31 October, 2018
The Supreme Court of India (Supreme Court) recently allowed an appeal1 filed by manufacturers of Liquified Petroleum Gas (LPG) Cylinders against the order of the erstwhile Competition Appellate Tribunal (COMPAT) which upheld the findings of the Competition Commission of India (CCI) that the manufacturers had indulged in cartelization. The Supreme Court appears to have passed the judgment in favor of the LPG Cylinder Manufacturers due to insufficiency of evidence to hold that there was an agreement between them for bid rigging.
Background
The CCI took suo moto cognizance of the matter based on an investigation report filed by Director General, CCI (DG) in another case titled M/s Pankaj Gas Cylinders Ltd. v. Indian Oil Corporation Ltd (IOCL) 2 . The investigation report in above referred case revealed that there was identical/ similar bidding by 50 bidders in response to a tender floated by IOCL for procurement of LPG gas cylinders. The DG indicated that there were strong indications of an agreement and understanding amongst the bidders to manipulate the process of bidding.
The CCI based on the facts revealed by the DG, directed further investigation into the matter. Thereafter, the CCI passed an order upholding the findings of the DG that there was bid rigging. While arriving at its conclusion, the CCI analyzed various factors such as identical quotations, meetings at the association level before submission of bids, absence of business justifications for quoting identical rates, appreciable adverse effect on competition (AAEC) and thereafter imposed a penalty on 44 bidders.
Aggrieved by the order of the CCI, the bidders filed an appeal before the COMPAT, which upheld the order of the CCI on the ground that
(a) the meetings at the association level, before the tender opening date raised suspicion;
(b) the association of LPG cylinder manufacturers provided a platform to the bidders;
(c) common replies by all parties coupled with the fact that there were common agents for depositing bids.
The COMPAT also considered various plus factors such as
(a) market conditions- constant demand for cylinders;
(b) small number of players;
(c) few new entrants; (d) active trade association;
(e) repetitive bidding;
(f) identical/ similar pricing even though there were locational differences in the manufacturing units of the bidders.
The COMPAT also observed that owing to the collusion amongst the bidders, IOCL could not get lower or competitive prices and that there was approximately a 30 percent rise in prices, consequently resulting in AAEC. However, the COMPAT reduced the quantum of penalty imposed by the CCI considering the ‘relevant’ turnover of the parties as opposed to the ‘total’ turnover.
Aggrieved by the order of the COMPAT, the LPG Cylinder manufacturers challenged the order on merits as well as quantum of penalty before the Supreme Court, whereas the CCI filed a cross appeal in respect of the reduction in penalty granted by the COMPAT.
Proceedings before the Supreme Court
The primary argument adopted by the LPG Cylinder manufacturers was that the market conditions were one of the reasons for identical/ similar bidding pattern and that there was a situation of oligopsony and the modus which was adopted by IOCL in floating the tenders and awarding the contracts would show that the determination of price was entirely within the control of the IOCL. They also contended that the way in which the price was determined had become an open secret to all manufacturers.
However, the CCI and COMPAT relied upon plus factors to show that there was meeting of minds and bid rigging.
The Supreme Court while dealing with the contentions of the parties, observed that all manufacturers were awarded tenders so that all parties are kept afloat and if IOCL would have left some manufacturers, the left-out lot would have had to shut shop. It was also observed that the government has control over the supply of cylinders to end consumers and the price to consumers is also controlled by the government.
The Supreme Court also considered a previous tender which was floated by a government entity, wherein after opening of the said tender, the rates of the bidders came to be known. It was also observed that 12 new entrants, cannot be considered as few new entrants and concluded that identical product along with market conditions leans in favor of the manufacturers. Moreover, the Supreme Court refuted the contention of identical pricing despite varying costs due to locational differences, by noting that the bidders had to quote the lowest even if their manufacturing cost was higher. The main purpose behind this was to remain in the fray and not to lose out business coupled with transparency in the market regarding prices of a standardized product.
Another observation of the Supreme Court was that the meeting before the tender raised suspicion, however despite 19 parties not attending the meeting and still quoting identical/ similar price shows that the meeting was not for pricing.
The Supreme Court held that the market conditions prevalent were that of an oligopsony and parallel behavior was not the result of any concerted practice. It was observed that in a oligopsony, parallel pricing simplicitor would not lead to the conclusion that there was a concerted practice and there has to be other credible and corroborative evidence.
Basis the above, the Supreme Court concluded that the LPG Cylinder manufacturers were able to discharge the onus upon them and consequently allowed the appeal and set aside the penalty imposed upon the manufacturers. The Supreme Court also made certain remarks to suggest that CCI should have delved deeper into issues and should have also heard IOCL as the same would have cleared many shrouded aspects.
Conclusion
The judgment appears to suggest that as a starting point there is no need to assess the factors laid down under Section 19(3) of the Act in case of ‘cartels’, as they are presumed to have an AAEC. However, if the parties lead evidence which dispels the presumption, then the CCI shall take into consideration the factors mentioned in Section 19 (3) and if any of the factors stand fulfilled, the same would again be treated as an agreement which may cause or is likely to cause an AAEC, compelling the CCI to take further remedial action.
The Judgment also seems to contradict observations given by the Supreme Court in an earlier judgment titled as the Excel Crop Care3 case, wherein the appellants were held to be guilty of bid-rigging a tender floated by a Government corporation for procurement of Aluminum Phosphide tablets.
In the LPG case, the Supreme Court has observed that identical/ similar pricing, even when there are plus factors such as meetings right before the tender opening date, identical pricing even when there are locational differences between the manufacturing facilities of bidders, cost of production may not be credible evidences to corroborate an anti-competitive agreement. However, in the Excel Crop Care case, the same bench of the Supreme Court rejected similar arguments by the appellants and went on to hold them liable.
Furthermore, in the Excel Crop Care case, the Supreme Court accepted the argument put forth by the CCI that price parallelism is not applicable in bid cases and it fits in the realm of market economy. However, in the LPG case, which was a bid rigging case, the Supreme Court appears to have tested the theory of price parallelism.
These contradictory observations may muddle the already existing issues which stem over the credibility of circumstantial evidence in cartel cases.
This is the third cartel case which has been put to rest by the Supreme Court and it will be interesting to see the approach which the Supreme Court adopts in the cement cartel case, where the evidence which suggests cartelization revolves around circumstantial evidence as opposed to direct evidence.
For further information, please contact:
Arjun Nihal Singh, L&L Partners Law Offices
info@luthralaw.com
1 Rajasthan Cylinders and Containers Ltd. And Ors. v. Union of India and Anr., Civil Appeal No. 3546 of 2014, Order dated 01 October 2018;
2 Case No. 10 of 2010;
3 Excel Crop Care Ltd. and Ors. v. CCI and Anr., (2017) 8 SCC 47 dated 8.05.2017;
