COMPETITION APPELLATE TRIBUNAL Appeal No.60/2014
[Under Section 53B of the Competition Act, 2002 against the order dated 25.08.2014 passed by the Competition Commission of India in Case No.03/2011] CORAM Hon’ble Shri Justice G.S. Singhvi Chairman Hon’ble Shri Rajeev Kher Member
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Hon’ble Ms. Anita Kapur Member In the matter of:
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…Appellant
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Toyota Kirloskar Motor Private Limited Building 4, Plot 20, Toyota Techno Park Bidadi Industrial Area, Ramnagara Taluk Bangalore (Rural) District 562109 Versus
Competition Commission of India Through its Secretary Hindustan Times House, 18-20, Kasturba Gandhi Marg New Delhi – 110 001
2.
Mr. Shamsher Kataria, E-219 East of Kailash, New Delhi – 110065
3.
Carnation Auto India Pvt. Ltd. Through its Managing Director Mr. Jagdish Khattar, 3/16, Shanti Niketan, II Floor, New Delhi – 110021
…Respondents
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IV
1.
Appearances:
Shri Percival Billimoria, Ms. Roopali Singh, Shri Rahul Goel, Ms. Anu Monga, Shri Rahul Satyan, Shri Samir Agrawal, Ms. Sayobani Basu, Shri Neeraj Lalwani and Shri Rishabh Arora, Advocates for the Appellant Shri Salman Khurshid, Senior Advocate with Shri Vaibhav Gaggar, Ms. Reena Kumari, Shri Tushar Gupta, Shri Saksham Dhingra, Ms. Smriti Jain, Ms. Sakshi Kotiyal, Ms. Sanchita Ain, Ms. Azra Rehman, Ms. Neha Mishra, Shri Shiv Johar, Advocates and Shri Kamal Sultanpuri, DD(Law) for Competition Commission of India – Respondent No.1
2
Appeal No.61/2014 [Under Section 53B of the Competition Act, 2002 against the order dated 25.08.2014 passed by the Competition Commission of India in Case No.03/2011] In the matter of: …Appellant
Ford India Private Limited S.P. Koil Post, Chengalpattu – 603204 Versus
Shri Shamsher Kataria E-219, East of Kailash, New Delhi – 110065
3.
Carnation Auto India Pvt. Ltd. A-110, Sector - 5, Noida, Uttar Pradesh - 201301
Shri Amitabh Kumar, Shri Gautam Shahi and Ms. Lagna Panda, Advocates for the Appellant
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Appearances:
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2.
…Respondents
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Competition Commission of India Hindustan Times House, 18-20, Kasturba Gandhi Marg New Delhi – 110 001
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1.
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Shri Vaibhav Gaggar, Shri Saksham Dhingra, Ms. Neha Mishra, Ms. Reena Kumari, Shri Shiv Johar and Ms. Smriti Jain, Advocates for Respondent No.1 – Competition Commission of India
Appeal No.62/2014
[Under Section 53B of the Competition Act, 2002 against the order dated 25.08.2014 passed by the Competition Commission of India in Case No.03/2011] In the matter of: Nissan Motor India Private Limited Through its Manager (Legal) ASV Ramana Towers, 3rd Floor, No.37 & 38, Venkatanarayan Raod, T. Nagar, Chennai – 600 017
…Appellant
Versus 1.
Competition Commission of India Through its Secretary Hindustan Times House, 18-20, Kasturba Gandhi Marg New Delhi – 110 001
2.
The Director General, Competition Commission of India,
…Respondents
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4.
Carnation Auto India Pvt. Ltd. Studio 205, IHDP Park, Plot 7, Sector – 127, Noida – 201 301 (U.P.)
5.
Honda Siel Cars India Ltd. Plot No.A-1, Sector 40/41, Surajpur – Kansa Road, Greater Noida Indl. Dev. Area, Distt. Gautam Budh Nagar (U.P.)
6.
Volkswagen India Pvt. Ltd. E-1, MIDC Indl Area (Phase – III) VIII : Nigoje Mahalunge, Kharabwadi, Tel: Khed, Chakan, Pune – 410 501
7.
Fiat India Pvt. Ltd. B/19 Ranjangaon, MIDC, Tel : Shirur, Pune – 412 210
8.
BMW India Pvt. Ltd. DLF Cyber City – Phase II Building No.8, Tower B, 7th Floor, Gurgaon – 122 002
9.
Ford India Pvt. Ltd. Via S.P. Koil Post, Chengalpattu – 603 204
10.
General Motors Ltd. Plot No. : 15, Sector – 32, Institutional Area, Gurgaon – 122 001
11.
Hindustan Motor Ltd. Irla Building, 10th Floor, 9/1 R N Mukherjee Road, Kolkata – 700 001
12.
Mahindra & Mahindra Ltd. Admin. Bldg, 4th Floor, Akurli Road, Kandivli (E) Mumbai – 400 101
13.
Maruti Suzuki India Ltd., Plot No.1, Nelson Mandela Road, Vansant Kunj, New Delhi – 110 070
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Mr. Shamsher Kataria, S/o Mr. Subir Kataria, R/o E-219 East of Kailash, New Delhi – 110055
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3.
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B Wing, HUDCO Vishala, 14, Bhikaji Cama Place, New Delhi – 110 066
14.
Mercedes-Benz India Pvt. Ltd. E-3, MIDC Chakan, Phase – III, Chakan Industrial Area, Kuruli & Nighoje, Tq – Khed, Pune – 410 501
15.
Skoda Auto India Pvt. Ltd. Plot No.A-1/1, Shendra, Five Star Industrial Area, MIDC, Tq & Dist : Aurangabad – 431 201
16.
Tata Motors Ltd. Bombay House, 24, Homi Mody Street, Mumbai – 400 001
17.
Toyota Kirloskar Motor Pvt. Ltd. Plot No.1, Bidadi Industrial Area, Bidadi, Ramnagar Taluk, Bangalore (Rural) Dist. – 561 109
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Dr. Vijay Kumar Aggarwal, Shri Param Tandon and Shri Ankush Walia, Advocates for the Appellant
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Appearances:
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Shri Joy Basu, Shri Vaibhav Gaggar, Shri Saksham Dhingra, Ms. Neha Mishra, Shri Shiv Johar, Ms. Reena Kumari and Ms. Smriti Jain, Advocates for Respondent No.1 – Competition Commission of India
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Shri T. Sundar Ramanathan, Ms. Arshia Dhingra and Shri Abir Roy, Advocates for Respondent No.5
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Shri R. Sudhinder, Shri Siladitya Chatterjee, Advocates for Respondent Nos.6 and 15 Ms. Ritam Arora and Shri Pradyuman Sewar, Advocate for Respondent No.8 Shri Akshay Nanda and Ms. Khyati Dhupar, Advocates for Respondent No.10 Ms. Nikita Agarwal, Advocate for Respondent No.12
ORDER Whether the Competition Commission of India (the Commission) erred in holding appellants’ distributions/sales agreements and practices violative of Section 3 (4) & Section 4 of the Competition Act (Act) is the subject matter of these appeals.
2.
Appellants M/s Toyota Kirloskar Motor Private Limited (Toyota), M/s Ford
India Private Limited (Ford) and M/s Nissan Motor India Private Limited (Nissan)
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filed these appeals against the common order of the Commission dated 25.08.2014 on 17.10.2014 (Toyota) and 30.10.2014 (Nissan & Ford). Earlier Mr. Shamsher Kataria filed information dated 18.01.2011 before the Commission requesting an investigation into alleged abuse of dominant position and anti-competitive agreement/practices adopted by the by the respondents. The Commission considered the information and prima facie having been satisfied that the information warranted investigation directed the Director General to conduct an investigation into the matter and to submit the report within 60 days from the order dated 24.02.2011.
In order to briefly understand the facts in the information, we quote from
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FACTS
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paragraph 2 of the order under Section 26 (1) of the Act passed by the Commission. “The facts in brief as stated in the information are as under: The information has been filed on 18.01.2011 by Mr. Shamsher
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2.1
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Kataria, who owns cars manufactured by the respondent companies.
The informant owns and uses three cars. i)
Honda City, Registration No. DL4C AN 1134
ii)
Fiat Palio, Registration No. DL3C V 3478
iii)
Volkswagen Palo, Registration No. DL3C BM 8312
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2.2
The informant has alleged that genuine spare parts, diagnostic tools, software and technological information is not made available by these car manufacturers to independent repair workshops (those which are not among authorized service centers of the car manufacturer). Also that these car companies have limited number of authorized service centers located in big towns only and therefore the informant is wary of travelling out of station due to concern of break down assistance.
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2.3
The informant has stated that he earlier owned a Maruti Suzuki vehicle and could easily get it repaired at independent workshops because the spares and tools were made available by the company in the open market.
2.4
The informant has stated that cost of getting a car repaired in an independent workshop is cheaper by 35-50% as compared to the authorized service centers of the company. The informant has alleged that the respondent companies charge arbitrary and high price to consumers who are forced to avail
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the spares and the services from their authorized dealers only. Also, the prices charged for repair/maintenance services and
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for spares by these car companies are even higher than what
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they charge in other markets like Europe. The informant has alleged that this results in significant increase in maintenance
The informant has found that the restriction by these car
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2.5
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cost to car owners.
companies on supplying spares and other required tools and
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knowhow in the open market, is not a local problem. These companies and dealers appointed by them, as a matter of policy refuse to supply these services in the open market and to independent repair shops. The informant has submitted letters from some independent service stations, where they have expressed inability to service the informants vehicles because the respondents refuse to supply spares and other tools, in support of his allegation.
2.6
The informant has alleged that by not supplying the spares, tools, software etc. required to repair or service their cars, the respondent companies in conjunction with their authorized dealers/service stations have indulged into directly determining the sale price of spare parts and repair/ maintenance services.
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In addition, such agreement and practice by these car manufactures has resulted into denial of market access to independent repair workshops. 2.7
The informant has stated that as per a CII report, the size of Indian Automotive industry is estimated to be US$ 122-159 billion by the year 2016, which will be larger than the US market. Growth in the market of spare parts, replacement parts, service and maintenance etc. is expected to be proportionate to the growth in the vehicle sales, as enumerated above. The informant has alleged that the restrictive and monopolistic
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2.8
trade practices, as detailed above, of the respondents and their
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authorized dealers/service stations have a negative effect not
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only on the consumer but the whole economy because it increases the cost of keeping a vehicle. The informant has
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stated that in a country where road transport is essential for
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mobility of people and goods, the increased cost of vehicle maintenance may hamper economic growth of the country. The informant has stated that effective competition at each
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2.9
level of automotive aftermarket is essential for fostering innovation and keeping mobility affordable. Consumer should have choice of getting vehicle services/repaired at a workshop of his choice. This will foster competition among service providers which will lead to improvement in quality and drop in prices. It will also foster innovation in the market. The informant has alleged that due to the restrictive trade practices of the respondent companies, effective competition at each level of automotive aftermarket is adversely affected.
2.10
The informant has also alleged that the anti competitive practices by the respondent companies has resulted in denial of market access to independent workshops who are usually
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micro, small and medium enterprises (MSME). The informant has stated that MSMEs give employment to 45% of industrial workers. The government has made several policies to encourage and support the MSME sector. 2.11
The informant has stated that the European Commission has the so called "Block Exemption Rule' in place since the year 2002 to force auto manufacturers to provide spares and tools etc.
to
independent
discrimination
between
operators. authorized
These
rules
service
prohibit
dealers
and
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independent operators. The European Commission took commitments from auto majors to ensure supply of spares and
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technological knowhow to independent operators. To ensure
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effective competition in the auto repair and maintenance market, the European Commission issued the new regulation
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no. 461/2010 in the year 2010, which included sector specific
2.12
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guidelines apart from the earlier block exemption rules. The informant has stated that there are regulations in place in
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the United States to ensure that emissions related diagnostic tools and information is available to independent vehicle repair shops. Several states have introduced the 'Right to Repair Act' to curb restrictive practices by auto manufactures.
2.13
The informant has alleged that all over the world consumers and governments are fighting to implement a free and fair competition regime in the automotive sector, with various degrees of success. The informant also alleges that auto manufacturers along with their authorized dealers are indulging in anti competitive practices and misusing their dominant position by undermining the rights of consumers.
2.14
The informant has alleged that the acts of the respondents in restricting the sale and supply of spare parts and technical
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information, diagnostic equipments and tools to independent automobile service providers indirectly determines purchase or sale prices of both vehicle spare parts and servicing, maintenance and repair jobs due to the monopoly maintained by them over the supply of genuine spare parts and the information and tools required for the servicing and repair of vehicles. This is in direct contravention of Sections 3(3)(a) and 3(3)(b) of the Competition Act, 2002. By refusing to sell the spare parts to independent operators the respondents attract
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Sec 3(4)(d) of the Act. Also the respondents have denied access to the repair and maintenance market to independent ser-
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vice providers and therefore such practices attract Sec 4(2)(a),
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4(2)(b) and 4(2)(c) of the Act.
The informant has alleged that the acts of the respondents are
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arbitrary, illegal and devastating to free and fair competition.
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The informant has submitted that the balance of convenience lies in his favour and therefore the Commission may pass
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ex-parte ad interim order, u/s 33 of the Competition Act, restraining the respondents and its agents from engaging in unfair practices and abuse of dominance.
2.16
The relief sought by the informant is, inter alia, to order the respondents and their authorized dealers/ service centers to desist from alleged restrictive, unfair and monopolistic trade practices.
2.17
The informant in his supplementary information to the Commission on 28.01.2011, has alleged that the respondents and other vehicle manufacturers impose restrictions on their original equipment suppliers (OES) forcing them not to supply parts in the open market. It is alleged that such practices amount to limiting and controlling production and supply of
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components/ spares in the automobile aftermarket. Such restrictive practices attract Sec 4(2)(d) of the Competition Act. In this reference the informant has submitted that the European Commission has effectively tackled this very aspect under their block exemption rules by affording statutory right to OES to sell vehicle parts in the open market. 2.18
The informant has also alleged in the supplementary information that the restriction by respondents on their authorized dealers from taking up dealership of other vehicle
After beginning his investigation, the DG made a request on 19.04.2011 for
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u/s 4(2)(a), 4(2)(b) and 4(2)(c).”
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manufacturers, is contravention of the Competition Act, 2002,
directions to initiate investigation against other car manufacturers, inter-alia stating that the scope of investigation needs to be widened in this case. The Commission
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considered the DG’s note and approved the request to initiate investigation against
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other car manufacturers. As a consequence of this order, the Commission directed investigation against following companies: BMW India Pvt. Ltd.
2.
Ford India Pvt. Ltd.
3.
Hindustan Motors Ltd.
4.
Honda Siel Cars India Ltd.
5.
Hyundai Motor India Ltd.
6.
Fiat India Automobiles Pvt. Ltd.
7.
General Motors India Pvt. Ltd.
8.
Mercedes-Benz India Pvt. Ltd.
9.
Nissan Motor India Pvt. Ltd.
10.
Premier Ltd.
11.
Mahindra & Mahindra Ltd.
12.
Maruti Suzuki India Ltd.
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1.
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5.
13.
Skoda Auto India Pvt. Ltd.
14.
Tata Motors Ltd.
15.
Mahindra Reva Electric Car Company P Ltd.
16.
Toyota Kirloskar Motor Pvt. Ltd.
17.
Volkswagen India Pvt. Ltd.
After several extensions granted to the DG, the main investigation report was
submitted to the Commission on 30.06.2012. However, since some sub reports were yet to be completed, DG specifically sought time till 15.07.2012 which was granted. After completing investigations DG submitted his complete investigation
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report which was considered by the Commission on 04.09.2012. A CD containing
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scanned copy of the report was made available to the 17 car manufacturers
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mentioned in the DG’s report along with the sub reports relating to each car manufacturer and the parties were asked to file their reply/objections within four
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weeks of receipt of the report along with profit and loss accounts and balance sheet
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of their enterprise for last three financial years and to appear for oral hearing.
The 17 car manufacturers were grouped into four groups and invited for oral
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hearing on four dates by order dated 04.09.2012. Various car manufacturers appeared on the scheduled dates and requested additional time for filing their
re-
plies/objections which was granted by the Commission. The parties also
re-
quested that they be allowed cross examination of witnesses who had deposed before the DG and whose evidence had been considered by the DG in preparing his reports. While allowing the parties to move appropriate miscellaneous applications for seeking cross examination, the Commission also directed that the parties shall clearly list the names of the witnesses they seek to examine and the specific areas on which such cross-examination was being sought along with the reasons in support thereof. Accordingly, the appellants/parties filed applications for crossexamination along with the details directed by the Commission. The Commission in its order dated 10.01.2013 addressed these requests and rejected them.
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7.
Some of the car makers before the Commission such as BMW India Private
Limited, Mahindra & Mahindra Limited, Mahindra Reva Electric Car Company Private Limited, Maruti Suzuki India Limited did not pursue applications for crossexamination. On behalf of one of the appellants herein, Nissan, the advocate pleaded that though they filed the application dated 10.12.2012 for cross
exami-
nation, they reconsidered the matter and now they did not wish to cross the witnesses, therefore, they requested to treat their application as
examine withdrawn.
During the same meeting, the Commission was also approached by M/s Carnation Auto India Limited (Carnation) which had earlier filed material before the Commis-
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sion in favour of the informant that their application dated 09.01.2013 to implead them as a party to the proceedings be accepted. The Commission
application.
Regulation 25 of the General Regulations under the
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“14(ii)
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the application of Carnation and made following orders on their
considered
Competition Act empowers the Commission to allow a
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person/enterprise to take part in the proceedings if the
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Commission is satisfied that the person/enterprise has substantial interest in the outcome of the proceedings or
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that it was necessary in the public interest to allow such person or enterprise to present its opinion on the matter. The applicant no doubt is having a substantial stake in the outcome of the result of this matter since the applicant is a multi brand auto sale service and repair solution provider. There may be many other multi brand auto sale service and repair solution providers. No one is presenting his case before the Commission. The Commission considers that it would be fruitful to consider the submissions made by the applicant for the purpose of deciding this matter in a fast and fair manner. The application is, therefore, allowed and the applicant is permitted to take part in the proceedings. However, the applicant shall coordinate with the informant
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for the purpose of documents, reports etc. No separate documents shall be furnished to the applicant.”
8.
On this issue, several parties raised an objection and submitted that
Carnation’s objections were received by the parties only three days before the hearing dated 04.02.2013 therefore, they had not been able to file response to the objection of Carnation. The Commission’s relevant order on the subject dated 04.02.2013 is quoted below: “The counsels for the parties raised an objection on allowing Carnation Auto India Ltd. to be a party in the matter and submitted
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that Carnation’s objections were received by the parties only 3 days
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before. Therefore, the parties could not file response to the objections
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of Carnation. It was made clear to the counsels for the parties that Carnation has not been given liberty to file any objections to the DG
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report or to make any supplemental pleadings. Carnation was given liberty only to address the Commission on the issues which arose in
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the matter on the material already available on record. If any response has been filed by Carnation to the DG report, the same shall not be
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considered by the Commission and shall not be made part of the record of the case. The counsels also raised objections that the OPs should have been heard before allowing Carnation to be impleaded as a party. Regulation 25 of the CCI (General) Regulations, 2009 empowers the Commission to permit a person or enterprise to take part in the proceedings if the Commission is satisfied that a person or enterprise had substantial interest in the outcome of proceedings and it was in public interest to allow such a person or enterprise to present his or its opinion on such a matter. In the present case, Carnation is a multi brand car repairer and representatives of Carnation had deposed before DG within the knowledge of the OPs. The OPs in this case are various car manufacturers. The informant before the Commission is a
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person who owns 3 brands of cars and had approached the Commission with information concerning competitive issues in the after market. Since none of the multi brand car repairer was before the Commission, the Commission thought it appropriate that the legal arguments of a multi brand car repairer should also be heard by the Commission since the Commission was going to consider an important matter. It was not necessary for the Commission to serve a notice to the OPs before asking Carnation to address arguments on the material already available on record before the Commission as it
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was not going to prejudice either of the car manufacturers who were plenty in number and had been given adequate time to address the
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Commission continuously for 5 days. The Commission, therefore, did
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not consider it necessary to service notice of the application made by Carnation on the OPs since the Commission was not reversing the
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hands of the clock and was not permitting Carnation to file any
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pleadings or material before the Commission. The Commission had only permitted Carnation to give its opinion on the legal issues which
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were being addressed by the car manufactures. It had not permitted Carnation to add to any pleadings. The objections made by the counsels are not tenable. Advocates on behalf of the above OPs argued the matter in support of their respective replies filed to the DG report. Arguments on the DG report have been concluded in respect of these parties. The Commission has directed to the parties to file written arguments, if they so desire, within ten days.” (Emphasis supplied)
9.
Since the Commission heard parties in groups, a similar order was passed
on subsequent dates of hearing i.e. 05.02.2013, 06.02.2013, 07.02.2013 and 08.02.2013. Nissan was heard on 04.02.2013, Ford on 05.02.2013 and Toyota on
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08.02.2013. Toyota along with two others filed applications in the Commission to seek stay of the proceeding encouraged by an interim stay granted by the Madras High Court to Hyundai Motor India Limited, one of the 17 car manufacturers involved in this enquiry. However, the Commission fairly declined to stay the proceedings as they had reached almost the end of their course. On 16.04.2013, the Commission considered interlocutory applications filed by Nissan and Toyota in respect to filing responses to queries made by the Commission and written arguments on their behalf. The Commission granted time to both the applicants accordingly. In the same meeting, the Commission also considered a request by
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Toyota to seek a meeting of one of its, business executive with the Commission to discuss the steps that the applicant is willing to take to make the market more
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competitive as well as to explain the complexities involved therein. The Commission
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declined to give a date for meeting with Toyota business executive since the applicant had already been given opportunity for oral arguments and also to file
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written submissions in the matter. The Commission during the interregnum upto
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pronouncing its order sought answers to several queries from the car manufacturers, some of which were answered from time to time and written
re-
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sponses were filed. Toyota also filed an affidavit on 22.01.2013. The Commission passed its final order on 25.08.2014.
10.
The DG in his main report after introducing the subject of investigation as
summarized in the information and supplementary information, took note of the fact that the alleged practices may not be confined to the three companies which had been referred by the informant in his information and considering that the case involved larger issue related to prevailing conduct of the players in the automobile sector and its implications on the consumer at large suggested that the investigation may not be restricted to the opposite parties mentioned in the order.
11.
The Commission consequently approved DG’s proposal to expand the scope
of enquiry from the three car manufacturers named in the information to all the car manufacturers operating within India.
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12.
DG broadly investigated the following four categories of issues: 1. Restrictions on Original Equipment Suppliers (OES) in selling spares directly in the aftermarket. 2. Constraints faced by independent repairers to undertaking repairs of various car brands on account of practices of car manufacturers/original equipment manufacturers (OEMs). 3. Restrictions on authorized dealers from sourcing spare parts from other than OEMs and taking up dealership of other car manufacturers. 4. Difficulties encountered by users of vehicles in meeting their after sale
In chapter II of his report, DG has focused on the structure of the Automobile
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service repairs and maintenance requirements.
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Industry in India. He has divided the automobile sector into two parts namely automotive primary market and automotive secondary market. According to the
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statistics quoted by the DG at the time of the investigation, Toyota commanded a
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3.4% market share of automobile market while Ford and Nissan had 3.91 and 0.52% share of automobiles, respectively. The automotive aftermarket is treated as
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secondary market of the automotive industry which comprises distribution, retailing and installation of all vehicles parts, workshop, service tools, equipment, accessories and chemicals after the sale of the automobile by the OEM to the consumers. As per the Automobile Components Manufacturer Association (ACMA) report 2011, the estimated turnover of auto component industry in India is US$ 40 billion (2010-2011).
14.
According to the ACMA report quoted above passenger vehicles accounted
for 24.68% of the auto components and components consumed in 2010. It has been estimated that the total market for aftermarket component in 2010 was Rs. 24,800 crores. DG has then identified various players in automotive aftermarket including component suppliers and service workshops. They are listed below:
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Component Suppliers
Service Providers
OEMs and OESs
Authorised dealers Multi-brand workshops
Distributors/stokiest/retailers
Semi-organized service stations
Authorised Dealers
Unorganized service providers and
Overseas suppliers
Road side garages
According to the information provided by Society for Indian Automobile
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15.
Manufacturers (SIAM) there are 17 car manufacturers whose names have already
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been stated in above. Authorized dealers constitute a significant level in the vertical
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chain of automobile industry. They provide a network of dealers for automobile manufacturer (OEMs) and at the same time they operate as vendors for OEMs and
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service workshops for the OEMs. Original Equipment Suppliers (OESs) are
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manufacturers of auto components who provide components to OEMs as original suppliers and may also supply components to the aftermarket. Most OESs are
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located within the country while some others are located abroad. The latter are very often affiliates or parent companies of the OEMs. Some auto components are also manufactured by the OEMs in their own facilities. Independent service providers constitute another class of service providers who are not affiliated to an OEM but run vehicle maintenance and repair services as independent standalone facilities. This category encompasses organized networked multi brand service providers such as BOSCH car service (BOSCH), Carnation Auto India Pvt. Limited (Carnation), Vahan Motor Private Limited (CARZ) and TVS Automobiles Solutions Pvt. Ltd. (TVS). DG has quoted from the Indian Automotive aftermarket study 2011, the following numbers of service providers in different categories: Type of Service Center
Number of workshops
OEM authorized
19000
18
Multi Brand Dealers
950
Semi – Organized Service Stations
60000
Neighbourhood Garages / Un-organized 300000 service providers
16.
Besides the above direct players, there are representative structures for all
categories of operators. The Society for Indian Automobile Manufacturers (SIAM) is the representative body for the OEMs. It has 46 members which include all Indian
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companies, joint ventures as well as foreign subsidiaries. ACMA is the association of Auto Component Industry and represents about 640 companies in the auto
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component manufacturing sector. Federation of Automobiles Dealers Association
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(FADA) is the Apex National body of automobile dealers (dealing in two wheelers, three wheelers, cars, trucks and buses) which protects and promotes the
In order to fully comprehend the kind of spare parts which are available in the
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automobiles repair business in India.
aftermarket following table is reproduced from DG’s main report:
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Categorization OE spare parts
Original spare parts made by OE suppliers (Tier1) and sold through OEM-owned channels or OE suppliers (OES) through distributors and wholesalers.
Genuine
Branded
spare Spare parts, locally manufactured and
parts
sold under brand names by OES and Tier 1 or 2 suppliers
Non OE brand
Spare parts manufactured by non-OE entities and sold under their own names
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Imported
Components manufactured outside India, mostly Chinese or Taiwanese or Korean spares with trade mark or brand name
Unbranded
Unbranded
Spare parts locally manufactured by small
and spurious
manufacturers who do not own a brand name or a trade mark. Also includes unbranded low cost Chinese or Taiwanese or Korean spares. Locally reconditioned OE, branded, and
Manufactured
non-OE branded spare parts and sold as
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Re-
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reconditioned spare parts. Locally manufactured or reconditioned
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Counterfeit
spares sold under brand names (both OE,
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branded and non-OE), using third party
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In order to appreciate the distribution network of spare parts which has a
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18.
intellectual property.
bearing on this case, we reproduce relevant portions of DG‘s report below: “Distribution network for spare parts The broad distribution channels for aftermarket supplies are as under:1. OEM channels and OE supplies. 2. Import channel The key players in the chain are: OEMs:
Car
manufacturers
usually
have
a
separate
independent
after-service division that buys parts from the component manufacturers and distributes them through their own network of dealers and in some cases also through distributors/stockist. In case of some of the OEMs the
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procurement and supply of spare parts for aftermarket is being undertaken by a separate company set up for the purpose. OESs:
Original Equipment Suppliers sell products through both the OEM
network and in some cases also through their own network of stockist and dealers. Overseas suppliers: Several OEMs source parts including spare parts from overseas suppliers and supply for the aftermarket. Wholesalers/ Distributors/ Dealers: These are members of the distribution chain and help in reaching the part of the end – consumers.
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Sub – distributors/ Semi Wholesalers: These dealers mostly buy from
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wholesalers/ distributors and area of operation is smaller.
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Retailers: The spare parts shop, the retailer could also be providing parts to other shops. The retailer is the point of contact between the manufacturer
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and the end-consumer.
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As per ACMA report there are more than 3,000 authorized distributor’s (authorized dealers) of auto manufacturing companies. There are approx.
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5,000 wholesalers. The number of semi-wholesalers, who mainly patch up for the distribution to the interiors and in some cases also reach up to the garage level is put at about 20,000. Auto component retailers are estimated to be more than 125,000 in the country. According to the report Tier 1 OE Ss are increasingly veering towards direct supplies through their authorized channels to ensure sustainability and profitability.”
OEMs ---------------------------->OEM Dealer ___ Raw Material/Compone nt Supplier
International Suppliers
Workshops Domestic -----> Distributor Manufactures of OESs /OESs
End user Retailers
21
19.
In the above background it can be summarized that an automobile in India is
assembled by procuring parts from overseas suppliers, domestic OESs and from the OEMs themselves. Every OEM has a network of authorized dealers which distributes its automobiles as well as spare parts. It is needless to emphasize that a widely spread network of authorized dealers will facilitate the availability of an OEMs
automobiles
and
their
spare
parts.
Therefore,
most
automobiles
manufacturers, as they carve out a larger market share in a given territory, will naturally be encouraged to expand the dealership network or the larger the market share of a player the greater is his presence in distant locations within a national
To review the supply agreements between the OEM and the overseas
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1.
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The focus of DG’s investigation has been on the following:
component suppliers and see if the overseas component suppliers are
2.
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free to sell their products in the aftermarket. Examine the purchase agreements between the OEMs and the OESs
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and investigate whether there are any restrictive provisions in such agreements and/or OESs are free to sell their products in the aftermarket.
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20.
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territory.
3.
Whether there are any restrictive arrangements within the dealership agreements executed between the OEMs and their authorized dealers particularly whether there are restrictions on the authorized dealers who take business from other competing OEM and whether authorized dealers can sell spare parts in the aftermarket without any restrictions.
4.
Whether independent repairers can access spare parts of all brands of cars produced by OEMs from different levels of operators in the vertical supply chain i.e. whether independent repairers can access spare parts from OEMs, OESs and authorized dealers.
22
21.
The DG has carried out his investigation focused on the above four
considerations and has produced reports specific to each company in order to focus facts which are specific to that company. In the course of his investigation DG examined the following:
“Whether any restrictions have been imposed by OEM on OES (local and overseas suppliers) in making the spare parts available
directly
to
third
parties
such
as
customers,
neighbourhood work shops, multi-brand work shops etc.
Whether there is any restriction on dealers on sourcing of spare
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parts. Whether over the counter sales of spare parts by authorized
Whether there are genuine/organized channels other than the
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dealers are permitted and actually taking place.
authorized dealers/service centres of OEM through which
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OES.
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entities can procure the spare parts sourced by OEMs from
Whether the body parts manufactured in house by OEM,
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imported parts which are used in repair and maintenance are being made available to entities other than their authorized dealers.
Are the customers being charged prices for spare parts which are substantially higher than the price at which they are being procured by the OEM from the OESs including overseas suppliers.
Whether the customer can get the after sales service from entities other than the authorized service centres. Are there any adverse warranty implications in case the customer avail services of non authorized dealers.
Are there any constraints being faced by the customers in getting the cars serviced and repaired from workshops other
23
than the authorized centre on account of non availability of the required spare/body parts.
Whether
the
technical
manuals,
diagnostic
tools/equipments/softwares/codes etc. required to service and repair the vehicle are being made available to other than authorized
networks
including
independent
workshops,
multi-brand workshops having the expertise and capabilities to handle after sales service requirements etc.
Whether any restrictions are being imposed by OEMs on their
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authorized dealers from taking up the franchisee/dealership of other OEMs.
the
various
levels
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Whether there are any clauses in the agreements entered at of
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aftermarket
which
are
anti
competitive/violative of provisions of the Act.
What are the best international practices and developments.”
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IV
Are there any IPR or technological issues.
DG collected information from all stake holders, their associations and
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22.
individual companies, and statements were recorded on oath of representatives of OEMs,
OESs,
independent
repairers
etc.
Relevant
laws,
practices
and
jurisprudence in other jurisdictions have also been studied and commented upon.
23.
After conducting lengthy investigation, DG has found all the three appellants
in violation of the provisions of Section 3 (4) and Section 4 of the Act.
24.
In chapter XII of his report DG has drawn conclusions of his investigation. In
brief his conclusions can be summarized as follows: DG has recognized ‘sale of cars in India’ as primary market, ‘sale of spare parts in the aftermarket in India’ as secondary market and ‘maintenance and service of automobiles in India’ as third relevant market. However there is a lateral connect between the secondary market and the market for repairs and
24
maintenance of automobiles. DG examined the vertical agreements between OEM’s, OESs and authorized dealers and concluded that “in terms of agreement with the OEMs most of the OESs are restricted from selling spare parts directly to third parties without obtaining prior consent of the OEM”. He found these agreements in the nature of exclusive distribution arrangements and refusal to deal in terms of Section 3 (4) (c) and Section 3 (4) (d) of the Act. Since OEMs defended their restrictions on the grounds of imposing reasonable conditions to protect their intellectual property rights, DG examined Section 3 (5) of the Act and concluded that these were not
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reasonable conditions. Consequently he also found that in almost all cases the appellants were not able to prove their intellectual property rights for
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various reasons mentioned in the report and therefore even if they were to be
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given the benefit of Section 3 (5) of the Act they could not have been granted such benefits. DG’s investigation also reported that though there were no
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specific clauses in the import agreements of most OEMs which restricted the
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overseas suppliers from selling directly in the aftermarket, they were found to be supplying spare parts only to the OEM’s and not directly in the open
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market to any other distribution channel. This conduct amounted to exclusive distribution agreement in terms of Section 3 (4) (c) of the Act. On the issue of agreements entered into by OEMs with the authorized dealers, DG reported that there are clauses requiring them to source the spare parts only from the OEM or their approved vendors. Such agreements were therefore found to be in the nature of exclusive supply agreements in terms of Section 3 (4) (d) of the Act. The dealer agreements of some OEMs contained clauses which either prohibit or restrict over the counter sales of spare parts to independent repairers; they were therefore found to be in the nature of refusal to deal in terms of Section 3 (4) (d) of the Act. In some cases though there were no specific clauses in the agreements evidence brought out that spare parts are not generally available over the counter or at best were being sold selectively. This gave rise to the conclusion that there was an
25
understanding/arrangement between the OEM and the authorized dealers regarding restraint or prohibition of sale of spare parts over the counter to individual customer/independent repairers amounting to exclusive distribution and refusal to deal agreement in terms of Section 3 (4) (c) and Section 3 (4) (d) of the Act.
25.
Since OESs were restricted from supplying spare parts in the aftermarket
and the authorized dealers were required to source spare parts only from the OEMs, these acts amounted to creation of entry barriers for the OESs who supply to the OEMs as well as to other OESs. The OEM is the only source of supply of
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spare parts in the market thereby completely eliminating and foreclosing
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competition in the aftermarket. According to DG’s conclusion OEMs also charged
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unfair price on the spare parts and given the complete dependence of customers on OEMs for these spare parts, with them having to spend far more than the normal
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price which could be charged on market principle thereby adversely affecting competition in the market and impacting consumer interest. DG has also reported
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that OEMs agreement with authorized dealers does not allow them to undertake dealership of other brands of vehicles without OEMs prior written consent. Some of
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the OEMs do not permit their dealers from taking dealership of competing brands while others prohibit undertaking business relating to other brands of cars from the same premises. DG has categorized this conduct as exclusive distribution agreement in terms of Section 4 (c) of the Act.
26.
On the issue of dominance DG’s investigation has concluded that the
automobile market is divided into primary market for cars, secondary market for spare parts and related market for service and maintenance. He has also concluded that “Investigation has revealed that in case of few OEMs spare parts, diagnostic tools etc are not available in the open market particularly to the independent repairers. As a result the independent repairers are
26
not in a position to offer their services with respect to these brands of cars. Even if they are able to source the spare parts in a limited way through alternate sources, non-availability of the specialized tools and other facility severely restrict their ability to undertake such jobs. It is, therefore, found that the conduct of these OEMs amounts to imposition of unfair conditions and denial of market access to independent repairers in terms of Section 4(2)(a)(i) and 4(2)(c) respectively of the Act. Further on account of the restrictions, the users of the cars are not in a position to choose between the
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independent repairers and the authorized dealers for their aftermarket requirements which amounts to imposition of unfair condition in terms
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of Section 4(2)(a)(i) of the Act. Also requiring users to avail services of
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the authorized dealers while purchasing spare parts was found to be use by the OEMs of their dominant position in one relevant market i.e.
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in the supply of spare parts to enter and protect the other relevant
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market i.e. the market for after sales service thereby attracting the provisions of Section 4(2)(e) of the Act.” On the issue of diagnostic tools, technical manual, fault codes etc. besides
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27.
concluding that they are not available to independent repairers’ thereby manifesting refusal to deal and recognizing that each OEM is in a dominant position in the relevant aftermarket, DG has concluded that they also create entry barriers for independent repairers. DG has concluded that diagnostic tools, technical manuals etc. are in the nature of essential facilities and by depriving independent repairers of the diagnostic tools for repairs, OEMs are depriving them of essential facilities to carry out their normal business.
28.
DG has examined the conduct of appellants on the parameters listed in para
21 above in respect to each OEM. While the main report covers the entire expanse of his investigation, for each OEM a sub report has been prepared. For our present purposes we are only concerned with the three appellants under consideration in
27
these appeals therefore, we reproduce the findings of DG as summarized by the Commission in its report below: “6.
Findings of the DG with respect to Ford
6.1
Ford India Pvt. Ltd. (“FIPL”) was incorporated in 1995 and is a 100% subsidiary of Ford Motor Company, U.S.A. FIPL is engaged in manufacturing of passenger cars and spare parts in India. FIPL has its manufacturing plant at Maraimalai Nagar, Chennai. FIPL has approximately 150 dealers through which it sells its cars. For after sale services, there are approximately 170 authorized service centers in
6.2
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about 100 cities/towns. The specific findings of the DG against the alleged anti-competitive
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practices of Ford are summarized below:
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6.2.1 Ford does not have any formal agreement with its overseas suppliers and imports spare parts from an associate company. DG did not find
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any restrictive clauses in Ford overseas supplier agreements. DG
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concluded that since the overseas supplier are associates of Ford and in-fact only supplies spare parts to Ford in India, there may exists an
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arrangement between Ford and such overseas supplier for not supplying spare parts in Indian aftermarket.
6.2.2 OES’s are restricted from accessing the aftermarket for protecting the OEM’s IPRs.
6.2.3 Based upon the submissions of multi-brand retailers and independent repairers, the DG has concluded that although the agreement between Ford and its authorized dealers does not contain any clause dealing with the right of the authorized dealers to sell spare parts over the counter, but in practice such sales are not permitted. 6.2.4 Diagnostic tools are only available to authorized dealers of the OEM. 6.2.5 Warranty conditions are invalidated if a Ford branded car is repaired by independent repairers.
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6.2.6 Ability of dealers to deal in competing brands is restricted; however, Ford has submitted that 61 dealers have undertaken dealerships of competing brands. 6.2.7 Price mark up for top 50 spare parts by revenue generated is: 38.37% -1171.09% (Q1, 2010-11); 35.62% - 1171.09% (Q2, 2010-11); 35.62% – 1171.09%(Q3, 2010-11); Price mark-up of top 50 spare parts on the basis
of
consumption
is:
64.1
–
1696.36
(Q1,
2010- 11);
64.1 – 1696.36 (Q2, 2010-11); 58.68% - 1696.36% (Q3, 2010-11); 64.1% – 1696.36% (Q3, 2010-11).
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6.2.8 Ford has submitted details of patents over 11 body parts which have been granted in India and applications for grant of patents over 30
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body parts in India. However, Ford does not have patent rights over all
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the body parts over which restrictions are currently being imposed by Ford.
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6.2.9 As per DG, denial to access diagnostic tools and spare parts amounts
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to denial of access to an “essential facility” and amounts to abuse of dominant position of Ford.
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6.2.10 Since Ford does not allow over the counter sale of spare parts and since diagnostic tools are not available to the independent repairers, Ford imposes unfair terms and denies market access to the independent repairers as per section 4(2)(a)(i) and 4(2)(c) of the Act, respectively. Further, Ford is in violation of section 4(2)(a)(ii) for imposing unfair prices. 6.2.11 Ford uses its dominance in one relevant market (i.e., supply of spare parts) to protect the other relevant market (i.e. market for repair services) which is violative of section 4(2)(e) of the Act. 6.2.12 Ford is in violation of provisions of sections 3(4)(c) and 3(4)(d) of the Act with respect to its agreements with local OESs and agreements with authorized dealers for imposing absolute restrictive covenants
29
and completely foreclosing the aftermarket for supply of spare parts and other diagnostic tools. 6.2.13 Agreements with the authorized dealers have restrictive clauses requiring dealers to source the spare parts only from Ford or its approved dealers. The DG has found these agreements in the nature of exclusive supply agreements in violation of section 3(4)(b) of the Act. 12.
Findings of the DG with respect to Nissan Motor India (P) Limited (“Nissan”) Nissan is a 100% subsidiary of Nissan Motor Ltd., Japan (“NML
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12.1
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Japan”) through Nissan International Holdings Netherlands and
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Nissan Asia Pacific Pvt. Ltd., Nissan was incorporated on February 7, 2005. Nissan is engaged in the design, manufacture, assembly and/or sale of certain motor vehicles and motor vehicle components. Further,
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it caters to the after sales service of the vehicles which are sold and
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manufactured by Nissan. It has been informed to the DG, that the company has recently commenced the export of vehicle components
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and trial parts to its group companies. Nissan has manufacturing facility at the SIPCOT Industrial Park at the Kancheepuram district of Tamil Nadu and is in the process of setting up an automobile manufacturing plant in Oragadam, Chennai. Nissan has a network of approximately 40 dealers throughout India in around 25 cities. The distribution network for spare parts of Nissan branded cars is stated to be managed through such authorized dealer network.
12.2
The specific findings of the DG against the alleged anti-competitive practices of Nissan are summarized below:
12.2.1 Nissan does not have an overseas supplier arrangement in place. 12.2.2 OES’s are restricted from accessing the aftermarket for protecting the OEM’s IPRs.
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12.2.3 The authorized dealer agreement of Nissan expressly restricts over the counter sale of spare parts of Nissan branded cars in the aftermarket. 12.2.4 Diagnostic tools are only available to authorized dealers of the OEM. 12.2.5 Warranty conditions are invalidated if a Nissan branded car is repaired by independent repairers. 12.2.6 Ability of Nissan’s authorized dealers to deal in competing brands is restricted. However, Nissan has submitted that certain Nissan dealers have been dealing in competing brands.
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12.2.7 Price mark up for top 50 spare parts by revenue generated is: 84.96% - 201.98%. Price mark-up of top 50 spare parts on the basis of
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consumption is: 85.81%-258.78%.
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12.2.8 The Manufacturing License Agreement between NML Japan and Nissan does not grant any license to Nissan to use any of the
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registered IPRs of NML Japan. Nissan has contended before the DG
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that it does not have any IPRs registered in India. 12.2.9 As per DG, denial to access diagnostic tools and spare parts amounts
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to denial of access to an “essential facility” and amounts to abuse of dominant position of Nissan.
12.2.10 Since Nissan does not allow over the counter sale of spare parts and since diagnostic tools are not available to the independent repairers, Nissan imposes unfair terms and denies market access to the independent repairers as per section 4(2)(a)(i) and 4(2)(c) of the Act, respectively. Further, Nissan is in violation of section 4(2)(a)(ii) for imposing unfair prices. 12.2.11 Nissan uses its dominance in one relevant market (i.e., supply of spare parts) to protect the other relevant market (i.e. market for repair services) which is violative of section 4(2)(e) of the Act. 12.2.12 Nissan is in violation of provisions of sections 3(4)(c) and (d) of the Act with respect to its agreements with local OESs and agreements
31
with authorized dealers for imposing absolute restrictive covenants and completely foreclosing the aftermarket for supply of spare parts and other diagnostic tools. 12.2.13 Agreements with the authorized dealers have restrictive clauses requiring dealers to source the spare parts only from Nissan or its approved dealers. The DG has found these agreements in the nature of exclusive supply agreements in violation of section 3(4)(b) of the Act. 16.
Findings of the DG with respect to Toyota Kirloskar Motors Pri-
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vate Limited (“Toyota”)
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16.1 Toyota is a subsidiary and an authorized distributor of Toyota
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Corporation, Japan (“TMC”) with 89% of Toyota’s shares held by TMC and 11% held by Kirloskar Group, India. Toyota was incorporated on 6th October, 1997. Toyota manufactures ‘Toyota’ brand of cars in
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India with the help of technical assistance received from TMC. Toyota
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Motor Asia Pacific Pvt. Ltd in Singapore (“TMAP”) is a wholly owned subsidiary of TMC. The role of TMAP is to support and guide the
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planning and implementation of distribution, sales and marketing strategies
in
India,
where
required.
Toyota
is
involved
in
manufacturing, importing, marketing and sales and service of Toyota brand automobiles in India. The company has its manufacturing plant in Bidad, Karnataka. Toyota has three (3) categories of dealership networks. The first model is for dealers which are dealing exclusively with sales of motor vehicles (1S model), second kind of dealership is the 2S model, where dealers cater to both sale of various models of Toyota cars as well as provide after sale services of particular brands of Toyota cars and the third model of Toyota dealers is the 3S model, where the dealer conducts the sale of Toyota cars, provides after sale services of TKM cars and sell spare parts of various models of Toyota
32
branded cars. Toyota has 173 dealers in its various models of dealership networks. The 2S and 3S models are stated to be spread over in 102 cities/towns in India. Toyota has submitted that it has plans to reach a network of 330 authorized dealerships by 2015. 16.2
The specific findings of the DG against the alleged anti-competitive practices of Toyota are summarized below:
16.2.1 Toyota sources several parts from overseas suppliers which include the Toyota Motor Corporation in Japan (“TMC”), Toyota affiliates in other countries and other overseas companies approved by Toyota.
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No clause in such overseas supplier agreements could be discovered that restricted the rights of such suppliers from accessing the Indian
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aftermarket. Since Toyota’s overseas suppliers are its affiliates and
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they do not as a matter of fact supply spare parts in the Indian aftermarket, an arrangement could be presumed.
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OEM’s IPRs.
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16.2.2 OES’ are restricted from accessing the aftermarket for protecting the
16.2.3 Based upon the submissions of multi-brand retailers and independent
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repairers, the DG has concluded that although the agreement between Toyota and its authorized dealers does not contain any clause dealing with the right of the authorized dealers to sell spare parts over the counter, but in practice the sale of such spare parts are not permitted. 16.2.4 Diagnostic tools are only available to authorized dealers of the OEM. 16.2.5 Warranty conditions are invalidated if a Toyota branded car is repaired by independent repairers. 16.2.6 Ability of dealers to deal in competing brands is restricted. 16.2.7 Price mark up for top 50 spare parts by revenue generated is: 79.61%-1305.85% Price mark-up of top 50 spare parts on the basis of consumption is: 38.26% -510.43%.
33
16.2.8 It does not stand established that Toyota possesses valid IPRs in India, with respect to all spare parts for which restrictions are being imposed upon OESs. 16.2.9 As per DG, denial to access diagnostic tools and spare parts amounts to denial of access to an “essential facility” and amounts to abuse of dominant position of Toyota. 16.2.10 Since Toyota restricts the availability of spare parts and diagnostic tools to its authorized dealers, it imposes unfair terms and denies market access to the independent repairers as per section 4(2)(a)(i)
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and 4(2)(c) of the Act, respectively. Further, Toyota is in violation of section 4(2)(a)(ii) for imposing unfair prices.
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16.2.11 Toyota uses its dominance in one relevant market (i.e., supply of
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spare parts) to protect the other relevant market (i.e. market for repair services) which is violative of section 4(2)(e) of the Act.
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16.2.12 Toyota is in violation of provisions of sections 3(4)(c) and (d) of the
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Act with respect to its agreements with local OESs and agreements with authorized dealers for imposing absolute restrictive covenants
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and completely foreclosing the aftermarket for supply of spare parts and other diagnostic tools.
16.2.13 Agreements with the authorized dealers have restrictive clauses requiring dealers to source the spare parts only from Toyota or its approved dealers. The DG has found these agreements in the nature of exclusive supply agreements in violation of section 3(4)(b) of the Act.”
29.
The Appellants have taken a more or less similar approach to most of the
issues raised except that there are some specific nuances or facts concerning each appellants. Therefore, the Commission has dealt with the DG report in a more generic way. However, while examining each of the issue it has specifically distinguished between the approaches adopted by different OEMs and categorized
34
them on the basis of the commonality of their approaches to specific issue. The Four kinds of issues listed in Para 20 have been clubbed by the Commission into two broad issues namely: (1)
Whether the opposite parties have violated the provisions of Section 4 of the Act as has been alleged.
(2)
Whether the opposite parties have violated the provisions of Section 3 of the Act as has been alleged.
30.
We now move on to salient features of the three appeals and then follow it
with discussion on four issues in the light of the Commission’s order, pleadings and
Toyota has preferred the appeal inter alia, identifying following major
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31.
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written submissions made by the parties in these appeals.
(1)
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grievances:
They have been incorrectly included as a party in the scope of the
The proceedings before the Commission/DG did not follow principles
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(2)
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investigation and the impugned order.
of natural justice.
The impugned order did not distinguish between the appellant and
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(3)
other OEMs.
(4)
The agreements entered into between appellants, its OESs and authorized dealers and the appellants’ commercial conduct were not in violation of Section 3 (4) and Section 4 (2) of the Act.
(5)
The directions imposed by respondent/the Commission are vague, arbitrary and impractical.
32.
Ford in its appeal have inter alia, identified following grounds, which we
quote: “9.1 That the Respondent No.1/CCI erred in applying the standards of highly developed and regulated European automotive market to the Indian automotive market.
35
9.2
That the Respondent No. 1/CCI failed to appreciate ‘objective justifications’ for the conduct of the Appellant/Ford.
9.3
That the relevant market defined by the Respondent No. 1/CCI is incorrect.
9.4
That the Appellant/Ford is not dominant in the primary market of sale of cars in India.
9.5
That assuming, but not conceding, that the relevant market as defined by the Respondent No.1/CCI is correct, the Appellant/Ford has not abused dominance in the relevant market. That the Respondent No.1/CCI erred in imposing a penalty on the
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9.6
Appellant/Ford on the basis of the total turnover and not the relevant
That the Respondent No. 1/CCI erred in approving the request of the
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9.7
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turnover.
Ld. DG to expand the scope of investigation to include additional
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OEMs, including the Appellant/Ford, against which no information was
The grounds taken by Nissan in its appeal can be broadly categorized as
follows:
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33.
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filed u/s 19 of the Act.”
1.
Grounds involving the character of the prima facie order given by the Commission for investigation.
2.
Respondent/the Commission did not follow the principles of natural justice and denied an opportunity of being heard to the appellant.
3.
That the respondent/the Commission had failed to establish any appreciable adverse effect on competition in India and violation of Section 3 (4) of the Act. It has ignored the defence under Section 3 (5) of the Act advanced by the appellant.
34.
It can be seen that the grounds raised by the three appellants are more or
less of similar nature and can be broadly clubbed into following categories: a. The expansion in scope of investigation ordered by the Commission.
36
b. Issues involving the process adopted by the DG/the Commission and the principles of natural justice. c. Whether vertical agreements listed earlier in this order and the conduct of OEMs is against the provisions of Section 3(4) of the Act. d. Whether automobile and auto spare parts market constitute a unified systems market or cars constitute a separate primary market and spare parts in the aftermarket as a separate market and the impact of such interpretation on whether appellants are in a dominant position. e. Whether there was abuse of dominance by appellants.
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f. Whether the Commission’s direction could be implemented in a
We have heard the learned counsels from both sides over several days, and
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35.
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practical manner keeping the interest of national economy in mind.
very carefully perused the pleadings and material put before us from both sides. We
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have also taken note of information relating to automobile sector displayed on relevant websites of Department/Ministries of the Government of India or
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recognized institutions in the automobile sector to make a fair assessment of the status of automobile industry in India as well as to appreciate the prevalent
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commercial practices in view of the role of automobile industry in India’s economic development. We first move on to take issues at a & b the preceding paragraph.
Expansion in the scope of Investigation 36.
The Commission by its order dated 29.04.2011 approved the proposal made
in the DG’s note dated 19.04.2011 for initiating investigation against other car manufacturers. It may be recalled that by its order under Section 26 (1) of the Act dated 24.02.2011 the Commission had ordered investigation against three OEMs namely (1) Honda Siel Cars India Ltd. (2) Volkswagen Car India Ltd. and (3) Fiat India Automobiles India Ltd. The DG in his note dated 19.04.2011 had requested for expansion of the scope of the investigation by including all the car manufacturers in India.
37
We quote below from the note sent by the DG to the Commission: “1.
In terms of CCI Order 03/2011 dated February 24, 2011, the Hon’ble Commission has directed the office of DG to investigate the captioned case against HSIL, VIPL and FIAL. The informant has inter-alia alleged anti- competitive practices by these entities such as: a. genuine spare parts, diagnostic tools, technological information etc are not made available to independent repair workshops; b. restrictions are imposed on original equipment suppliers (OESs) forcing them not to supply spare parts in the open market.
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c. Dealers are prohibited from taking dealership of other car manufactures. Immediately on …………………..
3.
However, in view of the fact that these practices may not be confined
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2.
to these entities, the case involves larger issue related to prevalent
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conduct of the players in the automobile sector and its implication on
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the consumers at large it is suggested that the investigation may not be restricted to the opposite parties mentioned in the order. Accordex-
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ingly, it is proposed that the scope of the investigation may be
panded to examine the practices, in the areas under consideration, of all the car manufacturers in India. A list of car manufacturers in dia, as obtained from SIAM (Society of Indian Automobile
In-
Manu-
facturers) is placed at Annexure I. Submitted for consideration and approval please.” (emphasis supplied) The note of the investigating officer states, “the scope of investigation needs to be widened in this case, considering the fact that restrictive trade practices on sale of spare parts, dealership etc. are also resorted by other car manufacturers. There appears a prima facie case, against the other car manufacturer as per list obtained from Society of Indian automobile manufacturer (SIAM) & therefore
38
requires investigation for verification in the larger interest of the consumers. It is therefore required that CCI may kindly issue necessary direction to initiate investigation against other car manufacturers.”
37.
The Commission in its order at para 5.2 states as follows: “From the submissions of the Informant, initial discussions held and the preliminary enquiries made during the investigation, the DG gathered that other automobile manufacturers (other than the Ops (1-3) may also be indulging in similar restrictive trade practices in the
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areas of after sales service, procurement and sale of spare parts from
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the OES, setting up of dealership etc. In view of the fact that these
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practices may not be confined to the OPs (1-3) and considering that the case involved the larger issue related to prevalent anti-competitive
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conduct of the players in the Indian automobile sector and its implications on the consumers at large, the DG realized that the
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investigation should not be restricted to the Ops (1-3) mentioned above. Accordingly, it was proposed by the DG that the investigation
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may be allowed to examine the alleged anti-competitive trade practices of all car manufacturers in India, as per the list maintained by the Society of Indian Automobile Manufacturers (“SIAM”). The DG, therefore, requested the Commission for direction to initiate investigations against all car manufacturers in India.”
38.
Toyota have stated that the Commission has acted ultra vires its powers
under the scheme of Section 26 of the Act by permitting the DG to expand the scope of the investigation beyond the three OEMs mentioned in the Commission’s initiation order dated 24.02.2011 by including 14 other car manufacturers. Such order does not satisfy the statutory requirement for a prima facie order under Section 26 (1) of the Act. It has been stated that the initiation order was limited to
39
OEMs named in the complaint and the act does not grant the DG the power to suo moto expand the scope of an investigation.
39.
Paragraph 10 of the information while explaining the practices of the
spondent Nos. 1 to 3 and the consequences of high technology based
reau-
tomobiles and their impact on competition in the repair market for consumers states as follows: “The regular denial of spare parts, accessories, information, diagnostic tools, and software from independent repair shops makes it impossible in many circumstances for these shops to complete repairs
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without sending the vehicle to the authorized dealers/service stations
W
to the vehicle manufacturers, which is exactly the intent of the
con-
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spondents No. 1 to 3 and other vehicle manufacturers in
Re-
junction with their authorized dealers/service stations. Should this
IV
trend continue, car owners will experience a significant increase in repair costs along with held at ransom and forced to bear with the
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reduced quality and complacency of the vehicle manufacturers and authorized dealers/service stations since they would realize that
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consumers have no option but to visit them for any of their vehicle requirements. This is exactly the scenario that free and fair competition prevents.”
40.
The Commission has responded to the contention made by the appellants
that they were included in the scope of investigation in violation of Section 26 (1) of the Act, in para 20.3 of the impugned order. The Commission while ordering the expansion of the scope kept in its consideration the nature of the powers vested in it which are inquisitorial, investigative, regulatory, adjudicatory and advisory. The direction under Section 26 (1) of the Act is an administrative direction to the DG for investigation of contravention of the provisions of the Act without entering upon any adjudicatory or determinative purpose. In the background of CCI Vs. SAIL (2010 CompLR 0061 SC), the Commission is not required to confine the scope of enquiry
40
to the parties whose names figured in the information. The purpose of filing information before the Commission is only to set the ball rolling as per the provisions of the Competition Act, 2002. The scope of enquiry is much broader and the Commission is not restricted in its enquiry to consider the material placed by parties only. The Commission also had before it the additional information filed by the informant on 27.01.2011 alleging certain restrictive practices by the opposite parties named in the information and by other vehicle manufacturers in violation of the provisions of the Act. The directions issued by the Commission in its order under Section 26 (1) of the Act were not qua the three parties but against alleged
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anti competitive practices in the industry in general. In view of the position taken by the Commission and the scheme of Section 26 (1) of the Act and the jurisprudence
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around it, we do not see the Commission’s acts in expanding the scope of
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investigation beyond its jurisdiction. Further by restricting investigation to only three operators the Commission could not have created an untenable situation where
(Emphasis supplied)
The powers assigned to the Commission in this respect are unfettered and
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41.
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in the entire sector.
IV
regulations are applicable to only three entities of the sector for practices prevalent
do not require specific mention in the information. We do not see the Commission exceeding its authority in ordering expansion in the scope of investigation by including other car manufacturers. On the contrary we believe the Commission did the right thing by doing so.
Due Process and Natural Justice 42.
In accordance with the normal practice of the Commission on receipt of the
DG’s report, the Commission ordered its circulation among all OEMs. The Commission also decided “to ask the parties to file their replies/objections within four weeks of receipt of the report along with profit and loss account and balance
41
sheet of their enterprise for last three financial years and to appear for oral hearing either personally or their authorized representative………….”
43.
Since most parties sought time to comply with the Commission’s order they
were granted time by the Commission. Prayers were made on behalf of Ford, Toyota and Nissan seeking cross examination of some witnesses. The Commission disposed all applications for cross examination of witnesses and applications for filing affidavits/documents/ grant of confidentiality treatment of replies/objections etc. It passed following orders in respect to the appellants on 10.01.2013: “4.(i) The advocate on behalf of Ford India Pvt. Ltd. pressed for
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allowing his application for cross examination of witnesses. He
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Asahi Glass Ltd. (AIS)
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has sought cross examination of following witnesses:
Rane TRW Steering Systems
IV
Victoria Motors
SPX India Pvt. Ltd.
(ii)
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Wonder Ford
He submitted that the Director General has not followed the
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procedure for conducting evidence and that he should have granted opportunity to other parties to cross examine these witnesses before relying upon their evidence as against the applicant. However, DG had not given any information nor an opportunity was afforded to cross examine their witnesses which was in violation of Regulation 41(5) of the General Regulations framed under the Competition Act.
(iii)
In the application a prayer has also been made for cross examination of multi brand repairers like CarZ, My TVS, Carnation Auto India Pvt. Ltd. A prayer is also made for cross examination of Original Equipment Suppliers (OES) namely Lumax Industries, Sandhar Technologies, Sona Koya Steerings
42
and Shriram Pistons & Rings. The multi brand repairers are sought to be cross examined as DG relied on their e-mail
re-
sponses that their request for genuine spare parts to the
ap-
plicant was not responded. (iv)
Vide its order dated 11th December, 2012, the Commission had made it clear to the applicant that the party shall name the witnesses they seek to cross examine or examine and the specific issue on which such examination/cross examination is sought along with the reasons in support thereof. In this matter,
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the main issue raised before the Commission is that the applicant was not supplying original spare parts to anyone else
W
except its authorized dealers. Authorized dealers were also not
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further permitted to sell these spare parts except for use in the service/repair of the vehicles brought to them for service/repair.
IV
When the counsel for the applicant did not specify the area of
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cross examination of the witnesses even during the arguments, the counsel was asked to clear the stand of the applicant and to
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make it clear if the applicant was prepared to give an affidavit that it had been supplying spare parts to the various enterprises dealing with aftermarket of spare parts and to the multi brand workshops. The cross examination of the aforesaid witnesses can be allowed only if it is the stand of the applicant that the witnesses have told lies and the genuine spare parts of the applicant were readily available in the aftermarket and were being provided by the applicant for this purpose. If the stand of the applicant is that it was not providing spare parts to the aftermarket, there will be no use of cross examination. The applicant has failed to take the stand that its spare parts were freely available in the aftermarket or it had in the past been supplying spare parts to the aftermarket or was ready and
43
willing to supply in future. Thus no purpose would be served in allowing cross examination of the witnesses except wasting the time. The counsel, however, took a stand that the information of the Multi Brand Repairers/OES that they had approached the applicant for supply of spare parts for the after market/free market was not correct. The Commission gave liberty to the applicant for filing an affidavit within 2 weeks to the effect that applicant was not approached by anybody for supply of spare parts in the open market and also to file an affidavit about its
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stand in future whether the applicant was ready and willing to supply the spare parts in the open market. This affidavit be filed
The Counsel also made a request for furnishing redacted portion
of
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(v)
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within two weeks from today.
documents
relating
to
the
applicant.
DG
IV
representative stated that all documents relating to the
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applicant have been supplied. However, the party shall file details of redacted portion of documents relating to it within 3
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days and the same shall be supplied within 3 days of filing of the application. The Commission also directed the party to file public version of its reply/objections to the DG report in soft copy within two weeks. The final arguments in respect of the case of the applicant shall be heard on 5th February, 2013 at 11.30 A.M.
5.
…………….
6.
……………..
7.
………………
8.
………………
9.
……………….
44
10.
…………………
11.
………………….
12.
…………………
13.
The counsel for Toyota Kirloskar Motors Pvt. Ltd. also argued for the application for cross examination of witnesses. The names of 6 witnesses are stated in the Annexure 1 of whom cross examination is sought. The scope of examination as stated in the application is to contest the theory suggested by DG
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about counterfeiting going down in case of constraints in supposi-
W
ply, inference drawn by DG about abuse of dominant
tion and AAEC from the statement of witnesses, denial of per-
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mission of Asahi Glass Limited to sell their products in the open retail market. No witness can be cross examined on the infer-
IV
ences drawn by DG. DG is free to draw inference from the
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statement as per law. It is a matter of argument if the inference drawn by DG was correct or not. The statement of the
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witnesses is about non supply/availability of the spare parts of the applicant in the free market/after sale market. There is no denial by the applicant in the application or in the reply of this fact. No useful purpose shall be served by cross examination of witnesses only for the sake of cross examination. The application is dismissed. However, the Commission directed the applicant to make its stand clear within two weeks whether the applicant was willing to supply the spare parts in the open market in future. The case shall be heard on 8th February, 2013 at 10.30 A.M. for final arguments. The counsel also made a request to supply redacted portion of documents relating to the applicant relied by DG but not received by the applicant. The
45
applicant shall make an application stating the list of such documents within 3 days from today and the documents shall be supplied to the applicant within 3 days of receipt of the application.”
44.
It can be seen that the appellants on the directions of the Commission
indicated the names of witnesses whom they would like to cross examine. However as the appellants/opposite parties were aggrieved by the alleged fact that DG’s report was influenced by the statements made by some witnesses who were not cross examined by the appellant as they were at that time not aware of such
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witnesses having being examined by the DG, the Commission asked the appellants
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to file affidavits if they believed that spare parts of all models of automobiles
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manufactured by them were available in the aftermarket freely to independent repairers and customers. While Toyota filed the reply no categoric statement was
IV
made by the appellants, including Toyota, on the specific question posed by the Commission, with regard to availability of spare parts in the after market. It may also
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be noted that Appellants themselves could have offered to examine witnesses in their support which they did not do. They could have specifically addressed each of
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the statement made by witnesses they wished to cross examine. They did not do that either.
45.
Further perusal of ordersheets of the proceeding before the Commission
show that: a. M/s Vahan Motors Pvt. Ltd. one of the independent repairers made an application dated 28.01.2013 requesting the Commission to allow it to become a party to the present case. The Commission heard the applicant and decided not to implead them as a party in view of the fact that it was a very late stage in the enquiry and that M/s Carnation Auto had already been permitted to address the Commission on issues involved. b. The Commission heard final arguments on behalf of Nissan, Ford and Toyota the present appellants on 4th, 5th and 6th February, 2013. In its proceeding
46
dated 05.03.2013 the Commission directed the informant to file written submissions inviting their views/information on the following issues: “i)
Since it has been submitted that currently the market is not fully competitive on account of the alleged anti-competitive conduct of the opposite parties, his views on how the markets of spare parts and servicing should operate to be fully competitive, including freedom of sale of parts, innovation and competition in making spare parts, encouraging standardization of parts for developing more generic parts (like tyres, lights) which can be used in many brands/models, the
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role of roadside garages for repairing, freedom of choice to consumers etc. may be elucidated.
The linkage of the relevant markets to the second hand car market, if
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i)
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any, as also modalities for factoring in the safety considerations and IPR issues may be elucidated.
What is the theory of harm professed by the informant, and what kinds
IV
ii)
46.
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of remedies are proposed?
The Commission also directed the opposite parties, except Premier Ltd. and
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Hyundai Motors India Ltd., to file the following submissions/clarifications within the next two weeks (i.e. within two weeks after filing written submission by the informant): i)
How does the systems market definition put forward by many of the opposite parties fit within the definition of relevant product market under section 2 (t) of the Act, wherein inter-changeability and substitutability are significant considerations?
ii)
How is life cycle cost of a car calculated? What are the various ements/factors taken into account, and what is the specific
elmod-
el-wise life cycle cost of each model manufactured by each car manufacturer? Information about which of these elements/factors is available in the public domain, and is it adequate to enable an
aver-
47
age customer to calculate the life cycle cost of a car at the time of buying a new car? iii)
What is the stand of each opposite party about allowing/ensuring unrestricted availability of spare parts in the open market, including through over the counter sales, and whether they are willing to file an affidavit to the effect that there are, or will be, no restrictions on availability of spare parts and diagnostic tools to anyone who wants them?
iv)
What measures are the opposite parties willing to consider for
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encouraging more competition in the spare parts and servicing markets?
What is the growth rate of each opposite party? This may be filed
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v)
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preferably for last ten years but not less than three years. The growth rate to be filed on the basis of sales for each product in each segment
Segmentation of its products (cars) and the basis for it into commonly
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vi)
IV
for the period in which its products have been sold in India.
used category of low end, mid level and luxury segments and within
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these broad categories, to distinguish the different products into SUV, Sedan etc.
vii)
What is the total car market share and market share estimates segment wise?
47.
The matter was again fixed for oral hearing on that day for 25.04.2013. On
the same day Toyota among others filed application seeking stay of proceedings before the Commission on the grounds of Madras High Court interim decision granting ex-parte stay to M/s Hyundai Motors in Writ Petition (Civil) No. 31808/2012 which was rejected by the Commission as the enquiry was at a late stage and there was no rationale for staying the proceeding. On 16.04.2013 the Commission among several other applications considered two applications filed on behalf of Nissan and Toyota, appellants herein. Nissan filed post hearing written submission after hearing
48
on 05.03.2013 and 22.03.2013 requesting for two weeks’ time till 19.04.2013 to file their response to the written arguments and response filed by the informant and response to queries raised by the Commission in its order dated 05.03.2013. Toyota filed an application dated 05.04.2013 to submit responses to the questions raised by the Commission in its order dated 05.03.2013, seeking two weeks additional time to convey the steps they were willing to take to make the market more competitive, to permit for meeting after 19.04.2013 of a Toyota business executive with the Commission to discuss the steps that applicant was willing to take to make the market more competitive as well as explain the complexity involved therein and
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response to the points raised in submissions of the informant and Carnation. The Commission considered both these applications and granted time till 18.04.2013. It
W
also considered Toyota‘s request for deputing a business executive with the
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Commission to discuss the steps they were willing to take to make the market more competitive which the Commission rejected in view of several opportunities for oral
IV
hearing and arguments having been given to the applicants. In its proceeding on
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05.05.2013 the Commission considered application dated 25.04.2013 filed by Ford filing submissions on the queries raised by the Commission in its proceeding dated
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05.03.2013; application dated 19.04.2013 filed by Nissan filing written submissions to the written arguments dated 21.03.2013 filed by the informant, written submissions to the written responses filed on behalf of informant to the queries raised
by
the
Commission
vide
their
order
dated
05.03.2013
and
submissions/clarifications to the queries raised by the Commission vide order dated 05.03.2013. The Commission also considered Toyota’s application dated 05.04.2013 filing responses to questions raised in the Commission’s order dated 05.03.2013, response to the points raised in submission of the informant and Carnation Auto and application dated 02.05.2013 enclosing a letter of Toyota regarding encouraging more competition in the spare parts and servicing markets and seeking confidentiality on the same for a minimum period of three years post closure of this case in entirety. In these proceedings the Commission made clear to the parties that the oral arguments/submissions by the parties have been concluded
49
and no further hearing shall be made. However, in case the Commission have any query the party/parties concerned may be directed to answer the query of the Commission in writing within the granted time. The Commission also allowed the parties to file additional submissions if any by 10.07.2013 making it very clear that the submissions filed after the stipulated date will not be taken into account. In their proceedings on 28.05.2013 the Commission raised further queries to the opposite parties including appellants. Later on 24.07.2013 the Commission disposed of applications seeking confidentiality by some opposite parties including the present appellants; rejected application on behalf of informant seeking the written argument
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filed earlier jointly by informant and Carnation Auto to be deemed to have been filed
Nissan requested through application under Section 36 (1) of the Act seeking
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48.
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by the informant alone.
fresh oral hearing in the matter by the Commission on the ground that there was a change in the constitution of the Coram of the Commission. The Commission
IV
decided that “after the matter was heard one new member had joined the
W .L
Commission, however, only those members of the Commission who heard the matter and were present at the time of arguments shall decide the matter in question.
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The application is therefore rejected.” In their proceedings dated 15.10.2013 the Commission inter-alia considered Nissan’s application filing an interim stay order dated 24.09.2013 in Writ Petition No. 26488/2013 and Miscellaneous Petition Nos. 1 & 2 of 2013 and decided to stay further proceedings in this matter till further orders. The stay interim order granted in favour of Nissan continued till 30.06.2014 on which date High Court of Madras dismissed the said Writ Petition as not maintainable as their existed an efficacious alternative remedy under Section 53 (B) of the Act. Nissan went in appeal against the order of the Single Bench before a Division Bench. The Division Bench set aside the order of the Single Bench and remanded it back to the Single Judge for deciding the Writ Petition on merits. The matter was listed before the Single Judge on 28.08.2014. However, the impugned order was passed on 25.08.2014.
50
49.
Appellants have alleged that by not affording them the opportunity to cross
examine certain third parties whose statements have been relied upon by the respondents for arriving at an adverse finding against them the Commission denied them natural justice. According to Toyota “statements made by such conflicted third parties who would normally be presumed to have vested interest in the outcome of the proceedings before the respondent ought to have been subject to cross examination by the appellant instead it was submitted that the respondent (the Commission) dismissed an express application dated 21.12.2012 made by the applicant seeking to cross examine such conflicted third parties and denied the
Nissan in the proceedings of 10-01-13 did not press its application for cross
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50.
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appellant the opportunity to adequately defend itself.”
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examination. Section 36 of the Act read with Regulation 41 of the Competition Commission of India (General) Regulations, 2009 govern the conduct of the
IV
Commission as far as regulation of its procedure and taking of evidence are
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concerned. The Commission is free to make its own procedure as long as it is guided by the principles of natural justice. The Regulation 41 provides for the
proce-
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dure/manner in which evidence has to be adduced in the proceeding before the Commission/DG. The Regulation 41 (4) and (5) are quoted below: “Regulation 41. Taking of evidence.(1) ………. (2) ……… (3) …….. (4)
The Commission or the Director General, as the case may be, may call for the parties to lead evidence by way of affidavit or lead oral evidence in the matter.
(5)
If the Commission or the Director General, as the case may be, directs evidence by a party to be led by way of oral submission, the Commission or the Director General, as the case may be, if considered necessary or expedient, grant an opportunity to the
51
other party or parties, as the case may be, to cross examine the person giving the evidence.” 51.
The Commission is free to call for the parties to lead evidence by way of
affidavit or oral evidence in any matter. If opportunity is granted to one party for oral submissions, the Commission or the DG if considered necessary or expedient grant an opportunity to the other party to cross examine the person giving the evidence. In compliance with this provision the Commission asked the appellants/opposite parties to indicate the witnesses whom they wished to cross examine and what would be the topic of cross examination. It further asked the appellants to state
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whether they could file affidavit stating that spare parts of automobiles
W
manufactured by them are available freely in the aftermarket to all categories of
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buyers/customers. However none of the appellants gave any affidavit to this effect though some of them preferred to counter various oral statements made by witnesses during the DG’s investigation. Toyota by its affidavit dated 28.01.2013
Learned Senior counsel for the Commission strongly opposed the manner in
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52.
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investigation.
IV
averred on various elements of statements recorded by the DG during his
which the affidavit in question was prepared and verified. Toyota argued that several negative statements which were made by witnesses could have been controverted if they were allowed to cross examine those witnesses. It may however be noted that no application for cross examination was made before the DG. However, the Commission was requested for cross examination. Since the ultimate objective of the evidence was to understand whether allegations made by the informant in the information were valid or not, the Commission made straight queries to the appellants which were left unanswered. Therefore, while we appreciate that a cross examination might help in bringing out information in a more comprehensive manner to facilitate decision making. The Commission’s approach of asking specific information through affidavit served the same purpose and the applications for cross examination were consciously rejected by the Commission
52
through a speaking order, keeping in mind the provisions of the Regulations 41 (4) and (5) in mind. Further neither of the appellants presented their own witnesses nor all conflicting statements were denied through affidavit by all the appellants. We are therefore, not inclined to entertain this objection of the appellants.
53.
Nissan in their appeal have also alleged the issue of inconsistency of Coram
that heard the parties and one which finally decided the case. Our discussion in an earlier paragraph clearly brings out that when the Commission was approached with this issue on the change of the member it took a conscious view that the member who had not heard the parties will not be the signatory to the decision. Further on
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Nissan’s grievance that the number of members who had heard the arguments was
W
different from the number of members who decided the matter, it can be clearly
EL A
seen that oral hearing in respect of Nissan was carried out on 04.02.2013 when besides the Chairman, Members H.C. Gupta, R. Prasad, Geeta Gouri, Anurag
IV
Goyal, M.L. Tayal and S.N. Dhingra were present. Finally, the decision was signed by two members namely Anurag Goyal and M.L. Tayal besides the Chairman. It can
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be clearly seen that each of the participants of the latter combination was present during the oral hearing imparted to Nissan. It cannot therefore be said that any new
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member was added to the coram and consequently none who had not heard decided the case. We do not find any substance in this argument made on behalf of Nissan.
54.
Nissan also argued that the Commission had considered the issue of their
alleged dominance on earlier occasion in Tristar Trading Private Limited and Ors. Vs. M/s Nissan Motors India Private Limited and Ors. (Case No. 98/2013) and a similar issue against several other auto companies in Case No. 20/2015 came up before the Commission. In both these cases, the Commission did not find automobile companies in a state of dominance therefore, there was no reason for the Commission to take a contrary view so soon after the above adjudications. We have looked at the cited decisions, they are entirely on a different subject. The cases in question on which the Commission decided to close the information related
53
to dominance of car makers in the relevant product market of cars rather than spare parts aftermarket. Therefore, it would be wrong on the part of Nissan to suggest that the matter of their dominance in the relevant market under issue had been considered in view of the findings of the Commission on their dominance in the spares aftermarket.
Violation of the Substantive Provisions 55.
We now move on to substantive issues. In order to fully appreciate the legal
provisions relating to anti-competitive agreements, abuse of dominance and
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guidance for examination of AAEC in case of vertical agreements and abuse of dominance. Section 3, 4 and 19 of the Act are quoted below: Anti-competitive agreements
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“Section 3
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(1) No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply,
IV
distribution, storage, acquisition or control of goods or provision of services,
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which causes or is likely to cause an appreciable adverse effect on competition within India.
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(2) Any agreement entered into in contravention of the provisions contained in subsection (1) shall be void. (3) Any agreement entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise or practice carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision of services, which— (a) directly or indirectly determines purchase or sale prices; (b) limits or controls production, supply, markets, technical development, investment or provision of services; (c) shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way;
54
(d) directly or indirectly results in bid rigging or collusive bidding, shall be presumed to have an appreciable adverse effect on competition: Provided that nothing contained in this sub-section shall apply to any agreement entered into by way of joint ventures if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services. (4) Any agreement amongst enterprises or persons at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or price of, or trade in goods or provision of
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services, including—
(b) exclusive supply agreement;
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(c) exclusive distribution agreement;
W
(a) tie-in arrangement;
(d) refusal to deal;
IV
(e) resale price maintenance, shall be an agreement in contravention of
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sub-section (1) if such agreement causes or is likely to cause an appreciable adverse effect on competition in India.
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(5) Nothing contained in this section shall restrict— (i) the right of any person to restrain any infringement of, or to impose reasonable conditions, as may be necessary for protecting any of his rights which have been or may be conferred upon him under— (a) the Copyright Act, 1957 (14 of 1957); (b) the Patents Act, 1970 (39 of 1970); (c) the Trade and Merchandise Marks Act, 1958 (43 of 1958) or the Trade Marks Act, 1999 (47 of 1999); (d) the Geographical Indications of Goods (Registration and Protection) Act, 1999 (48 of 1999); (e) the Designs Act, 2000 (16 of 2000); (f) the Semi-Conductor Integrated Circuits Layout-Design Act, 2000 (37 of 2000);
55
(ii) the right of any person to export goods from India to the extent to which the agreement relates exclusively to the production, supply, distribution or control of goods or provision of services for such export.
Section 4 - Abuse of dominant position [(1) No enterprise or group shall abuse its dominant position.] (2) There shall be an abuse of dominant position 4 [under sub-section (1), if an enterprise or a group].—(a) directly or indirectly, imposes unfair or discriminatory— (i) condition in purchase or sale of goods or service; or
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(ii) price in purchase or sale (including predatory price) of goods or
W
service.
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(b) limits or restricts—
(i) production of goods or provision of services or market there for or
IV
(ii) technical or scientific development relating to goods or services to the prejudice of consumers; or
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(c) indulges in practice or practices resulting in denial of market access 5 [in any manner]; or
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(d) makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts; or (e) uses its dominant position in one relevant market to enter into, or protect, other relevant market.
Section 19 - Inquiry into certain agreements and dominant position of enterprise (1) The Commission may inquire into any alleged contravention of the provisions contained in subsection (1) of section 3 or sub-section (1) of section 4 either on its own motion or on—
56
(a)
[receipt of any information, in such manner and] accompanied by such fee as may be determined by regulations, from any person, consumer or their association or trade association; or
(b)
a reference made to it by the Central Government or a State Government or a statutory authority.
(2) Without prejudice to the provisions contained in sub-section (1), the powers and functions of the Commission shall include the powers and functions specified in sub-sections (3) to (7). (3) The Commission shall, while determining whether an agreement has an
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appreciable adverse effect on competition under section 3, have due regard to all or any of the following factors, namely:—
creation of barriers to new entrants in the market;
(b)
driving existing competitors out of the market;
(c)
foreclosure of competition by hindering entry into the market;
(d)
accrual of benefits to consumers;
(e)
improvements in production or distribution of goods or provision
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IV
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(a)
of services;
promotion of technical, scientific and economic development by
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(f)
means of production or distribution of goods or provision of services.
(4) The Commission shall, while inquiring whether an enterprise enjoys a dominant position or not under section 4, have due regard to all or any of the following factors, namely:— (a)
market share of the enterprise;
(b)
size and resources of the enterprise;
(c)
size and importance of the competitors;
(d)
economic power of the enterprise including commercial advantages over competitors;
(e)
vertical integration of the enterprises or sale or service network of such enterprises;
57
(f)
dependence of consumers on the enterprise;
(g)
monopoly or dominant position whether acquired as a result of any statute or by virtue of being a Government company or a public sector undertaking or otherwise;
(h)
entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers; countervailing buying power;
(j)
market structure and size of market;
(k)
social obligations and social costs;
(I)
relative advantage, by way of the contribution to the economic
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(i)
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development, by the enterprise enjoying a dominant position having or likely to have an appreciable adverse effect on
any other factor which the Commission may consider relevant
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(m)
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competition;
for the inquiry.
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(5) For determining whether a market constitutes a “relevant market” for the purposes of this Act, the Commission shall have due regard to the “relevant geographic market’’ and “relevant product market”. (6) The Commission shall, while determining the “relevant geographic market”, have due regard to all or any of the following factors, namely:— (a) regulatory trade barriers; (b) local specification requirements; (c) national procurement policies; (d) adequate distribution facilities; (e) transport costs; (f) language; (g) consumer preferences; (h) need for secure or regular supplies or rapid after-sales services
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(7) The Commission shall, while determining the “relevant product market”, have due regard to all or any of the following factors, namely:— (a) physical characteristics or end-use of goods; (b) price of goods or service (c) consumer preferences; (d) exclusion of in-house production; (e) existence of specialised producers; (f) classification of industrial products
56.
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Abuse of Dominance The first question for determination is whether the opposite parties have
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violated the provisions of Section 4 of the Act. The Commission has concluded that
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the OEMs (appellants) have abused their dominance in the aftermarket of
In order to determine whether an entity is in a dominant position,
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57.
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automobile spare parts. Section 4 of the Act deals with abuse of dominant position.
determination of relevant product market and relevant geographical market is essential. Section 2 (r) (s) and (t) define relevant market, relevant geographic
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market and relevant product market. The definitions are quoted below: (r) “relevant market” means the market which may be determined by the Commission with reference to the relevant product market or the relevant geographic market or with reference to both the markets; (s) “relevant geographic market” means a market comprising the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighbouring areas; (t) “relevant product market” means a market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use;
59
58.
Section 19(4) to 19(7) provide the guidelines in determining whether an
enterprise enjoys a dominant position or not and points to be taken into consideration while defining relevant product and geographic market. These sub-sections have been quoted above.
59.
The DG has in his findings identified following two separate product markets
for the Passenger Vehicles in India: 1) The primary market consisting of the manufacturing and the sale of passenger vehicles.
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2) The secondary market which is essentially the aftermarket. Aftermarket is
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the expression used to describe a market comprising complementary or secondary products and services which are purchased after any product
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that is the primary product which they relate to. According to the DG report, the aftermarket in the present case comprises of the spare parts,
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diagnostic tools, technical manuals and after sales repairs and
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maintenance services that are required to be purchased after the purchase of primary product. DG has further identified the two segments
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of the aftermarket for passenger vehicle sector in India. They are a. Supply of spare parts including the diagnostic tools, technical manuals, catalogues, etc. for the aftermarket usage, and
b. provision of after sale services including servicing of vehicles, maintenance and repair services. 60.
The appellants have contested DGs identification of two separate markets
and canvassed the concept of one individual ‘systems market’ where the primary and the secondary market are in the nature of a continuum. According to the DG, once the primary product has been purchased, consumer’s choice is confined to those aftermarket products or services compatible with that primary product. Hence consumers are to a greater or lesser extent “locked” into certain aftermarket supplies.
60
61.
Going deeper in his analysis, DG has tried to examine whether there is a
separate aftermarket for each brand of car. Following the international precedents, two grounds where the two markets may not be separate relevant markets were identified– a) If it was possible for a consumer to switch spare parts manufactured by another producer (OEM), b) If it was possible for the consumer to switch to another primary product to avoid a price increase on the market for spare parts. The DG concluded that most of the spare parts except a few generic parts
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62.
are manufactured specifically for the respective models of the cars. Moreover, even
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within models of the same OEMs, interchangeability of spare parts was limited.
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Hence substitutability of spare parts across OEMs is drastically diminished. Further spare parts that are manufactured in house by the OEM, there is almost nil
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interchangeability and for those body parts that are procured from local OESs and
63.
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other overseas suppliers, there is limited substitutability.
With respect to the second question, DG found that switching over to new
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primary product was very costly, in view of the peculiarities of car market where value was lost the moment a car was registered and brought on the road. Therefore, the DG concluded that to a great extent, the purchaser of a product in the primary market was locked in and the feasibility of switching over to another primary product was limited.
64.
The Commission has examined the DG’s findings in respect to the relevant
markets. The allegation of the informant is that durable goods producer (i.e. OEM or the car manufacturer in the present case) behaves in a fashion that stops alternative producers from offering the complementary goods (restrictions imposed on the OESs/authorized dealers) or service with the result that the original durable goods producer monopolize the market. This monopoly behaviour and the concocted abuse of such monopoly market power allow the monopolist in the
61
primary market to charge supra competitive prices and impose other restraints in the aftermarket.
65.
One of the main contentions of the OEMs as recorded by the Commission is
that the consumers, who buy a durable product like a car, engage in a whole life cost analysis, at a point of sale of the primary product and even if the consumers become locked in after they have purchased their equipment, the OEMs will not charge supra competitive rates in the aftermarket as a result of “reputational effects” on the OEMs in the primary product market. The Commission did not agree with these submissions and determined that the relevant market for cars and that of
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spare parts consisted of multiple markets, i.e. a market for primary products and
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separate markets for the secondary products associated with each primary product.
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According to the Commission, customers do not engage in whole life costing or the reputation effects do not deter the OEMs from setting supra competitive prices for
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the secondary product. In cases where the switch over from one primary product to another primary product triggered by high price or failure of the secondary product
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takes place, such separate markets may not exist and they may be connected to form a systems market. In the case of automobiles, such a situation does not exist.
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Therefore, they do not form part of a systems market. The cost of the primary product and the cost of switch over to primary product are two very significant criteria when a customer has to make a decision to this effect. The Commission has agreed with the DGs findings that there existed a primary market for sale of cars in India and two aftermarkets for sale of spare parts and repair and maintenance services respectively.
66.
On the issue of secondary market, the Commission has concluded that the
sale of spare parts and repair and maintenance services are interlinked because in most cases a customer would buy a spare part and get it fixed at a workshop thereby accessing both the markets at the same time. Therefore, while broadly agreeing with the DG’s narrative, in the Commission’s view, the two segments of the automobile aftermarket are different yet interlinked and interconnected. This
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approach is further strengthened by the fact that the spare parts by themselves are not consumed till they are used in repair and maintenance services. It is irrespective whether the repair and maintenance service would come from a supplier of the spare part or an external agency. Therefore, in view of the Commission, spare parts and repair services are demanded but simultaneously or concurrently and only in a few instances, car owners may access one segment of the aftermarket where they may either themselves provide the repair services or where repair services do not involve replacement of spare parts.
67.
We have very carefully perused the analysis, the Commission has carried out
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on this subject. In the background of European and American case law, the
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Commission has looked at the framework within which relevant market has to be
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determined, and applied the relevant principles to the Indian realties. In order to better appreciate the Commission’s analysis, we are tempted to quote from paragraphs 20.5.22 to 20.5.24 –
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“20.5.22 However, the Commission, after the perusal of such submissions, is
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of the opinion that such a determination of the relevant product market is unnecessary for determining the present case on its
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merits. As it will be evident from the following paragraphs of the order that the Commission is of the opinion that a ‘systems market’ does not exist in the present case and that the relevant product market consists of the primary market for the sale of automobiles and the secondary markets for the sale of spare parts and repair and maintenance services. The Commission is of the opinion that for the purpose of this case, in order to correctly determine the relevant product market, the delineation of the primary market into separate automobile segments is not necessary. The primary market, consisting of sale of cars in India can be segmented based upon the price of such automobiles, as demonstrated by the order of the Commission, dated May 28, 2013. Further, the primary
63
market can be segmented based upon the characteristics and intended use of the automobiles. As is evident from the submissions of some of the OEMs, (e.g. Honda and MSIL), the primary market can consist of cars that fall under the same price range, for example, low-end (price below Rs. 5 lakhs), but may have different characteristics or intended use. For example, MSIL has submitted that two of its models “Eeco” and “Alto” fall under the same price range, i.e., low end (below Rs.5 lakhs), however, while the former is intended to be a dual purpose vehicle (both for
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commercial and family use), the latter is mainly intended to be used as a passenger car. Therefore, the segmentation of the primary
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market, without adequate considerations to the characteristics of
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intended use of such cars would not be appropriate. 20.5.23 However, as discussed above, the Commission is of the opinion that
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a segmented primary market has no bearing over the determination
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of the relevant market for this case, as per the provisions of section 2(r) read with section 2(s) and (t) of the Act. The determination of the
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relevant market is not an end by itself but is a means to analyze the position of strength, enjoyed by an enterprise in such a market, as per the provisions of explanation (a) to section 4(2) of the Act, to determine if such an enterprise is in a dominant position in such a relevant market. Therefore, the task of the Commission is to identify that relevant market where the dominance of the enterprise is being felt. As per the allegations of the Informant and the investigation of the DG, the OEMs are restricting the sale and supply of spare parts and technical information, diagnostic equipments and tools to independent automobile service providers and indirectly determining the purchase or sale prices of both the price of automobile spare parts as well as the price of repair and maintenance costs due to the monopoly maintained by the OEMs in the supply of their respective
64
brand of spare parts, diagnostic tools and technical information. Therefore, it is in the aftermarket of spare parts, diagnostic tools and technical manuals and not in the primary market of sale of cars where the alleged dominance of the OEMs is being felt. It is in the aftermarket for automobile spare parts and repair services, where each OEM are being alleged to operate independently of competitive constraints allowing them to affect their competitors, i.e., independent repairers and their customers. Consequently the aftermarket thus constituted by the market of the OEMs’ spare parts, diagnostic tools
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and technical manuals, required by the independent repairers must be regarded as the relevant market for the purposes of the
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alleged abuse was committed.
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application of section 4 of the Act. It is in fact the market on which the
(Emphasis supplied)
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20.5.24 According to the E.U. Notice on Market Definition:
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“Market definition is a tool to identify and define the boundaries of competition between firms. It serves to establish the
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framework within which competition policy is applied by the Commission. The main purpose of market definition is to identify in a systematic way the competitive constraints that the undertakings involved face. The objective of defining a market in both its product and geographic dimension is to identify those actual competitors of the undertakings involved that are capable of constraining those undertakings' behaviour and of preventing them from behaving independently of effective competitive pressure.” (Italics added)
The Commission is of the opinion that the effective competitive constraints that needs to be analyzed in the current case is not in the context of the primary market for the sale of cars, but the aftermarket for the sale of automobile spare parts and repair and maintenance
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services. Therefore, even if the primary market is subdivided into various segments the competitive constraints or effective competitive pressure in the aftermarket remains unchanged. As has been shown in the paragraphs below, the market power that each of the OEMs enjoys over its customers and competitors is due to the lock-in effect in the aftermarket for sale of spare parts and maintenance services. In this context it is irrelevant whether the primary market is considered to be a single monolith relevant market for a particular brand of car or is divided in separate relevant markets depending
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upon characteristics of a particular model of a brand of car, its price
68.
(Emphasis supplied)
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or its intended use.”
One of the crucial elements canvassed by the appellant in order to prove
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unified systems market approach is the concept of life cycle costing. It has been argued that whenever a consumer searches the market, he is equipped with
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analytical capacity and does have adequate information both technical and economic to guide him into taking a decision which locks him into preferring a
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specific make/model. Once he is locked into this model, the aftermarket is a natural consequence of making this fundamental choice. For example, the appellants would have us believe that when a customer who wants to buy a mid-sized car will have information about not just the initial cost of the car but also cost of all those events and situations which may arise during the course of the usage of that car. That would include a variety of elements such as cost of fuel, spare parts, servicing, maintenance, etc. The DG in the course of his investigation asked the OEMs to confirm the after sale services and maintenance cost of their vehicles. Several OEMs expressed inability to provide such information and couched their response in several conditionalities such as driving expertise, generic conditions, road conditions, etc. so much so that some of the OEMs did not even share this data. The present appellants gave following responses:
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Ford – The company stated that this data is not available to them. Nissan – The company submitted that they do not have data on annual basis. Toyota – The company has submitted the cost of services of only Toyota (Innova Diesel vehicle 0.5 per kms.) and that the annual cost has to be derived by multiplying the figures with average running of the car.
69.
It can be clearly discerned that though the appellants canvassed a certain
approach for appreciating the condition of the market they were not in a position to show the extent of information which could be available with a buyer when he went to a showroom. The Commission in its order has quoted from Eastman Kodak
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Company vs. Image Technical Services incorporated (504 US 451.92) where the
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US Supreme Court held that life cycle pricing of complex durable equipment is
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difficult and costly. In order to arrive at an accurate price, a consumer must acquire a substantial amount of raw data and undertake sophisticated analysis. Necessary
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information would include data on price, quality and availability of products needed to operate, upgrade or enhance the initial equipment as well as service and repair
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costs including estimates of brake down frequency, nature of repairs, price of service and parts..… A life cycle cost analysis would require the consumer to have
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knowledge of a large number of variables. The Commission has examined the raw data which is available to a potential consumer in the form of information at the showrooms, information on the websites of the OEMs and several specialized websites and magazines/journals. The Commission’s analysis shows that neither the adequate data is available nor the purchaser has the capacity to carry out complex whole life cost analysis. The Commission has also referred to some empirical studies and concluded that consumers tend to buy cheaper models with higher operating costs than those that would be efficient in terms of life cycle costs and, therefore, end up paying higher life cycle cost.The Commission has concluded that despite the economic information to the contrary consumers are not so rational and do not make farsighted choices. The Commission while specifically referring to Ford and Toyota quoted from their responses as follows:
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Ford- The life cycle cost depends on various factors such as standard of driving, maintenance of cars, road conditions and others. Since the manufacturer is not in control of a particular car in question, the life cycle cost cannot be calculated. Toyota – The actual life cycle cost of an automobile may be defined as the cost of a car throughout its life time which would include not only the initial purchase price but also the cost involved during the life time of the automobile. Such costs included fixed costs like depreciation costs, cost of finance, insurance, etc., and variable costs like fuel, maintenance, tyres, oil and other miscellaneous expenses. Further, Toyota submitted that in order to accurately calculate a life cycle cost, one
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needs an estimate of the actual mileage a person will drive as well as having actual
In view of the above discussion, the Commission did not find whole life
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70.
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information relating to maintenance and repair costs.
costing as a feasible test for an average consumer in the Indian automobile market.
IV
Both Toyota and Ford have argued that the Commission’s reliance on Eastman Kodak case was misplaced. They have narrated the specific circumstances of that
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case as it was a summary decision sought by the parties and consequently, given after no in depth examination. Further, this decision has not been followed by the
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US Courts subsequently. Interestingly Toyota in its written arguments has distanced itself from the whole life costing approach which it had taken during its oral arguments. According to Toyota, this criteria of whole life costing requires that every customer should be capable of making sophisticated computations of the total cost of a vehicle over its life time so as to be able to compare one brand of vehicle with the other. This thumb rule is unworkable since such sophisticated computations are not undertaken by corporations when acquiring some equipment and are employed only in situations of mega commitments such as when an airline acquires a fleet of aircraft. Given this criteria, every complementary product will always be considered to be a dual (primary and secondary) market, since whole life costing is not even possible in everyday situations. To estimate the cost of repair and maintenance of a car over the life cycle depends on several variables such as road conditions, driving
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habits etc., which cannot be estimated accurately or with any degree of uniformity between brands and models;
71.
According to Toyota the real criteria is whether conduct in the secondary
market impacts market share in the primary market. It is not necessary to have a stringent hyper-technical thumb rule such as this to determine this issue. The fact of the matter is that the Indian consumer is known to be extremely conscious about the cost and ease of servicing and maintenance. Several automobile companies market their brand or some model as being easy to maintain. One major vehicle manufacturer assures zero maintenance cost for 3 years while another guarantees
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that the maintenance cost would not exceed a particular pre-defined amount. It is
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submitted that it is a feature of the industry that rival auto companies promote sales
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of their vehicles in the primary market based on the recurring cost of maintenance and ease of availability of repair services. There is, therefore, no doubt that its
Toyota has argued that it is not necessary that the customer himself or
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72.
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conduct in the secondary market has a direct bearing on market share of vehicles.
herself has to undertake this computation. It would suffice if this information was
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available to him by expert agency/ websites/ TV shows etc. The Commission did not accept this argument as one could never be sure about the motive behind agencies which are not in the realm of public agencies or reputed business entities.
73.
Ford had tried to differentiate its case firstly by explaining the peculiar
circumstances of the Kodak case and secondly the facts that Kodak was in the service market whereas Ford is not. Ford in its arguments has also stated that an average life span of a passenger vehicle in India is five years according to an estimate by UN Environment Programme. Ford offers certain post sale contracts and manuals to its consumers to enable them to estimate the costs associated with repair and maintenance services. This post sale contracts and manuals are warranty, owners’ manual, extended warranty, scheduled service plan and total maintenance plan. The average life span of a car in India is five years and since
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Ford offers various types of post-sale contracts for repairs and maintenance services, the consumer has a reliable basis for estimating the number of times and approximate costs that would be incurred during the average life span of primary product. Consumers in India are extremely price sensitive when purchasing a car. Ford has further stressed that consumers do a significant amount of pre-purchase research before making a choice.
74.
None of the appellants, however, seems to have taken into account the
relatively cheaper finance which is very readily available to an automobile buyer. Quite often availability of finance and the rate of interest strongly tilts the decision
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making in favour of buying a car which is backed by better financial terms. Fleet
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buyer would easily be influenced by this temptation. Moreover, the market is
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comprised of several categories of consumers who suffer from information asymmetry in their capacities to understand fine points of difference in relation to a
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highly complex technological product such as the modern passenger vehicle. Therefore, while it may be desirable to have information symmetry and whole life
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costing available at the outset, in practice, it is not that simple. Both Ford and Toyota have laid a lot of emphasis on the role of reputation in the aftermarket in
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making a choice in the primary market by a consumer. Their argument is that if the aftermarket is conditioned by adverse circumstances which have the potential of maligning the reputation of the OEM, it is bound to have an adverse effect on the market for primary products and no company would like to adopt practices which create adverse reputation for it and thereby impact its market potential, particularly, so in a market which is nowhere near saturation and has been growing at a reasonable rate. While this argument may appear attractive, it does not show in practice. It is an acknowledged characteristic of automobile market that primary products, i.e. passenger vehicles are sold at very low margins while secondary products such as spare parts are sold at a very high margin. We have not yet gone into the aspect of supra normal profits but there is enough evidence to show that the
70
prices of spare parts in the aftermarket offered by the appellants are inexplicably higher than what they should reasonably be.
75.
Appellants have cited the decision of the European Commission in the matter
of European Federation of Ink and Ink Cartridge Manufacturers (EFIM) Vs. Hewlett Packard and others (COMP/C-3/39.391 EFIM) decided on 20.5.2009 where it was inter alia observed that the printer market and the consumables market were inter related in such a way that the competition in the printer market resulted in effective discipline in the secondary market. The General Court of European Commission in Case No. T296/09 vide order dated 24.11.2011 confirmed the above decision of the
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European Commission which was subsequently confirmed by the ECJ in Case No.
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56/12P. We have looked at these cases They have also referred to the
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Pelikan/Kyocera and Info-Lab/Ricoh cases. These cases have been cited to establish that there is continuity in the primary and secondary market and that
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dissatisfaction with the secondary market on account of post purchase failures or expensive spare parts could be a reason for customers to switch over their royalties
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to another primary product. It can be seen that printer is a relatively much simpler and cheaper product with much fewer spare parts, and an approach adopted to
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explain the character of the primary and secondary market in these cases cannot necessarily be followed in the present cases. For the mere reason that the secondary market here is constituted of hundreds of spare parts and the level of information to the buyer is not expected to be of the same level as it could have been in a less complex simpler product like a printer, we find the circumstances different in both these cases. Moreover switching costs in case of automobiles are exorbitant therefore, the two circumstances are different.
76.
Toyota has argued that the customer always has the option of switching over
to another primary product. Since switching over to a secondary product is not possible because of typical conditions of the market/technology, switching over to primary product could have been a logical choice but we have already noticed in earlier paragraphs where the Commission has observed that the cost of switching over
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from one primary product to other primary product can be exorbitant and an average Indian customer, would resist doing so. Toyota has further argued that there is a vibrant second hand market and, therefore, anyone who is adversely
affected
by an aftermarket would have option of switching over to a good second hand car, if he cannot afford a new car, and another brand. This argument to our mind is absurd. Firstly, this is comparing an apple with an orange. Secondly, it will be highly irrational to expect that a consumer who has been disappointed by a new product should have to buy a second hand product.
77.
The appellants have argued that if the aftermarket is taken as a relevant
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product market by itself, one of the major limitations is in the area of
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interchangeability and substitutability. This has been acknowledged by the DG in his
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investigation report as well. Referring to Section 2(t) the appellants have argued that interchangeability and substitutability are hallmarks of the definition of relevant
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product market. Responding to this argument, The Commission has examined the concept of cluster markets. The Commission has argued that the aftermarket is
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really a situation where one exclusive part is demanded with several other parts tantamounting to a cluster approach. The cluster markets are characterized by
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transmitting complementarities between various components of a bundle of products or services. The relevant unit with respect to the market definition is the bundle of goods or services, i.e. demanded by the consumer and supplied by the producer and not the individual units of such bundle. Although such units may not be interchangeable or substitutable with each other. In the Commission’s view, the concept of substitutability or exchangeability applies to the bundle rather than to its separate components where a bundle of products or services serves as the first candidate market. Thus the fact that the bundles of goods or services are demanded and supplied in a market does not affect the basic principle of market definition, i.e. interchangeability or substitutability between competing products. Referring to several decisions of the US Courts including the Supreme Court in United Stated versus Philadelphia National Bank, 374 U.S. 321 (1963), the
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Commission has concluded that the automobile aftermarket is more of a cluster market than several hundreds of relevant product markets. The Commission has referred to the US Horizontal Merger Guidelines (2006) quoting as follows: "when the analysis is identical across products or geographic areas that could each be defined as separate relevant markets using the smallest market principle, the Agencies may elect to employ a broader market definition that encompasses many products or geographic areas to avoid redundancy in presentation".
78.
Further the Commission states as follows:
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“Therefore, when the Commission is analyzing the anti-competitive issues of
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the entire automobile industry, it should not define the relevant market using
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the smallest market principle. The U.S. Horizontal Merger Guidelines provide that in the case of a merger analysis, where the anti-competitive effect of a
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proposed combination has to be reviewed from the perspective of an entire wider industry, a broader relevant market definition should be employed to
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better understand the anti-competitive effects of the proposed merger. In the same way, in the present case, the Commission needs to understand the
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alleged anti-competitive behaviour of the OEMs at the level of the macro automobile industry of India. Employing a narrow market definition would lead to redundancy and hamper the Commission’s effective analysis of the competitive constrains faced by the Indian automobile industry.”
79.
The Commission has compared the EU notice on market definition with
Section 2(t) of the Act and has found them para materia. We quote the Commission’s observations in this respect: “Therefore, the definition of the relevant product market is identical under both the E.U. and Indian competition law. Yet, in all spare parts related cases in E.U., including Hugin Kassaregister AB v. Commission of the European Communities (C-22/78) [1979] ECR 1869, Volvo AB v. Erik Veng (UK) Ltd (C-238/87) [1988] ECR 6211;
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CEAHR v. European Commission (Case T-427/08); the Commission has treated all spare parts of a cash register; an automobile and Swiss watches as part of the same relevant product market; even though various spare parts of a cash register or a watch are technically not interchangeable with each other, yet a consumer and a repairer requires such spare parts together in order to effectively repair or service the primary market product. The Commission is of the view that since the definition of relevant product market; under which the above mentioned case have been decided is exactly the same as
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under section 2(t) of the Act; a similar interpretation of “cluster market” may be possible constituting of all the spare parts for each brand of
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cars manufactured by the OEMs in the Indian automobile aftermarket.
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20.5.54 Therefore, the Commission concludes that the automobile primary market and the aftermarket for spare parts and repair services does
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not consist of a unified systems market since: (a) the consumers in the
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primary market (manufacture and sale of cars) do not undertake whole life cost analysis when buying the automobile in the primary market
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and (b) in-spite of reputational factors each OEM has in practice substantially hiked up the price of the spare parts (usually more than 100% and in certain cases approx 5000%); therefore rebutting the theory that reputational concerns in the primary market usually dissuade the manufacture of the primary market product from charging exploitative prices in the aftermarket. The Commission is of the opinion that there exist three separate relevant markets; one for manufacture and sale of cars, another for sale of spare parts and another for ‘sale of repair services’; although the market for ‘sale of spare parts’ and ‘sale of repair services’ are inter-connected. Further the Commission is of the opinion that a ‘clusters market’ exists for all the spare parts for each brand of cars, manufactured by the OEMs, in the Indian automobile market.”
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80.
Thus, the Commission has concluded that the Indian automobile aftermarket
is in the nature of a cluster market. We have very carefully considered the arguments of appellants. The main pillar of appellant’s arguments in favour of the unified systems approach is that the customer of automobile carries out a whole life cost analysis and is quite well informed before he goes to buy an automobile, which is a high status symbol in India. In earlier paragraphs, we have specifically looked at the concept and practice of whole life costing in Indian consumer’s decision making as far as automobiles are concerned. There is not enough evidence to suggest that Indian consumer goes buying automobiles fully armed and equipped with
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information to pick up the brand and make that it considers is the best for its
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purposes. More often this choice is driven by prima facie mileage considerations,
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availability of finance and a broad understanding of availability of “good models” in the market. There are several factors which determine the choice of a consumer.
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They are not necessarily data based information elements but could very often be clearly driven by advertisements, peer group selection, budget, past experience,
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etc. Therefore, at this moment of the development of Indian automobile sector, it is hard to say that consumer would necessarily make his choice driven entirely by
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whole life costing. Companies are increasingly making efforts to offer options which may replace consumers’ own need for whole life costing such as extended warranty but even that is a new phenomena and has not yet settled on a broad basis. It has also been clearly made out in the earlier paragraphs that OEMs themselves have not found it possible to say convincingly that consumer has all the information required for making a rational choice. Therefore, we do not consider it necessary to intervene with the Commission’s assessment of the relevant product market. As far as relevant geographic market is concerned, there is no dispute that the market in India is the relevant geographic market.
81.
Once it is decided that a primary market and two secondary markets which
are interconnected in nature exist, the determination of dominant position becomes easier. Explanation A of Section 4(2) provides that a dominant position means a
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position of strength enjoyed by an enterprise in the relevant market to operate independently of competitive forces or affect its competitors or consumers or the relevant market in its favour. The underlying principles in this definition is that of market power which allows the enterprise to act independently of competitive constraints. The Commission has examined the factors that allow such OEMs to act independently or alternatively afford the OEMs an opportunity to foreclose markets for its competitors or exploit its consumers. The Commission has analysed the production and distribution system of automobile spare parts in order to understand if the OEMs are subject to any competitive degree of constraints. Due to high
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degree of technical speciality even intra brand speciality of spare parts is greatly diminished. Further by virtue of a strong network of agreements and practices,
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OEMs have become sole supplier of their own brand of spare parts and diagnostic
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tools in the aftermarket. The super structure of aftermarket distribution has been so constructed that OEMs have found themselves secured from all sides to perpetuate
From the findings discussed hereinafter, it can be seen that there are
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82.
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their dominance.
restrictions on original equipment suppliers(OES’) in most cases; there are
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restrictions on the authorized dealers in releasing parts freely and without restrictions and availability of diagnostic tools to non-authorized dealers which is completely controlled. Even the authorized dealers can source their parts only from the OEMs. Therefore, by virtue of a network of agreements and practices, OEM becomes a sole supplier in the aftermarket for supply of spare parts and diagnostic tools for its own brand of automobiles.
83.
Section 19(4) of the Act lays down the factors on which an enterprise has to
be tested before it is discerned as a dominant enterprise. These are the following: “(4) The Commission shall, while inquiring whether an enterprise enjoys a dominant position or not under section 4, have due regard to all or any of the following factors, namely:— (a)
market share of the enterprise;
76
(b)
size and resources of the enterprise;
(c)
size and importance of the competitors;
(d)
economic power of the enterprise including commercial advantages over competitors;
(e)
vertical integration of the enterprises or sale or service network of such enterprises;
(f)
dependence of consumers on the enterprise;
(g)
monopoly or dominant position whether acquired as a result of any statute or by virtue of being a Government company or a
(h)
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public sector undertaking or otherwise; entry barriers including barriers such as regulatory barriers,
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financial risk, high capital cost of entry, marketing entry
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barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers; countervailing buying power;
(j)
market structure and size of market; social obligations and social costs; relative advantage, by way of the contribution to the economic
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(I)
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(k)
IV
(i)
development, by the enterprise enjoying a dominant position having or likely to have an appreciable adverse effect on competition;
(m)
any other factor which the Commission may consider relevant for the inquiry.” (Emphasis supplied)
84.
Even for the limited interchangeability of spare parts between the automobile
market by various OEMs, each consumer of an OEM is completely dependent upon such enterprise. Therefore, the independent repairers who are consumers of OEMs in the aftermarket for spare parts and diagnostic tools are also solely dependent upon such enterprise. The appellants have argued that the DGs inference of lack of
77
access to genuine spare parts for the independent repairers has largely been drawn from the evidence submitted by Carnation. However, as our discussion later on evidence collected from several multi-brand repairers and OESs clearly show that it is not Carnation alone but all of them, who have stated that their access to genuine spare parts is sufficiently constrained and many a times they have to resort to practices such as importing parts, getting customers to register for job work at authorized dealers or sometimes even pushed to use spare parts which may not be necessarily genuine. The Commission has found that this approach has worked as entry barrier, as defined in Section 19(4)(h). The Commission has, therefore,
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concluded that in the absence of the availability of genuine spare parts and diagnostic tools that are compatible to carry out effective repair work on various
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models of automobiles manufactured by the OEMs,the independent repairers are
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foreclosed to compete effectively with the authorized dealers of the OEMs. The appellants have argued that their market share is so small (Toyota – 3.4%,
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Ford – 3.71%, Nissan -0.52% in 2010) that they are hardly in a position to influence
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the market. If these statements are reviewed on the benchmark of our discussions in the preceding paragraphs, it is clearly made out that each OEM as a matter of
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fact has a 100% share of the aftermarket for each of its model, therefore, is entirely a dominant entity.
85.
The next logical flow of above analysis is to see whether appellants have
abused their dominant position. Firstly, whether the price charged for spare parts in the aftermarket is unfair, secondly indulgence in certain practice or practices have resulted in denial of market access to others, and thirdly, whether the dominant position in spares aftermarket has been leveraged to protect the relevant market in services.
DENIAL OF MARKET ACCESS 86.
On the question of availability of diagnostic tools and workshop manuals to
the independent repairers, the Commission has concluded as follows:
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“Section 4(2) provides a list of abusive conducts, which when undertaken by a dominant enterprise, would fall within the mischief of section 4(1) of the Act. Section 4(2)(c) provides that a dominant enterprise shall abuse its dominance, if it indulges in practice or practices resulting in denial of market access. As discussed earlier, we are of the opinion that each OEM is a monopolistic player in the aftermarket for its own brand of spare parts and diagnostic tools and is in effect the sole supplier of such spare parts and diagnostic tools to the aftermarket. We have also discussed the practices of the OEMs to conclude that in effect each OEM severely limits the access of
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independent repairers and other multi brand service providers to genuine spare parts and diagnostic tools required to effectively compete with the
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authorized dealers of the OEMs in the aftermarket. Such practices amounts
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to denial of market access by the OEMs under section 4(2)(c) of the Act.”---The OEMs have submitted that the spare parts and diagnostic tools,
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workshop manuals are their proprietary materials and therefore accessible
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only to the authorized dealer network of each OEM. The Commission notes that unlike section 3(5) of the Act, there is no exception to section 4(2) of the
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Act. Therefore, if an enterprise is found to be dominant pursuant to explanation (a) to section 4(2) and indulges in practices that amount to denial of market access to customers in the relevant market; it is no defense to suggest that such exclusionary conduct is within the scope of intellectual property rights of the OEMs. On the basis of aforesaid, the Commission is of the opinion that the OEMs have denied market access to independent repairers and other multi brand service providers in the aftermarket without any commercial justification.”
87.
In subsequent paragraphs we have examined the relationship between
OEMs and OESs, and OEMs and authorized dealers, as far as it relates to release of spare parts to independent repairers for their businesses. Our examination has shown that either by virtue of express agreement or by practice OEMs do not allow
79
a large number of OESs to sell spare parts directly in the aftermarket including to independent repairers. The same was found true in the case of restrictive practices imposed upon authorized dealers by OEMs in so far as over the counter sale to independent repairers is concerned. At an appropriate place we will discuss the relevant evidence collected by the DG. Since independent repairers are important potential competitors to authorized dealers the impact of restriction is quite appreciable.
UNFAIR PRICE The Commission has agreed with the DG’s findings that OEMs are imposing
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88.
unfair price in sale of spare parts in terms of Section 4(2)(a)(ii) of the Act which is
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substantiated by the considerable mark up in prices and significant variation across
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spare parts as demonstrated in the DG’s report. The following table extracted from table 8 of the Commission’s order is self-explanatory :
Price mark-up of top 50
spare parts based on Rev-
spare parts on the basis of
enue Generated
consumption
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Price Mark-up of top 50
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OEM
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Table 8
Nissan
84.96%-201.98%
85.81%-258.78%
Toyota
79.61%-1305.85%
38.26%-510.43%
Ford
38.37%-1171.09% (Q1,
64.1-1696.36 (Q1, 2010-11);
2010-11);
64.1-1696.36 (Q2, 2010-11);
35.62%-1171.09% (Q2,
58.68-1696.36 (Q3, 2010-11);
2010-11);
64.1-1696.36 (Q3, 2010-11);
35.62%-1171.09% (Q3, 2010-11); 35.62%-1171.09% (Q3, 2010-11)
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The price range of spare parts selected on the basis of top 50 revenue earners and top 50 by consumption can be seen in the above table. There is no doubt that there is a significant variation in the prices between the stage of sourcing them from the OES and releasing them into the aftermarket. The baseline of the price taken by the DG is the cost at which the spare parts are made available to the OEM by the OES. The appellants have argued that over and above this price, several taxes/ fixed costs have to be added.
89.
Appellants in their written submissions given to the Commission from time to
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time have expressed that price of a spare parts is not a simple function of cost plus calculation instead besides taxes whole lot of other costs, which could be fixed in
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nature, are also distributed among various spare parts. In modern marketing,
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strongly infused by brand equity, cost of the brand is also assimilated within the
90.
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price so charged.
Nissan has argued that effectively, the average profit margin is in the range
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of 25 to 30 percent. However, the final sale price could be less than the maximum retail price. The Commission has responded to these arguments as follows:
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“The Commission is aware that in adopting a cost-price comparison to determine the extent of profits enjoyed by a dominant enterprise entails the calculation of the cost of production of the goods/services of the dominant enterprise. This can be a particularly difficult task given that an enterprise may have diverse production and marketing operations which incur various categories of costs and working out the production costs may raise great difficulties, especially determining what costs should be taken as a basis for calculating the cost-price ratio to show whether the price charged exceeds the costs incurred. However, the Commission is of the view that such difficulties do not arise in the present case. Since the OEMs source a majority of their spare parts, both for assembly line and aftermarket requirements from OESs or other overseas suppliers, a starting point for the
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Commission’s cost-price analysis can be the price at which the spare parts are sourced from the OESs and other suppliers. The OEMs have submitted that the DG in its investigations has failed to consider that over and above the procurement, other costs incurred by the OEMs, including, depreciation on tangible assets, amortization of intangible assets, royalty for technical know-how, packing materials, warehouse management, octroi, government taxes, financial and freight cost etc. are also added. The Commission has noted that such submissions of the OEMs are general in nature and the OEMs have submitted broad cost components, however, the OEMs have not
It has then gone on to examine the celebrated decision in the United Brand’s
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91.
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submitted particulars of the constituent elements of its production costs.”
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case delivered by the European Court of Justice and jurisprudence following it from the European Courts. The issue of excessive pricing has also been examined by
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this Tribunal in Appeal No. 02/2014 Orissa Steel Federation versus Orissa Mining Corporation and other. The Tribunal had examined the extant jurisprudence as it
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has emerged in the US and European Union. According to Section 4 of the Act a predatory pricing is clearly defined as unfair but excessive pricing has to be
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interpreted as unfair on the basis of the circumstances and economic analysis. Calculation of economic value is a difficult task and requires extensive information. DG’s investigation in our view has taken a relatively simplistic approach to assessment of the price of the spare parts charged by appellants as unfair. Unfairness need not necessarily come from the price being excessive. It could also come from the special circumstances of a given situation when monopoly has been proved and consumers have nowhere else to go. In such cases significantly higher prices can also operate as unfair prices. There is no denying the fact that in view of the dominance proved in the earlier paragraphs, the OEMs have a natural temptation to charge high price for their spare parts. They may deny it on the ground of reputational effect or defend it on the ground of R&D and other fixed costs including their brand equity, the fact remains that they were not able to explain the
82
phenomenal difference between sourcing cost and selling price. In our view they have not even tried to do so. There is no doubt that the mark ups are very high but to what extent they can be justified by explaining the additions through costs incurred on a variety of other operations, has not been considered by the DG. In absence of a very reliable analysis either by the DG or by the OEMs offered in their defence, while we may find it difficult to classify mark ups as excessive pricing, it could definitely be recognized that the prices charged by OEMs are abnormally high. This also needs to be seen in the background of yet another fact reported by the DG. The OEMs were asked to furnish the details of turnover and profits from
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sale of automobiles as well as from spare parts separately. While all companies did not furnish this data, the analysis with respect to companies that submitted the
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requisite data showed that in all cases, the margins from spares business exceeds
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the margin from car business substantially. In fact, several OEMs are incurring overall losses as well as that from the sale of cars. However, profits have been
The Commission has tabulated revenue generation from sale of spare parts
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92.
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generated from spare parts business.
of some automobiles though none of the appellants is included in this table. Quoting
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a CII Mckinsey Report on the aftermarket business, the Commission has stated that aftermarket contributes a modest 24% in revenues to OEMs. However, a sizable 55% of the profit is derived from this segment. The Commission has concluded that this is possible because OEMs are able to mark up the price of spare parts without any competitive constraints. We agree with the Commission.
LEVERAGING 93.
The Commission has also found the appellants engaged in leveraging their
position in one market to protect another market thereby violating Section 4 (2)(e) of the Act. It has been argued on behalf of the Commission that by a network of agreements and practices the supply of spare parts to independent repairers has been so restricted that independent repairers are not in a position to source spare
83
parts in an economically rational manner. They are also deprived of diagnostic tools and technical information and consequently though the appellants may not be actually present in the service market as claimed by them they are able to push independent repairers out of the market thereby facilitating the availability of the services/repairs market to their associates- the authorized dealers. The appellants have argued that the Commission’s logic is not based on facts as relationship between the appellants and their authorized dealers is that of a principal to principal and they are not in a position to influence the decision making of the authorised dealers. It has been stated that over the counter sales to independent repairers
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could even be restricted by the authorized dealers themselves and appellants should not be blamed for that. In the manner of speaking it may appear to be true
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that appellants and their authorized dealers are in a principal to principal
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relationship as they are both independent entities but the fact remains that they are in a vertical relationship with exclusivity built into the relationship when the
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authorized dealers are restricted from doing business for others they are entirely
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dependent upon the OEMs. Further there is enough evidence to show that by an array of policy and practice, independent sale to aftermarket is restricted at all
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levels. Therefore, it is not difficult to argue that OEMs facilitate protection of the services market for their authorized dealers and thereby exclude independent repairers from competition. As far as the dominance of OEMs in the supply of aftermarket for spares is concerned it is quite clear that on different counts the market is restricted and therefore, they have a complete hold on the supply of spares to the aftermarket. This complex network therefore, is utilized to protect the services market. It need not to be over emphasized that though OEMs by themselves may not be in the services market they operate in the services market through their associates i.e. the authorized dealers and their sales of spare parts depend upon the practices adopted by the authorized dealers. Therefore, the Commission’s conclusion about leveraging is not off the mark and we agree with it.
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Vertical Agreements 94.
We will now examine the impugned order on the issue of anti-competitive
agreements under Section 3 (4) of the Act. The Commission has found that vertical agreements between OEMs and suppliers and OEMs, and authorized dealers have anti-competitive restrictions or practices adopted by the OEMs are anti-competitive in nature, thereby leading to appreciable adverse effect on competition. There are three kinds of relationships investigated by the DG, viz., OEM-Overseas Suppliers, OEM-OES and OEM-Authorized Dealer hence we review the Commission’s order in
.IN
respect to all of them.
DG found appellants in violation of Section 3 (4) of the Act in their
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95.
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OEM – Overseas agreements
relationship with overseas suppliers. In the course of his investigation he analyzed
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the importer agreements entered by OEMs with their overseas suppliers to find if
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any restrictions existed in these agreements. The Commission noted that examination of these agreements did not reveal any specific clause restricting
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overseas suppliers from undertaking supplies of spare parts in the aftermarket. The Commission in its consideration of the DG report found that OEMs were sourcing inter-alia spare parts for the aftermarket from their parent companies abroad or affiliates of their parent companies in different countries. Since they belonged to the same group where the decision making on behalf of the affiliates was largely influenced by the policy of the parent, they could all be termed to be part of a single economic entity. In such situation they could not be termed to be separate enterprises for the purposes of our present consideration and the Commission did not find them subject to the provisions of this Act. It is an internal arrangement between the parent company and its affiliates and will be excluded from Section 3 (4) of the Act. The Commission observed that all the appellants have agreements/arrangements with their respective overseas suppliers which do not contain any specific restrictive clause regarding the rights of the overseas suppliers
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to supply spare parts into the Indian aftermarket. The Commission observed that among others Nissan did not import spare parts from overseas suppliers. However, our examination shows that it is an admitted fact that Nissan imports about 43% of its aftermarket spare parts. Even if the argument of single economic entity was ignored for the moment, it makes little economic sense for a foreign affiliate to create a separate distribution system for the aftermarket, as that will prove
ex-
tremely costly in view of the relatively smaller size of the aftermarket. Therefore, on the one hand there are no specifically worded clauses in the relevant agreement, on the other hand, it makes little economic sense keeping in mind the share of the ap-
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pellants both in the primary and secondary market, therefore, DG’s finding that the OEM- overseas suppliers agreement has an anti-competitive character are rightfully
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rejected by the Commission. We agree with the Commission.
OEM – OES Agreement
The second category of agreements examined by the DG and analyzed by
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96.
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the Commission are the OEM-OES (local suppliers’) agreement. The OEM procures spare parts for both assembly line and aftermarket requirements from the local
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OES. The DG had categorized the spare parts broadly into the following three categories:
“(a)
Where the design, drawing, technical specification, technology, know-how, equipment, quality parameters etc. are provided to the OESs by OEMs, the OESs are required to make the parts and supply according to these parameters.
(b)
Where the patents, know-how, technology belong to the OESs however,
the
parts
are
manufactured
based
on
the
specification, drawings, designs supplied by the OEMs. The tooling/tooling cost may be borne by the OEMs. (c)
Where the parts developed and sold by the OESs are made to their own specifications or designs which are commonly used in
86
the automobile industry. Such parts are very few, for example, batteries, tyres etc.” 97.
The Commission observed that category ‘a’ and ‘b’ of the above three
categories of OESs cannot supply spare parts directly into the aftermarket without seeking prior consent of the OEMs. Alluding to the submissions of OEMs and OESs, the Commission notes that most of the OESs are not selling directly in the aftermarket. Further DG’s investigation has not revealed any instance where written consent has been granted by the OEMs to OESs to supply spare parts directly in
98.
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the aftermarket. DG has very extensively examined whether there are restrictions on the
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OESs to supplying spare parts in the aftermarket and if so then what are the
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circumstances of such restrictions. We have already mentioned above, the three broad categories of OESs. In order to fully appreciate DG’s conclusion, we have
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very carefully gone through the responses collected by the DG from a large number
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of OESs and statements of the representatives of OESs recorded by the DG. DG circulated a questionnaire with the help of ACMA to OESs and collected relevant
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information. While it will be impossible to quote from all of these statements, in order to get a flavour of some of these statements, we quote below: Wheels India Limited “11.
In case restrictions are imposed by any of the car manufacturers in India with respect to production/ sale of these products by you to any other car manufacturers, relevant details there:
As
the
specifications
for
wheels
are
provided
by
the
car
manufacturers, some of them impose restrictions on our ability to sell such wheels manufactured by us for them to other customers without their prior permission. The car manufacturing companies which has imposed such restrictions are ……………….and………………
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13
The distribution channels through which these products are being sold particularly for the after market:
The requirement of the after market is met through sale of spares through OEMs wherever restrictions as specified in our answer to question 11 above and in other cases through our distribution network…………..The agreement provides for sale to the after market
18.
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with their prior approval. We have not sought permission for direct sale to distributors in such cases since the quantum of
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after market requirement for wheels is very negligible. Apart
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from what has been stated above, there are no conditions in terms of quantity, price, geographical allocations, revenue
…………The
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19.
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sharing imposed by car manufacturers.
agreements
with
some
car
manufacturers
mentioned in our reply to question 11 above have clauses on
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exclusive supply to them.
26.
…………. Globally these MNCs restrict sale of wheels by manufacturers for after market requirements. There are also cases where such restriction does not exist.”
ASAL “4.
Details of clauses in the agreements entered for supply of parts between
the
various
OEMs
and
the
OESs,
prohibition/restricting the latter from supply to parties other than the OEMs. Wherever the prohibition/restrictions are based on the intellectual property rights held by OEMs, relevant details
88
including such registrations of IPRs in India. Information to be given pertaining to each customer OEM.
Response: There are no clauses in the agreements with OEMs entered for supply of parts which prohibits/restricts the Company from supply to parties other than the OEMs. However the OEMs in order to secure their intellectual Property Rights, may put a clause in the supply agreement requiring the OESs not to use the Intellectual property they have provided to us for the purpose other than mentioned in the supply agreement.
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The information related to registration of such Intellectual
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Property Rights of OEMs is not available with us.”
Autoliv “We have
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observed that
while
there are
no
general
prohibitions/restrictions from supplying to other OEMs, some with
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contracts
our
customers
as
below
do
contain
prohibitions/restrictions for supplying products to other OEM’s
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in
respect
to
products
customized
on
customer
proprietary/intellectual property.”
Brakes India Limited “18.
Where the car manufacturers pay for technical license agreement arising out of the follow source arrangement for design,
support
etc.
it
is
customary
for
the
vehicle
manufacturers to expect us to not offer such parts to others without their consent.
All the well known car manufacturers want to assure their customers genuine car parts through their own network. It is customary in such cases that we sell car parts to them (known
89
as OES). If they have paid for tooling, design etc, they require the parts sold to them. Other than these, there are no conditions
relating
to
prior
approval,
quantity,
price,
geographical allocations, revenue sharing etc.”
Electrica Engineers (India) Pvt. Ltd. 4.
Details of clauses in the agreements Excluding
clause
in
entered for supply of parts between agreement with OEMs to the various OEMs and the OESs, sell products to OEMs or
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prohibiting/restricting the latter from their spares division only. supplying to parties other than the Wherever
the
prohibi-
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OEMs.
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tions/restrictions are based on the intellectual property rights held by
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OEMs, relevant details including
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such registrations of IPRs in India. Information to be given pertaining to
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each customer OEM.
7
Would the OESs like to make direct Yes sales in the aftermarket?
FAG “Query # 4.
Details of clauses in the agreements entered for supply of parts between the various OEMs and the OESs, prohibiting/restricting the latter from supplying to parties other than the OEMs. Wherever the prohibitions/ restrictions are based on the intellectual property rights held
by
OEMs,
relevant
details
including
such
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registrations of IPR in India. Information to be given pertaining to each customer OEM.
Reply: There are no direct clauses in the agreements entered into with any of the OEMs prohibiting/restricting FAG from supplying to parties other than the OEMs.
However in case (1) manufactured parts using technology, equipment or tooling of OEMs or (2) the sale of parts using trademarks
or
trade
names
of
OEMs
some
OEMS
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(i.e………………..) have prohibited/restricted sales under these conditions to third parties.
Would the OESs like to make direct sales in the
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Query # 7.
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aftermarket. Reply:
Yes. FAG has an independent aftermarket business and
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would like to continue making direct sale in the aftermarket,
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which is an important business for FAG.”
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DENSO
“It
is
submitted
that
under
some
product
purchase
arrangements between DENSO and car manufactures, it is agreed that the supply of products, which are manufactured as per the specifications provided by the car manufacturer in the After-Sales Market will be carried out through the car manufacturer itself.
Since the specifications are provided by the car manufactures, there are conditions included in the agreements entered into between DENSO and the car manufacturers which allow sales of such products through the car manufacturer itself.”
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Lumax Industries Limited “11.
Yes, our Customers i.e. Car manufacturers restrict us from selling these products to any other customers or in the open Market because these car manufacturers either supply funds required for the investment in the Tools, Dies and Moulds or provide the Tools, Dies etc for manufacturing the Lamps for such customers.
12.
No. It is not possible to use the Products across cars/brands with minor modifications because these products viz Lamps are
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being manufactured as per the specifications stipulated for each car/brand, as the Design of each car is different and
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therefore the mounting are different for each product.
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13-14. For After-market these customers take the products from us for onwards distribution by them through their respective “SPARE
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PARTS DIVISION” (SPD) which further supply these products
15.
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to their authorized service centers only. As explained above, we are not authorized to sell these
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components viz Lamps in the After – Market as per agreement with customers. However in some cases, where the OEM has discontinued any model, in that case, we can supply the components for after market as per practice.”
Munjal Showa Ltd. “18.
As per agreement there are ……………..not to sell, in open market. As per …………with………Ltd. there is a prohibition of sale to third parties. As per para ……with …………. there is a prohibition of sale to third parties. However, we have no arrangements and comforts to sell in the open market due to low volume and costs involved in the dealer network.
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RICO AUTO INDUSTRIES LIMITED “18.
We are restricted by car manufacturers through agreement for selling of these products directly in the open market, dealers, stockiest, workshop etc. since the designs have been provided by them.”
Sandhar Technologies Limited “These restrictions are either absolute or could be in terms of prior approval, but generally absolute restrictions in the nature
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of prohibition. The rationale for this is to ensure that quality adherence is ensured and spurious materials/components do
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not create any potential hazard for life of the owner of the car
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as well as third parties. Copy of the Purchase Order is annexed
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hereto and marked as Annexure-3A.”
“4.
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Rane Engine Valve Limited Details of clauses in the agreements entered for supply of parts
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between the various OEM’s and OES’s, prohibiting/restricting the latter from supplying to parties other than OEMs. Wherever the prohibitions/ restrictions are based on intellectual property rights
held
by
OEM’s
relevant
details
including
such
registrations of IPRs in India. Information to be given pertaining to each customer OEM.
Response:
OEMs like ……… are restricting with their
purchase agreement to supply the company products directly to the after market. Please not the following clause in this regard : ………
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1.
In case there are any oral understanding of the OES with the OEM’s regarding non-supply of spares directly in aftermarket the same may be reduced in writing on an affidavit.
Response: Yes, as given in point No. 4 ........... OEMs, as part of the supply agreement explicitly insist for exlucsively apart from other clauses. However, we have been taken up with them during our one to one discussion requesting them to allow us to sell in the aftermarket and no
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decision has been taken by OEM’s.”
Details of clauses in the agreements entered for supply of pans between
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“4.
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TATA Autocomp
the
various
OEMs
and
the
OESs,
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prohibiting/restricting the latter from supply to parties other than the OEMs. Wherever the prohibition/restrictions are based on
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the intellectual property rights held by OEMs, relevant details including such registrations of IPRs in India. Information to be
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given pertaining to each customer OEM.
Response: There are no clauses in the agreements with OEMs entered for supply of parts which prohibits/restricts the Company from supply to parties other than the OEMs. However the OEMs in order to secure their intellectual Property Rights, may put a clause in the supply agreement requiring the OESs not to use the Intellectual property they have provided to us for the purpose other than mentioned in the supply agreement.The information related to registration of such Intellectual Property Rights of OEMs is not available with us. (Emphasis supplied)
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99.
In order to explain their conduct OEMs have relied upon two arguments
namely: (1)
that all of these spare parts have intellectual property content manifested in patents, designs, copy rights, trademarks, trade secret, know-how etc. and therefore they have
a legitimate
right to impose restriction under Section 3 (5) of the Act. (2)
indiscriminate release of spare parts in the market without regulating their flow may encourage mixing of these spare parts with
spurious
spare
parts
thereby
adversely
impacting
The Commission has examined relevant parts of the agreement with local
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100.
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consumer interest and reputation of OEMs.
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OESs and has observed that all three of the appellants have restrictions on account of protection of IPRs. The Commission has concluded that none of the OESs
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actually supply genuine spare parts of the various brands of the OEMs directly into
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the aftermarket. The DG has found that these agreements are in the nature of exclusive distribution agreements and refusal to deal as contemplated under
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Section 3(4) (c) and 3(4)(d) of the Act, respectively. The Commission has analyzed the AAEC of such agreements/arrangements. Further since all OEMs have taken the defence of protection of intellectual property rights the Commission has examined the scope of Section 3 (5) of the Act. 101.
The DG has addressed issues specific to each appellant in the sub reports
prepared for each OEM. Relevant portion of Toyota’s standard agreement with OES is quoted below: “(CI XXIII) Supply of Third Parties: (1)
TKM’s Materials and the products shall not be supplied to any
third parties by the Seller without the prior written consent of TKM, if they are made using any of the following: (i) any intellectual property right of TKM or its promoters in the forms of patents, know-how
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designs, copyrights or others (whether registered or not); (ii) secret knowledge or manufacturing processes (know-how) of TKM; or (iii) Tooling or TKM’s Materials. (2)
If the products are of the standard type of the seller, then the
seller shall ensure that the material similar to the products/their packaging supplied by the seller to the third parties shall not bear any mark or reference, either intellectual property rights of TKM or otherwise.
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(CI XXIV) Intellectual Property: (1) the seller shall not use the intellectual property rights of TKM or of the promoters of TKM
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including but not limited to Trademarks, Copyrights, designs, patents,
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logos, know-how, utility model, computer program, copyrights of other party supplied by TKM for the purpose of this Agreement, etc. in
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relation to anything except for the production and as supply of the
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Products to TKM. (2) The seller shall not do anything to affect or likely to affect the validity of any patent, design or trademark or any license
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held thereunder or any form of intellectual property whatsoever vested in TKM or its promoters relating to the products.”
102.
DG has extensively quoted from statements and questionnaires made by
Toyota representatives. We quote from a response given on behalf of Toyota to a specific question in this respect: “Submissions of TKM made vide letter dated 04.01.2012 Q.8
Do you have IPR registered in India for all the spare parts for which restrictions on sale to third parties or requirements for prior permission for selling are imposed on OES. TKM is the subsidiary and an authorized distributor of M/s Toyota Motor Corporation – Japan (‘TMC”), in India. TMC has given license to TKM to manufacture Toyota vehicles and the
96
parts thereof using the technical information (including drawings)
provided
by
TMC
under
various
Technical
Assistance Agreements (the “Technical Information”) signed between TKM and TMC. TKM then engages the OES to manufacture certain parts based on the Technical Information. TMC is able to claim IPR on the Technical Information, especially copyright in the parts and components used in the manufacture of automobiles and for their after sale servicing. TMC has brought state of the art automobile technology into
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India and all parts and components required to build its vehicles
W
involve unique IPRs which are protected.
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TKM by virtue of its license from TMC, restricts the sale of service parts to third parties (or requirements for prior
IV
permission for such sale are imposed on OES) based on IPRs
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found in copyright in all the automobiles and their parts. TMC claims copyrights in all the engineering drawings provided
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to its vendors for manufacture of parts, which are used in manufacturing of vehicles and for after sale servicing purposes. As per The Copyright Act, 1957, registration of copyright is not compulsory and TMC claims its IPR rights, i.e. copyright, in all the engineering drawings in original equipment parts (“OE parts”) and service parts. In addition to the IPR available as above, TMC has also registered and has applied for registration of hundreds of patents, designs and trademarks of certain key mechanism, designs and brands under the applicable laws of India. TMC has secured and applied for copyright registration in engineering drawings of several parts in many countries across
97
world and as such claims IPR in such copyright filing in India by virtue of India being signatory to the Berne Convention and other applicable international treatise. Q.9
In case of parts where the IPRs are not registered in India how are such restrictions legally tenable. Please cite the relevant applicable provisions. Kindly refer to the reply given by us to Q.8 above, as a part of our reply to this query. Further we wish to submit that The Competition Act recognizes
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the respective intellectual property laws as a saving provision i.e. if restraints are imposed due to intellectual property rights,
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such restrains are considered as reasonable. In large number
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of cases, in deciding whether a negative covenant was acceptable under the law or not the courts have applied the test
IV
of reasonableness.
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A reading of Section 3(5) if the Act clearly show the exceptions conferred based upon ‘right’ arising from the statutory provision
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of Law (hence the term infringement), or other ‘reasonable condition’ necessary for protecting “any” of the rights which “have been” or “may be” conferred under the five Acts detailed in the said Section. Company referred to the following. [A]
Trade Marks Act of 1999: Trademark Act recognizes
two rights to a proprietor namely: (1) Infringement; and (2) passing off. Infringement applies strictly based upon registration of the trademark in India while passing of applied in the following conditions:
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(i)
When there is a precise Trademark right based upon priority in adoption or use or both (as the case may be);
(ii)
Prior rights based upon a prior filing;
(iii)
Rights emanating from prior international adoption and use subject to condition that such adoption and use have created a reputation and goodwill in India that would be impacted through any uncontrolled activities.
In addition to this the Trademark Act of 1999 further recognizes
Right of a well-known trademark which may extend even
ii)
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to unrelated goods;
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i)
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rights namely:
The impact on rights of a proprietor through blurring or
IV
tarnishment.
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The act further recognizes that the right can be enforced by a registered
proprietor
or
a
proprietor
and
a
Licensee
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independently. If the licensee is recorded with the Trade Mark Authority as a registered User; if not, the licensee can still sue by making licensor a pro-forma party. It is implicit, that if the licensee can sue in a court of Law it is also capable of transacting with vendors. In any case, if a question is raised as to proprietorship being in the name of one entity and the execution of contract by TKM it would be possible to argue that this was under authority and that the two entities are group concerns. To this effect there is now established case law that group entities are to be considered as one “economic” entity and an action cannot be barred on this ground against a third party.
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Section 27 (1) of the Act, confers the right to initiate action for infringement while sub section (2) confers the rights of passing off. [B] Copyright Act: The scope of rights under the Copyright Act is defined in section 13 which defines Copyright to subsist in several categories of work including literary work. The term literary
work
competitions.
includes The
computer
definition
is
programs, thus
tables
inclusive
and
and
not
exhaustive. The word original is required only with an
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expression of an original thought which in the case of literary work applies to expression in print or writing.
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A drawing would be an original work as long as it not copied
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from another work. Section 17 of the Copyright Act defines ownership as with the person who has created the work unless;
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Act.
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it is assigned or transmitted in accordance with the Copyright
The scope of use of right is defined in the Copyright Act
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including in respect of adaption, reproduction, abridgement, modifications etc. Infringement of copyright is defined under section 51 and the definition has nothing to do with registration of copyright. In other words as long as work is original, it would be entitled to protection under Section 51, if one has right of the owner or rights from assignment or transmission. TKM seeks copyright protection in the engineering drawing that relate to the parts. [C]
Patents Act 1970: The Patents Act seeks to protect the
rights of a person of the patent of an invention and not a discovery. The Patent Act protect invention which is defined to mean new product or process involving invention step and capable of industrial application. Invention step means a
100
feature that makes the invention not obvious to a person skilled in the art. The persons applying for a patent for an invention include: i) Any person claiming to be the true first inventor of the invention; ii) Any person being the assignee of the person claiming to be the true and first inventor in respect of the right to make such an application. Rights conferred upon a patentee under the Patents Act
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include:
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i) Where the subject matter of the patent is a product, the
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exclusive right to prevent third parties, who do not have his consent, from the act of making, using, offering for sale,
IV
selling or importing for those purposes that product in India;
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ii) Where the subject matter of the patent is a product, the exclusive right to prevent third parties, who do not have his
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consent, from the act of using that process and from the act of using, offering for the sale, selling of importing for those purposes the product obtained directly by that process. Section 109 of the Patents Act confers the right to take proceeding against infringement to an exclusive licensee of the patented work. The exclusive license holder shall have the like right as the patentee to institute a suit in respect of any infringement of the patent committed after the date of the license, and in awarding damages or an account of profits or granting any other relief in any such suit the court shall take into consideration any loss suffered or likely to be suffered by the exclusive licensee as such or, as the case may be, the profits earned by means of the infringement so
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far as it constitutes an infringement of the rights of the exclusive licensee as such. [D]
Designs Act 2000: The design Act seeks to
protect invention of a proprietor of any new or original design wherein design under Section 2 (d) of the Designs Act, means “the features of shape, configuration, patterns, ornament or composition of lines or colors applied to any article whether in two dimensional or three dimensional or in both forms, by the nay industrial process or means, whether
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manual, mechanical or chemical, separate or combined, which in finished article appeal to and are judged solely by
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the eye but does not include any mode or principle of
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construction or anything which is in substance a mere mechanical device and does not include any trademark as
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defined in clause (v) of sub-section (1) of Section 2 of Trade
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and Merchandise Marks Act, 1958 (43 of 1860) or property mark as defined in Section 479 of the Indian Penal Code
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(45 of 1860) or any artistic work as defined in clause (c) of Section 2 of the Copyright Act, 1957 (14 of 1957)”. Section 2(j) of the designs Act defines the proprietor of a new or original designs as :
i.
Where the author of the design, for good consideration, executes the work for some other person, means the person for whom the design is so executed.
ii.
Where any person acquires the designs or the right to apply the design to any article, either exclusively of any other person or otherwise, means, in the respect and to the extent in and to which the design or right has been so acquired, the person by whom the design or right is so acquired; and
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iii.
In any other case, means the author of the design; and where the property in or the right to apply, the design has devolved from the right to apply, the design has devolved from the original proprietor upon any other person includes that other person. This aspect was again taken up with the company’s representative during the recording of statement. The relevant extract is as under:
Please furnish the registration details of relevant IPRs in India.
Ans
We shall revert with details.
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.IN
Q18
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TKM vide their letter dt. 06.2.2012 filed a list of certain Trade Marks, Designs and Patents. The same are enclosed along
As far as Toyota is concerned, it can be noted that they have registered
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103.
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with the said reply.”
certain IPRs in India. Apart from that copyright has been claimed on all designs,
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drawings as well as spare parts. Reliance has also been placed on the technology transfer agreements with their parent company TMC for claiming protection under IPR. It has been contended that in terms of the agreement they are obliged to protect IPRs of TMC. However, company was not able to furnish the technology transfer agreement.
104.
With respect to Nissan the DG quotes as follows in the sub reports: “Q8
Does Nissan India has IPRs registered with regard to the parts covered by Sec 8.2 & 8.3? Please confirm the details of IPRs if registered for top 50 spare parts.
Ans
Nissan India has not registered IPRs for spare parts.
Further in response to query w.r.t. top 50 spare parts in terms of consumption and also top 50 spare parts in terms of revenue, whether
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they are covered by intellectual property rights in India, if yes details thereof, no information has been furnished. A copy of the Manufacturing License Agreement entered between NML and NMIPL was obtained and examined (Annexure L4). The following clauses in the Manufacturing License Agreement deals with the rights and privileges of NMIPL to use of Trade mark and other intellectual properties of NMIPL. “2-1. Subject to the terms and conditions as herein provided and for
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the term of this Agreement, NML hereby grants to NMIPL;
in
the
TERRITORY,
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(1) Exclusive rights and privileges to manufacture and / or assemble, AUTOMOBILES
using
TECHNICAL
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INFORMATION disclosed to NMIPL hereunder;
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(2) Non-exclusive rights and privileges to manufacture and/ or procure
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LOCAL COMPONENTS and LOCAL SPARE PARTS, in the TERRITORY; and
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(3) Non-exclusive rights and privileges to apply, use or affix TRADEMARKS to or on AUTOMOBILES, LOCAL COMPONENTS and LOCAL SPARE PARTS in connection with manufacture and assembly of the same.” Article 14. Use of Information 14-1
NMIPL shall use TECHNICAL INFORMATION disclosed
to it by NML hereunder solely for the purposes of this AGREEMENT only during the term of this Agreement, and shall not, either during the term of this Agreement or thereafter, disclose, or permit or causes such technical information, included but not limited to those items listed in schedule-C to be disclosed to any third party without prior written consent to NML.
104
Notwithstanding the above, NMIPL may disclose technical information and such other information and data as provided by NML hereunder to suppliers of local components and/or local spare parts insofar as such disclosure is required for NMIPL to perform this agreement and unless specifically required by NMP not to disclose to any third party. 14-3
This agreement shall not be construed to grant any
license to NMIPL from NML with respect to various patents, trademarks, design patents, copyright and other industrial property
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rights used or embodied in automobiles and/or component parts
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other than to the extent to the right granted under Article 2 hereof.
15-1
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Article 15. Warranty and disclaimer
NML’s warranty with respect to technical information to
be disclosed hereunder shall be limited to the extent that technical
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information shall be such as is used by NML in its own
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manufacture and/or assembly of automobiles in Japan. It is observed that as per the license agreement, NMIPL has been
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given license to conduct the activities with respect to NISSAN products. It is specifically mentioned that the agreement does not grant any license to NMIPL with respect to various IPRs of NML. Further it is noted that most IP rights conferred under different related Acts are territorial, i.e. they have jurisdiction only in the country where the protection has been granted. Therefore, even if the parent company were in possession of IPR’s in their respective countries, the same would not automatically confer corresponding rights to OEM’s in India. The aforesaid license agreement entered between NMIPL and NML is primarily contractual in nature. In terms of IPR laws, for legal enforceability registration in India would be mandated for other than copyright.
105
It is noted that NMIPL has confirmed that they do not have any IPRs registered in India. From the information gathered during the investigation it has emerged that the designs and drawings of spare parts are capable of registration under the Designs Act in India. Therefore there would be limitation under the Copyrights Act on account of provisions of Section 15 (2) given above. Given the available facts and in view of the aforesaid provision, the protection of Copyright may not subsist in all Spare Parts. This aspect has been further discussed in detail in the
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main report (chapter VIII) and may be referred.
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It is noted that there are large number of spare parts which are
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being sourced from OES for which restrictions in terms of agreement are applicable. Based on the above facts and
IV
analysis it has emerged that NMIPL does not have any
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registered rights in India (other than may be trademark) under Intellectual property laws. Although there are no registration
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requirements for claiming copyrights, there are limitations in terms of validity as discussed above.”
105.
As far as Ford is concerned, we quote from the sub report on Ford as below: “Q.8
Do you have IPR required in India for all the spare parts for which restrictions on sale to third parties or requirements for prior permission for selling are imposed on OES.
Ans
We do not have IPRs registered for all parts for which restrictions on sale to third parties or requirements for prior permission for selling are imposed on the OES.
Q.9
In case of parts where the IPRs are not registered in India, how such restrictions are legally tenable. Please cite the relevant applicable provisions.
106
Ans
We are examining this question internally. No further response has been received.
Relevant extract of recording of statement of FIPL Q.17 With reference to your response to query 8 of letter dt. 30.01.2012, please confirm the parts for which IPRs have been registered in India. Ans. Refer to information submitted vide Annexure to letter dated 07.11.2011. The company vide letter dated 7.112011 had stated that they require
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time to collate all information with regard to IPRs covered spare parts
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as this require coordination with their counter parts in USA. The
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company had submitted an annexure containing a list of certain parts for which patents have been granted (11 titles) as well as parts of
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which patents have been filed (26 titles).
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During the investigation, the product development license agreement entered by FIPL with its parent company Ford Global Technologies,
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LLC was obtained (Annexure C8). The aforesaid product development and license agreement submitted by the company contains as follows:-
II.
License Grants
A.
“FGTL will make available to FIL Intellectual Property which is necessary for assembly of vehicles and the manufacture of vehicle assembles, subassemblies and components in its facilities. In acknowledgement of the Intellectual property used by FIPL, FGTL will collect a royalty on each Ford brand vehicle manufactured by FIL.
B.
In acknowledgment of the grants of a non-exclusive license under Intellectual Property (including improvements) from
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FGTL
to
have
Ford
brand
vehicles
manufactured,
to
manufacture Ford brand vehicles in its facilities, and to manufacture
and
have
manufactured
assemblies,
subassemblies, and components for vehicles, all as necessary to support its businesses. FIPL will pay a royalty to FGTL as provided herein.” It is observed that as per the agreement FGTL has been given a non exclusive license to conduct the manufacturing activities of the Ford products which includes vehicles, components etc. Further in terms of
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the agreement, FIPL is granted right to use intellectual property of
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FGTIL for which FIPL is required to pay royalty to FGTL.
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The aforesaid agreement does not specify the technologies, patent, know-how, copyrights, other intellectual property which are being given to the FIPL. Therefore, the specific technologies, patents, know
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IV
how etc which are covered by the agreement are not known. In this regard, it is pertinent to mention that the IP rights are mostly
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territorial, that is, they have jurisdiction only in the country where the protection has been granted. Therefore any registration of IPRs in the country of the parent company or other jurisdictions may not automatically confer IPR rights on FIPL in India. The aforesaid license agreement entered between FIPL and FGTL is primarily contractual in nature. In terms of IPR laws, for legal enforceability registration in India would be mandated for other than copyright. It is also observed that the company has furnished certain details of patents held and applied for in India. From the perusal of the list it is noted that patent has been granted with respect to 11 body parts. Apart from these applications have been filed with respect to approximately 30 parts but are yet to be granted.
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It has also been admitted during the investigation that FIPL does not have IPRs registered in India with respect to all parts for which restrictions are being imposed. In this context it may be relevant to mention that several OEMs have claimed copy rights in designs, drawings etc which are being provided by them to the OESs. Although no such claim has been made by the company it would be relevant to discuss this aspect. There are no requirements for registration to claim copyrights
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however, for Copyright to subsist in a “work” it must be compliant with the provisions of Section 13 of the Act. Further, Section 15 of the
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Copy Right Act, 1956 provides a special provision regarding copy
EL A
rights in designs registered or capable of being registered under the Design, Act 1911 which is found to be relevant and is reproduced
IV
hereunder:
Copyright shall not subsist under this Act in any design which
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(1)
is registered under the Design Act, 1911 (2 of 1911)
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(2)
Copyright in any design, which is capable of being registered
under the Design Act, 1911 (2 of 1911), but has not been so registered, shall cease as soon as any article to which the design has not been so registered, has been reproduced more than fifty times by an industrial processes by the owner of the copyright, or, with his license, by any other person.
From the information gathered during the investigation it has emerged that the designs and drawings of spare parts are capable of registration under the Designs Act in India. This aspect has been discussed in detail in the main report under chapter VIII and may be referred.
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Therefore there would be limitation on protection under the Copyrights Act on account of provisions of Section 15 (2) given above. Given the available facts and in view of the aforesaid provision, the protection of Copyright may not subsist in all Spare Parts of Ford brand vehicles. It is also observed that restriction are being imposed even in cases where the tooling cost is borne by the OEMs. As discussed above the Act provides for exemption for protection of rights which have been conferred under certain specific IPRs Acts mentioned under Section 3(5)(i). Hence, such contractual obligations may need to fall within the
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ambit of these Acts to qualify for exemption in terms of the Act. For the
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various reasons discussed above, the position would vary across
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agreements entered between OEMs and OESs depending upon the specific facts. Thus a blanket exemption may not be available under
IV
the Act on these grounds.
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There are large number of spare parts which are being sourced from OES and for which restrictions in terms of agreement are applicable.
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Based on the above facts and analysis it has emerged that though FIPL has submitted details of certain IPR’s in the form of patents registered in India which as per the information given cover only 11 body parts. The extent of coverage of these registered IPRs over the entire range of spare parts on which restrictions are applicable is very limited. It has been admitted by FIPL that they do not have IPRs registered for all parts for which restrictions on sale to third parties or requirements for prior permission for selling are imposed on the OESs. Although there was no registration requirements for claiming copyrights, there are limitations in terms of validity as discussed above.
110
For being covered for exemption under Section 3(5)(i) of the Act, the OEM needs to establish that the stated parts on which restrictions have been imposed, have been granted IPR’s as per the relevant Acts. During the course of investigation despite being given opportunity, OEM has not been able to substantiate the same. OEM needs to be subjected to strict proof regarding their possessing valid IPR’s with respect to each part for being considered for exemption under Section 3(5)(i) of the Act. Hence for these reasons, it does not stand established that FIPL
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possesses valid intellectual Property Rights in India w.r.t. all spare
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parts for which restrictions are being imposed on OES, in terms of the
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provisions of the various Intellectual Property Acts mentioned under Section 3(5)(i) of the Competition Act.” The Commission observed that the appellants needed to prove that the right
IV
106.
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which they were trying to put forward as an intellectual property right was rightfully characterized so and whether the requirement of the law granting the IPR was
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satisfied. The DG in order to examine these claims on the touchstone of these two considerations went to great length in his report. Section 3(5) of the Act allows an owner of intellectual property to impose restrictions which cause anti-competitive consequences to the extent that such restriction are ‘reasonable conditions’ and are ‘necessary’ for protecting such rights. The key words in Section 3(5)(1) of the Act are “reasonable conditions” and “necessary”. These phrases while allowing the freedom to put restriction on competitive behaviour, clearly limit the freedom to impose such restrictions. Further the exemption available to a person is limited to the six legislation mentioned in the provision. According to the investigation report a perusal of the agreement/purchase order/letter of intent entered by the OEMs with the local OES revealed that in most of the cases there were restrictions on the OES from supplying parts directly to third parties without prior written consent. Such
111
restrictions were also applicable in case of supply of spare parts directly by the OESs in the aftermarket. 107.
OEMs have stated in their defence that they have their intellectual property
rights embedded in the manufacturing of various spare parts in the form of patents, trademarks, copy rights and designs. They have also claimed that there are trade secrets and know-how which are transferred from the parent company to OEM and from OEM to OESs in the process of manufacturing spare parts, therefore, they have taken umbrage to Section 3(5) of the Act to impose certain restrictions which are necessary and reasonable. DG noticed that several OEMs did not have any
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registration under the intellectual property laws in India other than their trademarks;
W
few OEMs have registered/applied for registration of certain designs, patents details
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of which have been furnished and incorporated in sub reports; OEMs have also asserted that certain rights under intellectual property laws might be vested with their parents overseas companies. However, no specific details were furnished
IV
except technology transfer agreement entered with the parent company by Nissan.
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OEMs have also claimed IPRs in the form of copy right in the drawings, designs, specifications etc. for every spare part. Copy right is one of the main ground on the
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basis of which the proprietary right on spare parts is being claimed and thereby restrictions are being imposed. 108.
DG has concluded that even if their existed a copyright in the drawings
prepared by the OEM and shared with the OES; since the Article to which these drawings applied would certainly have been produced more than 50 times by an industrial process, therefore, the protection available under this provision would not exist. As far as designs are concerned OEMs have claimed protection on all designs by virtue of their drawings having been claimed under Copyright Act and designs which have been registered under the Indian Design Act. As we have seen Section 15(2) of the Act does not allow a copyright to be claimed as design, if the product is reproduced 50 times through an industrial process. DG has through an elaborate examination of jurisprudence on the subject concluded that appellants
112
were not successful in claiming protection under the Copyright Act on the products which were subject to reproduction through industrial process. He has cited Microfibers Inc. Vs. Girdhar and Co. and Anr. and Mattel Inc. and Ors. Vs. Jayant Aggarwala and Ors., and Dart Industries Inc. and Anr. Vs. Techno Plast and Ors. decided by High Court of Delhi (RFA (OS) No. 25/2006, FAO (OS) No. 447/2008 and RFA (OS) No. 25/2006), Samsonite Corporation Vs. Vijay Sales, decided by High Court of Delhi (IAS No. 1616/97 n& 2920/97 in Suit No. 379/97). The High Court of Gujarat in Devendra Somabhai Naik Vs. Accurate Transheat Pvt. Ltd. 2005 (31) PTC172 (Guj) held “When the law says that the Copyright shall cease as soon
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as an article to which the design has been applied has been reproduced more than fifty times, then the logical and intelligible interpretation would be that any article has
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been produced for more than fifty times applying the said design. Application of the
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design for manufacturing or creating an article would not mean that the design has been reprinted and has been posted on the body of the machine. The word, 'appli-
IV
cation' in the present context would mean that the knowledge has been
manufac-
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from the said design and that knowledge has been applied for
derived
turing a particular machine. We cannot have dogmatic approach in the present mat-
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ter when the law clearly says that the Copyright shall cease as soon as any article to which design has been applied has been reproduced more than fifty times. In the present matter indisputably after applying the design a machine has been manufactured at last 170 times very year. The logical conclusion would he that the copyright shall cease to have the effect. The Board was absolutely justified in directing deletion/cancellation of the said registration.” 109.
Thus as far as copyrights are concerned, appellants have not been able to
prove that they had the benefit of copyrights all through the period when they were using these drawings. As far as designs are concerned appellants have not been able to show evidence for establishing their analogy of all designs claimed by them. DG has further examined the issue of IPRs being assigned to the OEMs by their parent companies and whether there really existed such assignment and if so what
113
would be the protection available to OESs. Relevant portion of DG’s report is reproduced below: “There are usually large number of spare parts which are being sourced by each OEM from local OESs and for which restrictions in terms of agreement are applicable. Based on the above facts and analysis it has emerged that most of the OEMs do not have registration under the intellectual property laws as mentioned in Section 3(5)(i) of the Act. Although some of the OEMs have furnished details of certain rights in the form of patents, designs and trademark
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registered in India, however, the specific parts to which these
W
correspond have not been furnished. Therefore, the extent of
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coverage of rights claimed under intellectual property laws over the entire range of spare parts on which restrictions are applicable is not known. Intellectual property right under Copyright on design, drawing,
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spare parts etc., has been claimed by most of the OEMs with respect
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to all the spare parts to which restrictions apply. The OEMs have also placed reliance on the technology transfer agreements entered by the
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OEMs with their parent companies for justifying restrictions on the OESs. During the investigation these technology transfer agreements were obtained and perused. It is observed that most of these agreements contain confidentiality clause as per which they are required to protect the technical knowhow, IPRs etc of the parent company. In this regard, it is felt that these agreements are contractual in nature which have been entered between the OEM and their parents. From the context of the present issue under consideration it needs to be seen whether these agreements would enable the company to claim exemption under the provisions of Section 3(5)(i) of the Competition Act. It is noted that these
114
agreements do not contain any specific details of IPRs other than trademark which are being assigned to the OEMs. Therefore, the IPRs claimed on the basis of these agreements could not be verified. Further it is noted that most IPRs conferred under different related Acts are territorial i.e. they have jurisdiction only in the country where the protection has been granted. Therefore, even if the parent company were in possession of IPRs in their respective countries, the same would not automatically confer corresponding rights to the OEMs in India. Since the trademarks of the OEMs may be
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registered in India (some of the OEMs have furnished details) they
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may be justified in restricting the OES from selling spare parts using
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this brand name/logo without their permission. The provisions of Section 3(5)(i) of the Competition Act may be
IV
applicable for spare parts where the OEMs have established their
W .L
claims under various IPR legislations spelt out in mentioned Section. For the reasons stated above, OEMs have not been able to establish
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that they possess valid rights under intellectual property laws in India in terms of the provisions of various intellectual property Acts mentioned under Section 3(5)(i) of the Competition Act, with respect to all spare parts for which restrictions are being imposed on OES. In view of the above, claim of OEMs of exemption under Section 3(5)(i) of the Act has not been found to be fully tenable.” 110.
While appreciating the DG’s report, the Commission has focused on two
aspects of DG’s investigation, namely a.
Whether the right which is put forward is correctly characterized as protecting as intellectual property.
b.
Whether the requirements of the law granting the IPRs are in fact being satisfied.
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The Commission on the basis of DG’s findings has noted that none of the OEMs have submitted the relevant documentary evidence to successfully establish the grant of the applicable IPRs in India, with respect to various spare parts pursuant to which such OEMs have claimed the exemption under Section 3(5)(1) of the Act. The Commission has noted that even in those cases where the OEMs have registered/applied for registration of certain designs, patents however, the details of specific spare parts to which these correspond have not been furnished. Hence it has not been possible to relate these claimed rights under the applicable IPRs laws to individual spare parts that are protected. The Commission has concluded that in
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order to take benefit of Section 3(5)(1) of the Act the first test which is on the validity of the IPRs has not been passed by any of the appellants. The relevant portion of
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the Commission’s appreciation of the situation is quoted below:
“For the Commission to appreciate a party’s validly foreign registered IPR, in the context of section 3(5) of the Act, satisfactory documentary
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evidence needs to be adduced to establish that, the appropriate Indian
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agency administering the IPR statutes, mentioned under section 3(5)(i) have: (a) validly recognized such foreign registered IPRs under
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the applicable Indian statues, especially where such IPR statutes prescribe a registration process, or (b) where such process has been commended under the provisions of the applicable Indian IPR statutes and the grant/recognition from the Indian IPR agency is imminent.”
111.
On the issue of patents, during the investigation questions were put to OEMs
to describe all patents which were registered in their names or where applications had been filed with the Controller of patents in India. While Toyota and Ford gave lists of patents including existing patents and applied patents. Nissan did not produce any such list. DG has raised the issue of territoriality in this context. It is well known that patent rights are territorial in nature and therefore, the protection available to them is limited to the territory where they are registered. The list provided by appellants before the DG included a number of patents which either
116
existed in the names of parent companies and registered in the respective countries of their operation or filed in Registries there. Secondly there was no evidence on assignment of these patents. It was claimed that technology transfer agreements had provisions which showed that the patents had been assigned/licensed to the OEMs. However, no such evidence was produced which would have proved either the registration of such patents in India or their assignment/licensing to the Indian subsidiaries i.e. the OEMs. In such situations the claims of the OEMs were not tenable. There is no doubt that important trademarks are registered in India or some of them are under application and the protection in accordance with Trademarks
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Acts would be available to the OEMs. As far as the claim of trade secrets and knowhow is concerned India does not have relevant laws which allow protection to
112.
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remedy is available to the claimants.
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trade secrets and knowhow specifically, however, i.e. not to deny that common law
We confronted the learned counsel for TKM during his oral arguments to
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specifically address issues on territoriality and if there was any benefit which could
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be drawn by the appellant on the basis of the Patent Cooperation Treaty. However, we could not find a response which could dispel the conclusion drawn by the DG.
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The second group of products where the appellants claim similar protection relate to diagnostic tools, technical information, fault code, softwares and toolings made available to OESs for producing spare parts. As far as toolings are concerned protection has been claimed on the ground that tools are provided to the OESs to produce spare parts for exclusive use of OEMs automobiles and OEMs claimed intellectual property rights on such products. In the preceding paragraphs we have seen that the DG and the Commission have very extensively dwelt on the issue as to what extent the claim to IPR protection would have allowed OEMs to impose anti-competitive conditions on the OESs, therefore in case of diagnostic tools etc. also a similar inference would be drawn. 113.
The second aspect of this analysis looks at the necessity and the
reasonableness of these restrictions. One of the important arguments made by
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learned counsels for the appellants was that Indian aftermarket is full of counterfeit/spurious spare parts and by imposing these restrictions they were simply trying to check the potential of mixing of original with the counterfeit. They have also contested DG’s report and the Commission’s conclusion on some facts. For example it has been denied that TKM absolutely restricts all vendors from making sales in the aftermarket. However, it has been admitted that TKM does restrict these sales in some situations to introduce safeguard so as to ensure that spurious spare parts do not enter in the market and that its IPRs’ are protected and moreover such safeguards are applicable in very limited circumstances. The Appellants have argued that they cannot possibly place any restriction
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114.
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on those OESs who manufacture products using their own knowhow and
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technology, these are category 1 vendors who make generic parts such as batteries, tyres, spark plugs, shock absorbers, exhaust systems etc. and these are the products of the particular manufacturer (OES) and not products of OEMs. There
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are category 1(A) vendors who also manufacture their own products using their in
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house knowhow and technology though they may require specifications from appellants such as designs and dimensions. This is because such parts are
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developed by the category 1A vendor specially for each model of the vehicle and to the extent these category 1 vendors differ from those who supply generic parts in the market. According to the appellants just like category 1 vendor the products remain that of the manufacturers and are not the products of the appellants. TKM during its arguments have stated that if a category 1A vendor wishes to sale its products in the aftermarket, Toyota does not and cannot possibly restrict such sales since it is not the product of Toyota but the product of category 1A vendor. However, the only condition in such case is that such category 1A vendor should not use the Toyota mark on such products. The third category of vendor, according to Toyota is a contract manufacturer who is given the technology, knowhow, toolings etc. by the OEM. According to Toyota these are not vendors but contract manufacturers whose role is to manufacture a product on behalf of the main
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manufacturer who outsources some of its own manufacturing functions. These sub-contractors as a matter of fact are extension of OEMs factory. The business model of contract manufacturer is very different from other OESs who are independent manufacturer. Toyota in its written submission has stated that in contract manufacturing situation the EU vertical restrain guidelines specifically recognized the terms of the Commission’s sub-contracting notice of 18.12.1978 according to which where a sub-contractor undertakes to produce certain products exclusively for the contractor, they generally fall outside Article 101 (1) of the TFEU; if the technology or equipment is necessary to enable the sub-contractor to produce
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the products. The said notice clarified those restrictions which are acceptable in such situations. In para 2 of the notice it is stated that restrictions on providing the
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technology/equipment provided by the contractor to a third party or a condition to
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provide the goods resulting from the use of such technology or equipment to only the contractor would not fall foul of Article 85 (1) EEC Treaty. The long list of OESs broadly indicates two categories of vendors, those who
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115.
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may be manufacturing not only for one OEM but may be for several others and who have already established their brands and reputation in the market. There are
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others who could be exclusively manufacturing for one or two OEMs and depend on the OEMs not just for knowhow, technology but even for finances, at times. Their approach to marketing independently, products manufactured by them and the use of their brand names obviously is influenced by their status in the market. The contractual relationships between the OEM and these companies also varies. In the first case the relationship is mostly driven by purchase orders while in the second case a vendor development and purchase agreement may be resorted to. A glance across the responses made by these vendors shows that in all cases where technology/equipment/toolings/IPR dependence is on the OEMs they are not allowed to market the product independently. Some of the OESs in their responses have accepted that they voluntarily do not sell in the aftermarket independently. Some of them have alluded to the high cost of marketing infrastructure which would
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be required in case they wish to sell in the aftermarket. Some of the vendors are in product area which has long life and therefore, little aftermarket. In our assessment it will not be fair to paint all of these statements with the same brush. We have tried to capture some of the responses above. The general tenor of these responses could be summarized as follows: 1.
All cases where technology, knowhow, equipment, tools have been made available to vendors they are not allowed to sell in the aftermarket. In cases where vendors supply products which are already in
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2.
their stable but are made to specifications of the OEMs they are
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allowed only with the consent of the OEM. However, no such
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consent has been ever given. Some of such vendors have even stated that they have not ventured to ask for such consent. There are vendors who are established manufacturers of auto
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3.
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components and their presence in the aftermarket is noticeable
116.
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and they are allowed independent sales.
The first category noted above in order to be considered as sub-contractor
would have to be examined on the criteria of their exclusivity for the OEM i.e. if they have to be considered as extension of the OEMs factory? Are they manufacturing exclusively for a particular OEM or are they manufacturing for more than one OEM. If they are exclusively manufacturing for one OEM and are entirely dependent upon the OEM for knowhow, technology, designs, drawings, specifications, intellectual property even finances in some cases, than they could well be considered as sub-contractors and there is a rationale for them not to sell in the aftermarket. However, we do not see a rationale for those OEMs who produce to their own technology/IPR/equipment/tooling but only draw specifications such as designs and dimensions, to also seek appellants permission to sell independently in the aftermarket, as they can clearly market such products as ‘matching quality products’
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and would therefore, be entitled to make independent sale in the aftermarket. Undoubtedly in such cases they may have to forgo the use of appellants’ brand names. 117.
We need to reflect upon the issue of sub contracting. The phrase has not
been defined in any Indian law. Section 194 of the Indian Income Tax Act explains the phrase ‘work’ which can be considered broadly similar to the notion of sub-contracting. The European law is more explicit on this phrase particularly on its relevance in the context of the competition law. The Commission notice of 18th December 1978 concerning its assessment of certain sub-contracting agreements
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in relation to Article 85 (1) of the EEC Treaty, contains salient features of a
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legitimate but limited sub-contracting arrangement. Article 85 (1) corresponds to We quote from
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Article 101 of the TFEU which is akin to our Section 3 of the act. the Commission’s view,
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“In the Commission’s view, Article 85(1) does not apply to clauses whereby:
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-technology or equipment provided by the contractor (OEM in this case) may
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not be used except for the purposes of the subcontracting agreement, -technology or equipment provided by the contractor may not be made available to third parties, -the goods, services or work resulting from the use of such technology or equipment may be supplied only to the contractor or performed on his behalf, provided that and in so far as this technology or equipment is necessary to enable the subcontractor under reasonable conditions to manufacture the goods, to supply the services or to carry out the work in accordance with the contractor’s instruction.” 118.
The notice goes on to say, “However the restrictions mentioned above are
not justifiable where the subcontractor at his disposal could under reasonable conditions obtain access to the technology and equipment needed to produce the
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goods, provide the services or carry out the work. Generally, this is the case when the contractor provides no more than general information which merely describes the work to be done. In such circumstances the restrictions could deprive the sub-contractor of the possibility of developing his own business in the fields covered by the agreement.” Further, “However any undertaking by the sub-contractor regarding the right to dispose of the results of his own research and development work may restrain competition, where such results are capable of being used independently. In such circumstances, the subcontracting relationship is not sufficient to displace the ordinary competition rules on the disposal of industrial
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property rights or secret know how.”Though we do not have a corresponding law on the subject and resultant jurisprudence, this notice reinforces our understanding of
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the three situations listed earlier on OEM-OES relationship. As far as subcontracting
have been identified in this section.
Before we move on to the next sub issue under this section we must also
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is concerned it will have to be interpreted situationally though the basic contours
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reflect upon to what extent IPR based restrictions discussed above could be considered as reasonable restrictions. The restrictions apparently are being claimed
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for two reasons firstly to protect intellectual property from being released into the market with the apprehension that it may be copied and secondly with the apprehension that release of products into the aftermarket made out of intellectual property owned by the OEM may produce mixing of original and counterfeit parts and thereby mislead the gullible customers into buying counterfeit rather than original. In our view appellants have not been able to prove their case on both these criteria. As far as the first point is concerned protection of intellectual property by itself cannot be considered as a reasonable condition. In this context we need to consider the overriding character of the Indian Competition Act as articulated in Section 60 of the Act as well as the contemporary jurisprudence in advanced jurisdictions such as the European Union. As far as the second point is concerned the argument itself appears defensive and irrational. The DG report, the
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Commission’s order and a variety of documents presented on these files clearly show that there is a large segment of counterfeit/spurious automobile spare parts available in the aftermarket. If we go behind the reason for the aftermarket being significantly impacted by the non genuine parts, the primary reason would be very low pricing of counterfeit parts, huge supplies, besides, the lack of regulatory environment. One of the important ways, to regulate the supply of counterfeit product, inter alia, would be to release in the aftermarket, genuine products at reasonable price. We can say with definitiveness that genuine parts released by the OEMs into the aftermarket are highly priced. Thus, on the one side high price of
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these parts and on the other restraints on their supply in the open market contribute to the abundance of counterfeit parts. We do not deny the lack of regulatory
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environment in this respect. Therefore, it is necessary that situations where artificial
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constraints are being created on the release of genuine spare parts into the aftermarket, are addressed. In our opinion therefore, restrictions imposed by the
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appellants are not reasonable and they are definitely not necessary as the same
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purpose of protecting IPR’s can be achieved through contractual means and common law remedies. The DG and the Commission both have examined the
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potential impact of such restraints on competition in the market. It is clearly made out that restraint on supply of genuine spare parts in the aftermarket causes encouragement to the counterfeit industry to fill up the deficit in the market. Further availability to independent repairers is discouraged and all this leads to the customer not receiving the genuine parts, impacting safety and maintenance of automobiles.
OEM – Authorized Dealers 120.
The third category of agreements/arrangements reported by the DG and
examined by the Commission are the ones between OEM and the authorized dealers. The marketing structure in the automobile sector has been stated in an earlier paragraph. The DG has examined the dealership agreements in respect to the appellants, focusing on two aspects firstly whether dealers can undertake over
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the counter (OTC) sale of spare parts i.e. without necessarily requiring the cars to be service/repaired at their workshop and, secondly, whether there are any restrictions on the dealers to sourcing the spare parts. The third issue relates to treatment of warranty in case a customer exposes his vehicle to a non authorised service agency. No clause regarding the rights of the dealers to undertake over the counter sales of spare parts were found in case of Toyota. They have submitted that spare parts of Toyota cars are sold to customers over the counter at company authorized dealers. Further customers can get their vehicle serviced/repaired at authorized dealer or buy genuine service parts at the counter therein. DG
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addressed a questionnaire to relevant dealers as well as independent repairers. We quote from the sub report on Toyota below:
Are your authorized dealers allowed to sell the spare parts
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“Q5.
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including body parts manufactured in house over the counter without getting the car serviced at their authorized service
Yes, our authorized dealers are allowed to sell the spare parts
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Ans
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centre?
over the counter to our customer. Can any individual including independent repairers purchase
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Q6
the spare parts over the counter?
Ans
Yes
Q7
Is the above position true for all models of TKM?
Ans
Yes.
During recording of statement TKM was asked to furnish the data pertaining to the counter sales of the spare parts to substantiate their claim. The relevant submissions of TKM are as under: Q14
Please furnish details of sale of spare parts over the counter through your top two authorized dealers during the last financial year?
Ans
We shall revert in this regard.
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In response to the above query TKM vide there letter dt. 06.2.2012 has stated that: Under the present system, TKM does not monitor information about counter sale proceeds at its authorized dealerships. For the purpose of replying to this query, we have tried to capture this information from dealers and hence actual figure may vary as per dealer wise according. Dealer Service parts Counter Sales volume [Period: Jan-Dec 2011]. Top Dealers:
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1. Nandi Toyota Bangalore – Rs. 29 Million
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2. Wasan Toyota, Mumbai – Rs. 25 Million
During the investigation the response of multibrand workshops have
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been obtained. CarZ in their response has alleged that as per general
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understanding the spare parts of Toyota brand cars are available in a limited way only for older, phased out models like Qualis, however, they are not able to access the parts of Qualis. Further, CarZ stated
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that for new models of Toyota they have no option but to reject service. My TVS has also submitted that the spare parts of TKM are not available in the market due to restrictions. Carnation has contended that the spares of Toyota cars are not available at all in the after market and their availability is highly restricted and limited to Authorized Dealerships. Further, during the recording of statement Carnation informed that they have requested TKM for supply of Genuine Spare parts, but TKM not responded, as a result they are not able to undertake repairs and service of Toyota brand vehicles. Refer chapter VII and Annexure R in this regard. It is observed that there are no clauses in the agreement restricting over the counter sales by the authorized dealers and the data
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furnished by the company, suggests some sale of spare parts over the counter by the authorized dealers. However, contentions of the independent repairers indicate to the contrary. In terms of the definitions under Section 2 of the Act it is not necessary that the ‘agreement’ is ‘formal or in writing’. Enquiries carried out and submission of stakeholders bring out that the spare parts are not generally available over the counter and at best are being sold selectively. The OEMs and the authorized dealers may not be keen to sell the spare parts over the counter to prevent the
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customers from shifting to independent repairers. The sale of spare
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parts over the counter is in any case at the discretion of TKM and its
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authorized dealers.
Based on the above facts it can be stated that there exists an
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arrangement / understanding between the OEM and their authorized
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dealers regarding non sale of spare parts over the counter to individual customers/ independent repairers thereby amounting to
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exclusive distribution and refusal to deal agreement in terms of Section 3(4)(c) and Section 3(4)(d) of the Act.”
We also quote from appropriate Sections in respect to the Ford and Nissan sub reports: NISSAN a. “Assessment of over the counter sales of spare parts by authorized dealers During the investigation, the dealer agreement was perused (Annexure L1) and the following clauses are found to be relevant in this regard. Responsibilities for Genuine Nissan Parts and Accessories.
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Article 13-(a) Dealer shall not use Genuine Nissan Parts and Accessories for any purpose other than Dealer’s provision of the Nissan Services. Article 13-1(b) Dealer shall not, without prior written consent of Company, sells, directly or indirectly, Genuine Nissan Parts and Accessories to any Person, including other Authorized Nissan Dealers, in or outside Territory. Hence, it is observed that the dealers are required to use spare parts only for provision of aftersales service and are restricted to sell to others over
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the counter without prior written consent. It has been contended by NMIPL in their submissions that the counter
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sales can take place. During the investigation, the position of counter
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sales was checked with the company. The relevant submissions of the representative of NMIPL are given below. Are your authorized dealers permitted to sell the spare parts over the
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Q.6
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counter to any customer without necessarily getting the vehicle service there? Yes
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Ans Q9
Can independent repairers purchase the spare parts over the counter?
Ans
Independent repairers can purchase parts from Nissan Dealers.
Q5
Please furnish details of over the counter sales by your top five authorized dealers, as a % of total sale of spare parts by them.
Ans
Details are not available at NMIPL as the sale is directly done by individual dealer. Later in the response vide email dated 23.4.12 it has been stated:-
Ans. One of our Dealer M/s Ichibaan Motors Pvt. Ltd., Mumbai has done counter sales of Rs. 17445.51/-. The amount and frequency of counter sales of parts is very low as all our vehicles are still under warranty
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and all the customers are visiting dealer workshop for their vehicle repair. It is observed that there are clauses in the dealer agreement restricting over the counter sales by the authorized dealers without prior permission. The data furnished by the company, suggests some sale of spare parts over the counter by the authorized dealers. However, multibrand service providers such as Carnation Auto India Limited, CarZ in their responses have alleged that the genuine spare parts of Nissan brand vehicle are not available in the market. It has been contended that due to non availability
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of parts they have no option but to reject service of Nissan brand cars.
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(refer Annexure T and chapter VII of main report)
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Based on the aforesaid facts and analysis, it is observed that there are restriction in the agreement on over the counter sales by the authorized dealers without prior consent. Though it has been contended by the
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company that the spare parts are available over the counter at authorized
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dealers. Submissions of the independent repairers indicate that the spare parts are not being sold in the open market. In any case in the present
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scenario, the availability of spare parts is at the discretion of NMIPL and its authorized dealers. Hence, based on these facts, it can be stated that there exists an agreement between the OEM and the authorized dealers regarding use of spare parts only for purpose of undertaking service and repairs and non sale of spare parts over the counter to individual customer/independent
repairers
thereby
amounting
to
exclusive
distribution in terms of Section 3(4)(c) and refusal to deal in terms of Section 3(4)(d) of the Act.” FORD Q9
“Are the authorized dealers selling spare parts over the counter to customers including independent repairer? Can the customers get the
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spare parts from the authorized dealers without necessarily getting the vehicle serviced/ repaired? Ans
On a request from a customer, the authorized dealer would sell the spare part to the customer. However the dealership would also advise the customer to get the required repairs done through the dealership since the dealer would be equipped with the required skilled technicians, tools and equipments and the diagnostic procedure to do a quality service.
Q10
Please furnish detail of the over the counter sales of spare parts by
Ford India does not maintain the details. However, we can try to obtain
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Ans
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authorized dealers for the last one year.
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such data and furnish to this office.
The company vide reply 28.2.2012 submitted a soft copy of the data containing the countersales of its top five authorized dealers in this
Soft Copy provided vide email dated 28.2.2012 as the documents are
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Ans
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regard company’s statement is reproduced below:-
voluminous. The soft copy contains the data for top 5 authorized
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dealers namely Bhagat Ford, Metro Ford, Mody Ford, MPL Ford and Rajshree Ford.
Q11
Is there any communication from Ford India to the authorized dealers to sell spare parts only to customers and not to independent repairers?
Ans
We shall revert. Vide reply 28.2.2012
Ans
There is no restriction imposed upon the dealers in accordance with the Dealer Sales and Service Agreement (DSSA).
As per submissions made by the company, their authorized dealers can sell spare parts over the counter without requirement of getting the car repaired on a request from a customer. Individual billing details with respect to few dealers
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have been given. The company was asked to provide the consolidated over the counter data for each of these dealers. In reply the company stated that they do not maintain such records, therefore it could not be supplied. In the absence of data, it has not been possible to determine the extent of countersales.
Nevertheless
the
information
submitted
indicates
some
instances of over the counter sales by dealers. In this regard the multibrand service providers in their responses have alleged that the genuine spare parts of FORD brand vehicles are not available in the
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market. Carnation Auto India Private Limited has also submitted copy of email sent by them to FIPL requesting for genuine spare parts. It has been stated
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that there was no response from the company (refer Annexure T of main
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report).
As a result it has been contended that they are not able to undertake repairs
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and service of Ford brand vehicles. Other multibrand service providers such
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as CarZ, My TVS have also confirmed non availability of spare parts of Ford brand cars (refer Annexure T of main report). Automobile Air Conditioning
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Association vide letter dated 28.5.11 has inter-alia stated that they approached FIPL seeking their policy about the availability of car spare parts from the authorized dealers to the members of associations. FIPL replied stating that they do not encourage retail sale of spare parts. In this connection the association submitted the copies of the correspondences held with FIPL (refer Annexure IP5). One of the discontinued dealer of FIPL, Victoria Motors has stated that as per the provisions of the DSSA, they were prohibited from selling genuine spare parts and accessories (company products) to any other person for resale. It has further been submitted that the access to genuine spare parts and accessories over the counter and have them fitted by independent repair workshops. Such spare parts and accessories are sold only when they are to be fitted by authorized workshops.
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It is observed that there are no restriction in the agreement on over the counter sales by the authorized dealers. From the submissions of company and other available information it has emerged that it may allow counter sales to individual customers in special cases but to not permit sales to independent repairers. In any case in the present scenario, the availability of spare parts is at the discretion of FIPL and its authorized dealers. From the submissions of the various entities it is observed that the spare parts of the FORD brand cars are not being sold in the open market by the dealers. In terms of definitions under section 2 of the Act it is not necessary that the agreement is formal or in
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writing. Hence, based on these facts, it can be stated that there exists an arrangement understanding between the OEM and the authorized dealers
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regarding use of spare parts only for purposes of undertaking service and
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repairs and non sale of spare parts over the counter to others thereby amounting to “exclusive distribution agreement in terms of Section 3(4)(c) of
As far as sourcing of spare parts by authorized dealers is concerned, we
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121.
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the Act “refusal to deal” in terms of Section 3(4)(d) of the Act.”
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quote from relevant parts of the three sub reports below : TOYOTA
“Section I (V) Use of Genuine Service Parts and Accessories To ensure high quality, genuine and reliable service parts availability to the customers and to prevent trading in and supply of spurious products to the customers, it agreed between the parties that the Dealers shall not use, fit or supply any parts other than the Service Parts and Accessories, generally referred to as ‘Toyota Genuine Parts and Accessories’ for the purpose of any service, for the performance of any Warranty activities, for meeting the requirements of customers for Service Parts and Accessories, etc. Service parts shall mean such kind of products used for the after sale needs of the CBUs, generally referred as Toyota General Parts and Accessories,
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possessing the same or the same general type specifications as the ones used for the production purposes of the product. It is thus observed that in terms of the agreement, the dealers are required to use Toyota Genuine Parts and Accessories. During recording of statement, the company representative was asked the following: Q17
Are your authorized dealers required to procure the spare parts only through you?
Ans Our authorized dealers are required to procure Toyota genuine parts
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(which are manufactured with IPR of Toyota) only through us. Other
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parts can be purchased by our dealers directly from OES.
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It is noted that the authorized dealers of TKM Grace Toyota (Cosmic Motors India Pvt. Ltd., Gurgaon) and Arya Honda (Shaman Cars India Pvt. Ltd.), Mumbai have in their response stated that procurement of spare parts is
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done through dedicated software run by the OEM. From the aforesaid it has emerged that the dealers are required to use
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Toyota Genuine parts which can be sourced only from TKM. Hence, the authorized dealers cannot source such parts (other than proprietary parts of OES) from sources other than TKM. This amounts to exclusive supply agreement in terms of Section 3 (4) (b) of the Act.” FORD “Cl. 3 (e) Maintenance and Repair Service : The dealer shall perform all other maintenance and repair services, including, where feasible, body repair services, reasonably required by owners and users of company products. Cl6. OTHERS
PURCHASE
FROM
OTHERS
AND
SALES
TO
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(c) The Dealer undertakes to use Ford Genuine parts sourced from the Company and Ford Genuine accessories sourced from Company approved Suppliers, for servicing the Customer vehicles. The Dealer undertakes not to use non-approved parts in the servicing of the Company Vehicles and not to purchase or sell parts at the dealerships, other than Ford Genuine Parts, bought only form the Company. Any damage, claims or consequences safely issue resulting due to usage of non-approved parts, will be at the sole risk of the Dealer and any claim against the Company in
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this regard, would be indemnified by the Dealer, without explanation. Further, in the event of the Company becoming aware
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that on any particular vehicle, non-approved parts had been used
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while servicing by the dealer, the said vehicle would lose its warranty. All warranty claims made and approved by the Company
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on the said vehicle earlier would also be claimed back from the
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Dealer, with interest, along with a penalty equal to the warranty claim made. All claims from the customer, in this regard, shall be
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satisfied by the Dealer at his costs and consequences. Cl 1.
(g)
Definition
“Genuine Parts” shall mean parts supplied by the company or products of manufacturers or sellers approved by the company.
(h)
“Genuine Accessories” shall mean accessories supplied by the company.
(i)
Ford “Approved Accessories” means those accessories/products approved by the company and supplied by manufacturers or sellers approved by the company.
The reading of the said clauses of the agreement clearly stipulates that the genuine spare parts are to be sourced and bought only from FIPL. In view of the requirements, the authorized dealers cannot source the genuine spare
133
parts from other sources including the OES who could be supplying these parts to FIPL. In order to check the actual position, this aspect was also taken up with the authorized dealers of the OEM. This office has received response of one of the authorized dealers, Harpreet Ford, who in this regard submitted that they are restricted to purchase spare parts only from Ford India. Only some accessories and lubricants are purchased directly through OES based on advice of Ford. From the aforesaid it has emerged that the dealers are required to use the spare parts supplied by FIPL or authorized vendor/suppliers. This amounts to
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exclusive supply agreement in terms of Section 3(4)(b) of the Act.” NISSAN
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“From the perusal of the dealer agreement the following clauses are found to
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be relevant :-
Article 1. (h): “Genuine Nissan Parts and Accessories” means the parts and
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accessories for Nissan Vehicles offered for sale by Company to Dealer under
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this Agreement, which are listed in the Nissan Parts Catalogue, as from time to time amended or replaced and notified in writing by Company to Dealer.
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15.4 Dealer shall not use any item other than Genuine Nissan parts and accessories in its Nissan service operations on any Nissan vehicles or when appropriate, on other motor vehicles manufactured and/or marketed by or for Nissan. From the reading of the aforesaid clauses, it is observed that the dealers are required to use only genuine Nissan parts and accessories which are to be sourced only from NMIPL. This aspect has also been confirmed by one of the authorized dealer, Nath Nissan Delhi (Annexure L10). In view of the requirements, the authorized dealers cannot source the spare parts from other sources including the OES supplying these parts to NMIPL. From the aforesaid it has emerged that the dealers are required to use the spare parts supplied by NMIPL only. This amounts to exclusive supply agreement in terms of Section 3(4)(b) of the Act.”
134
122.
The OEMs have defended their action on three grounds firstly on the ground
of intellectual property rights, secondly on safety concerns and thirdly on account of lack of skills and accountability of independent repairers. As far as the issue of IPR is concerned we have discussed at great length in the preceding paragraphs and do not consider it necessary to repeat. On the safety aspect there is no denying the fact that genuine spare parts are the best solution to addressing the issue of safety hazards. The OEMs and representative of SIAM have highlighted the absence of any quality standard for spares to be used in aftermarket, and minimum qualification and license requirement for independent repairers. The Commission has
In case of agreements entered by few OEMs with their dealers
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“a.
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summarized DG’s observation on the subject as follows:
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there are specific clauses restricting/prohibiting sale of spare parts over the counter. The DG has found such agreements to be in the nature of exclusive distribution agreements and
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refusal to deal in terms of Section 3(4)(c) and 3(4) (d) of the
In several cases though there are no specific clauses in the
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b.
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Act. Such OEMs include, Fiat, Skoda, Nissan and Mahindra.
agreements entered by the OEMs restricting over the counter sales, however, the DG, based upon the enquiries carried out and submissions of stakeholders, have concluded that the spare parts are not generally available over the counter and at best are being sold selectively. The DG, therefore, alleged, that there exists an arrangement or understanding between the OEM and the authorized dealers regarding non sale of spare parts over the counter to individual customer/independent repairers thereby amounting to exclusive distribution and refusal to deal agreement in terms of Section 3(4)(c) and 3(4)(d) of the Act.
135
c.
There are clauses in agreements entered by most of the OEMs with the Authorized dealers requiring them to source spare parts only from them or their approved vendors. These agreements are found to be in nature of exclusive supply agreements in terms of Section 3(4)(b) of the Act.
123.
According to the DG report he did not find a restrictive clause in the
dealership agreements of either of the appellants. The DG’s findings have been summarized by the Commission as follows:
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Table 12
Toyota
No clause*
Ford
Availability of Diagnostic Tools
Warranty Conditions
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Counter sale of Spare Parts
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OEMs
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Agreement between OEMs and their authorized dealers Ability of Dealers to deal with competing brands
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Only available to Warranty invali- Restricted authorized deal- dated if repaired ers. by independent repairer
Only available to Warranty invaliauthorized deal- dated if repaired (DG based upon ers. by independent submissions of repairer multi-brand retailers and independent repairers have contended no such sales occur in practice)
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No clause*
Nissan
Total restriction
Restricted (However, 61 dealers have undertaken dealership of competing brands)
Only available to Warranty invali- Restricted authorized deal- dated if repaired ers. by independent (However, cerrepairer tain Nissan dealers have been dealing in competing brands)
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124.
The Commission has assessed AAEC of agreements between OEM and
authorized dealers. The relevant paragraphs are quoted below: “Assessment of AAEC of agreements between OEMs & Authorized Dealers 20.6.26
As already explained while assessing the AAEC of agreements between OEMs and OESs, in order to analyze the AAEC caused by agreements between the OEMs and the authorized dealers also, we have noted the factors
The rationale given by the OEMs for such restrictions, such
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20.6.27
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provided in section 19(3) of the Act.
as, (i) the independent operators may not possess the skills
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required to replace the parts and undertake repairs thereby causing health hazards, (ii) widespread availability of
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counterfeit parts; (iii) parallel resale network if established
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would conflict with the distribution network etc. The OEMs
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have submitted that the rationale behind their policies in restricting access to spare parts and diagnostic tools to independent repairers is to protect the automobile owners from the counterfeit and spurious spare parts market. The policy is to ensure that the automobile owner does not end up purchasing spurious/counterfeit spare parts in the mistaken assumption that he is purchasing a genuine spare part. It has been further submitted that the reasons provided by the OEMs to restrict availability of the spare parts and diagnostic tools are due to the fact that technologically advanced vehicles require specialized skills, infrastructure, regular training which is available only at the authorized dealers, and the OEMs have submitted that even if genuine
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spare parts are purchased by customers over the counter, but they are fitted in the vehicle by an untrained or unskilled person, the fitment of the part may not be done properly and the car may develop even more serious safety defects. The OEMs have submitted that it would be practically impossible for the OEM to ensure that once the customer buys the genuine spare parts “over-the-counter”, it would be fitted correctly using the approved procedures in the open aftermarket that comprises thousands of unskilled and
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untrained mechanics. This is more relevant in respect of safety critical parts e.g. engines, brakes, etc. It is also
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practically impossible for the OEMs to try and cover these
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thousands and lakhs of roadside mechanics and garages in their training and skilling activities. However, the Commission is of the view that access to
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20.6.28
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spare parts and diagnostic tools cannot be restricted due to
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greater public good. The presence of spurious parts/health hazards should not be used as an argument to deny consumer choice. Every car owner (consumer) should have a choice to make a rational decision after taking into account the costs and benefits into account. A Mercedes owner may be less concerned with money he is spending in repairs and more averse to risk of spurious parts as compared to an owner of Maruti/Honda Brio. The choice of ‘whether to go to an Independent Repairer or Authorized Dealer’ should not be taken away in the guise of consumer protectionism. Further, the Commission is of the view that it would be wrong to presume that the entire set of aftermarket repairers is a monolithic group of service
138
providers. As evident from the table below the total number of after sale service providers may be divided into various categories,
including,
OEM
authorized
dealerships,
multi-brand retailers and standalone neighborhood garages.
Number of workshops
OEM authorized
19000
Multi Brand Dealers
950
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Type of Service Centre
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Semi- Organized Service Sta- 60000
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tions
Neighbourhood Garages / Un- 300000
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organized service providers
Source:
The Indian Automotive Aftermarkets study,
2011 As per the DG Report, the Indian automobile aftermarket is serviced by several multi-brand retailers, who have the same
scale
of
operations,
in
terms
of
finances,
infrastructure and workforce, as many of the OEM authorized dealer workshop. These include Bosch Car Service, Carnation Auto India (Pvt) Ltd, Vahan Motors (Pvt) Ltd and TVS Automobile Solutions (Pvt) Ltd. Therefore, the argument submitted by several OEMs that even if spare parts are available over the counter, the cars could develop fitment defects when serviced by unskilled independent
139
repairers cannot be accepted entirely. For example, a Mercedes car owner may not avail the services of a local garage owner, due to lack of technologically advanced diagnostic tools required to service a Mercedes brand car, however, the Mercedes car owner may be inclined to get his Mercedes car repaired from the repair shop of a multi-brand repairer, since he may perceive that such repair shops are providing comparable repair jobs to that of the Mercedes authorized workshops. Alternatively, a Honda Brio owner
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may avail the services of the local garage repair shop, because, in the estimation of a Honda car owner, the local
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garage technician has enough skill and training to
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service/repair his Honda branded car. At the present state of affairs neither the garage owner nor the multi-brand
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repairer has effective access to spare parts or diagnostic
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tools. Therefore, both the owner of a Mercedes car as well as the owner of a Honda Brio car is forced to avail the
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services of the authorized dealers.
20.6.29
Based upon submissions made by the OEMs in reply to the queries raised by the Commission in its order dated May 28, 2013, the Commission is of the opinion that since substantial segments of car owners shifts to unauthorized network for their repair and maintenance needs once their warranty expires, absence of genuine spare parts, tools leads to rise in usage of spurious spare parts thus jeopardizing the safety of car owner and leading to high emissions. Therefore, the fact that the OEMs restrict the access of spare parts and diagnostic tools in the Indian automobile aftermarket, coupled with the fact that all OEMs
140
substantially mark up the price of their spare parts, is responsible for the shift of car customers to spurious parts. During the course of the investigation, several multi-brand service providers have submitted that one of the primary reasons for substantial segments of car owners to shift to unauthorized network for the repair and maintenance of their cars in the post-warranty period, is the absence of genuine spare parts and diagnostic tools leading to the rise in usage of spurious spare parts, thus, jeopardizing the
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safety of car owner and leading to high emissions. Further, SIAM has submitted to the DG that there is a serious
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problem of spurious parts in the Indian automobile
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aftermarket with approximately 35 % of the spare part in the aftermarket being counterfeit. The Commission is of the
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opinion that a large number of the customers of each of the
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OEMs avail the services of independent repairers, due to high mark up of the genuine spare parts and the
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requirement to avail repair services from the authorized dealers of the OEMs. The OEMs: (a) by restricting access to genuine spare parts and diagnostic tools leads to the rise in the usage of spurious spare parts and (b) by denying the independent repairers access to repair manuals force them to work on inefficiently, jeopardizing consumer safety. Further, the Commission is of the opinion that the clauses in agreements requiring authorized dealers to source spare parts only from OEMs or their approved vendors is anti-competitive in nature. Based on the foregoing, there is no doubt that by restricting access of independent repairers to spare parts and diagnostic tools and by denying the independent repairers access to repair manuals, the
141
agreements entered into between OEMs and authorized dealers have fallen foul of the provisions of section 3(4)(b), 3(4)(c) & (d) read with section 3(1) of the Act. 20.6.30 Besides, it may be noted that the DG has also found contravention of the provisions of the section 3(4)(b), 3(4)(c) and 3(4)(d) of the Act, with respect to agreements entered into between OEMs and their authorized dealers, restricting the ability of such dealers to deal in competing products. The Commission, however, is of the opinion that the root of anti-competitive
conduct
complained
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the
of
and
em-
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investigated by the DG, in the present case mostly
as
au-
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anates from and is localized in the aftermarket for
tomobile spare parts and repair services, respectively. The Commission has not considered any issues relating to the
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primary market for sale of cars in the present case. Since
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the issue of ‘single-branding’, or the restrictions as imposed
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by the OEMs, restricting the ability of their
respective
authorized dealers to deal in competing products, is an issue related to the primary market for automobiles, the same is not being examined by the Commission in the present order.
20.6.31 Before parting with the assessment of AAEC of various agreements entered into by the OEMs with their OESs and authorized
dealers,
the
Commission
would
like
to
emphasize that the efficiencies of the selective distribution system claimed by the OEMs need to be analyzed in perspective of the ability of the restrictive clauses to create foreclosure effects and barriers to entry in the market. Article 101(3) (of the TFEU) (analogous to section 19(3) of
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the Act) provides that an agreement, containing restrictive clauses which ‘contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit’, will cause AAEC if such restrictive clauses ‘afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.’ Therefore, the agreement as a whole must not lead to the elimination of competition. The criterion of
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attempting to balance the efficiency gains and the foreclosure effects of vertical agreements is to reflect the
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view that short term efficiency gains must not be
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outweighed by longer-term losses stemming from the elimination of competition.” While addressing the issue of OEM authorized dealer agreement, we need to
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1.
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look at the following issues:
2.
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125.
Whether authorized dealers are allowed to sell spare parts to customers and independent repairers over the counter. Are there any restriction on authorized dealers in sourcing spare parts?
3.
Whether warranty policy is implemented to the detriment of customer interest.
4. 126.
Whether independent repairers have access to spare parts.
In our discussion in the earlier paragraphs we have seen that DG has
concluded that authorized dealers are not allowed to sell spare parts over the counter to anyone who approaches the authorized dealer. This is particularly so when independent repairers approached the authorized dealer. It has been further
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alleged that even customers cannot access spare parts unless they get the maintenance/service done by at the authorized dealers’ service station itself. DG has drawn upon the statements and responses of authorized dealers of appellants and independent repairers.
127.
Toyota alluding to its Vice President Customer Service Group Shri Mahesh
N. Salkar who was examined on oath has stated that, Toyota’s authorized dealers are allowed to sell the spare parts over the counter; any individual including independent repairers can purchase the spare parts over the counter and further that it is true to all models. Toyota also submitted tentative data on over the counter
From the statement made available by Toyota it can be seen that over the
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128.
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sales of some of its dealers.
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counter parts sales at some Toyota Dealership, during 2011 as a percentage of total service parts sales ranges between 1% to 17%. It further expressed anguish
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that DG did not examine even a single authorized dealer or customer of Toyota.
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They have argued that despite these facts the Commission accepted DG’s erroneous findings to state that in practice authorized dealers would not be allowed
129.
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to sell spare parts over the counter.
DG has examined almost all multi brand independent repairers. Bosch car
service is a multi brand car repair network which offers service as leading car workshop to make available genuine Bosch auto parts and quality service to the consumer. Bosch makes available Bosch manufactured parts and diagnostic tools which are specifically needed for Bosch auto parts as and when required by the service station. Since Bosch has no control over the management and operations of these service stations it could not comment on non Bosch manufactured parts. Carnation is the other major multi brand independent repairer. Carnation has responded to the questionnaire circulated by the DG. In their response to the questionnaire Carnation has made following statement:
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1.
Carnation services almost all brands of vehicle, the list includes Ford and Toyota.
2.
Primarily the models serviced by Carnation cost less than Rs. 12 lacs. They are restricted in their service of more expensive models as they do not have access to technical manuals, diagnostic tools, special tools and equipments. Out of the five OEMs whose brands were serviced by them in the month of April, 2011 3.9% vehicles were from the Ford brand, other brands were (40.7%),
Hyundai
(21.3%),
Tata
(13.2%),
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Maruti
Mahindra & Mahindra (4.9%).
They have stated that they have insistently pursued with
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3.
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manufacturers for supply of spare parts over the counter or without a job card but have failed including with the
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present appellants. They have reported that spare parts,
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parts catalog, special tools and diagnostic tools were not available from Toyota and Ford. They have stated that
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spare parts availability from Maruti, Tata, Hyundai and Mahindra is far better. They have further stated “in some instances some dealers have agreed to supply us the parts after opening the job card on their system including the corresponding labour charges. Besides curtailing competition, we do not have access to the parts catalog since they are only provided by manufacturer on a chargeable basis. These are available with authorized dealership in the form of booklet or electronic catalog.
4.
They have further stated that special tools are necessary for repairs which are not made available in the aftermarket. Similarly technical manual and workshop manual are also sold by the manufacturer only to their
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dealers and are not available in the aftermarket. “the non availability of diagnostic equipment allow the authorized dealers to overcharge the customers since they have no or limited alternatives outside the dealer network. In certain cases customers are forced to replace parts instead of repairing them given to manufacturer recommendation bringing up the total cost of repairers for the customers.
On asking how they procured spare parts of various cars directly from car
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130.
manufacturer/OESs or from dealers/stockist/authorized workshops, Carnation has
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responded as follows:
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“Spare parts requirement for Carnation multi brand auto service centers is catered through procurement from two channels: OES Suppliers: Spare parts procurement from OES supplier is
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▪
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limited to few car manufacturers (Maruti, Tata, Hyundai and M&M) and is restricted to a few part lines only and certain ge-
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ographical regions. OES parts availability in aftermarket is primarily for parts used in General repairs (Filters, shockers, pads etc.). Sheet metal parts, body parts, Engine and transmission parts are not available in aftermarket through any OES suppliers.
▪
Authorized
distribution
channel
of
OEMs
(Dealers/
Distributor/ Stockiest): Spare parts procurement is carried out from authorized channels of OEMs for certain manufacturers only (Maruti, Hyundai, Tata and M&M). However, the availability is based solely on the discretion of the Distributor
146
and there is significant resistance in certain regions for distribution of spare parts of these manufacturers. The spare parts for manufacturers like Honda, Toyota, Skoda, Volkswagen, Ford & premium car manufacturers e.g. BMW, Mercedes and Audi are not available at all in the aftermarket due to restrictive policy of these OEMs.” 131
While explaining the current scenario on availability of spare parts Carnation
has stated that Maruti, Tata and Mahindra & Mahindra sell spare parts through their
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own distribution channel. Finally in their statement Carnation has reported that they have adequate trained man power and skills to carry out repairs of all car brands.
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However, because of restrictions on the supply of spare parts and diagnostic tools
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etc. in the aftermarket they have not been able to do so. They are also cheaper generally by 10% over the corresponding rates of OEM dealership. Carnation has
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also supplied several invoices which apparently indicate job work by the authorized
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dealership for different car makers. It can be seen from these invoices that labour charges and service tax have been levied indicating that these invoices were made
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in pursuance to the job work which was supposedly done by the authorized dealership. Shri Dheeraj Wadhwa, General Manager (supply) of Carnation was also examined on oath by the DG. Perusal of the statement shows following: 1. There are two kinds of constraints in undertaking repair work by independent repairers which are (1) absence of workshop manuals and catalog prepared by the manufacturer and presently made available only to their authorized network. (2) absence of availability of recommended or approved spare parts required for general repairs and job repairs.
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132.
He categorically mentioned that specific parts of the requisite quality at
reasonable price and timely delivery are a continuous challenge and the success rate is marginal. However, this is confined to manufacturer Maruti, Tata, Hyundai. This is largely because these company models have a very high percentage of local production. In case of other manufacturers even the fast moving parts are not available. In case of body parts which are largely manufactured by OEMs inside their production facility there was no alternate source of supply in such situation customers are left with no choice but to get the repair done only by their authorized workshops. In terms of value it was stated that general repair parts would constitute
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40% and body repair parts 60% excluding labour costs. It was further stated that OEMs like Maruti, Tata and Mahindra & Mahindra have their own distribution
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network accessible to aftermarket which was in addition to their own authorized
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workshops. Sourcing of spare parts from these distributorships is much cheaper than from the authorized dealers. We quote a part of the statement made by Mr.
It has been contended that technical manuals, diagnostic tools,
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“Q9
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Wadhwa below:
spare parts are not being made available by most of the OEMs
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outside their authorized network. The same could be on account of the patent rights that these companies, lack of skills to handle such parts and the safety concerns emerging thereof. What do you have to say about this?
Ans
Substantial segment of car owners (approx. 40%) shift to unauthorized network for their repair and maintenance needs once their warranty expires. In absence of above mentioned tools and skills this leads to rise in usage of spurious spare parts thus jeopardizing the safety of car owner and leading to high emissions.
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OEM should allow the access for their spare part catalogue, diagnostic tools, workshop manuals and ensure the availability to organized aftermarket workshops as per the same terms and conditions laid down as given to their authorized workshop network. Most the manufactures do not have extensive network covering large number of this cities in the country with the result that car owners are deprived of quality service and support of their car. It is to be noted that even today the car owners are visiting the
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neighborhood workshop post warranty irrespective of the level
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of the skills of the technicians and the quality of the spare parts.
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The issue is should not that why not facilitate the unorganized sector to improve the quality of the skill and quality of work in
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the interest of the car and its owners.
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We may also like to mention that after a prolong debate European Commission has issued direction to all OEMs to
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provide manuals diagnostic tools and spare parts to any customer or any other agency on the same terms and conditions as they are provided to their own network. We need to mention that various research shows that of the total cost of the ownership of the life of the car one third is estimated to the price of the new car one third is the cost of fuel for running the car and one third is towards all elements of repairs etc. during post sales and life of the car therefore, the burden on the car owner for maintenance of car is substantial because it is on third. As far as the question of patent R&D is concerned our understanding is the most of the R&D and the technological
149
improvement
are
undertaken
by
major
component
manufacture. They supply their components to the OEMs depending on the specifications on the particular car. By and large the quality of the product is common to all OEMs except the design and the fitment specification is different. It is our understanding that even if the OEM were to have some right on patent and IPR the same is forgone once he has provided to his own network. The question now is to provide, on the same terms and conditions to users other than his network. How are you serving the customers in case some of the spare
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Q12
There have been several cases in which authorized dealers re-
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Ans
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parts are not available in the open market?
fuse to sell those few spare parts over the counter. In such
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cases we had job card open in their workshop and they give us
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those spare parts along with charges for the labour. In such cases in order to meet the customer we were substantially out
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of pocket. In support of this we would like to submit few instances which are placed here. For example: Honda, Surat Bumper purchased (Honda City) From Land Mark Automobiles Pvt. Ltd. vide Invoice no 1/TAX/SRT/11-12 dt 22.04.2011 raised on Carnation Auto India Pvt. Ltd. Dealer has raised Invoice (Bumper Rs. 5691+Labour= approx. Rs. 600). Though no labour was availed constraint to paying for labour in order to buy the part to meet the service need. - - - - - -
Q13
Have you approached the OEMs seeking access to their spare parts and what has been their response.
150
Ans
We have requested the OEMs mention below for supply Genuine Spare parts. Maruti Mahindra TATA Ford TKM Mobis (Hyundai) Fiat Volkswagen Honda Skoda
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General Motors
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Copies of letters/e-mail have been furnished vide letter dated
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08.07.2011. Response was received only from Mahindra, Mobis, Fiat, Volkswagen. Out of these Volkswagen, Fiat
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informed that they do not supply genuine parts outside their
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authorized network. Copy has been enclosed. Hyundai informed that they are meeting the requirements of the
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market though their authorized dealership currently. Mahindra indicated that other than Scorpio and Logan parts, they could supply. No response received from Maruti, TATA, Ford, TKM, Honda, Skoda, General Motors.”
133.
The DG has also examined other multi brand independent repairers TVS
automobiles Solutions Ltd. which offers multi brand repairers under the brand name My TVS, in response to a question reported as follows: “Parts are available from four sources, but each has their own issues and challenges.
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o The vehicle manufacturer themselves. While availability per se is not an issue, the price is so structured that the independent players are at a disadvantage vis-à-vis the authorized network. o From Tier 1 suppliers (those who supply to the vehicle manufacturers and to the outside market in their brand names) o Other parts suppliers who make good and quality products. They generally do not have the approval to supply parts to the vehicle manufacturer and brand power that others have. o Imported sources. There are good parts available. Landed cost
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of most of them is higher than local MRPs. They face resistance
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from customers as their reputation is not known.
consistent.
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o From other sources. These are not always reliable and are not
There are situations where parts are just not available outside the
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authorized network.
These vary with Car Brands and are indicated in the table attached.” In response to a query on which vehicle manufacturers make available spare
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134.
parts, tools and fault codes, My TVS responded in the form of a statement according to which the response for present appellants Ford and Toyota is mentioned as ‘not tested’, inconsistent. Only Maruti, Tata, Hyundai were reported to be making their parts available from different sources. We quote below from the responses received by the DG from My TVS: “7)
Where feasible, parts are procured from Car manufacturers’ dealers and distributors. The margins are less. This puts the multi-brand chain to a strain as these parts have to be fitted some time.
8)
Other than purchases from Tata Motors Limited, most other parts are purchased from distributors of vehicle manufacturers
152
or their tier 1 suppliers. Some parts are purchased after testing and authentication. In case of overseas sources it is done through their importers. Hence it may be neither possible nor relevant to give a list of suppliers. 9)
We have not taken up at the very senior level with vehicle manufacturers. However, we have been discussing with their Service Heads and we understand that some of them have policies which do not encourage sale of spare parts to outside
10)
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market. We do not have any written correspondence. Technology can be sourced through alternate means such as
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from component suppliers and even from overseas. But
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generally, once the knowledge is available for similar type of cars, senior technicians can be trained to handle the other cars.
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The matter gets easy because not all cars are highly
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technology oriented and not all repairs wanted by customers require specialized knowledge. Therefore we are able to repair
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a large makes and models of cars. But the spare parts availability is a real issue that limits our ability to give effective service to sizeable makes and models.
11)
The cost of after sales service, repair, etc in independent workshops like ours is definitely lower compared to authorized workshops. This is so even in advanced countries such as US. Our belief is the dealership model in vogue here requires service to make high profits to enable meet the overheads of their vantage locations in contrast to frugality of our operations and smaller size enables our workshops to give customers rate benefits from 30% to 50% depending on the make and model of the car. In respect of body repairs and insurance repairs this
153
is uniformly true. However, we do not have authentic comprehensive statistics for the same. 12)
TATA Motors Agreement enclosed
13)
These are ➢ Availability of the right parts at reasonable margin ➢ Access to information on OE part numbers, comparable alternate part numbers from other suppliers, parts
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catalogues and authentic price lists
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➢ Skilled workmen
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➢ Technical knowledge and possibility of continuous or periodic updation of the same
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➢ Availability of the right tools and equipments
With the growth in the no of passenger cars under various
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14)
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➢ Financial and managerial resources
brands across the country, providing quality service to the car owners at reasonable cost becomes necessary. The presence of the multi-brand car repairers like our company, would supplement the limited number of service Centres authorized by the car manufacturers and thus provide the car owners opportunities to avail the services from a larger number of car repairers at competitive cost. To make this effective, the multi-brand car repairers should have unrestricted access to various
auto
components
manufacturers.(Emphasis supplied)
from
the
respective
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We also believe an effective competitive environment for service and repairs is in the long term interest of the nation, consumers, manufacturers and parts suppliers alike. For example the Automotive Aftermarket Industry Association, US have an on-going lobbying for a “Right to Repair” bill that would require car manufacturers there to share codes, knowledge etc. The competitive law in US requires car manufacturers and car parts suppliers to supply parts to aftermarket without restriction and hence their priorities are different.
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We have some access to knowledge, happenings and
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movements in this direction of similar issues in even advanced
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markets such as UK, Europe and US and would partner with CCI to bring about similar environment here too. We would like to participate in this exercise and would be too glad to give a
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white paper to you on Support and the issues the Multi Brand
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Service Networks face in the Indian Context in person and contribute to healthy development of an eco-system for
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effective and economical use of resources and reach of service to ever spreading automotive users in the nooks and corners of the country.”
135.
President of TVS Automobiles Solutions Ltd., R. Srivatchan was examined
on oath by the DG. Relevant parts of his statement are reproduced below: “Q2
It is understood that TVS Automobiles Solutions Ltd. (TVS ASL) is under taking after sale service of multi brand vehicles. Further another group company TVS & Sons is undertaking service as authorized dealers of certain car manufacturers. Please explain the distinction b/w the two models.
155
Ans
Through years of our experience we have come to an understanding that for a corporate like TVS the dealership operations involving sales of vehicles is not remunerative as sometimes even negative return on capital is experienced. As a rule the sales operations tend to give below economic levels of returns of the capital investors. In this regard I would like to place on record the note titled Automotive service market. We realized that it is the service market which is the economically viable and have chosen a business which will focus exclusively
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on servicing of cars. Since the warranty on cars get negated by authorized network if they are serviced outside during the
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warranty or extended warranty period we have chosen to
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attend to post warranty cars for service running repairs and accident repairs.
Have you exchanged any correspondence with the OEMs other
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Q3
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than Tata Motors, for being their authorized service centers as
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a multi brand car service provider?
Ans
In the interest of good relationship we informally sound our intensions with the OEMs. Only when we get a positive reception
we
will
formally
enter
into
correspondence.
Unfortunately, we have not reach the stage with any other OEMs. Q4
As a multi brand repair / service chain what are the major constraints which are being faced by you in undertaking after sale service.
Ans
The constraints are many I will list some of them. In all these cases our interest is to create collaborative space with car OEs so that we can play effective role in avoiding spurious parts.
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Imperfect repairs by people who do not understand the emerging technology of cars
though our repairs are of a good quality and with quality parts the authorized network partners discourage the customer saying that our repairs were not good and the parts used as substandard. This puts off the customers from visiting us next.
there is a fear that the warranties will be nullified in case
spare parts are not freely available. Even if they are made
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their cars are repaired with us.
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available they are at very low margin, generally delayed and most often only when proper explanation is given. as a rule, barring Maruti and Tata Motors parts
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catalogues, parts numbers etc. are not shared and are not freely available.
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Q7
the diagnostic tools are not made available and the tool distributors are allowed to sell it only to their authorized dealers and nobody else. (Emphasis supplied)
It is understand that some of the car manufacturers have their own distribution network for spare parts in aftermarket. What is your feedback on availability of spare parts through these networks?
Ans
To the best of our knowledge such distribution network was available for Maruti, Tata Motors, General Motors, Hindustan Motors in the past. Recently, Hyundai Motors through Mobis have started distributing this. In all cases the margin available is much lower than for authorized network. Because of this
157
frequently we lose either the customers or are forced to do the job but low margins.” What is the position regarding availability of body parts? o Detailed list with respect to specific OEMs has been enclosed. Non availability of majority of the parts & limited availability in certain cases, largely restricts the insurance business (ANX – I)
Are you in a position to undertake complex repairs of all brand of cars?
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o We are not in a position to do the same for higher end
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models because of restricted availability of parts,
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diagnostic & special tools. Detailed list on the same has been enclosed. (ANX – II)
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Please furnish detailed information regarding availability
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of spare parts, toolings, manual etc. with respect to all OEMs in the format given herewith. o Detailed list in the mentioned format is enclosed (ANX-1)
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Are there any implications in warranty in case the customer wants to get his car repaired/serviced from you during the warranty period? o Generally we don’t undertake repair/service of cars which are under warranty. This is because we fear that the customers may face difficulty in enforcing the warranty claims. Many customers have expressed their fears in this regard, during their interaction. Even during regular service, if by chance the cars were taken to dealership workshops, we find that dealership service personnel scare the customer saying that the parts are not of good quality or the repair quality is not up to the
158
mark and the entire repairs may need to be re-done. Though we don’t have documentary evidence of the same, we have come across instances where customers were made to understand that their warranty may expire because of repairs carried outside authorized network. How are you serving the customers if spare parts are not available in the open market? o Depending on the brand & make we have different approaches towards serving customers. The several
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alternatives that are followed include: obtaining directly from component manufacturers or alternate OE supplies;
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certain parts can be imported from other countries; at
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times we also have to deal with traders who sell parts at a premium in after-market. Detailed list on the same is
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enclosed. (ANX –I)
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In case parts are not available despite trying all the above, we send the vehicle to car dealers or respective
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authorized workshops for undertaking the repair. Car dealers carry out the specific repairs and change respective parts and release the car in the name of customers. We hand over the car to customer after completing balance repairs. Bill provided by the dealer workshop is added to the customer bill for reference. However, there is no guarantee that this can happen uniformly.
Have you approached the OEMs seeking access to their spare parts and what has been their response? o Spare parts are available for Maruti, Tata Motors, Hindustan Motors and recently from Mahindra & Mahindra – mostly through their distributors/dealers. For
159
some of the OEs like Hyundai & Toyota, selective range of products is available. However, the response from others has not been positive so far. It has been contended that the technical manuals, diagnostic tools and spare parts are not available by most of the OEMs outside their authorized network. The same could be on account of patent right that these companies own lack skills to handle such parts, safety concern emerging thereof. What do you have to say about it
.IN
o To the best of our knowledge it is not due to patent rights. Training may be relevant in case of using
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diagnostic tools. However, it should not be an issue with
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spare parts & fitment. Safety concerns are largely reduced if repairers have access to genuine parts &
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related information/tools. It is the lack of availability that
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is more important towards safety concerns.” (Emphasis supplied)
Specifically commenting upon the availability of spare parts and diagnostic
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136.
tools My TVS reported as follows: CCI FORMAT – OE SPECIFIC INFORMATION Sl.
Brand
Spare parts
Catalog
No.
Special
Technol-
tools
ogy/
Manual Work-
DiagnosGenuine
Technical
shop
Branded Not
Body parts
tic tools
Genuine
Branded
Not Branded
Limited
Not Available
Available
branded
4
Ford
Limited
Limited
India
availabil-
availabil-
Ltd.
ity new
ity
Available Not
Not
Available Available
Limited
Availa-
Not
availabil-
ble
Available availa-
ity (only
bility
models
on engine
new
(Thailand)
& not on
models
ABS/BCM
(Thai-
)
land)
160
Sl. No.
Models/Make
All repairs
Segmented repairs
ECU
ADS
Airbags
Service
Fuel Injection system
Regulator KM Service
Water wash
Interior cleaning
Brake/Clutch /Steering adjustment
Toyota
Capable
Not capable because of Scanner
Partially capable
Capable
8
Ford
Partially Capable
Not capable because of Scanner
Capable
Capable
12
Renault san
Nis- Partially Capable
Not capable because of Scanner
Not capable because of repair manual availability
Capable
137.
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4
DG also examined Shri Vijay Gummadi, CEO M/s CARZ which is a multi
brand independent repairer. In his examination Mr. Gummadi stated that spare
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parts and catalog, toolings, technology and diagnostic tools, workshop manual and
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technical manual for Nissan would not be available. We quote from the relevant
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parts of his statement below:
“Q.4 Have you ever attempted obtaining the aforesaid from these OEMs or the ones mentioned in your previous letter, their distributors/authorized dealers? If yes, what has been the response?
Ans
We have tried numerous times to approach these entities mainly through their authorized dealers. In all cases where such requests were made, written communication was discouraged by the dealers? Inspite of numerous requests, we have never been able to procure either spares or any assistance on the above from these entities.
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Very recently we have been able to procure parts at MRP or very low margins from some dealers. Hyundai -
3-5% discount on MRP for some parts. All parts are not available.
Toyota -
General understanding is that parts are available (only for older models such as Qualis, not available for any other model). We have never been able to procure parts for Qualis.
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Chevrolet GM- Limited parts are available at MRP. Experiencing issues with sourcing parts for old
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Tata -
Mahindra -
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and very new models. Experiencing issues with sourcing parts for old
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and very new models. Parts are available at MRP
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on distributors’ discretion.
In all these cases, we are at the discretion and mercy of the
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dealer/distributor in terms of parts availability, timing, price etc. In case of Maruti, Tata and to some extent in case of Mahindra, parts availability is generally good through their independent parts distributors. On a case by case basis and based on volume purchases, we get between 5-8% discount on MRP from the distributor.
Q.5
Please elaborate your submissions made earlier regarding availability of aftermarket spares through alternate proven manufacturers.
Ans
We procure parts from respected global and Indian brands such as Bosch, AC Delco, Purolator, Gabriel, MAHLE and so
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on. Parts from these brands are available only in the following instances: 1.
Fast moving items for such as Oil Filters, Air Filters etc. – these parts are only available for cars available in high volumes in the market
2.
Common repairs for high volume vehicles (e.g. Maruti 800, Santro)
Certain parts for few vehicles (e.g. Skoda) are also available
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through importers in Bengaluru, Chennai, Mumbai and Delhi.
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These parts constitutes less than 5% of overall requirements required to perform car repair and maintenance. These parts
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from importers are not always of reputable quality or competitive to dealer pricing and hence the parts availability is
Q6
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further restricted.
Please elaborate your submissions regarding the constraints
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faced in using the on board diagnostic tools and scanners.
Ans
On board diagnostics (OBD) is a standard that allows vehicle performance parameters to be analysed and reported for diagnostic purposes. Our primary source of OBD scanners is from independent aftermarket suppliers who provide one or more tools to analyze vehicles supported by that scanner. Following are the problems we encounter in using these 3rd party scanners: 1. Due to lack of standardization of error codes across OEMs, we are unable to accurately identify the problems/faults
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2. Inability to diagnose all problems that can be diagnosed by an OEM scanner. 3. Non availability of timely software and hardware updates for new vehicles. This leads to excessive investments either in updates or procuring scanners for new models. This also leads to complexity in training of personnel considering the variety of software and hardware involved for each make/ model of vehicle.
.IN
4. Lack of sufficient reporting to correctly diagnose the
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problem
5. Inability of reset service lights to reset systems after a
There are related safety aspects in making parts freely
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Q.7
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service is performed
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available as the independent repairers may not have the expertise for proper fitment etc and there are risks that spurious
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parts be used the garb of genuine parts. What do you have to say on this?
Ans
Contrary to this point of view, if manufacturers make genuine parts easily available at decent margins to independent repairers, usage of spurious parts will to a great extent be controlled. Usage of genuine parts and extending warranty support on these parts to independent repairers given them an incentive to use genuine parts because it is much easier to convince customers than when we use alternative aftermarket parts. Logistics for spares sourcing also becomes easier in most instances considering local availability.
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To curb safety concerns, OEMs can share information on recall, service procedure updates with independent repairers. Opening of technician training to independent technicians supported by OEMs also helps with building awareness. OEMs can also set up qualitative criteria to determine qualification criteria for independent repairs for procurement of spares, catalogs, diagnostic tools, repair manuals. However, the qualification criteria and pricing should be reasonable and in line with that offered to their dealer network. The objective of
How does your cost of service and repairs compare with those
Ans
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of authorized dealers?
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Q.8
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setting up such criteria should not be disqualifying participants.
Our labour rates are definitely lower than dealers by 15-30%. In
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cases where vehicle performance or safety is not hampered,
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we repair instead of replacement thus reducing the costs to the customer significantly. In such cases, we are cheaper by more
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than 50%. Global analysis indicates that independent repairs are cheaper on an average by 34% compared to dealers. I shall revert with samples to substantiate this. 3.
Only a few manufacturers, such as Maruti, Tata, Mahindra, Hyundai have a wide service network as of today. If car owners of other brands of vehicles are stuck with a problem during a journey (and this happens often) in a town/ city where a dealer does not exist, independent repairers can come to the rescue of such customer. This is also true when the car owner resides in a place where an authorized dealer does not exist. The car owner has to travel long distances even for
165
routine maintenance services causing waste of time, money and at a huge discomfort to the car owner.” (Emphasis supplied) 138.
In the above paragraphs we have extensively quoted from statements/
responses received from multi brand independent repairers. It was argued by Toyota that these witnesses were not allowed to be cross examined by appellants, therefore their responses should not be taken into evidence. The issue of cross examination/oral hearing has been examined at great length in earlier paragraphs
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therefore we do not propose to repeat at this stage. It has also been said by Toyota that by their own admission Carnation has stated that they can repair cars upto the
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value of Rs. 12 lacs. However, i.e. not a satisfactory response as it only includes a
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part of the overall brands which are available in the market. Even that segment is only partially catered to as can be seen in above statements. Toyota have also stat-
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ed that the statements given by them indicating over the counter sale is good
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enough to show that there is no restriction over the counter sale to independent repairers and therefore, the Commission’s conclusion cannot be sustained. We do
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not feel satisfied with this argument, firstly, it is not clear whether the stated sales are to independent customers or to independent repairers and the list does not cover all authorized dealers. Secondly even if authorized dealers were to make available spare parts to independent repairs there is enough evidence to show that customers have to book their vehicles for repairers for job work with the authorized dealers then only they could access the spare parts. Thirdly this is not a proof of the fact that all parts are available. Fourthly diagnostic tools, equipments, scanners, fault codes, technical manuals etc. are still not available to independent repairers- this is an admitted fact. So, on the one hand it cannot be said with conviction that authorized dealers are allowed to make spare parts etc. available to independent repairers on the other even if these parts were sporadically made available, in absence of diagnostic tools independent repairers would hardly be able to do much, opening himself to the challenge of concerns of safety and
166
sustainability. We have seen that both Toyota and Ford have been covered by the above evidence. As far as Nissan is concerned by their own admission OTC sale is not allowed to others. Nissan’s plea in this respect is that almost all of their vehicles at the time of investigation were under warranty and therefore outside repair was not possible. 139.
One of the big questions which arises in the background of such evidence is
the geographical dispersion of repair, maintenance and service facilities, it is apparent that in view of the limited number of authorized dealers/service stations and the peculiar characteristics of the road side services claimed by some of the
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OEMs such as Nissan, it can be clearly stated that un-served areas in a large
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geography like India remain un-serviced thereby opening a customer to resort to
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independent garages/multi brand repairers. This necessitates a liberal and pro competitive approach to the issue of availability of spares and tools. On the issue of warranty both Toyota and Ford have argued that they were
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140.
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misquoted by the DG on warranty implications. Both have submitted that if customers get the under warranty vehicle repaired by a non authorised
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mechanic/garage, in such cases only the repaired part or the consequences of a bad repair meet with warranty cancellation but the rest of the vehicle is still covered under the warranty. Nissan however has not denied DGs finding.
Learnings from Foreign jurisdictions 141.
Since Indian law on competition is in an evolutionary state and finds similarity
with laws in several other developed and developing jurisdictions, the DG has also examined law and practice in other jurisdictions.
142.
Section 3(4) of the act is similar to Article 101 of TFEU. The latter is
reproduced below: “1.
The following shall be prohibited as incompatible with the common
market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member
167
States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading
.IN
parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties
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of supplementary obligations which, by their nature or according to commercial
EL A
usage, have no connection with the subject of such contracts. 2. Any agreements or decisions prohibited pursuant to this Article shall be
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automatically void.
the case of:
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3. The provisions of paragraph 1 may, however, be declared inapplicable in
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- any agreement or category of agreements between undertakings; - any decision or category of decisions by associations of undertakings; - any concerted practice or category of concerted practices, which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.”
168
143.
The article 101(3) guidelines adopted in EU were developed on an
economics based methodology for application of Article 101. The application of Article 101(3) is subject to four conditions – a) The agreement must contribute to improving the production or distribution of goods or contribute to promote technical or economic progress. b) Consumers must receive a fair share of the resulting benefits. c) The restrictions must be indispensable to the attainment of these objectives, and
.IN
d) The agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question. Article 101(3) of TFEU gives the eligibility framework for those cases which
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144.
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do not attract the prohibition of Article 101(1) and therefore are not termed as anti-competitive. The institutional framework for such agreements is contained in
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the Block exemption regulations 330/2010. For some specific sectors dedicated
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Block Exemption Rules have been framed. Automobile sector was covered by Regulation 1400/2002, which was then replaced in 2010 by Regulation 461/2010.
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Those agreements which do not conform to the four conditions of Art. 101(3) are termed as hard core restrictions and categorically included in the prohibited category covered by the Art. 101(1). This Regulation specifically addresses vertical agreements practiced in the automobile industries in the EU. While the Regulation 1400/2002 was a far more elaborate and extensive regulation its successor regulation has much less scope of coverage. Though the European car market has matured over time, the spare parts aftermarket is still not subject to full competition. Therefore, Regulation 461/2010 provides a framework within which vertical agreements have been examined on the threshold of the four conditions laid down in Article 101(3). All those agreements which respond to all of these four conditions are exempted from the effect of Article 101(1). However, while Regulation 1400/2002 had a relatively longer list of hard core restrictions, their numbers in the successor regulation has been significantly reduced. Even then the following
169
restrictions have been recognised as hard core restriction in Article 5 which is quoted below“Article 5 - Restrictions that remove the benefit of the block exemption — hardcore restrictions The exemption provided for in Article 4 shall not apply to vertical agreements which, directly or indirectly, in isolation or in combination with other factors under the control of the parties, have as their object: (a) the restriction of the sales of spare parts for motor vehicles by members
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of a selective distribution system to independent repairers which use those parts for the repair and maintenance of a motor vehicle;
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(b) the restriction, agreed between a supplier of spare parts, repair tools or
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diagnostic or other equipment and a manufacturer of motor vehicles, of the supplier’s ability to sell those goods to authorised or independent distributors
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or to authorised or independent repairers or end users;
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(c) the restriction, agreed between a manufacturer of motor vehicles which uses components for the initial assembly of motor vehicles and the supplier
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of such components, of the supplier’s ability to place its trade mark or logo effectively and in an easily visible manner on the components supplied or on spare parts.”
145.
There exists a dual regime of hard core restrictions for motor vehicle sector
under EU law. The General Vertical Block Exemption Regulation (GVBER) No.330/2010 of 20 April 2010 and the Motor Vehicle Block Exemption Regulation (MVBER) No.461/2010of 27th April 2010 are both relevant on the application of Article 101(3) of the TEFU to categories of vertical agreements and concerted practices in the motor vehicle sector. The MVBER 2010 superseded the EU Motor Vehicle Block Exemption Regulation 2002 which expired on 31 May 2010. Article 4 of MVBER 2010 states requirements which if fulfilled would provide for an exemption to certain vertical agreements. Article 5 of MVBER 2010 lists the
170
hardcore restrictions which do not get the benefit of MVBER and the same may attract provisions of Article 101(1) TEFU and may be considered anti-competitive. Further, Regulation 461/2010 also refers to the issue of tooling arrangements to prevent the producers from selling directly to the aftermarket. The guidelines clarified the extent to which a car maker can rely upon the 1978 sub contractor guidelines to argue that the tooling arrangements fall outside Article 101(1) of TFEU. We have discussed these guidelines at an appropriate place earlier.
146.
In the United States, right to repair campaigns in several States have been
the hallmark of the modern consumer’s pursuit to exercise his choice as far as
legislation
on
Motor
Vehicle
Owners’
Right
to
Repair
Act,
W
considered
.IN
selection of a garage for its automobile is concerned. As far as States are
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Massachusetts, has unanimously passed the Right to Repair Legislation in 2012. Further, in the US, a national automotive task force is utilized by car manufacturers
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to provide all relevant information in respect to vehicle characteristics and facilitation of selection of a vehicle. Various manuals, diagnostic tools and equipments can be
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accessed through NASTF. All repair information is maintained by manufacturers on their websites. The present appellants also offer their information on the NASTF
147.
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website in the US.
Under South Africa’s statute, a vertical agreement is prohibited if it has the
effect of substantially preventing or lessening competition in a market, unless a party can prove that any technological, efficiency, or other pro-competitive gain resulting from that agreement outweighs the anti-competitive effect.
(Sec. 5(1)
South African Competition Act, 1998) Thus finding a violation usually depends on showing an actual anti-competitive effect. The only practice that is prohibited per se is minimum, resale price maintenance. A supplier may recommend resale prices as long as they are clearly not binding. If the resale price is indicated on the product, it must be labelled “recommended price”. (Sec. 5(2), 5(3)).
171
148.
It can be clearly seen that in all of the above jurisdictions positions similar to
the one being taken now exists. The Appellants have argued that adopting an approach which has been used in developed countries is neither practical nor feasible. We would disagree with this assessment. Indian automobile sector has come a long way and this is the opportunity for us to bring the much desired leapfrogging in the regulatory framework while mandating removal of restrictions on the competitive framework.
AUTO SECTOR IN INDIA 149.
The automobile sector in India is one of the bright performers of Indian
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economy. It is an important sector which has contributed significantly to India’s
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industrial development and employment. After India’s economic liberalization in
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early 90’s, the sector was encouraged by State policy which India adopted through a Phased Manufacturing Program (PMP) notified by India’s Export and Import policy
IV
of 1997-2002, whereby investments made into automobile sector were subjected to
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conditionalities such as ‘localization’ and ‘export import balance’. This policy though contrary to the provisions of the Agreement on Trade Related Investment Measures (TRIMS) of the World Trade Organization (WTO) significantly facilitated investment
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in India in the auto sector and also compelled major manufacturers into investing in manufacturing within India. India faced litigation in the WTO and had to loose in the process, it borrowed enough time for itself to ensure that investment policies brought useful results in the area of setting up automobile manufacturing in the country. A natural consequence of setting up of modern manufacturing in the automobile sector was expansive ancilliarisation whereby car manufacturers did not simply set up their manufacturing units but also promoted vendor development, thereby building their supply chains. The modern automobile sector is distinctive from its predecessor in the fact that a large part of value in a car is added by ancillaries. According to SIAM the role of OEM is not to actually manufacture the system or the components but to be mainly engaged in the following: “a)
Design and styling of the vehicle
172
b)
Ensuring quality, reliability and durability of the component systems and parts thru quality control and system
150.
c)
Final Assembly of vehicles, testing and homologation etc.
d)
Branding, Marketing and Sales of vehicles.
e)
After sales support and service to the customers”
According to SIAM about 70% of the value of a car is created through out
sourcing. The remaining 30% is created in house. 151.
Following the PMP Government instituted an Automotive Mission Plan (AMP)
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which ran from 2006 to 2016. The plan has been further renewed for another 10 years to last till 2026. The plan aims towards contributing more than 12% of India’
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GDP and more than 40% of the manufacturing sector GDP. It also aims at creating
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employment of about 65 million people. The present level of employment creation is 25 million jobs. Both automobiles and auto components are important areas for
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export earnings. India has emerged as a global hub for small cars. Around 31% of
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the global sale of small cars are those manufactured in India. India has also emerged as a world leader in the manufacture of diesel and petrol engines of small
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capacity, engine and transmission related auto components and components that require relatively low scale and complexities in manufacture. The automotive industry as a consequence of automotive mission plan is envisaged to grow 3.5 to 4 times in value from its current output of around 464000 crores (2015) to Rs. 1616000 crores-1888500 crores by 2026. It is apparent that auto sector is destined to receive significant attention of the Government. Among the major intervention sought during the automotive mission plan period are working towards auto fuels and emission norms, safety regulation, inspection and certification regime, end of life policy and trade policy and fiscal and taxation measures, scale development, specific infrastructure etc.
173
INDEPENDENT REPAIRS 152.
According to ACMA report the status of service providers in automobile
sector is reported as follows:
Type of Service Center
Number of workshops
OEM authorized
19000
Multi Brand Dealers
950
Semi – Organized Service Stations
60000
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Neighbourhood Garages / Un-organized 300000
It can be seen that these four categories operate within varying institutional
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153.
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service providers
eco systems and this case significantly relates with the need for evolution of this system.
Traditionally
when
investments
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eco
in
technology
and
modern
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manufacturing and business practices had not been made, India relied on very few automobile manufacturing companies which offered designs and technologies dated
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in time. There was a very vibrant maintenance and repair eco system. This eco system was populated by human resource which mostly would have acquired their skills by learning on the job. Many a time this could be passed down from one generation to another in a family. Since technology was not a pre-dominant factor, concurrent skill up-gradation in an organized institutional format was not considered necessary. In most cities and outskirts of these cities we see mushrooming of these garages.With the advent of new automotive industry most of these garages found themselves unprepared for the transition. Consequently, they switched over to addressing maintenance issues in lesser technology areas in rural and semi urban sector. With the advent of new industry and restrictions in distribution of spare parts for a variety of reasons this sector was substantially choked. As more and more maintenance and repairs were concentrated in authorized networks of automobile manufacturers, some brands which occupied larger space of the market place
174
gradually adopted distribution system which to some extent helped revival of this eco system in a more organized and technologically evolved manner. 154.
Multi brand repairers are a relatively new concept which emerged only a few
years ago. It is an acknowledgment of the fact that new automobile requires higher levels of technology, skills and investment if they have to be attended to by non authorized segment of automobile service industry. It also clearly discerned that a sound regulatory regime is required to grow side by side to ensure that emergent eco system transitions well to help average consumer. These appeals therefore, pose questions which need to respond to this transition. While the government has
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focused a lot of attention on the growth of automobile industry, relatively little
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attention has been paid to building a sound regulatory environment focusing on
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repairs, maintenance and the required eco system. In view of our growing commitment towards regulating auto emissions, building safe environment for use of automobiles and at the same time building the potential of the auto service
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industry to employ millions who enter the job market, it has also become important
Appellants have argued that the regulatory system required for a completely
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155.
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to look at the cases in this perspective.
unrestricted release of spare parts in the aftermarket does not exist in the country. They have also argued that independent repairers do not have skills and infrastructure to be able to cater to the technical requirements of modern day automotive service industry. These statements undoubtedly diagnose the deficiencies of the automotive repair eco system. Ford has gone to the extent of saying that Government has not done anything in this direction. As stated earlier, Government has played a significant role in letting the auto industry grow and build a greater potential for growth in the years to come. As economic growth takes place middle class expands and automobile sector grows, the need for a automotive repair and maintenance industry to grow far and wide in the country is being felt. The restrictive supply of spare parts, their expensive availability at authorized dealers only and absence of distribution network in many areas of the country must
175
make us review the present approach of automobile sector to repairs and maintenance. The Commission has clearly shown that the practices adopted by automobile sector in several ways are anti competitive. It is clearly made out that independent repairers in practice are significantly impacted by restrictive policies of OEMs. The argument of the OEMs goes as follows: 1. Abundance of counterfeit/sub standards/spurious spare parts in the market. The ACMA study quoted by the DG states that about 35% spare parts in the market are counterfeit.
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2. Deficiencies in human skills outside the authorized network.
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3. Absence of a regulatory framework to ensure enforcement against counterfeit products and to build a sound eco system for independent
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repairers.
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These concerns encourage a restrictive competition policy environment and unless
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the government addresses the regulatory space the car manufacturers should not be asked to do anything howsoever anticompetitive this might be. The Appellants do not seem to accept that their restrictive policies relating to
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156.
distribution of automobile spare parts in the after market, in anyway contribute to the abundant flow of non genuine/counterfeit/spurious/substandard spare parts in the aftermarket. We have seen how significant mark ups in the price of spare parts and restrictive physical availability are affecting the consumer’s choice to go to a non-authorized network repairer. There is enough evidence in the DG’s report and the Commission’s decision to show that independent repairers offer much cheaper services. It is a simple principle of economics that if supplies of spare parts are improved in the aftermarket, the prices must come down. 157.
One of the arguments of appellants is that the price differential between
genuine spare parts and counterfeit spare parts is so significant that a consumer has no incentive to buy genuine spare parts when he gets his vehicle serviced
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outside the network. This is in a way an admission of the fact that genuine spare parts are very expensive in the authorized network which at times are unaffordable by the common consumer who then willy nilly has to resort to the cheaper non genuine alternative. Therefore, if genuine spare parts are made available far and wide in abundance by removing restrictions through agreements and through practice and prices are rationalized, besides building an institutional eco system, consumer must benefit from these steps. 158.
As far as the institutional eco system is concerned, the requirements of the
modern auto service industry emphasize that there should be sound investment in
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infrastructure, human skills in the non authorized network besides building an
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institutional regime which will encourage the growth of non authorized networks. In
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order to do this on the one hand the restrictions have to be let loose in accordance with the discussions in earlier paragraphs and on the other an institutional framework needs to be developed. Law making and regulatory development cannot
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happen overnight but that does not mean that we should stop moving in that
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direction. We would have expected the Commission to go deeper into this aspect and suggest an institutional framework to take care of the concerns on both sides.
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In the first place we believe that once restrictive agreements/practices are loosened, distribution networks are widened and deepened even a contractual system of institutional compliance can be built till a regular regulatory framework is institutionalized. 159.
We have seen that there are a large number of roadside garages in the
country. It is not our perception that each of them can be made capable of dealing with the modern automobile repairs but a standards based technical regulatory framework can be created which will encourage economic entities to build organized garages which will be equipped to deal with the need of the day. As we have seen the auto repair institutions are operating at four levels. There are no prevalent technical regulations or standards in force even on voluntary basis. Therefore, as a first step towards institution building a standards architecture needs
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to be built. Under the Motor Vehicles Act, 1988 the Central Government in the Ministry of Road Transport and Highways administers the Central Motor Vehicles Rules, 1989. The Ministry has constituted three committees to deliberate and advice the Ministry on issues relating to safety and emission regulation. These are CMVR – Technical Standing Committee (CMVR-TSC); Standing Committee on Implementation of Emission Legislation (SCOE) and Automotive Industry Standards Committee (AISC). These committees also have representation from Ministry of Heavy Industry, Bureau of Indian Standards, Testing Agencies such as Automotive Research Institute of India, Vehicle Research Development Establishment, Central
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Institute of Road Transport and other organizational representatives. Separately Automotive Industry Standards (AIS) are also developed, considered and finalized
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through a mechanism of these committees. Quality Council of India (QCI) is another
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Industry-Government cooperative agency which deals with building a sound standards coordination/conformity assessment/accreditation eco system in the
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country. QCI has lately helped in several sectors to develop eco system for
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standards both in the voluntary area as well as mandatory technical regulation. As a first step the Ministry of Road Transport and Highways can be mandated to
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develop, with the assistance of the institutions mentioned above, an array of voluntary standards and regulatory regime around them so that those independent repairers who would like to take up automotive repair works/spare services on multi brand basis could get their business establishment approved/certified by conformity assessment agencies. The main worry of appellants is that they apprehend mixing of spare parts with counterfeit if they are freely released in the aftermarket. By subscribing to an independent repair eco system, technical regulation and certification of Independent repairers will become an imperative. This will help in meeting with most of the concerns of the OEMs.
To illustrate the voluntary
standards to be developed could include physical and ethical elements in the standards to address concerns on account of counterfeit parts, skilled manpower, appropriate investments in infrastructure, process regulations etc. As a matter of fact one of the leading OEM has already adopted a certified service station concept
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over and above the authorised dealer framework. This will also create a demand pool for automotive repair skills training institutions. We are aware that a National Skill Development Mission is already under way and automotive repair and maintenance skill is an identified skill for support under that program. The moment we create a formal institutional mechanism the demand from these skills will increase necessitating production of greater human resource in numbers. To begin with such independent repair organization can be set up through contractual means till a regulatory framework is put in place. We estimate, this exercise of developing standards and their conformity assessment procedures and bodies would not take
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more than a year. Till that is done OEMs and other interested entities can execute contractual arrangements encompassing elements of the ecosystem we have
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160.
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discussed above.
Learned counsels for Toyota and Ford during oral arguments informed, that
after these cases were taken up for enquiry by the Commission, they had opened
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distribution outlets to cater to the consumers including independent repairers. This
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action by itself is an acknowledgment of the fact that there are restrictions in the manner in which businesses are presently organized and secondly that there are
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significant parts of this country which are left unserved by the appellants. Thirdly it is also clear that opening of an intermediate distribution channel offers the same spare parts cheaper than the rate at which an authorized dealer would make them available. 161.
During the course of oral arguments we had particularly raised questions on
the preparedness of the appellants to cater to the customers’ needs in remote areas of the country as well as unserved areas. We were informed that there are roadside repairs maintenance services run by some of them. These services are essentially in the nature of emergency break down services. They are not available in a regular manner in a remote area. Toyota filed an affidavit in the Tribunal on 06.09.2016 referring to the Commission’s enquiry on what measures inter alia would the appellants be prepared to take to make spare parts and servicing markets more
179
competitive. The proposal envisaged the setting up of an additional distribution channel i.e. spare parts distributors based on certain objective and transparent eligibility criteria to provide even greater access to spare parts for car owners and independent repairers. Toyota also informed that they have appointed spare parts Distributor in Karnataka in the meanwhile. They had emphasized that these distributors are wholesalers who, since they were established in January 2015, are offering volume discounts, resulting in pricing of spare parts at rates cheaper than the over the counter sales from Toyota authorized dealers. Toyota has informed that by the end of December, 2016 they would complete plans to appoint 29 such
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distributors. They also informed that they have set up a web platform for the sale of spare parts online. They have set up a dedicated portal www.Toyota parts
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connect. in. This portal has been activated in Bangalore since August, 2015. This
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affidavit clearly shows that an intermediate distribution channel even while maintaining the so-called integrity of distribution chain can be created. Ford has
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also done a similar thing. The distribution network should be intended as stated
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earlier to cover those areas which have been left unserved but where OEM’s vehicle population exists, as well as, those areas where their vehicles in abundance
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are available to bring about width and depth in their distribution network. At this moment, we do not wish to examine the potentially multi brand character of these distributorship as that was not the subject under consideration in these cases.
Conclusions 162.
It will be appropriate to summarize the conclusions that we have drawn from
our discussion, in order to better appreciate the subsequent directions given hereinafter. While doing so it may also be appropriate to recall specific arguments put forth by Toyota alleging that DG has painted all OEMs with the same brush whereas Toyota was not found in violation of several practices which others could have been. Nissan had argued that at the time this investigation was conducted Nissan was only six months old on the Indian roads and almost all Nissan vehicles were still under warranty cover, therefore Nissan could not have been held in
180
violation of the act. On both these arguments it is our opinion that this investigation has covered certain practices as they exist in the automobile after market and the repair and service sector. All companies have been found violating the relevant provisions of the act albeit in varying degrees, therefore even if specific company wise conclusions are not drawn violations need to be stated and checked. On the same understanding Nissan’s argument is also untenable as we do not have a de minimis provision in our law and a violation of the prohibited provisions is nevertheless a violation. However in our assessment of penalty and over all directions herein after we have taken these consideration into account. On a careful
The Appellants Toyota, Ford and Nissan are in dominant position in respect
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1.
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consideration of these appeals, we conclude that:
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to their respective spare parts including diagnostic tools, technical information, fault codes, repair manuals etc., in the aftermarket.
The Appellants are abusing their dominant position by imposing unfair
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2.
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conditions in the nature of restrictions on purchase or sale of goods or services on their authorized dealers and original equipment suppliers thereby violating Section 4
3.
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(2)(a)(1) of the Act.
The Appellants acted in violation of Section 4(2)(c), indulging in practices
which result in denial of market access to independent repairers of automobiles to the spare parts in the aftermarket. 4.
The Appellants also acted in violation of Section 4 (2) (e) by using their
dominant position in the spare parts aftermarket to enter into or protect other relevant market i.e. the repair and maintenance market. Appellants are found in violation of Section 4(2)(e) of the Act because due to peculiar circumstances characterized in our discussion on account of network of agreements and practices appellants used their position in the spare parts aftermarket to protect their authorized dealers to retain their market in the repair and service market for automobiles.
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5.
The Appellants acted in violation of Section 3(4) (b), (c) and (d) on account of
imposing restrictions through agreements and practices on original equipment suppliers by restricting them from selling spare parts including technical manuals, diagnostic tools etc., in the aftermarket including to the independent repairers, and to the authorised dealers, restricting them from sourcing spare parts from OESs and from selling spare parts to independent repairers thereby refusing to deal with the latter. The conduct of appellants has appreciable adverse effect on competition as elaborately discussed and established by the Commission and verified in appropriate paragraphs herein above.
Before we examine the nature of operative part contained in paragraph 22.3
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163.
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Directions
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of the impugned order, we would like to quote Section 27 of the Act and paragraph 22.2 of the impugned order which is an appropriate encapsulation of the approach
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which necessitates a framework of action to remove anti-competitive constraints on
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the market in the automobile spare parts aftermarket, “Section 27 - Orders by Commission after inquiry into agreements or abuse
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of dominant position
Where after inquiry the Commission finds that any agreement referred to in section 3 or action of an enterprise in a dominant position, is in contravention of section 3 or section 4, as the case may be, it may pass all or any of the following orders, namely:— (a)
direct any enterprise or association of enterprises or person or association of persons, as the case may be, involved in such agreement, or abuse of dominant position, to discontinue and not to re-enter such agreement or discontinue such abuse of dominant position, as the case may be;
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(b)
impose such penalty, as it may deem fit which shall be not more than ten percent. of the average of the turnover for the last three preceding financial years, upon each of such person or enterprises which are parties to such agreements or abuse: 2[PROVIDED
that in case any agreement referred to in
section 3 has been entered into by a cartel, the Commission may impose upon each producer, seller, distributor, trader or service provider included in that
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cartel, a penalty of up to three times of its profit for each year of the continuance of such agreement or ten
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percent. of its turnover for each year of the continuance
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of such agreement, whichever is higher.] x x x]
(d)
direct that the agreements shall stand modified to the
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[3(c)
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extent and in the manner as may be specified in the order by the Commission;
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(e)
direct the enterprises concerned to abide by such other orders as the Commission may pass and comply with the directions, including payment of costs, if any;
[1(f)
x x x]
(g)
pass such other 2[order or issue such directions] as it may deem fit.
3[Provided
that while passing orders under this section, if the
Commission comes to a finding, that an enterprise in contravention to section 3 or section 4 of the Act is a member of a group as defined in clause (b) of the Explanation to section 5 of the Act, and other members of such a group are also responsible for, or have contributed to, such a contravention, then it may pass orders, under this section, against such members of the group.]”
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“22.2
In deciding the remedies in this case, the Commission’s primary objective is to correct the distortions in the aftermarket, to provide corrective measures to make the market more competitive, to eradicate practices having foreclosure effects and to put an end to the present anti-competitive conduct of the parties. The aim of the Commission is to provide more freedom to Original Equipment Suppliers (OESs) in sale of spare parts, and more choice to consumers and independent repairers. The Commission considers it necessary to (i) enable the consumers
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to have access to spare parts and also be free to choose between independent repairers and authorized dealers and (ii)
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enable the independent repairers participate in the aftermarket
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and provide services in a competitive manner and to have access to essential inputs such as spare parts and other
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technical information for this purpose, as part of a more
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competitive eco-system which is equally fair to the OPs and their authorized network also.”
The operative part of the impugned order is quoted below,
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164.
“22.3
In view of the foregoing, the Commission, therefore, orders the following under section 27 of the Act:-
i)
The parties are hereby directed to immediately cease and desist from indulging in conduct which has been found to be in contravention of the provisions of the Act.
ii)
OPs are directed to put in place an effective system to make the spare parts and diagnostic tools easily available through an efficient network.
iii)
OPs are directed to allow OESs to sell spare parts in the open market without any restriction, including on prices. OESs will be allowed to sell the spare parts under their own brand name, if
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they so wish. Where the OPs hold intellectual property rights on some parts, they may charge royalty/fees through contracts carefully drafted to ensure that they are not in violation of the Competition Act, 2002. iv)
OPs will place no restrictions or impediments on the operation of independent repairers/garages.
v)
The OPs may develop and operate appropriate systems for training of independent repairer/garages, and also facilitate easy availability of diagnostic tools. Appropriate arrangements
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may also be considered for providing technical support and training certificates on payment basis.
The OPs may also work for standardization of an increasing
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vi)
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number of parts in such a manner that they can be used across different brands, like tyres, batteries etc. at present, which
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would result in reduction of prices and also give more choice to
vii)
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consumers as well as repairers/service providers. OPs are directed not to impose a blanket condition that
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warranties would be cancelled if the consumer avails of services of any independent repairer. While necessary safeguards may be put in place from safety and liability point of view, OPs may cancel the warranty only to the extent that damage has been caused because of faulty repair work outside their authorized network and circumstances clearly justify such action.
viii)
OPs are directed to make available in public domain, and also host on their websites, information regarding the spare parts, their MRPs, arrangements for availability over the counter, and details of matching quality alternatives, maintenance costs, provisions regarding warranty including those mentioned above, and any such other information which may be relevant
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for full exercise of consumer choice and facilitate fair competition in the market.”
165.
In view of the discussion held in foregoing paragraphs and the objective
behind examining these matters, we believe that some of the directions given in paragraph 22.3 of the impugned order require reconsideration or review. We have clearly seen that while anti-competitive conduct on the part of the three appellants has been established, we also need to take into account the structure, the potential and the role that auto industry plays in the larger framework of India’s economic development. Therefore, any direction given by a regulator should be pragmatic and
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capable of being implemented. Further we clearly recognize that reformatory
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directions given herein cannot be implemented overnight as they require a frame of
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time and ancillary action. We have already stated that anti-competitive practices in order to be eliminated would require the support of appropriate regulatory
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development but that should not be implied to mean that the OEMs do not have the responsibility of taking immediate steps to remove anti-competitive constraints by
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following procedures and practices in contractual manner rather simply putting all blame on the Government’s door. There is no doubt that Government has to work
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towards creating a regulatory framework but it is not our view that until a regulatory framework is constructed, anti-competitive restrictions cannot be removed. We squarely hold OEMs accountable for creating and maintaining a competitive environment conducive to the consumer’s interest recognising the importance of safety on roads and development of skills and investments in automobile repair sector. 166.
Having said this, we modify para 22.3 of the impugned order to read as
follows: The Appellants shall within a period of one year of this order adopt the following:
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1.
Remove all restrictions imposed through agreements and practices on original equipment suppliers (OESs) in accordance with the conclusions drawn in this order for selling spare parts including Diagnostic tools etc., in the aftermarket. In our discussion, we have considered situations where OESs may be producing spare parts on the drawings and design of OEMs though all IPRs, knowhow and technology may belong to the OESs. In such situations OEMs shall not restrict the OESs to sell spare parts in the aftermarket with the trademarks of the OESs. If OEMs also want to use their trademark they are free to do so. OES’ will be within
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their rights to certify such product as a product with ‘matching quality’ with corresponding OEM’s spare parts and market them freely in the
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2.
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aftermarket.
Open additional distribution channels to the open market for spare parts on a country wide basis. Such channel shall be opened on preference in
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territories where appellants’ automobiles have been sold but adequate
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servicing/repairs/maintenance network/infrastructure has not been provided. Such channel shall also be operationalized in areas where the
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sale of appellants’ models of automobiles is higher than average.
3.
Remove all restrictions on supply of spare parts by OESs to Authorized Dealers in accordance with discussion held in this order. The apprehensions expressed by the appellants can be addressed through contractual agreements between independent repairers and spare parts suppliers.
4.
No restrictions shall be imposed on Original Equipment Suppliers, Authorized Dealers and Authorized Distribution Channels from selling spare parts/diagnostic tools etc. to independent repairers.
5.
The Ministry of Road Transport and Highways in the Central Government is directed to develop voluntary standards under Motor Vehicles Act, 1988/Central Motor Vehicles Rules, 1989 with support
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from Quality Council of India, BIS, IARI etc. for certification of garages/independent repairers. These standards and corresponding conformity assessment and accreditation system shall be developed and notified within one year of this order. 6.
The Appellants are directed not to impose a blanket condition that warranties would be cancelled if the consumer avails of services of any independent repairer. While necessary safeguards may be put in place from safety and liability point of view, OPs may cancel the warranty only to the extent that damage has been caused because of faulty repair
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work outside their authorized network and circumstances clearly justify such action.
The Appellants shall develop extensive information system with the
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7.
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objective of removing asymmetry in information on extensive details of automobiles and their spare parts manufactured by appellants so as to
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facilitate the potential customers make rational choices at the time of
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buying automobiles. The Central Government under the Motor Vehicle Rules, shall notify the minimum standards of information which should made
available
through
websites
and
other
means
of
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be
communications.
8.
The Appellants are directed to make available in public domain, and also host on their websites, information regarding the spare parts, their MRPs, arrangements for availability over the counter, and details of matching quality alternatives, maintenance costs, provisions regarding warranty including those mentioned above, and any such other information which may be relevant for full exercise of consumer choice and facilitate fair competition in the market. The Central Government under the Motor Vehicle Rules, shall notify the minimum standards of information which should be made available through websites and other means of communications.
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9.
The Ministry of Road Transport and Highways in consultation with other relevant Government Departments/Agencies/Industry Organizations shall take up a program for standardization of automobile spare parts.
10. The Appellants shall furnish individual undertakings before the Commission, within 60 days of this order about schedule of compliance with this order, within mandated frame of time. The modified Penalty as imposed in the subsequent paragraph shall be assessed and paid within 90 days of this order.
Penalty The Commission has imposed a penalty of 2% on average annual turnover
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167.
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of the appellant companies in pursuance of Section 27(b) of the Act amounting to
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Rs. 93.38 Crores (Toyota), Rs. 1.63 Crores (Nissan) and Rs. 39.78 Crores (Ford). According to Section 27 (b) of the Act a penalty may be imposed which shall not be
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more than 10% of the average of the turnover for the last three preceding financial
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years. The interpretation of turnover has been a subject of several previous decisions given by this Tribunal. The relevant turnover test was adopted in the case
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of United Phosphorous Ltd. (Appeal No. 81 of 2012) and subsequently applied in several other cases including M/s. Excel Crop Care Limited (Appeal No. 79 of 2011), Escorts Ltd. (Appeal No. 13, 15 and 20 of 2014) and LPG Cylinder Cases. The issue has been further refined in EPC Industries Ltd. & Ors. Vs. CCI (Appeal Nos. 47 and 57 of 2015, decided on 01.03.2016), in which the Tribunal has found that the relevant turnover to be used as the basis for the fine is the turnover of the product subject to bid rigging; not the turnover of the entire multi-product enterprise. While concluding so, the Tribunal relied on the EU and UK fining guidelines. In the EPC case in its order the Tribunal stated as follows: “Term ‘turnover’ used in Section 27(b) and its proviso would necessarily relate to the goods, products or services qua which finding of violation of Section 3 and/or Section 4 was recorded and while imposing penalty, the Commission could not take average of the
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turnover of the last three preceding financial years in respect of other products, goods or services of an enterprise or associations of enterprises or a person or associations of persons. Definition of term ‘turnover’ which included value of sale of goods or services would necessarily mean value of goods or services which are made subject-matter of investigation under Section 26 and order of punishment under Section 27. If accusation/allegation related to abuse of dominant position, then the Commission was required to take into consideration factors enumerated in Section 19(4), (5), (6) and (7).
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Neither Act nor Regulations empowered the Commission to order an investigation into product, goods or service other than those qua
168.
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position was levelled.”
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which allegation of anti-competitive agreement or abuse of dominant
We find no reason to deviate from a well evolved view of the Tribunal, in
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these appeals. The Commission had asked the appellants to provide their three
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years annual turnover of spare parts in the aftermarket. Our perusal of the files showed that Nissan and Ford have also submitted their annual turnovers for spare
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parts in the aftermarket. However, Toyota has not done so pleading it does not keep separate accounts for primary and secondary products. Even the figures given by Ford and Nissan cannot be said to be conclusive as the Commission has not formed an opinion on the validity/finality of those figures. Therefore, the Tribunal is constrained in deciding exact amount of penalty. We are not in favour of imposing heavy fines in these cases as we have essentially come across omnibus sectoral practices which have anti-competitive character. This is a transitionary reform process and we would like to pursue the issue of imposition of penalty in the above perspective. However, since we are following the yardstick of relevant turn over, our concerns about mitigating circumstances are automatically getting addressed as penalty amount will now be calculated on the basis of relevant turn over of spare parts in the after market. Since we do not have the relevant turnover figures with us
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while we mandate the appellant companies to pay a 2% penalty on average annual turnover of spare parts in the aftermarket of immediately preceding three years before the year of enquiry. We direct the Commission to obtain relevant statistics and after verification determine the amount of penalty on the basis of this direction. 169.
The implementation of this order shall be completed within one year
therefore, the Commission is directed to review the progress and action taken by each party to the order including the Government Departments/Ministry, every three months and send a report to the Tribunal for further directions.
The first meeting of the Commission to monitor compliance of this order shall
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170.
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be held in February, 2017 and compliance/follow up report shall be made available
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to the Tribunal by 15th February, 2017. A copy of this order should be sent to the Secretary of the Ministry of Road Transport and Highways for taking follow up
In the result, these appeals are disposed of in terms of directions contained
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171.
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action.
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in Paragraphs 166 to 170 above.
(Rajeev Kher) Member
(G.S. Singhvi) Chairman
(Anita Kapur) Member 9.12.2016
