DIRECTOR GENERAL (I And R) vs OUDH SUGAR MILLS LTD., BOMBAY

THE Oudh Sugar Mills Ltd. is facing this enquiry on an application filed by the Director General of Investigation & Registration (DG for brief) filed under Section 10(a)(iii) of the MRTP Act, 1969. THE DG has charged the respondent, the Oudh Sugar Mills Ltd., of having indulged in certain restrictive trade practices attracting the provisions of Sections 33(1)(e) and (f) of the Act. Briefly, the complaint application of the DG makes the following averments.

THE respondent is a Public Limited Company incorporated under the Companies Act, 1956 and is engaged in the business of manufacture and sale of sugar, industrial alcohol, spirit, oil, solvent extracts, canned fruits and vegetables and paints. For the purpose of sale and distribution of the aforesaid product, the respondent appointed wholesalers/distributors with whom, a standard agreement was entered into. Clause 2 of the agreement reads as follows: "You will also be at liberty to procure orders for sale of free sugar at prices which may be accepted by us in our absolute discretion".

The DG has alleged that his clause attracts the provisions of Section 33(1)(f) of the Act, as it tantamounts to a restrictive trade practice inasmuch as it requires the wholesaler to procure order for sale of sugar at prices stipulated by the respondent.

The respondent has a scheme in terms of which, its agents are paid commission varying between 3 and 6 percent on the sale price of orders, which are booked by them. This, according to the DG, attracts the provisions of Section 33(1)(e) of the Act. Similarly, Allahabad Canning Company, a unit of the respondent which manufactures canned fruits and vegetables has been offering incentives for distributors, who purchase specified minimum quantities of certain products. This again, according to the DG, attracts the provisions of Section 33(1)(e) of the Act.

THE DG has recommended that an enquiry be instituted against the respondent for the restrictive trade practices indulged in by it, falling within the mischief of Sections 33(1)(e) and (f) of the Act. A Notice of Enquiry (NOE) was issued on 6th August, 1996 on the basis of the application of the DG. The NOE alongwith the DG''s application was communicated to the respondent for putting in its appearance through an authorised representative and to defend itself against the charges in the NOE.

THE respondent submitted a detailed reply to the NOE. THE respondent has taken certain preliminary objections besides advancing its defence on merits. THE reply of the respondent is summarised herein below: Preliminary Objections: 1. THE existence of a restrictive trade practice is a condition precedent to the issuance of NOE and the alleged trade practices do not constitute any restrictive trade practice as defined in the Act. 2. THE NOE does not set out clearly the relevant facts and feature of the trade nor does it state as to how the field of competition has been affected by the alleged restrictive trade practices. 3. THEre is no prima facie case established and no preliminary enquiry has been held in respect of the allegations. Defence on merits: 4. THE Central Government has been following the dual pricing policy for sugar, in terms of which 40% of the total sugar production is requisitioned by it as levy sugar at prices fixed by it and the remaining 60% is permitted to be sold as free sale sugar. 5. Clauses 1 and 2 of the impugned agreement have to be read together. Clause 1 permits sugar to be sold by the respondent to the wholesaler or distributor on a principal to principal basis. This is out of the quota of free sale sugar. THE price for such sugar will be as settled between the respondent and the wholesaler or distributor. Clause 2 of the agreement permits the wholesaler or distributor to have the liberty to procure orders for free sale sugar at prices to be accepted by the respondent. THE sale transaction ultimately is between the respondent and the outside parties and, therefore, the prices will have to be determined by them with the wholesaler or the distributor getting commission for procuring the orders. THEre is, therefore, no restrictive trade practice of price fixation as alleged by the DG. If the sale price has to be decided by the distributors or wholesalers, it will tantamount to ''travesity of justice''. 6. THE paint factory closed down from 13th May, 1996 as it was facing heavy losses, and, therefore, the charge of discriminatory commission to the respondent''s agent has lost its validity. In any case, if higher commission is paid to the agents who procure more orders, it only promotes competition and does not inhibit competition. 7. Insofar as discounts and incentives for canned fruits and vegetables are concerned, they are essentially intended to promote the sale of respondent''s products. THEse incentives are provided to all dealers and purchasers and there is no discrimination at all. No one has alleged discrimination. It is established marketing convention to provide for discounts, rebates and incentives. Giving of such incentives cannot be regarded as a restrictive trade practice.

In any case, without prejudice to the aforesaid contentions, the respondent is entitled to gateways provided in Clauses (a), (b), (h) and (k) of Section 38(1) of the Act. The share of the respondent in sugar trade is approximately 0.77% and, therefore, the alleged restrictive trade practices do not affect competition, materially, in the market. 8. The following issues were framed after the pleadings were completed: 1. Whether the enquiry is not maintainable for the preliminary objections taken by the respondent in its reply ? 2. Whether the respondent has indulged in or has been indulging in the RTFs alleged in the Notice of Enquiry? 3. Whether the alleged RTFs are not prejudicial to public interest?

The DG relied on some documents which were admitted by the Advocate for the respondent. Both the DC and the respondent filed affidavits in evidence, the former furnishing the affidavit of Mr. Saud Ahmed, Assistant Director General and the latter the affidavit of Mr. Ram Niranjan Bagaria, Constituted Attorney of the respondent Company.

I gave a hearing to Ms. Renu Sehgal, Advocate for the DG and Mr. Panduranga Sarma, Advocate for the respondent.

THE first issue relates to the maintainability of the enquiry in the light of the preliminary objections taken by the respondent in its reply. At the time of arguments, the preliminary objections were neither referred to nor pressed by the Advocate for the respondent. In fact, both the Advocates did not advance any arguments in respect of the first issue. In any case, a perusal of the preliminary objections shows that there is no merit in them, in the sense, that the allegations of restrictive trade practices are clearly set out in the application of the DG as well as in the NOE and, therefore, it is not correct on the part of the respondent to plead that the existence of a restrictive trade practice which is a condition precedent to the issuance of NOE, has not been alleged at all. In fact, the whole case rests on certain clauses of the impugned agreement and the circulars of the respondent which attract the provisions of Sections 33(1)(e) and (f) of the Act. THE first issue is, therefore, decided in the negative against the respondent. THE enquiry is maintainable. The second issue is the main one as to whether the respondent has indulged in or has been indulging in the restrictive trade practices alleged in the NOE. There are three limbs to the charges namely the restrictive character of Clause 2 of the impugned agreement, the offering of discounts and incentives in respect of sale of paints and the offering of discounts and incentives in respect of canned fruits and vegetables.

Insofar as the first limb of the charge is concerned, it is very clear that Clauses 1 and 2 of the impugned agreement will have to be read together, as correctly contended, by the Advocate for the respondent. Sugar is divided into 40% levy sugar and 60% free sale sugar. Levy sugar is offered to the Government for distribution through the public distribution channels at certain fixed prices, fixed by the Government itself. The manufacturers of sugar, in giving the 40% of the production as levy sugar, often suffer losses in respect of that quantity. This is sought to be made up through sale of sugar which constitutes 60% of their production.

CLAUSE I of the impugned agreement very clearly requires sugar to be sold by the respondent to the distributor or wholesaler on a principal to principal basis, out of the free sale sugar quota. It is correctly contended by Mr. Panduranga Sarma, Advocate for the respondent that the price for that sugar has to be settled between the respondent producer and the wholesaler or distributor. The wholesaler or distributor can also procure orders and can get a commission for the same. The price in that case cannot be determined by the wholesaler as he is only an intermediary for procurement of orders from the open market. CLAUSE 2 of the impugned agreement, therefore, enjoins the wholesaler or distributor to procure orders for free sale sugar at prices acceptable to the respondent. In case, the price is not acceptable, the transaction itself will not materialise. That price, obviously, is what the market can bear and not what the wholesaler desires. In this view of the matter, the first limb of the charge fails and is dismissed. Insofar as the second limb of the charge is concerned, the paint unit itself has been closed down on 13th May, 1996 because of heavy losses. Earlier, the lease of a paint factory was taken from Macfarlane and Company Ltd., the respondent being the lessee. The respondent is no longer in the business of manufacture and sale of paints. However, at the relevant period, there was a commission scheme for the agents. The commission was paid on the basis of off-take of paints. Such an incentive or commission will attract Section 33(1)(e) of the Act as it is based on off-take. To that extent, during the relevant period when the commission scheme was in operation, the respondent has indulged in the restrictive trade practice falling within the mischief of Section 33(1)(e) of the Act but as the restrictive trade practice has ceased, the respondent can only be directed to desist from indulging in the same in future. However, the respondent is entitled to gateways, as will be seen, a little later.

THIS brings us to the third limb of the charge about discriminatory discounts and incentives in respect of canned fruits and vegetables. As mentioned against the second limb of the charge, discriminatory discounts on minimum off-take, available to the distributors, wholesalers or agents, as the case may be, arising in connection with or by reason of dealings, attract Section 33(1)(e) of the Act. The argument advanced by Mr. Panduranga Sarma, Advocate for the respondent that such a scheme promotes competition rather than inhibits competition is not entirely correct, as the small distributors and wholesalers may not have the wherewithal to purchase prescribed minimum quantities and thereby may not be able to avail of the higher rates of discounts and incentives. In that view of the matter, they are likely to go out of competition. The ruling of this Commission in Re: Saraikella Glass Works (Pvt.) Ltd. case (RTPE 32/85 dated 10.5.1993) extracted herein below will govern the instant case: "First, differential or discriminatory incentive bonus or discount based on quantity is a restrictive trade practice within the meaning of the Section 2(o) inasmuch as such discounts would reduce the opportunities of the smaller dealers in being able to compete with the bigger ones and this would have the effect of preventing or distorting or reducing competition between them; Second, such a practice is a concession, benefit, allowance, discount or rebate in connection with or by reason of dealings within the meaning of Section 33(1)(e) of the Act."

The third limb of the charge, therefore, stands established. However, as Mr. Panduranga Sarma, Advocate for the respondent argued, the respondent''s share in the market is less than 1% being only 0.77%. This market share relates to the sugar market. In respect of paints as well as canned fruits and vegetables, the affidavit of Mr. Ram Niranjan Bagaria, Constituted Attorney of the respondent mentions that the market share is very insignificant to make any impact on competition. This has not been refuted by DG either in the affidavit of Mr. Saud Ahmed, Assistant Director General nor through any other independent evidence. All that the DG has stated in his rejoinder to the reply of the respondent is that "the fact that the respondent''s share in the sugar trade is miniscule is no criteria" for adjudicatory purpose. In respect of paints also, all that the DG has said in his rejoinder is that the fact that "the business of paints is only a small fraction of the total business operations of the respondent Company is no excuse" for the respondent to indulge in the restrictive trade practices. The benefit of doubt is, therefore, given to the respondent, as the DG has not refuted the contention of the respondent that it has an insignificant share in the market for different products like sugar, paints and canned fruits and vegetables. In this view of the matter, the respondent is entitled to the gateway under Section 38(1)(h) of the Act. The alleged restrictive trade practices do not, directly or indirectly, restrict or discourage competition to any material degree. There is, therefore, no injury to public interest. The second issue is decided against the respondent insofar as paints, canned fruits and vegetables are concerned but the third issue is answered in the affirmative in favour of the respondent. The Notice of Enquiry, therefore, shall stand discharged. No order as to costs. Enquiry discharged.