Penalising the Discount: CCI imposed penalty of INR 200 Cr. on Maruti Suzuki for enforcing Discount Control Policy !

The Competition Commission of India ("CCI"), on August 23, 2021 imposed a penalty of INR 200 Crore on Maruti Suzuki India Limited ("MSIL") for enforcing a Discount Control Policy ("DCP") that amounted to Resale Price Maintenance and consequently contravened the provisions of the Competition Act, 2002 ("Act").1

Resale Price Maintenance ("RPM"), also commonly known as vertical price fixing, is defined under Section 3(4)(e) of the Act as any agreement between the seller and the purchaser that prohibits the purchaser to resell the goods below a stipulated price unless it is expressly allowed to charge a lower price. This creates a price floor, below which sales cannot occur, thereby allowing the manufacturer or seller to directly control the price of their products.

The CCI took suo moto cognizance of the matter based on an anonymous email sent by a MSIL dealer wherein it was alleged, inter alia, that MSIL's sale policy is against the interest of the customers and the provisions of the Act.

According to the MSIL dealer, MSIL engaged in a DCP under which dealers were not permitted to offer any discounts to customers without the express permission of MSIL. Furthermore, the CCI was informed that any dealer that was found violating the DCP was penalized and threatened with the suspension of supplies for particular premium models.

The CCI, based on the complaint and submissions received through the email and MSIL's response, was of the opinion that prima facie, an anti-competitive agreement in the form of the DCP exists between MSIL and its dealers. It therefore directed the Director General (DG) to investigate the allegations and submit a report of the findings.

Findings of the DG:
The DG defined the relevant markets for investigation as the market for manufacturing of passenger vehicles in India ("upstream market") and the market for distribution and sale of passenger vehicles in India ("downstream market"). MSIL had the highest market share in the year 2018-19, amounting to 51.22 percent, and could therefore be classified as being dominant in the relevant market.

Based on the submissions of the dealers and MSIL, the DG formulated three issues and concluded them as follows:

  1. AMSIL and its dealers are an 'enterprise' as per Section 2(h) of the Act, and as MSIL operate in the upstream market and the dealers operate in the downstream market, an agreement between the entities can be examined under Section 3(4) of the Act, which refers to agreements amongst enterprises engaged at different stages or levels of production chain in different markets.
  2. It is evident that MSIL framed and issued guidelines to its dealers prohibiting them from offering discounts without their explicit consent over and above certain pre-stipulated discounts. Further, MSIL also appointed Mystery Shopping Agencies ("MSAs") to ascertain whether any additional discounts were being offered and threatened to impose monetary penalties and even suspend supply of certain premium models based on the audit reports of the MSAs. It was therefore evident that MSIL engaged in the practice of RPM through the implementation of its DCP on its dealers across India.
  3. This practice of RPM by MSIL caused an 'appreciable adverse effect on competition' ("AAEC") within the Country and was in contravention of Section 3(4)(e) of the Act, as it lowered inter-brand and intra-brand competition, and also led to products not being offered to the consumers at the best prices.

Analysis by the CCI:
The CCI, while examining whether or not there was an agreement between MSIL and its dealers to the effect of liming discounts that may be offered by the dealers, looked at the definition of the term 'agreement' as provided in Section 2(b) of the Act. It stated that an 'agreement' for the purposes of Competition Law is not the same as an 'agreement' for the purposes of Contract Law. Under the Act, the definition of the term 'agreement' is very wide and covers all forms of agreements, arrangements and understandings, whether formally entered into or tacit in nature. It relied on the contents of the emails and rejected MSIL's contention that there was no formal agreement that substantiated the implementation of any DCP.

MSIL's contentions that even if the DCP did exist, it was an inter se measure taken by the dealers through a mutual agreement to police themselves and MSCI was simply an independent third-party that facilitated the process, was rejected by the CCI. The Commission stated that, based on the evidence adduced, it was evident that MSIL conducted meetings on its DCP, required dealers to take prior consent for providing any additional discounts, circulated threats of monetary penalization and even threatened to suspend supplies - something which only MSIL would have the power to do. The CCI stated that the emails contained no evidence to show that the dealers themselves had imposed the DCP or appointed and MSAs. Further, it was established in the DG's reports that the amount collected in the form of penalty was used, inter alia, to pay the advertising bills of MSIL.

After establishing that a RPM mechanism existed through the way of the DCP, the CCI analyzed whether the arrangement between the MSIL and the dealers caused or was likely to cause an AAEC as per Section 19(3) of the Act.

The RPM imposed by MSIL hindered both inter-brand and intra-brand competition. When a maximum discount is fixed, the company essentially sets the floor price at which the product could be sold and distributors are not allowed to effectively compete on price. This further leads to competing manufacturers tracking the prices and accordingly adjusting their price strategy, which would allow them to price their products at a higher rate and soften competition. The impact of this would be significant because MSIL holds a substantial share of the market power.

The RPM led to denial of benefits to consumers who would not be able to avail discounts, hindered the distribution of goods and services in relation to new cars, and created entry barriers in the market as the new dealers would take into consideration restrictions on their ability to compete with respect to prices in the intra-brand competition of MSIL.

The CCI concluded that MSIL violated Sections 3(4)(e) read with 3(1) of the Act and caused an AAEC. Keeping in mind the post-pandemic recovery phase of the automobile sector, the CCI imposed a considerate penalty of INR 200 Crore as against a maximum penalty of ten percent of the turnover of the last three years as per the Act, and issued a cease-and-desist order from indulging in RPM directly or indirectly in accordance with Section 27(a) of the Act.

Concluding View:
The present decision of the CCI was passed relying on the Hyundai Motor case2, wherein the manufacturer was fined INR 87 crore for engaging in a similar DCP that was operated through their MSAs.

Vertical price fixing or RPM hinders healthy competition in the market. Discounts and concessionary prices are integral for functioning of markets as they allow healthy competition between sellers and incentivize prospective entrants to set foot in the market. The CCI, through its comprehensive and cogent reasoning, has enhanced the jurisprudence on RPM in the Country. It elucidated that while looking at agreements or arrangements that the parties have entered into, it is not necessary to have a prima facie formal agreement, rather, the conduct of the parties will help establish the existence of RPM.

  1. In Re: Alleged anti-competitive conduct by Maruti Suzuki India Limited in implementing discount control policy vis-a-vis dealers, (Case no. 01 of 2019), order dated 23 August 2021
  2. In Re: Fx Enterprise Solutions India Pvt. Ltd. And Hyundai Motor India Limited (Case No. 36 of 2014) with In Re: St. Antony's Cars Pvt. Ltd. And Hyundai Motor India Limited (Case No. 82 of 2014) (order dated 14 June 2017).

By - Muskaan Ahuja