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COMPAT Holds DLF Guilty; Dilutes CCI’s Powers!

Published on Fri, May 30,2014 | 23:06, Updated at Fri, May 30 at 23:06Source : CNBC-TV18 |   Watch Video :

3 years ago, the Competition Commission of India found real estate company DLF guilty of abuse of its dominant position. Last week, the Competition Appellate Tribunal not only upheld CCI’s order but also refused any relief to DLF on the Rs 630 crore penalty. But in doing so, the Tribunal may have diluted the regulator’s power to check such abuse. Payaswini Upadhyay reports on the outcome in DLF’s case and the precedent it sets.

In 2010, customers of DLF’s Belaire , Park Place and Magnolia project in Gurgaon complained to the CCI that the company imposed upon them an unfair builder-buyers agreement after they had paid the booking amount. A year later the regulator found DLF guilty of abusing its dominant position in the high-end residential accommodation market of Gurgaon.   

DLF appealed the order on several grounds. The first was the relevant market argument. DLF argued that a home buyer or investor can substitute Gurgaon with other regions of NCR and so, the relevant market should be wider than just Gurgaon. The Tribunal struck down DLF’s argument and held that it is not necessary to concentrate on the investment market. It upheld CCI’s conclusion a Gurgaon address cannot be easily substituted  

Farhad Sorabjee
Partner, JSA
“Obviously, it’s a very restrictive definition. But by the very nature of the beast, your definitions of relevant market can vary extremely widely and do so in the more mature jurisdictions- how you interpret what should be the relevant market can also be worked with. We don’t have the market reports etc that were but prima facie, it looks restrictive and also terms like high-end, that’s another very anomalous concept.”

Nisha Uberoi
Partner, Amarchand Mangaldas
“The COMPAT’s acceptance of the CCI’s definition of the relevant market is disappointing. What the COMPAT should have really done is tested it in term sof hard economic evidence which it didn’t particularly in the definition of relevant geographic market – very narrow and limited just to Gurgaon and you apply the principle of competition law would clearly encompass the National Capital Region. The moment the COMPAT had done that, if it had, automatically DLF would not be dominant and there would be no case for abuse of dominance. So, it’s a clear missed opportunity and it appears that going forward, parties are now constrained by this because in terms of economic evidence, you’ll have to adduce it before the CCI with the COMPAT taking a pure play generalist approach.”

In concluding that DLF’s conduct was abusive the CCI had examined the apartment buyer’s agreement and had found it to be blatantly unfair; even exploitative. It had directed DLF to modify the agreement terms. At COMPAT, DLF argued against CCI’s jurisdiction as the agreements were signed before the Competition Act became effective.

Here, the Tribunal agreed with DLF’s argument. It held that CCI cannot direct parties to amend agreements signed before the Competition Act became effective. The Tribunal didn’t stop there. It went to say that if the CCI finds a party guilty of abuse of dominant position under Section 4, it cannot order amendments to an agreement. The COMPAT held that Section 27 of the Act that gives remedial powers to the CCI allows it to modify agreements in the case of cartels but not in abuse of dominance cases.

Suhail Nathani
Partner, ELP
“On the face of it, the reading of the COMPAT has to be appreciated in as much as Section 27- from where the remedial powers emanate- the COMPAT has noted that Section 3 agreement can be amended. And under Section 27, only an action pursuant to Section 4- which is the abuse of dominance Section- can be penalized. See the distinction- Section 3 talks about a cartel. So if there is an agreement for cartel; that can be amended. But if there is a dominant position and that dominance is exercised pursuant to an agreement, you can’t amend the agreement but can penalize for abuse of dominance.”

Nisha Uberoi
Partner, Amarchand Mangaldas
“That’s not how we’ve read it so far. If you look at Sec 27(g)- that’s the catch-all. It allows the Commission to pass any other order it deems fit. So therefore it still has the right to alter and amend agreements; even in an abuse of dominance case. The COMPAT seems to have read Sec 27 narrowly which I don’t think is a correct view.”
 
Finally though the Tribunal agreed with CCI’s overall conclusion that DLF had abused its dominant position. But of the 21 abusive behaviors CCI had listed, the COMPAT agreed with just 3.

They are – more floors than promised; reduced ratio of apartment area to the super area and higher penalties in case of payment delays by the buyer.

Having found DLF guilty of such abuse, the Tribunal upheld the 630 cr rupee penalty- amounting to 7% of DLF’s turnover. Curiously, the COMPAT did not consider the precedent it set last year in the Aluminum Phosphide manufacturer’s case where it had laid down that while deciding the penalty, CCI should consider not overall turnover but product related turnover.

Farhad Sorabjee
Partner, JSA
“What did strike me was if you’re defining your relevant market as being high-end residential property in Gurgaon, then quite clearly your relevant product is residential property. To the best of my knowledge DLF does infrastructure products, DLF does commercial projects, DLF does leisure projects- it may have been argued and they may have discarded it- but I would have said you can’t take my total turnover; you have to take the turnover of the relevant product market which you yourself have said is residential.”

Suhail Nathani
Partner, ELP
“Now on the facts of this case, what is the relevant turnover? DLF is a construction company – you may argue that they are constructing commercial, they are constructing residential, they are constructing in Gurgaon, they are constructing all over the country. I don’t support the view that you can narrow down the business head of construction further to say that the relevant turnover arising out of high-end residential in Gurgaon. I don’t believe that’s a position you can take; you have to take the turnover of the relevant division of the company which the COMPAT had done in the Aluminium Phosphide case or you take the turnover of the whole company- there is no support for the theory that you further whittle it down into silos.”

That is a battle CCI is already fighting in the Supreme Court. The regulator has appealed COMPAT’s Aluminium Phosphide order in the apex court on grounds that the Competition Act allows it to impose penalties based on total turnover and not just relevant turnover. And thanks to this order, the CCI – even after winning the DLF case- may have to fight against the dilution of its powers to modify agreements under the abuse of dominance Section.    

In Mumbai, Payaswini Upadhyay

 
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