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26 September 2019
On 10 April 2019 the Delhi High Court disposed of 12 writ petitions filed by 10 car manufacturers (ie, BMW, Mercedes Benz, Fiat, Skoda, Volkswagen, Honda, General Motors, Tata Motors, Hindustan Motors and Mahindra & Mahindra) and India's largest music label and movie studio, T-Series – Super Cassettes Industries Pvt Ltd. The writ petitions had challenged the main provisions of the Competition Act 2002 and were filed against a common order passed by the Competition Commission of India (CCI) on 25 August 2014, which had imposed penalties on 14 car manufacturers.(1) In its order, the CCI had found that each of the car manufacturers, including the 10 named above, had been dominant in their respective markets and abused this dominance by preventing the establishment of an aftermarket (ie, the spare parts and repair services market) in India by imposing vertical restraints on their authorised dealers.
The specific provisions of the act which the petitioners challenged before the High Court were:
The original informant was Shamsher Kataria, who alleged that Honda India, Volkswagen India and Fiat India had violated Sections 3 and 4 of the Competition Act by restricting the supply of genuine spare parts in the open market. Kataria alleged that:
However, the director general, whom the CCI had ordered to investigate the allegations, expanded the scope of the investigation (with the CCI's permission) to include other car manufacturers.
The original CCI order of 25 August 2014 was challenged by three of the 14 car manufacturers (ie, Ford India Pvt Ltd, Nissan Motor India Pvt Ltd and Toyota Kirloskar Motor Pvt Ltd) before the Competition Appellate Tribunal (COMPAT).
On 9 December 2016 COMPAT, while upholding the CCI's substantive order, reduced the penalty imposed by the CCI at the rate of 2% of the infringing parties' average annual turnover to 2% of their average 'relevant turnover' (ie, the average annual turnover of spare parts in the aftermarket). It also dismissed the three appellants' claims and issued eight specific directions with the aim of opening up the spare parts and repairs and maintenance aftermarkets in India.
Is CCI a tribunal with judicial functions or does it have administrative and investigative functions and adjudicate issues?
In answering this question, the Delhi High Court referred to SAIL,(2) in which the Supreme Court held that when information or a complaint received by the CCI triggers an inquiry, the first steps which it takes are not always in aid of adjudication, but may be to discern whether the investigation and further steps towards adjudication are necessary. This function was considered relevant by the Delhi High Court, which observed that a court or tribunal is seized of a dispute when approached by a litigator. The Delhi High Court observed that the issuance of a notice or summons by the court in exercise of its jurisdiction is a judicial act; however, in the early stage of CCI proceedings, when it entertains and directs an inquiry, its function is merely administrative. The Delhi High Court also observed that in discharging their investigative functions, the director general and the CCI are not concerned with a dispute between two parties over a legal relationship, status or private property, but rather whether the Competition Act has been breached.
In view of the specific functions performed by the CCI (ie, advisory, investigative, administrative and adversarial), the Delhi High Court held that it does not perform the exclusive adjudicatory functions of a tribunal. However, the court ruled that this finding does not mean that the CCI's orders are not quasi-judicial. In this regard, the court observed that CCI orders are subject to appeal to a tribunal (ie, an appellate tribunal). Further, they are open to judicial review as regards any procedural flaw under Articles 226 of the Constitution.
Based on these findings, the Delhi High Court held that the CCI does not perform purely adjudicatory functions so as to be characterised as a tribunal which discharges solely judicial powers of the state. Rather, it is part administrative, part expert (ie, its advisory and advocacy roles) and part quasi-judicial (ie, its final orders, directions and penalties).
Is CCI unconstitutional because it violates the separation of powers doctrine?
When the CCI considers a complaint or information and records a prima facie opinion, it acts administratively. Further, during an investigation, the director general does not decide the dispute – it is only after the director general's report has been submitted and a hearing has taken place that a (quasi-judicial) order is made. The Delhi High Court observed that the ultimate test to apply in considering whether a law violates the separation of powers doctrine is to check whether the executive or any other branch of the authority in question "takes over an essential function". The fact that some acts bestow authorities with a broad range of administrative, quasi-legislative and quasi-judicial functions per se does not make that authority judicial or purely administrative. While referring to the multiple functions that the act bestows on the CCI (ie, advisory, adversarial, investigative and adjudicatory), the Delhi High Court held that the argument that the CCI must comprise lawyers, persons with judicial experience or persons entitled to hold office as judges was without merit.
As regards the CCI's membership, the Delhi High Court relied on the Supreme Court's decision in Utility User's Welfare Association,(3) which concerned Section 113 of the Electricity Act 2003 – under which the appointment of a judicial member is not mandated – which states as follows:
We are, thus of the unequivocal view that for all adjudicatory functions, the Bench must necessarily have at least one member, who is or has been holding a judicial office or is a person possessing professional qualification with substantial experience in the practice of law and who has the requisite qualifications to have been appointed as a Judge of the High Court or a District Judge.
Accordingly, the Delhi High Court held that when the CCI issues adjudicatory orders (especially final orders), the judicial member's presence and participation is necessary.
As regards the necessary qualifications to be appointed as a member of the chair of an appellate tribunal under Section 53D of the Competition Act, the Delhi High Court observed that the tribunal performs judicial functions by hearing and deciding appeals of CCI orders. However, the mandate that the chair must have been a former Supreme Court judge or high court chief justice and obtained the approval of the chief justice and at least one Supreme Court judge is sufficient to guarantee their judicial experience.
As regards Section 53E, which was challenged on the ground that the selection committee which appoints the chair and members of an appellate tribunal is overseen by the executive, the Delhi High Court referred to Madras Bar Association v Union of India(4) and held that the personnel chosen for the task assigned to COMPAT must be approved by the chief justice and at least one judge of the Supreme Court. Consequently, Section 53E, as it stood prior to the 2007 amendment, was declared unconstitutional.
Section 22(3) – is double voting by chair unconstitutional?
Section 22(3) of the Competition Act provides that all questions under consideration in a CCI meeting must be decided by the majority of members present and voting and that in the event of a tie, the chair or presiding member has a casting vote. Section 22(3) stipulates a minimum quorum of at least three members for all meetings. The petitioners in the case at hand argued that this power of the chair or presiding member to vote twice (ie, have a casting vote) was detrimental to the judicial system and was more suited to board meetings under a corporate structure. As regards the minimum quorum of three, it was argued that whenever the quorum is an even number (eg, four or six), the chair or presiding member presiding has their say by voting twice.
The Delhi High Court observed that the concept of a casting vote is better suited to meetings where decisions to operate a body or select personnel are taken and not to meetings where an adjudicatory function which presupposes a fair procedure is undertaken, such as meetings of a tribunal comprising impartial members who render their decisions objectively. The Delhi High Court noted that a strong element of collegiality is necessary in all stages of an appeals tribunal's functioning, but particularly during the decision-making stage. Further, this collegiality may be compromised if the chair or presiding member has a second vote. Considering that a casting vote may sway the vote, the Delhi High Court declared Section 22(3) void in its entirety. However, it retained the proviso which mandates a quorum of three members, which stands alone and is the norm.
Does 'revolving door' practice vitiate the act or CCI decisions?
The appellants also objected to Section 22(3) due to the so-called 'revolving door' policy, which enables members to participate in only one or some proceedings or cease from participating at their will, which does not guarantee a fair hearing and violates the basic principle of 'one who hears must decide'. The revolving door allegation was based on the premise that certain persons who had heard the final arguments in the Shamsher Kataria case before the CCI had chosen not to sign the final order of 25 August 2014.
Sanjay Jain, on behalf of the CCI, refuted this allegation and stated that only three members had signed the order; all other members who had heard the final arguments had retired and the newly appointed members had not signed the final order as they had not heard the final arguments and thus complied with the principle of one who hears must decide.
The Delhi High Court held that the question of whether the principle of natural justice has been violated depends on the facts and circumstances of each case. It noted that in the present case, the three members who had finally decided the matter had been present throughout the entire final hearing. Four of the other original members had retired, and the mere fact that one of the members had been present on two hearing dates but had not been a party to the final decision per se did not amount to a violation of the principles of natural justice. In addition, the three parties (ie, Nissan Motors, BMW and Mahindra & Mahindra) that had raised the issue of the tribunal's varying composition were satisfied that no prejudice would be caused to them in the 24 July 2013 order in which the CCI declared that only members who heard the matter and were present at the time of arguments could decide it.
In view of the above analysis, the Delhi High Court held that the possibility of a 'revolving door' did render Section 22(3) invalid. The court supported this view by referring to the Supreme Court's decision in State of Rajasthan v Union of India(5) and Sushil Kumar Sharma v Union of India,(6) in which it was observed that the:
mere possibility of [an] abuse of [a] provision of law does not per se invalidate a legislation. It must be presumed, unless contrary is proved, that administration and application of a particular law would be done not with an evil eye and an unequal hand.
However, bearing in mind the undesirability of a decision by a smaller number of members when a hearing is undertaken by a larger body, the Delhi High Court issued certain directions which will guide the CCI in its hearings and when rendering final decisions. The court stated that when all evidence has been heard, the CCI should set down the case for a final hearing. When the final hearing commences, the membership of the CCI should be constant and the same number of members should write the final order. The court further ordered that no member should take an individual break during the course of the proceedings and rejoin the proceedings later, as such walk-out/walk-in practice is detrimental to the principles of natural justice.
The court also opined that the CCI should comprise all nine members, which will enable the chair to ensure that enough members are present at every important hearing and final hearing. As regards the appointment of technical members, the Delhi High Court stated that the government should consider recruiting legal practitioners who regularly practise in the company, competition, securities and other related legal fields and have sufficient experience.
Was CCI's power to expand scope of inquiry under Section 26(1) illegal?
The information filed before the CCI in the Shamsher Kataria case concerned only three car manufacturers (ie, M/s Honda Siel Cars India Ltd, Volkswagen India Pvt Ltd and Fiat India Automobiles Ltd). It alleged that they had abused their dominant positions by opening the aftermarket for spare parts to independent dealers. After forming a prima facie opinion, the CCI directed the director general to investigate by way of a 24 February 2011 order made under Section 26(1). Subsequently, the director general asked the CCI for permission to expand the scope of the investigation to include other car manufacturers. The CCI granted such permission and expanded the scope of the investigation by a second order under Section 26(1), dated 26 April 2011. This second order was challenged before the Delhi High Court.
The Delhi High Court, while referring to the Supreme Court's judgment in Excel Crop,(7) observed that when the CCI decides to act on a complaint and orders an investigation, it does not always have all of the information or material in respect of the general pattern of behaviour or the method adopted by parties which affected the marketplace. Rather, it has before it only the information on which the director general based the decision to inquire into the matter. Thus, it is during such an inquiry that the facts leading to a decision of pervasive practices by one or more entities may be discovered. At this stage, the investigation is quasi-inquisitorial to the extent that the report given is inconclusive of the rights of the parties; however, to the extent that evidence is gathered, the material can be final. The Delhi High Court noted that Excel Crop dealt specifically with the question of subject matter expansion and that the Supreme Court had clarified that the director general can expand the subject of investigations, which are not limited to the parties against which allegations have been levied, but may be extended to other associated ones (eg, third parties). Accordingly, the Delhi High Court was not convinced by the petitioners' plea that the CCI had acted in an illegal manner.
Is Section 27(b) of the act unconstitutional or were CCI's orders arbitrary because no separate hearing was held and the act provides no guidelines on exercise of discretion?
The Delhi High Court observed that a deeper analysis of the nature of CCI proceedings revealed that the procedure that it must adopt gives sufficient safeguards to parties – with regard to both its findings and any penalties. The first step of the procedure, in which the CCI decides whether to issue a notice to the director general, is an administrative step and does not contemplate a prior hearing, as held in Excel Crop. The next step is the director general's investigation, in which the parties, where necessary, receive notice and opportunity and can seek directions to the director general from the CCI. This stage also includes evidence gathering, and cross-examination occurs where necessary. Next, the director general drafts a report. The parties can submit objections or comments regarding this report and have the opportunity of a full hearing. The Delhi High Court noted that this step is significant because when the parties submit their objections or comments to the CCI, they have foreknowledge of all evidence – including adverse evidence and comments made in the director general's report – and are thus aware of the options in terms of both the CCI's findings and any penalty. The Delhi High Court noted that in the Shamsher Kataria case, the CCI had followed all of the steps set out by law. As such, the penalty order was justified.
In response to the argument that Section 27 of the Competition Act provides no guidelines on how to impose a penalty and the argument that there is no maximum penalty which can be imposed, the Delhi High Court referred to the principles set out by the Supreme Court in Excel Crop and Hindustan Steel Ltd v State of Orrisa and held that these principles (which guide the CCI during the imposition of penalties) are sufficient to rebuff claims of unconstitutionality levied against Section 27.
For further information on this topic please contact MM Sharma at Vaish Associates by telephone (+91 11 4249 2525) or email (email@example.com). The Vaish Associates website can be accessed at www.vaishlaw.com.
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Man Mohan Sharma