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Delhi High Court’s Recent Judgment on Competition Act undermines its Regulatory Character

Delhi High Court in its judgment dated 10th April 2019 declared section 22(3) of the Competition Act (“Act”) unconstitutional[1]. The said sub-section allowed the Chairperson of Competition Commission of India (CCI) to have a second vote, subject to difference in opinion in the Commission’s members. The court noted that casting vote can potentially lead to adjudicatory result and is anathema to the Rule of Law in the context of Indian Constitution. The said ruling however felt short of declaring the provision to section 22(3) unconstitutional, which sets the minimum condition for quorum to be fulfilled as three members.

Background of the case
The said case was filed in the background when one Shamsher Kataria filed an information in the CCI alleging that certain car manufacturers have formed a cartel in the Indian market. The said carmakers were restricting repair, maintenance and servicing of automobiles sold by them and it could be carried only out at the authorized service stations of the manufacturer. This was in violation of Section 3 of the Act and therefore required passing of appropriate order. The car manufacturers were eventually fined by the Commission to the tune of 2,500 crore rupees for displaying anti-competitive conduct. The CCI held that the ‘unified systems market’, as elaborated by the parties, is not applicable in the Indian market context and were held in contravention of Section 3(4)(b), (c) and (d) of the Act. The parties rather than approaching the Appellate Tribunal (AT), filed an appeal with the Delhi High Court challenging constitutional validity of section 22(3) of the Act.

Issues and Contentions
Few of the preliminary concerns raised by the petitioners were that the legislative history of the Act would suggest that the CCI is an adjudicatory body. To support their case, they relied on Raghavan Committee report in 2000 which formed the bedrock of the Act. It stated that an adjudicatory body is required at the center for implementation of competition law [Para 5]. Even the Monopolies Inquires Commission report in 1965 suggested that (monopoly) restrictive practices need a judicial determination and finding [Para 4]. The petitioners paid due emphasis on the Standing Committee report which described CCI as a quasi-judicial body [Para 6]. Based on the same, they deduced that second and casting vote for a Chairperson is anathema to judicial function, given that is a phenomenon majorly relevant in private board company meetings.

The petitioners also challenged the validity of Section 27 under which the penalty order was passed. They submitted that there is no provision for ‘show cause notice’ once the contravention has been established and Section 27(b) allows Commission to impose a penalty up to 10 per cent of the annual turnover. This gives unfettered powers to the CCI, making the said sub-section void and arbitrary. Other provisions of the Section talk about changing the terms of agreements signed between the parties and also passing of a cease and desist order in case it violates the law laid down in the Act. Therefore, the parties submitted that it has a far reaching effect on the right to trade and infringes upon their fundamental rights guaranteed under the Indian Constitution.

On the contrary, opposite party relied on the Preamble and Statement of Objects and Reason of the Act to supplement Commission’s regulatory nature [Para 50]. It submitted that CCI is an expert body which has to conduct in-depth economic analysis of Mergers and Combinations as per section 5 and 6 of the Act and it is difficult to see separation of powers enshrined in the Indian Constitution in a watertight manner. The commission wears multiple hats at the same time and the legislature has provided for a separate appellate mechanism, i.e. the National Company Law Appellate Tribunal (previously known as Competition Appellate Tribunal), apart from the judicial review provided by Constitutional Courts [Para 52].

The said judgment tinkers with the adjudicatory and regulatory functions of the CCI. Two landmark rulings, both referred to in the said pronouncement, i.e. CCI vs. SAIL (2010) (now referred as “SAIL”), and Brahmdutt vs. Union of India (2005) (now referred as “Brahmdutt”) require reconsideration. In the SAIL ruling, Supreme Court held that “…under the scheme of the Act, this Commission is vested with inquisitorial, investigative, regulatory, adjudicatory and to a limited extent even advisory jurisdiction...”. As much as the top court has focused on adjudicatory functions of the body in the said ruling, it has underscored its regulatory character in the same breath. This becomes more pronounced in the light of Brahmdutt ruling where the Court again noted, “…respondents (Union of India) to consider the creation of two separate bodies, one with expertise that is advisory and regulatory and the other adjudicatory…”. Therefore the Apex Court has made abundantly clear that the commission has both the functions to perform, i.e. regulatory, as well as adjudicatory. An important aspect is that while Brahmdutt ruling was pronounced in 2005, when the government was yet to table the Competition (Amendment) Bill 2007 in Parliament, SAIL ruling came in 2010 when not only the said amendment was passed, but the actionable provisions of the Act were notified in 2009 as well. Therefore the position of law was more settled during the said ruling. The regulatory nature of the commission gets reasserted from the replacement of the word ‘complaint’ with ‘information’ in the Competition Act.

The said change is not only in letter of the law, but in practice as well. In Jupiter Gaming Solutions Private Limited vs. Government of Goa (2011) case[2], the informant pleaded the CCI to withdraw information as the tender was already awarded. However the Commission rejected the plea and observed that it had found a prima facie case in the matter and DG investigation has been ordered. Therefore it took upon itself to administer competition in the market, irrespective of the absence of aggrieved parties. This got reiterated in Yogesh Ganeshlaji Somani vs. Zee Turner Limited (2013) case[3], where the informant pleaded the body to withdraw information. However CCI again negated the plea by saying that there is no provision in Act for withdrawal of information. Add with it the submission made by the Union of India in Brahmdutt ruling, i.e. Commission operating under the judicial review power of High Courts and Supreme Court, the regulatory nature of Commission gets reasserted.

Delhi HC has declared section 22(3) unconstitutional under the presumption that CCI has strict adjudicatory functions to perform. As much as there is evidence in support of the same, case laws dealt above would suggest it would be entirely wrong to keep CCI at the same pedestal at which the courts are. The stance taken by the HC elaborates how the Commission is different from a judicial tribunal, where the former has its own investigative wing, contrary to depending on the submissions made before them for the latter [Para 136]. There should be some leeway given to the Commission, given that administering competition in the market is a complex phenomenon. Parliament in its wisdom while enacting Competition (Amendment) Act, 2007 did not make a clear division of regulatory and adjudicatory functions (as prescribed in Brahmdutt ruling) and rather decided to give CCI both the characters at the same time, in the same house. One may also note that the casting of second vote is subject to two conditions, i.e. first divided opinion amongst members of CCI, and second equal number of votes on both the sides. Therefore the ability of Chairperson acts more as a safety valve, rather than having potential for mischief [Para 163], to keep the Commission decisive, in case there is a clash of opinion.

The judgment also holds the provision to section 22(3) valid. The Court held that the proviso is harmonious to the contingencies CCI has to operate in, as there might be situations when seven members of the Commission might not be able to sit together. However one of the allegations made by the parties was that the number ‘three’ in provision is in itself problematic as the decision has to be taken by majority. The total strength of the CCI is seven and therefore the minimum requirement for the quorum should at least be four.

The Court while holding section 27 of the Act constitutional drew a distinction between proceedings in the CCI and other bodies like Central Board for Excise and Customs [Para 195]. The peculiar nature of procedure elaborated in the Competition Act would suggest that parties, while appearing before the Commission, are aware about the options available to the body in terms of “findings and sanctions” [Para 194]. The ‘right to hearing’ is granted only after the submission of DG report which entails the adverse findings and comments. Therefore there is no requirement for a separate hearing, once the contravention is established. The Court also observed that the impugned order is reasoned in terms of penalty and is in the light of submissions made by the opposite parties.

Another ancillary issue involved in the said case is the strength of CCI. Central government on 4th April 2018 had approved rightsizing the CCI with one chairperson and three members, under its ‘minimum government - maximum governance’ policy[4]. Now the said judgment directs CCI to begin final hearings with a minimum strength of five members. This results in almost a direct clash between government’s policy decision making and conclusions of the said judgment.

Given that section 22(3) has been declared unconstitutional, it would open box for litigation two ways. While it would complicate the appeal in AT for which the car manufactures were penalized, it would also move CCI to challenge the validity of High Court’s decision in Supreme Court. Given that section 27(b) is still in force, constitutionality of which was also challenged in the said ruling, car manufacturers would have to restrict themselves to the facts of the cases. The CCI members were unanimous in decision making where all three of them were present throughout the hearings. Absence of minority opinion is likely to have a bearing in the AT. The future of section 22(3) also lies in bleak given that there are visible gaps in High Court’s order declaring it unconstitutional.

[2]Case No. 15 of 2010, Order dated May 12, 2011.
[3]Case no. 31 of 2011, Order dated March 21, 2013.

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