RULE OF REASON UNDER THE INDIAN COMPETITION ACT

Editors Note: The author of the paper analyses the meaning of the per-se rule in
Indian Competition Law, this is in light of Section 3(3) of the Competition Act, 2002
which presumes certain agreements to have an appreciable adverse effect on
competition in India.
INTRODUCTION
There are many legislations of competition law that exist in the world today. Some of the
laws are a century old like the Sherman Act of the US while some are more recent like
the Indian Competition Act, 2002 and the Singaporean Competition Acts of 2004. While
doing business in India, parties are prohibited from executing anti-competitive
agreements. Generally, the agreements which cause or are likely to cause appreciable
adverse effect on competition are anti-competitive agreements.[1] Such agreements
may be horizontal or vertical. The most pernicious form of anti-competitive agreement is
cartelization.
Any agreement in respect of production, supply, distribution, storage, acquisition or
control of goods or provision of services, which causes or is likely to cause an
appreciable adverse effect on competition within India, is an anti competitive agreement.
[2] Such agreements are void agreements.[3] The term agreement includes any
arrangement or understanding or action in concert whether or not formal or in writing or
is intended to be enforceable by legal proceedings.[4] In Registrar of Restrictive Trade
Agreements v. W. H. Smith and Sons,[5] the court observed, people who combine
together to keep up prices do not shout it from the house tops. They keep it quiet. They
make their on arrangements in the cellular, where no one can see. They will not put
anything into writing nor even into words. So it includes not only an agreement properly
so called but any agreement however informal. However, in the EU in some recent
cases, for example, Bayer[6] and Volkswagen[7], the court disagreed with the ECs
expansive interpretation of agreement and has effectively toughened the standards for
proof of agreement in cases or restrictive distribution.
To bring in the application of Section 3, it is pertinent that the effect on competition must
be appreciable. The term appreciable adverse effect on competition, used in section
3(1) has not been defined in the Act. The determination of appreciable has proved to
be a main problem under the Competition Act. The author T.Ramappa considers that to

be considered appreciable, the effect has to be substantial.[8] However; this may not be
in line with Indian economic interests. Accordingly, a more appropriate meaning has
been given in Law Lexicon where appreciable is defined as capable of being
estimated, weighted, judged of or recognized by the mind which is perceptible but not a
synonym of substantial. For the most practical purposes appreciable has to be more
than just a detectable effect but may not be substantial.
Section 19(3) of the Act states that while determining whether an agreement has an
appreciable adverse effect on competition under section 3, the commission shall give
due regard to all or any of the following factors:

creation of barriers of new entrants in the market;

driving existing competitors out of the market;

foreclosure of competition by hindering entry into the market;

accrual of benefits to consumers;

improvements in production or distribution of goods or provision of services;

Promotion of technical, scientific and economic development by means of

production or distribution of goods or provision of services.

The first three relate to the negative effects on the competition while the remaining three
relate to beneficial effects.[9] In Automobiles Dealers Association v. Global Automobiles
Limited & Anr.,[10] CCI held that it would be prudent to examine an action in the
backdrop of all the factors mentioned in Section 19(3). The agreement should be the
cause of the adverse effect on the competition. Even if such a consequence is probable,
the agreement is anti-competitive. The probability and not mere possibility of its
consequence as appreciably affecting competition is the requirement.[11]
Competition law usually places anti-competitive agreements in two categories of
horizontal and vertical agreements. The horizontal agreements are viewed more
seriously than vertical agreements. The Act doesnt specifically use the terms horizontal
agreement and vertical agreement. However, the agreements referred in section 3(3)
are horizontal while those referred in section 3(4) are vertical agreement.[12]

Horizontal agreements refer to agreements among competitors, i.e., agreements

between two or more enterprises that are at the same stage of the production chain and
in the same market. A distinction is also made between cartels a special type of
horizontal agreement and other horizontal agreements.[13] The Act provides for the
following four kinds of horizontal agreements, which are presumed to be anticompetitive:
[14]
(a). Agreements regarding prices: Agreements that directly/indirectly fix purchase/sale
price;
(b). Agreements regarding quantities: Agreements aimed at limiting or controlling
production, supply, markets, technical development and investment;
(c). Agreements regarding market sharing: Agreements for sharing of markets by
geographical area, types of goods/services and number of customers; and
(d). Agreements regarding bids (collusive tendering and bid rigging): Tenders submitted
as a result of joint activity or agreement.
Such agreement may lead to a cartel, which is pernicious.[15] Cartels have an
unfavourable effect on competition and anti-trust legislation all across the world try to
curb them. Unlike the MRTP Act, the Competition Act explicitly defines Cartels. They are
placed under Section 3(3) where there is a presumed appreciable adverse effect on
competition.
CARTELIZATION
Cartels are agreements between enterprises[16] (including association of enterprises)
not to compete on price, product (including goods and services) or customers. The
purpose of a cartel is to raise price above competitive levels, resulting in injury to
consumers and to the economy. For the consumers, cartelization results in higher
prices, poor quality and less or no choice for goods or/and services. In the European
Union, Mario Monti, the former commissioner for Competition, once described cartels as
cancers on the open market economy[17], and the Supreme Court in US has referred
to cartels as the supreme evil of antitrust[18].

The Indian Competition Act, 2002 covers cartels under Section 3(3). According to the
section, it is presumed that such agreements causes appreciable adverse effect on
competition. Thus the burden of proof in any cartel case is on the defendant to prove
that the presumption is not causing appreciable adverse effect on competition. A
specific goal of Competition Act is the prevention of economic agents from distorting the
competitive process either through agreements with other companies or through
unilateral actions designed to exclude actual or potential competitors.
Cartels are included in the category of agreements, which are presumed to have
appreciable adverse effect on competition. The term Cartel is explicitly defined in the
Act as:- [19]
Cartel includes an association of producers, sellers, distributors, traders or service
providers who, by agreement amongst themselves, limit, control or attempt to control the
production, distribution, sale or price of, or , trade in goods or provision of service.
There are three essential factors have been identified to establish the existence of a
cartel, namely
1.

Agreement by way of concerted action suggesting conspiracy;

2.

The fixing of prices

3.

The intent to gain a monopoly or restrict/eliminate competition[20]

Parity of prices coupled with a meeting of minds has to be established to prove a cartel.
The test for concerted practice is that the parties have co-operated to avoid the risks of
competition, and this has culminated in a situation which does not correspond with the
normal conditions of the market.
A cartel is a horizontal agreement to fix prices, allocate customers or territories, restrict
output or rig bids. A cartel is regarded as the most pernicious form of violation of
competition law since it unequivocally damages competition and causes loss to the
economy and to consumers. Owing to the seriousness of cartels, they are subject to the
per se rule[21] in many jurisdictions e.g., in the US[22] and in the European Union[23].
The most crucial ingredient of cartelisation behaviour is collusive manipulation of prices

by the competitors. A mere simultaneous movement of prices, especially for

homogeneous products, is not by itself sufficient to prove a cartel.[24]
The conditions in a competition that make it conducive for cartelization are oligopolistic
market, structural factors, highly concentrated market, demand and supply conditions,
dependence of customers, homogeneous product, entry barriers, exchange of
information, active trade association.
A hard-core cartel as defined in the OECD Recommendation is an anticompetitive
agreement, anticompetitive concerted practice, or anticompetitive arrangement by
competitors to fix prices, make rigged bids (collusive tenders), establish output
restrictions or quotas, or share or divide markets by allocating customers, suppliers,
territories or lines of commerce.[25] Adam Smith, often recognized as the father of
modern economics, wrote in 1776 in The Wealth of Nations, People of the same trade
seldom meet together, even for merriment and diversion, but the conversation ends in a
conspiracy against the public, or in some contrivance to raise prices.[26]
Cartels are not easy to detect since the colluding parties go to great lengths to cover
their tracks. Therefore, competition agencies have been resorting to and seeking greater
investigative powers for unearthing evidence. So to do so the same various methods are
adapted all over the world such as:
1.

Dawn Raids:

Upon request by the Federal Competition Agency, the Austrian Cartel Court issues a
search warrant (provided there is reasonable suspicion of a cartel infringement). With a
search warrant, the Federal Competition Agency can, similar to the EU Commission,
enter premises, search documents and computers, etc. Notably, the inspection can start
without the search warrant being served on the undertakings concerned; the law only
provides that it must be served within 24 hours.[27]
2. Incentives and Rewards
Under US law, the Civil False Claims Act enables a private citizen to bring an action in
the name of the US Government claiming fraud by government contractors and other
entities that use government funds, and the litigant is then able to share in any money
received. This legislation was used in the case of a bid-rigging cartel of wastewater

treatment projects in Egypt funded by USAID, representing the first time that the
legislation had been used to expose a large multinational cartel.[28] In South Korea, the
Korean Fair Trade Commission has established a reward system for those who report or
give information about competition law violations.[29] A reward of 66.87 million won was
paid in June, 2005 to a person who provided decisive evidence in a welding rod cartel
case.[30]
3. Whistleblowing and Leniency
A crucial tool in the detection of cartels has proved to be the policy of encouraging
whistleblowers to approach the competition authorities with information about a cartel.
Subject to a series of conditions, such as that the whistleblower will cooperate with the
investigation of the authority in question and that it was not a ringleader of the cartel,
complete immunity will be available from any penalty that might otherwise have been
imposed. Amnesty programs have been implemented in many jurisdictions, and have
proved to be highly successful. For Example 200 the European Commission received 49
applications for immunity and leniency in 25 different cases in 2004.[31]
The Competition Commission of India had given various landmark judgements on
various allegations of cartel formation. Some of the significant judgments were:
1.

All India Tyre Dealers Federation v. Tyre manufacturers[32]

The AITDF alleged that since independence, the behaviour of domestic tyre majors has
been anti-competitive, anti-consumer and they have been indulging in various pricing
and trade mal-practices, which had direct bearing on the revenue of the state
exchequer. CCI undertook detailed investigation on various grounds after the report of
DG was prepared and found that there is not sufficient evidence to hold a violation by
the tyre companies Apollo, MRF, J.K. Tyre, Birla, Ceat and ATMA of the provisions of
Section 3(3)(a) and 3(3)(b) read with Section 3(1) of the Act.
2. Builders association of India v. Cement manufacturers association and other[33]
In a first-of-its-kind order, the CCI has imposed a penalty of over Rs 6,000 crore on 11
leading cement producers after finding them guilty of forming cartels to control prices,
production and supply of cement in the market. According to the CCI order, it found
cement manufacturers violating the provisions of the Competition Act. The CCI issued

the order after investigation by the Director General (CCI) upon information filed by the
Builders Association of India.
While imposing the penalty, the commission considered the parallel and coordinated
behaviour of cement companies on price, dispatch and supplies in the market. The
commission observed that the act of these cement companies in limiting and controlling
supplies in the market and determining prices through an anticompetitive agreement
was detrimental to the entire economy.
3. In re: Suo Motu Case against LPG Cylinder Manufacturers[34]
The Commission had held the manufacturers of LPG cylinders guilty of bid-rigging for
quoting identical prices in the tender issued by Indian Oil Corporation Limited. All LPG
manufacturers were penalized at the rate of 7% of their average turnover.
In all these cases the CCI presumes that there is an appreciable adverse effect in the
market. The presumption and its implication have been discussed in the next chapter.
PRESUMPTION RULE
To identify an agreement and then reproving it as an anticompetitive agreement has
always been a grey area in anti-trust cases. Due to which the courts have devised
apparatus of investigation in order to expeditiously come to a rational conclusion. Of the
numerous legal principles that have become the cornerstone of anti-trust common law
none have attracted more attention then the rules of per se and the rule of reason.
These two rules have been helpful in ascertaining that whether or not a particular
agreement is anti-competitive.
There is a presumed appreciable adverse effect on competition if the said agreement
falls under Section 3(3) of the Competition Act, 2002. In order to truly discern the spirit
of sub-section (3) of section 3 the language of the provision must be given utmost
supremacy. In order to unlock the mystery surrounding section 3(3) the words shall be
presumed must be given utmost importance. Presumptions operate where certain
facts may be presumed to exist even in the absence of complete proof.[35] The court is
bound to take the fact as proved until evidenced is given to disprove it. In this sense
such presumption is also rebuttable.

The presumption raised under Section 3(3) is that of AAEC. If there is sufficient proof
to establish that the opposite parties are engaged in any of the restricted activities laid
down in the sub-section then the commission shall presume that there is AAEC. Two
possible scenarios appear once AAEC is presumed. The first being that opposite
parties may rebut the presumption by showing that their actions dont fall tainted with
any of the clauses [(a) to (d)] of the sub-section. The other being when the parties rebut
the presumption by availing the grounds laid in section 19(3) of the act.
The first scenario appears to be reasonable and to a certain extent echoes the spirit of
the per se rule. The opposite party, if this scenario were to prevail, will not be allowed
to show the pro-competitiveness of their actions. Thus the only grounds available for
rebuttal are those laid down in clauses (a) to (d) of section 3(3). However such a
situation will not arise because of the language of the sub-section. The sub-section
raises a presumption of AAEC and therefore rationally the grounds for determining
AAEC should also be the ground for rebutting AAEC.
In the second scenario if the opposing parties are permitted to buttress their defence by
seeking aid of 19(3) then the whole process will be reduced to a rule of reason
analysis and not a per se rule. The rule of reason evidently mandates an elaborate
analysis in to the reasonableness of an agreement and sub-section (3) of section 19
enables the opposite parties to do the same but the language of the Act inadvertently
negates the true spirit of the per se rule.
The use of the words shall be presumed gives rise to a presumption against the
opposing parties. The principle of shall presume, used in section 3(3) has been
explained by courts in India in numerous cases such as in Sodhi Transport Co. v. State
of Uttar Pradesh[36] and R.S. Nayak v. A.R. Antulay[37]. In Sodhi Transport Co., the
court observed that:
The words shall presume have been used in the Indian judicial lore for over a century
to convey that they lay down a rebuttable presumption in respect of matters with
reference to which they are usedand not lying down a rule of conclusive proof.
The court also observed that

A presumption is not itself evidence but only makes a prima facie case for the party in
whose favour it exists. It indicates the person on whom the burden of proof lies. But
when the presumption is conclusive, it obviates the production of any other evidence.
But when it is rebuttable, it only points it the party on which lies the duty of going
forward on the evidence on the fact presumed, and when that party has produced
evidence fairly and reasonably tending to show that the real fact is not as presumed, the
purpose of presumption is over.[38]
It is perceptible that the language used in section 3(3) imposes a limitation on the
competition authorities to apply the per se rule in its true spirit. Indian Competition law
vide Section 3 does not provide for a case-by-case application of the per se rule. If the
per se rule has to be applied in its true spirit then the legislature has to rephrase the
language of the section. The words, shall be presumed creates considerable doubt in
the minds of legal practitioners. There is an absolute need to have a per se rule in India
especially while dealing with serious offences like bid-rigging. However policy makers
must also conceive of a per se rule that suits Indian conditions.
Edited by Amoolya Khurana
[1] Section 3(1), Competition Act, 2002.
[2] Ibid.
[3] Section 3(2), Competition Act, 2002.
[4] Section 2(b), Competition Act, 2002.
[5] Registrar of Restrictive Trade Agreements v. W. H. Smith and Sons (1968) 3 All ER
721.
[6] Bundesverband der Arzneimittel- Importeure and Commission of European
Communities v. Bayer AG, C-2/01P and C- 3/01P.
[7] European Commission v. Volkswagen, Case No. C-74/04P.

[8] T.Ramappa, Competition Law In India- Policy, Issues and Development, Oxford India
Paperbacks, 2nd Ed (2009).
[9] Vinod Dhall, Competition Law Today, Oxford