India - Delhi High Court Rules On The Constitutionality Of Certain Provisions Of The Competition Act In Its Auto Parts Decision.

Legal News & Analysis - Asia Pacific - India - Competition & Antitrust

25 April, 2019

 

On April 10, 2019, a division bench of the High Court of Delhi (‘DHC’) comprising Justice Ravindra Bhat and Justice Prateek Jalan (‘Bench’) pronounced its landmark judgement in relation to the petitions filed by original equipment manufacturers (‘OEMs’) of passenger cars (‘Petitions’). The Petitions challenged the constitutional validity of certain provisions of the Competition Act, 2002 (‘Act’) and associated regulations. Specifically, Sections 8, 9, 15, 17, 22, 26, 27(b), 17, 36, 53A, 53B, 53C, 53D, 53E, 53F, 53T, 55, 56 and 61 of the Act and Regulations 37, 41, 44, 45 and 48 of the Competition Commission of India (General) Regulations, 2009 (‘General Regulations’) (‘Impugned Provisions’) were challenged, along with two orders of the Competition Commission of India (‘CCI’) dated April 26, 2011 and August 25, 2014.

 

Background

 

The genesis of the Petitions relates to information filed with CCI by Mr. Shamsher Kataria (‘Informant’) against Honda Siel Cars India Limited, Volkswagen India Private Limited and Fiat India Automobiles Limited. On February 24, 2011, by way of a prima facie order under Section 26(1) of the Act, CCI directed its Director General (‘DG’) to conduct an investigation based on the Informant’s allegation that the three OEMs placed restrictions on: (i) their authorized dealers from making over-the-counter sales of their spare parts and diagnostic tools; and (ii) the supplier of the spare parts making direct sales in the market. The Informant had alleged that such practices limited consumer choice and raised the prices of repair and maintenance services of the OEMs’ cars. On April 26, 2011, CCI passed an order accepting the DG’s request to expand the scope of the investigation to include 11 other OEMs (‘First Order’).

 

On August 25, 2014, based on the submissions of the OEMs and the DG’s investigation report, CCI held that the OEMs had contravened Section 3(4) (Prohibition against Anti-Competitive Vertical Agreements) and Section 4 (Prohibition of Abuse of Dominance) of the Act, for restricting supply of their spare parts in the market, amongst other reasons (‘Final Order’). CCI imposed a penalty of 2% of the total turnover in India for three financial years (2007-08, 2008-09 and 2009-10) on each of the 14 OEMs, along with directions which inter alia included the standardization of spare parts across brands, and access to diagnostic tools and spare parts of the OEMs to all independent repairers.

 

DHC’s issue-wise findings

 

Ten of these OEMs (viz., Mahindra, Tata Motors, General Motors, Mercedes Benz, Skoda, Honda, Volkswagen, Hindustan Motors, Fiat and BMW) filed a writ petition before the DHC on the constitutional validity of the Impugned Provisions, and on that basis, the validity of CCI’s First Order and Final Order. Based on the submissions in the Petitions and those by CCI, the Bench delineated six issues for consideration:

 

i.       Whether CCI is a Tribunal exercising judicial functions:

 

The Bench held that unlike a Tribunal which performs purely judicial functions, CCI is a body that is in part administrative, expert (when discharging advisory and advocacy functions) and quasi-judicial (when it determines the rights and liabilities of parties by way of issuing final decisions, directions and penalties, after the conclusion of the DG’s investigation), and does not perform exclusively adjudicatory functions.

 

ii.      Whether the composition of CCI violates the constitutional principles of separation of powers:

 

The Bench held that to examine whether a particular law violates the ‘separation of powers’ principle, the Court would be required to examine if the executive branch or any other branch usurps an essential judicial function. Based on the reasons provided below, the Bench held that there was no violation of the separation of powers principle in the present case:

 

•   Comparison with other regulatory bodies: The Bench made reference to other commissions and Tribunals, including the Securities and Exchange Board of India (‘SEBI’), the Telecom Regulatory Authority of India (‘TRAI’), and the Central Electricity Regulatory Commission (‘CERC’). It observed that different specialized bodies follow different models, and there is no ‘one size fits all’ approach or a tipping point, where regulatory models are considered ideal. Accordingly, the Bench held that since CCI performs multiple tasks as stipulated by the Act (advisory, advocacy, investigation and adjudication), it is not necessary for CCI or the appellate tribunal to necessarily comprise entirely of lawyers or those possessing judicial experience or those entitled to hold office as judges, to conform with the Constitution (however, please see the point on composition of CCI below).

 

•   Exclusion of jurisdiction of Civil Courts (Section 61 of the Act): The Bench noted that CCI does not decide a traditional lis (dispute), which is premised on an adversarial proceeding, like a Court. Therefore, no party has the absolute right to demand that a dispute is to be adjudicated only by a Civil Court. The Bench relied on a previous judgement of the Supreme Court that had examined similar considerations in relation to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and found it to be constitutional. For these reasons, Section 61 was held valid.

 

•   Exclusion of the scrutiny of High Courts (Section 53T of the Act): Section 53T, which provides for an appeal from an order of the appellate tribunal to be made directly to the Supreme Court (excluding scrutiny by the High Court altogether), was held to be valid. While the Bench acknowledged that there may be some merit in allowing an appeal from a decision of the appellate tribunal to the High Court, the same is insufficient to hold a section unconstitutional.

 

•   Composition of CCI (Section 8 of the Act): Under the Act, CCI is presently required to be comprised of members with qualifications and expertise in diverse fields (including legal). It is not mandatory for CCI to have a judicial member. The Bench held that this does not satisfy the test of constitutionality as set by the Supreme Court in State of Gujarat v. Utility Users Welfare Association[1] which requires the presence and participation of a judicial member at all times when adjudicatory orders (especially final orders) are made by CCI. Accordingly, the Bench read into Section 8 of the Act the requirement for CCI to mandatorily have a judicial member at all times.

 

•   Selection procedure of CCI Members (Section 9 of the Act): The Bench observed that under Section 9 of the Act, the selection committee consists of five members, including the Chief Justice of India (or his nominee) as the Chairman, and two outside independent experts. Accordingly, the Bench held that the Act provided sufficient safeguards to ensure that the executive does not dominate the selection process of CCI members, by mandating the 5-member selection committee to be chaired by the Chief Justice of India (or his nominee) and two independent experts.

 

•   Tenure of CCI Members and supersession by the Central Government (Sections 11, 55 and 56 of the Act): The Petitions had alleged that Sections 55 and 56 of the Act violated the principle of separation of powers since they allowed the Central Government to issue directions to CCI and supersede it in the event the Central Government perceives that CCI is unable to discharge its functions. The Bench stated that similar provisions have been made by the Parliament in other regulatory enactments, and therefore Sections 55 and 56 were not specific to the Act. Further, Section 11(3) of the Act safeguards the tenure of the CCI members from any arbitrary removal by the Central Government as it requires the Central Government to seek the permission of the Supreme Court before removing a CCI member. Accordingly, Section 11 was held to be valid.

 

•   Constitution of the Appellate Tribunal (Section 53D of the Act): The Bench has opined that the Chairman of the appellate tribunal should be a former Supreme Court judge or a Chief Justice of a High Court which will sufficiently guarantee the application of a judicial mind, and judicial principles to the issues brought before that Appellate Tribunal.

 

The Bench also observed that the provisions relating to Appellate Tribunal contained in regulatory enactments in various sectors (telecom, electricity, airports, securities etc.) follow an identical pattern.

 

•   Composition of the selection committee of the Appellate Tribunal (Section 53E): The Bench drew a distinction between the Appellate Tribunal for competition law from other regulatory tribunals, finding that the former has the ability to not merely adjudicate on appeals, but to also award compensation for damages. The Bench held that the composition of the selection committee has to be in accordance with the law laid down by the Supreme Court in the two Madras Bar Association cases, and in Swiss Ribbons Pvt. Ltd. v. Union of India[2], i.e., the Chief Justice or her/ his nominee should have a final say in the matter of selection, with the right to have a casting vote. Accordingly, the Bench held that Section 53E of the Act, as it stood, before the amendment by the Finance Act, 2017 (‘Finance Act’), is unconstitutional since it renders the Chief Justice a minority in the selection committee. However, the Bench has clarified that this observation was not determinative and is subject to the Supreme Court’s decision in Central Administrative Tribunal v. Union of India[3] – where certain provisions of the Finance Act have been challenged.

 

iii.     Whether the CCI’s decision-making process under Section 22(3) and the revolving door practice (whereby any members of CCI can participate in any proceeding at any given point of time) is unconstitutional:

 

•   The Bench noted that a casting vote (by the CCI chairman), which may potentially lead to an adjudicatory result is unconstitutional.  It held that the principle of giving equal weight to the decisions of each participant of a quasi-judicial tribunal is destroyed by Section 22(3) of the Act, and therefore declared it to be void. The Bench however upheld the proviso to Section 22(3), which mandates a minimum quorum of three members (including the Chairman) for any meeting of CCI where an adjudicatory decision is made.

 

•   With respect to the ‘revolving door policy’ that Section 22(3) of the Act permitted, the Bench held that the mere possibility of abuse of power is not a ground to hold a provision of a law as arbitrary. Determination of whether a concerned party has been prejudiced by a ‘revolving door’ would depend on the facts and circumstances of each case. Referring to the facts of the case, the Bench held that the mere fact that another subsequent member participated in two intervening hearings, but was not a party to the final decision, did not in itself amount to a violation of principles of natural justice.  Having so concluded, the Bench was nevertheless of the opinion that a hearing by a larger body and decision by a smaller number (for compelling reasons or otherwise) leads to undesirable and possibly avoidable situations. To address this, the Bench issued certain directions to CCI and suggestions to the Central Government (set out in point vii below).

 

iv.      Whether the First Order, expanding the scope of the inquiry and notice under Section 26(1), was passed in an illegal and in an ‘overboard’ manner:

 

The Bench relied on the Supreme Court’s decision in Excel Crop Care Limited v. Competition Commission of India[4] (‘Excel Crop’) to observe that it is well within the DG’s powers to investigate against persons not mentioned in the information or a prima facie order under Section 26(1) of the Act. This is because the subject matter included in the prima facie order includes not only the issues alleged, but other allied and unspecified issues as well. The Bench also noted that at the prima facie stage, CCI may not necessarily have all information or material in respect of the parties’ conduct which affects competition in the market, and therefore it is within CCI’s power to expand the scope of inquiry to include other allied issues and parties.

 

v.       Whether Section 27 (b) of the Act, which empowers CCI to impose a penalty as ‘it may deem fit’, is unconstitutional and the Final Order arbitrary since no separate hearing on penalty was provided to the petitioners:

 

Differentiating the petitioners’ allegation (that the Final Order was arbitrary since there was no separate hearing on penalty) from previous Supreme Court precedents, the Bench held that the need for a separate hearing on penalty is undermined in the present case since CCI followed all the steps indicated in the statute, and did not adopt an unfair procedure in not granting a separate hearing on penalty. The Bench stated that at the time of submitting their written and oral arguments on the DG’s report, the parties are aware of the range of findings and/or sanctions that CCI can impose, as well as the statutory cap (of not more than 10 percent) on the quantum of penalty. The Bench further stated that the statute did not compel CCI to adopt an unfair procedure (i.e., the absence of a second specific hearing before imposition of penalty). Therefore, Section 27 could not be held as arbitrary or unconstitutional.

 

Further, the Bench issued the following directions:

 

•   CCI is to frame regulations to ensure that ‘one who hears decides’ is embodied in letter and spirit in all cases where final hearings are undertaken and concluded, i.e., once final hearings in any complaint or batch of complaints begin, the membership should not vary, and a matter should preferably be heard by seven or at least, five members;

 

•   After the commencement of a hearing, all the CCI members who have commenced hearing the case must continue to be a part of the proceeding, all hearings must be conducted en banc, and every member who participates in the hearings must also be a party to the final order(s);

 

•   No CCI member should be allowed to take a break during a hearing to rejoin later as this would violate the principles of natural justice and undermine public confidence in CCI’s functioning;

 

•   The Central Government is to take expeditious steps to fill all existing vacancies in CCI within six months;

 

•   CCI is to ensure that at all times, during the final hearing, the judicial member is present and participates in the hearing; and

 

•   In all cases, at the final hearing stage, the parties have to: (i) address arguments taking into consideration the factors indicated by the Supreme Court in Excel Crop and any other relevant factors; and (ii) make submissions on imposition of penalty and mitigating factors, without prejudice to the other submissions.

 

The Bench also allowed the petitioners to approach the appellate tribunal within six weeks, and directed the appellate tribunal to admit the appeal(s) on merits, without raising any objection on limitation.

 

Implications

 

The Bench has held as unconstitutional Section 22(3) (with the exception of the quorum rule) which forms the basis on which CCI takes all decisions, including adjudicatory decisions. Moreover, in light of the Bench’s direction that the minimum quorum for a CCI hearing should be five members (with at least one judicial member), and given that CCI is currently composed of three members (with no judicial member), the Central Government will need to fill up vacancies at CCI. CCI will be constrained from hearing or passing any order of an adjudicatory nature (including final orders) absent a judicial member, until the time the remaining members are appointed by the Central Government.

 

[1] 2018 (6) SCC 21
[2] 2019 SCC OnLine SC 73
[3] W.P.(C) 640/2017
[4] Civil Appeal No. 2480 Of 2014

 

For further information, please contact:

 

Zia Mody, Partner, AZB & Partners

zia.mody@azbpartners.com