India - Landmark Decision: Constitutional Validity Of Certain Provisions Of The Competition Act.

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9 May, 2019

 

India - Landmark Decision: Constitutional Validity Of Certain Provisions Of The Competition Act.

 

In a landmark decision on 10 April 2019, a division bench of the High Court of Delhi (Delhi HC), pronounced a judgment relating to a batch of petitions filed by car manufacturers, which challenged the constitutionality of certain provisions of the Competition Act, 2002 (Act).

 

The genesis of the matter arose from the Competition Commission of India’s (CCI) findings in what has come to be known as the Auto Parts Case. The complaint alleged that three car manufacturers, M/s. Honda Siel Cars India Ltd, Volkswagen India Pvt. Ltd and Fiat India Automobiles Limited, restricted free availability of spare parts in the open market, which caused a denial of market access for independent repairers. This was in addition to other anti-competitive effects including high prices of spare parts and repair and maintenance services for automobiles.

 

After a detailed investigation by the Director General (DG) into the practices of 14 car manufacturers (the Informant had only complained about three car manufacturers), the CCI found that the car manufacturers had contravened provisions of Sections 3 and 4 of the Act and levied a penalty of 2% of the total turnover in India on each of the manufacturers.

 

As a consequence, some car manufacturers filed a writ before the Delhi HC challenging the constitutional validity of certain provisions of the Act, which directly impacted the validity of the CCI’s final order in the Auto Parts Case.

 

Key Issues for Determination  

 

The Delhi HC delineated the following key issues for determination:

 

  1. Whether the CCI is a tribunal exercising judicial functions.
  2. Whether the composition of the CCI is unconstitutional and violates the principle of separation of powers.
  3. Whether the ‘revolving door’ practice at the CCI vitiates any provisions of the Act and, more specifically, if the manner for decision making provided under Section 22(3) of the Act is unconstitutional.
  4. Whether it is illegal to expand the CCI’s scope of inquiry .

 

Ruling on the first issue, the Delhi HC held that the CCI is in part administrative, expert (when discharging advisory and advocacy functions) and quasi-judicial (while issuing final orders, directions and penalties) and cannot be characterised as a tribunal solely discharging judicial powers.

 

On the second issue, the Delhi HC dealt with each of the provisions of the Act that were challenged by the petitioners and also undertook a comparison of regulatory models of different specialised bodies/tribunals vis-à-vis the CCI. In particular, the following were upheld to be valid:

 

  1. Section(s) 61 and 53T of the Act (which deal with exclusion of jurisdiction of Civil Courts and High Courts, respectively).
  2. Section 9 (which provides for the selection procedure/committee for members of the CCI).
  3. Section(s) 11, 55 and 56 (which deal with tenure of the members of the CCI and the provision for supersession by the Central Government in the event the CCI is unable to discharge its functions).
  4. Section 53D (which prescribes the composition and constitution of the Appellate Tribunal).

 

Regarding Section 8 of the Act, the Delhi HC clarified that it is mandatory for the CCI to have a judicial member at all times and in line with precedents of the Hon’ble Supreme Court of India (SC). The Delhi HC declared Section 53E of the Act (which deals with composition of the selection committee of the Appellate Tribunal), to be unconstitutional subject to the decision of the Hon’ble SC in Central Administrative Tribunal v. Union of India[1] (wherein certain provisions of the Finance Act 2017 have been challenged).

 

Most importantly, the Delhi HC declared Section 22(3) of the Act, which provides a casting vote to the Chairperson of the CCI to be void. It was held that the principle of equal weight for decisions of each participant of a quasi-judicial tribunal is destroyed by this provision. The proviso to Section 22(3) was upheld, however, mandating a minimum quorum of three members (including the Chairman) for any meeting of CCI – where an adjudicatory decision is made.

 

Regarding the “revolving door policy”, the Delhi HC emphasised the principle of ‘who hears must decide’ and stated that any violation of this rule would render any final order void. It also clarified that much would depend on the factual context and merely resorting to the practice of “revolving door” would not render Section 22 of the Act invalid or arbitrary. It is necessary that the party raising such objections must have been prejudiced.

 

Further, in line with the decision of the Hon’ble SC in Excel Crop Care Limited v. Competition Commission of India[2], the Delhi HC held that the CCI is well within its power to expand the scope of inquiry to include other issues and parties. This is because at the prima facie stage, the CCI may not have all information in respect of the parties’ conduct.

 

Finally, the Delhi HC has directed the CCI to frame guidelines ensuring that the principle of ‘one who hears decides’ is embodied in letter and spirit in its functioning. It concluded that in all cases where final hearings begin, the membership should not vary, and a matter should preferably be heard by seven or at least five members. The CCI has also been directed to ensure that a judicial member is present and participating at all times during a final hearing. The directions also mandate the Central Government to take expeditious steps to fill all existing vacancies in the CCI within six months.

 

Key Takeaway

 

While the directions of the Delhi HC will go a long way to entrenching principles of natural justice in the CCI’s practice and procedure, they may have immediate ramifications on its functioning (given that the CCI is currently composed of three members with no judicial member). Interestingly, this may also have a bearing on the decision of the Union Cabinet which had approved “right sizing” of the CCI to four members (including the Chairperson) in April last year.

 

Having said that, this may not be the last we hear from the judiciary as the Delhi HC order is likely to be challenged before the Supreme Court of India.

 

 

[1] W.P.(C) 640/2017.

[2] Civil Appeal No. 2480 of 2014.

 

 

For further information, please contact:

 

 

Bharat Budholia, Partner, Cyril Amarchand Mangaldas

bharat.budholia@cyrilshroff.com