CCI’s Self-Devised Disability in Investigation of Buyer's Anti-Competitive Agreement

- Kashish Makkar

Competition Law must promote Consumer Welfare & not Consumer Protection. 

The Competition Act of 2002 was enacted as a policy measure to promote efficiency in the market. The Raghavan Committee Report, which served as the roadmap for the Act, envisaged it as an instrument to achieve efficient allocation of resources, technical progress, consumer welfare and regulation of concentration of economic power. However, it prescribed ‘consumer welfare’ as the ultimate motive for ensuring effective competition. Therefore, the stated aim of the law was to ensure market efficiency in order to ensure consumer welfare. However, the Competition Commission of India (CCI) in its operations has assumed an altogether different prescription of Consumer Welfare.

The CCI has conflated the notion of consumer protection with consumer welfare in its approach towards investigating anti-competitive conduct. While, ensuring consumer welfare entails prevention of concentration of market power, maintaining allocative efficiency in the conduct of all the stakeholders when they operate in the market;[1] consumer protection is a movement to impose the burden of the efficient conduct of the market on the supply side.[2] Simply, consumer welfare is a long term approach where the market forces (both demand & supply) are regulated in a manner that leads to maximisation of welfare for the consumers. While, consumer protection involves granting immunity to consumer’s conduct in order preserve their interests.

In this blogpost, I will discuss how the CCI has assumed to itself a mandate of Consumer Protection. I will analyse how in the assumption of this mandate, the CCI has refused to take cognisance of buying arrangements that clearly amount to cartelisation. In my analysis, I will highlight how the assumption of such a mandate is not envisaged under the Act, and in fact runs contrary to the mandate of Consumer Welfare. As a result, in conclusion, I will recommend a course-correction for the CCI in order both fulfil its legislative mandate and its policy mandate of promoting market efficiency which together lead to the achievement of consumer welfare.

Withdrawal of Presumption of AAEC from Buyer’s Agreements A statute is an edict of the Legislature and in construing a statute, it is necessary to seek the intention of its maker.[3] The primary source for inferring this legislative intent rests in the bare text of the statute, as the Supreme Court has quite categorically held in M/S. Hiralal Ratanlal v. State of UP:

“In construing a statutory provision, the first and foremost rule of interpretation is the literal construction. All that the court has to see at the very outset is what does the provision say. If the provision is unambiguous and if from the provision legislative intent is clear, the court need not call into aid the other rules of construction of statutes.”[4]

Section 3(3)(a) of the Act prescribes that an agreement entered between persons which directly or indirectly determines purchase or sale prices shall be presumed to cause an Appreciable Adverse Effects on Competition (AAEC) in the market.[5] It is quite clear from the text that the legislature intended to include anti-competitive agreements which could be entered into by the buyers. There cannot be an argument on the contrary as, had this not been the case, there would have been no reason to include specific term ‘purchase’ price in section 3(3)(a).

The above argument is also supported by section 3(3)(d) of the Act, which provides that in cases of collusive bidding, AAEC is presumed.[6] It is writ large that a bidding process would manifestly involve buyers participating in a competition to purchase commodities. The legislature clearly wanted to promote healthy competition among the buyers, and as a result outlawed any agreement which the buyers might enter to impair the bidding process.

The mischief rule of interpretation of statutes, which was laid down in Heydon, lays down that the true interpretation of statute is the one that complies with the mischief that the act aimed to prevent.[7] The same has been upheld in India in RMDC v. Union of India.[8] Section 3(3)(d) of the 2002 Act clearly reflects that an existence of buyer’s cartels is one of the mischiefs that the Act wanted to prevent.

Therefore, both by virtue of literal rule of interpretation and the mischief rule of interpretation it is clear that the Act sought to prevent cartelisation among the buyers. However, CCI’s jurisprudence with respect to the same indicates otherwise.

For instance, in Pandrol Rahee Technologies v. M/s. DMRC Ltd,[9] where the informant alleged that the DMRC ltd. as a consultant to Kolkata Metro and Bengaluru Metro had been colluding to get their preferred supplier for a proprietary product. The CCI in this case observed:

“Section 3(3) concerns agreements between persons etc. ‘engaged in identical or similar trade.’ The word ‘trade’ has been defined in section 2(x) as “any trade, business industry, profession or occupation relating to the production, supply, distribution, storage or control of goods and includes provision of any services.” The word ‘acquisition’ mentioned in definition of an ‘enterprise’ in section 2 (h) is not included here. As can be seen, purchasing activity of a consumer does not qualify as ‘trade’. Therefore, section 3 (3) is not applicable to a consumer.”

The CCI by such an observation ruled out the applicability of S. 3(3), which presumes the AAEC on the consumers. The CCI came to this conclusion by referring to the part of the provision which restricts its application only to entities who are engaged in trade. Thereafter, by reading the definition of trade as not inclusive of acquisition, they ruled that the section is not applicable to the consumers. However, such an interpretation is clearly not sustainable.

The definition of trade in S. 2(x) includes trade in relation to the production of goods or provision of services.[10]The primary meaning of the word “trade”, as defined by the Supreme Court in the five-judge bench judgment ofKhoday Distilleries Ltd. v. State of Karnataka,[11]  is the exchange of goods for goods or goods for money. Applying the above definition of trade to the definition given in s. 2(x) would lead to a construction in the following terms: “exchange of goods for money in relation to production of goods” or “exchange of goods for money in relation to provision of services”. An exchange of goods for money in relation to production of goods or provision of services have to necessarily be in the form of acquisition of raw materials. As a result, the reasoning employed by the CCI in Pandrol Rahee stands fragile in light of the above analysis.[12]

Yet, as it stands, Pandrol Rahee is the law of the land and as a result the applicability of S. 3(3) has been ruled out over the consumers/buyers. Therefore, even if the buyers’ enter into an anti-competitive agreement, prescribed under one of the 4 conditions of S.3(3), they will be held to not have AAEC presumptively. As a result, if buyer’s are to be held accountable for their anti-competitive agreements, they need to prove AAEC separately as is prescribed under S. 3(1) of the Competition Act.

However, in the next section we will analyse how such a route to hold consumer’s accountable has also been foreclosed by the CCI by self-presuming a consumer welfare mandate.

Foreclosure of Consumer’s Potential to cause AAEC Under the scheme of the Competition Act, 2002 an agreement between parties is termed anti-competitive if and only if it causes or is likely to cause AAEC. While, the agreements prescribed under S.3(3) have a presumption of AAEC, therefore, the regulator need not prove it; all other agreements must prove AAEC or the likelihood of it. As explained in the previous section, the CCI has ruled out the applicability of the presumption by exempting consumers or buyers from S. 3(3). However, there was still a scope to regulate anti-competitive agreements and sanction the buyers under S.3(1) of the competition Act. It entailed a two-fold process, first, proving the existence of the agreement, and second, proving AAEC. To determine if an agreement under S.3 causes AAEC, the CCI has to rely on factors prescribed in S. 19(3) of the Act.[13] Only if the two requirements would be fulfilled the CCI would sanction such conduct. However, in the same decision in Pandrol Rahee the CCI observed that: “It is noteworthy that for determining appreciable adverse effect on competition for the purpose parameters given in section 19(3) all indicate harm to competitors. It is not envisaged that a consumer can cause appreciable adverse effects on competition.”[14] As a result, the CCI foreclosed any inquiry on buyers/consumers once again by taking the second limb of the two-fold process of the inquiry out of the scope of application to consumers. Under S. 3(1) of the 2002 Act, the term “agreements in respect of acquisition” has been clearly provided, as a result, the CCI couldn’t have foreclosed this limb of the process. Therefore, it attacked the second requirement. However, there are two principled inconsistencies with such an approach. First, if S. 19(3) was not to be applicable on the consumers, why in the first place the term ‘acquisition’ has been prescribed in S.3(1) as one of the forms of agreement that is likely to cause AAEC. If s. 19(3) is to be interpreted in the way the CCI has interpreted it, it obliterates the purpose of the term ‘acquisition’ under S. 3(1). Such interpretation goes against the established rule of statutory interpretation, i.e., Construction to avoid invalidity. This principle holds that, “an interpretation which would defeat the purpose of the statutory provision and, in effect obliterate it from the statute book should be eschewed.”[15] Therefore, such an interpretation of S. 19(3) stands against the principles of statutory interpretation recognised by the Supreme Court.[16]

Second, S.19(3) doesn’t warrant an interpretation that the CCI has provided to it. Clearly, the factors under S. 19(3) prescribe harm to the competitors, however, nowhere is it indicated that the consumers/buyers cannot be competitors. The CCI’s interpretation makes the two categories of buyers/consumers and competitors to be mutually exclusive. However,  given that it is prescribed that an agreement can be formed for acquisition of goods,[17] clearly there has to be competition in such an acquisition, thus, incentivising parties to form agreements. As a result, the above interpretation is inherently contradictory and inconsistent.

However, despite these inconsistencies, the foreclosure of an enquiry into a consumer/buyer’s anti-competitive agreements is the law of the land.

Conclusion Both by withdrawing the presumption of AAEC and foreclosing the applicability of the factors that determine AAEC from the consumers, the CCI has systematically disabled itself from any inquiry into consumer’s anti-competitive agreements. However, as pointed out above such an approach is both jurisprudentially flawed and inherently inconsistent. It is simply the assumption of a consumer protection mandate on part of the CCI that explains the law it has laid down in the recent past. This assumption of mandate is now no longer limited to enquiries on cartelisation, but it has started impacting inquiries under S.4 relating to Abuse of Dominant Position as well. In the well-documented and discussed cases of K.N. Chaudhary v. DMRC Limited and Suntec Energy v. National Dairy Development Board, the CCI refused a S. 4 inquiry in order to ‘protect’ free exercise of consumer’s choice.

Such an assumption of the consumer protection mandate not only leads to the reduction in the net welfare of the upstream market by disabling them from receiving the most efficient prices for their output. But, it also causes loss in welfare for the downstream market by disabling the most efficient producer to enter the market and offer a choice to the consumer. As a result, ensuring the allocative efficiency, which ensures consumer welfare gets lost in the assumption of this mandate. The aim of the Anti-Trust Law is not to ensure consumer protection but to preserve the structure and integrity of the market, which in longer run ensures consumer welfare. However, this goal of Anti-Trust Law seems to have been forgotten by regulators across the world. Anti-competitive agreements facilitate Monopolistic and oligopolistic market structures. These in turn enable dominant actors to coordinate with greater ease and subtlety, facilitating conduct like price-fixing, market division, and tacit collusion; and also block new entrants. ​ Therefore, it is clear that preservation of market structures is a value that must be preserved by regulators. It ensures efficiency, effectiveness, choice and in turn ensures the largest welfare for firms, consumers, and economy in the long run. In light of the analysis presented in this article, it is clear that the CCI needs a course-correction, both to comply with its original mandate and the correct position of law; and to ensure market efficiency in the longer run. This course correction shall necessarily involve restoring the mandate of consumer protection to consumer courts, and following the policy of consumer welfare in both letter & spirit.

*Makkar is a III Year B.A. LL.B (Hons.) student at National Law School of India University, Bangalore.

[1]Raghavan Committee Report, ¶2.1.1.

[2] Planning Commission, ‘Consumer Protection & Competition Policy’, Chapter 11, 11th Five Year Plan (2007-12).

[3]Suganthi Suresh Kumar v. Jagdeeshan, (2002) 2 SCC 420, ¶12 (SC).

[4]M/s. HiralalRatanlal v. State of UP, 1973 AIR 1034.

[5]The Competition Act §3(3)(a), No. 12, Acts of Parliament, 2003 (India).

[6]The Competition Act §3(3)(d), No. 12, Acts of Parliament, 2003 (India).

[7]Heydon’s case, (1584) 76 ER 637, Pasch 26 Eliz, (England).

[8] RMDC v. Union of India, 1957 AIR 628.

[9]PandrolRahee Technologies v. M/s. DMRC Ltd., Case no. 3 of 2010, Dt.7 October, 2011.

[10]The Competition Act §2(x), No. 12, Acts of Parliament, 2003 (India).

[11]Khoday Distilleries Ltd. v. State of Karnataka, (1995) 1 SCC 574.

[12]  Arguably, it may be said that such foreign interpretations of the word ‘trade’ must not be employed, however, it must be pointed out that the definition of trade under s. 2(x) of the Competition Act defines trade to include trade. As a result, a widely accepted &recognised definition maybe used to define the term.

[13]The Competition Act §19(3), No. 12, Acts of Parliament, 2003 (India).

[14]PandrolRahee Technologies v. M/s. DMRC Ltd., Case no. 3 of 2010, Dt.7 October, 2011.

[15] Justice A.K. Shrivastava, Interpretation of Statutes, Judicial Training & Research Institute’s Journal, July-September, 1995.

[16] State of Punjab v. PremSukhdas, AIR 1977 SC 1640.

[17]The Competition Act §3(1), No. 12, Acts of Parliament, 2003 (India).