CCI introduces Leniency “Plus” regime in India- Will it suffice?
Delhi High Court settles constitutional challenges to the Competition Act, 2002- refuses to grant substantive relief to Car makers -sends them back to NCLAT for deciding on merits.
The High Court of Delhi by its common judgement dated 10.04.2019, has disposed of 12 Writ petitions filed by 10 noted car manufacturers ( BMW, MERCEDES BENZ, FIAT, SKODA, VOLKSWAGON,HONDA , GENERAL MOTORS, TATA MOTORS, HINDUSTAN MOTORS, MAHINDRA & MAHINDRA) and India’s largest Music Label & Movie Studio Co. ( T-Series – Super Cassettes Industries Pvt Ltd.) challenging the main provisions of the Competition Act, 2002 (“the Act”) against orders passed by the Competition Commission of India (“CCI/Commission”) . The writ petitions were filed , inter alia , by the 10 car makers against a common order dated 25.8.2014 passed by CCI imposing penalties on 14 car makers[1], holding that each of the car makers , including the 10 named above, being dominant in their respective brands of cars , had abused their dominant positions by not allowing the aftermarkets of spare parts and repair services to open and develop in India due to vertical restraints imposed on their authorised dealers.
The specific provisions of the Act , challenged by the petitioners , before the High Court , related to Section 22(3): Meetings of the Commission, Section 27(b): Orders by the Commission, Section 53A: Establishment of Appellate Tribunal, Section 53B: Appeal to Appellate Tribunal, Section 53C: Composition of Appellate Tribunal, Section 53D: Qualifications for appointment of Chairperson and Member of Appellate Tribunal, Section 53E: Selection Committee, Section 53F:Terms of office of Chairperson and Members of Appellate Tribunal and Section 61:Exclusion of jurisdiction of Civil Courts.
Background
The original information was filed by an individual Mr. Shamsher Kataria against Honda India, Volkswagen India and Fiat India for violating Section 3 and 4 of the Act, by restricting the supply of genuine spare parts in the open market. The Informant had alleged that:
- OEMs are not providing technological information, diagnostic tools and software programs required to maintain, service and repair the technologically advanced automobiles to the independent repair.
- Restrictive practice carried out by OEMs in conjunction with their respective authorized dealers, amounts to denial of market access to independent repair workshops.
- OEMs and their authorized dealers’ charges arbitrary and high prices to the consumers for spare parts and maintenance services.
- OEMs are restricting independent original equipment suppliers (OES) from selling the parts/components in the open market.
However, later the Director General (DG) , to whom the CCI had directed to investigate the allegations , expanded the scope of investigation (after taking due permission from CCI) to include other car manufacturers. The CCI original order dated 25.8.2014 was challenged by 3 of the 14 car makers ( Ford India Pvt. Ltd, Nissan Motor India Pvt. Ltd and Toyota Kirloskar Motor Pvt. Ltd ) in appeal before the erstwhile Competition Appellate Tribunal (COMPAT) .
The COMPAT , vide its order dated 9.12.2016 , while upholding the substantive order of CCI , 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 and also issued 8 specific directions to the three appellants towards opening of the spare parts and repairs and maintenance aftermarkets in India , while dismissing their appeals. For the sake of brevity, the details of the COMPAT order dated 9.12.2016 can be viewed here .
Issues
After hearing the contentions raised by the petitioners and the responses given by the Counsel for the Commission, the Division Bench of the Delhi High Court (DHC) , comprising of Justice S Ravindra Bhatt and Justice Prateek Jalan, framed six issues to be determined:
- Is CCI a tribunal exercising judicial functions?
- Is the CCI unconstitutional in as much as it violates the Doctrine of Separation of Power?
- Is Section 22(3) unconstitutional?
- Does the ‘revolving door’ practice vitiate any provision of the Act or the decision rendered by the CCI?
- Was the power exercised by the CCI to expand the scope of inquiry and notice under Section 26(1) in an illegal and in an overboard manner?
- Is Section 27(b) of the Act and the provision for penalties unconstitutional for the reason that no separate hearing is provided, and the Act does provides no guidelines for exercise of jurisdiction?
Summary of arguments along with the decision of the High Court on each issue
- Is the CCI a tribunal exercising judicial functions, or is it performing administrative and investigative functions and also adjudicating issues before it ?
Arguments :
Mr Amit Sibal, senior advocate , appearing for Mahindra Electric Mobility Ltd. argued that both CCI and the Appellate Tribunal “(COMPAT/now NCLAT”) have all the trappings of a court and hence are tribunals. He emphasized that the CCI’s functions are overwhelmingly adjudicatory keeping in mind Section 3, 4, 26, 27 and 28 of the Act and the CCI also perceives itself to be a judicial body placing reliance on Regulation 24, 26, 27, 29, 31, 32 and 35 of the Competition Commission of India (General) Regulations, 2009. He stressed that the functions of CCI are predominantly reactive and cannot be equated with other bodies such as Securities Exchange Board of India (“SEBI”), Telecom Regulatory Authority of India (“TRAI”), Real Estate Regulatory Authority of India (“RERA”) whose functions are proactive in nature i.e. setting tariffs, laying down guidelines etc.
Mr Gopal Subramaniam ,senior advocate, drew a comparison with the TRAI – TDSAT (Telecom Dispute Settlement and Appellate Tribunal) model where TDSAT discharges adjudicatory functions with a very wide original jurisdiction while TRAI is the regulatory body, which as per him is in contrast to the CCI-COMPAT model. He stated that the functioning of CCI is predominantly judicial in nature and its proceedings are akin to civil court proceedings. He then referred to the structure of SEBI whereby the judicial and regulatory functions are separated by providing for a dedicated adjudicatory officer under Section 15 of the SEBI Act, 1992.
Dr. A M Singhvi and Mr Arvind Nigam, representing Tata Motors, made an attempt to differentiate between courts and tribunals on one hand and regulatory bodies on the other. He stated that the former category is an authority which react to given situations which is brought to its notice whereas the regulator is of proactive bodies empowered to frame statutory rules and regulations. He emphasized that while considering the functions and rules, it is clear that the CCI is not a regulator and it is a principal authority which exercise judicial functions conferred by the statute and has all the trappings of courts and is a Tribunal. This view was also supplemented by Mr V Lakshmikumaran , Advocate , representing Honda Motors , urged that the corollary of Section 61 which bars the jurisdiction of civil courts is that the role and functions of CCI are that of a court and not a regulatory body.
Mr Sanjay Jain, senior advocate , appearing for the CCI, urged that the CCI is an executive body which performs “executive adjudication”, which is a well-recognized concept within the India Constitution framework and every executive authority is necessarily required to engage itself in some form or manner of adjudication for discharging its duties. He argued that in the course of its functioning, CCI undertakes executive adjudication in juxtaposition to judicial adjudication in respect of all aspects entrusted under the Competition Act, 2002 and merely because CCI also performs adjudicatory functions it does not acquired the character of a court or tribunal. As regards Section 61 which debars the jurisdiction of civil courts, Mr Jain referred to Section 9 of the Code of Civil Procedure, 1908 (“CPC”) which provides as a general law that unless barred, a civil court has unfettered powers to adjudicate upon almost every dispute which is of civil nature. However , for its invocation two requisites are to be fulfilled: (i) A bilateral dispute between two parties and (ii) the dispute must be of civil nature not otherwise covered under any Special Act. He emphasized that this provision of the CPC is the reason why a number of Special enactments contain a provision having the same effect as Section 61 i.e. preventing overlapping jurisdictions.
Decision :
DHC, while making reference to the SAIL judgment[2] of the Supreme Court, held that when the information or complaint which triggers an inquiry is received by the CCI, the initial steps it takes are not always towards or in aid of adjudication but is to discern whether such investigation and further steps towards adjudication are necessary or not. This function of the Commission was considered to be relevant by the High Court, which observed that a court/ tribunal is seized of the lis or the dispute, when the litigator approaches it. DHC observed that the issuance of notice or summons by the court in exercise of its jurisdiction is a judicial act however the stage at which CCI entertains and directs an enquiry, its function in merely administrative. It was also observed that in the discharge of its investigative functions too, the bodies constituted i.e. the DG and CCI are not concerned with any lis, in the sense of a dispute between two parties over a legal relationship, status or private property and rather have regard to the peculiar emit of the Act.
The High Court, in view of the specific functions performed by the CCI (advisory, investigative, administrative, advocacy), held that it does not perform exclusive adjudicatory functions to be called a tribunal. The High Court however, apprised that the finding that CCI is not a tribunal shall not be interpreted to mean that the orders of CCI are any less quasi-judicial at the stage when they attain finality. In this regard, the court observed these orders are subject to appeal to a tribunal i.e. the appellate tribunal. Moreover, they are amenable to judicial review under Articles 226 of the Constitution of India as regards any procedural flaw.
Based on these findings, the High Court held that the CCI does not perform only or purely adjudicatory functions so as to be characterized as a tribunal solely discharging judicial powers of the state and is rather, a body that is in parts- administrative, expert (advisory and advocacy roles) and quasi-judicial (final order, directions, penalties)
- 2. Does CCI violate the Doctrine of Separation of Powers and is, therefore, unconstitutional?
Arguments :
The Petitioners argued that the Act violates the doctrine of separation of powers and the independence of judiciary which provides that the judicial functions shall be independent of executive influence. It was argued unanimously that the provisions for members’ re-appointment (Section 10(1) and Section 53F), selection by a committee with majority members from the Executive (Section 9 and Section 53E) and directions and supersession by the Central Government (Section 55 and 56) clearly violate separation of powers and independence of judiciary. It was also argued that the absence of predominance of judicial members or those with experience in law is anathema to the judicial approach.
The Counsel for the CCI, Mr Jain argued that CCI is a body charged with performing multiple functions and it is not necessary that the person(s) manning it must have a legal background. He stated that the incidental performance of quasi-judicial functions by a regulatory authority cannot militate against the doctrine of separation of powers so as to be called arbitrary or vitiate the setting up of the agency. He also emphasized on the fact that the CCI is considered to be an expert regulatory body and while culling out the market share, relevant geographical and product market, there are various economic formulae, economic tools, accounting principles etc. which are required to be pressed and thus there is a need for experts. As regard the manner of appointment of members of CCI, it was urged by Mr Jain that the composition of the selection committee is in conformity with the established legislative norms, particularly when the Chief Justice of India is the Chairperson that Selection Committee.
Decision :
While reiterating its finding as made in issue No.1, DHC noted that CCI cannot be called a tribunal in its strict sense and is a mixture of administrative, expert and quasi-judicial as it progresses with its functions. When the CCI considers a complaint or information and records a prima facie opinion, it acts administratively. During the investigation by the DG also, it does not decide the lis and it only after the DG report is submitted and a hearing given, that an order (Quasi-judicial one) is made.
The High Court observed that the ultimate test to apply in considering a complaint that a law violates the separation of power is to check whether the executive or any other branch “takes over an essential function” and the fact that some powers under an enactment which clothe the authorities with a broad range of power such as administrative, quasi legislative and quasi-judicial per se would not make that body a judicial or purely administrative one. While referring to the multiple tasks that the Act requires CCI to discharge (advisory, advocacy, investigation and adjudication), DHC held that the argument that CCI must necessarily comprise of lawyers or those possessing judicial experience or those entitled to hold office as judges does not hold merit.
As regards the CCI’s membership, the DHC relied on the Supreme Court decision of Utility User’s Welfare Association[3] while dealing with Section 113 of the Electricity Act, 2003 whereby appointment of a judicial member was not mandated, the relevant extract of which is – “We are, thus of the unequivocal view that for all adjudicatory functions, the Bench must necessarily have at least one member, who is or has been holding a judicial office or is a person possessing professional qualification with substantial experience in the practice of law and who has the requisite qualifications to have been appointed as a Judge of the High Court or a District Judge.
Accordingly, the High Court always held that when adjudicatory orders (especially final order) are made by CCI, the presence and participation of the judicial member is necessary.
As regards the qualification for appointment for Chairperson and Members of the Appellate Tribunal under Section 53D, the High Court observed that it performs judicial functions in hearing and deciding appeals from the orders of the CCI. However, the mandate that the Chairman should have been a Supreme Court Judge or a Chief Justice of a High Court and the personnel chosen is with the approval of the Chief Justice and at least a judge of the Supreme Court is sufficient guarantee of the application of a judicial mind.
Coming to the question of Section 53E, which was challenged on the ground that the selection committee which appoints the Chairperson and members of the Appellate Tribunal is dominated by the executive, the DHC while referring to the dicta in Madras Bar Association v Union of India[4] held that the personnel chosen for the task assigned to the COMPAT shall be with the approval of the Chief Justice, and at least a judge of the Supreme Court and consequently Section 53E, as it stood prior to the amendment of 2007, was declared unconstitutional.
- Section 22(3) – double voting by chairperson unconstitutional?
Section 22(3) of the Act provides that all questions which come up for consideration in a meeting of the Commission would be decided by majority of members present and voting and that in the event of equality of votes, the Chairperson or the Member presiding would have a second or casting vote. The proviso stipulates a minimum quorum of at least three members for any meeting.
The Petitioners argued that this power of the Chairperson/Presiding Member to vote twice, that is, have a casting vote is anathema to judicial functioning and was relatable to board meetings in a corporate structure. Associating the proviso, it was further urged that having regard to the minimum quorum of 3, whenever the quorum is an even number (4 or 6), the Chairperson/Member presiding would have his say because he will vote twice.
Decision:
The High Court observed that the concept of a casting vote is belter confined to the realm of meetings where decision to run a body or selection of personnel are decided and not while undertaking an adjudicatory function which presupposes a fair procedure whereby the tribunal comprised of impartial members render their decisions objectively. The High Court noted that a strong element of collegiality is necessary either in all stages of functioning and at least at the stage of decision making and this collegiality is vulnerable to be compromised if the Chairperson/Presiding Member is conferred a second vote. Considering the potential mischief of the casting vote by which the Chairperson may tip the balance the other way by his second vote, the DHC declared Section 22(3) void in entirety, while keeping the proviso intact which mandates a quorum of minimum three members, which would stand on its own and act as a norm.
- Does the ―revolving door practise vitiate any provision of the Act or the decisions rendered by the CCI ?
Another serious objection to Section 22(3) (proviso) was the ‘revolving door’ policy which enables the members to participate in one or the other proceedings or desist from participating at their will which destroys the guarantee of fair hearing and violates the basic principle of one who hears must decide. The revolving door allegation was based on the premise that certain members who heard the final arguments of the Shamsher Kataria Case before the CCI, chose not to sign the final order dated 25.08.2014.
Mr Sanjay Jain, on behalf of the CCI refuted this allegation and stated that apart from the three members who signed the order, all the other members who heard the final arguments had retired and the newly appointed members did not sign the final order since they did not hear the final arguments and thus complied with the principle of one who hears must decide.
The DHC was of the opinion that the question whether principles of natural justice was violated depends on the facts and circumstances of each case. DHC noted that in the present case, the three members, who finally decided the matter were present throughout all the dates of final hearing. Apart from these three members, as time passed, the four original members had retired and the mere fact that one of the members had participated in two intervening dates of hearings but was not party to the final decision per se does not amount to violation of principles of natural justice. In addition, only three parties i.e. Nissan Motors, BMW and Mahindra & Mahindra had raised the issue with regard to the varying composition of the members who were satisfied that no prejudice would be caused to them in view of the order dated 24.07.2013 by which the CCI had declared that only those members who heard the matter and were present at the time of arguments shall decide the matter.
Decision :
In view of the above analysis, the DHC held that the possibility of the ‘revolving door’ does not result in Section 22(3)’s invalidity. The DHC supplemented this view with the decision of the Supreme Court in State of Rajasthan v Union of India[5] and Sushil Kumar Sharma v Union of India[6] in which it was observed that “mere possibility of abuse of provision of law does not per se invalidate a legislation. It must be presumed, unless contrary is proved, that administration and application of a particular law would be done “not with an evil eye and an unequal hand”.
However, keeping in mind the undesirability of a decision by a smaller number of members when the hearing is undertaken by a larger body, the DHC issued certain directions which will guide functioning of the Commission in its hearings and final decision. The High Court directed that when all evidence is completed, CCI should set down the case for final hearing. At the next stage, when the final hearing commences, the membership of the CCI should be constant and the same number of members should write the final order. It was further directed that ‘no member should take a recess individually during the course of the proceedings to rejoin the proceeding later, since such walk-out and walk-in practice is deleterious to the principles of natural justice.
Apart from this, the Court also opined that CCI should be manned fully with all nine members which will enable the Chairman to ensure that substantial members are present at every important hearing and final hearing. Commenting on the technical members’ appointment, DHC stated that the Central Government should seriously consider recruiting legal practitioners who regularly practice4 in the field of company law, competition, and securities and other related fields with sufficient experience.
- 5. Was the power exercised by CCI to expand the scope of inquiry under Section 26(1) in an illegal and overboard manner?
The information filed before the CCI in the Shamsher Kataria Case was only against three car manufacturers M/s Honda Siel Cars India Ltd, Volkswagen India Pvt. Ltd and Fiat India Automobiles Ltd alleging that they are abusing dominant position by opening the aftermarket for spare parts to the independent dealers. CCI after forming a prima facie opinion directed the DG to investigate vide order under Section 26(1) dated 24.02.2011. The DG while conducting investigation requested for permission to expand the scope of its investigation to include other car manufacturers. CCI, accepting the permission of the DG, expanded the scope of the investigation by a second order under 26(1) order dated 26.04.2011. This second order under Section 26(1) dated 26.04.2011 was challenged before the DHC.
Decision:
DHC while referring to the Excel Crop[7] Judgement of the Supreme Court observed that at the stage when CCI decides to act on a complaint and directs investigation it doesn’t always have all information or material in respect of the general pattern or method adopted by parties that affect the marketplace. It only has the information filed before it based on which the DG is tasked to look into the matter and it is during the course of this inquiry the facts leading to pervasive practices on part of one or more entities may be possible unearthed. At this stage, the investigation is quasi inquisitorial to the extent that the report given is inconclusive of the rights of the parties; however, to the extent that evidence is gathered, the material can be final. The DHC noted that the Excel Corp judgement had already specifically dealt with the question of ‘subject matter’ expansion and the Supreme Court clarified that the subject matter can be expanded by the DG in his investigation which not only is limited to the one alleged but other allied ones, involving others i.e. third parties. Accordingly, DHC was not convinced with the plea of the petitioners that CCI had acted in an illegal manner.
- Is Section 27 (b) of the Act and the provision for penalties unconstitutional or the orders impugned arbitrary, for the reason that no separate hearing is provided, and the statute provides no guideline for exercise of discretion. Or Should CCI grant separate hearing for imposition of penalty?
It was argued by the petitioner’s that Section 27(b) is void as it does not provide for opportunity of hearing and the Act read with Regulation 48(1) specifically excludes an opportunity of hearing to parties at the time of imposing penalties for contravention under Section 3 and 4 of the Act. The petitioner’s advocated for two separate hearings- one for presenting arguments against contravention and one for penalty proceedings.
Decision:
DHC observed that a deeper analysis of the nature of the proceedings followed by the CCI reveals that the procedure it adopts/is required to adopt gives sufficient safeguards to the parties, both as regards the findings and the sanctions/penalty. The first step in which the CCI decides whether or not issue notice to the DG is an administrative step and does not contemplate any prior hearing, as held in the Excel Crop case. The next step is investigation by the DG in which the parties, whenever needed, receive notice and opportunity, and if it is denied the parties can seek directions to the DG from the CCI. This stage also includes evidence gathering and whenever required cross examination is granted. The next stage is the report of the DG on which the parties submit their objection/comments and are granted full opportunity of hearing. The DHC noted that this step is significant because when the parties address CCI and submit their contentions, they have foreknowledge of all materials, including adverse materials and comments made in the DG report and hence the parties are aware of the range of options available with the CCI in terms of both findings and the sanction. DHC noted that in the Shamsher Kataria case, CCI had fully followed all the steps indicated the statute and the penalty order is, therefore, justified.
As regards the argument that Section 27 does not provide for any guidelines on how to impose penalty and there is no maximum amount/cap amount to the penalty which can be imposed, the DHC referred to the principles laid down in Excel Crop and Hindustan Steel Ltd vs State of Orrisa[8] by the Supreme Court on imposition of penalty and held that these principles which guide the CCI during imposition of penalties are a sufficient answer to the unconstitutionality levelled against Section 27.
Directions
The High Court, in view of the above-mentioned findings, issued the following directions with regards the functioning of the CCI:
- The CCI shall frame guidelines to ensure ‘the one who hears must decide’ principle i.e. once final hearings in any complaint begin, the membership should not vary and it should be preferably be heard by a substantial number of 7 or at least 5 members.
- The Central Government shall take expeditious steps to fill the existing vacancies in the CCI within 6 months.
- CCI shall always ensure that , during the final hearing, the judicial member is present and participates in the hearing.
- Parties should address the CCI, during the final hearing, on why penalty should not be awarded and if awarded, what should be the mitigating factors and quantum, without any prejudice to their submissions. They may also indicate this in their written submissions or separate note of submissions to the CCI.
- Section 22(3) of the Act is declared unconstitutional and void, except the proviso.
- Section 53E, as it stood before the amendment in 2017 is declared unconstitutional and void; however, this is subject to the final decision of the Supreme Court in the writ petitions challenging the Finance Act, 2017.
Comment:
This is another important judgment from the Delhi High Court which will hopefully settle the constitutional challenges to the Competition Act . Though the judgment is likely to be challenged before the Supreme Court yet, considering that most controversial issues have been decided based on recent landmark judgments of the Apex Court , there may not be many changes in decisions. The direction of the High Court that during final hearings by CCI a judge must be present is likely to stir a hornet nest in the administrative ministry and may delay adjudication in pending matters until the decision is either stayed or quashed in appeal directing the mandatory presence of a judge during final hearing .
[1] Better known as the Shamshser Singh Kataria case
[2] Competition Commission of India v SAIL(2010) 10 SCC 744
[3]State of Gujarat v. Utility Users Welfare Association 2018 (6) SCC 21
[4] Madras Bar Association v Union of India & Anr (2014) 10 SCC 1
[5] State of Rajasthan v Union of India (1978) 1 SCR 1
[6] Sushil Kumar Sharma v Union of India and Ors. (2005) 6 SCC 281
[7] Excel Crop Care India v Competition Commission of India 2017 (8) SCC 47
[8] AIR 1970 SC 253
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