Law on dominant position- Gautam Khaitan says they are likely to be tested more in near future

The Competition Act, 2002 prohibits an enterprise in a ‘dominant position' to abuse its position of strength in the relevant market in its favour.

As the Indian economy is bouncing back, an eminent corporate lawyer and managing partner of OP Khaitan & Co. — Gautam Khaitan said that it is very likely that the role of dominant players in the Indian market is to be tested in law for the abuse of dominant position in a large volume. Recently, the Competition Commission of India (CCI) has initiated an investigation against a number of companies regarding alleged anti-competitive behavior including ACC and Ambuja Cements amongst others. Moreover, it had also dismissed the antitrust complaint against the e-retail giant Amazon while GPay remains under the lens of the CCI.

Dominance in law

Section 4 of the Competition Act, 2002 prohibits companies in a dominant position in the relevant market from abusing their position. “Section 4 of the Competition Act, 2002 defines the dominant position of an enterprise as the position of strength in the relevant market. Here, ‘dominant' and ‘relevant market' are crucial. The objective is to prevent bad practices which are against the concept of laissez-faire — keeping business competitive,” said Gautam Khaitan. He said that this provision is essential as it is good for the market and the interests of consumers.

Application and Exemption

Gautam Khaitan explained that the law on dominant position applies to all companies - private and public enterprises that are engaged in economic activities . However, Section 2(h) of the Competition Act, 2002 exempts the sovereign functions of the government including atomic energy, currency, defence and space. Moreover, there are several case laws that deal with it. For instance, in Rajat Verma v Haryana Public Works (B&R) Department and Ors (2016), the Competitive Appellate Tribunal held that PWD Haryana is to be considered an enterprise as it provides services to the public and is engaged in economic activity,” he adds.

Chances for a rise in volumes for tests of anti-competitive practices

After witnessing an unprecedented slowdown amidst the pandemic, the Indian economy has finally starting to grow. Gautam Khaitan said that to attract more customers, companies specifically in the online market are offering huge discounts on products, “The question here is whether such discounts qualify as an antitrust activity under Section 4 of the Act defining predatory price or not.”

PREDATORY PRICE (under Section 4 Competition Act, 2002) is

The sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors. Thus, ‘Predatory price' is defined as the price that is below the cost of goods and services and is prohibited for a company in a dominant position under the Act. “Therefore, we might witness a rise in litigation under the Act in the near future across the nation,” he adds. However, explanation (b) to section 4 of the Act stipulates two-step test for assessing whether a dominant enterprise's conduct is predatory. First, the price must be below cost (as determined by CCI regulations) and second, the dominant enterprise must have the intention to reduce competition or eliminate competitors.

The CCI has published regulations on determining the cost of production, which state that the default cost benchmark is average variable cost (as a proxy for marginal cost). However, the CCI and the Director General (DG) may consider other cost measures such as avoidable cost, long-run average incremental cost and market value, depending on the nature of the industry, market and technology used, with reasons provided in writing.

In National Stock Exchange of India Ltd case, the CCI found zero pricing by the National Stock Exchange (NSE) in the currency derivatives segment of stock exchange services to be unfairly low pricing. In appeal, the COMPAT clarified that the zero pricing by NSE was predatory. However, neither the CCI nor the COMPAT provided any guidance on the relevant cost benchmark to be applied in predatory pricing cases. The NSE has filed an appeal against the COMPAT's decision before the Supreme Court.

In two subsequent cases involving predatory bidding, M/s Transparent Energy Systems Pvt Ltd v TECPRO Systems Ltd (2013) and HLS Asia Limited, New Delhi v Schlumberger Asia Services Ltd, Gurgaon & Ors (2013), the CCI held that predatory pricing had to be assessed on the basis of an appropriate cost benchmark (ie, average variable cost), as reduction of prices in itself was actually the essence of competition. The CCI also observed that the abuse of predatory pricing had to be assessed on the basis of actual prices and not projected prices.

The CCI had also opened an investigation into Ola Cab's activities, on the strength of a complaint by Meru Cabs, accusing it of predatory pricing under the scheme of section 4 of the Act, giving discounts to passengers and incentives to drivers on a scale such that it was operating at a loss in Bengaluru. In July 2017, the CCI dismissed these allegations against Ola, holding that Ola did not hold a dominant position in the relevant market as Ola and Uber posed competitive constraints on each other. The CCI also decided not to interfere with a new and evolving market, noting that any interference at this nascent stage would disturb market dynamics and risk prescribing a sub-optimal solution. As the COMPAT has been merged with the National Company Law Appellate Tribunal (the NCLAT) with effect from 26 May 2017, the NCLAT sometime in June 2020 has also dismissed an appeal seeking investigation into alleged fixing of prices by cab aggregators Ola and Uber by using algorithms.

A three-member NCLAT bench upheld the order passed by fair trader regulator CCI, which had earlier rejected a plea seeking probe against Ola and Uber alleging unfair price fixation mechanism and abuse of dominant position by them.

The appellate tribunal observed that the allegations against the cab aggregators had no substance and none of the two enterprises - Ola and Uber - is independently holding a dominant position in the relevant market of providing services and not operating as a joint venture or a group.