The Competition Commission of India (“CCI”) vide its order dated August 23, 2021, has held Maruti Suzuki India Limited (“MSIL”) liable for indulging in anti-competitive conduct in implementing ‘Discount Control Policy’ vis-à-vis its dealers.
The CCI initiated suo motu investigation basis an email received from a purported dealer of MSIL, inter-alia alleging that dealers in the West-2 Region (Maharashtra State other than Mumbai and Goa) are not permitted to give discounts to their customers beyond that prescribed by MSIL in the announced ‘consumer offer’. If a dealer is found giving extra discounts, a penalty is levied upon the dealer by MSIL. This is called the ‘Discount Control Policy’ of MSIL.
Pursuant to the above email and the comments received from MSIL, the CCI, vide order dated July 4, 2019 passed under Section 26(1) of the Competition Act, 2002 (“the Act”) formed an opinion that there exists a prima facie case of contravention of the provisions of Section 3(4)(e) of the Act, i.e., Resale Price Maintenance, by MSIL. The CCI, hence, directed the Director General (‘DG’) to cause an investigation into the matter and submit a report.
Analysis by the CCI:
The CCI examined the allegations against MSIL under Section 3(4) of the Act, being an agreement amongst enterprises engaged at different stages or levels of the production chain in different markets.
During the investigation, the DG found various emails exchanged between MSIL and its dealers indicating that MSIL had a ‘Discount Control Policy’ for its dealers and the dealers were discouraged from giving extra discounts, freebies, etc. to consumers beyond what was permitted by MSIL. If found to be violating the Discount Control Policy, the dealers were threatened with imposition of penalty, not only upon the dealership, but also upon its individual persons, including direct sales executive, regional manager, showroom manager, team leader, etc., and stopping of supplies. The CCI was of the view that an exchange of such e-mails between MSIL and its dealers, is an ‘agreement’ between them to control discounts, in terms of Section 2(b) of the Act.
On the analysis of the emails exchanged between MSIL and its dealers, the CCI observed that the ‘Discount Control Policy’ was controlled by MSIL and not by the dealers. The dealers were required to get an approval for providing additional discounts which was also directly sought from the managers of MSIL. It was also clear that, MSIL was the approving authority of the maximum discounts that may be offered by its dealers to customers, despite its claim that it had a principal-to-principal relationship with the dealers.
The DG during investigation found several e-mails which showed that for non-adherence to such a ‘Discount Control Policy’ of MSIL, the dealers were penalised. To enforce its ‘Discount Control Policy’, MSIL used to appoint Mystery Shopping Agencies (“MSAs”) who used to pose as customers to MSIL dealerships to find out if any additional discounts were being offered by such dealerships to customers or not. The MSA would report to MSIL management with proof (audio/video recording) who, in turn, would send an e-mail to the errant dealership with a ‘Mystery Shopping Audit Report’, confronting them with the additional discount offered and asking for clarification. If clarification was not offered by the dealership to the satisfaction of MSIL, penalty would be imposed on the dealership and its employees, accompanied in some cases, by the threat of stopping supplies. MSIL would even dictate to the dealership where the penalty had to be deposited.
The CCI also noted that, in the territory of Pune, Maharashtra, the dealerships were required to give the penalty cheque in the name of one Ms. Swati Kale, who was the wife of the President of Wonder Cars Private Limited, an MSIL dealership in Pune, Maharashtra. Ms. Swati Kale deposed before the DG that her role was to receive cheques as per the instructions of the regional manager of MSIL and deposit the same in her account and issue cheques as per his instructions, as and when required. The CCI further observed that the amount collected in the account of Ms. Swati Kale was used by MSIL, inter-alia, to pay the bills of advertisements. The e-mails clearly indicated that the advertisements under reference had been released by the Regional Office, West-2, MSIL, as per the directions of the Zonal Office and not by any dealer(s). Thus, the penalty amounts were clearly imposed by MSIL and collected in the account of Ms. Swati Kale as per the directions of MSIL, and the amounts were also utilised as per the instructions of MSIL. The CCI held that, it is clear from the submission of Ms. Swati Kale that she was merely the keeper of the penalty funds in the territory of Pune; the management of such penalty funds however, lay with MSIL, and the amounts therefrom were utilised as per the directions of MSIL managers.
The CCI after analysing the evidence and the submissions made by MSIL noted that, ‘Resale Price Maintenance’ (“RPM”) as defined under Explanation (e) to Section 3(4) of the Act includes, “any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged”.
The CCI further held that, the RPM enforced upon the dealers by MSIL has led to denial of benefits to the consumers in terms of competitive prices being offered by MSIL dealers. When all the dealers are controlled by a ‘Discount Control Policy’, they are forced to sell the same product at the same price which, to a large extent, eliminates price competition amongst them. As such, due to almost nil intra-brand competition amongst MSIL dealers, the consumers would have had to purchase MSIL vehicles at fixed prices without flexible discounts being offered to them by MSIL dealers, thereby leading to charging of higher prices/ denial of discounts in kind, to them. Such arrangements perpetuated by MSIL restricted intra-brand competition amongst MSIL dealers, as it impaired their ability to compete with respect to prices in the sale and distribution of MSIL brand cars. As such, it is evident that had there been no Discount Control Policy enforced by MSIL, customers of MSIL would have been able to buy MSIL vehicles at lower prices. This has resulted in the denial of benefits to consumers, which would have otherwise been accrued to them in a healthy competitive environment between dealers.
The CCI was of the view that, imposition and enforcement of RPM by a player like MSIL, having a significant market share, not only thwarts intra-brand competition but also leads to the lowering of inter-brand competition in the passenger vehicles market.
Basis the above analysis, the CCI thus, concluded that, MSIL not only entered into an agreement with its dealers across India for the imposition of ‘Discount Control Policy’ amounting to RPM, but also monitored the same by appointing MSAs and enforced the same through the imposition of penalties, which resulted in AAEC within India, thereby committing contravention of the provisions of Section 3(4)(e) read with Section 3(1) of the Act.
The CCI imposed a penalty of Rs. 200 crores (Rupees Two Hundred Crores) on MSIL and in terms of Section 27(a) of the Act, directed MSIL to cease and desist from indulging in RPM directly and/or indirectly.
Please find a copy of the order here.
This update has been contributed by R. Sudhinder (Senior Partner) and Prerana Amitabh (Counsel).
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