relevant turnover’ which relates to the activity of the company contravening the provisions of the Act, should be considered (M/s Excel Crop Care Limited v Competition Commission of India).21 This view of COMPAT is contrary to the CCI’s practice of imposing a penalty based on the entire turnover of the infringing enterprise. However, COMPAT itself has failed to apply this concept of ‘relevant turnover’ in its subsequent decisions. For instance, in its decision in M/s DLF Limited v Competition Commission of India & Ors22 (COMPAT DLF), COMPAT did not restrict the calculation of the penalty on the basis of DLF Limited’s turnover arising only from the residential segment, despite the relevant market in that case being the market for ‘high-end residential accommodation’. COMPAT upheld the penalty levied by the CCI, which was calculated on the basis of DLF’s turnover pertaining to its entire business (ie, the development of residential, office and commercial properties).
As stated above, in addition to imposing monetary penalties, under section 27(g) of the Act, the CCI has powers in addition to the imposition of a penalty, such as directing the division of a dominant enterprise. The exercise of one of such powers under section 27(g) (ie, the CCI’s power to direct modification of agreements) has been read down by COMPAT to cases where there is a contravention of the provisions of section 3 of the Act pertaining to anti-competitive agreements. In COMPAT DLF, COMPAT disapproved the approach adopted by the CCI in directing the Apartment Buyers’ Agreements (from which the abuse of dominance behaviour of DLF stemmed) to be amended, and noted that there was ‘absolutely no justification on the part of the CCI to change the language of the agreement altogether’. COMPAT noted that the specific power to modify agreements can be exercised by the CCI only in the limited circumstances where it finds that such agreements violate the provisions of Section 3 of the Act. COMPAT specifically observed that ‘no provision in the Competition Act permits the re-writing of the agreements’. In doing so, COMPAT has held that the scope of the CCI’s residuary powers under the Act,23 whereby the CCI can pass any order or issue any directions as it may deem fit, are restricted. The CCI has appealed COMPAT DLF before the Supreme Court of India.
Trends in recent orders
In its first decision against a public sector undertaking, indicating that public sector enterprises engaged in economic activities are not exempt from CCI’s scrutiny, the CCI fined Coal India Limited (CIL) for having abused its dominant position in the market for the production and sale of non-coking coal to thermal power generators. Despite the dominant position of CIL being the result of a government policy and CIL being a creature of the statute, the CCI imposed a fine of 17.7 billion rupees (at a rate of 3 per cent of the average turnover for the last three years) on CIL for imposing unfair and discriminatory conditions under fuel supply agreements executed with power generation companies and directed modification of CIL’s agreements.
As stated above, in Auto Parts, the CCI investigated the automobile industry where it found that 14 automobile companies were abusing their dominant position and fined the companies at 2 per cent of their average turnover in India for the past three years. The total fine imposed was 25.4 billion rupees. The CCI also directed the OEMs to sell spare parts in the open market without any restriction. Further, OEMs were required to permit independent original equipment suppliers to sell their spare parts and were prohibited from placing restrictions or impediments on the operation of independent repairers and garages. OEMs were also directed not to impose a blanket condition that warranties would be cancelled if the consumer availed of services of any independent repairer.
In June 2011, the CCI passed an order stating that the National Stock Exchange (NSE) was following unfair pricing policies and using its dominant position to attract more business. While directing NSE to levy charges in its currency derivatives segment, the CCI imposed a penalty of 555 million rupees on the NSE. Recently, COMPAT upheld the CCI’s order, stating that the NSE in continuing with the zero transaction fees policy indulged in exclusionary conduct.
It may also be noted that the CCI imposed a penalty of 10 million rupees on M/s Google Inc and Google India Private Limited (collectively, Google)24 for failing to comply with the directions of the director general seeking certain information with respect to the on-going investigation against Google. The CCI observed that no cause was shown by Google for non-compliance with the directions given by the director general. It was further noted that despite liberal indulgence shown by the director general in granting successive extensions, Google had engaged in delaying tactics to prolong the investigations. Accordingly, the CCI imposed the maximum penalty envisaged under section 43 of the Act (10 million rupees) and ordered Google to furnish all the information required by the director general within a period of 10 days. The CCI further clarified that in case of any non-compliance with the directions of the director general in future, each instance of non-compliance would be taken separately as an aggravating factor for the imposition of fine.
Claim for damages
Notably, MCX Stock Exchange Ltd (MCX-SX) has filed an application with COMPAT claiming damages of 5.9 billion rupees, stating that due to the NSE’s exclusionary conduct it had lost transaction charges of 2.2 billion rupees, along with a treasury income loss of 3.4 billion rupees. This is the first instance where a company has filed claim for damages. Publicly available reports mention that MCX-SX intends to increase its claim for damages to 8 billion rupees.
First dawn raid
After five years of enforcing provisions relating to anti-competitive agreements and abuse of dominance, the CCI recently exercised its powers in relation to dawn raids and search and seizure for the first time. In contrast to the typical use of dawn raids as an investigative tool in cartel cases, the CCI conducted its first dawn raid in relation to a case of alleged abuse of dominance. The search and seizure powers of the CCI were used against JCB India and its wholly-owned subsidiary, JC Bamford Excavator, for failing to cooperate with the CCI’s ongoing investigation pertaining to the allegation of abuse of its dominant position.
The CCI has proven its mettle as a very proactive regulator within a very short span of time. The benefits of its orders in terms of deterrence of anti-competitive conduct must be appreciated. It has also established that the Act will apply on an ‘ownership neutral’ basis – it will regulate private companies as well as government companies – and the penalty imposed on CIL evidences this. The CCI has also invoked its dawn raid powers to supplement its investigations. Interestingly, most of the CCI orders are being challenged in high courts or at COMPAT on grounds of non-compliance with due process, and it remains to be seen whether the CCI will opt to voluntarily issue penalty guidelines or be compelled to by the courts. Until this impasse is resolved, the industry will continue to take recourse to the courts and procedure, rather than substantive aspects, will continue to hold centre stage.
The authors would like to acknowledge the contribution of senior associate Soumya Hariharan and associates Arunima Chandra, Jayati Handa and Kaustav Kundu in the Mumbai Competition Law Practice of Amarchand & Mangaldas & Suresh A Shroff & Co.
- The CCI is the principal regulatory body which regulates competition in India and has been established by the central government under section 7(1) of the Act.
- Case No. 25 of 2010.
- Enterprise has been defined in section 2(h) of the Act.
- Case No. 54 of 2014.
- Relevant market has been defined under section 2(r) of the Act.
- Relevant product market has been defined in section 2(t) of the Act.
- Relevant geographic market has been defined in section 2(s) of the Act.
- Case No. 19 of 2010.
- Case No. 10 of 2014.
- Case Nos. 03, 11 and 59 of 2012.
- Case No. 17 of 2014.
- Case No. 03 of 2011.
- The CCI went on to combine the two relevant markets of sale of spare parts and sale of repair services, under the bigger ‘after-sales’ services as the two markets were inter-connected.
- Case No. 39 of 2012.
- Case No. 48 of 2011.
- Case No. 73 of 2011.
- Case No. 79 of 2012.
- Case No. 17 of 2014.
- Case No. 74 of 2012.
- Section 2(y) of the Act defines ‘turnover’ as below: ‘turnover’ includes value of sale of goods or services.
- Appeal No. 79 of 2012, Appeal No. 80 of 2012, Appeal No. 81 of 2012.
- Appeal No. 20 of 2011, Appeal No. 22 of 2011, Appeal No. 19 of 2012, Appeal No. 23 of 2011, Appeal No. 12 of 2012, Appeal No. 20 of 2012, Appeal No. 29 of 2013, Appeal No. 8 of 2013, Appeal No. 9 of 2013, Appeal No. 11 of 2013.
- Section 27(g) of the Act.
- Case No. 7 and 30 of 2012.