Case Law Details
COMPETITION COMMISSION OF INDIA
Varca Druggist & Chemist
V/s.
Chemists & Druggists Association, Goa
MRTP CASE NO. C-127/2009/DGIR (4/28)
JUNE 11, 2012
ORDER
1. BACKGROUND
1.1 This case was initiated on a complaint filed by Varca Druggist & Chemist through its proprietor Mr Hemant Pai Angle and two other proprietors of pharmaceutical drugs and medicines firms (hereinafter referred to as “Informants”), before the Director General (Investigation & Registrations), Monopolies & Restrictive Trade Practices Commission (hereinafter referred to as “DGIR, MRTPC”)alleging that the Opposite Party, namely, Chemist & Druggist Association, Goa (hereinafter referred to as “CDAG” or “Association”) is indulging into restrictive practices.
1.2 The Informants have claimed that they are members of CDAG which has been formed by chemists, druggists, distributors, stockists and retailers of various pharmaceutical companies in Goa.
1.3 The allegations made by the Informants in the complaint/information are summarized as below:
(i) CDAG has formed various guidelines, which its members are bound to abide. The said guidelines were formed by the members of the CDAG for the benefit of its members so that the business of stocking, whole selling and retailing could be smoothly facilitated among its members. However over a period of time due to the unfair practices of some of the members of its Executive Committee, CDAG has become a monopolistic body and has started practicing certain restrictive trade practices.
(ii) As per the normal practices, whenever a new pharmaceutical company establishes its industry in Goa, or is interested in distributing its products in Goa, it has to appoint stockist and wholesalers for the various regions as per its requirements. These stockist/wholesalers then sell these medicines to the retailers who possess a drug license. However, as per the CDAG guidelines, the CDAG has not only directed but also forced all such companies to appoint their stockist and wholesalers only from those individuals and firms, who are members of the CDAG, thus, thus, making it very clear that no person or firm who is not a member of the CDAG is eligible for being appointed as the stockist or wholesaler of such a company.
(iii) Furthermore, even when such a company wishes to appoint stockist and retailers from the members of the CDAG, it is insisted and directed that no such stockist or wholesaler could be appointed unless they receive a ‘No Objection Certificate’ from the CDAG.
(iv) The company desirous to appoint a third wholesaler or stockist has to fulfill the conditions placed by the CDAG that the sale of the previous stockists has to be above Rs. 2 lakh per month. The conditions further go on to restrict the company from appointing the 4th stockist till the sale exceeds Rs. 4 lakh per month. Similarly, only if the average sale crosses Rs. 6 lakh per month then the company can apply to the CDAG for appointment of their 5th stockist.
(v) The guidelines laid down by CDAG do not permit appointing more than five stockists by any pharmaceutical company.
(vi) A committee has been formed by CDAG which has recommended huge increase in the above mentioned slabs without taking retailers into confidence. The retailers and the wholesalers together form this association. The slab of appointment of stockist now starts from Rs. 6 lakh and ends at Rs. 40 lakh for a 5th stockist which totally extinguishes the chances of small wholesalers who could get a offer letter of a particular company to be its stockist as the CDAG bars any new appointment even though the company feels the need.
(vii) The company is restricted to appoint another stockist for one year after it appoints a stockist, even if the company feels the need.
(viii) It has also been the practice of the CDAG that even in cases where the 2 stockists have to be appointed, ‘No Objection’ by the CDAG is given only for one stockist, and the reason for such an action cannot be questioned by any member of the CDAG or the pharmaceutical company. But earlier, two stockists, who were on their good books, have been appointed.
(ix) As per the market trends in the pharmaceutical business, the pharmaceutical companies introduce schemes for retailers. However, some financially powerful stockist-members of the CDAG who are also on the executive council refuse to pass on the benefits of the schemes to their retailers.
(x) It is also a settled practice in the pharmaceutical business that if a particular batch of drugs or medicines has crossed its expiry date, then such drugs are to be returned by the retailer to the stockist who in turn returns it to the respective company and can claim refund. However such refund is never passed on to the retailers. Some stockists also overcharge the retailers when such products are supplied to the retailer and the retailer has no forum to complain against such a stockist as they are appointed by the company on recommendations of CDAG, and even if the company desires to take action, it cannot do so, because in that case they shall not have any stockist to distribute their products, unless the CDAG gives ‘No Objection’ to appoint a new stockist.
(xi) Even a new individual or firm which possesses all the qualifications and means for being appointed as stockist, distributor or a wholesaler can’t be appointed by any company, although there may be dire need for appointing such a new stockist, unless and until such a firm or a wholesaler obtains a no objection from the CDAG. Further such an individual or firm has to become a member of the CDAG, first.
(xii) When any firm or individual wishes to bid for any government tenders, then the CDAG directs that such tenders are to be routed only through the ‘authorized stockist’, and such ‘authorized stockist’ are the members of CDAG, who control the affairs of the CDAG being financially powerful and influencing the executive council.
(xiii) The companies are threatened with punitive actions by the office bearers and therefore, reluctantly the company has to follow the directions of the committee in fear of boycott and the small wholesalers who want to participate in the government tenders are illegally barred from doing so.
(xiv) The members who are wholesalers and who are qualified to quote and bid for the government tenders are threatened of dire consequences if they do not route the supply from the ‘authorised stockist’. The companies are also threatened of dire consequences if they do not follow the guidelines of CDAG.
(xv) It is also a common practice of the CDAG to force and compel any new entrant who wishes to carry out business of stockist, distributor or retailer of any pharmaceutical product to become its member. If such a new entrant refuses to become a member, then the CDAG directs all its members not to purchase stocks from such a stockist and if he is a retailer then not to supply him with stocks of other companies. Similarly if a company wishes to appoint a new or a additional stockist then they cannot do so without the ‘consent’ of the CDAG, which is against the fundamental rights as enshrined in Article 19 (1)(g) of The Constitution of India.
(xvi) The CDAG also directs that no credit be given to retailer although as per the market practice, a credit of 20 days to one month is normally given to settle all dues. However, if a company appoints a stockist without the consent of the CDAG, then the CDAG directs the existing stockist of such a company to give credit of 3-4 months to retailers so that the retailers do not purchase stocks from the new stockist and also directs its existing stockist who are members of the CDAG not to purchase stocks from such a company so that eventually the company bows down to the demands of the CDAG. So also if the company wishes to supply its stocks directly to a retailer, then in such a case they are directed by the CDAG not to do so and demand that all stocks should be routed through the stockists who are members of CDAG.
(xvii) CDAG’s governing body i.e. its Executive Committee, comprises of one President, four Vice Presidents, one Chairman of wholesalers, one Chairman of retailers and seven Members and take arbitrary decisions and force its views on all its member as well as non-members. The Executive Committee consists of some very financially influential persons who are themselves stockist of various companies and are therefore not allowing companies to appoint new or additional stockist for fear of losing their business so much so that they have even tried to amend the association guidelines so that new companies cannot appoint new stockist. No new stockist has been appointed by any company, without NOC, for the last nine years in Goa as the CDAG does not give its ‘No Objection’.
(xviii) Some of the wholesalers are harassed by the Association to relinquish the stockist-ship of a particular company, because some of the members of the Executive Committee were interested to grab the company of that particular stockist.
(xix) The retailers are harassed by such stockist by unnecessarily making them stand in queues, demanding immediate payment, non-refund on products that have crossed expiry dates, non-supply of stock even when such stock is in surplus, non-passing of schemes to such retailers, even when the company has floated various schemes. As some of the stockists enjoy position of monopoly, the retailers are at their wits end.
(xx) At the time of the Annual General Meeting (AGM), most of the members are not intimated, only those members are intimated about the date and time of meeting who are in good books with the executive council members of the CDAG. This is done with the ulterior motive of remaining in power and for the fear of being voted out by majority of the members. In case members wish to make certain suggestions, which are contrary to the opinion of the members of the executive committee of the CDAG, then the committee unlawfully adjourns the meeting and the next date of meeting is never communicated to such members.
1.4 The Informants prayed for following reliefs :
(i) After conducting inquiry into the working of CDAG and looking into guidelines issued by it, the current executive council be debarred from taking any decisions with respect to any amendment of CDAG guidelines and also that the provisions in the guidelines which restrict the companies to appoint the number of stockists should be scrapped.
(ii) CDAG should be barred from interfering in the free bidding and supply of goods by the wholesaler to the Government.
1.5 After receiving the complaint, the DGIR, MRTPC undertook a preliminary investigation into the allegations made in the complaint and sought the comments from CDAG.
1.6 The CDAG submitted its objections on 05.10.2009 before DGIR, MRTPC denying the allegations made in the complaint and submitted that guidelines issued by CDAG did not amount to monopolistic and restrictive trade practice. It was also submitted by CDAG that the pharmaceutical companies are at liberty to appoint as many stockists and dealers of their choice as they wish and CDAG is not placing any restriction on appointment of stockists or retailers.
2. At this stage, consequent upon the repeal of Monopolies and Restrictive Trade Practices Act, 1969 (the MRTP Act) the case was transferred to the Competition Commission of India (the Commission) under section 66 (6) of the Competition Act, 2002 (the Act).
3. The Commission, after considering the material on record formed an opinion that a prima facie case existed and referred the matter to the Director General (DG) for conducting investigation. In pursuance of the direction of the Commission the DG conducted investigation and submitted the investigation report onl6.06.2010.
4. During the course of investigation the DG gathered facts out of primary and secondary sources, collected evidences by sending questionnaire to the concerned parties including information providers, analyzed the evidence/facts gathered in light of the information supplied to the Commission and recorded the statements of information providers as well as members of CDAG.
Findings of DG Report
5. The observations and the findings in the DG Report can be summarised as under:
5.1. As per the report of DG, from the examination of various clauses of the guidelines of CDAG it is undisputed that unless the CDAG grants NOC, pharmaceutical companies cannot appoint a wholesaler/stockist on its own. Further, it is also stipulated that in order to become a wholesaler or a retailer in Goa, one has to become a member of the association. These conditions, in effect, limit the supply of pharma products in the territory of Goa. The DG in this regard has observed that had it not been for the guidelines, the pharma companies could have appointed more wholesalers and there would have been more retailers leading to more supplies in the market. By restricting the numbers of wholesalers and retailers, the association has restricted the supply of medicines in the market of Goa.
5.2. After examining the conditions prescribed in the guidelines the DG has noted that no wholesaler is allowed to take stockist-ship of any company without taking permission of the association. Similarly, wholesalers can supply to retailers only if retailers are the members of the association. Thus, there has been understanding among the stockist not to allow other players come in the market and compete against them. Further, as per Memorandum of Understanding, maximum cash discount offered to retailers should be 2% only and wholesalers should not operate any indirect beneficiary schemes to get larger orders from Retailers. As per guidelines, any wholesaler found violating the above rules will be liable to strict action by CDAG on the recommendation of the disciplinary committee appointed for the purpose. The guidelines also state that retailers should not resort to any unhealthy competition by giving discount to their customers and should not operate any beneficiary schemes to attract the customers and retailers found violating the above rules will be liable to strict action taken by CDAG on the recommendation of the Disciplinary Committee appointed for the purpose.
5.3. The DG has observed that the guidelines of the association and understanding among the wholesalers and retailer are anti-competitive since they are acting in concept to fix price in terms of Section 3(3)(a) of the Act by not allowing the wholesalers and retailers to give discounts or extend any beneficiary schemes to the customers. Instead of the market forces determining the price of the drugs, ban4 has been imposed on lowering prices or offering incentives. The DG has quoted the statement of Albert De Sa, President of CDAG confirming that association in its meetings does discuss issues related to price margins etc.
5.4. Further, as per DG, the guidelines are also in violation of Section 3(3)(b) of the Act, since by not allowing any outsider (who is not a member of association) to become stockist or retailer restriction has been placed on the number of players, thereby, limiting the supply of drugs in the market. More players would mean more availability of the drugs in the market and consequently more provisions of goods and services.
5.5. DG has noted that the members of CDAG are meeting during Annual General Meetings and Executive body meetings on regular basis. Apart from the discussion on the topics of common interest of members, certain issues have also been discussed which show that the Chemists and Druggists Association of Goa hold regular meetings with a view to regulating the conduct and behaviour of members and discipline them. From the excerpts of the meetings, it was also noted that direct supplies from the pharma companies to the hospitals or retailers were severely discouraged. Unity of wholesalers and retailers for a common cause was also discussed in several of these meetings. The minutes also show that without the express approval of the Association, pharma companies cannot engage wholesalers and retailers.
5.6. The DG has come to the conclusion that actions of Association have no positive market outcomes and its conduct and actions, on the contrary, are against public interest. The report goes on to show that three factors listed in Section 19 (3) which could have been advanced as justification for their actions as being pro-competitive and consumer friendly, namely, (I) accrual of benefits to consumers, (II) improvements in production or distribution of goods or provision of services and III) promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services, do not offer any kind of defence to them. The DG has also cited the ratio laid down in the cases of Consten Grundif v. Commission [1966] ECR 299, Glaxo Smithkline Service Limited v. Commission [2006] ECRII-2969(2006),wherein it has been held that the benefits produced by an agreement must be something of objective value to the Community as a whole, not a private benefit to the parties themselves. Thus, according to the report of DG there is a case against the CDAG to say that their guidelines, rules and regulations coupled with their actions contribute to appreciable adverse effect on competition (AAEC) in the market of pharmaceuticals.
6. Are members of CDAG acting like Cartels?
6.1 The DG has further investigated the aspect as to whether the activities of CDAG/members of CDAG were akin to cartel within the meaning of Section 3(3) of the Act. The DG in this regard observed that it is undeniable that the trade or professional associations in modern times benefit their members and may also be beneficial in increasing the efficiency of the market. Most trade associations take an active role in shaping the way their industries work. They promote product standards and best practices, and define and promote standard terms and conditions of sale. They also issue recommendations to their members on a variety of commercial and non-commercial issues and also promote, represent and protect the interest of members on legislation, regulations, taxation and policy matters likely to affect them. According to OECD, “although their principal function is to provide services to their members, trade associations also have important “industrial policy” and “political functions”. However, the trade or professional associations have to limit their activities in such a manner that they do not run afoul of the competition law. Often discussions of such associations, even if they are meant to pursue legitimate association objectives, bring together direct competitors and provide them with opportunities for exchange of views on the market, which could easily spill over into illegal coordination. Casual discussions of prices, quantities and future business strategies can lead to agreements or informal understandings in clear violation of anti-trust rules. Frequently businesses use trade associations as a means of providing “cover” for their cartel activities. It is for this reason that trade associations and their activities are subject to close scrutiny by competition authorities around the world.
6.2 DG has further observed that the trade associations often have been found to serve as a vehicle for practices that prohibit competition in the market as has been seen in cases of some cartels lysme cartels where activities were carried out under the garb of associations. The competition agencies across the world have frowned upon trade associations for their direct or indirect involvement in conduct which harm or restrain competition. Office of Fair Trade (UK) has been of the view that functions of trade associations are useful to members – especially, perhaps, to smaller firms – and they may also be beneficial in increasing the efficiency of the market system as a whole. Activities of trade associations which have no appreciable adverse effect on competition may be of no concern. A trade association may, however, provide directly or indirectly the vehicle for anti-competitive, or even collusive activity. When associations act as a conduit for the organization of concerted actions by its members – for example by making recommendations as to the prices at which its members sell their goods or services or by giving a call of collective boycott -both the constituent members and the trade association itself may face condemnation under Article 81 of EC or Section 1 of Sherman Act.
6.3 Many associations including law and attorney firms, worldwide, have issued guidelines for the associations so that their behaviour is compatible with the anti-trust laws. It has been recognized that activities of trade associations such as general assemblies and meetings can be a forum for concentration between the members. Such concentration does not necessarily have to be related to the subjects that are formally on the agenda of the association. As members of the association will usually also be the competitors, information concerning the meetings of the association might be considered, as an indication or proof that the intention to restrict competition or restrictive practices exists amongst certain members.
6.4 The organization cost of a cartel is significantly lowered where a trade association exists. Trade associations, by lowering the cost of meetings and coordinating activities among firms in a market, facilitate the establishment and enforcement of a cartel.
6.5 Here, on this aspect the DG has observed that the wholesalers and retailers used CDAG as platform and issued guidelines/directives which restrict the supply of medicines in the market. It is significant that many powerful wholesalers are retailers as well and such wholesalers could have their own interest in creating such type of guidelines so that others may not get entry in the market of pharmaceuticals in Goa. On the basis of the guidelines issued by CDAG, following activities of wholesalers and retailers carried out through CDAG, as per the DG may be taken as cartel-like:
(i) Guidelines/Directives issued to the members by the association to obtain no-objection certificate to get stockist-ship of any pharma company.
(ii) Organizing meetings to pursue their agenda.
(iii) Talking about pricing margins in the meetings as has been confirmed in the statement of Mr. Albert De Sa.
(iv) Taking collective actions in terms of deciding issues of trade, prices, discounts and also awarding punishment to the violators.
(v) Denying business unless one becomes member of CDAG and agrees with the terms and conditions of the association.
6.6 The DG in his report emphasized that looking at the nature of activities of the wholesalers and retailers who are the members of CDAG (engaged in similar or identical trade), it can be stated that they reached an agreement amongst themselves and decided to restrict the market of pharmaceutical products by limiting it amongst themselves. As per DG, following factors which have been identified in general as factors for existence of cartels, facilitated the cartel-like behaviour of the wholesalers and retailers:
(i) Barriers to entry have been put by CDAG by coming out with the guidelines which state that till one becomes member of CDAG, he or she will not get no-objection to get stockist-ship from any pharma company in case of a wholesaler or supply from any wholesaler in case of a retailer. This is clear from the following clauses in guidelines/MoU:
“POLICY TO MAKE SUPPLIES TO NEW RETAIL OUTLETS
Following conditions apply to new Retailers outlets for a period of minimum one year.
(a) SUPPLY: No supply to be made to any Retailer by any wholesaler unless such Retailer becomes member of CDAG” (Clause 8 of MoU).”
“Appointment/Termination of new stockist shall only be done with the permission of the Association.”(Clause 1 of Prescription Guidelines)
(ii) The pharma companies could have appointed more wholesalers and there could have been more number of retailers but for the existing guidelines. Not only members but companies also are liable for punishment as per the guidelines of Association, if wholesalers and retailers are appointed without seeking permission from the Association. The companies are also barred from direct supplies to the doctors, nursing homes, chemists. (Clause 7 under the heading General-Prescription Guidelines). CDAG is, thus, controlling the market of medicines.
(iii) The cartel-like behaviour of wholesalers-retailers was facilitated by the existence of associations and interaction of the wholesalers-retailers in those associations. The members of CDAG are united together and exhibit collective action.
(iv) Since the wholesalers and retailers are all concentrated in small state of Goa, Geographical advantage of being present at a small concentrated area also helped the wholesalers-retailers to organize and act together.
(v) The guidelines of association contain clauses which try to discipline the violators, an act quite typical of the Cartels. The clauses contain in clear terms the penal clauses in terms of monetary fines in case of violations of guidelines of association. Clause 7 and clause 9 under the heading procedure of Prescription Guidelines). Thus, policing of activities of members is being done typical of all cartels.
(vi) Low expectation of severe punishment because of the fact that MRTPC (which was in existence earlier) did not have powers of penalizing the firms for anti-competitive behaviour also facilitated the cartel-like behaviour.
6.7 Collusion among independent firms in the same industry to co-ordinate pricing, production or marketing practices in order to limit competition, maximise market power and affect market prices has been referred to as a “carter” (Canadian Economy online, available at htttp://www.canadianeconomy.gc.ca/english/economy/cartel.html).The most common practice undertaken by cartels is price-fixing. This is the term generically applied to a wide variety of concerted actions taken by competitors, which have a direct effect on price. The simplest form is an agreement on the price or prices to be charged to some or all customers. In addition to simple agreements on what price to charge, the following are also considered price-fixing:
• Agreement on price increase;
• Agreement on a standard formula, according to which prices will be computed;
• Agreement to maintain a fixed ratio between the prices of competing but non-identical products;
• Agreement to eliminate discounts or to establish uniform discounts including agreement on credit terms that will be extended to customers;
• Agreement to remove products offered at low prices from the market so as to limit supply and keep prices high;
• Agreement not to reduce prices without notifying other cartel members including agreement to adhere to the published prices;
• Agreement not to sell unless agreed price terms are met; and agreement to use a uniform price as starting point for negotiations.
6.8 As per the report of DG, it can be seen from the clauses contained in the guidelines of CDAG that discounts are being severely discouraged. Restrictions have been imposed on the members not to pass on beneficiary schemes to the consumers. Further, as has been admitted by Mr. Albert De Sa in his statement, in meetings of association, issues of pricing, price margins are discussed. DG has mentioned that the following clauses in MoU clearly bring out agreements to eliminate discounts or to establish uniform discounts including agreement on credit terms that will be extended to customers:
“1. Purchase and Payment (Clause 1 of MoU)
(a) All Wholesalers should make cash bills of minimum Rs. 100/- However the minimum amount for credit bills is at the discretion of the Wholesalers.
(b) It is agreed that maximum cash discount offered to Retailers should be 2% only. The minimum purchase by Retailers for eligibility of cash discount is to be decided by the concerned Wholesaler.
(c) No other indirect discount should be given such as selling to Retailers and Doctors without LST/giving free offer either in excess to the trade offer officially operated by the company or giving free other products where no trade offer is operated by the company. Any such things will be considered as indirect discount.
(d) Wholesaler should not operate any indirect beneficiary schemes to get larger orders from Retailer.
(e) Any wholesaler found violating the above rules will be liable to strict action taken by CDAG on the recommendation of the disciplinary committee appointed for the purpose.
(1) For first violation a fine Rs. 2500/- will be imposed beside warning letter will be written to the Wholesaler.
(2) For second violation a fine of Rs. 5000/- will be imposed and also executive committee will not issue any NOC to such a wholesaler for a period of 1 year for being appointed as a stockist any company.
(f) Retailers should not resort to any unhealthy competition by giving discount to their customers and should not operate any beneficiary schemes to attract the customers.
(g) Any Retailers found violating the above rules will be liable to strict action taken by CDAG on the recommendation of the Disciplinary Committee appointed for the purpose.
(1) For first violation a fine Rs. 25000/- will be imposed beside warning letter will be written to the concerned Retailer.
(2) For second violation a fine of Rs. 5000/- will be imposed and all Wholesaler will boycott such retailer for a period of 3 months.”
6.9 DG has observed that since cartels operate in secrecy, they go up to great lengths to hide their activities. Using trade associations as a cover usually means using an umbrella protection to avoid arousing any suspicion. Based upon guidelines discussed above and the activities of the bodies like CDAG, DG concluded that these association exhibited cartel-like behaviour.
6.10 The DG has concluded that the facts brought out during the investigation are indicative that the guidelines of CDAG are restrictive and anti-competitive in nature. The DG has recommended that apart from considering action against the CDAG for their anti-competitive conduct, the Commission may also through Department of Pharmaceuticals, Govt. of India, consider getting directions issued to all such associations including All India Chemists and Druggists Association to desist from such practices.
7. The DG report was considered by the Commission in its meeting held on 29.06.2010 and CDAG was invited to file its comments/objections to the report of DG.
Reply of CDAG to DG report
8. The CDAG filed its reply dated 13.09.2010 before the Commission and also made oral submissions on 12.10.2010. The gist of the objections of CDAG is as under:
8.1 The CDAG has contended that the acts alleged in the complaint filed with the DGIR, MRTPC on 16.06.2009 against CDAG under the MRTP Act, 1969 are for the period prior to 16th June, 2009. Consequent upon the repeal of MRTP Act, the said case was transferred to the Commission under Section 66(6) of the Competition Act, 2002. In this regard it is pertinent to note that the notice for investigation dated 20.08.2009 sent by the DGIR, MRTPC was replied on 02.10.2009. Thereafter, on 14.10.2009, the Competition Act, 2002 was enforced vide the Competition (Amendment) Ordinance 2009 (Ordinance 6 of 2009) which also repealed the MRTP Act, 1969. Thereafter, this Commission took up the matter received by transfer from the MRTPC under section 66(6) of the Competition Act, 2002 and carried out an . investigation culminating in investigation report dated 15.06.2010. CDAG in this regard emphasized that the entire evidence taken by the DG while preparing the report relates to the period prior to 16th June 2009, as the 1st Show-Cause Notice was issued by the DGIR on 20th August 2009 under the provision of the MRTP Act, 1969 and the present proceedings and preceding investigation were pursuant to the said Notice dated 20th August, 2009 only.
8.2 On the above basis the CDAG has argued that the entire investigation and proceedings including the investigation report are completely without jurisdiction and ultra vires of the several provision of law and this Commission as well as the DG of the Commission do not have jurisdiction or any lawful authority in the matter. The CDAG by quoting the various provisions contained in section 66 of the Competition Act, 2002 , section 6 of the General Clause Act, 1897 (10 of 1897) as well as section 2 (o), section2(u) and section 36A of the Monopolies and Restrictive Trade Practice Act, 1969 has contended that a conjoint reading of these provisions makes it clear that after the repeal of MRTP Act,1969 by the Competition Act, 2002 the authorities under the MRTP Act, 1969 viz. the MRTP Commission as well as the DGIR MRTPC ceased to be in existence and the relevant provisions contained in section 66(3) to 66(8) of the Competition Act, 2002 provide for continuance of the investigations and proceedings pending under the MRTP Act, 1969 before the commencement of the Competition Act, 2002. As per the averment of CDAG the scheme envisaged for dealing with matters pending under the repealed MRTP, Act is as follows:
i. Section 66(3) of the Competition Act, 2002 provides that all the cases pertaining to Monopolistic Trade Practices and Restrictive Trade Practices pending before the MRTP Commission shall be transferred to the Appellate Tribunal and shall be adjudicated as per the provisions of the MRTP Act, 1969 as if it had not been repealed.
ii. Likewise, section 66(4) of the Competition Act, 2002 provides that all the cases pertaining to the Unfair Trade Practices pending before the MRTP Commission be transferred to the National Commission under the Consumer Protection Act, 1986 and shall be adjudicated as per the provisions of the MRTP Act, 1969 as if it had not been repealed.
iii. Furthermore, section 66(6) of the Competition Act, 2002 provides that all investigations or proceedings, other than those relating to unfair trade practices, pending before the Director General of Investigation and Registration on or before the commencement of the Competition Act, 2002 Act shall stand transferred to the Competition Commission of India.
iv. Section 66(7) of the Competition Act, 2002 provides that all investigations or proceedings relating to Unfair Trade Practices pending before the Director General of Investigation and Registration on or before the Commencement of the Competition Act, 2002 shall stand transferred to the National Commission constituted under the Consumer Protection Act 1986 and the National Commission may conduct or order for conduct of such investigation or proceedings in the manner as it deems fit.
8.3 Therefore, as per CDAG, this Commission can exercise jurisdiction only in investigations or proceedings in matters other than those related to Unfair Trade Practices which were pending before the DG(I&R), MRTPC under the . MRTP Act, 1969. On the other hand investigation or proceedings related to the Unfair Trade Practices are to be handled only by the National Commission under the Consumer Protection Act, 1986.
8.4 As per the contention advanced by CDAG, section 2(o) of the MRTP Act, 1969 as cited hereinabove defines “Restrictive Trade Practices and the necessary ingredient for “Restrictive Trade Practices” is that there should be an imposition of unjustified cost or restriction on consumers by manipulation as set out in the said section. Further, section 2(u) of the MRTP Act, 1969 defines Trade Practices and finally section 36A of the MRTP Act, 1969 defines Unfair Trade Practices. It has been pointed out that the allegations against CDAG as set out in the complaint of M/s Varca Druggists and Chemists and others (on which the entire saga has commenced) are covered under Section 36A(5) of the MRTP Act, 1969. Thus, as per CDAG the allegations against it are, at the most, in the nature of Unfair Trade Practices and therefore as provided under Section 66(7) of the Competition Act, 2002 only the National Commission under the Consumer Protection Act, 1986 has the power and authority to investigate into the same.
8.5 In light of the above submissions, the CDAG has contended that this Commission has exceeded its jurisdiction and has taken up a matter which it is not entitled nor empowered to entertain. Therefore, as per CDAG, the order of this Commission directing the Director General to investigate the matter under section 26(1) of the Competition Act, 2002 is illegal, unlawful and ultra vires.
8.6 It has been also argued that without prejudice to whatever has been stated hereinabove, under Section 66(1A) and Section 66(10) of the Competition Act, 2002 as well as under Section 6 of the General Clauses Acts 1897, the repeal of the MRTP Act, 1969 does not affect its previous operation or anything duly done or suffered thereunder or any right, privilege, obligation or liability accrued, acquired or incurred under the MRTP Act, 1969. As per the submission made by CDAG it is expressly provided in these provisions that any proceedings or remedy can be instituted, continued or enforced as if the MRTP Act, 1969 had not been repealed.
8.7 It has been submitted that, therefore, any act committed during the currency of the MRTP Act, 1969 cannot be called in question under the Competition Act, 2002. Furthermore; it is expressly provided that the provisions of the MRTP Act, 1969 will alone be applicable to proceedings which have been instituted under the MRTP Act, 1969 “BEFORE” the commencement of the Competition Act, 2002. Thus, even if it is assumed even for the sake of argument that the present proceedings and investigation are legally maintainable, the provisions of the Competition Act, 2002 cannot be applied under any circumstances and any prosecution or proceedings can be undertaken only in accordance with the provisions of the MRTP Act, 1969 as the entire matter is based on a complaint dated 16.06.2009 viz. before the commencement of the Competition Act, 2002.
8.8 As per the submission made by CDAG, there is no provision in the Competition Act, 2002 whereby the said Act has been granted retrospective effect. Therefore under section 5 (3) of the General Clauses Act, the Competition Act can only be enforced and implemented after 14th October, 2009 and not prior to that date. Thus, CDAG contended that the complaint dated 16.05.2009 received from M/s Varca Druggist and Chemist shall have . to be treated and disposed off only under the provisions of the MRTP Act, 1969 and not under the Competition Act, under any circumstances. The only provisions of the Competition Act, 2002 which may be employed in the present matter are Sections 66 (1A) and 66 (7) of the Competition Act since they provide for continuity of the proceedings/investigations in view of the immediate disbandment of the MRTP Commission and the DGIR, MRTPC. Therefore, any penal provisions or violations, if any, shall be solely and exclusively subject to the provisions of the MRTP Act and not the Competition Act, 2002.
8.9 It has also been submitted by CDAG that the entire evidence recorded and collected by the DG while preparing report dated 15.06.2010 was for the period prior to 16th June, 2009 when the Competition Act, 2002 was not enforced and the proper law at the time of the purported commission of the alleged offences was the MRTP Act, 1969. Therefore, CDAG cannot now be subjected to proceedings or penalized under the Competition Act, 2002 on evidence which pertains to period prior to the enforcement of the said Act.
8.10 CDAG has also contended that the DG has submitted report dated 15.06.2010 inter alia finding alleged infringement of the provisions of Competition Act, 2002 whereas in fact, he ought to have restricted himself only to the provisions of the MRTP Act, 1969 in terms of Section 66(1A), 66(10) of the Competition Act, 2002 and Section 6 of the General Clauses Act, 1897. On the basis of above submissions the CDAG has argued that the investigation report of DG, therefore, is violative of and ultra vires of express provisions of law and is not sustainable.
8.11 Moreover, as per CDAG, since alleged acts were done purportedly in violation of the MRTP Act, 1969, no action can be taken under the Competition Act, 2002 for the very same acts. On this ground also the present proceedings deserve to be dismissed.
8.12 CDAG has also submitted that without prejudice to the above submissions, it can be seen that the DG has failed to take into consideration provisions of Section 19(3)(d) and (e) of the Competition Act, 2002 which mandate that while determining whether an agreement has an appreciable adverse effect on competition (AAEC) due regard to the following factors ought to be given:-
(d) Accrual of benefits to consumers.
(e) Improvements in production or distribution of goods or provision of services.
8.13 CDAG has submitted that the DG failed to consider the fact that on account of the actions of CDAG, ultimately the consumers have been benefitted and that the distribution and sale of drugs has been effectively regulated by CDAG in larger public interests. Therefore, CDAG has committed no infringement of any law much less the Competition Act, 2002.
8.14 CDAG has also submitted that the complainant M/s Varca Druggist and Chemist is a disgruntled and mischievous element and is out to harass and trouble CDAG. Mr. Hemant Angle, the Proprietor of the said Varca Druggist and Chemist was himself the Vice-President of the Executive Committee of CDAG for the period from 2006-2008 and relinquished his office when he lost the elections. Furthermore, Mr. Angle is himself Defendant No. 12 in Special Civil Suit No. 36 of 2008 wherein CDAG is also a co-defendant. The documents related to that Civil Case are placed as Exhibit-2 in Volume II of the investigation report dated 15.06.2010.Therefore, since the Informant is sailing in the same boat as CDAG, he is not entitled to make such serious, baseless, false and frivolous allegations against CDAG. It has been further averred that Mr. Angle is misusing the process of this Commission in order to pressurize and browbeat the democratically elected office-bearers of CDAG into abdicating their responsibilities so that Shri Angle can wrest control of it.
8.15 CDAG has submitted that it is a non profit-oriented Association and is interested in the welfare of the trade and the consumers at large and is taking an active role in the trade and is working with the various parties in order to bring about some sense of responsibility and accountability in the trade within the State. CDAG has prayed that it should be encouraged in its benevolent efforts rather than be called into question for its actions which are in the larger interests of the public. Inviting the attention of the Commission to the mandate set out in the Preamble of the Act, the CDAG has also submitted that that the Competition Act, 2002 has been enacted in order to generally protect the interests of the consumers. As per CDAG, it is striving hard to protect the interests of the consumers and therefore none of its actions can be said to be violative or contrary to the provisions of the Act. On the contrary, the objects of the Act as well as those of CDAG are in consonance with each other.
9. On 02.12.2010, the report of the DG dated 16.06.2010 along with entire material including the submissions made by the CDAG was placed for consideration of the Commission. After going through the entire material, the Commission opined that in order to enable it to come to a conclusion, a further inquiry into certain aspects is required. The Commission, therefore, directed the DG to collect supplementary information/evidence on the following issues:
(i) Determination of price by cartel: Since DG has considered operation of CDAG as a cartel, prohibited under section 3 of the Act, it is necessary to establish the following through reliable evidence on the record;
(a) Material regarding the agreement, practice & decision amongst the members of the alleged cartel to fix prices.
(b) Material to show that the alleged cartel has actually determined the sale prices of drugs as required u/s 3(3)(a) of the Act, with requisite data.
(ii) Limits or controls production etc. : Though DG has concluded violation of Section 3(3)(b) of the Act, it is necessary to get the following evidence for establishing this finding in terms of the specific provisions of Section 3(3)(b):
(a) If CDAG has limited or controlled market for Drugs and Pharmaceuticals – information needed to show that they are actually in a position to do this.
(b) If CDAG, has limited or controlled supply of drugs – there has to be data to establish at least the actual existence of such limitation on supply, if not the extent.
(iii) In addition to the above, the DG was also required to fully investigate and report on the entire structure of the cartel and the active members. As CDAG is a part of All India Organisation of Chemists and Druggists (AIOCD), which also operated through various state units engaged in activities similar to that of CDAG, DG was required to clearly bring out the nexus between AIOCD and CDAG. DG was also required to give specific evidence about the members of CDAG, who have participated actively in the operation of the stated cartel. In addition, DG had to give full financial information necessary to determine appropriate penalties for AIOCD, CDAG and the active individual members of CDAG, in case the Commission ultimately comes to a finding of a violation of provisions of the Act.
10. In accordance with the directions of the Commission a further investigation was conducted by the DG and a supplementary investigation report dated 18.03.2011 was submitted to the Commission.
Findings of supplementary DG report
11. The observations and findings given in the suplementary DG report are summarized as under:
11.1 Relationship and Nexus between AIOCD and Chemist and Druggist Association, Goa
11.1.1 It has been noted by the DG that AlOCD (All India Organisation of Chemists and Druggists) is an apex body of wholesalers and retailers of pharmaceuticals at All India Level and below AlOCD, there are associations of wholesalers and retailers at the state level in the States. These state associations are affiliated to AlOCD. Further, there are associations at the district level also, which are affiliated to state level associations. DG has further noted that CDAG was registered under the Societies Registration Act, 1860 in the year 1967 and is a state level association of Goa. It is ultimately affiliated to AlOCD. This fact was confirmed in the statement of Hemant Pai Angle, member of Chemist & Druggist Association, Goa recorded on 28.02.2011 and also corroborated by the Informant Mr. Mario Vaz, of Xcel Healthcare, Bardez, Goa, in his statement separately recorded on 28.02.2011.
11.1.2 From the web site of AlOCD, it has been gathered by DG that AlOCD has been operating at National-Level, while there are associations further down at state and district level, which are ultimately affiliated to AIOCD.
11.1.3 The Commission while seeking supplementary report had also called for financial details of CDAG, AlOCD and active members of CDAG. The DG has observed that although in the instant case AlOCD was not named as respondents the information and the information was filed against CDAG, however, the financial information in respect of AIOCD was obtained for the year ending 31.03.2006 and 31.03.2007.The financials details of executive/main committee members of CDAG who are tasked with the functioning of CDAG were called for but were not submitted during the investigation.
11.1.4 A copy of Annual Report of CDAG showing its comparative financial details for 2008-09 and 2009-10 along with copies of accounts of AIOCD has also been enclosed as Exhibit -2 to the supplementary investigation report by the DG.
11.1.5 In course of investigation, it has been gathered by the DG that AIOCD has entered into MoU with Organisation of Pharmaceutical Producers of India (OPPA) and Indian Drug Manufacturers Association (IDMA) in 1982, prescribing certain guidelines and norms regarding margins at the level of wholesalers and retailers. Among others, guidelines and norms for appointment of new and additional stockists have also been prescribed. No pharma drug company can conduct business with wholesalers and retailers, unless it follows the guidelines and norms of AlOCD, which have been formulated by the members of AlOCD -a body of wholesalers and retailers together. The guidelines and norms show the collective intent of the members of AlOCD. The guidelines/ norms of MoU are revised from time to time.
11.1.6 The supplementary DG report brought out as to how the guidelines of AIOCD, which are being followed by State/District Level associations like Chemists and Druggists Association of Goa (CDAG), limit and control supplies of drugs and number of wholesalers/stockists in the market and fix margins for wholesalers and retailers which ultimately has the effect of determination of sale price of drugs in the market. AIOCD is in position to control the affairs of State/District Level Associations and these associations cannot deviate from the guidelines/norms of AIOCD. If pharma companies do not follow the norms/guidelines of associations, their normal business operations get hampered. In case members of associations at National, State or District Level, do not follow the guidelines and norms, they are boycotted and even penalized.
11.1.7 The DG has noted that common factor of all these Associations, as is evident from the statements of persons recorded, is that all of these are following norms/guidelines which are restrictive and anti-competitive in nature. This has come out in the statement of Shri Hemant Pai Angle, member of CDAG and statement to similar effect has been given by Mr. Mario Vazalso.
11.1.8 As per DG, if any wholesaler or retailer wants to transact business with the members of CDAG, it has to compulsorily follow the norms and guidelines of association. Further, pharma companies are also obliged to follow the norms of associations, otherwise they would also face problems in selling their products in a particular territory.
11.2 Issue of limit or control of supply
11.2.1 As per DG, CDAG being a state level association and affiliated to AlOCD follows the guidelines/norms prescribed by AlOCD. These guidelines are found to be restrictive and anti-competitive in nature since they ultimately have the effect of controlling and limiting supply of drugs in the market. The restriction is imposed on two counts; one, no pharma company can introduce a pharma drug in a territory, unless it pays certain amount to the association in name of PIS (Product Information Service) purportedly for the purposes of advertisement and second, before appointment of any new stockist or additional stockist, the association grants no-objection in name of NOC/LOC (Letter of Cooperation). If the association does not grant NOC, no new or additional stockist can be appointed. Following excerpts from compilation of all the Memorandum of Understanding (MoU) and Agreement executed between AlOCD-IDMA -OPPI from 1982 till date (Circulated on 12.05.2009 reveal this position:
“I. Stockist Policy:
(i) Appointment of Stockist:
The company will appoint stockist only in consultation with State/District association and as per the guidelines laid down by State Association. Such appointed stockist will work for the area for which they are appointed. Wherever there is only one stockist of the company in the district, the second stockist can be appointed in consultation with state/district association, however the second stockist should be a bona fide member of the association. Company will not appoint any additional stockist for any new division formed or created, it will be given to the any existing stockist of the company.
(ii) Discontinuation of stockist:
(a) a regular defaulter in payment
(b) dealing in spurious medicines
(c) not keeping adequate stock or is not serving the market properly or not submitting regular stock and sales statement
In such circumstances company will approach State/District association with proper documentation and written application State/District Association will consider the request of the company, then looking into the facts of the application will try to resolve the issue. If they wish to consider the request of the company then State/District can allow additional or replacement of the stockist to the company as per the set norms of State/District association/’
11.2.2 Further, as regards additional stockist also, guidelines have been prescribed to the effect that additional stockist can be appointed only with the concurrence of associations.
“VII. Additional Stockists Appointment (beyond two):
(a) Additional Stockists may be appointed, subject to State Association’s concurrence, provided there is substantial increase in sales, which the existing stockists are unable to cope with. There will be no LOC/LOT fee for such additional stockist’s appointments.
(b) The State Association will decide within 30 days from the date of new stockists request to the Association, Internal uniform guidelines will be formulated by AIOCD for State Associations to facilitate expeditious disposal of stockist’s applications.”
11.2.3 As per DG, without getting NOC from the association, stockists cannot get supplies from pharmaceutical companies in order to sell their products in the market. If the dictates of the association are not followed, then call of boycott is given by the association and the stockists not following the dictates of the association are also penalized. Along with grant of NOC for appointment of stockists/additional stockists, the association has also adopted the practice of approving introduction of drugs in a particular territory in name of Product Information Service (PIS) and taking money for the same. This practice is also found to be anti-competitive and restrictive. The modus operandi followed in respect of PIS is that a drug company has to get drugs approved for their launch in a particular territory by the associations. The association (CDAG) charge Rs. 500 per drug before it can be launched in a particular territory. Moreover, amount of Rs. 500 is not only charged per drug, but also, per category of that drug. For example if a drug comes under different categories- say, 1 gm, 50 gm, 500 gm pack , for each such category of that drug, the drug manufacturing companies will have to pay Rs.500.Thus, the association (CDAG) not only restricts number of players, but also restricts introduction of new drugs in the market. The relevant portion of Moll of AlOCD on PIS is as under:
“II. Product Information Service (PIS)
(a) If no PIS Bulletin was published or circulated regularly, no PIS charges would be payable. PIS Bulletin information will cover the information as per Form V of DPCO.
(b) PIS charges would be payable only on State-wise basis, except in Maharashtra, where the present District-wise system would continue until March 2004.Thereafter, Maharashtra would also implement PIS system on State-wise basis.
(c) For the purpose of PIS charges, States would be classified under A & B categories as per Schedule ‘A’ attached hereto.
(d) Subject to above, with effect from 1st October 2003, PIS would be payable as follows:
‘A’ Category States – Rs. 2000/- per entry in PIS Bulletin.
‘B’ Category States – Rs.500/- per entry in PIS Bulletin.
Note: ‘Entry’ means product brand/dosage from/strength for which PIS charges will be paid.
(e) No PIS charges are payable for additional pack sizes, additional flavours and/or price revisions. As such, entries will be published free in PIS Bulletins.
(f) All registered SSI units with their own marketing set-up and having annual turnover of up to Rs.25 crores (calculated at Company Prices) as certified by IDMA/OPPI on balance sheet basis, will be eligible for 50% concessional PIS charges.”
11.2.4 The DG has quoted the guidelines formulated by CDAG for appointment/termination of stockist which were found to be restrictive in nature. The DG has cited the clauses of Memorandum of Understanding of CDAG to show that in case guidelines/MoU are not followed, members would be boycotted and penalties would be imposed on the defaulting firms.
11.2.5 The DG after examining the minutes of meeting of CDAG and has come out with the conclusion that the Association is limiting and controlling the supply of drugs. According to DG the minutes of the meeting of association bring out the fact that the CDAG controls the supply of drugs by way of PIS since unless the PIS is paid, drugs cannot be introduced in Goa. Further, the issue of appointment of stockist is also decided by the association.
11.2.6 The DG has noted that according to Memorandum of Understanding (MoU) between Retailers & Wholesalers dated 15/3/2004, no wholesaler is allowed to directly sell the products to the customers and any wholesaler found violating the above rules will be liable to strict action taken by the Association on the recommendation of the Disciplinary Committee appointed for the Purpose. As per the clauses stipulated therein a fine of Rs.2500/- will be imposed for first violation besides warning latter to be issued to the concerned wholesaler. Further, for second violation a fine of Rs.5000/- is stipulated to be imposed and additionally executive committee will not issue any LOC to such a wholesaler for a period of 1 year for being appointed as stockist of any company.
11.2.7 The DG has stated that the letters written by CDAG to the Pharmaceutical Companies confirmed that the guidelines issued by CDAG were actually enforced. The DG has referred letter dated 10.01.2009 addressed to Eris Life Sciences Pvt. Ltd., Ahmadabad to show that without NOC of the association, companies cannot appoint stockist. In the said letter the association (CDAG) has intimated the company that as per guidelines it was mandatory for a new company to appoint two stockists. Since the company had not followed the guidelines, the NOC was withdrawn. Similarly the letter dated 8.9.2007 to Emcure Pharmaceutical Ltd., Pune revealed that the NOC from the association (CDAG) is required for appointment of additional stockist.
11.2.8 As per DG report the letter dated 8.9.2008 addressed to Micro Laboratories Limited also revealed the fact that companies can supply only through stockist appointed by the association (CDAG) as per guidelines. The DG has come to the conclusion that the evidence gathered during investigation establish that the associations- AIOCD, and Chemist and Druggist Association of Goa (CDAG) are engaged in the practice of;
(a) Issuing NOC for appointment of a new or an additional stockist in a particular territory which eventually restricts the number of players in the market and in turn also limits or controls supply of drugs;
(b) Insisting for PIS approval for introduction of drugs in a particular territory and taking money for that which eventually restricts the supply and availability of drugs;
(c) Imposing penalties in case the firms do not follow the norms prescribed by the associations.
11.2.9 DG has stated that if the practice of NOC is done away with, there would be more supply of drugs in the market and consequently more availability of the drug for the common man.
11.2.10 Thus, DG has concluded that CDAG through guidelines and actual conduct is able to limit supply of drugs and number of players in market, since without NOC of the Association, no person/enterprise can be appointed as wholesaler and stockist at Goa. Further, if product NOC in form of PIS approval is not given, companies will not be in a position to supply drugs. The guidelines and practice of issuing NOC for appointment of a new or an additional stockist in a particular territory eventually restricts the number of players in the market and in turn also limits or control supply of drugs. The system of PIS approval for introduction of drugs in a particular territory and taking money for that also restricts the supply and availability of drugs. These followed by imposition of penalties on firms which do not follow the dictates of association establish that the practices and conduct of CDAG are restrictive and anti-competitive.
12. Issue of determination of price
12.1 As per the report of DG, besides exercising their control over the number of stockists and products as discussed above, the Association(s) are also involved in the issue of fixation of margins and ultimately determination of sale price of drugs as far as non-controlled drugs are concerned. The DG has noted that there are broadly two categories of drugs under Drug Price Control Orders (DPCO) for the purpose of price fixation/revision and monitoring. These are scheduled drugs (drugs under price control) and non-scheduled drugs which are out of price control. It has been stated by DG that in the category of non-scheduled drugs the trade associations are determining the margins -which generally is 20% for retailers and 10% for wholesalers. The report has further relied on the statement made by Shri Hemant Pai Angle, member of Chemist & Druggist Association Goa recorded during the course of investigation wherein he has explained the mechanism of determining the trade margins for non scheduled drugs as per the norms fixed in the guidelines of the Association.
12.2 As an evidence that trade margins are decided by the association(s) at the time of giving PIS approval, Mario Vaz, the information provider submitted before the DG copies of approvals of Product Information Service (PIS) given by Chemist & Druggist Association (placed as Exhibit-10 of supplementary report).The DG has stated that the circular of CDAG dated 25.05.2009 also established that trade margins are fixed as per guidelines of Association. The DG has concluded that norms of margin fixed by the association ultimately have the effect of determination of sales price of drug for the end consumer.
12.3 It has been noted by DG that at the time when PIS approval is given by the CDAG for launch of drugs in a particular area, margins for wholesalers and retailers are fixed. The DG has mentioned the instances where margins of some drugs to stockists and retailers were determined and approved under the system of Product Information Service.
12.4 The DG has also noted that apart from fixing margins on drugs, the CDAG also determines the amount of discount to be extended by wholesalers and retailers that has the impact of ultimate determination of price of drugs. In this regard, circulars of CDAG dated 16.08.2005 and 11.06.2009 have been cited by DG.
12.5 From the evidence furnished in course of proceedings in form of PIS approvals and statements of persons recorded in course of proceedings, the DG has concluded that the norms and guidelines of the Association which prescribe the margins for wholesalers and retailers, not only has the effect of fixing margins, but also has the effect of determining the sales price of drugs. The margins of drugs for wholesalers and retailers are determined by the association(s) at the time of giving PIS approval for introduction of drugs in a particular territory. The DG has stated that Moll and guidelines of CDAG posted on their website also reveal that margins are determined by the Association. Under the system of PIS approvals, the CDAG takes an amount of Rs. 500 per drug per category from drug manufacturing companies for introduction/marketing of drugs in a particular territory.
13. Whether practices of CDAG are restrictive and anti-competitive
13.1 On the basis of evidence gathered during investigation the DG has come to the conclusion that the practices of CDAG are anti-competitive and restrictive in nature since they not only tend to control and limit the supplies of drugs in the market, but also, fix the margins for the wholesalers and retailers, ultimately determining the sale price of drugs in the market. It has also been observed by the DG that if the practice of NOC is done away with, there could be more supply of drugs in the market and consequently more availability of the drugs for the common man. The DG has also noted that as per guidelines, a disciplinary committee has been constituted to discipline the members. This shows that the association exercises complete control over its members and in case of any violation of guidelines, the members are also punished.
13.2 The DG has concluded that the practices of CDAG are anti competitive to the extent that margins are fixed for wholesalers and retailers, prices are determined, and the supplies are restricted in the market.
14. Role and involvement of members of CDAG
14.1 As regards the question as to who are the members of CDAG responsible for anti-competitive practices, the DG has concluded that it is the executive/main committee of association which takes decisions on behalf of association. Such members are – Albert De Sa, Mahesh Naik, Akhtar Shah, Santosh Fondekar, Venkatesh prabhu Desai, BM Prabhu Desai, Datta Ram M. Mopkar, Lyndon D’ Silva, Amit Kamt, Sudesh Molio, Rajesh Colvalkar, Livio Vaz, Rajaram Gawas. Further, Mr. Hemant Pai Angle and Mario Vaz in their statements have also named persons, who according to them, are actively involved in the anti-competitive practices.
14.1.1 The DG has also quoted the following statement of Hemant Pai Angle in this regard:
“Q. Who are the members of the Chemist and Druggist Association, Goa who are active participants in the affairs of the Association and all their other alleged anti-competitive practices?
Ans. 11. The main person is Albert De Sa who is President of CDAG and is partner of CS Enterprises. All executive committee members who are wholesalers like – Raj Enterprises (Prop. Rajesh Colvalkar), ICM Enterprises (Prop. Mahesh Naik) and Pharma Plus (of which Santosh Fondekar), Babu Pharma (Prop. Babu Mopkar), G.N. Agencies (Partner- Yatin Naik), D’Silva and D’Silva (Partner- Lyndon D’ Silva) are active participants in the association. In addition, Prakash Shankwalkar, Partner of Drogaria Ananta, although not part of the association is also activity in the affairs of CDAG.”
14.1.2 In the course of investigation, a letter from one, Shri Nadie Jauhri of Nashik was received by the DG in which Shri Jauhri pointed out towards anti-competitive practices of associations stating that they are engaged in giving price approvals and fixing margins of trade. He also requested that his letter along with papers enclosed may be made part of investigation report.
15. Conclusions in the DG report
15.1 On the basis of the evidence collected in course of proceedings and statements of persons recorded the DG has concluded that the associations, not only limit and control supply of drugs in the market through a system of PIS approvals, but also limit and control the number of players by insisting on need of NOC of associations for appointment of stockists in their areas of operations. It has also been concluded that the associations through their guidelines and norms fix margins for the wholesalers and retailers, which has the effect of determination of sale prices of drugs in the market. As per the findings of DG these practices and conduct of CDAG are violative of provisions of Section 3(3)(a) and 3(3)(b) of the Competition Act, 2002.
16. After examining the entire material and supplementary report of DG, the Commission in its meeting held on 26.04.2011 decided that a copy of the DG report be sent to the Informants and the CDAG to invite their comments/objections. The Commission also directed the parties to appear for oral hearing, if they so desire, on 19.05.2011.
17. The Commission further considered the matter in its meetings held on 19.05.2011, 09.06.2011, 30.06.2011 and 21.07.2011.
18. The informants filed their written submissions dated 19.05.2011 &06.07.2011 11.07.2011 wherein they reiterated the allegations made in the complaint and before DG which primarily relate to the anti-competitive and monopolistic working of the CDAG through the draconian guidelines for appointment of stockists and regarding the requirement of NOC for appointment of stockists. The Informants have also submitted that the contention of CDAG that the supplementary investigation is in fundamental violations of the Competition Act is a ploy to mislead the Commission and to delay the proceedings. The Informants also submitted that the mention of the case pending before Hon’ble High Court of Karnataka wherein the Commission is also a party is another ploy of CDAG’s delaying tactics.
19. The CDAG filed its response to DG’s supplementary investigation report vide its replies dated 24.06.2011 and 09.07.2011. In the meeting of the Commission held on 21.07.2011, Shri Yusuf Iqbal Yusuf, Advocate appeared on behalf of the CDAG and made oral submissions.
20. The gist of the abovesaid replies of CDAG to the supplementary investigation report of DG is as under:
A: Preliminary Objections
On behalf of CDAG it has been contended that the proceedings initiated by the Commission on the basis of the DG’s supplementary investigation report dated 18.03.2011 are not sustainable in law as fundamental violations of the statutory provisions of the Competition Act, 2002 have been made. It has been submitted that the continuation of these proceedings are required to be reviewed by the Commission, in the light of the following, amongst others, grounds:
i. It has been argued that since violation of the provisions of the Act was recommended in the DG investigation report dated 16.06.2010, the Commission was obliged to conduct an inquiry under section 26 (8) of the Act, after considering the objections to the DG report filed by the parties.
ii. The CDAG has contended that after conclusion of the hearing from both sides, during the said inquiry held on 12.10.2010 under section 26(8) of the Act, the Commission closed the case for orders and no indication of any direction to the DG for any further/supplementary investigation was given to the parties during the said hearing on 12.10.2010.
iii. Based on above it has been argued that the order of the Commission directing the DG to conduct further/supplementary investigation into the same matter, after the matter had been inquired into by the Commission under section 26(8) of the Act and the case closed for orders in the presence of all the parties, was void ab initio in the absence of any provision to this effect under section 26 of the Act. Consequently, the supplementary investigation conducted by the DG and his supplementary report dated 18.03.2011are non-est and without any legal basis.
iv. The CDAG has further contended that without prejudice to the apparent illegality of the order of the Hon’bie Commission directing supplementary investigation and conducting further proceedings based on the supplementary investigation report it is also to be noted that whereas a notice dated 16.03.2011 was issued by the DG to the CDAG calling upon for supplementary information and fixing the date for hearing on 23.03.2011 and subsequently hearing the matter on 07.04.2011 and written submissions were also tendered by the counsel for CDAG on 08.04.2011, the CDAG was surprised to know through the notice of Commission dated 28.04.2011 that the supplementary investigation report was already submitted by the DG to the Commission on 18.03.2011.
v. It has been argued that it is apparently clear and evident that the entire exercise of issuing notice by the DG to the respondent CDAG and calling upon it to present itself for hearing on 23.03.2011, when the supplementary report had already been submitted on 18.03.2011 itself was of no meaning and this aspect should have been taken into account by the Commission.
vi. it has been further contended that on grounds of similar violation of the statutory provisions of the Act in a similar case the Kamataka Chemists and Druggists (TKCD) has filed Writ Petition in the Hon’ble High Court of Kamataka at the Principal Bench at Bangalore vide W.P. No. 19579/2011. Since the same legal issues have also been raised in WP NO. 19579/2011 before the Kamataka High Court and the matter is sub judice the Commission should keep the present proceedings in abeyance till the matter is decided in the Kamataka High Court at Bangalore.
vii. It has been further contended that it is abundantly clear from the sequence of events as recorded hereinabove that the entire exercise of directing the Supplementary Investigation was done in order to bring the matter within the purview of the Competition Act, 2002 especially since the CDAG had vehemently stated in its written submissions dated 13.09.2010 that the offence, if any, was committed under the Monopolies and Restrictive Trade Practices Act. Therefore by virtue of specific directions as laid down in section 66 (1A) of the Competition Act, 2002 as well as section 6 of the General Clauses Act, the Director General who was conducting the investigation under the Competition Act, 2002 could have at the very most found contravention with the provisions of the MRTP Act which was in existence at the time when the complaint was received. The provisions of the aforesaid sections are very clear, lucid and can hardly be disputed. This Commission can direct an investigation in matters which it receives on transfer from the MRTP Commission subject to the conditions laid down in the sub-sections of section 66 of the Competition Act. It has been submitted that the law is very clear that if any violation is found in such matters, the same can only be that of the MRTP Act and not the Competition Act, 2002. Thus, even if the Director General finds contravention, he can find such contravention only of the MRTP Act and not the Competition Act, 2002 since the Competition Act was not in existence on the date when the complaint was received. Also, the Competition Act was not in force on the date when the alleged infractions are purported to have been committed. It has been submitted that in the detailed investigation report of 2010, the Director General, went beyond the scope of the law and found contravention of the Competition Act, 2002.
viii. It has been submitted that all the reports of the Director General are in the context of the Competition Act, 2002 and he has not found any contravention of the provisions of the MRTP Act (which was in force on the date of the alleged offences as complained). Therefore, the present proceedings deserve to be dropped and quashed.
ix. In addition to the preliminary objections, it has been submitted that the DG has failed to carry out any economic analysis in respect of the relevant market or any anti-competitive agreement in both the Main Report as well as the Supplementary Report No evidence showing the existence of any “agreement” between the members of the respondent CDAG has been submitted with both the said Reports to show the violation of section 3(3) of the Act.
x. It has been further contended that the CDAG is an association of Chemists and Druggists and is covered under the definition of an “enterprise” under section 2(h) of the Act only by virtue of the service of introducing the new products launched by the drug manufacturing companies through its bulletins and charging the “product information service (PIS) for the said service. The relevant product market for the CDAG has, therefore, to be related to this “service” rendered by the respondent association and it can certainly not be the “market for pharmaceuticals in the state of Goa” or that of “drugs sold by the stockists and retailers to the consumers”, as determined by the DG in Para 7.2.2 of the first report.
xi. The CDAG has, thus, contended that in the absence of an appropriate market definition the conclusion of violation of section 3(3)(a) and section 3(3)(b) drawn by the DG in the investigation report, cannot be sustained under the eye of the law.
xii. It has been also contended that the DG has failed to collect any material evidence even in support of his general and vague conclusion except the statement of the complainants which too are full of leading questions and suggestive answers without having been subjected to cross-examination by the CDAG and, therefore, they are inadmissible in evidence. The DG has shown utmost disregard to the established legal principles of examination of witnesses on oath in exercise of his power under section 41 (2) of the Act and hence the documentary evidences attached with both the reports are not admissible in evidence.
xiii. The CDAG has also raised the contention that the DG has based his conclusion entirely on the basis of oral allegations made by the complainants without any corroborative independent evidence and the allegations being made by the interested witnesses cannot be relied upon. The investigation has been conducted in a most casual manner and no efforts were made to collect onsite evidence by discreet inspection to verify the veracity of the allegations made in the complaint.
B: Objections on merits
i. The CDAG has also submitted that DG has failed to examine the stockists and dealers in Goa who are not members of the respondent CDAG, and who were specifically mentioned in the reply dated 25.03.2010 filed by the CDAG.
ii. It has been further submitted that the fact that Chemists and Druggists who are not members of the respondent CDAG are operating both as stockists and retailers in Goa goes to show that the requirement of obtaining a no objection certificate from the CDAG does not restrict the entry of new players in the market.
iii. The CDAG has submitted that DG has failed to study and understand the structure of the highly regulated pharmaceutical sector in India.
It is submitted that there is a National Pharmaceutical Pricing Authority (NPPA) which regulates the prices of bulk drugs sold in India and there exists a Drug Policy, 1986 announced in September 1994. The NPPA regulates the fixation and revision of prices of bulk drugs and formulations and also monitors the prices of both controlled and decontrolled drugs in the country through the provisions of the Drugs (Price Control) Order, 1995 (DPCO). it has been pointed out that till date no complaint has been made before the NPPA for any violation of the DPCO by any member of the respondent CDAG. The DG has failed to examine this essential aspect of the case in his Reports.
iv. According to the submissions made by CDAG, the margins allowed to wholesalers and retailers are fixed at 16% for controlled drugs and trade margins of the decontrolled formulations have been mentioned as 20% for retailers and 10% for wholesalers as per the norms of DPCO. It has been pointed out that the same trade margins have been mentioned in the MoU signed between the AIOCD and IDMA and OPPI produced by the complainant and relied upon by the DG in his reports to conclude the so-called “fixation” of trade margins by the CDAG.
v. It has been further contended that the DG has also failed to recognize the history behind the practice of obtaining “no objection certificate” by the pharmaceutical companies from the State Association of Chemists and Druggists. It has been submitted that this practice was evolved on the recommendations of the Mashelkar Committee appointed by the Union Health Ministry of the Government of India. The report of the Mashelkar Committee recommended that the Chemist and pharmacists through their association should act as “watchdog” to prevent entry of spurious/doubtful quality drugs of those purchase from unauthorized sources and had specifically reiterated that all India organization of chemists and druggists (AIOCD) should play an active role to educate their members and to cooperate with regulatory authorities to eliminate sale of spurious and substandrd drug by their members. The said committee had noted the role of the pharmacy industry, trade and other professional associations including the AIOCD in preventing the monopolistic activities of large pharmaceuticals companies.
vi. That the MOU was signed between the AIOCD and IDMA and OPPI in the above context and based on the recommendations of the Mashelkar Committee whereby the trade of sale of pharmaceutical products through chemists was organized in accordance with the DPCO and the practice of obtaining “no-objection certificate” from the State level associations of Chemists and Druggists was evolved to curb the proliferation of large number of stockists and wholesalers at the cost of smaller retailers. The DG in his reports has completely overlooked the growth of competition in the pharmacy trade and has failed to recognize the efforts made by the Apex organisation i.e. the AIOCD in organizing a balanced relationship between the large pharmaceuticals companies and the small retailers.
vii. It has also been contended that the DG has also failed to examine any pharmaceutical company to the verify the allegations made by the complainants regarding the alleged role of the respondent in restricting the entry of new stockists.
21. The Commission again considered the matter in its meeting held on, 21.10.2011 and decided to direct the CDAG to file its financial statements for the last three years and also to file the names of its office bearers year-wise since June 2009 i.e. the period when complaint was filed by the informant. In response to the directions of the Commission, a reply dated 04.11.2011 was submitted by the counsel of the Opposite Party which was considered by the Commission in its meeting held on 15.11.2011. !n the said reply, the directions given to the party vide letter dated 01.11.2011 by the Commission have been termed as illegal, unlawful and unsustainable. The party has further called upon the Commission to show any provision of law which permits calling of such information.
22. After considering the abovesaid letter of CDAG, the Commission passed an order on 13.12.2011 to the effect that whenever, the Commission finds that an enterprise was in breach of section 3 or 4 of the Competition Act, the Commission, apart from passing other directions has powers under Sec 27 of Competition Act to impose penalty up to not more than 10% of the average turnover for the last 3 preceding financial years. In case of cartels, the Commission has power to impose penalty upto 3 times of the profit for each year of the continuance of such agreement whichever is higher.
23. In view of the above provision contained infection 27 of the Competition Act, Commission held that it is imperative that the party involved in a case before the Commission should supply the requisite information about its financial status, including the turnover & profits for last three years. The Commission for the purpose of discharging its functions can even otherwise call upon the concerned parties to file each and every required information. Non-filing of the requisite information is looked upon seriously by the legislature and Section 43 of the Competition act provides that if any person (which includes an association or an enterprise) fails to comply with the directions of the omission or with the directions of the DG, seeking information then such persons is liable to be punished with fine, which may extend upto Rs. 1,00,000/- for each day, during such continuance of refusal subject to a maximum of Rs.1,00,00,000/-. Therefore, law being very clear on the aspect, it was held by the Commission that non-submission of requisite information by CDAG without reasonable cause will hamper further proceedings in the matter. The Commission, therefore, decided to initiate proceedings against CDAG under Section 43 of the Act. The Commission further decided to accord opportunity to the Association of being heard in person or through their authorized representative on 13.12.2011, if it so desired.
24. The Commission thereafter listed the matter for 13.12.2011 to consider the issue of imposition of penalty on CDAG for non-providing of information as required by the Commission. As no one put appearance on behalf of CDAG, the penalty proceedings were taken up ex-parte. The Commission noted that CDAG has deliberately and purposefully refused to part with the information and has rather questioned the authority of the Commission to ask for the information. In view of this conduct, the Commission imposed a penalty of Rs. 25,000/- per day on CDAG for non-furnishing the requisite information w.e.f. 13.12.2011 for a period of 30 days. In case, the information is not furnished within the 30 days, it was decided that the penalty shall be Rs. 50,000/- per day for the next 30 days and Rs. 1,00,000/- per day thereafter, till the penalty amount culminated to Rs.1,00,00,000/-.
ISSUES
25. The matter was thereafter considered by the Commission in its meeting held on 05.01.2012 and 07.01.2012. The Commission has carefully considered the essential issues raised by the Informants in the instant case, the submissions made by the CDAG before the DG end the evidence gathered by the DG in his first investigation report and the supplementary investigation report as well as the replies filed by the CDAG and the Informants in response to the notice of this Commission. After thorough perusal of the aforesaid documents, the following issues arise for consideration and determination of the Commission in the case:-
(I) Whether the present information can be examined under the provisions of the Competition Act, 2002?
(II) If the answer to the first issue is in affirmative, whether the conduct and practices of CDAG are anti-competitive and in violation of section 3 of the Act?
(III) Whether the members of Executive-Committee of CDAG are also liable for violation of section 3 of the Act?
26. Determination of Issue No. 1
26.1 The CDAG has contended that it is clear from a reading of the provisions of the Competition Act, 2002, MRTP Act, 1969 and General Clauses Act, 1897 that after the repeal of MRTP Act,1969 by the Competition Act, 2002 the authorities under the MRTP Act, 1969 viz. the MRTP Commission as well as the DGIR ceased to be in existence and the relevant provisions of the Competition Act, 2002 govern the proceedings and investigation which were pending under the MRTP Act 1969 before the commencement of the Competition Act, 2002. Since the authorities under the MRTP Act, 1969 ceased to be in existence on the commencement of the Competition Act, 2002, section 66(3) to 66(8) of the Competition Act, 2002 provide for continuance of the investigations and proceedings under the MRTP Act, 1969 before the commencement of the Competition Act, 2002. It has been contended that, however, it has been specifically provided that such pending matters should be dealt with under the provisions of the MRTP Act, 1969 as if it had not been repealed.
26.2 Section 66(6) of the Competition Act, 2002 provides that all investigations or proceedings, other than those relating to unfair trade practices, pending before the Director Genera! of Investigation and Registration on or before the commencement of the Competition Act, 2002 Act shall stand transferred to the Competition Commission of India.
26.3 Therefore, as per CDAG, this Commission can exercise jurisdiction only in investigations or proceedings in matters other than those related to Unfair Trade Practices which were pending before the Director General of Investigation and Registration under the MRTP Act, 1969. On the other hand, investigation or proceedings related the Unfair Trade Practices are to be handled only by the National Commission under the Consumer Protection Act, 1986.
26.4 As per CDAG, the ingredients for “Restrictive Trade Practices” as defined in section 2 (o) of the MRTP Act, 1969 is that there should be an imposition of unjustified cost or restriction on consumers by manipulation as set out in the said section. Section 2(u) of the MRTP Act, 1969 defines Trade Practices and finally section 36A of the MRTP Act, 1969 defines Unfair Trade Practices. As per CDAG, the allegations against it as in the complaint from Varca Druggists and Chemists and others (on which the entire saga has commenced) are covered under section 36A(5) of the MRTP Act, 1969. Thus, CDAG contends that the allegations against CDAG are at the most in the nature of Unfair Trade Practices and therefore as provided under Section ,66(7.) of the Competition Act, 2002 only the National Consumer -Commission has the power and authority to investigate into the same under the Consumer Protection Act, 1986.
26.5 In light of the above submissions, CDAG has emphasized that this Commission has exceeded its jurisdiction and has taken up a matter which it is not entitled nor empowered to and accordingly the order of this Commission directing the Director General to investigate the matter under Section 26(1) of the Competition Act, 2002 is illegal, unlawful and ultra vires. Thus, it has been argued by CDAG that the Investigation Report pursuant to such order is of no legal force, effect or consequence in any manner whatsoever.
26.6 Further CDAG has contended that under section 66(1A) and section 66(10) of the Competition Act, 2002 as well as under section 6 of the General Clauses Acts 1897; the repeal of the MRTP Act, 1969 does not affect its previous operation nor anything duly done or suffered thereunder nor any right, privilege, obligation or liability accrued, acquired or incurred under the MRTP Act 1959 and any proceedings or remedy can be instituted, continued or enforced as if the MRTP Act, 1969 had not been repealed.
26.7 Therefore, CDAG contended that any act committed during the currency of the MRTP Act, 1969 cannot be called in question under the Competition Act, 2002, Furthermore, it is expressly provided that the provisions of the MRTP Act, 1969 will only be applicable to proceedings which have been instituted under the MRTP Act, 1969 “BEFORE” the commencement of the Competition Act, 2002. Thus, as per CDAG, the provisions of the Competition Act, 2002 cannot be applied under any circumstances in the present case and any prosecution or proceedings are to be in strict accordance of the MRTP Act, 1969 only as the entire matter is based on a complaint dated 16.06.2009 viz. before the commencement of the Competition Act, 2002.
26.8 Therefore as per CDAG there is no provision in the Competition Act, 2002 whereby the said Act has been granted retrospective effect. Therefore, under section 5 (3) of the General Clauses Act, the Competition Act can only be enforced and implemented after 14th October 2009 and not prior thereto. Thus, the complaint dated 16.06.2009 received from Varca Druggist and Chemist shall have to be treated and disposed off only under the provisions of the MRTP Act, 1969 and not under the Competition Act, 2002 under any circumstances. The only provisions of the Competition Act, 2002 which may be employed in the present matter are sections 66 (1A) and 65 (7) of the Competition Act since they provide for continuity of the proceedings/investigations in view of the immediate disbandment of the MRTP Commission and the DGIR. However, any penal provisions or violations, if any, shall be solely and exclusively subject to the provisions of the MRTP Act and not the Competition Act, 2002.
26.9 In view of the Commission, the preliminary objections taken by the CDAG are contrary to the scheme of the Act and the legal position on this aspect is quite clear. In this regard it is also noted that Hon’ble High Court of Delhi in Interglobe Aviation Ltd. v Secretary, CCI [2010] 104 SCL 67/7 taxmann.com 93 (Delhi) has held on similar issue that where the investigation by the DGIR, MRTPC remained incomplete and the matter did not crystallize into a ‘case’ before the MRTPC, it was not incumbent on the DGIR, MRTPC to transfer the case to the Competition Appellate Tribunal and not to Commission. This view was reiterated by the Hon’ble High Court of Delhi in W.P. (C) 7766/2010, Gujrat Guardian Ltd. v CCI decided on 23.11.2010. In this case the petitioner advanced the argument that as the matter was pending before DGIR, MRTPC the case ought to have been transferred to Competition Appellate Tribunal and not to the Commission. It was also contended that the Commission had no power to pass order under section 26(1) in such matter and that the Commission had to proceed under the provisions of the MRTP Act. The Delhi High Court rejected the arguments raised by the petitioner and held that “This Court finds that since the investigation was incomplete the matter was rightly transferred to the CCI. On further consideration of the material on record the CCI formed a prima facie opinion to proceed under section 26(1) of the CA. This was not contrary to Section 66(6) of the CA.. It is possible in the course of investigation that the DG, CCI forms a prima facie opinion to proceed under the provisions of the CA, 2002 itself There is no illegality per se in such action of the DG, CCI.”
26.10 The Commission notes that the present matter was filed before the DGIR, MRTPC on 16.06.2009 and section 3 and 4 of the Competition Act, 2002 dealing with anti-competitive conduct were brought into force on 20.05.2009. Furthermore, on filing of the complaint the DGIR, MRTPC undertook the preliminary investigation which was still pending when the MRTP Act, 1969 was repealed vide ordinance dated 14.10.2009. As the investigation had not culminated into a ‘case’ the matter was rightly transferred to the Competition Commission by the DGIR, MRTPC invoking the provisions of section 66(6) of the Act as the allegations involved in the complaint were related to restrictive trade practices of CDAG. Even a plain reading of section 66(6) of the Act clearly demonstrates that on receiving the matters where investigation was pending, the Commission may order for conduct of the investigation in the manner as it deems, fit. If the Commission were to order investigation in such matters, the only section of the Act which empowers the Commission to do so is section 26 by treating the complaint as information under the Competition Act. Further, on receiving the matter the order for investigation under section 26(1) can be passed only if in view of the Commission there existed a prima facie case of violation of the provisions of Competition Act. As the complaint filed before the DGIR, MRTPC was still at the stage of preliminary investigation no right, liability, privilege or obligation can be said to have been accrued to any party and, therefore, the provisions of section 66(1A) or 66(10) referred by CDAG are not applicable in the present situation. Furthermore, the Commission has not been conferred any power to adjudicate any matter invoking the provisions of repealed MRTP, Act. This premise becomes clear when the provisions of section 66(6) are contrasted with the provisions of section 66(3) of the Act. Whereas the Competition Appellate Tribunal has been specifically conferred power to adjudicate cases pertaining to monopolistic and restrictive trade practices pending before MRTP Commission in accordance with the provisions of repealed MRTP Act under section 66(3) of the Act, no such power has been given to the Commission under section 66(6) of the Act. In the backdrop of the provisions of the Act as analysed above, the Commission finds that there is no illegality in entertaining and examining the present case under the Competition Act, 2002 in which the investigation was pending before the DGIR, MRTPC before the MRTP Act was repealed.
26.11 Further, even in cases where the alleged anti-competitive conduct was started before coming into force of section 3 and 4, the Commission has the jurisdiction to look into such conduct if it. continues even after the enforcement of relevant provisions of the Act. This position has been settled by the Hon’ble High Court of Bombay Kingfisher Airlines Ltd. v CCI [2011] 108 SCL 621/12 taxmann.com 285. In the said case, it has been held by the Hon’ble Bombay High Court that though the Act is not retrospective, it would cover all agreements covered by the Act though entered into prior to the commencement of the Act but sought to be acted upon now, i.e., if the effect of the agreement continues even after 20.5.2009. In the present case, the practices of CDAG alleged to be anti-competitive have been found by DG to be still continuing and there is nothing on record to contradict the same. Therefore, in view of the continuance of enforcement of the guidelines of CDAG and understanding/agreement amongst the members of CDAG which have shown to have anti-competitive effect, the present case is squarely covered by the law propounded by the judgment of the Hon’ble High Court of Bombay in the aforesaid case. The Commission therefore is of the considered view that in the light of legal position as discussed above there is absolutely no illegality in the proceedings in the present case and the arguments and the contentions of the CDAG on this aspect have no force.
26.12 As regards the contention of the CDAG that the Commission has no power to direct the DG to carry out supplementary investigation, the Commission is of the considered view that the plea taken by the CDAG is devoid of any merit and is liable to be rejected. The Act has not placed any fetter on the power of the Commission to conduct further investigation or further inquiry. The Commission vide order dated 02.12.2010, while considering the DG investigation report, had noted that in order to enable it to come to a proper conclusion, a further inquiry into certain aspect is essential and accordingly had directed the DG to conduct further investigations in respect of certain issues specified in the direction with a view to do complete justice in the matter. It is also pointed out that Regulation 20(6) of The /Competition Commission of India (General) Regulations, 2009 specifically empowers the Commission to direct the DG to conduct further investigation even after the DG has submitted his report.
26.13 The Commission also finds that no procedural irregularity was committed by the DG while conducting supplementary investigation. In this regard, a perusal of the note of the DG forwarding the representation dated 08.04.2011 filed by the advocate of the CDAG reveals that letters were written to the members of the CDAG by the DG for submitting their profit & loss accounts and balance sheets. The advocate of CDAG had filed the aforesaid representation/objection to the supplementary investigation challenging the legality of the proceedings and at the same time choosing to ignore the request of the DG to furnish the requisite information. The DG had stated in the supplementary report that information regarding financial details were called for from the CDAG and the same will be submitted as and when it is submitted. As the DG had already filed the supplementary report there was no occasion for him to give hearing or deal with the objections raised in the representation. In any case the objections taken in the representation were also raised by the CDAG in its reply to the supplementary report of the DG and they have already been dealt with in the preceding paras of this order and on this count no prejudice has been caused to the CDAG.
26.14 As regards the contention of CDAG that the margins allowed to wholesalers and retailers are fixed at 16% for controlled drugs and at 20% for retailers and 10% for wholesalers for the decontrolled formulations as per Drug Price Control Order (DPCO), it is noted that whereas the trade margins for the scheduled drugs is fixed at 16% for a retailer as per para 19 of the DPCO, 1995, in case of non-scheduled drugs (non-price controlled drugs) the trade margins have been determined for the wholesalers and retailers operating in the pharmaceutical market through an agreement between the trade associations and the pharmaceutical industry. Thus, the MOU between AIOCD, OPPI and IDMA, which has been referred in DG report, has in fact led to the determination of the trade margins on sale of the non scheduled drugs. The CDAG has followed the guidelines laid down by AIOCD in this respect. MR. Hemant Pai Angle, member of CDAG has confirmed this in his statement recorded before the DG. On the basis of above facts, the Commission finds that there is no force in the argument of CDAG that the trade margins are being fixed in terms of DPCO.
27. Determination of issue no. 2
27.1 Having decided the issue No. 1 in affirmative, the Commission now proceeds to determine issue No. 2 i.e. whether the acts and practices of CDAG are anti-competitive in nature.
27.2 DG has come to the conclusion that decision in form of guidelines, actions and practices of CDAG are anti-competitive in terms of provisions of section 3(3)(a) and 3(3)(b) of the Competition Act, 2002.The Informants have agreed with the conclusions drawn by the DG and on the other hand the CDAG has denied indulging into any anti-competitive activities.
27.3 Since the DG has found that the CDAG has violated the provisions of section 3(3)(a) and 3(3)(b) of the Competition Act, 2002 the relevant sub-section (3) of section 3 of the Act may be looked into which reads as under:
“Any agreement entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise or practice carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade cf goods or provision of services, which –
(a) directly or indirectly determines purchase or sale prices;
(b) limits or controls production, supply, markets, technical development investment or provision of services;
| (c) and (d)** | ** | ** |
shall be presumed to have an appreciable adverse effect on competition.
27.4 For the purpose of proper appreciation of applicability of relevant provisions relating to anti-competitive agreements, it is useful to consider the various elements of section 3 of the Act in some detail. Section 3(1) of the Act prohibits and section 3(2) makes void all agreements by association of enterprises or persons in respect of production, supply, distribution, storage, acquisition or control of goods or provisions of services which cause or likely to cause appreciable adverse effect on completion within India.
27.5 Therefore, if any agreement restricts or is likely to restrict the competition then it will fall foul of section 3 of the Act.
27.6 Further, section 3(3) of the Act applies not only to an agreement entered into between enterprises or associations of enterprises or persons or association of persons or between any person and enterprises but also with equal force to the practice carried on or decision taken by any association of enterprises or association of persons including cartels, engaged in identical or similar trade of goods and provision of services which has the purpose of directly or indirectly fixing prices, limiting output or sales for sharing markets or customers. Once existence of prohibited agreement, practice or decision enumerated under section 3(3) is established there is no further need to show an effect on competition because then a rebuttable presumption is raised that such conduct has an appreciable adverse effect of competition and is therefore anti-competitive. In such a situation burden of proof shifts on the opposite parties to show that impugned conduct does not cause appreciable adverse effect on competition.
27.7 The next question arises- whether the CDAG, being an association of chemists and druggists in the state of Goa is covered under the category of entities enumerated in section 3(3) of the Act.
27.8 In this respect the definition of ‘enterprise’ as provided in section 2(h) assumes significance and which runs as follows:-
”enterprise” means a person or a department of the Government, who or which is, or has been, engaged in any activity relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services of any kind……….but does not include any activity of the Government relatable to the sovereign functions of the Government including all activities carried on by the departments of the Central Government dealing with atomic energy, currency, defence and space.
27.9 It is noted by the Commission that CDAG is an association of wholesalers and retailers of Goa region and is affiliated to AIOCD. From the records it is also gathered that it was registered under the Societies Registration Act, 1860 in the year 1967. Its constituent members comprise of retailers and wholesalers of Goa .A list of members has been enclosed by the DG with the investigation report. The DG has also placed on record MoU of Chemists and Druggist Association, Goa, copies of Rules and Regulations and guidelines to be followed for appointment/ termination of stockist by all pharmaceuticals companies including ayurvedic companies selling through chemists.
27.10 There is no dispute as to the fact that constituent members of CDAG are stockists and retailers of pharmaceutical companies who are engaged in the supply of pharma products to the consumers. Therefore, they fall squarely within the definition of ‘enterprise’ provided in the Act. Further, sub-section (3) of the Act not only covers agreements entered into between enterprises or associations of enterprises but also the practice carried on or decision taken by any association of enterprises engaged in identical or similar trade of goods or provision of services. There is no denying the fact that CDAG is an association of enterprises whose constituent members are engaged in identical or similar trade of goods.
27.11 The MoU, rules , regulations and guidelines are reflective of the collective intent of the constituent members based upon which the CDAG takes decisions and members in turn give effect to the decisions by acting upon them. The CDAG is composed of stockists and retailers with common interests in trade, which join together to further their commercial objectives.
27.12 The Commission, therefore, holds that since CDAG is taking decisions relating to distribution and supply of pharma products on behalf of the members who are engaged in similar or identical trade of goods, the practices carried on, or decisions taken by CDAG as association of enterprises are covered with in the scope of section 3(3).
27.13 It is noted by the Commission that the investigation by DG has found many acts and conduct on part of CDAG as anti-competitive. Therefore, it is necessary to examine such infringements by CDAG as alleged in the information and found substantiated by the DG in order to arrive at a conclusion.
Limiting the supply of pharma products
27.14 It is observed by the Commission that in the course of investigation, DG has found that various clauses of MoU and guidelines framed by CDAG as well as the practice carried on by it restrict and control the supply of drugs. In this regard the guidelines of CDAG (placed as Exhibit-4 of supplementary report) are reproduced below:
“Guidelines to be Followed for Appointment/Termination of Stockist By All Pharmaceuticals Companies Including Ayurvedic Companies Selling through Chemists
Definition: Stockiest means Trade and Institutional Stockiest. There shall be no differentiation between Trade and Institutional Stockiest as a Stockiest will deal with both wings.
Appointment/Termination of new stockist shall only be done with the permission of the Association.
Since Goa is a small state it shall be considered as ONE district divided into two North Goa and South Goa. A new company can initially appoint only two stockist one in North Goa and 2nd in South Goa Preferably. These stockist may or may not have branches.
All stockist operating prior to 14th September, 1997 will continue to be the stockist of their respective companies, irrespective of the number of stockist in Goa.
All further appointments shall be made as per the following formula: When the average secondary trade sale crosses 2 lacs, per month, a third stockist can be appointed. Average means 6 months trade sales prior to date of application.
When the average secondary trade sale crosses 4 lacs, per month, a fourth stockist can be appointed.
When the average secondary trade sales are above 6 lacs per month, a fifth stockist can be appointed.
There can be no more than 5 stockist except in case of mergers and acquisitions.
Replacement of stockist is allowed on condition the Association is .satisfied the need of replacement taking into consideration company’s interest. The Association must have the consent of the retiring stockist in writing to allow replacement. However, such replacement should be effected within six months of the last invoice raised by the supplier on the retiring stockist. However, if the current sales are not within the above guidelines no replacement shall be given e.g. If there are 3 existing stockist and if one retires and if the sales are below 2 lacs no replacement will be granted. The company will have to manage with the 2 existing stockist. No mutual transfer of stockist-ship is permissible, even with the consent of the existing stockist. Appointment of additional stockist even with the consent of existing stockist is not allowed. The decision of the Association is final and binding on all members. Any member purchasing the liabilities and assets of a retiring member (member who wants to close down his pharma business) will be allowed to take over the existing stockist-ship of the retiring member, with a letter from the retiring member to that effect. No other transfer of stockist-ship is permissible.
Once a company appoints a stockist, no further appointments can be issue for one year.
If any wholesaler takes stockist-ship of a company without the permission of the Association, then the stockist will be terminated and he will be fined (minimum Rs. 5000/-) and will not be granted permission to take any new stockist-ship for a period of one year.
PROCEDURE
Those companies who are eligible as per above guidelines for additional stock point should give an offer/appointment letter in original to the Association or to the wholesaler whom they wish to appoint. Such offer/appointment letter should be signed by the Manager or a superior officer or issued directly from the company office on the company’s letterhead. The company should explain in their letter, the need to change Existing arrangement within the above guidelines.
The wholesaler in turn should inform the CDAG enclosing the above offer/ appointment letter and submit the necessary proof on which eligibility is based.
The steering committee which is constituted for this purpose shall scrutinize such application and issue clearance if the conditions as per stockist-ship guidelines given above are satisfied.
Applications should be disposed off within 30 days from the date of receipt. Within this period the committee should confirm that there are no long pending issue between the company and the existing stockist.
Routine claim concerning expiry/breakage etc. less than 6 months should not be treated as pending issues.
No stockist shall place order to the company before receiving clearance certificate within the stipulated period of 30 days.
The final clearance shall be given by the President/Secretary. In case of any disputes in the implementation of the above norms the first appeal authority shall be the steering committee, and the final appeal forum shall be the State Executive Committee.
Any wholesaler violating these guidelines/procedure shall be asked to leave the particular stockist-ship and he will be debarred from taking up any further lines for one year and will have to pay a fine (minimum Rs. 5,000/-).
Any Company which has violated the guidelines will have to pay a fine (Minimum Rs. 10,000/-) and abide by the final decision of the Association.
The Company shall be solely responsible for the excess stocks with the existing stockist. It is the duty of the company to take back the excess stocks or transfer the stocks to the new stockist. The excess stock problem should be first settled before the Company dispatches stock to the new stockist.
A Company can apply for NOC for a new stockist for each division separately provided that the new stockist to be appointed is a stockist of any other division of the Company. A completely new stockist will be eligible only when the existing stockist are dealing with all the divisions, and if the application is within the guidelines. If only one division applies for NOC then the new stockist will have to deal ONLY for that division and cannot order or sell goods of the other divisions. The Company will have to apply fresh for the other divisions in such cases.
If a Company policy is that a stockist should deal with all its divisions, then the company should apply accordingly, provided all existing stockist are dealing with all divisions.
A stockist operating in Goa with multiple branches will be considered as a single stockist of the company even if the Company raises separate invoice for their different branches.
The NOC given to a Company to appoint a new stockist is valid for 6 months only. After 6 months the NOC is invalid and the Company/ Stockist will have to submit a fresh application.
GENERAL
Notwithstanding anything in these norms a company can replace a stockist when:
Companies are genuinely aggrieved and are losing sales due to the non-performance of a stockist.
A stockist relinquishes his stockist-ship.
Note: Criteria for non-performance will be as follows:
Stockist is a habitual defaulter of payments to the company.
Does not operate scheme meant for the retailers.
Does not maintain adequate stocks as per inventory norms.
(Sales×2 – Closing stock – Stock in transit = Order of next month).
Does not co-operate with the company in providing agreed information. When the company is aggrieved based on the above criteria and wishes to replace a stockist it will have to submit the necessary evidence to the Association and the Association in turn after discussing the matter with the concerned stockist will its decision.
The company can only appoint as STOCKIST a wholesaler who is member of our ASSOCIATION.
If a company has not raised any invoice on a wholesaler/stockist for continuous 12 months it shall be deemed that the stockist-ship has been terminated and in no way can be restarted without the permission of the Association, provided there is no correspondence between the stockist and the company on stopping supplies and the Association is informed about this correspondence.
No company can make direct supplies to doctors, nursing homes, chemist. All supplies must be routed through authorized stockist ONLY. Companies may quote directly to Government Institutions like G.M.C., D.H.S, M.P.T. but cannot deal with private hospitals, Nursing Homes etc. except through their authorized stockist.
If a company has stopped operations in Goa for more than 2 years and if it wants to restart operations it will be considered as a new company and will have to apply fresh for P.I.S. and for appointment of stockist, provided all previous claims of old stockist/retailers have been settled. Preference to old stockist should be considered.
Selling of products/brands from one company to another will be considered as a new product.
If a company has closed down its operation then the stockist are responsible for taking back unsold and expiry stocks from the retailers. The Wholesaler is responsible for expiry of goods sold by him even if company is not giving Credit Note for the same.
It is the duty of the stockist to inform retailers/Association about the stoppage of operations by the company.
IMPORTANT: No wholesaler should supply goods to any new Retailers, even on CASH, unless the retailers became a member of the Association. The retailer not be given any CREDIT facilities for a period of 6 months after which the wholesaler may extend Credit facility to the party at his discretion.”
“Policy to Make Supplies To New Retail Outlets
Following conditions apply to new Retailers outlets for a period of minimum one year.
(a) SUPPLY: No. supply to be made to any Retailer by any wholesaler unless such Retailer becomes member of CDAG.”
27.15 The examination of the clauses of the guidelines conclusively establishes that no person or entity is allowed to do business of pharmaceutical drugs as wholesaler and retailer unless it becomes member of Association. It is also evident that without obtaining NOC from CDAG neither any new product can be introduced by any pharmaceutical company nor any new stockist can be appointed. These facts were also confirmed by Hemant Pai Angle, Proprietor of Varca Druggist and Chemist in his statement recorded before DG wherein it has been stated by him that in order to become stockist of any pharma company, a stockist/wholesaler has to take NOC from CDAG.
27.16 The fact that the Association not only controls introduction of drugs but also the appointment of stockists has also been confirmed by Mr. Mario Vaz, proprietor of Xcel Healthcare in his statement made before DG.
27.17 The following excerpts from Memorandum of Understanding of GDAG have been reproduced by the DG to show that in case guidelines/MoU are not followed, members would be boycotted and penalties would be imposed on the defaulting firms:
“Purchase & payment”
Any wholesaler found violating the above rules (a to d listed in MoU) will be liable to strict action taken by CDAG on the recommendation of the disciplinary committee appointed for the purpose.
For first violation a fine Rs. 2500/- will be imposed beside warning letter will be written to the Wholesaler.
For second violation a fine of Rs. 5000 will be imposed and also executive committee will not issue any NOC to such a wholesaler for a period of 1 year for being appointed as a stockist any company.
Retailers should not resort to any unhealthy competition by giving discount to their customers and should not operate any beneficiary schemes to attract the customers.
Any Retailers found violating the above rules will be liable to strict action taken by CDAG on the recommendation of the Disciplinary Committee appointed for the purpose.
For first violation a fine Rs. 2500/- will be imposed beside warning letter will be written to the concerned Retailer.
For second violation a fine of Rs. 5000/- will be imposed and all Wholesaler will boycott such retailer for a period of 3 months.
Retailers should make payment of credit purchases within 21 days failing which the wholesaler will charge 18% interest from the 30th day.
Wholesalers should report the name of retailers along with details of bills of retailers delaying the payment beyond 60 days which will be forwarded to the Disciplinary Committee.
Following action will be taken against the retailers if found guilty.
Issue of warning letter to the defaulting retailer and order him to pay the dues to the respective wholeseller within 8 days along with the interest there on.
In case the defaulting retailer still fails to make the payment to the wholesaler all other wholesaler will be directed to stop supplies to such retailer.
27.18 The fact that the Association is limiting and controlling the supply of drugs is further-substantiated from the examination of the following minutes of meeting of CDAG quoted in DG report:
27.18.1 Minutes of the Wholesalers meeting held at Keservel Garden Retreat Cortalim on 25.08.2006
”Some wholesalers said that the Company’s were selling goods directly to Doctors by passing both the wholesalers and retailers. The names of Companies were Cipla, Glenmark, VHB, Organon, and Thivim Pharmaceuticals. Other wholesalers/retailers who were aware of direct supplies from Company/C&F to Doctors were to report the same to the Association. It was decided that a letter should be sent to such companies.”
27.18.2 Minutes of the EC meeting held at the office premises, Panaji, on 14.11.2006
“Regarding Micro Labs it was decided that as they are already having 5 stockists in Goa, a new stockist cannot be appointed as per our guidelines”
27.18.3 Minutes of the EC meeting held on 20.07.2007
“Mr. Kurtarkar said that he had put before the wholesalers meeting that some wholesalers were making products available and supplying to retailers without paying PIS and he had therefore proposed that for a product made available by a wholesaler without paying PIS charges the wholesaler would have to pay Rs.1000 instead of Rs.500/-“.
27.18.4 Annual Report for the year 2007-08
“The total collection on Product Information Service during the last year has been around 12 Lakh which means 2400 new products have been launched during the last year. Retailers should purchase products only which are registered with the association.”
27.18.5 Minutes of Executive Committee Meeting held on 31.07.2008
“…………………………… President asked the wholesalers chairman that a wholesalers committee should be formed which would be responsible for deciding on the issue of appointment of stockist”
27.18.6 Minutes of Executive Committee Meeting held on 19.09,2008
‘Complaint from Desai and Co. and Drogaria Menezes and Cia. “There was a complaint from Desai and Co., about Mahaveer Agency, super stockist of Micro Laboratories and Raju Sales Corporations.
| 1 and 2** | ** | ** |
3. Micro Laboratories do not take PIS for the new products.
4. Raju Sales Corporation has sold directly as a C&F agent to the retail chemists.
5. It was decided to write to Mahaveer Agency about the complaints and instruct the firm to adhere to the rules and regulations of the Association.” “Regarding Mediwings Bioscience Pvt. Ltd, Mr. Albert explained the reason for denying the third stockistship for the company. EC decided to fine the company but Mr. Albert informed that the company and the existing stockist are settling the issue amicably. It was agreed upon”
27.18.7 Minutes of Executive Committee Meeting held on 29.09.2008
“Mr. Ashish explained the Mahaveer Pharmaceuticals issue. It was decided to write to Micro Laboratories explaining the violation of the CDAG guidelines by their super stockist with a cc to Mahaveer Pharmaceuticals.”
27.18.8 Minutes of the meeting held on 12.02.2009 at office premises
“On the receipt side, Mr. Lyndon said that PIS of total 1860 new products was taken up till 10th of December.”
27.18.9 Minutes of the EC meeting held on 20.02.2009 at office premises
‘Mr. Rajesh suggested that E.C. should make an offer to the companies. The company can avail a waiver on PIS fees for an year if it sponsors a minimum of Rs. 1 lakh.’
27.18.10 Annual Report 2008-09
“During the year we have added 48 new members to the Association and earned Rs.1.2 Lakh by way of New membership fees. The total collection on the Product Information Service has been Rs. 12,53,500.”
27.19 Thus, perusal of the minutes of the meeting of association clearly brings out the fact that the CDAG controls the supply of drugs by way of PIS since unless the PIS is paid, drugs cannot be introduced in Goa. When the minutes are read in the context of guidelines and Moll of CDAG, it also establishes beyond any dispute that the appointment of stockist is also controlled by the Association.
27.20 Further, according to Memorandum of Understanding (MoU) between Retailers & Wholesalers dated 15.3.2004 no wholesaler allow to directly sell the products to the customers and any wholesaler found violating the above rules will be liable to strict action taken by the Association on the recommendation of the Disciplinary Committee appointed for the purpose. As per the clauses stipulated therein a fine of Rs.2500/- will be imposed for first violation besides warning letter to be issued to the concerned wholesale and for second violation a fine of Rs.5000/- is stipulated to be imposed and additionally executive committee will not issue any LOC to such a wholesaler for a period of one year for being appointed as stockist of any company.
27.21 The Commission is in agreement with the findings of DG that the letters written by CDAG to the Pharmaceutical Companies confirmed that the guidelines issued by CDAG were actually enforced. Further, the letter dated 10.01.2009 addressed to M/s Eris Life Sciences Pvt. Ltd., Ahmadabad goes on to show that without NOC of the Association, companies cannot appoint stockist. In the said letter the CDAG intimated the company that as per guidelines it was mandatory for a new company to appoint two stockists and since the company had not followed. the guidelines, the NOC was withdrawn. Similarly the contents of letter dated 8.9.2007 to M/s Emcure Pharmaceutical Ltd., Pune reveal that the NOC from the CDAG is required for appointment of additional stockist.
27.22 This finding also flows from examination of the letter dated 8.9.2008 addressed to M/s Micro Laboratories Limited which reveals that companies can supply only through stockist appointed by the CDAG as per guidelines.
27.23 After considering the cumulative effect of the evidence as discussed above the Commission agrees with the conclusion drawn by the DG that the evidence gathered during investigation clearly establishes that Chemist and Druggist Association of Goa (CDAG) is engaged in the practice of:
(i) Issuing NOC for appointment of a new or an additional stockist in a particular territory which eventually restricts the number of players in the market and in turn also limits or control supply of drugs;
(ii) Mandating PIS approval for introduction of drugs in a particular territory and taking money for that which eventually restricts the supply and availability of drugs.
27.24 To enforce the guidelines the CDAG has also put in place the mechanism of imposing penalties in case the stockists or retailers do not follow the norms prescribed by the CDAG.
27.25 The contention of CDAG that it is not restricting either the number of stockists or retailers falls flat in the light of clinching evidence as analysed in the preceding paras.
27.26 The necessary corollary which flows from above findings is that if the practice of NOC is done away with, there would be more supply of drugs in the market and consequently more availability of the drugs to the consumers.
27.27 Thus, Commission concludes that CDAG through guidelines and actual conduct is able to limit supply of drugs and number of players in market, since without NOC of the Association; no person can be appointed as wholesaler or stockist at Goa. Further, if NOC in form of PIS approval is not given for pharma products the companies will not be in a position to supply drugs. The guidelines and practice of issuing NOC for appointment of a new or an additional stockist in a particular territory eventually restricts the number of players in the market and in turn also limits or controls supply of drugs. The system of compulsory PIS approval for introduction of drugs in a particular territory and taking money for that also restricts the supply and availability of drugs. Had there been no compulsion on the pharmaceutical companies to seek PIS approval before introducing the drugs in any territory and they were allowed to opt for mechanism of PIS for information dissemination voluntarily it may not have possibly given rise to any anti-competitive practice. But in the present matter the aforesaid conduct of CDAG followed by imposition of penalties on firms which do not follow the dictates of association establishes that the practices and conduct of CDAG are limiting and controlling the supply of drugs in the state of Goa in violation of provisions of section 3(3)(b) of the Act.
27.28 The CDAG has also taken the plea that the conclusion of DG are not based on any economic analysis and the relevant market has been incorrectly defined by the DG and, therefore the concessional of violation of section 3(3)(b) drawn by the DG in the Supplementary Report, cannot be sustained under the eyes of the law.
27.29 At the very outset, in Commission’s view, the arguments raised by the CDAG are flawed and contrary to the scheme and provisions of the Act. For finding contravention under section 3, the delineation of relevant market is not required to be done. Furthermore, as discussed in preceding paras, once the elements constituting the violation of section 3(3) of the Act have been established, the presumption regarding AAEC is triggered and the onus shifts on the infringing entity to rebut that presumption referring to the factors enumerated in section 19(3) of the Act. In the present matter no effort has been made by the CDAG to repel the presumption.
27.30 As pointed out above that though the Commission is not required to launch into an enquiry in cases related to section 3(3) to find out the existence of AAEC, however, the DG has analyzed the action of CDAG vis-a-vis factors mentioned in Section 19(3)in following terms:
(I) Creation of barriers to new entrants in the market: As per the guidelines of the association no new wholesaler can be appointed unless the pharma companies give no-objection certificate to this effect. The pharma companies can appoint new stockist only as per the guidelines of CDAG which are restrictive in nature. Further, only those retailers are eligible to get supplies from the wholesalers who are the members of the association. With their collective market power, the association of Chemists and druggists has tried to ensure that no new player gets entry in the market without their no-objection. The association has made its members and pharma companies comply with their terms and conditions. During merger of Sarabhai and Nicholas, a group of stockist prevailed over CDAG to ensure that number of stockist remains restricted and thereafter Secretary of CDAG wrote to Nicholas Piramal India Limited not to change in the distribution policy without taking LOC from the association. (It is said that Cipla, a manufacturer of asthma drugs, tried to bypass the supply chain by providing home service for its products. Cipla faced strong resistance from one of the traders lobby- (of some other State), which stopped stocking Cipla’s product. Ultimately, Cipla had to withdraw the scheme.) 1. When a company launches a new product (either branded or generic), to make that product available in the pharmacy, the company has to pay certain amount in form of Product Information System (PIS) to the association. Thus, entry barriers have been created by the association in terms of new players and introduction of new products. Even in case of government tenders, as per the dictate of association, only authorised stockist can make supplies as is evident from the letter addressed to M/s Xcel Healthcare Pharmaceuticals distributors, Alto Porvorim, Goa (Exhibit-4) of the DG report informing them that sale by unauthorized stockist tantamount to violation of Rules and Regulations of CDAG and invites disciplinary action and also asking them to show cause as to why action should not be initiated against them.
(II) Driving existing competitors out of the market: The agreements of the like entered by the wholesalers-retailers through CDAG is agreement among competitors at the same level of value chain. Through their actions, the wholesalers-retailers have attempted to ensure that if the wholesalers-retailers do not abide by the decisions of the association, they will be punished and they will not get stockist-ship of pharma companies.
(III) Foreclosure of competition by hindering entry into the market: The act of wholesalers-retailers certainly attempted to hinder the entry of those wholesalers and retailers who are not the members of the association into the market. Moreover, the pharma companies would also not get entry in the market of pharmaceuticals, unless the association provides a no-objection certificate to them. Thus, the competition has been restricted by their conduct.
(IV) Accrual of benefits to consumers: As has been brought out above, the guidelines, rules and regulations of the association are certainly not such which facilitate any benefit to the consumers. On the contrary, rules and regulations of the association which stipulate that retailers cannot pass on any beneficiary schemes or discount to the consumers certainly is anti-consumer in nature.
(V) Improvements in production or distribution of goods or provision of services: The acts, guidelines, rules and regulations of the association also do not bring about any improvement in production or distribution of goods or provision of services since the number of the wholesalers-retailers gets limited and restricted because of the clauses mentioned in the guidelines.
(VI) Promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services: Further, there is no justification or case made out by the association of its members to prove that their action resulted in promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services. There was no positive outcome achieved either in terms of improvements in production or distribution of goods or provision of services or in terms of promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services as a result of the action of the association or its members.
27.31 Thus, on the basis of analysis of the factors enumerated in Section 19(3) of the Act as brought out by the DG, it can be seen that all pro-competitive factors are absent and at same time all factors indicating anti-competitive effect are present in this case. The analysis done by the DG further strengthens the finding of the Commission that the Chemists and Druggists Association, Goa is engaged-in actions and practices which are anti-competitive and violative of provisions of section 3(3)(b) of the Act.
Determining the sale prices of drugs
27.32 In the present case, the DG has also returned the finding that the conduct and practices of CDAG are also indirectly determining the sale prices of non-controlled drugs in violation of section 3(3)(a) of the Act. On the other hand the CDAG has denied this charge.
27.33 It has been brought out in DG report that there are broadly two categories of drugs; the scheduled drugs (drugs under price control of DPCO) and non-scheduled drugs which are out of price Control. It is in the category of non-scheduled drugs that trade associations decide upon the margins -which generally is 20% for retailers and 10% for wholesalers.
27.34 As regards the issue of determination of margins and sale prices of drugs by the association, in his statement before DG, Shri Hemant Pai Angle, Member of Chemist & Druggist Association Goa, has submitted as under:
“Q. Can you furnish/Do you have evidences regarding the agreement, practices or any decision amongst the members of the Chemist and Druggists Association, Goa to control prices, if any?
Ans. CDAG is affiliated to AIOCD and follows the guidelines of AID CD. in the guidelines, the margins have been fixed for drugs for both wholesalers and retailers. The margins are fixed to the time of giving PIS approvals. The PIS is collected in the name of advertisements published in the magazines like “Bulletin-cum-PIS”. For PIS, Rs.500 per product per strength/formulation is charged, i am giving you copies of approvals given by AIOCD published in “Bulletin-cum-PIS” which would show that Product Information Service is charged by associations.
Q. Can you furnish/Do you have evidence and data to show that the activities of members of the association have led to determination of the sale price of drugs ?
Ans. Trade margins fixed by AIOCD followed by CDAG and PIS charged by them may have impact on prices of drugs. Circular dated 04.06.2010 of CDAG also brings out that the association writes to the companies for effecting variation in prices”
27.35 When asked by the DG how the margins/discounts are decided by the association at various stages of supply/distribution chain, Mr. Hemant Pai Angle, has stated as under:
“Q. What are the margins charged at various stages of the supply/distribution chain? Please furnish evidences, in your possession, if any?
Ans. The PIS approvals as handed over to you given for different companies would reveal that margins are fixed.
Q. What are the discounts given with reference to the margins laid down in the guidelines?
Ans. Discount policies is given in MoU of CDAG which states that wholesalers can pass only 2% as cash discount to retailers. Further, CDAG also restricts the retailers from passing on discounts to customers which affects the common man. If retailers give discount to customers/Common man, penalties are imposed. Thus, sale price of drugs are impacted in a way because the retailers, even if they would like to pass on discounts to common man, cannot do so. I am given two pieces of evidences – circular dated 16.08.2005 and 11.06.2009 to support this contention/’
27.36 Further, in order to show that trade margins are decided by the Association at the time of giving PIS approval, Mario Vaz, the information provider, submitted copies of approvals of Product information Service (PIS) given by Chemist & Druggist Association Goa before the DG. The fact that margins are fixed for the wholesaler and retailer at the time of PIS approval, is also borne out from the following statement of Mr. Mario Vaz of Xcel Healthcare Vaz:
“Q. Can you furnish/Do you have evidences and data to show that the activities of the members of the association have led to determination of the sale price of drugs?
Ans. Trade margin fixed by ALOCD followed by CDAG and PIS charged by them may have impact on price of drugs.
Q. What are the margins charged at various stages of the supply/distribution chain? Please furnish evidences, in your possession, if any?
Ans. PIS approvals as handed over to you given for different companies would reveal that margins for wholesalers and retailers are fixed. There cannot be deviation from the margins which are laid down in the guidelines’.
Q. What are the discounts given with reference to the margins laid down in the guidelines?
Ans. Discount policy is given in MoU of CDAG which states that wholesalers can pass only 2% as cash discount to retailers. Further, CDAG also restricts the retailers from passing on discounts to customers which affect the common man. If retailers given discount to customers/common man, penalties are imposed. Thus, sale price of drugs are impacted in a way because the retailers, even if they would like to pass on discounts to common man, cannot do so.”
27.37 A circular dated 25.05.2009 of CDAG which is available on record also establishes that trade margins are fixed as per the norms set by the guidelines of associations. The trade margins fixed by the association ultimately have the effect of indirect determination of sales price of drug for the end consumer.
27.38 It has also come in evidence that at the time when PIS approval is given by the association for launch of drugs in a particular area, margins for wholesalers and retailers are fixed. The DG has mentioned margins of some drugs to stockists and retailers manufactured by drug companies as determined and approved under the system of Product Information Service.
27.39 Apart from fixing margins on drugs, the Association also determines the amount of discount to be extended by wholesalers and retailers that has the impact of ultimate determination of price of drugs. In this regard, following circular of CDAG dated 16.08.2005 assumes significance:
“a With immediate effect Wholesalers could extend a maximum of 2% Cash Discount for immediate cash payment or payment with current dated cheques to retailers.
Wholesalers are requested not to offer more than 2% CD. and in case of cheque payment the Cheques should be deposited in the bank immediately.
Retailers please do not demand more than 2% CD. and do not give post-dated cheques or do ask wholesalers to present cheques late to the bank”
27.40 In this regard another circular dated 11.06.2009 of the CDAG has also been furnished which also restricts the competition between retailers by announcing the practice of extending discounts:
“We have been receiving a lot of complaints that many retailers are giving discounts which run even upto 10%.
Please be aware that our Association and its parent body – The AlOCD thrive hard to bargain the companies and maintain our trade margins on medicines. These trade margins are just enough (and some occasions not enough) to sustain ourselves & have a respectable living.
Please also be aware that a big pharmacy retail chain in the Southern India which was brashly advertising and giving discounts to customers, is today in bankruptcy, with losses amounting to crores of rupees.
Giving discounts not only disturbs the other retailers in the neighbourhood who do not give discounts, but it also leads to unethical practices and is actually hampering your, own profits in the long run. You giving discounts is not only destroying the neighbouring retailers, but will also eventually destroy you too.
Please note, strict action will be taken against any retailers found given discounts. We therefore appeal to you to stop giving discounts. Help us to keep the trade healthy & alive! “
27.41 Thus, it is evident that the CDAG is also determining the amount of discount that may be extended by the stockists to the retailers and also the extent of discount which can be given to the consumers by the retailers.
27.42 When the evidence available on record in form of PIS approvals and statements of persons recorded by the DG in course of investigation, is taken into account conjointly it becomes clear that the norms and guidelines of the Association which prescribe the margins for wholesalers and retailers, are not only fixing margins, but also have the effect of indirectly determining the sale price of drugs. The margins of drugs for wholesalers and retailers are determined-by the Association at the time of giving PIS approval for introduction of drugs in a particular territory. The DG has made PIS approvals in some of the cases as part of his report, which clearly show that margins for wholesalers and retailers are determined by the Association. The MoU and guidelines of CDAG posted on their website also corroborate the finding that margins are determined by the Association. Under the system of PIS approvals, the CDAG takes an amount of Rs.500 per drug per category from drug manufacturing companies for introduction/marketing of drugs in a particular territory.
27.43 After careful examination of all the facts and evidence as disclosed by DG report and referred in the foregoing paras the Commission has come to the conclusion that CDAG holds sway over the supply of drugs in the territory of Goa. Furthermore, the cumulative effect of the evidence collected by the DG during investigation and analysed in the light of contentions advanced by the DG leads to inevitable conclusion that the conduct and practices of CDAG emanating from the guidelines and MoU of the Association definitely amount to indirectly fixing the sale prices of pharmaceutical drugs in violation of the provisions of section 3(3)(a) of the Act. The contention raised by the CDAG that their actions cannot be said to be determining the price of drugs cannot be accepted in view of incontroverted evidence available on record.
27.44 The Commission finds force in the findings of the DG that in such a situation, when efforts are being made to ensure supply of drugs to the common man at, a cheaper rate, the restrictive guidelines of Chemists and Druggists Association work as stumbling block and do not appear to be in live with the government plans to provide medicines to common man at an affordable rate. In view of the aforesaid, the Commission is of the view that CDAG not only limit and control supply of drugs in the market through a system of PIS approvals and limit and control the number of players by insisting on need of its NOC for appointment of stockist but also through its guidelines fixes trade margins for the wholesalers and retailers which, in turn, results into determination of sale prices of drugs in the market. Therefore, the Commission holds that CDAG has violated the provisions of Section 3(3)(a) and 3(3)(b) of the Act.
28. Determination of Issue no. 3
28.1 After having decided that the conduct and practices followed by CDAG are anti-competitive and in violation of provisions of section 3(3)(a) and 3(3)(b) of the Act the Commission proceeds to decide the issue no. 3 i.e. whether the members of the executive body of CDAG are also liable for anti-competitive conduct violative of provisions of section 3(3)(a) and 3(3)(b) of the Act.
28.2 Under the scheme of the Act in case of association of enterprises, called trade associations in common parlance, comprising of members which are themselves enterprises, liability for anti-competitive conduct may arise two fold. An association of enterprises may be liable for breach of section 3 of the Act embodied in a decision taken by that association, while additionally the constituent enterprises of association may be held liable for contravention of section 3 of the Act arising from an agreement or concerted practice between them. Further, the anti-competitive decision or practice of the association can be attributed to the members who were responsible for running the affairs of the association and actively participated in giving effect to the anti-competitive decision or practice of the association. In case the contravention of any of the provisions of this Act is made by a company, section 48 of the Act specifically provides for the individual liability of the persons, in addition to the liability of the company, who were in charge of and were responsible for the conduct of the business of the company at the time when the contravention was committed. The Explanation to section 48 further provides that for the purposes of this section, company includes a firm or other association of individuals. Therefore, the members of the Executive Committee of CDAG who were responsible for anti-competitive conduct of CDAG are also liable, in addition to CDAG, for contravention of section 3 (3)(a) and 3(3)(b) of the Act.
28.3 The DG has identified the members of the executive committee of CDAG who were responsible for the anti-competitive decisions taken and enforced by the CDAG. Such members are – Albert De Sa, Mahesh Naik, Akhtar Shah, Santosh Fondekar, Venkatesh Prabhu Desai, BM Prabhu Desai, Datta Ram M. Mopkar, Lyndon D’ Silva, Amit Kamt, Sudesh Molio, Rajesh Colvalkar, Livio Vaz, Rajaram Gawas. Further, Mr. Hemant Pai Angle and Mario Vaz in their statements have also named persons, who according to them, are actively involved in the anti-competitive practices. The relevant part of the statement of Mr.Hemant Pai Angle recorded by DG is reproduced below:
“Q. 11. Who are the members of the Chemist and Druggist Association, Goa who are active participants in the affairs of-the Association and all their other alleged anti-competitive practices?
Ans. 11. The main person is Albert De Sa who is President of CDAG and is partner of CS Enterprises. All executive committee members who are wholesalers like – Raj Enterprises (Prop. Rajesh Colvalkar), ICM Enterprises (Prop. Mahesh Naik) and Pharma Plus (of which Santosh Fondekar), Babu Pharma (Prop. Babu Mopkar), G.N. Agencies (Partner- Yatin Naik), D’Silva and D’Silva (Partner- Lyndon D’ Silva) are active participants in the association. In addition, Prakash Shankwalkar, Partner of Drogaria Ananta, although not part of the association is also active in the affairs of CDAG.
28.4 The Commission vide its order dated 13.12.2011directed the CDAG to submit its financial statement for the last 3 years and also to furnish the names of the office bearers, however, CDAG did not file the requisite information. Therefore, the Commission has decided to deal with the issue of passing orders under section 27 of the Act against the individual members separately when the requisite information is furnished by the CDAG.
Order under section 27 of the Act
29. As the Commission has found that the CDAG has violated the provisions of section 3(3)(a) and 3(3)(b) of the Act the Commission now proceeds to pass . suitable orders under section 27 of the Act against the CDAG including penalty.
30. As per the Statutory Audit Report on Audited Accounts for Financial Year 2009-2010 dated November 11,2010 ,annexed with the supplementary investigation report of DG,CDAG (entity against which the allegations have been filed) had the following receipts during 2008-09 and 2009-10:
| Financial Years | Receipts (in Rs.) |
| 2008-09 | 21,38,955.00 |
| 2009-10 | 18,72,007.00 |
31. Thus, Commission after considering the facts and circumstances of the instant case is of the opinion that it is appropriate to impose penalty @ 10% of the average of the receipts for financial years 2008-09 and 2009-10 (in respect of which the figures are available with the Commission) on CDAG. Therefore, in exercise of powers under Section 27(b) of the Act, the Commission imposes penalty on CDAG computed as follows:
32.
| Gross Revenue Receipts during the year 2008-09 | : | Rs. 21, 38, 955.00 |
| Gross Revenue Receipts during the year 2009-10 | : | Rs. 18, 72,007.00 |
| Average of the Revenue Receipts | : | Rs. 20, 05,481.00 |
| 10% of the Average of the Revenue Receipts | : | Rs. 2, 00,548.00 |
| Penalty (Rounded off to the nearest number) | : | Rs. 2, 00,000.00 |
33. Accordingly, the Commission passes the following orders, under Section 27 of the Act against the aforesaid contravening entities:
(I) The CDAG and its members are directed to cease and desist from indulging in and following practices which have been found anti-competitive in violation of section 3 of the Act in the preceding paras of this order.
(II) The CDAG is further directed to file an undertaking that Guidelines and MoU with respect to non-appointment of a stockist or wholesaler from amongst the non-members of CDAG, requirement of No Objection Certificate from the CDAG for appointment of stockist or wholesaler and limit on number of stockist of pharmaceutical companies as well as the clauses mandating compulsory PIS approval from CDAG for introduction of drugs in the territory of Goa and requiring routing of bids for supply of drugs to the Government and Hospitals through authorised stockists only have been done away within 60 days from the date of receipt of the order.
(III) The CDAG is also directed to remove the clauses in the Circulars, MoU and Guidelines which lay down the margins for wholesalers and retailers in the category of non- scheduled drugs, prescribing a cap on the amount of discount a wholesaler can give to the retailers and prohibiting the retailers from giving any discounts to the consumers and file an undertaking to this effect within 60 days from the date of receipt of this order.
(IV) A penalty of Rs. 2,00,000/- is also imposed on CDAG. The penalty shall be paid by CDAG within sixty days from the date of receipt of the copy of this Order.
34. Secretary is directed to send a copy of this order to the concerned parties for compliance immediately.
Per R. Prasad, Member (Partially dissenting view) – I have gone through the orders passed by the majority of the members of the Commission. I have a different view and am therefore passing a separate order. The facts are stated in the order of the majority and there is no need to repeat them.
2. The first issue is the applicability of Section 3 of the Competition Act. The scheme of the entire Competition Act, 2002 is against monopoly or dominance. This is done either by entering into anti-competitive agreements which is Section 3 of the Act. Persons who do not have sufficient dominance or market/economic power enter into anti-competitive agreements so as to collectively acquire monopoly power. Anti-competitive aspects of such agreements are defined in Section 3 and the factors to determine such anti-competitive activities are described in Section 19(3) of the Act. Dominance or monopoly power can also be acquired by acquisition or merger and amalgamations. These are the subject matter for consideration in Sections 5 and 6 of the Act. The factors to be seen for identifying the concentration of economic power are mentioned in Section 20(4) of the Act. Under Sections 3, 5 and 6 of the Act, Commission is required to establish appreciable adverse effect on competition. But when dealing with dominance in Section 4, the Commission is not required to establish appreciable adverse effect on competition. Once dominance is established in a relevant market, then under Section 4 only the abuse needs to be examined.
3. Now, coming to the issue at hand i.e. the application of Section 3 of the Act, we have to examine the provisions. According to the provisions, persons or enterprises cannot enter into an agreement in respect of supply, storage, distribution of goods and provisions of services which creates an appreciable adverse on competition. If an appreciable effect on competition is caused then the agreement is void. But would an agreement entered into by enterprises to form an association would be an agreement in respect of restriction on supply, storage, distribution of goods and provisions of services. The agreement envisaged in Section 3 is not an agreement to form an association but an agreement which creates an appreciable adverse on competition. I therefore do not agree that the association was formed with the idea of gaining economic power and creating an adverse effect on competition. The agreement referred to in Section 3 is not the agreement to form an association. It is an agreement which leads to an anti-competitive behaviour in the markets. If the memorandum of CDAG is seen, it would show that the agreement to form the association was not to create AAEC in the market. Forming an association for the welfare of the members is a constitutional right guaranteed under Article 19 of the Constitution of India. If the argument that the association was formed with the idea of gaining economic power then all the trade associations formed would have to be treated as void under Section 3(2) of the Act. By forming a trade association, one gets economic strength and may be a position of strength and dominance. But the agreements referred to in Section 3(1) are different agreements between enterprises which are entered into with the motive of causing appreciable adverse effect on competition in India. If a view is taken that the formation of a trade association is an agreement hit by the provisions of Section 3 then it has to that such an association is causing an appreciable adverse effect on competition in India.
4. If one looks at the definition of person in Section 2(1) of the Act, then a society registered under the Societies Act is a person. Therefore from this definition it is clear that the intention of the legislature was to recognize the formation of such societies or associations as a person and such agreements to form such societies were not the subject matter of the rigours of Section 3 of the Act. Once the law treats an entity as a person, the Commission is not entitled to treat such a person’s formation for an inquiry under Section 3 of the Act.
5. Section 2(h) of the Act defines an enterprise as a person or a government department. In India, we are not governed by the European or American competition laws where a person is not defined. In such a case, the formation of such an association itself may be questioned as an anti-competitive agreement. But in India the issue is different. In the case of Hindustan Lever Ltd. v. Monopolies & Restrictive Trade Practices Commission AIR 1971 SC 1285, the Supreme Court has looked down upon the intention of authorities to look at the laws foreign jurisdiction when there is no requirement as our laws are clear.
6. Further, as the association in this case is a person, it cannot enter into an agreement with one self or take a decision unilaterally or unilaterally have practices so as to be hit by the provisions of Section 3 of the Act. For Section 3, there has got to be more than one person. As in this case there is only one person, as sanctioned by law under Section 2(1) of the Act, Section 3 has no application.
7. The question for examination is that when such a person is exhibiting anti-competitive behaviour, what would be the procedure to deal with such behaviour under the provisions of the Competition Act, 2002. In this particular case there is no doubt that the society CDAG’s formation increased the economic strength of the small retailers, stockists and the wholesellers dealing with the sale of drugs within the territorial jurisdiction of Goa. This society/association had no statutory backing for running its affairs but it started regulating the trade in the State of Goa. This was possible for the association to do so because it could boycott a person and ensure that market access was denied to person who did fall in line with, the directives of the association. In fact it could drive a person out of business by its activities. The society could also ensure that a company marketing drugs in Goa could be driven out of Goa markets if the drug marketing/manufacturing company did not follow the directives of the society. This could be done by a diktat issued by the society that its members would not deal in the drugs manufactured/marketed by the companies who did not follow the directives of the society. All the members would then stop buying and selling the drugs of the delinquent drug company and in a short time, the drug company would have to exit the market of Goa. A company trying to market its goods in Goa would not be able to market the goods in Goa as it would not be able to set up a marketing chain in Goa without the blessings of the CDAG.
8. Before taking the discussion further it is necessary to examine the functioning of CDAG. CDAG functions in Goa but then there is an All India chain of wholesellers and retail of All India level known as All India Organisation of Chemists and Druggists (AIOCD). CDAG is affiliated to AIOCD like other state level association. In a state there are associations of wholesellers and retailers at district levels which are affiliated to the state level associations. AIOCD had entered into a MoU with the Organisation of Pharmaceutical Products of India (OPPI) and Indian Drug Manufacturers Association (IDMA) in 1982. According to the norms laid down in the MoU margins were fixed at the level of wholesellers and retailers. Guidelines in the MOU have also been laid down for the appointment of new and additional stockists. Further no drug manufacturing company could conduct business with wholesellers and retailers unless it followed the guidelines and norms of AIOCD. Many of the guidelines appear to be restrictive and anti-competitive in nature. These guidelines are applicable to the manufacturers, stockists and distributors.
9. Pharmaceutical products are marketed in a regulated under the Drug Price Control Order (D.P.C.O.) issued by the Central government. Under the Price Control Order, whenever a drug is introduced in the market, it is for the drug company to give information to the consumers about the drug. As this involves costs, the drug companies pay the association certain sums of money to the association and it is the job of the association to give information about the product to the consumers. The payment is known to be paid for Product Information Service (PIS).
10. The D.G. has reported in his report that each state association has to follow the guidelines laid down by AIOCD. According to him these guidelines have the effect of controlling and limiting supplies of medicines in the market. One of the respective factors mentioned by the DG is PIS. The second anti-competitive measure referred to by the D.G. is the requirement to obtain a no objection from the state level association from the State/District level association. Further a new stockist or a distributor has to become a member of the association before he can become a distributor/stockist. The State/District level association can levy fines on a stockist/distributor if he does not follow the guidelines laid down by the AIOCD/State/District association. Normally in an area according to the AIOCD guidelines not more than two stockists can be appointed. If the third stockist is appointed it can only be done after an approval of the State association is obtained. Further as AIOCD has entered into an agreement with OPPI and IDMA, if a stockist does not obtain a NOC, the manufacturers would not supply medicines to the said stockist. Whenever, a new drug is introduced in the market a SSI unit, it has to be certified by the OPPI/IDMA. According to the agreement between AIOCD and OPPI/IDMA whenever a new drug is introduced in the market, PIS charges are to be paid. If the PIS Bulletin is not published then no PIS charges are payable by the drug companies. If the balance sheet of a SSI unit is certified by OPPI/IDMA, the SSI unit get 50% discount on PIS charges. Another abuse noted by the D.G. was the fact that no wholeseller could sell goods to the consumers without incurring a penalty from the association. Further, no drug company market drugs directly in the market to consumers/doctors. No drug company could appoint any stockist/distributor without NOC from the association.
11. The D.G. has held in his report that –
(i) fixing of trade margins for stockists/distributor amounts to fixing of prices under Section 3(3)(a) of the Act.
(ii) fixing of PIS charges leads to the fixing of prices of drugs in violation of Section 3(3)(a) of the Act.
(iii) As N.O.C. before the appointment of stockists/distributor leads to reduction of supply in the market, it is a contravention of Section 3(3)(b) of the Act.
12. The first issue to be decided is that fixing of trade margins for stockists and distributors amounts to fixing of prices in accordance with Section 3(3)(a) of the Act. The facts of the case are that medicines are subject to Essential Commodities Act, 1955. Under the said Act, a Drug Price Control Order (DPCO) has been issued. Around 350 medicines are covered under this order. In this order, the drugs listed are known as scheduled drugs. The other drugs not covered by the DPCO order are known as non-scheduled drug. According to the DPCO, the margin is fixed for the wholesellers at 16% and for the retailers it is fixed at 8%. This is mandatory and all the manufacturers, the wholesellers and the retailers have to follow this order. As far as non-scheduled drugs are concerned. AIOCD in its agreement with the IDMA and the OPPI has decided that the margins for the wholesellers would be 20% and for the retailers would be 10%.
13. The question to be decided whether the fixation of the margins for the wholesellers and the retailers by the AIOCD, the IDMA and the OPPI amounts to a fixation of price. In every trade while marketing products, discounts and rebates are allowed to wholesellers and retailers. This margin is the source of revenue to the wholesellers and the retailers. Without this systems of discounts and rebates called the margin money, the retail chain cannot survive. This system cannot be regarded as fixing of prices. In the case of Hindustan Lever Ltd. (supra), the Supreme Court has stated that in case of competition, rule of reason has got to be adopted. In the opinion ‘per se’ rule in respect of a provision is not applicable under Indian laws. ‘Per se rule’ may be applicable under the American legal system but it is not applicable in the Indian legal system. In this particular case, the margins fixed at 20% and 10% for wholesellers and retailers are not unreasonable and is line with the similar practices followed in other trades in the market. There is no doubt that the margins fixed are in line with the margins fixed by the DPCO order though in the case of non-scheduled drugs the margins were fixed in accordance with agreements entered into by AIOCD, the IDMA and the OPPI. But in any case there is no doubt that margins fixed for the wholesellers and the retailers result in fixing the prices of drugs indirectly. But this fixation of prices is done by the manufacturers and not the association CDAG. Therefore CDAG cannot be held responsible for fixing the prices. Further applying the rule of reason fixing the prices by taking into account the margins does not amount to fixation of prices under the Competition Act.
14. The issue which is important is the directive issued by CDAG that the wholeseller would not give discount of more than 2% to the retailer and that the retailers would not give any discount to the consumer. If the wholeseller and the retailer gave any discount to the retailer and the consumer respectively they were liable to be fined by the association. This is a restriction on freedom to do business. The behaviour of the association is anti-consumer. If a retailer wanted to give discount to a consumer out of its margin of 8% for scheduled drug or out of 10% out of non-scheduled drug, the association had no right to stop this. Competition arises when two entities compete with each other on the basis of prices to get more competitors. If each competitor is made to sell at the same price then there would be no competition in the market. Thus, by making the retailer not to pass on the discount to the consumer it limits the market for a retailer. Further by not allowing a wholeseller or a retailer to give discount to a buyer, as it is a restriction on the freedom of trades, it also amounts to putting unfair conditions in the purchase or sale of goods. Thus, these activities of the association are anti-competitive in accordance with the provisions of the Act.
15. The second issue is the issue of PIS. Whenever a new drug is introduced in the market, DPCO directives require the drug companies to give information about the new drug to the wholesellers, retailers and the consumers. The drug companies because they do not access to all the retailers, wholesellers and the consumers they pass on this duty to the AIOCD. For this purpose the drug companies pay a sum of Rs. 2000/- before introducing a new drug. As far as the State agencies are concerned, they are entitled to receive a sum of Rs. 500/- whenever a drug company introduces a new drug. According to MOU between AIOCD and the IDMA and the OPPI if the information bulletin is not published then the drug companies are to give any PIS fund either to the AIOCD or the State agencies. CDAG found that some wholesalers were making new drugs available to the retailers without paying PIS charges to CDAG. CDAG proposed to fine the wholeseller a sum of Rs. 1000/- instead of Rs. 500/- payable as PIS. According to the D.G., the insistence on P.I.S. payments restricts the supply and availability of drugs. It is not clear as to how a small sum of Rs. 500/- taken from a wholeseller at the time of introduction of a new drug is anti-competitive. It is also not clear as to how the charge of P.I.S. leads to a restriction and supply of medicines in the market. It is on the basis of D.P.C.O. directive that at the time of introduction of a new drug information has to be given to the retailer and the consumer. The information to be furnished involves cost and if this cost, which is nominal, has to be paid by a wholeseller, it does not lead to restriction of supply. Therefore the levy of PIS does restrict the market and is held not to be anti-competitive.
16. The next issue to be considered is the issue of the denial of market access. An issue which was raised in the information and which has also come out DG’s report is that in Goa no person who is not a member of the CDAG can do business as a retailer or wholeseller. If the enterprise wants to become a wholeseller or a stockist, it has to first become a member of CDAG and then apply for a no objection certificate. Without the no objection certificate, no drug manufacturer can make an enterprise either a wholeseller or a stockist. This is on the basis of the MOU between AIOCD and the IDMA and the OPPI. If a manufacturer makes someone a wholeseller or a stockist of its drugs without the NOC from CDAG the retailers would boycott the said wholeseller or the stockist. This happens because the retailers being members of the CDAG would follow the directives of CDAG. But the boycott would drive the newly appointed stockist out of business. Further when a retailer buys medicines from a stockist/wholeseller who is a member of CDAG, according to the CDAG guidelines, he is given a credit of 20 days and after that the retailer has to pay interest at 18%. If a retailer is a habitual defaulter, CDAG directs the other stockists not to supply medicines to driven out of business. But if the stockist/wholeseller is not a CDAG member, CDAG follows a different policy. A retailer in such a case asks the retailers to take a credit of three of four months. This behaviour of CDAG is having a discriminatory behaviour.
17. Taking the issue of denial of market access further the whole process starts with the MOU between AIOCD and the IDMA and the OPPI. According to this MOU in a state or an area, not more than two stockists could be appointed by a drug company. But in Goa, a drug company could appoint five stockists depending on the turnover of the concerned medicines. Thus, the CDAG has limited the market to just five stockists. It is also a restriction on the freedom to carry on business. Further, by limiting the number of stockist, competition has been reduced and the availability of medicines would accordingly reduced.
18. It has been argued on behalf of CDAG that the NOC was required in order to eliminate sellers of spurious drugs in the market. No material has been submitted to show that there was a sale of spurious target and the system of NOC helped in eliminating such sellers of spurious drugs from the market. In fact the main aim was to restrict the number of wholesalers and stockists so as to ensure that there were lesser number of players in the market so that each stockist would have a larger share of the pie. Therefore the arguments of CDAG are without any basis and cannot be accepted. The fact is that by the action of CDAG the market is limited and there was a denial of market access to many persons. The denial of market access to persons to sell medicines in the State of Goa as an infringement of the freedom of trade and lesser consumer satisfaction because the availability of the drugs decreases.
19. An argument can be raised that as the CDAG does not carry out any business, it cannot be treated as an enterprise under Section 2(h) of the Competition Act. According to the definition the keyword is carrying out any activity. As the activity of CDAG has an effect on carrying on the business of medicines in the State of Goa, it is certainly hit by the definition of enterprise as it is also a person defined under section 2(1) of the Act. Carrying on business is not necessary for a person to fall under the definition of enterprise under the Competition Act. This view has been confirmed by the Delhi High Court in the case of Hemant Sharma v. Chess Federation [Writ Petition (Civil) No. 5770 of 2011].
20. The next issue to be decided in this case is as to whether CDAG enjoys a dominant position in the relevant market. The market has to be defined with reference to the relevant product market or the relevant geographic market or with reference to both the markets. In this particular case the relevant geographic market would be the State of Goa. As far as the relevant product market is concerned it means the marketing medicines in Goa. The position of dominance arises due to the formation of a product association for the State of Goa as well as the MoUs entered into by AIOCD with OPPI and IDMA. Due to this collective strength of association CDAG is able to operate independently of competitive forces primarily because no competitive force is prevailing in the State of Goa. The object of the association is to regulate the trade of the sale of medicines in the State of Goa. Thus the association be able to affect its consumers in the relevant market in its favour. The fact is mentioned in Section 19(4) have also be considered while deciding the issue of dominance. As far as a market share of the association, the size and resources of the association, size and importance of the competitors, economic power of the enterprise, vertical integration of the enterprise, countervailing buying power, market structure and the size of the market is concerned, are the factors which cannot be seen or examined in this case of the association. But the consumers are depending on the decisions of the association and the dominant position has been acquired due to the collective bargaining power which the association is acquired for forming the association. Therefore under clause (g) of Section 19(4) the dominance has been acquired under the item ‘otherwise’. No relative advantage acquired in terms of economic development by informing the association or by regulating the trade of medicines in the State of Goa. But as medicines are important for human life, social obligations and social costs are necessary. Therefore clause (f), (g), (h), (k) and (I) of Section 19(4) are applicable to the facts of this case.
21. In view of these facts the dominance of CDAG is established in the market of medicines in the State of Goa. The abuse of dominance is already established as discussed in Paras 16 and 17 of this order. The behaviour of CDAG is discriminatory as far as the conditions of purchase and sale of goods which is medicines in this case. Therefore the provisions of Section 4(2)(a)(i) are attracted. The action of CDAG also limits and restricts the market of medicines in Goa as there is restriction to the entry of stockists and wholesalers in the State of Goa. Therefore the provisions of Section 4(2)(b)(i) are clearly attracted. The practice followed by CDAG also results in denial of market access as no one can enter the market without no objection certificate from the association. Therefore CDAG has contravened section 4(2)(c) of the Act.
22. As the abuse of dominance is established, I am in agreement with the majority view that penalty has to be levied in this case. I agree with the majority view to the extent of the penalty levied in this case. The other directions issued in the order of majority have to be followed by the CDAG in this case.
23. The secretary is directed to send a copy of this order to the concerned parties.
Order :
1. I had the benefit of going through the order passed by my learned colleagues and having different opinion on certain issues, decided to pass a separate order.
2. The informant in this case had brought to the notice of the Commission various acts and deeds of the opposite party and asked the Commission to take appropriate action under the provisions of the Competition Act. The investigation was conducted by the DG who had collected documentary material and oral evidence about the allegations made by the informant. The evidence consists of Memorandum of Association, various guidelines issued by the Association, letters, minutes of meetings and statement of office bearers of OP narrating the conduct of association about holding of meetings and issuance of letters etc. Thus the evidence available on record is beyond the pale of doubt.
3. The opposite party is an association of wholesalers, stockists and retailers in Goa. A perusal of list of executive members of the Association would show that the Association was having separate wholesellers Chairman and Retailers Chairman. It was being governed by an executive body having President, Secretary, Vice Presidents, the two Chairmen as stated above and executive members.
4. The Opposite Party was having a Memorandum of Association and had enacted by-laws and guidelines for its members. The guidelines issued by the OP to be followed by the members and drug manufacturing companies including Ayurvedic companies, inter alia, contained following directions :-
(1) Appointment/termination of stockists shall only be done with the permission of the Association.
(2) A new company can appoint only two stockists, one in North Goa and the second in South Goa.
(3) The steering Committee shall issue clearance certificate for appointment of stockist if the stockist satisfies the conditions as per guidelines. No person can be appointed stockist by a company without letter of clearance/NOC.
(4) No stockist shall place order to a company before receiving a letter of clearance.
(5) Any wholesaler violating the guidelines shall leave the stockistship and shall be debarred from taking further lines for one year and will have to pay a minimum fine of Rs. 5,000 to the opposite party.
(6) The number of stockists to be appointed by the pharmaceutical companies is also governed by the guidelines.
(7) Companies are not allowed to appoint another stockist for one year after it appoints a stockist, even if the company feels the need for another stockist.
(8) A company violating the guidelines will have to pay a minimum fine of Rs. 10,000 and it shall abide by the final decision of the Association.
(9) A company wanting to appoint a new stockist shall apply for NOC to the Association. Application shall be made separately for the two districts of Goa and new stockist would be given NOC if the existing stockist has already reached a minimum-sale.
(10) No company can make direct supply of medicines to doctors, nursing homes, hospitals or chemists. All supplies must be routed through an authorized stockist only. A company cannot directly deal with private hospitals, nursing homes i.e. bulk purchasers.
(11) Bids for Government tenders are to be routed through CDAG. failing which the companies/stockists may be boycotted by CDAG and threatened of dire consequences is given.
(12) Schemes of the pharmaceutical companies (giving benefits) are not to be passed on by the retailers to the consumers and the detractors are to be penalized by the disciplinary committee of the CDAG.
(13) If a company has stopped operations in Goa for more than two years and want to restart the operations, it will be considered a new company and will have to apply for fresh PIS (Product Information service) and for appointment of stockists.
(14) Wholesalers shall give maximum cash discount to retailers only of 2%.
(15) Wholesalers should not operate any indirect beneficiary scheme to get larger orders from retailers.
(16) A wholesaler found violating the guidelines & rules will be liable to strict action by CDAG on the recommendation of Disciplinary Committee appointed for the purpose. On being found violating the rules, he shall be fined Rs. 2,500 and a warning letter for first violation and a fine of Rs.5,000 for second violation coupled with debarring him for a period of one year for being appointed a stockist.
(17) Retailers were directed not to enter into unhealthy competition of giving discount to the customers and to not to operate any beneficiary scheme to attract the customers. A retailer found violating the rules would be levied a fine of Rs.2,500 besides warning letter for first violation and a fine of Rs.5,000 for second violation with directions to all wholesalers to boycott such retailer for a period of 3 months.
5. The above guidelines formed part of the enforceable rules of the OP. Apart from these guidelines, the minutes of meetings of AGM held by OP show that the OP had been serious about implementation of such guidelines and had been ensuring that the wholesalers, companies, stockists and retailers follow these guidelines. Right from 2005 onwards AGM minutes of OP show that in the AGMs, there was discussion about different wholesalers and stockists and companies who had not followed the guidelines and there was mention of action taken by the Association against them. NOCs were been denied and penalties were imposed in pursuance of above guidelines. In the meeting held on 20th July, 2007 at the office of CDAG, one member produced a bill from “Vintage Hospital” showing 10% discount on regular medicines purchased and a note was taken of this violation and it was decided that this violation be put up before wholesalers meeting. It was also noted that some wholesalers were making products available and supplying drugs to retailers without payment of PIS charges. This matter was also discussed and it was decided that the wholesalers will have to pay Rs. 1,000/-to the Association instead of Rs. 500/- the normal PIS charges being levied illegally by CDAG. The annual report for the year 2007-08 mentions that the wholesalers should become members of the Association and while making first supply to the retailers, they should first check the membership of new chemists. The retailers should also place orders only on those wholesalers who were members of the Association. In the meeting of wholesalers of 14th August, 2008, the Chairman reported that a letter was being written to ‘Raikar Distributors’ regarding practice of giving extra discount to the retailers against the guidelines. Similarly, it was also decided to write letter to ‘Micro Labs’ seeking explanation regarding violation of CDAG guidelines by their super stockists. The letter dated 10th September, 2008 written by CDAG to Micro Labs is on record. In this letter, Micro Labs has been told to direct its super stockists not to supply medicines to those stockists who were not official stockists (i.e. not registered with CDAG).
6. The resolutions passed by the Association of 3rd February, 2009 are on record. Resolution No. 3 provides that it was mandatory for all companies that the stockist which has one division of a company shall get all other divisions of the said company. The resolution No. 4 provides that if the existing stockist of the company satisfies the guidelines regarding limit of sales of a stockist, then only the executive Committee of CDAG shall give NOC to the company to appoint another stockist simultaneously. Similarly, five resolutions were passed in the meeting of 1st March, 2009. The first resolution provided that the Association shall make it mandatory for all existing companies and new companies to appoint at least two stockists one in North Goa and other in South Goa. The third resolution provided that it would be mandatory for all companies that the stockist, which has one division of a company, shall get all other divisions of the said company.
7. A perusal of the minutes of two other meetings of the Executive Committee and Association available on record would show that the OP Association has been insisting on obtaining LOC (letter of consent) and NOC from it before appointment of any wholesaler, stockist in the area by companies. Any company which resisted the dictates of OP was boycotted by the members, in pursuance of guidelines & circulars and the members of the association faithfully followed the dictates of the association. The companies were denied LOC for appointment of additional stockists and did not appoint additional stockists under the fear of boycott of their products. For example M/s. ‘Raikar Distributors’ were denied appointment of additional stockist in Goa despite existing stockists having given NOC that it may appoint more stockists.
8. CDAG had been compulsorily charging PIS from every company which introduced any new drug or a new variant of existing drug. PIS was being charged at a fixed rate and a company was bound to pay this amount if it wanted to sell its product within Goa. In case of non-payment of PIS charges, penalties were imposed by CDAG and threat of boycott is there. Product Information Service (PIS) is a service provided by CDAG by publishing the information about the drug of the company in its periodical publication which is circulated to the chemists and druggists within Goa. CDAG charges separate PIS for the same drug even in cases of quantity variants i.e. if a company has come out with 3 versions of a drug, say in 10 mg, 20 mg. and 40 mg., it will have to pay separate PIS for each version. Payment of PIS is compulsory for all the companies.
9. In the wake of above facts and practices of CDAG in controlling the entire business of retail and wholesale of drugs in the state of Goa, the informant argued that MOU, guidelines, acts and deeds of CDAG amounted to violation of provisions of the Competition Act and wanted that the Commission should restrain CDAG from enforcing anti-competitive guidelines and such guidelines should be scrapped. The Commission should amend the guidelines and should pass orders for freeing the business of supply of drugs from the clutches of CDAG.
10. It was submitted that CDAG had become a monopolist body and was practicing and doing acts which were anti-competitive. The practice of CDAG forcing companies to appoint stockists and wholesalers from only those persons who were members of CDAG amounted to killing of competition. Imposition of penalties by CDAG and boycott threat was violative of the provisions of the Competition Act.
11. The above matter was filed in June, 2009 under MRTP Act before Director General (Investigation & Registration). The informant was perhaps unaware of the Competition Act having come into force on 20th May, 2009. However, the complaint was forwarded to the Competition Commission as MRTP Act had ceased to exist.
12. The main argument of the OP is that the Association was working for the welfare of its members and for betterment of the trade. It was regulating the trade in such a manner that it was for the benefit of the members & consumers. It is stated that Union Health Ministry had constituted Mashelkar Committee which recommended that Chemists & Pharmacists through their association should act as a watch dogs to prevent entry of spurious drugs/medicines purchased from unauthorized resources and had specifically reiterated that All India organization of Chemists & Druggists should play an active role to educate their members and to cooperate with regulatory authorities to eliminate sale of spurious and sub-standard drugs by their members. It is stated that the Association CDAG was issuing NOC after verifying the antecedents of the Stockists, wholesalers and retailers to ensure that nobody deals with spurious drugs. Therefore, whatever was being done was being done for the benefit of the consumers.
13. The argument of the opposite party must fail. Formation of an association is a fundamental right of people of India, but no association can be formed for illegal purposes or to perpetuate illegality. A perusal of minutes of AGM of OP would show that the whole effort of the OP has been to protect the sizeable profit margin of its members, whether wholesellers or retailers. OP had no business to regulate the profit margins or issue letter of consents or NOCs to persons for doing business in wholesale or retail supply line of drugs/medicines. Only few professions have been given responsibility of keeping a watch on the professionals by legislature by enacting necessary statutes. The elected bodies of Advocates, CAs, CSs, ICWAs & Doctors have been given statutory powers to regulate the profession. No such power has been given by legislature to chemists & Druggists Associations either at state level or national level to regulate business, fix margins & ensure profits or to regulate the entry and exit of the person in this business or to fix norms of minimum turnover etc. The entry into this business is regulated by a host of central rules and regulations and a complete administrative structure is there at state and central level under Drugs & Cosmatic Act & Rules. It is the state which grants or revokes licence to do trade in this field. No association can super impose its own dictate over retailers or wholesellers about whether they can open shop in an area or not. The business person itself has to decide whether he wants to enter the field and compete with others or not. CDAG or any other association of existing retailers or whole sellers cannot decide nor has business to decide whether a new entrant in the field should be there or not. There can be no worse anti-competitive act than denial of market access to a person.
14. Section 3 of the Competition Act (the Act) provides that where an agreement is entered into between enterprises or association of enterprises etc. etc. or a practice is carried on or a decision is taken by any association or enterprise or association of persons including cartels engaged in identical or similar trade of goods or provision of service, which directly or indirectly causes or likely to cause an appreciable adverse effect on the competition within India, such an agreement shall be void. Section 3(3) provides that if decision or practice determines purchase or sale price, it shall be presumed to have an appreciable adverse effect on competition. Similarly, if the actions or decisions or practices limit or control production/supply, market of provision of services, it shall be presumed to have appreciable adverse effect on competition. Section 3 prohibits an agreement in respect of supply, production, distribution, storage, acquisition or control of goods which causes or is likely to cause an appreciable adverse effect on competition within India.
15. Cartel is defined under section 2(c). Cartel includes an association of producers, sellers, distributors, traders or service providers who by agreement among themselves limit, control or attempt to control production, distribution, sale or price of, or trade in goods or provision of services.
16. In order to form a cartel, it is not necessary that a formal association should be got registered. A cartel can be formed by an informal association of enterprises as well as by a formal registered Association of enterprises. The coordination between the enterprises can be achieved through medium of either of the associations. Formation of a trade association becomes handy where cartel consists of a large number of firms. In such cases where trade associations are formed for the purpose of cartelization, the compliance of the rules made by the cartel needs to be monitored and is monitored through the Executive Committee or the members of the Association. Where only a few firms unite to form a cartel, it is relatively easy for each firm to monitor one another. However, where large numbers are there, this monitoring and penalizing is done through reporting by the members. The members keep on giving information to the Executive Committee about the violation as it comes to their knowledge. Then the executive committee takes action.
17. The legislature was aware that associations can take the shape of cartels and that is why in section 2(c), the association of producers, sellers, etc. has been included in the definition of cartels. Similarly, the legislature in section 3 also envisaged a situation where enterprises may form an association and take such decisions or adopt such practices which were akin to a cartel. The constitution of an association and adopting of its Memorandum of Articles of Association, its rules, bye-laws, guidelines itself is a decision of the enterprise. Every individual member who subscribes to the Memorandum of Association and becomes member of the Association either at the time of inception or later on, is a party to the decision as recorded in the form of by-laws, guidelines, rules & regulations or of the association. The decisions of the Executive Committee of the Association elected by the general body of the association are not only the decisions on behalf of Association but amount to the decisions of the members of the Association. It is quite possible that some members may not agree with the decision of Executive Committee. Those members who do not agree with such decisions which affect the trade or service are supposed to convey their disagreement with the decisions to the Association. If no member conveys disagreement to the decision of the Executive body, it is presumed that he agrees with the decision.
18. An association may have two faces, one that of the looking after the welfare of the Association members and other face that of killing the competition among the members and to ensure cooperation in earning assured profits as well as taking such decisions which are anti-competitive. The Commission has to adopt a functional approach. Those actions of the Association which are only in the nature of welfare of the members of the association like ensuring that the members get credit from wholesalers, they are not harassed by the authorities, organizing welfare schemes, cultural programmes etc. are the measures of an association which are not to be objected to. However, those functions and decisions of the association which violate Competition law are to be considered in a different perspective and cannot be considered as legitimate functions of the association. An association of enterprises can be held responsible as a body for anti-competitive decisions and the members of the Association individually can also be held responsible for those decisions and practices which are anti competitive and show formation of a cartel.
19. The various decisions and guidelines of which have been enumerated in paragraph 4 above, would show that the OP in this case has practically taken the shape of a cartel. The guidelines issued by CDAG that no company can appoint stockist without obtaining LOC or no stockist would be allowed to be appointed unless the previous stockist had reached a certain minimum turnover, or unless he is made stockist for all the divisions, are in the nature of limiting the provisions of service.
20. Appointment of stockist, wholesalers is for the purpose of supply of drugs. These drugs are supplied by stockists to wholesalers and by wholesalers to the retailers. This chain of supply of drugs exists so that the supplies go to the ultimate consumers uninterrupted, in this market of supply of drugs CDAG by its guidelines, actions and penal provisions had put limits to the provision of the services. The decision regarding number of stockists to be appointed in a particular territory is taken by pharma companies based on demand for drugs. Any restriction on such matters collectively imposed or mandated by an association of competitors not only infringes on the freedom of trade as guaranteed by Constitution of India but also erects barrier to competition. It may again be reiterated here that there exists a government regulatory mechanism which ensures the fulfilment of regulatory requirements for issuing licenses to all sales establishments pertaining to drugs including wholesalers and retailers. The conduct of the OP in terms of imposition of restriction on appointment of stockists is anti competitive. The restrictive guidelines and norms implemented by the association, seen in conjunction with the action taken for non-compliance, establish that the conduct of the CDAG amounts to limiting the number of players and controlling the supply of drugs in the state of Goa and therefore, contravenes Section 3(3)(b) of the Competition Act, 2002.
21. The guidelines issued by CDAG and for which penalties are imposed by CDAG limit the provision of service of supply of drugs to the retailers as well as to the consumers. CDAG has even ensured that wholesalers and retailers also cannot function in the territory of Goa without obtaining NOC from the Association and without becoming member of the association. A collective coercive action is taken by CDAG through its members, if any one dares to defy the guidelines of CDAG.
22. The undisputed evidence shows that CDAG has fixed trade margins at wholesale and retail levels for all non-scheduled drugs at 10% and 20% across states. It went a step further and through the MOU for its members and dictated even discounts to be extended by wholesalers and retailers. The relevant clauses of the MoU as posted on CDAG website as on 4.5.2012, are as under:
Purchase & Payment
1(b): It is agreed that maximum cash discount offered to Retailers should be 2% only. The minimum purchase by Retailers for eligibility of cash discount is to be decided by the concerned Wholesaler.
1(c): No other indirect discount should be given such as selling to Retailers and Doctors without LST/giving free offer either in excess to the trade offer officially operated by the company or giving free other products where no trade offer is operated by the company. Any such things will be considered as indirect discount.
1(d): Wholesaler should not operate any indirect beneficiary schemes to get larger orders retailer.
1 (e): Any wholesaler found violating the above rules will be liable to strict action taken by CDAG on the recommendation of the disciplinary committee appointed for the purpose.
(1) For first violation a fine Rs.2500 will be imposed beside warning letter will be written to the Wholesaler.
(2) For second violation a fine of Rs.5000/- will be imposed and also executive committee will not issue any NOC to such a wholesaler for a period of 1 year for being appointed as a stockist any company.
1(f): Retailers should not resort to any unhealthy competition by giving discount to their customers and should not operate any beneficiary schemes to attract the customers.
1 (g) Any Retailer found violating the above rules will be liable to strict action taken by CDAG on the recommendation of the Disciplinary Committee appointed for the purpose.
(1) For first violation a fine of Rs.2500/- will be imposed beside warning letter will be written to the concerned Retailer.
(2) For second violation a fine of Rs.5000/- will be imposed and all wholesaler will boycott such retailer for a period of 3 months.
23. The circular of CDAG dated 16.08.2005 is self explanatory and reads as under:
“(a) With immediate effect Wholesalers could extend a maximum of 2% Cash Discount for immediate cash payment or payment with current dated cheques to retailers.
Wholesalers are requested not to offer more than 2% CD and in case of cheque payment the Cheques should be deposited in the bank immediately.
Retailers please do not demand more than 2% CD and do not give post-dated cheques or do ask wholesalers to present cheques late to the bank.”
24. In the statements made before the D.G., Shri Hemant Pai Angle, Member of Chemist & Druggist Association, Goa, has submitted as under:
“CDAG is affiliated to AIOCD and follows the guidelines of AIOCD. In the guidelines, the margins have been fixed for drugs for both wholesalers and retailers. The margins are fixed at the time of giving PIS approvals. The PIS is collected in the name of advertisements published in the magazines like ‘Bulletin-cum-PIS’. For PIS, Rs.500 per product per strength/formulation is charged. I am giving you copies of approvals given by AIOCD published in ‘Bulletin-cum-PIS’ which would show that Product Information service is charged by associations.
Trade margins fixed by AIOCD followed by CDAG and PIS charged by them may have impact on prices of drugs. Circular dated 4.6.2010 of CDAG (a copy of which is being submitted) also brings out that the association writes to the companies for effecting variation in prices.”
25. The circular dated 11.06.2009 issued by the CDAG demonstrates the attempt to restrict competition between retailers by denouncing the practice of extending discounts to the end customers. The circular reads :-
“We have been receiving a lot of complaints that many retailers are giving discounts which run even upto 10%.
Please be aware that out Association and its parent body – The AIOCD thrive hard to bargain the companies and maintain our trade margins on medicines. These trade margins are just enough (and some occasions not enough) to sustain ourselves & have a respectable living.
Please also be aware that a big pharmacy retail chain in the Southern India which was brashly advertising and giving discounts to customers, is today in bankruptcy, with losses amounting to crores of rupees.
Giving discounts not only disturbs the other retailers in the neighbourhood who do not give discounts, but it also leads to unethical practices and is actually hampering your own profits in the long run. Your giving discounts is not only destroying the neighbouring retailers, but will also eventually destroy you too.
Please note, strict action will be taken against any retailers found given discounts. We therefore appeal to you to stop giving discounts. Help us to keep the trade healthy & alive.”
26. The directions given by CDAG to retail chemists that they should not enter into ‘unhealthy competition’ by giving discounts to the consumer shows that CDAG had in fact fixed the prices of all drugs for the consumer as MRP and no discount can be given to the consumers. Similarly directions and guidelines given by CDAG to its wholesalers and stockists about fixing the discounts in case of non-scheduled drug also results into fixing the prices. The wholesalers cannot give additional discounts to the retailers for showing better performance nor a wholesaler can try to increase its sale by offering more discounts. Thus there is no price competition in the sale of drugs between the wholesalers because every wholesaler has to sell a drug at the same price despite the fact that he has wide margins out of which he can give further discounts to the customers ultimately which will go to the consumers.
27. The drugs these days are quite costly. Some of the drugs cost in lakhs. Many of these are essential drugs used in serious ailments. If a drug costs Rs. 1,00,000 for a pack of one month, the discount of 20% would amount to Rs.20,000. Even if the wholesaler or the retailer can afford to give additional discount to the consumer, they do not give discount to the consumer because all of them have joined hands and formed a cartel that no discount would be given to the consumer.
28. This cartelization had taken place because all the members have subscribed to the decisions of the Association that they would abide by the guidelines issued by the Association in respect of retail and wholesale discounts. The association had fixed cash discounts and had also given directions of non-transferring of benefits to the consumers. The decision of the association is the decision of the members of the Association. It is apparent that all the members of the Association together acted as a cartel by subscribing to the Memorandum of association and guidelines and by following it. A perusal of the minutes of the General Body meeting would show that violations of the guidelines were brought to the notice of the Executive Committee and the Executive Committee decided to take action against the violators.
29. I, therefore, consider that the facts proved in this case clearly show that there was a cartel of the members of the Association in the relevant market of supply/distribution of drugs in order to kill the competition among the retailers, among the wholesalers and among the stockists. CDAG and its members considered the competition as ‘unhealthy’. But for these decisions of CDAG, the companies/manufacturers would also have been compelled to give better discounts in order to compete so that the sale of their medicines would increase but the cartelization by CDAG has ensured of fixing the price and drugs are now sold at pre-determined prices i.e. MRP to the consumer without any competition among the chemists.
30. On consideration of all evidences including the copies of PIS Bulletin, statements of persons recorded in the course of proceedings, various circulars issued by the CDAG, it is evident that the Association not only prescribed the margins for wholesalers and retailers as determined in the agreement entered into between AIOCD, IDMA and OP1 but also dictated the maximum discounts to be offered to the retailers and to the consumers. While trade margins and levels of discounts may tend to converge across players even through a market driven mechanism, collective determination of the same by an association of competitors is against the principles of competition and is in contravention of Section 3(3) of the Competition Act, 2002.
31. Another feature of the Association is to ask for charges for PIS. This has been made compulsory by the association and every company is asked to pay PIS. PIS is Production Information Service. A company which produces a new drug is bound to give information of this drug in various medical journals and research journals. It is not that PIS is the only mode of giving information of their product either to the ultimate consumers or to the chemists. In India Rosemay Sharp, a missionary from UK had started first drug information centre at Christian Medical College, Vellore in early 1970. This centre provides information on drug to members, pharmacists, nurses and other personnel of various departments. The centre has established several other drug information centres in other places outside Vellore. While in the past, the drugs available were few in number and the need for drug information was minimal but now the situation has changed and the number of drugs has increased phenomenally. Apart from Drug Information Centres of Christian Medical College, Vellore, there are various other journals who publish drug information. The list of these journals is available at internet and almost every medical professional is aware about these journals. Linking of payment of PIS and making payment of PIS compulsory for companies is another high handed practice of CDAG. Since the amount charged is not significant, the issue is worth ignoring.
32. From my above discussion, I find that CDAG as an association of enterprises has violated section 3(3)(a) & (b) by issuing various guidelines and enforcing them and the members of the Association were guilty of forming a cartel for determining the sale price of the drugs at MRP with no discounts to customer. The adverse effect of the decisions of Association and of its members on competition is self evident in view of presumption drawn by law. Section 3(3) provides that where decisions of association or cartel directly or indirectly determines sale prices or limits or controls supply of provisions, the Commission shall presume that such decisions caused appreciable adverse effect on competition.
33. The next issue which arises is about imposition of penalty under section 27 of the ‘Act. If the Commission after inquiry finds that any agreement or practice or decision referred to under section 3 was in contravention of the provisions of the Act, it should pass cease and desist order and declare such part of the agreement as void. It should declare the violative practice & decision as void. The Commission can also impose penalty. Since a Memorandum of association forms an agreement between the members, the Memorandum of Association, guidelines, bylaws form an agreement between its members, these memorandum of association, guidelines and bye laws if violative of section 3 are to be declared as null and void.
34. I therefore, consider that the guidelines enumerated above in paragraphs 4 & 22 including prescribing discounts margins, cash discount are null and void. Similarly, CDAG has no authority to issue NOC or LOC for appointment of wholesalers, stockists or retailers. All guidelines, instructions, circulars regarding issuance of NOC, LOC by CDAG are held anti competitive and shall be void and not binding on the members and companies. The guidelines and circulars and articles of MOU restraining companies/stockists from directly supplying medicines to hospitals, nursing homes or bulk purchasers are null and void and are so declared.
35. I also consider that the members and the Association must be imposed appropriate penalty for violation of the provisions of the Act. As per record, the Association has 243 retail members and 65 wholesalers within Goa state. So there are more than 300 members of the association. All these members through their Association have been following the policy of cartelization through and with the help of their Association. They are all liable to pay penalty through the Association. Section 27 provides that the Commission may impose such penalty as it may deem fit subject to the condition that the penalty should not be more than 10% of the average turnover for the last three preceding financial years. An Association of enterprises in itself may not have significant turnover. That does not mean that an Association of enterprises indulging into cartel activity, highly affecting the competition should go scot free. If it is so, it will be easy for the enterprises to indulge into cartelization & escape penalty by forming an association. That could never be the intention of legislature. I consider that while imposing penalty, the Commission has to take into account the average turnover of all its members and thereafter impose a reasonable penalty which should not exceed 10% of the total turnover of its members. If we consider that the average turnover of each retailer was about Rs.2 lakh per month or Rs.24 lakhs per annum, the total turnover of all the retailers would be Rs.24 lakh × 240 (members) = Rs.57.6 crores. And if we consider that the average turnover of each wholesaler per annum was Rs.5 crores, the total turnover of all the wholesalers would be Rs.5 crores x 65 (wholesalers) = Rs.325 crores. Thus the total turnover of all the members would be approx. Rs.382.6 crores, say Rs.380 crores. Considering this turnover in mind, I think a penalty of Rs.20 crores on CDAG would be the appropriate penalty. CDAG would recover this penalty from all its members and shall deposit this amount with the Commission within a period of 60 days. It is also directed that Memorandum of Association and guidelines shall be modified by CDAG and all offending clauses & guidelines as enumerated in paragraphs 4 & 22 above shall be dropped.
36. The competition bodies of different jurisdictions have issued guidelines of do’s and don’ts for their associations. Some of the don’ts are required to be followed by associations of enterprises as under :-
(a) Do not issue guidelines/bye-laws/instructions about
(i) price at which products or services are to be purchased or supplied;
(ii) the level of discounts to be given by the producer, stockists, wholesaler;
(iii) requirement of obtaining LOC, NOC from the association for any person to enter the trade;
(iv) Instructions to the company as to who should be appointed as stockist, wholesaler etc.
37. The goal of the trade association should be to keep within the boundaries of Competition Law. Sales territories should not be fixed. Compulsory service in the nature of PIS should not be there. No restriction on sale volumes or supply to hospitals and other institutions should be there. No penalty should be imposed for giving discounts or other benefits to the consumers either by the stockists or by wholesalers or by the retailer. Allocation of customers and restrictions on types of product or market division should not be there.
38. In cases where companies are held guilty of the provision of the Competition Act, Section 48 of the Competition Act provide that persons responsible for the conduct of business of the company shall also be deemed to be the guilty for contravention of the act and shall be liable to be punished. The Company has been defined in this section as a body corporate or a firm or association of individuals. However, Association of enterprises has not been considered as a company. I therefore, consider that the office bearers of CDAG would not be covered under section 48 and only CDAG and its members would be the enterprise which can be punished. So no penalty is leviable on the office bearers.
Per Dr. Geeta Gouri, Member – The Commission received an information filed by Varca Drugs & Chemists & Others, Goa, transferred from Monopolies and Restrictive Trade Practices Commission (MRTPC) under Section 66(6) of the Competition Act, 2002. The allegations pertain to certain restrictive trade practices adopted by Chemists and Druggists Association, Goa, (hereinafter referred to as ‘CDAG’). While the original information was filed before MRTPC. The substance of allegation shall be analysed on the basis of the provisions of the Competition Act.
2. According to the informant, CDAG as an association, framed various guidelines, meant to benefit its members in carrying out their business of stocking, wholesaling and retailing of pharmaceutical product. However, as per the allegations, over the years due to the unfair practices of some of the members of its Executive Committee, the CDAG has become a monopolistic body and has started indulging in certain restrictive trade practices, now deemed anti-competitive. The allegation of the informant centred on the selection process and appointment of stockists by AIOCD (national level association of wholesalers and retailers) and CDAG and its abuse, resulting from existing guidelines and MoUs between CDAG and the manufacturers.
3. During the course of investigation, DG noted several anti-competitive conditions emanating from these very guidelines. The Commission ordered further enquiry into the links between CDAG and AIOCD and the anti-competitive practices mentioned in the investigation report of DG by issuing a supplementary order dated December 2, 2010. Since the facts of the case have been detailed in the majority Order, only a brief summary of the allegations are set out below.
4. The informant, in his submission to the Commission, has drawn attention to the method and process of appointing stockist/wholesalers and restricting their number in the state of Goa which, in his opinion, creates entry barrier and hence is anti-competitive. The crux of the allegations lies in the issue of ‘no objection certificate’ (NOC) by CDAG for appointment of stockists/wholesalers. Further, no stockist/wholesaler can be appointed without an NOC from CDAG. This ‘right’ which normally rests with manufacturers has been transferred to AIOCD and CDAG through the MOU signed with the pharmaceutical companies. Additionally, the MOU mandates all pharma companies to appoint stockists/retailers in the state of Goa only from the members of CDAG.
5. The ‘ right of appointment’ of stockist translates into:
i. Restrictions on the number of stockists in the state;
ii. Conditions for permitting appointment of additional stockist.
Limited number of Stockists so appointed control the supply of drugs in the markets in Goa.
6. The appointed stockists/wholesalers are under instructions from CDAG and:
a. are not permitted to pass on the financial benefits of schemes introduced by the Pharma companies,
b. To refuse refunds to retailers by wholesalers in respect of stocks which have crossed expiry date,
c. Forcing bids for government tenders to be routed only through the ‘authorized stockist’,
d. Not to allow credit to retailer, contrary to the industry practice of allowing a credit of 20 days to one month.
7. Restrictions have also been imposed by CDAG on pharma companies as under:
a. Pharma companies are not permitted to make direct supplies to doctors, nursing homes, chemists etc. and instead route the same through the authorized stockists only.
b. Pharma companies and wholesalers are restricted from supply of drugs to retailers who are not the members of CDAG.
8. The DG, during the course of investigation, has brought out certain additional anti-competitive practices (hereafter referred to as ‘observed’ allegations) of CDAG which included –
(a) Fixation of trade margins to wholesalers and retailers;
(b) Not permitting discounts to retail consumers in the name of preventing unhealthy competition;
(c) Capping of cash discount available to retailer;
(d) Issue of PIS by the Associations.
Methodology of Analysis
DG and Majority Order:
9. The approach of DG pertaining to the allegations both filed and observed was to examine these as an integral part of association functioning. This can be observed from the finding of DG. To quote:
“Evidences collected in course of proceedings and statements of persons recorded before this office are indicative of the fact that the associations, not only limit and control supply of drugs in the market through a system of PIS approvals, but also limit and control the number of players by insisting on need of NOC of associations for appointment of stockists in their areas of operations. It has also been found that the associations through their guidelines and norms fix margins for the wholesalers and retailers, which has the effect of determination of sale prices of drugs in the market. These practices and conduct of CDAG are violative of provisions of section 3(3)(a) and 3(3)(b) of the Competition Act, 2002” (DG supplementary report dated March 18, 2011).
10. This approach, while it may have its merits can lead to situations where the positive activities of an association tend to get blurred by the undesirable outcomes. More significantly, it prevents identification of the precise anti-competitive effects which as per DG are in built into the guidelines and MOU. Moreover, DG, by limiting investigation to CDAG, was unable to capture what he mentions in his report itself the linkages between associations, both horizontal and vertical. Further, he has not been able to capture the dynamics of an industry where associations have been in existence for over four decades and the present guidelines are a result of long term negotiations between the industry players, which might have contributed to the overall stabilization of the industry, thus mutually benefitting all the participants. The majority order has also followed the same approach and concluded that the association(s), not only limit and control supply of drugs in the market through a system of PIS approvals, but also limit and control the number of players by insisting on NOC for appointment of stockists. It was also concluded that associations, through their guidelines and norms, fix margins for wholesaler and retailers, which has the effect of determination of sale price of drugs in the market. The DG and the majority Order found all these activities to be in contravention of Section 3(3)(a) and 3(3)(b) of the Act.
Approach of the present Order:
11. I prefer to look at each of the following allegations/practices separately for anti-competitive conduct as these require separate examination from the lens of competition assessment (as also followed in the Order of Member (R)):
(i) Requirement of no-objection certificate (NOC) from CDAG before the appointment of stockists/distributors leads to reduction of supply in the market, in contravention of section 3(3)(b) of the Act.
(ii) Fixing of trade margin for stockists/distributor amounts to fixing of prices violating section 3(3)(a) of the Act.
(iii) Issue of restriction on discounts to be allowed by the wholesaler to retailer, and by retailer to end consumer.
(iv) Fixing of PIS charges leading to the fixing of prices of drugs in violation of Section 3(3)(a) of the Act.
12. In the light of the approach taken in this Order briefly outline the structure of pharmaceutical sector in India and the role of associations.
Pharmaceutical industry and Associations
13. Among others, the industry is characterised by two main features-(i) existence of associations at each level of the value chain viz. manufacturers and wholesalers/retailers; (ii) high degree of regulation. These features are elaborated in the following paragraphs.
14. The Indian Drug Manufacturers Association (IDMA) and Organization of Pharmaceutical Producers of India (OPPI) are the pan India associations of drug manufacturers, whereas AIOCD is the apex association of wholesalers and retailers of drugs at all India level. The industry norms relating to various commercial aspects get determined collectively through continuous interaction between these apex associations.
15. The industry is highly regulated by a host of government regulations which have evolved over the years to address concerns relating to drug safety, quality standard, IPR protection, affordability and accessibility. The pharmaceutical industry in India is regulated by the Drugs and Cosmetics Act, 1940 (DCA) and the Drugs and Cosmetics Rules (DCR) made thereunder. Under the provisions of DCA, the office of the Drug Controller of India (DCI) is responsible for enforcing the provisions of the law. At the field level, enforcement is done by the State governments through their Food and Drug Administration offices. Matters of product approval and standards, clinical trials, introduction of new drugs, and import licenses for new drugs are handled by the DCI, whereas the approvals for setting up manufacturing facilities, and obtaining licenses to sell and stock drugs are provided by the State Governments. The licenses are to be renewed periodically.
16. It may be pertinent to mention here that the pricing of drugs are also regulated by the National Pharmaceuticals Pricing Authority (NPPA). NPPA, through the Drug Pricing and Control Orders, provides not only the price formula but also the margins for wholesaler and retailer in case of scheduled drugs. The Pharmaceutical Policy, 2002 provides detailed pricing framework specifically focussing on Maximum Allowable post-Manufacturing Expenses (MAPE), margin for imported formulations, pricing of formulations, ceiling prices and monitoring thereof. It also monitors the pricing of non-scheduled formulations. As per press release of Press Trust of India dated May 15, 2012, prices of 95 packs of non-scheduled drugs were reduced following the intervention of NPPA. Thus the task of price setting, margin reasonableness etc. is being looked into by the NPPA and this should also be a factor in analysis of allegations.
17. The provisions of Competition Act, 2002, with its distinct focus on prevention of anti-competitive practices, complements ail such diverse set of laws, policies and regulation governing the pharmaceutical sector.
18. Having gone through the industry peculiarities, it is now important that the assessment of the conduct and practices of CDAG as pointed out by the opposite party, be contextualised with respect to the overall structure of the pharmaceutical industry in India, including the pharmaceutical value chain, the regulatory framework and the role of and linkages between the various industry associations.
19. The spread of Associations interlinked horizontally and vertically in a regulated sector tends to obfuscate the boundaries of regulator and the regulated. It is in this framework that each of the allegations are now examined:
(i) Issue of requirement of no-objection certificate (NOC) from CDAG before the appointment of stockists/distributors in Goa leads to limiting supply in the market, in contravention of section 3(3)(b) of the Act.
20. On this issue, I agree with the main order, but detailed examination of the facts and evidences brought on record makes it clear that the aforementioned Guidelines enforced by the association emanate from the various vertical agreements and MoUs entered into between AIOCD, IDMA and OPPI. CDAG and all other state associations are enforcing such agreements in their respective states. While this certainly does not preclude the liability of CDAG in this specific case, at the same time it warrants an in depth inquiry into the role and function of the parent associations (AIOCD, IDMA, OPPI) who have been setting the terms of business between the players at the various levels of the supply chain over the years. The attention in this case was on the allegations levelled against CDAG and therefore the practices of CDAG have been the focal point of investigation in the majority order. However, the culpability of the parent associations cannot be overruled. In order to clearly bring out the facts, separate investigation on the role of the parent associations AIOCD, OPPI and IDMA needs to be initiated to analyse the nexus and application of the provisions of the Act.
(ii) Fixing of trade margins for stockists/wholesalers and retailers
21. DG has concluded that margin fixation by AIOCD/CDAG at different level of supply chain amounts to violation of Section 3(3)(a) of the Act. This has been accepted subsequently in the majority Order.
22. NPPA regulates the margins for wholesaler and retailer at 8% and 16%, respectively. These regulations are for Scheduled drugs and are effected through Drug Pricing and Control Orders. The industry norms as stated by the informant are 10% and 20% for wholesaler and retailer respectively for non-scheduled drugs. It is observed that these margins are largely in line with the margins regulated by NPPA for scheduled drugs.
23. The critical aspect of margin fixation being anti-competitive in the Main order was that it was leading to price fixation. In this regard, it is important to note that the margins are allowed as a percentage of MRP, but determination of MRP is vested with the manufacturing company, and not the Association. Also, in any product where MRP is to be indicated, the margins for the intermediate players are considered by the manufacturer and these are largely based on industry practices and do not fluctuate much over a period of time. Even in this case, the margins for scheduled drugs are same since 1995. Thus, it is stated that margin fixation is more a question of distribution of total margin among the intermediaries rather than a question of retail price fixation. This could also have been looked into for being anti-competitive, had the same not been in line with the NPPA prescribed margins. Under the circumstances, the margin fixation seems to work in the direction of achieving the price control over non-scheduled drugs on the same lines as the scheduled drugs.
24. Having said that the system of margin fixation is conceptually different and does not imply price fixation, still, DG, on the issue of margin-price nexus could have looked into the price fixation formula of pharma manufacturers for the non-scheduled category, which has not been looked into. DG has placed some evidence in the form of minutes of the meetings of CDAG to suggest that there was attempt to fix end prices also, but the evidence is inconclusive.
25. The issue of margin fixation has also been looked into, from the perspective of the end consumer. In this connection, we may note the observation of WHO/HAI as brought out in their working paper titled “The Regulation of Mark Ups in Pharmaceutical Supply Chain” published in May 2011. According to the report, around 60% of low income countries regulate wholesale or retail mark ups in the public or private sector, which suggests that this is a global industry practice. The report notes: “Regulation of mark ups as part of comprehensive price regulation strategy probably will lead to reduced medicine prices. However, regulation of mark-ups without regulation of either the manufacturer’s selling price or the retail selling price is unlikely to lead to reduced medicine prices”. In India, as already stated, NPPA regulates the pricing of scheduled drugs and monitors the pricing of non-scheduled drugs, which protects the end consumer from any adverse effect (if any) of margin fixation in the industry.
26. Thus, it can be concluded that while margin fixation in case of product such as drugs and pharmaceuticals, has the merit of introducing transparency and stability in the industry operations, the adverse impact on prices and end consumer remains inconclusive. On that note, it is held that margin fixation has not produced any anti-competitive effect on the consumer, as for him, the effective price is MRP, which has to be paid and the investigation has not been able to establish the adverse impact of margins on prices. There is no appreciable adverse effect on competition and no perceived consumer harm.
27. The supplementary order of Member (R) also emphasises the view that margin fixation cannot be presumed to be anti-competitive activity. The fact that margins prescribed by association are in line with the margins prescribed by NPPA for scheduled drugs and are thus not unreasonable to be viewed as anti-competitive. Margin price nexus has also not been established by DG.
(iii) Issue of capping of cash discount at 2% by wholesaler to retailer and non-allowance of any discount by retailer to end consumer.
28. There are two discounts to be examined in this allegation. They are: (i) cash discount between wholesaler to retailer and (ii) any discount offered by the retailer to the end consumer. It is important to note that the association guidelines provides for Cash Discount and not trade discount. The purpose of cash discount is to encourage quicker realization and the said guidelines is applicable to all retailers who pay within stipulated time. Cash discounts are aimed to facilitate quicker conversions of receivables to cash so as to reduce the overall length of the operating cycle. The quantum of cash discount to be allowed by a market player is based on the opportunity cost of funds. Allowance or non-allowance or capping of cash discount, however, does not raise competition concerns. Further, there is uniform application and no discrimination can also be alleged. The restriction however, of the association in not permitting retailers to extend discounts to consumers is anti-competitive as it interferes in the freedom of trade and devoid consumers, the benefits of lower prices.
(iv) Issue of PIS
29. The main order on the subject of PIS concludes that PIS approval is functioning like NOC, without which the pharma companies will not be in a position to supply drugs. The system of PIS approval for introduction of drugs in a particular territory and acceptance of PIS money restricts the supply and availability of drugs in contravention of section 3(3)(b) of the Act.
30. PIS as the name suggests is the Public Information System and plays a very important role in lending transparency to wholesalers, retailers and patients on the constituents of different drugs. The DPCO directives require the drug companies to give information about the new drugs to the wholesalers, retailers and consumers.
31. Based on the available facts and evidences, it is not imminently clear as to how the PIS system by itself restricts the supply of drugs or creates entry barrier or PIS Charges lead to price fixing. In view of the possibility that such service may be deemed beneficial and a cost-effective way of disseminating information by the manufacturers, a conclusion on the effect of PIS cannot be arrived at without a complete analysis of the merits and demerits of the system and the manufacturers’ perspective on the same. The evaluation of the possible rationale for having such a system in place assumes all the more importance given that the practice has evolved and has been standardised through a process of mutual understanding between the drug manufacturers and the distributors’ associations. On the basis of available facts, it is an efficient system for information dissemination made available at a nominal cost charged by the Association(s) as pointed out by Member (R). The negligible cost is immaterial to the eventual cost and price of the product, and the efficiencies of the information are clearly more than proportionate to the restrictions it imposes. In fact, internationally there is a move for greater information through PIS and strengthening the existing regulatory system especially for enabling more detailed and universal classification of drugs and chemicals between branded generic and generic and also strengthening the public information system where simple drugs are known to consumers.
32. Thus, it is abundantly clear that the system of PIS is indispensable to the pharma industry. This being so, it cannot be termed as anti-competitive by any stretch of imagination. The drug companies have passed on this task to the AIOCD, who publishes the same in their information bulletin. As regards cost of PIS, it is a mutual understanding between the drug companies and the association. I am of the view that a onetime payment of Rs. 2000- to AIOCD and Rs. 500/- when a new drug is introduced is negligible, given the total cost of production/marketing over the entire product life cycle.
33. Therefore this system cannot be faulted for price fixation or for restriction of supply and hence cannot be termed as anti-competitive as per provisions of the Act.
Conclusion
34. In this order I have analysed in depth the activities of CDAG which are alleged to contravene the provisions of the Competition Act. Each allegation has been examined separately in the context of the role played by CDAG and other Associations in the Pharmaceutical industry. Though it is observed that Associations in this industry have had beneficial impact, but over the years the Associations have crossed the ‘Rubicon’ of purely Association activities denying benefits of competition to consumers.
Order :
This order finds contravention by CDAG on two counts:
a. In the appointment of stockists by way of issue of ‘NOC’ and regulating the number of stockists in contravention of Section 3(3)(b) of the Competition Act, 2002
b. In preventing and restricting the retailers from allowing discounts to the consumers in contravention of Section 3(3)(a) of the Competition Act, 2002. As mentioned earlier a suo motto investigation be initiated into the nexus between associations both horizontal and vertical for as observed most of the practices have evolved over several decades. In fact, association in the pharma industry associations have impacted on several activities along the value chain.
The amount of penalty may be in line with the majority order.
CDAG to cease and desist from the following activities within 60 days from the date of receiving this order and to furnish an undertaking to this effect:
a. Limiting and controlling the number of stockists by doing away with the restrictive clauses contained in guidelines as the same is in contravention of Section 3(3)(b).
b. The restriction on extending any discount to the consumer by the retailer which is in contravention of Section 3(3)(a).
c. The restrictive conditions related to insistence on routing the bids through authorized stockists, non-allowance of companies and wholesalers to deal with retailers who are not the members of CDAG which are in contravention of Section 3(3)(b).
The Secretary is directed to inform the parties accordingly.
I am a pharmaceutical sub distributor and a chemist in west bengal. i want to know if we are going to suffer margin cuts for a retailers and a wholesalers over the D.P.C.O binding products. what is doing A.I.O.C.D and as well as our B.C.D.A for our this trouble in this competitive market where all the hospital`s doing large number of business by fair price shops in a wrong way where has no bounded product by D.P.C.O. it is not for a people relief shop but a people killing shop, you and central govt.knows that.