CCI introduces Leniency “Plus” regime in India- Will it suffice?
The Competition concerns in the automobile industry in India in general and in to vertical auto dealership arrangements between OEMs and their authorised dealers keep on emerging after India’s first landmark auto / car spare parts case filed by Shamsher Singh Kataria ( Shamsher Singh Kataria Case / auto/car Spare Parts Case) . The ratio decidendi of the said case, that each OEM is dominant in its respective brand of car is being used repeatedly in each successive case by the Competition Commission of India (CCI/Commission).
In the above context , the recent order dated 4.5.2021 passed against TATA MOTORS ( “Tata Motors order” ) by the Commission directing investigation into alleged abuse of dominant position by inserting unfair conditions including exclusive dealership clause in the dealership agreements of its dealers for commercial vehicles in the city of Varanasi (UP) and Nashik ( Maharashtra) , is the fourth such investigation directed by the CCI, regarding similar vertical restrictions placed on dealers. The earlier three being , the first one against Hyundai Motors, in 2017, second one against Honda Motorcycles in 2017 , and the third one being against Maruti Suzuki in 2019.
The issues raised in all these cases , including the present one of TATA motors , are the same , tying-in the main product i.e. automobiles with ancillary products or services such as lube oil, engine oil, lubricants, batteries, accessories, merchandise items, insurance, and finance etc and threats to terminate the dealership if they fail to adhere to their directions, often given as a matter of “Company Policies”. There are also issues relating to exclusivity imposed on dealers by OEMs restricting dealers from taking dealership of competing brands . For a comprehensive discussion and analysis on this topic readers are advised to refer to my earlier blog how competition issues affect auto dealers in India, published here on 1.11.2019 .
In the present Tata Motor order, two separate information were filed against Tata Motors Ltd. Tata Capital Financial Services Limited & Tata Motors Finance Ltd. (“Tata Group entities /Opposite Parties-OPs”) .
The first case (Case No. 21of 2019) was filed by one Ms Neha Gupta, an advocate based in New Delhi on behalf of her family’s dealership, Varanasi Auto Sales Pvt Ltd. (VASPL) based in Varanasi (UP) and the second case (Case no. 16 of 2020) by Proprietor of M/s Kanchan Motors, a dealer based in Nashik (Maharashtra) .
In both the Informations it was alleged that Tata Motors is a dominant entity in the commercial vehicles segment and enjoys 85% market share in India .VASPL referred to the data collected from the Office of Regional Transport Office (RTO), Varanasi to show the market share of OPs in year 2015-16 in the district of Varanasi to be on an average 69% in Heavy Commercial Vehicles (HCV); 88% in Medium Commercial Vehicles (MCV); 68% in Light Commercial Vehicles (LCV) and 29% in Bus segment. VASPL has further stated that the Annual Report 2018-19 of Tata Motors declares itself as India’s largest original equipment manufacturer (OEM).Similarly, the second informant , an authorised dealer of the Tata Motors’s Small Commercial Vehicles (SCV) [Cargo and Passenger range] category and also for passenger/ utility vehicles category including their spare parts, accessories, after sales services, utility vehicles and value-added services in the district of Nashik, Maharashtra, stated that Tata Motors is a dominant enterprise with a market share of more than 85% in India and more than 50% in district of Nashik along with a strong global network of subsidiaries and associate companies. With respect to the allegations in respect of the contravention of the provisions of Section 4 of the Act, the Informant stated that the OPs are ‘enterprise/ Group’ within the meaning of provisions of Section 2(h) read with Explanation (b) to Section 5 of the Act.
The Allegations-The allegations of abuse of dominance on both the Informations were also similar, such as:
- Tying in finance and loans etc with sales of Vehicles– unduly favouring its own captive finance companies to the exclusion of others for financing vehicle purchase by customers (known as “channel financing facility loan”) -Imposing exclusionary as well as exploitative conditions on dealers- Tata Motors obligated dealers to raise finance/ loan from its captive NBFCs such as Tata Capital and Tata Motors Finance. OPs dictated and restricted the finance facility as per their discretion. The finance facility was extended by Tata Capital and Tata Motors Finance to the authorised dealers as per the direction and desire of Tata Motors. Further, Tata Capital and Tata Motors Finance sanctioned finance facility in a discretionary manner mainly relying upon the number of vehicles Tata Motors authorised its dealer to off-take for sale. Furthermore, the channel finance facility loan limit extended by Tata Capital and Tata Motors Finance to an authorised dealer was increased or decreased as per the targets set by Tata Motors rather than considering the financial strength of that authorised dealer or market demand.
- VASPL referred to specific conditions in the dealership agreements in support of the allegations, such as, the finance facility was given by other banks/ NBFCs based on comfort letter provided by Tata Motors and accordingly, the dealer was compelled to raise finance from Tata Capital and Tata Motors Finance in spite of OPs imposing exorbitant interest rates, additional interest, penal interest and prepayment penalty. Moreover, Tata Motors used its discretion to provide the comfort letter to other lending institutions. It was also alleged that Tata Motors created a situation, whereby the loan extended to the dealer by banks and other NBFCs was exhausted, and the dealer was unable to meet the target set by Tata Motors and thereafter Tata Motors started putting pressure on the dealer to increase its working capital otherwise threatened termination of the dealership.
- VASPL referred to specific non-compete obligations imposed vide some clauses [such as clause 4(d) and 15(c)] and stated that Tata Motors vide its communication dated 04.07.2016 terminated its passenger/ utility vehicle dealership arbitrarily on ground of poor performance in terms of failure to achieve sales target for passenger/ utility vehicle without providing any opportunity of being heard. Further, Tata Motors also did not buy back the stock of passenger/ utility vehicles once the dealership was terminated creating the issue of liquidating the vehicle’s stock after termination of the dealership.
- VASPL also alleged that Tata Motors directed its dealers to create fake names and bill the vehicles to them which is known in business parlance as ‘Billed but not delivered’ (BBND) so that Tata Motors could push the off take of vehicles or justify its forced billing on papers on its dealer by creating wrong record of stock of vehicles.
- Kanchan Motors averred that finance facility extended by Tata Capital and Tata Motors Finance took away the decision-making power of the dealer and unfairly imposed liability of unpaid instalments of the borrower on the dealer, which caused depletion of working capital of the dealer and eventually made it financially sick. Furthermore, the Informant has averred that some of these liabilities were non-reversible i.e., irrespective of payment received or not by the OPs, the dealer was liable to pay the dues of customer to the OPs without any
- privity of contract.
- Moreover, as per the Informant, Tata Motors Finance intentionally financed the slow-moving vehicles solely with the aim to increase the sale of Tata Motors’s vehicles.
- Similarly, the Informant has alleged that Tata Motors Finance in spite of having sufficient knowledge of customer’s inability to repay would still finance the vehicle to such customers in order to retain the market share of Tata Motors as the defaulted/ unpaid instalment of the customers would be recovered from the dealer illegally, using unfair, anti-competitive, restrictive and by abusing their dominant position.
- VASPL alleged that Tata Motors followed a unique practice to coerce its dealers to order the vehicles according to its own whims and fancies (by compelling the dealers to copy paste the list of vehicles provided by Tata Motors on dealer’s letter head and sending back the same to the Tata Motors), is in violation of the provisions of Section 3(4) and Section 4 of the Act. VASPL alleged that OPs engaged themselves in tie-in arrangement by coercing the Informant to order the SCV or passenger/ utility vehicles according to the list provided by it via e-mail and later asking the dealer to paste the contents of the attachment without any changes on dealer’s letter head and sending back the scanned copy of such list (as provided by Tata Motors) immediately via e-mail followed by the original hard copy via post. The Informant has averred that the same was done to coerce the dealer for billing the SCV or passenger/ utility vehicles as desired by Tata Motors and thereafter, preparing a paper trail to wrongfully show that the vehicles were requested by the dealer
- Territorial restriction– Dealer is confined to a territory specified in the Dealership Agreement. Kanchan Motors alleged that the said territory could be extended or curtailed simply by oral instruction from Tata Motors. For instance, clause 3(b) of the dealership agreement dated 10.02.2017 between the Informant and the Tata Motors, had specified the Informant’s territorial limit to the districts of Nashik only. Further, the Informant has alleged that vide e-mail dated 24.11.2017 Tata Motors restricted the Informant from selling vehicle in Jalgaon district of Maharashtra. Accordingly, the Informant has alleged that the same is in nature of ‘exclusive distribution agreement’ as mentioned under the provisions of Section 3(4)(c) of the Act.
- Resale price maintenance – in violation of the provisions of Section 3(4) of the Act. Kanchan Motors alleged that Tata Motors by restricting the discounting policy of its dealers that creates a situation of Resale Price Maintenance (RPM) by Tata Motors .Further, VASPL alleged that Discount on vehicles was contingent only if the off take of SCV or passenger/ utility vehicle was more or equal in number against the sales made by the dealer in a particular month. Further, tie-in arrangement of Discount Special Insurance Scheme (DSIS) was only on policies issued of participating insurance companies using existing TATA Business Support Service System (TBSS).
- Imposing supplementary obligations – Kanchan Motors alleged that Tata Motors had exclusive agreements with different vendor and accordingly the Informant was forced to buy the office furniture, TV Screen, employee’s uniform, ceiling paint, office tiles etc. from a particular vendor only. The Informant has alleged that such tie-in arrangement has also caused an appreciable adverse effect on competition (AAEC) in India if such factors are analysed on touchstone of provisions of Section 19(3) of the Act.
Tata Group Entities, while denying each allegation on merits based on their interpretation of the various clauses of the dealership agreementsin their reply raised two preliminary objections, Firstly , that disputes involved in the present cases are purely contractual and commercial in nature involving no competition concerns and therefore, the Commission does not have the jurisdiction to examine the issues raised by the Informants in the present batch of cases; and Secondly , that of laches and delays on the part of the Informants in approaching the Commission raising the issues highlighted in the Information.
CCI, however, dismissed the first preliminary objections by observing that the plea that issues raised are contractual and commercial in nature and therefore, the disputes raised by the Informants ought to have been filed before appropriate forum and not before the Commission, is misconceived and misdirected. The provisions of the Act which prohibit abuse of dominant position inter alia categorically envisage imposition of unfair or discriminatory condition/ price in purchase or sale of goods or service, as abusive conduct. That being so, entering into contractual arrangement between the parties is clearly implicit else the issue of purchase or sale of goods or service, would not arise. If such a plea is accepted, the dominant undertakings would virtually acquire an immunity from anti-trust actions. This was neither the intent nor purport of the legislature and the same is clearly reflected and can be gleaned from the statutory scheme as engrafted in Section 4 of the Act”.
Regarding the delay in approaching the Commission, CCI held that “the scheme of the Act does not envisage or provide any period of limitation for the obvious reason that the inquiries conducted by the Commission are in rem in nature and not in the nature of determining a lis between two competing parties and thereby acquiring characteristics of an in personam dispute. It also needs no emphasis that dynamic nature of markets makes application of plea of limitation to anti-trust inquiries as wholly irrelevant and ill-suited. In a changing and evolving market scenario, it cannot be determined with any exactitude as to when an anticompetitive behaviour commenced or morphed into another type of behaviour and when such conduct was terminated…. The concept and application of principles of limitations or delays/ laches in instituting the inquiries at the hands of the information provider is wholly out of context in the case of inquisitorial proceedings as against the adversarial proceedings, as provided under the law.
Thereafter, CCI delineated the relevant market prima facie as ‘market for manufacture and sale of commercial vehicles in India’ to examine the allegations made in the Informations. As regards the dominant position of Tata Motors Ltd., CCI observed that “the dominance of Tata Motors in the supra delineated market, the Commission observes that “it is discernible from the Annual Report 2019-20 of Tata Motors itself that it enjoys a market share of 43.0% in the commercial vehicle segment. In this market scenario, it cannot be, at prima facie stage, ruled out that Tata Motors enjoy a high market share as compared to the competing manufacturers such as Mahindra & Mahindra, Ashok Leyland and VECV-Eicher etc.” The dominant position of Tata Motors, in the aforementioned market, is also substantiated from the Tata Motor’s Annual Report for 2018-19 wherein the following has been noted:
‘…TML is the leader in India’s CV market with a market share of 45.1% and sales of 4,68,788 vehicles in FY 2018-19 and further notes that it has gained market share in the Medium and Heavy Commercial Vehicle (MHCV), Intermediate Light Commercial Vehicle (ILCV) and Small Commercial Vehicle (SCV) segments…’(Emphasis added).”
On the merits of each allegation, CCI found that except for one allegation , most of them appeared to be prima facie correct and it’s view on each are as tabulated below:
| S. No. | Allegation | Tata Motor’s Reply | CCI’s prima facie view |
| Tata Motors coerced its dealers to order vehicles according to its own whims and fancies by compelling the dealers to copy-paste the list of vehicles provided by Tata Motors on dealer’s letter head and sending back the same to Tata Motors. | Denied by contending that it does not set off-take related targets for its dealers. It was, however, pointed out that it expects its dealers to off-take minimum quantities of commercial vehicles every month to maintain a reasonable inventory of stocks at the dealerships for meeting expected/ unexpected demand from the market. Specifically denied that it has coerced the dealers to copy-paste the list of vehicles provided by Tata Motors on dealer’s letter head and sending back the same to the Tata Motors. It has submitted that the purpose was to consolidate the orders placed by VASPL from time to time (through e-mails, phone calls or even in in person meetings with Tata Motors’s sales team) during a month into a single document. Thus, the same was done for internal record-keeping, internal accounting purposes and for operational convenience. | Noted that VASPL has provided a complete trail of the emails as evidence that ex facie suggest that Tata Motors indulged in practice of coercing the dealers to bill vehicles as per its own needs and requirement. The same may result in swarming dealers with a stock of slow-moving vehicles and may further impair the financial health of the dealer. In such a disputed scenario of foundational facts, the Commission is of the view that such practice prima facie appears to be an unfair imposition upon the dealers besides being in the nature of a supplementary obligation imposed upon the dealers, in contravention of the provisions of Section 4(2)(a)(i) and 4(2)(d) of the Act and the matter requires an in-depth investigation to ascertain the factual basis. ( Para 121) | |
| The dealership agreement provides that the dealer shall not start, acquire or indulge in any new business (of product or services) even if it is not related to the automobile industry | Defended the said clause on the basis that it does not seek to impose a blanket restriction on the dealer for seeking an NOC. | Looking at the overarching restriction and the actual implementation of such clauses, the Commission has no hesitation in holding that the same appears to be unduly restrictive and expansive in its coverage and interferes with the freedom of trade. Consequently, the Commission is prima facie of the opinion that such clause is an unfair imposition upon the dealers besides resulting in denial of market access to the dealers to other markets in contravention of the provisions of Section 4(2)(a)(i) and 4(2)(c) of the Act, respectively. ( Para 122) | |
| Tata Motors obligated dealers to raise finance/ loan from NBFCs such as Tata Capital and Tata Motors Finance and did not readily issue comfort letters for availing financing facility from other lenders | On the contrary, Tata Motors pointed out that there is nothing on record to indicate that it compelled its dealers to avail finance facility from Tata Capital or Tata Motors Finance or VASPL asked for any Comfort Letter from Tata Motors, as this e-mail of VASPL merely states that ‘…SBI asking for Comfort Letter’ . | There is nothing on record to show that Tata Motors imposed such requirement upon dealers for availing finance facility from other sources. Further, from the response of Tata Motors, it is evident that VASPL itself has outstanding debts to various lenders in the following ratio: PNB (38%), SBI (12.23%), Tata Capital (20%), Tata Motors Finance (12%). In such a diversified outstanding debt portfolio of VASPL itself and in the absence of any material showing imposition, as alleged, in this regard by Tata Motors, the allegations made by VASPL do not appear to be well founded. Thus, the allegation of the Informant(s) on this count remains unsubstantiated and fails. ( Para 123) | |
| 4. | Territorial restrictions on dealers – as alleged by Kanchan Motors in Case No. 16 of 2020. | Contended that in the absence of such a clause discouraging the dealers to actively sell outside the allocated territories, the dealers would not be incentivized to make investment in developing the dealership business. Moreover, it was argued that such restrictions enhance inter-brand competition as the authorized dealers would be better positioned to effectively compete with the dealers appointed by the other manufacturers within the same territory. | Commission is of the considered opinion that the defence raised by Tata Motors requires a detailed investigation to ascertain the effectiveness, veracity and validation of this plea. In the considered view of the Commission, such restriction is prima facie in violation of the provisions of Section 3(4)(c) of the Act. (Para 126). |
Based on the above, the Commission was of the view that prima facie a case of contravention of the provisions of Section 3(4) and Section 4 of the Act is made out against Tata Motors, and directed the Director General (DG) to investigate the matter.
COMMENT: This is another order from the Commission highlighting the prevailing exclusionary and exploitative conditions in the vertical dealership agreements in respect of commercial vehicles imposed by Tata Motors, India’s leading manufacturer of commercial vehicles. The views expressed by the CCI though at prima facie stage are likely to case their shadow on the impending investigation by the Director General (DG), as noticed from the previous such investigation and orders passed by CCI in the Hyundai Case, which was , however, set aside in appeal by the NCLAT. You may like to see my views on the NCLAT order in the Hyundai appeal.
#TataMotors # Abuseofdominance #exclusivity # Noncompete# Antitrust
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