ABIR ROY : Hello and welcome once again to Sarvada Vartalap, where we'll discuss the other major enforcement trends that Aman had highlighted in the previous episode. Again, Aman is with me for this interesting episode that we would like to discuss. So, in the last episode, if you recall, we discussed two major trends, both intertwined with each other.

One was obviously the endorsement of the effects-based analysis and then codification or I would say acceptance of objective justification as a legitimate commercial business defense. Obviously, it has to be when you say objective justification, you need to have an analysis.

Between the alleged harm versus the efficient efficiency, which is there. So that's a big mark of compliance checklist for all the companies operating in India. But keep keeping the same door open for MNCs operating in India, what they should be aware of. There was an interesting discussion around the Intel case. I'll just give a background before Aman takes over. See a lot of these global MNCs which are there, for various business justifications, may have various policies which are applicable to a region, which may be different from other regions. It may be because of local behavior, local laws and regulations, customers, etc., as the case may be. But having said that, CCI has in the recent past, again looking at objective justification, so we have seen a case where objective justification was taken as a defense and accepted by the CCI. Now we'll discuss a case where objective justification was not accepted as a defense, in those facts and circumstances where India's policy was much more harsher. So Aman, why don't you take forward listeners to understand what the Intel case is all about? Why should global MNCs which are operating in India must be mindful of?

AMAN SHANKAR : Sure. So the Intel case is very important from two accounts. One, it also creates a slight nuance to the objective justification test that we discussed in the previous episode. And secondly, for a global MNC, as you mentioned, who are having global policies, but certain changes or nuances are added to particular jurisdiction or a region, how does that play out with the regulator? So in this particular case, there was a specific India warranty policy by Intel for their boxed microprocessors, which was distinct from what they had already in other jurisdictions.

What in effect it did was, if you're going to buy it, let's say a box microprocessor outside India, you can't claim that warranty in India. You have to claim from that particular distributor where you bought it. So this was found by the CCI to be unsettling with their competition. A, it said it reduced consumer choice. B, it disincentivized the parallel imports of the trade channels. Third, it also produced an exclusionary effect as far as it was unfair advantage to the distributors in India and the importer channels was limited by this particular policy. And they were also sustained higher domestic prices because of this lack of cross border sharing or buying mechanism. Now, apart from this, what is important in this particular case was A, CCI didn't accept any objective justification argument by, that was advanced by Intel. Intel said broadly speaking that A, this is going to prevent counterfeit and B, it was more towards consumer protection as a standard. But CCI said that no, this cannot be an objective justification because there are too broad stipulations or restrictions that you are going to pose on the market and which includes both the consumer as well as the importers. Now, this case is important from the point of view that a global MNC who are having the differential policy in terms of their pricing or warranty or access and they are producing exclusionary effects, then the CCI will act upon it. So you have to, if you're global MNC, you have to be very careful in how you design these global policies and how well documented and reasoned are your justifications. Number two, and which is very important is that even though there's a India specific deviation from your global standards, I think four questions must be asked by the MNC to them as far as compliance is concerned. Number one, why is India placed differently from other states? Number two is the differentiation objectively necessary? Number three, are there any less restrictive measures that you can adopt for that particular purpose? So the test of proportionality has to be there. The lens has to be there. And lastly, does the policy effectively protect a local distribution or monetization status? So you have to ask these four questions, well documented in your compliance document because it cannot be an afterthought that you are caught by the regulator and then you come up with your justifications which are not even grounded in the realities of it or it may be grounded in the realities but they are too broad you could have adopted other measures. So this case to that effect is very very important on these two fronts.

ABIR ROY : In fact, if I recall correctly that there was something on being the least restrictive also. So that is also I think and I think you hit the nail on the head that objective justification cannot be an afterthought. It cannot be retrofitted. You had the book my showcase where based on documents available on record, they said objective justification, yes, there is justification. Two months down the line in the Intel case, they said no, in this particular case, it is more a bland or a vague objective justification, not grounded in reality. So CCI did not endorse that. Obviously, we'll see how the appellate tribunal looks at it because Intel has challenged the order before the National Company Appellate Tribunal. In fact, one of the things that they have said is they have withdrawn the policy in practice. So it will but it will be interesting to see how actually it plays out. And this is a debate that we keep on happening in the compliance circles when we actually discuss with the business team, when they want to roll out a policy, especially in say the consumer goods space, where in India you resale price maintenance is not a hardcore restriction, like some other jurisdictions that they are. Then the debate always sees that they insist on having some kind of a safeguard, which safeguard or policy document which may be seen as RPM. So the debate is always that why do you want that? What is the end game that you are trying to solve? So ultimately from a compliance standpoint, this case I would say is very, very important for global MNCs. Is that you may have an Indian policy, perhaps you may have may have some policy which are more harsher, but why it is why it is required? What is the justification? Is it the least restrictive route which is there? So last if you re see the last episode, we spoke about I would say what the MNC should be happy about in the sense okay, fine, objective justification has come in. But merely having objective justification as a defense or a bland and a vague defense will not stand on its own legs before the court of competition laws in India.

So coming from the and MNC's, I think we are looking from an and MNC I think one of the things which obviously has caught everyone's attention, coming to the next update would be more of a legal update, would be that the CCI has now said, or rather, the Competition Act has been amended to now state that CCI has the power to levy penalty on global turnover. So that's a major update which has happened. So Aman, tell me this law, this legal change came in, I think a couple of years back. It's not a recent change, and we were all, we're waiting for the CCI to use this power and see whether how and in what circumstances the CCI will penalize a party based on global turnover. So what has been the CCI's outlook in the recent past for this?

AMAN SHANKAR : So I think Abir we have to also understand when you talk about penalty as a measure under the competition act, the honorable Supreme Court in the recent Kerela Exhibitors is very succinctly pointed out that penalty is also a deterrence measure and it's a very strong enforcement power. It is not a nominal thing that you just impose on the parties. So penalty mechanism has to make sense in all scenarios. Not every time when you deal with an alleged violator of the law, he has to be based out of India or he may be deriving revenue from the products that are under investigation. Because I will deal with two cases that have come before the CCI and CCI thought that gives the right time to prompt a shift from what we had in the Excel crop standard. So what Excel crop said and rightfully so as a standard that whenever you lay the penalty, it has to be based on the relevant turnover. So you can't go all in comparsely because proportionality standards always have to be there. What is the product under investigation? What is the market under investigation? You have to look at everything and then basis that you have to compute the penalty. So the relevant turnover standard was always there.

What CCI did in two cases which I point out and both of these are cartel cases relating to a tender process. CCI went a step ahead. One is the Nagarik Chetna Manjh and second one is the CP cell case. Now in the Nagarik Chetna Manjh, the peculiar fact was that the cover bidders who are found in violation of the act didn't generate any revenue from the relevant market. And as a result, relevant turnover could not be computed. So the reliance on global turnover then was found to be necessary in those cases because ultimately you have to deter the party. You have to pass on a signal or a message. And CCI then relied upon its penalty guidelines which it had come up with that in cases where any relevant turnover cannot be computed, it's impossible, then you will shift to the global turnover standard. So in that case, based on the global turnover, penalty was levied by the regulator. The second case which I mentioned, the CP cell case, it was again a cartel case relating to tender. But the peculiar fact in this case was that the enterprises who were found in violation of the law was not a global company, it was a pure domestic company, but it did not derive any revenue from that tender process or the alleged product or the market it said to be in violation of law. So what the CCI said was, if we find we cannot obviously compute the relevant turnover, we cannot compute the global turnover, what we will do is we will calculate the average turnover.

So you may be, you're a business, you are deriving some kind of revenue. So we'll calculate the average turnover for the last three years. And basis is that the CCI said that will impose penalty. However, in that particular case, they ultimately chose not to impose any monetary penalty, but this standard was tested and laid down. Now, few interesting things come up here. One, there has been a shift by the penalty guidelines of the CCI as to how they will compute the penalty when levying that. Obviously, revenue turnover is the first go to mechanism, but beyond that also there are other mechanisms that the CCI has tested. Now the penalty guidelines itself is a subject of constitutional challenge before the Honorable Delhi High Court in one of the cases filed by Apple. The matter is subjudice. So it will be tested to what extent excel crop has to be fulfilled or complied with and what is the permissible definitions that we can go around or is this only a supplemental step that we are taking.

Number two, from a deterrence perspective or a mechanism perspective, obviously CCI is armed with a lot of powers that they can test on parties, even if you are a global company or a company who is not deriving revenue, still penalty can be imposed upon you. Now, there is a heightened financial risk in cartel investigation, regardless of direct revenue linkage to the market. So global companies have to always bear this in mind when taking any conduct. And there is a need for robust group level companies because they need to calculate their global turnover, the group companies can also get into those scenarios. So these are the few takeaways that can come out with these cases on penalty levying mechanism.

ABIR ROY : It's very interestingly the couple of cases that you mentioned were on reference of a cartel behavior. Now extrapolate that to a platform level analysis, which all these antitrust investigators, authorities are looking at. And how would you determine a relevant turnover? And in the absence of an understanding of the relevant turnover on those particular facts, to look at global turnover of a platform entity, is something which obviously is will face a certain amount of challenge if the CCI were to levy such a penalty, but from a compliance perspective as we speak today this is definitely a deterrent and that is also the purpose which is there because what happens is the relevant turnover work is also based on proportionality while that is obviously one of the yardsticks of any penalty statutory penalty not only the CCI even say the Securities Exchange Board of India levy is a penalty it has to be proportional and yet a deterrent factor. So the when the Competition Act was amended in the recent past post Excel Crop, these were the factors which played in the mind of the lawmakers to make that change. Obviously, we'll have to see, like you said, there's a constitutional challenge by Apple before the Delhi High Court to see how the lawmakers changes will obviously will put be put to test, and we'll see how that goes. But as things stand today, the CCI can penalize companies based on global turnover. So that is something which is extremely important.

AMAN SHANKAR : I think having done with the penalty test, objective justification test, the effect standard test, what is now important for us is actually to deal with the last line that we had already discussed the hospitals of the market case and why this is also important is that somewhere also is linked back to the excessive pricing standards that we had seen earlier on the aftermarket case that we had seen. So this case will be important so Abir your thoughts on this case what implications does it have.

ABIR ROY :  In fact, this judgment just for our listeners came out I think three, four days back. The allegation was actually quite similar to what is happening internationally. Is that the allegation was that the hospitals overcharge their patients for their treatment? So that was the, I would say, the principal allegation. Obviously, I would say that that is and that was spread across a lot of parts. So what the DG, the Director General, is the investigating arm analyzed and said that every hospital is an aftermarket, is a market in itself. Why? Because once the patients have admitted, they are actually locked into the network. So they actually tried to create a situation where the DG said that it's an aftermarket. Every hospital is an aftermarket and that being said, then every hospital becomes dominant by necessary definition. And then all the tests are more expensive, the treatment is more expensive, etc. So the Director General wanted to make out a case of an after market abuse. The matter traversed all the way to the CCI, and obviously the DG report, just for our listeners, is more of a recommendation. It has no binding nature, it's more of a recommendation. There have been instances in the past that the CCI has overturned the DG findings.

Like they did in the book my show case, for example, which we discussed in the last episode, and the CCI in this case, also, which is a hospitals case where there were leading hospitals like Max, etc., who were there, they overturned the DG findings and they said, among other things, A, if there's no aftermarket, it's a super super speciality market. But more importantly, when we talk about global MNCs and pricing, what they said was that taking the United Brands test, they said every hospital has different cost standards. You cannot compare for a lack of better word apples with oranges, as in you cannot compare hospitals with a diagnostic center because the cost standards are completely different, the cost frameworks are completely different. So the incurred cost is different, and hence the price, while may seem higher, is completely justified. So, one of the things I would say is that broadly CCI is not a pricing regulator. Any antitrust authority is not a pricing regulator. So, if you see even the excessive pricing cases, they are few and far between. which is there because CCI doesn't want to get into pricing related determination whether A is fair or B is fair because that makes them a pricing regulator in the eyes of the law. Which CCI does make does not have the mandate for. Well, the CCI is obviously they want to remove every bottleneck. But in this case, they said the service is of such a nature you cannot compare with other non-hospitals or non-superspeciality hospitals. It's a service at the end of the day. 

And service, when you give a service, you need to look at the cost incurred by that particular hospital. And in a broader context, from a compliance perspective, you need to understand the costs which are incurred by any company. And costs incurred between companies, even in the same market, may be different. Here, the market was also different. All the counts is the CCI held that there is no case of abuse which is made being made out. while I would say I would I would just divorce myself from competition law and say from a broader policy level, health and safety is a state subject under the constitution. So that's another debate which is there. Whether competition law in the first place should get into pricing of hospitals, etc. That's a different debate altogether. That's a constitutional debate which may arise in any subsequent cases. But as things stand today, the case has been closed, no, no abuse found out.

So so that has this has been a quite a welcome development in the sense not for hospitals, obviously. Hospitals where the where under investigation, but from a broader level, they endorse the United Brands test as one of the tests which needs to be seen from an abuse of dominance excessive pricing case.

AMAN SHANKAR : Yeah. I think it's very interesting one of the arguments that I've had and that you've said. Although it was a very interesting thing to do that every hospital was considered as a standalone market in itself in this case and that's where the aftermarket test was also drawn. But the CCI didn't concur with that particular notion. So it's very interesting what this case has laid down and endorsed.

ABIR ROY : Yeah, aftermarket is obviously they said there's no lock-in, patients can obviously go to other hospitals if they don't like the treatment and life cycle or life cycle costing on a broader term and specifically for hospitals. They said an estimate cost is always given. So the customers sorry, the patient is aware. So, from a broader economic principle, also they said there's no aftermarket. And I think CCI did the right thing. If you start calling every hospital an aftermarket, by definition, then every shopping mall will be an aftermarket. Every building will be an aftermarket, every apartment will be an aftermarket. Where do you draw the line? competition law cannot get into for at least for an Indian context, unlike say the Australian law where the consumer protection and the competition law authorities house within the same regulator, the ACCC, India, the consumer authority and the competition authority is completely different, and they serve different purposes. So that also has to be kept in mind. One is a consumer issue, one is a competition law issue. So we should know so CCI.

I, in my opinion, did the right thing, not by going into aftermarket, because that would have opened a can of worms, which may not have been the perfect solution for competition law investigation. So, yeah, so we have finished, I would say, the leading enforcement updates which are there. I would say the listeners will come back soon with another Vartalap extremely soon. And stay tuned. Thank you so much for listening to us.