Indian Competition Law

5.4 Enterprises: The meaning of enterprises for the purpose of this Act has been defined under Section 2(h) of the Act as under:

• Enterprise‘ means a person or a department of the Government, who or which is, or has been, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services, of any kind, or in investment, or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, either directly or through one or more of its units or divisions or subsidiaries, whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or at different places, but does not include any activity of the Government relatable to the sovereign functions of the Government including all activities carried on by the departments of the Central Government dealing with atomic energy, currency, defence, and space.

Explanation.-For the purposes of this clause,– (a) ‚

• activity‚- includes profession or occupation; (b) ‚
• article‚- includes a new article and ‚
• service‚- includes a new service; (c) ‚
• unit‚- or ‚
• division‚-,

in relation to an enterprise, includes– (i) a plant or factory established for the production, storage, supply, distribution, acquisition or control of any article or goods; (ii) any branch or office established for the provision of any service;A‚-65 The substance of the definition of enterprise is that it can either be a person (section 2(l)) or a department of government subject to the conditions specified in the definition carrying on an economic activity in the supply of goods or services. The definition makes it clear that all person66 or department of the government, any other entity cannot for the purpose of the Act, be treated as an enterprise unless it is engaged in commercial activities.

65	Section 2 (h)
66	Section 2(l)

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5.5 Trade Associations:- Trade associations have not been specifically dealt under the Act but they come under the purview of section 3 for they are merely association of enterprises engaged in similar kind of trade. Trade association can be defined as an association of business organizations having similar concerns and engaged in similar fields, formed for mutual protection, the interchange of ideas and statistics, and the establishment and maintenance of industry standards.67 Trade associations in India, as a socially responsible body and in enlightened self interest, can proactively promote compliance on the part of enterprises as well as themselves. They make a positive contribution to the economy, particularly to the specific industry they represent. They can legitimately lobby the authorities to resolve problems facing the industry, or create awareness about new laws or taxes or environmental issues, or ready the industry to meet new challenges. But the very fact that an association brings together competitors presents the risk that they will enter into an agreement that might violate the competition law. Any such agreement held under the auspices or cover of a trade association, can spell trouble for not only the conspiring firms but also for the association and its office bearers.

5.6 Person:- The term “person” has been defined very widely under section 2(l) 68 it would cover every conceivable entity. It would include an individual, a Hindu undivided family, a company, a firm, an association of persons, whether incorporated or not, in India or outside India, a registered co- operative society, a local authority and every artificial juridical person, not falling under any above said category.

67	Black’s Law Dictionary, 8th edition p. 133
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Section 2 (l) “person” includes– (i) an individual; (ii) a Hindu undivided family; (iii) a company; (iv) a firm; (v) an association of persons or a body of individuals, whether incorporated or not, in India or outside India; (vi) any corporation established by or under any Central, State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956); (vii) any body corporate incorporated by or under the laws of a country outside India; (viii) a co-operative society registered under any law relating to cooperative societies; (ix) a local authority; (x) every artificial juridical person, not falling within any of the preceding sub-clauses;

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However it is to be noted that persons and entities defined above will fall under the ambit of section 3 only if their activities results in any of the effect mentioned under section 3(3) and 3(4).

5.7 Practice:- The term practice have been defined under

section 2(m) of the Act as

“practice” includes any practice relating to the carrying on of any trade69 by a person or an enterprise. It is an inclusive definition. There have been practical difficulties to establish the existence of an anti-competitive agreement between the firms. The fact is that firms engaging anti-competitive behaviour have developed sophisticated mechanics of hiding their behaviour so that they escape the liability under the competition laws. Hence the competition laws of most of the countries have introduced a safety net in the form of prohibition on concerted practices However, in the Act particularly the word concerted practices had not been used it says

“practice carried on”, or decision taken by, any association of enterprises or association of persons‚- which indicates meeting of minds of enterprises resulting into practice carried in by associations of enterprises. According to Lord Denning ‚

•people who combine together to keep up prices do not shout it from the housetops.

They keep it quite. They make their own arrangements in the cellar where no one can see. They will not put anything in writing or even into word. A nod or will do. Parliament as well is aware of this. So it included not only an agreement‘ properly so called, but any arrangement‘, however informal.A‚- 70 A leading case discussing concerted practices in EU is Imperial Chemical industries v. Commission71 , in which the ECJ defined concertation under Article 81(1) (now Article 101) as A‚

•A form of coordination between undertaking which, without having reached the stage where an agreement properly so called has been concluded, knowingly substitutes practical cooperation between them for the risk of competition.¢â‚¬- 69(x) “trade’ means any trade, business, industry, profession or occupation relating to the production, supply, distribution, storage or control of goods and includes the provision of any services

70	RRTA v W.H. Smith n Sons Ltd. (1969) 3 All ER 1065
71	1972 E.C.R. 619at page 64, 65.

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The ECJ further added that by its very nature a concerted practice have all the elements of contract but may inter alia arise out of coordination which becomes apparent from the behaviour of the participants.72 Conceptually concerted practices are not easy to define with precision and its application depends on facts and circumstances of a given case. A concerted practice is a form of coordination between the parties where they have not reached the stage of actual agreement. But knowingly coordinate their actions and cooperate with one another instead of competing with each other. Criteria of cooperation and coordination in no way requires the working of an actual plan and it must be understood in the light of concept inherent in EC treaty relating to competition that each economic operator must determine independently the policy which he intends to adopt on common market including the choice of person and undertaking to which he makes offers or sells. The test for concerted practice is that the parties have substituted for the risk of competition practical co-operation between the parties between the parties, which culminated in a situation, which does not correspond with the normal conditions of the market. In order to constitute a concerted practice, a action by a group of competitors need not reach the level of agreement, but must be knowingly coordinated with the further knowledge that the effect of coordination will be to substitute effectively cooperative for competitive conditions. In addition to constitute violation of Section 3 coordinated conduct must have an AAEC as per the conditions laid down in Section 3(3) (a) to (d) For the purpose of present study

Section 3 can broadly be divided into four parts namely:

1. General prohibition [section 3(1)and section 3 (2)]
2. Horizontal agreements[section 3(3)]
3. Vertical agreements[section 3(4)]
4. Exceptions[section 3(5) and (3) ]

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6. General Prohibition:-

Section 3(1) is a general prohibition of an agreement relating to the production, supply, distribution, storage, acquisition or control of goods or provision of services by enterprises, which causes or is likely to cause an AAEC within India. Section 3(1) is that such agreement must cause an AAEC within India. So the key elements for application of section 3(1) are agreement between enterprises and its AAEC within India. It is to be noticed that section 3(1) prohibits agreements which causes appreciable adverse effect in India only. On reading the section3 (1) it becomes clear that Act does not provide that agreements between enterprises and persons are prohibited it clearly states that No enterprise or association of enterprises or person or association of persons shall enter into any agreement which causes or is likely to cause an AAEC within India. It is also clear from the provision if an agreement does not have any adverse effect on competition within India then it will remain out of the preview of this provision, but if someone alleges that agreement is likely to cause an appreciable adverse effect, then there will arise an action under this Section. The provision of section 3(1) cast a duty upon enterprises to examine the proposals for agreement from its long term effect on competition in the market. Section 3(2) declares all the agreements void entered into contravention of the provisions contained in section (1).

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7. Horizontal Agreements

Agreements prohibited under section 3(3) are described as horizontal agreements for they apply to similar or identical trade of goods or provision of services. A careful reading of section 3(3) prompts that it restricts three things namely agreement, practice and decision including cartels who are identical or similar trade of goods or provision of services. The Act under this sub-section presumes following activities as to have appreciable adverse effect on competition.

1. Agreement between :-

• Enterprises
• Associations of enterprises
• Persons
• Associations of persons
• Person and enterprise

2. Practice carried by:-

• Association of enterprises
• Association of persons

3. Decision taken by:-

• Association of enterprises
• Association of persons

4. Cartels

Who are engaged in identical or similar trade of goods or provision of services including cartels only if any of their activity:-

• Determines either directly or indirectly purchase or sale prices.
• Limits or controls production, supply, markets, technical development, investment or

provision of services.

• Shares the market or source of production or provision of services by way of

allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way;

• Directly or indirectly results in bid rigging or collusive bidding73

73 Section 3(3)(a)to (d)

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It is to be noted that under section 3(3) agreements, decisions and practices between similar trade of goods or provision of services is a condition precedent for prohibition. For the violation of Section 3(3) (b), it must be established that there exists an agreement, practice carried on or, decision taken by entities mentioned therein, including cartels, engaged in identical or similar trade of goods or provisions of services, which result in effects mentioned in clauses (a) to (d) of sub- section (3) of Section 3 of the Act. These include acts that limit or control production, supply, markets, technical development, investment or provision of services.74

7.1. Types of horizontal agreement prohibited under Section 3(3):- Section 3(3) of the Act expressly mentions four types of horizontal agreements that are presumed to have an AAEC as mentioned above. Now we will discuss those agreements in detail.

7.1.1 Agreements that directly or indirectly determine purchase or sale prices:- Price fixing agreements, as the name suggests are agreements to fix, directly or indirectly purchase or sale prices. The term price fixing is applied to a wide range of actions taken by competitors having a direct effect on price and includes a number of agreements such as agreements on price, agreements on credit terms, agreements to adhere to published prices etc75 . In Southern Motors Rate Carriers Conference Inc. et. al. V. United States76, it was observed that the term price fixing generally refers to a process by which competitors agree upon prices that will prevail in the market for the goods or services they offer. The Competition Act, however refers to agreements to determine both purchase and sale prices. For instance, if a group of manufacturers of product A‚-A‘ enter into an agreement not to sell product A‚-A‘ below a fixed price. Price fixing agreements between competitors negatively impact competition as they prevent prices from being fixed by the competitive forces in the market. Consumers may thus, be forced to pay higher prices for good than they would pay in competitive market. The aim and result of every price fixing agreements, if effective, is the elimination of one form of competition. The power to fix prices, whether reasonably exercised or not, involves the power to control the market and to fix 74Shri Govind Agarwal Vs. ICICI Bank Ltd., Shri Norbert Lobo Vs. Citibank, Shri Gulshan Kumar Gupta Vs. BHW Home Finance Ltd.(para 61) Decided On: 07.06.2011 by CCI. (MRTP Cases) 75World Bank/OECD (1998): A framework for the design and implementation of Competition Law and Policy, World , OECD, 1998 76 471 US 48 (1985)

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arbitrary and unreasonable prices.77 The reasonable price fixed today, may through economic and business changes become the unreasonable price of tomorrow. Once established, it may be maintained unchanged because of the absence of competition secured by agreement for a price reasonable when fixed. Agreements which create such potential power may well be held to be in themselves unreasonable or unlawful restraints, without the necessity of minute inquiry whether a particular price is reasonable or unreasonable as fixed without placing on the government, in enforcing the law, the burden of ascertaining from day to day whether it has become unreasonable through the mere violation of economic conditions.A‚-

7.1.2 Limits or controls production, supply, markets, technical development, investment or provision of services:- Agreements that limit or control production, supply, markets, technical development investment or provision of services are also considered to be anticompetitive. An example of such an agreement is one where there is a clause that the distributor must ensure the selling of 100 cylinders a month78 . An agreement limiting production may lead to a rise in prices of the concerned product. Similarly, limiting technical development that may help in lowering the costs of a product ,ay affect the interests of consumers. Livingstone notes that limiting production maintains high prices by ensuring that there is no surplus and therefore, demand remains steady; limitation of sales has a similar effect as well as discouraging competition for new entrants79 . Agreement for limiting or controlling production are anticompetitive for two reasons; one that by controlling production. The supply is kept low as compared to the demand creating artificial scarcity; second the agreement, in effect restricts competition between the parties themselves so that the efficient ones among them also cannot go ahead with further production and dislodge the less efficient from the market. 77 See Arizona v. Maricopa County Medical Society 457 US 332(1982); Unites States v. Trenton Potteries 273 US 392(1926)

78	Livingstone, Dorothy (2001): “Competition Act, 1998: A practical Guide”, Sweet and Maxwell, London
79	Livingstone, Dorothy (2001): “Competition ct, 1998”: A Practical Guide”, Sweet and Maxwell, London
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7.1.3 Shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or the number of customers in the market or any other similar way This category covers the agreements referred to as market sharing agreements. Market sharing or market division agreements may be either to share markets geographically or in respect of consumers or particular categories of consumers or types of goods or services in any other way. An example of geographical market sharing would be an agreement between manufacturer and a manufacturer (both manufacturers of product ) that will sell product in a certain geographic area, while will sell product in another area and A will not sell P in the area allotted to  and vice versa. Market sharing agreements are considered to be anti-competitive80 as they reduce the choice available to customers in a competitive market. Such agreements also reduce competition between the parties to agreement. Prof. Whish81 observes that geographic market sharing is particularly restrictive from the customers‘ point of view since it diminishes choice; at least where the parties fix prices, a choice of product remains and it is possible that restriction of price competition will force parties to compete in other ways. Market allocation agreements eliminate the need to police the pricing practices of the companies party to the agreement and the need for producers with different costs to agree on appropriate prices82 .

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