Competition Appellate Tribunal (COMPAT) rejects appeals of Ford, Nissan and Toyota against CCI Order in Car Spare Parts case but reduces penalty amounts.

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In an important and path breaking order the Competition Appellate Tribunal (COMPAT) vide order dated December 9, 2016 has upheld the earlier order dated August 25, 2014 passed by the Competition Commission of India (CCI), whereby it has held that Ford India Pvt. Ltd, Nissan Motor India Pvt. Ltd and Toyota Kirloskar Motor Pvt. Ltd (“Appellants”) have indulged in anticompetitive practices by not opening the markets for their spare parts and repair and maintenance for independent repairers  and have contravened the following provisions of the Competition Act, 2002 (“the Act”):

• Section 3 (4) (b), (c) & (d) of the Act by (a) imposing restrictions through agreements and practices on original equipment suppliers (OES) by restricting them from selling spare parts including technical manuals and diagnostic tools etc. in the aftermarket, to the (b) independent repairers and to the authorized dealers, (c) restricting them from sourcing spare parts from OESs, (d) from selling spare parts to independent repairs thereby  (e)refusing to deal with the latter.  This conduct has caused appreciable adverse effect on competition in India.
• Section 4 (2) (a) (1) of the Act by abusing their dominant position in their respective brands by imposing unfair conditions in the nature of restrictions on purchase of sale of goods or services on their authorized dealers and OESs.
• Section 4(2) (c) of the Act by indulging in practices which result in denial market access to independent repairers of automobiles to the spare parts in the aftermarket.
• Section 4(2) (e) of the Act by abusing of their dominant position in the spare parts aftermarket to enter into or protect their relevant market i.e. the repair and maintenance market.

The COMPAT however, reduced the penalty imposed by CCI at the rate of 2% on average annual turnover to 2% of the average relevant turnover i.e. the average annual turnover of spare parts in the aftermarket of each of these companies of immediately preceding 3 years before the year of inquiry and directed “the commission to obtain relevant statistics and after verification determine the amount of penalty on the basis of this direction. The details are as under.

COMPAT, while generally upholding the directions of the CCI to each of the appellants to open the spare parts market of their respective brands, issued 8 specific directions to each of the appellants towards opening of the spare parts and repairs and maintenance aftermarkets in India and directed each of them to furnish undertaking within 60 days of the order about the schedule of compliance with the directions within mandated timeframe. The COMPAT also directed that the implementation of this order shall be completed within one year and to ensure its implementation by the appellants, directed CCI to review the progress and action taken by each party to order including the Government Departments/Ministry, every three months and send a report to the Tribunal for further directions.

The specific directions towards opening of the aftermarkets for spare parts and repairs and maintenance of the cars of these 3 brands included directions to the appellants to make available in public domain, and also host on their websites, information regarding the spare parts, their MRPs, arrangements for availability over the counter, and details of matching quality alternatives, maintenance costs, provisions regarding warranty and any such other information which may be relevant for full exercise of consumer choice and facilitate fair competition in the market.

It may be recalled that in the present case,  information  was originally filed in 2011 by Mr. Shamsher Kataria  against  3 car brands namely Honda, Fiat and Volkswagen alleging  restriction in the sale and supply of spare parts and technical information, diagnostic equipments and tools to independent automobile service providers, indirectly determines purchase or sale prices of both vehicle spare parts and servicing, maintenance and repair jobs 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  in contravention of Sections 3(3)(a) and 3(3)(b) of the Act. The matter was examined by CCI and after finding a prima facie case it was referred to the Director General (DG) for investigation and the DG had broadened the investigation to also include similar practices against other brands namely, Ford, Hindustan Motors, Fiat, Nissan, General Motors, Premier, Mahindra & Mahindra, Maruti Suzuki, Tata Motors, Hyundai, Skoda, Toyota and the 2 premium brands i.e. Mercedes – Benz and BMW. After a detailed investigation, the DG concluded that each of these 17 car manufacturers / original equipment manufacturers (OEM) had contravened the provision of the section 3 and 4 of the Act. The CCI after hearing the objections of each party on the DG investigation report copy of which was forwarded to each of them, vide a detailed order dated August 25, 2014 upheld the findings of the DG and after a series of oral hearings imposed penalty @ 2% of the total average annual turnover of each party. The CCI had also issued detailed directions to each OEM  to open their spare parts and repair maintenance aftermarkets by removing restrictions from their agreements with their authorized dealers and to make available the spare parts and technical manuals to the independent repairs to generate competition in the aftermarkets of each brand/ OEM.  This order of CCI was reported in a detailed coverage by this bulletin in the September 10, 2014 issue and can be read at (http://www.vaishlaw.com/Files/fp_competition/_CLB-Sep%202014.pdf )

In its earlier landmark decision of 2014, the CCI had found that car manufacturers enjoy a dominant position in the markets for spare parts and after-sales service of their respective brand of cars because, according to CCI there exists a viable “Aftermarket” for such spare parts and after sales service and repair& maintenance of each brand of car, which was being restricted and abused through excessive pricing by each OEM. Consequently, among others, the restriction on original equipment suppliers against sale of spare parts and diagnostic tools and manuals to independent service providers constituted abuse of dominant position. Further, it was held that the vertical agreements between manufacturers and their respective authorized dealers not to sell the parts over the counter had appreciable adverse effect on competition.

The COMPAT, while upholding the CCI order has again rejected the main argument taken by Counsels of each appellant that they are does not exist an aftermarket for spare parts and repair &maintenance for each brand of OEM but there was a “single system market” for both cars and their genuine spare parts and that the customers makes a whole life time costing analysis before deciding to buy a costly foreign branded car in India.   COMPAT stressed on adopting a “liberal and pro-competitive approach”. [Para 139] The COMPAT also makes reference to the foreign jurisprudence and regulatory framework governing the competitive framework in the automobile industry, most importantly the EC Regulation 461/2010 covering the vertical agreements practiced in the automobile industries in the EU as well as the General Vertical Block Exemption Regulation No. 330/2010. [Para 144]

The COMPAT specifically rejected the argument of car manufacturers that adopting the approach taken in developed countries is neither practical nor feasible for India. The COMPAT holds that “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.”[Para 148]

(Source: COMPAT Order dated December 09, 2016. For full text see COMPAT website)

COMMENTS: The COMPAT order is a path breaking order and somewhat unique because whereas none of the car manufacturers or OEMs’ is dominant in the primary market of the main product, that is, cars of different segments yet each of them have been found to be not only dominant in the secondary markets for spare parts and after sales service & maintenance but also to have abused their dominant position in their respective brands. The decision of COMPAT, if implemented by each party, will bring in transparency and competition in the spare parts and after sales and repair markets for cars in India. 

It may be also noted that the present decision covers only Ford, Toyota and Nissan as only 3 manufacturers filed the appeal to COMPAT against the order of CCI. The remaining car manufacturers have chosen to approach the Delhi High Court challenging the constitutionality of the Competition Act, 2002 itself. The decision of the Hon’ble High Court was reserved on 29 January 2016 and is awaited.

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