Competition Commission of India (CCI): Noting that Maruti Suzuki India Limited used to impose penalties on its dealers for the reason of the violation of its ‘Discount Control Policy’, Coram of Ashok Kumar Gupta (Chairperson) and Sangeeta Verma and Bhagwant Singh Bishnoi (Members) held that,
Maruti Suzuki India Limited was not a third-party in the enforcement of the Discount Control Mechanism.
When a significant player such as MSIL imposes minimum selling price restrictions in the form of maximum discount that can be offered by the dealers, RPM can decrease the pricing pressure on competing manufacturers.
Instant matter was taken up suo motu by the Commission based on an anonymous e-mail received from a purported Maruti Suzuki India Limited (MSIL) dealer, wherein it was alleged that MSIL’s sales policy was against the interest of customers as well as the provisions of the Competition Act, 2002.
Discount Control Policy
Further, it was alleged that, in the West-2 Region, (Maharashtra State other than Mumbai & Goa) the dealers of MSIL were not permitted to give discounts to their customers beyond that prescribed by MSIL is the announced ‘consumer offer’. In case, a dealer was found giving extra discounts, a penalty was levied upon the dealer by the MSIL.
Penalty amount imposed was required to be paid via cheque in the name of Swati Kale, wife of Vinod Kale who was the Vice-President of Wonder Cars Pvt. Ltd., an MSIL dealership in Pune, Maharashtra. Prior to charging the penalty, MSIL management would send an email with a ‘Mystery Shopping Audit Report’ to the errant dealership asking for clarification.
The above-said similar Discount Control Policy was implemented by MSIL all across India – specifically in cities where more than 4 to 5 dealerships operated.
Commission vide an order dated 4-7-2019 passed under Section 26(1) of 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.
In view of the above background, Commission had directed the Director General to cause an investigation into the matter and submit a report.
The Commission directed MSIL to furnish its audited balance sheets and profit and loss accounts/turnover details for FYs 2017–18, 2018–19 and 2019–20 along with details of the revenue and profits generated by it from the sale of ‘passenger vehicles in India’ during these FYs by way of Affidavits supported by certificates from Chartered Accountants.
Analysis Law and Decision
Commission noted that MSIL was the manufacturer dealing in the upstream market while its dealers were distributors dealing in the downstream market.
Manufacturer and dealers entered into an agreement which could be examined within the scope of Section 3(4) of the Act, being an agreement amongst enterprises engaged at different stages or levels of the production chain in different markets.
Whether there was an agreement between MSIL and its dealers in terms of Section 3(4) on restricting discounts that may be offered by dealers?
‘Agreement’ for the purposes of Competition Law, is not the same as ‘agreement’ for the purposes of Contract Law.
The definition of ‘agreement’ under Section 2(b) of the Act is very wide and covers all possible agreements/ arrangements/understanding, not only in written form but also in tacit and informal form.
Since MSIL argued that only agreement between them with the dealers was the Dealership Agreement and the same contained no clause restricting discounts but rather allowed dealers to offer any discounts as they deem fit.
Coram opined that such agreement/arrangement/understanding with regard to discount control policy between MSIL and its dealers may exist dehors the Dealership Agreement entered into on writing between them.
Did MSIL have a Discount Control Policy? DG’s investigation
DG in its investigation while looking through the email dump found multiple email exchanged between MSIL and its dealers which showed that MSIL did, in fact, have an agreement with its dealers to not let them offer discounts to customers beyond those permitted from time to time by MSIL without MSIL’s prior approval.
“…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.”
Discount Control Policy, even if found to be existing in certain region, was only a form of policing amongst the dealers themselves inter se, and MSIL had no role in formulating such a policy, except to enforce the same on behalf of the dealers as an independent third-party.
Commission noted that, meetings on Discount Control Policy were conducted by MSIL and it formulated policies wherein discounts were defined by way of limiting maximum discount allowed in cash or in terms of accessories, etc.
Adding to the above, it was noted that, MSIL dictated that any dealership, after price rise, if found selling/billing on old price, will be considered violating selling norms and it will be treated as a discount offered to customers
MSIL circulated communications of warning and threats of imposing high penalties in case dealers offered extra discounts without prior approval
Hence, Coram opined that MSIL did not seem to be merely a third-party in the Discount Control mechanism as contended.
MSIL nowhere could establish that the discounts were given by the dealers without seeking any prior approval from MSIL.
Significantly, the Commission observed 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.
MSAs Role with respect to Discounting Policy
To enforce its Discount Control Policy, MSIL used to appoint 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. If found offered, 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 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.
Appointment of MSAs was done by the dealers only and MSIL had no role to play in this regard.
Commission opined that MSIL had tried to pick-up isolated statements from its emails, which appeared to be self-serving statements, to allege that it was the dealers who has appointed the MSAs.
Adding to its opinion, Coram stated that there was absolutely no indication in the e-mails that the appointment of MSAs was done by the dealers themselves.
DG when questioned Swati Kale, she submitted that her role was to receive cheques as per the instructions of Regional Manager of MSIL and deposit the same in her account and issue cheques as per his instructions when required.
It was further noted that the amount collected in the account of Ms Swati Kale was used by MSIL to pay the bills of advertisements.
Whether any AAEC in the market had been caused or was likely to be caused as aresult of such an agreement between MSIL and its dealers?
In Commission’s opinion, the imposition of maximum discount limits by MSIL upon its dealers amounted to Resale Price Management (RPM) as defined under Explanation (e) to Section 3(4) of the Competition Act.
RPM can prevent effective competition both at the intra- brand level as well as at the inter-brand level.
In the present matter, RPM imposed upon the dealers led to the denial of benefits to the consumers in terms of competitive prices being offered by MSIL dealers.
Restriction on intra-band competition
Coram stated that, 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.
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.
Hence, had there been no discount control policy enforced by MSIL, customers of MSIL would have been able to buy MSIL vehicles at lower prices.
Anti-competitive impact of the above practice of MSIL was reinforced by the fact that MSIL had more than 50% market share in the passenger vehicles segment, as observed by the DG.
Commission, however, opined 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.
Noting the above discussion, Coram expressed that RPM as a practice by multiple manufacturers is conducive for monitoring of tacit collusion among such manufacturers.
Arrangement/ Agreement perpetuated by MSIL hindered in the distribution of goods and the provision of services in relation to new cars, further it resulted in creating barriers to new entrants/dealers in the market as the new dealers would take into consideration restrictions on their ability to compete with respect to prices in the intra-brand competition of MSIL brand of cars.
Another significant observation made by the Commission was that by controlling the dealers’ margin, inter brand competition softens due to ease of monitoring of retail prices by the competitors, providing the manufacturer more liberty to regulate its own margin freely.
All dealers of MSIL are subjected to the SOP/SPG and non-compliance with the same also results in the imposition of penalties. As such, the justification put forth by MSIL, that RPM is required to eliminate the problem of free-riding, is not tenable.
Commission concluded that Maruti Suzuki India Limited 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 Appreciable Adverse Effect on Competition (AAEC) within India, thereby committing contravention of the provisions of Section 3(4)(e) read with Section 3(1) of the Act.
Competition Commission of India having considered the nature of infringing conduct and the post-pandemic phase of recovery of automobile section, deemed it fit to appropriate to impose a penalty of Rs 200 Crores upon MSIL as against a maximum penalty permissible under the provisions of the Act which may extend upto ten percent of the average of the turnover of the entity for the last three preceding financial years.
Commission directed MSIL in terms of Section 27(a) to cease and desist from indulging in RPM directly and or indirectly. [Alleged anti-competitive conduct by Maruti Suzuki India Ltd. in implementing discount control policy vis-a vis dealers, In re.; 2021 SCC OnLine CCI 45, decided on 23-08-2021]
Advocates before the Commission:
For Maruti Suzuki India Limited (MSIL): Dr. Abhishek Manu Singhvi and Mr. Rajshekhar Rao, Senior Advocates, with Ms. Shweta Shroff Chopra, Mr. Rohan Arora and Ms. Supritha Prodaturi, Authorized Representatives of MSIL and Ms. Manjaree Chowdhary, Executive Director and General Counsel of MSIL