SYMBIOSIS INTERNATIONAL UNIVERSITY

SYMBIOSIS LAW SCHOOL, PUNE

Constituent of Symbiosis International University, Pune
(Accredited by NAAC (UGC) with `A’ Grade)

COMPETITION LAW
Critical Analysis On
SHRI SHAMSHER KATARIA v. HONDA SIEL CAR INDIA LTD.

Submitted By
ANUJ SINGH
13010123350
4th Year B.A. LLB
SHRI SHAMSHER KATARIA v. HONDA SIEL CAR INDIA LTD.1 :
Automobile Dealers' Case

INTRODUCTION

In the past four decades the number of players in the Indian automobile industry
has grown from
mere six to more than fifty due to liberalization of the Indian economy. In the
Financial Year ending
2016, more than 65 companies were present in the organised sector and there are
over 10,000 in
unorganised sector of Automobile and spare parts Industry. In the absence of
sectoral regulator it
has become increasingly important that free and fair competition prevails in the
industry since the
interest of various stake holders like dealers, suppliers, manufacturers, consumers
and corporate
firms are to be protected.
The Competition Commission of India delivered a landmark decision on August 25,
2014 in the
present case wherein it found 14 automobile companies 2 guilty of anti-competitive
practice, in
violation of Section 3(4) and Section 4 of the Competition Act, 2002 and imposed
upon them a
staggering penalty of INR 2544.65 crores. The Competition Commission of India
(hereinafter
referred to as ‘CCI’) for the first time scrutinized and passed an order on
vertical agreements and
imposed the largest penalty of the year. The CCI is authorized under the
Competition Act to impose
penalties on companies engaging in cartel formation, price manipulation or abuse of
their
dominance to the tune of 10% of their turnover or an amount thrice their annual
profit. The
Competition Commission of India adopts the essential facilities doctrine in
‘refusal to deal’ cases,
denies competence to question the validity of an intellectual property right and
explains the scope of
the statutory exemption for holders of intellectual property rights to enter into
anti-competitive
agreements.
In this context, the CCI's order in Kataria, India's first spare parts case, gains
much significance.
The interface of IP and antitrust in the case of spare parts has evoked conflicting
decisions in the
United States in Kodak II (Image Technical Services Inc. v Eastman Kodak Co., and
Xerox (Re
Independent Services Organizations Antitrust Litigation, 203 F.3d 1322 (Fed. Cir.
2000)). In
1

Shri Shamsher Kataria v. Honda Siel Cars India Ltd. & Ors, Case No. 03 of 2011 (CCI
25/10/2014).
Ford India, Tata Motors, BMW India, Toyota, Maruti Suzuki, General Motors India,
Volkswagen India, Hindustan
Motors, Fiat India, Mahindra & Mahindra, MercedesBenz India, Nissan Motor India,
Skoda Auto India, and Honda
India.
2
contrast, the European Union has provided for a block exemption with stricter
antitrust rules
specifically for motor vehicle spare parts.
FACTS
Mr. Shamsher Kataria had filed the information against Volkswagen India, Honda
India and Fiat
India for violation of Section 3(4) and Section 4 of the Competition Act, 2002. It
was alleged by the
informant that the aforementioned Original Equipment Manufacturers (‘OEMs’) entered
into
agreements with Original Equipment Suppliers (‘OESs’) and authorized dealers, which
imposed
unfair prices on the sale of auto spare parts and restricted the free availability
of genuine auto spare
parts in the market. These vertical agreements hindered the OESs from selling the
auto-spare parts
directly to the independent car users and repairers in the market. It was further
alleged that the
OEMs did not furnish the technological information, diagnostic tools and software
programs that
are required to maintain, service and repair the technologically advanced
automobiles to the
independent repairers in the open market. This led to the OEMs carrying out
restrictive trade
practices with their authorized dealers and thus denying market access to
independent repairers.
Following this, the Director General (hereinafter referred to as “DG”) investigated
into the case.
The DG sought detailed information from the various OESs, authorized dealers,
independent
repairers, SPX India Ltd and the automobile industry associations during the
investigation. The DG
observed that the 14 car manufacturing companies were involved in the violation of
Section 3(4)
and Section 4 of the Competition Act. The DG held that the denial of market access
stemmed from
the denial to access diagnostic spare parts and tools.
ISSUES
1. Whether the automobile market as whole, from manufacturing to aftermarket
service, is a single
unified “system market” or there exists separate relevant markets at different
stages?
2. Is

(i)

there

abuse

of

dominance

by

OESs

in
spare

parts

market?

Abuse by denying access to market to the independent repairers/service providers;

(ii) Abuse by imposing unfair prices for aftermarket sale of spare parts;
3. Whether the OEMs are entitled to benefit arising out of statutory exemption
provided to
agreements related to intellectual properties?
4. Whether agreements entered into by the OEMs with OESs and authorized dealers are
anticompetitive in nature?
RULES
1. Section 3(4)(b), (c) ,(d), 27, Competition Act, 2002.
2. Section 4, Competition Act, 2002
3. Berne Convention read with Section 33 of the Indian Copyright Act
MAIN CONTENTIONS OF THE OPPOSITE PARTIES
The OEMs contended that:
1. The relevant market in the present case is an indivisible and unified “system
market” of cars.
The market of sale of spare parts is not distinctive from market of sale of cars. A
“system
market” for complimentary products is appropriate for durable products like car as
customers
engage in “whole life costing”. The relevant product market would be various
product markets
in the Indian automotive sector based on various segments of automobiles, viz.
small or
economy car segment, mid market car segment and the luxury car segment.
2. On the issue of unfair pricing they contended that reputation of each OEM and
price
consideration by the consumers deter them from charging supra-competitive prices
hence there
prices are not unfair.
3. Restriction imposed by them on OESs and authorized dealers are for the safety of
consumers
and to enhance the service to the car owners in the absence of “matching quality”
law in India.
Further, the restriction under agreements with OESs from sale in open market
without the
consent of OEM is a reasonable condition imposed to protect their IPRs, and such
agreements
are protected from scrutiny of the Commission by section 3(5).
ANALYSIS
While the Order has been welcomed by the Automotive Component Manufacturers
Association
("ACMA"), whereas SIAM has criticized the Order. This is the first significant
ruling on vertical
restraints and excessive pricing under Section 4. This could be indicative of the
Commission's view
on vertical agreements such as those between manufacturers and retailers. The Order
has farreaching implications for similarly placed industries such as electronic
goods including software
services where a manufacturer may impose restrictions on the manner in which spares
and services
are provided.
However, certain valid points may be made against the Order. Rejection of 'systems
market' has led
to an incongruous situation where the consumption of spares has been analyzed
independent of how
consumers purchase cars. The incongruity is underscored since this automatically
makes a
manufacturer dominant as a consumer of a car will have to necessarily purchase
spares of that
particular car. Thus, it is the purchase of the car that determines the consumption
of spares and
consumption of spares is not an independent economic act by a consumer. The
Commissions
emphasis on open access of spares and diagnostic tools would seem misplaced since
it ignores the
technical nature of cars and its components and the special role of authorized
dealers. Access to
spares would also require training to use them since access to spares is defeated
if there is faulty
usage and compelling OEMs to provide access and training to independent garages and
repairers
defeats the role of an authorized dealer.
On question of Relevant Market
Relying majorly on international case laws and findings of the DG, CCI determined
the appropriate
relevant market. CCI held that in the automobile sector, a primary product cannot
be easily
switched to another competing product, which makes it difficult to club the
primary. Unified
‘systems market’ comprise a set of products or services, which cannot be
distinguished into two
different antitrust markets, since the consumers demand the primary and the
secondary products as
a 'system' and determining inter-changeability and substitutability of such
products when
distinguished into different markets are an inefficient determination of
competitive market
behaviour for such complex durable goods where the competition for the sale of the
products exists
at the “point of sale of primary goods” (even if consumers are uninformed, have
high switching
costs and become locked in ex post).3 Thus, it dismissed the contention of unified
‘systems market’
as was raised by the OEMs and held that the primary market of “manufacture and sale
of cars” and

G Maheswaran & C Rakesh Gopal, Miebach Consulting India Limited “Increasing

Importance of Aftermarket Parts”,
available at: http://www.miebach.com/files/file/Increasing%20Importance%20of
%20Aftermarket%20Parts-2012.pdf
aftermarkets- ‘sale of spare parts, diagnostic tools etc.’ and ‘service of repair
and maintenance’ are
three separate relevant markets.4
In the present case, there was no engagement of the customers in ‘whole life
costing’ while buying
automobiles in primary market and also the price of spare parts have been
substantially hiked by the
car manufacturers despite reputational factors. The aforementioned reason signify
that there is no
existence of a ‘systems market’. The theory of ‘clusters market’ which was raised
by the OEMs was
also rejected by CCI. The stand taken by CCI appreciating the fact that a relevant
market can be an
‘aftermarket’ for those primary products which cannot be changed by consumers
unless substantial
switching cost is incurred is interesting. The Commission took the position that
determining
whether a market is relevant market or not is a means to determine the strength of
a company in that
particular market.
On question of Anti-Competitive Agreement
On the issue of internal arrangement between the OEMs and the overseas suppliers,
the
Commission dismissed the findings of the DG and held that such arrangement does not
stand in
violation of Section 3(4) of the Act. The Commission applied the doctrine of
‘single economic
entity’ to arrive at this conclusion.
On the issue of arrangement between the OEMs and the OESs, CCI was of the view that
the
eventual choice has to remain at the hands of the consumers to choose either an
independent
repairer or an authorized dealer of the OEMs for the purchase of genuine auto spare
parts. Thus,
CCI held that the restrictions placed on the OESs under the agreement between OEMs
and OESs
are anti-competitive in nature and are violative of Section 3(4) of the Act.
On the issue of arrangement between the OEMs and the authorized dealers, CCI held
that the
provisions in the agreements, which require the authorized dealers to source the
spare auto parts
only from the OEMs, are anti-competitive in nature. The Commission has taken
corrective
measures by directing the OEMs to train the independent repairers so that the end
consumers would
be able to approach the independent repairers for spare parts. Without having taken
such measures,
the effect of the order would not be of much significance because lack of basic
training will hinder

ICRA Reseach Services, Indian Automobile Industry, “CCI’s proposed penalty on

Passenger Vehicle OEMs not
materially credit negative”, available at: http://icra.in/Files/ticker/SH-2014-Q3-
3-ICRA-Automobiles.pdf (Published on
September 2014)
the independent repairers from repairing the vehicles even if they have the
requisite spare parts and
diagnostic tools.
On question of Abuse of Dominance
On the aspect of abuse of dominance by the OEMs, CCI decided on three major sub-
issues namely
market access deniability, unfair pricing and leveraging the dominant position.
Commission also
held that the OEMs abused their dominance in the relevant market of supply of spare
parts to
protect the other relevant market namely the after sales service and maintenance,
thereby, violating
Section 4(2)(e). 5 Thus, CCI finally held that the OEMs have abused their dominant
position by
indulging in anti-competitive activities in violation of Sections 4(2)(a)(i), 4(2)
(a)(ii), 4(2)(c) and
4(2)(e) of the Act CCI observed that the OESs were not supplying the spare parts to
the Indian
aftermarket directly.6 It was further revealed by the Commission that the agreement
between OEMs
and the local OESs imposed restrictions on the OESs to supply spare parts directly
to the third
parties without prior permission of the OEMs. while deciding the issue on ‘dominant
position’, the
Commission has drifted away from the definition of ‘dominance’ in this particular
case. The
Commission has said that an OEM‟s dominant position will be seen in respect of the
products
manufactured by it.7
Undoubtedly, it can be said that either the entire spare products/diagnostic tools
is one relevant
market and all the players are participating in that one market or it can be said
that the
manufacturer‟s specific products are the relevant market. In the first case, it is
difficult that there
can be 15-20 dominant players in one market and in second case, which has been
accepted by the
Commission, not only does the automobile sector but also the car/motor
manufacturers will enjoy
dominant position in respect of their manufactured products. If that would be the
scenario, then CCI
is duty bound to check each manufacturer for abuse of dominant position. 8
On question of Intellectual Property.
The CCI considered the IP defence under s 3(5) while determining the existence of
an anticompetitive agreement between the manufacturer and the authorized seller or
workshop. To begin

OECD Policy Roundtables,

2011, “Excessive Pricing”,
DAF/COMP(2011)18,
http://www.oecd.org/daf/competition/abuse/49604207.pdf (Published on February 07,
2012)
6
Para 16.1, Neeraj Malhotra vs Deustche Post Bank Home Finance Ltd. & Ors. (Case No.
06 of 2009)
7
Shri Shamsher Kataria vs Honda Siel Cars India Ltd. & Ors. (case No.03 of 2011)
8
Eastman Kodak Co. vs. Image Tech. SVCS., 504 U.S. 451(1992).

available

at:
with, CCI correctly observed that it is not the competent authority to decide, for
example if a
patent/trademark that is validly registered under the applicable laws of another
country fulfils the
legal and technical requirement or is capable of being registered under the Indian
IPR statutes,
specified under section 3(5) of the Competition Act. The economic and cultural
importance of the
collection of rules of IPRs is increasing rapidly.9

This is a welcome observation. To prove the existence of an IP right protected by

the statutes listed
under Section 3(5), the person must adduce adequate documentary evidence. It is the
subsequent
analysis of CCI which is deeply problematic.

• First, the CCI drew a distinction between the right to exploit an IPR and the IPR
itself, holding
that the former is not protected by s 3(5). This appears to contradict the text of
the exemption
which refers to ‘any person’ and not just the enterprise alleged to have violated S
310.

• Secondly, with regard to non-registered IP such as copyright, the CCI states that
no such
copyright can exist in engineering drawings as it should have been registered as a
design instead
(S 15 of the Copyright Act 1957). Not only does the CCI adjudicate upon the
existence of the IP
right (contrary to the quote above): it also completely skirts the issue of
copyright over technical
manuals and software programs.

• Thirdly, in evading the issue of the existence of the IP right, the CCI held
that, in any event, the
conditions are unreasonable: manufacturers can sell spare parts in which IP exists
even in the
open market without compromising the IP. By adequate regulation, even independent
service
providers would be capable of delivering the same safety and quality of spare parts
without any
adverse effect to the IP. The CCI lost sight of the proposition that the freedom to
not deal with
competitors is an inherent right of IP.
IMPLICATIONS AND SIGNIFICANCE
The order by the CCI against the 14 car manufacturing companies holds significance
as it is the first
case where the Commission has imposed penal provisions on companies violating
provisions
9

William W. Fisher III, Theories of Intellectual Property, Originally published in

New Essays in the Legal and Political
Theory of Property (Stephen Munzer, 2001), available at
http://cyber.law.harvard.edu/people/tfisher/IP
Fisher_IP_Theories.pdf, l
10
MCI v AT&T (708 F 2d 1081 (7th Cir 1983))
dealing with anticompetitive agreements and abuse of dominant market position in a
vertical
market. Though the penalty imposed is the lowest by CCI until the present date, yet
the OEMs
might face potential claims for compensation by affected consumers. The Competition
Appellate
Tribunal (COMPAT) had previously in the Aluminium Phospide tablets cartelization
case, imposed
penalty on the ‘relevant turnover’ and not the ‘total turnover’. But however, the
CCI in the present
case, imposed penalty on the „total turnover‟ of the guilty enterprises. This is a
departure from the
ruling in the preceding case. Thus, this can be raised as a ground for appeal by
the OEMs.
For the first time, the CCI in Kataria has fully considered the IP defence in
Indian antitrust law.
While there is no IP exemption from an allegation of abuse of dominance, the CCI
has adopted the
EU's ‘essential facilities’ doctrine. This will prove crucial in Micromax, where
the issue of FRAND
licensing of SEPs has arisen. However, since it appears necessary to adduce
documentary evidence
to claim the exemption under s 3(5), it is advisable to register the IP under
Indian statues to the
extent possible. While the CCI has categorically stated that it would not question
the validity of the
IP, it also essentially held that mandatory licensing would not infringe the IP.
This reasoning is
clearly flawed and the only limiting principle that can be deduced is that this
will be restricted to
secondary markets (and derivative products). While the automobile manufacturers
will surely
appeal this decision to the Competition Appellate Tribunal, these observations are
bound to guide
the approach of the CCI in antitrust investigations in the near future.
POST JUDGMENT ACTIONS
Certain car companies had approached the Delhi High Court against the Order.
Additionally, there
is a challenge to the proceeding pending in the Madras High Court and the Delhi
High Court has
therefore directed car manufacturers to approach the Madras High Court. It is
interesting to note
that OEMs have approached the High Court in a writ petition rather than avail the
statutory appeal,
namely, appeal to the Competition Appellate Tribunal. A possible reason could be
the nature of the
challenge to the Order on the ground that the Order is vitiated by lack of
jurisdiction and suffers
from arbitrariness and hence, parties need not approach the statutory appellate
authority.
CONCLUSION
The Commission has imposed penalty on “total turnover” of the OEM’s rather than on
“relevant
turnover” in the spare parts market. According to Competition Appellate Tribunal’s
(“COMPAT”)
decision in Aluminium Phosphide tablets cartelisation case11, penalty should be
calculated on the
basis of the “relevant turnover” instead of overall turnover of the guilty
enterprise. The Commission
in this case had clearly distinguished the primary market and aftermarkets, and
have held
aftermarket of sale of spare parts as the relevant market. Clearly, the turnover of
only the relevant
market should have been considered for determining the penalty. The OEMs may use
this ground in
appeal.
This decision of the Commission is a wakeup call for all the market players and the
government as
well. The Commission has espoused the need to have an appropriate framework for
safety and
standards relating to spare parts and after sales services and have requested the
government to look
into it. The order also sends a message to the business world to do assessment of
their market
behaviors and their agreements. Sophisticated industries similar to the auto
manufacturing sector
(e.g. computer industry, mobile industry and other industries where after sale
services and use of
defective parts is sensitive due to model specific technology and standard) need to
assess their after
market conducts.
Further, the OESs and authorized dealers who have contracted with OEMs need to
quickly asses
there agreements and question OEMs on implication of the order. Though the
Commission’s order
does not give any specific directions to them, nonetheless they are a party to
these anti-competitive
agreements. This also raises an interesting question – whether every non-protesting
party to a
vertical anti-competitive agreement is hit by the order or only the dominant party?

11

M/s Excel Corp Care Ltd v. CCI, Appeal No. 79, 80 and 81 of 2012. The Commission
has challenged this order
before the Supreme Court of India.
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(2009)
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Websites

- http://www.cci.gov.in/
- http://www.mondaq.com/
- http://www.oecd.org/regreform/sectors/oecdjournalofcompetitionlawandpolicy.htm
- https://jcle.oxfordjournals.org/