[Monopoly] CCI | State of Uttarakhand created monopolies by canalising liquor procurement || Detailed Order on Abuse of dominance by Uttarakhand Agricultural Produce Marketing Board denying market access to others

Competition Commission of India (CCI): The Coram of Ashok Kumar Gupta (Chairperson) and Sangeeta Verma and Bhagwant Singh Bishnoi, (Members) expressed that:

State of Uttarakhand formulated the Liquor Wholesale Order in a manner through which State officials were vested with exclusive powers which included discretion to dictate as to what brands of alcoholic beverages were to be procured and distributed to retailers and sold to end-consumers.

The instant case was by International Spirits and Wines Association of India (Informant) against Uttarakhand Agricultural Produce Marketing Board (OP – 1), Garhwal Mandal Vikas Nigam Ltd. (OP – 2) and Kumaun Mandal Vikas Nigam Ltd. (OP – 3) alleging contravention of the provisions of Section 4 of the Act.

Informant company is a representative body of International Spirits and Wines Companies which includes the following:

(a) Bacardi India Private Limited;

(b) Beam Global Spirits & Wine (India) Pvt. Ltd.;

(c) Brown Forman Worldwide LLC;

(d) Diageo India Private Limited;

(e) Edrington Marketing;

(f) Moet Hennessy India Private Limited;

(g) Pernod Ricard India Private Limited (‘Pernod’);

(h) United Spirits Limited (‘USL’); and

(i) William Grant and Sons Limited.

State of Uttarakhand issued an Excise Policy which provided that a new wholesale arrangement shall be brought into force within one month of the notification of such policy. OP-1 was appointed as the exclusive wholesale licensee for foreign liquor/beer/wine including Indian Made Foreign Liquor in the State of Uttarakhand. OP-2 and OP-3 were appointed as the exclusive sub-wholesalers of alcoholic beverages.

Monopoly

Allegation in respect to the above was, that the appointment of the above-stated caused monopoly vested in the OPs making them dominant in the relevant market.

Later, Uttarakhand Government issued a new excise policy in terms of which OP-2 and OP-3 ceased to operate as licensees. Hence, since 2016 Uttarakhand Government discharged OP-1 from all responsibilities of dealing with the procurement of alcoholic beverages in State of Uttarakhand.

How were the OPs taking advantage of their monopoly and abused their dominance? 

  • The OPs were placing orders with alcoholic beverage manufacturers for supply of IMFL in an arbitrary and discriminatory manner with no relation to the consumer demand, for certain brands of beverages in the market.
  • The OPs were not procuring alcoholic beverages of certain brands, despite demonstrably high consumer demand for such alcoholic beverages and thereby discriminating against manufacturers of these beverages. This resulted in the replacement of IMFL brands of certain members of the Informant with the brands of other alcoholic beverage manufacturers, for which there was significantly less demand when the Informant’s members were supplying in the ordinary course.
  • The OPs were not maintaining minimum stock levels and were not supplying IMFL brands in accordance with the retailers’ demand, despite express stipulation in Clauses 10 and 11 of the Liquor Wholesale Order.

Commission prima facie vide it’s order dated 19-07-2016 directed the DG to cause an investigation into the matter and submit the investigation report.

DG noted that OP-1 disregarded the mechanism of procurement of different brands of alcoholic beverages as per the Liquor Wholesale Order and order of Additional Commissioner of Excise. It was found that OP-1’s arbitrary approach in placing orders for alcoholic beverages resulted in gross decline in procurement of alcoholic beverages from USL and Pernod.

Hence, DG concluded that OP-1 contravened the provisions of Sections 4(2)(c) read with Section 4(2)(b)(i) of the Act.

Whereas OP-2 and 3’s acts were not found to be contravention of the provisions of the above-stated Sections, as both OP-2 and OP-3 were wholly dependent on OP-1.

OP-2 and OP-3 had no inter-se agreement, whatsoever, with the manufacturers/suppliers of alcoholic beverages and were not getting any direct supplies from them.

Whether there were complaints from retailers and consumers in respect of the non-availability of brands of IMFL?

DG found that OP-2 provided several copies of complaints made by retailers which were forwarded to OP-1, despite which OP-1 continued with arbitrary manner of procurement.

Further, DG noted that OP-1 did not follow the directions of the Additional Excise Commissioner (Licensing) in respect of procurement of alcoholic beverages.

DG’s Conclusion 

DG concluded that non-maintenance of minimum level of different brands at all times and carrying out the procurement of alcoholic beverages in a manner which was arbitrary and one-sided by OP-1 adversely affected competition and OP-1 abused its dominant position in the relevant market, which resulted in denial of market access to the products of USL and Pernod in the State of Uttarakhand.

It was also found that Clauses 7.1, 7.2, 7.3, 14, 4, 1.1, and 2.6 were one-sided, unfair, abusive and anti-competitive in terms of Section 4(2)(a)(i) of the Act.

Analysis, Law and Decision

After the final hearing held on 15-12-2020, Bench analysed the matter.

It was stated that the activities pertaining to procurement and distribution/supply were in the nature of ‘economic and commercial activities for which profit distribution had also been defined under the provisions of the Liquor Wholesale Order itself.

Commission reiterated that

if an entity is engaged in any activity, no matter with or without profit motive, it would be considered an enterprise as it interfaces with the market and hence, with other alternatives for the product or service in question. It is not ‘generation of profits’ rather the defining feature of an entity to be termed as an ‘enterprise’ under the Act is that the entity is engaged in some economic or commercial activity under Section 2(h) for the purposes of Section 4 of the Act.

Commission notes that the precedent is clear and well settled that in case of trade in liquor, the State has following three options:

(a) To completely prohibit the trade in liquor, or

(b) To create a monopoly for itself over manufacture, sale, possession or distribution of alcohol,

or

(c) To allow private individuals to trade in liquor.

Further, it was elaborated that, the grant of license for the trade of liquor is a statutory function, but in the present case, it is the Licensees, even though being wholly-owned Government entities, which are engaged in the economic activity of ‘procurement and distribution/supply of IMFL’ in the State of Uttarakhand.

Hence, it was held that OP-1, 2 and 3 were are ‘enterprises’ within the meaning of Section 2(h) of the Act.

Main Grievance

Unfair procurement of IMFL brands by OPs and the unfair nature of conditions imposed by OP-1 in the agreements it has entered into with IMFL manufacturers.

Commission observed that the competition assessment in respect of an alleged contravention of the provisions of Section 4 of the Act is different in scope and nature from a competition assessment of a proposed combination by way of merger notification under Section 6(2) of the Act.

Commission found that the OPs will remain dominant in any of the plausible relevant markets as each of the OPs had been granted exclusivity in its respective business and area of operation; and no other person could procure, supply or distribute alcoholic beverages in the State of Uttarakhand on account of the restrictions envisaged pursuant to the Liquor Wholesale Order.

Liquor Wholesale Order

 Provisions in the said Order were framed in a manner that entry to any competitor in the relevant market was denied and all the OPs were able to act exclusively and independently in their respective relevant markets during the relevant period.

Whether the dominant position is bestowed upon OP-1 owing to the Excise Policy and the provisions of the Liquor Wholesale Order and subsequently upon OP-2 and OP-3 in their relevant spheres of operation?

 In terms of the Liquor Wholesale Order, during the relevant period, OP-1 was the exclusive procurement agency and OP-2 and OP-2 were sole distributors of IMFL for their respective regions and no alternate access route to the market was available.

Commission expressed that, the provisions of the said order granted powers and discretion to OP-1  to decide the manner of carrying out business operations in the entire State.

OPs enjoyed 100% market share ensuring no competition to the OPs from any other entities. Such exclusion of competition virtually allowed OPs to enjoy monopoly.

Violation of Liquor Wholesale Order and Minimum Stock Requirement

As per the Liquor Wholesale Order, OP-1 was required to maintain minimum stocks of all brands of foreign liquor/beer/wine as fixed by the Additional Excise Commissioner (Licensing).

Commission further observed that it was imperative upon OP- 2 and OP-3 to regularly raise brand-wise indents/requisitions on OP-1 based on the demands of the retailer licensees of their concerned districts, in accordance with the requirements of the said order and no deviation was provided in the said order.

Bench expressed a very significant and crucial point that:

State of Uttarakhand, like other states in the country, has created monopolies by canalising liquor procurement. 

While reaching the conclusion, Commission agreed with the DG that OP-1 did not act in a manner that ensure availability of required brands to retailers and instead did not take concrete steps on the complaints, which also tends to show that OP-1 carried out procurement in a manner which adversely affected competition in the market and discriminated between different manufacturers and suppliers of IMFL.

Commission opined that OP-1 did not place any orders for many brands of Pernod and USL for many months during the 11 months period, that Liquor Wholesale Order was in effect, and the OPs were the only route to access the market for alcohol manufacturers on account of the sole rights of procurement and distribution vested under the Liquor Wholesale Order. Further, this conduct on the part of OP-1, despite existence of retailers’ demand for IMFL, indicates limiting or restricting wholesale procurement and distribution of IMFL in the State of Uttarakhand and denial of market access to producers of certain brands of IMFL in the State of Uttarakhand, in violation of Section 4(1) read with Section 4(2)(b)(i) and Section 4(2)(c) of the Act.

Commission placed reliance on its earlier decision in the matter of Surinder Singh Barmi case wherein it was held that it was immaterial whether the inclusion of clause had any anti-competitive effect, rather the unfairness of the clause needs to be seen which could only be imposed by a dominant entity.

Hence, in the present matter, OP-1 being the dominant entity was in a position to impose one-sided contractual obligations.

Commission directed OP-1 to desist from indulging in such anti-competitive conducts which have been found to be in contravention of the provisions of the Act.

In the present case the anti-competitive conduct on the part of OP-1 had not ceased of its own accord but on account of change in the policy of Government whereby earlier Liquor Wholesale Order ceased to have any effect and OPs were released from performance of the activity of procurement and distribution of liquor.

There was an abject failure in undertaking distribution based on demand, which in fact was the essence of the Liquor Wholesale Order rather than mere fulfilling of MGD obligations as has been countenanced by the said OP.

Hence, a penalty of Rs one crore on OP-1 under Section 27(b) of the Act was imposed. [International Spirits and Wines Association of India (ISWAI) v. Uttarakhand Agricultural Produce Marketing Board, 2021 SCC OnLine CCI 15, decided on 30-03-2021]

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