In re House of Diagnostics LLP Vs Neurologica Corporation (CCI)
It has been alleged by the Informant that OP-4 is the exclusive aftersales service provider of OP-1 in India with respect to the machine in question. On the other hand, OP-4 has replied that though it is the authorised service provider of aftersales services with respect to the machines of OP-1 in India, there is no bar upon the Informant to procure spare parts or avail aftersales services, from third parties.
In this regard, the Commission notes that the Informant has simply stated that as the machine is sophisticated and encrypted/protected by passwords which are known only to the manufacturer or authorised service provider which are not being provided to it, it is unable to get the machine serviced from outside. In reply to this, OP-4 has submitted that all passwords related to operation of the machine/unit as also the user manual etc. have been shared with the Informant. The Informant is well-aware that only properly trained and skilled technicians can access and repair the machine; any untrained person trying to calibrate the machine may cause radiation accidents and therefore, the same is not advisable. As far as technical know-how etc. of the machine is concerned, the same forms part of the Exclusive Distributorship Agreement entered into between OP-1 and OP-4. The same are proprietary to the manufacturer and therefore, OP-4 cannot disclose the same to the Informant. It is OP-1 who holds rights in the patents, pending patents, trade secrets, trademarks, copyright, etc. vested in the machine purchased by the Informant.
In view of the above submissions of parties, the Commission is of the opinion that the facts of the case do not highlight any anti-competitive agreement in terms of Section 3 of the Act and accordingly, the allegation of the Informant with regard to contravention of Section 3 of the Act is misplaced and devoid of any merit.
FULL TEXT OF THE JUDGMENT/ORDER OF COMPETITION COMMISSION OF INDIA
1. The present Information was filed by M/s House of Diagnostics LLP (‘Informant’), under Section 19(1)(a) of the Competition Act, 2002 (the ‘Act’) against Neurologica Corporation (‘OP-1’), Samsung Electronics Co. Ltd. (‘OP-2’), Samsung India Electronics Private Ltd. (‘OP-3’), and Schiller Healthcare India Pvt. Ltd. (‘OP-4’) (hereinafter ‘OPs’), alleging, inter alia, contravention of the provisions of Sections 3(4) and 4 of the Act (together OP-1, OP-2, OP-3 and OP-4 are referred to as the OPs).
2. The Informant is stated to be in the business of chain of diagnostic centres in and around Delhi NCR, including at Medanta Hospital, Gurugram, Haryana.
3. OP-2, headquartered in Seoul, South Korea, is stated to be one of the world’s largest semi-conductor manufacturers and South Korea’s top electronics company. It is stated to make a wide variety of consumer devices, including TVs, LCD panels, and printers; semi-conductors such as DRAMs, static RAMs, flash memory, and display drivers; communications devices ranging from smartphones to networking gear; and microwave ovens, refrigerators, air conditioners, and washing machines. OP-3 is stated to be the Indian subsidiary of OP-2.
4. OP-1, operating in healthcare segment, is stated to be the healthcare subsidiary of OP-2, based out of Danvers, Massachusetts, USA. It is stated to develop, manufacture and market imaging technologies and accurate diagnostic solutions to healthcare providers. It is stated to be the only supplier of portable CT scanner machines in India, the product in question in the present matter.
5. OP-4, also operating in healthcare segment, is stated to be a manufacturer and supplier of devices for cardiopulmonary diagnostics, defibrillation and patient monitoring as well as software solutions for the medical industry. Its product range is stated to cover critical care, cardiology, radiology, telemedicine, cardiopulmonary, anaesthesia and surgery. It is also stated to be the exclusive agent through which OP-1 provides aftersales services with respect to the portable CT scanner machine sold by OP-1, in India.
6. The Informant is stated to have purchased “Portable and Mobile CT– CereTom”/“CereTom–eight slice CT scanner” from OP-1 vide Purchase Order (‘PO’) dated 31.12.2012, for an amount of $3,10,000 plus 11.76% Customs Duty. The said machine is stated to be currently installed at Medanta Hospital, Gurugram. The terms and conditions attached to the PO of the aforesaid portable CT scan machine, inter alia, included the following:
a) A second machine shall be purchased within one year subject to successful operation of the first machine.
b) Comprehensive All Parts Warranty with free replacement of all parts including Tube with no additional cost, for 12 months from the date of satisfactory installation, shall be provided.
c) After the first year Comprehensive Maintenance Contract (‘CMC’), 2nd year onwards Annual Maintenance Contract (‘AMC’) shall cost ₹1,00,000/- per annum for initial two machines, and for 3rd to 5th machine when ordered, AMC shall be at no additional charge, and the said amount for AMC is escalation free for subsequent years.
d) All parts insurance cover including the Tube shall be facilitated by OP-4 and shall cost additional 1.1 % of the machine’s invoice value, per annum, post the 1st year CMC. Premium for the insurance is to be borne by the customer. In case OP-4 is not able to provide/facilitate the same, this cost shall be added to the cost of AMC as mentioned above and then it shall be converted to all parts covered CMC with replacement including Tubes, plastic and other vacuum parts, boards etc.
e) OP-4 shall provide an uptime guarantee of 98% per year. It further guarantees that at no time the machine shall be down for more than 1 day at a stretch. In case the machine is down beyond 48 hours, it shall entail downtime penalty @ ₹10,000/-per day.
f) Any upgrade of whatsoever nature of the machine shall be provided free of cost for the next 5 years. The machine shall be upgraded to match any latest machine/technology for Ceretom as sold by OP-1 for the next 5 years, in both hardware and software.
7. It has been averred that based on the above terms and conditions, the Informant computed the lifetime cost of owning and operating the machine at the time of making the purchase. However, it alleged that after the expiry of the period under the PO and at the time of renewing the terms and conditions for provision of aftersales services with respect to the machine purchased, the OPs, inter alia, revised the cost of AMC provided to the Informant in an arbitrary manner or in the alternative, offered to the Informant Maintenance Contract whereunder only engineer visits would be covered, and prices to be charged for spare parts replacement, service provision etc. would not be disclosed in advance.
8. In specific, the Informant alleged as under:
(i) In September, 2016, OP-4 unilaterally increased the price of AMC to ₹15,00,000/- plus additional one-time amount of ₹10,00,000/- for replacement of spare part Monoblock (CT Tube), which the Informant was forced to accept. Though the amount of ₹10,00,000/- paid was to be adjusted in the CMC price of ₹15,00,000/-, OP-4 did not do such adjustment.
(ii) OP-4 also added a 2% annual escalation clause.
(iii) OP-4 restricted the duration of contract to 5 years from 2016 to 2021.
(iv) Though CMC was expiring on 25.09.2021, no one month advance notice for renewal of CMC was given by OP-4 to the Informant.
(v) Vide quotation dated 22.09.2021, OP-4 again wanted to increase CMC cost from ₹15,00,000/- to ₹65,00,000/- plus 18% GST (including cost of spare part X-Ray Tube) or ₹35,00,000/- plus 18% GST (excluding cost of spare part X-Ray Tube). Thereafter, on such amount, vide revised quotations dated 25.09.2021, 10% percent discount was offered making it ₹58,50,000/-, ₹31,50,000/-, which is however, still on a very higher side. Also, such amounts quoted are for a period of one year contract only.
(vi) OP-4 forced the Informant twice over a period of 5 years (2015 to 2020) to take computer and software upgradation at a cost of ₹19,00,000/-.
(vii) Nonetheless, though the last upgradation was done in 2018, within a span of 3 years, vide e-mail dated 07.11.2021, OP-4 issued End of Life (‘EoL’) letter for the Informant’s machine.
(viii) Though the Informant requested the OPs for buyback of the machine as the OPs were not maintaining it properly; the OPs have till date not agreed to it.
(ix) The Informant is unable to get the machine serviced from outside on its own or through any other third party as the machine is a sophisticated machine encrypted/protected by passwords, which are known only to the manufacturer or authorised service provider. Though the Informant requested the OPs to provide passwords, encryption codes, accessibility to spare parts, diagnostic tools, technical know-how and/or other information, data etc. so as to enable the Informant to get the machine serviced from outside, OP-4 stated that it has already provided password related to operations and manual to the Informant. However, it refused to provide to the Informant, know-how and service password.
(x) Since September 2021, the CMC of the machine has not been renewed. Thus, OPs are charging ₹59,000 per service visit. However, even after servicing, the machine again shows error within 3-4 days.
(xi) The Informant has been forced to purchase spare parts like CT Tube and centipedes at very high prices.
(xii) The OPs are forcing the Informant to take ‘Service only AMC’ on which the Informant asked them to share spare parts prices with the Informant to enable it to take a viable decision. However, the OPs refuse to share such price list also.
(xiii) As on date, the machine has been down since more than 90 days. Hence, as per uptime clause in the PO, the OPs are bound to pay to the Informant, penalty @₹10,000 per day i.e. ₹9,00,000 and still counting.
9. Based on the above averments and allegations, the Informant filed the instant information against the OPs alleging contravention of the provisions of Sections 3(4) and 4 of the Act.
10. With respect to the allegations of contravention of the provisions of Section 4 of the Act, the Informant stated that:
(a) A ‘portable’ CT Scan machine is a separate relevant product when compared with other CT Scan machines.
(b) In terms of the decision of the Commission in House of Diagnostics LLP v. Esoate S.p.A. and Another, Case No. 09 of 2016 decided on 27.09.2018, the relevant geographic market ought to be “Delhi NCR”.
(c) In terms of the decision of the Commission in Shamsher Kataria v. Honda Siel Cars India Ltd. and Others, Case No. 03 of 2011 decided on 27.07.2015, two separate relevant markets ought to be delineated in the present matter as firstly, the cost of switching the machine for the Informant would be extremely high and hence, it is locked-in with the OPs once the machine is purchased, and secondly, constant arbitrary increase of CMC/AMC for the machine by the OPs have made calculation and estimate of lifetime cost of the machine by the Informant, completely wrong and redundant. Such two separate relevant markets ought to be:
(i) market for manufacture and supply of Portable CT Scan Machines in Delhi NCR (RM I); and
(ii) market for spare parts and repair service of Portable CT Scan Machines in Delhi NCR (RM II).
(d) In India, the only supplier of Portable CT Scan machines is OP-1, thereby making it dominant in RM I. Further, as OP-1 provides exclusive aftersales services through OP-4, it is also dominant in RM II.
(e) The conduct of the OPs is in violation of:
(i) Section 4(2)(a) – Imposing unfair and discriminatory prices and conditions on the Informant for renewal of CMC/AMC;
(ii) Section 4(2)(b)(i) – Limiting and restricting RM II and provision of services therein by not providing encryption/passwords etc. for availing after-market services from outside;
(iii) Section 4(2)(b)(ii) – Forcing the Informant to either abandon the equipment and issuing of EoL letter, thereby restricting technical/scientific development;
(iv) Section 4(2)(c) – Not sharing encryption/passwords, technical knowhow etc. thereby not letting any other person to enter RM II which is clear denial of market access;
(v) Section 4(2)(d) – Forcing the Informant to accept supplementary obligations like upgradation of machine at exorbitant price, accept CMC at manifold rates, etc.; and
(vi) Section 4(2)(e) – Using dominance in first delineated relevant market to enter into and protect its interest through OP-4 in second delineated relevant market.
11. With respect to the allegations of contravention of the provisions of Section 3(4) of the Act, the Informant stated that:
(a) The agreement between the Informant and the OPs amounts to a tie-in arrangement as defined under Explanation (a) to Section 3(4) because the Informant has been forced to accept servicing of the machine from the OPs only which shows that service of the machine had been tied up with purchase of the machine;
(b) The agreement between OP-1 and OP-4 amounts to exclusive supply agreement and exclusive distribution agreement as defined under Explanations (b) and (c) respectively, to Section 3(4), as OP-1 provides aftersales services for its machine exclusively through OP-4;
(c) The agreement between OP-1 and OP-4 amounts to refusal to deal as defined under Explanation (d) to Section 3(4) because the OPs are not sharing encryption/passwords with the Informant to enable it to get the machine serviced from any third party outside;
(d) The conduct of the OPs is causing an appreciable adverse effect on competition (‘AAEC’) in India where competition does not even exist in both the Relevant Markets as delineated.
12. As per the Informant, due to the aforesaid conduct of the OPs, the Informant is incurring huge losses not only in financial terms but also in terms of loss of goodwill. Shifting critically ill/ICU patients who are kept alive on life support system and dependent on the machine to CT Scan room because of non-working of portable CT scan machine at the hospital, poses extremely high risks. Even the doctors at Medanta Hospital, Gurugram have written letters in this regard to the Informant, however, it was unable to get the machine operative by the OPs.
13. Based on the facts and allegations stated above, the Informant prayed that the Commission (i) directs an inquiry and/or investigation be held into the matter by the Director General; (ii) directs the OPs to cease and desist from indulging in anticompetitive activities; (iii) impose penalty on the OPs; (iv) directs the OPs to provide passwords/encryption, technical knowhow and spare parts necessary and essential for service of the Informant’s machine; (v) directs the OPs to provide a copy of the agreement between Samsung Group and OP-4 to bring out the price paid by OP-4 to Samsung Group; (vi) directs the OPs to honour their commitment and service the machine of the Informant as per the terms of the PO; (vii) directs the OPs to honour their commitment and service the machine of the Informant as per mutually agreed terms; (viii) directs the OPs to provide penalty in respect of failure to keep uptime of the machine of the Informant; (ix) directs the OPs to pay back the capital cost incurred by the Informant and increased cost forcefully charged by the OPs from the Informant over the years; (x) directs the OPs to take back/revoke the EoL issued; (xi) give a finding on contravention of the provisions of the Act by the OPs on the basis of which compensation can be claimed by the Informant from Appellate Tribunal; and/or (xii) pass any such other order as the Commission deems appropriate in the present facts and circumstances of the matter.
14. Further, the Informant also filed a separate application under Section 33 of the Act seeking interim relief stating that the machine is lying idle at Medanta Hospital, Gurugram and this is causing a lot of inconvenience to the doctors and patients. As such, it prayed the Commission (i) to direct the OPs to immediately restore the machine in proper and full working condition if not at terms of the PO but then at least at rates charged previously i.e. ₹15,00,000/- + 2% escalation per year starting from 26.09.2016 amounting to ₹16,56,121/-; and/or (ii) pass any other order which the Commission may deem fit under the present circumstances, equity and justice.
15. The Commission considered the Information and the application for interim relief filed by the Informant in its ordinary meeting held on 15.02.2022, and vide order of even date, forwarded an electronic copy of the Information to OP-1 and OP-4, seeking their comments/response thereto (including replies on certain specific queries), and also to file its rejoinder to such response(s), if any.
16. In its response dated 18.04.2022 to the Information, OP-4 submitted as follows:
(a) The Informant has stated certain facts wrongly before the Commission. The actual facts are that vide e-mail dated 03.11.2012, a quotation was shared with the Informant for supply and installation of one Ceretom–eight slice CT scanner (portable) along with all available accessories. Vide letter dated 05.11.2012, terms and conditions were finalised between the Informant and OP-4 for initial two machines and then subsequent three more machines, including CMC and AMC. Accordingly, such discounted prices were for more than one machine; however, the Informant ended up purchasing only one machine with accessories from OP-1. Thus, one such machine was delivered, installed and made operational on 13.02.2013.
(b) For the first year, the aforesaid machine was covered under warranty; thereafter, a Labour AMC (‘LAMC’) which included only maintenance, servicing and upkeep of machines, but not the cost of spare parts, was entered into between the Informant and OP-4 on 12.02.2014 for a period of one year ending on 11.02.2015 and the same was subsequently revised and renewed on yearly basis for two years i.e. up to 11.02.2017. While LAMC for 2016-17 was still operational, the Informant entered into Comprehensive AMC (‘CAMC’) on 26.09.2016 (which included cost of spare parts) with OP-4 for its machine, renewed till 25.09.2021. As per the terms of the CAMC, the new revised quote was ₹15,00,000/- p.a. excluding taxes. Along with the said price, a 2% annual escalation was also agreed upon between the parties. The Informant renewed the CAMC for a consecutive period of 5 years i.e. till 2021.
(c) The Informant agreed to such increase in rates of its own volition because not only was it fully satisfied with the services offered by OP-4, but it was also well aware that it had negotiated the original rates by indulging in misrepresentation and deceit. Terms of PO dated 05.11.2012 were based on reliance that the Informant intends to place orders for multiple machines and not just one machine. It was not at all feasible for OP-4 to provide CAMC service at requested price for only one machine to the Informant. Further, as per e-mails exchanged between the Informant and OP-4 in 2016, CAMC of ₹15,00,000/- was much lower than direct CAMC with the manufacturer. In fact, the Informant was also aware that the CAMC charged was less than several other customers of OP-4.
(d) On 23.09.2021, before expiry of CAMC dated 26.09.2016, new CAMC quotes of ₹65,00,000/- (including X-ray Tubes and excluding taxes) and ₹35,00,000/-(excluding X-ray Tubes and taxes) for continued maintenance services were issued by OP-4. Upon request of the Informant and after negotiations and discussions, considering long association with the Informant, OP-4 even offered 10% discount whereafter which, prices came down to ₹58,50,000/- and ₹31,50,000/- respectively.
(e) Such prices offered were the best feasible price and were settled considering the condition and EoL period of the machine. The Informant is well aware of this. The Informant’s machine sold on 05.11.2012 had only a year and a half left of its commercially serviceable life. Hence, continuing earlier CAMC charges as quoted in CAMC dated 26.09.2016 with 2% escalation would have been commercially unfeasible for OP-4. OP-4 stated that one-year CAMC charges are higher than five-year CAMC as risk of spare parts failure is distributed over five years and therefore, becomes lesser than concentrated risk of one year (that too in latter life of machine which has commercial life of 10 years) where chances of spare parts failure is much higher. CAMC offered by OP-4 to all its customers is driven by same calculations and considerations, and it ensures that said terms stay uniform across the board, without any undue favours to a customer.
17. Regarding specific allegations made by the Informant, OP-4’s submissions are as follows:
(a) In relation to issuance of EoL to the Informant, OP-4 submitted that issuing of EoL certificates for diagnostic machines is a common practice. As per International Standard IEC 60601-1 which is generally followed for medical equipment in India, expected serviceable life of medical machines/units shall be as decided by manufacturer and ISO 14971 which is mandatory for manufacturers requiring them to provide information on maximum expected product service life. This concept of EoL marks the end of manufacturer’s obligation to make spare parts of machine available to purchaser or provide maintenance of the same. The said practice is undertaken to ensure the accuracy and innovation in machines, and also to allow manufacturers to move away from supply and maintenance of old equipments. EoL does not mean that the machine itself is rendered useless, the same only extinguishes the liability of the manufacturer to provide spare parts and manage upkeep of the machine. The Informant is also well aware that even most government tenders consider 10 years to be the expected life of such machine. In fact, some of spare parts like X-ray tube costs more than ₹20,00,000/-, and if required to be changed, the said costs will be borne by OP-4. Further, the Informant is attempting to profiteer by making illegal claims against the OPs after having used (to full satisfaction) the machine for virtually its entire serviceable life.
(b) With respect to delineation of relevant market, OP-4 submitted that market for ‘portable CT Scan Machines’ may not be defined as a relevant market separate from ‘CT Scan Machines’ as the end-use of both is same.
(c) Regarding the dominance of OPs, it has been submitted that there are other companies in the market also which are manufacturing and supplying portable CT scan machines and the OPs are not the only entity in business of such machines. Such other products are: See Factor CT3 of Epica, Airo of Mobius, Loop X of Brainlab, O Arm of Medtronic, Studio imaging Ring of Elekta, and On-Site of Siemens. These other products may not be similar in design or quality to the machines and equipment provided by the OPs; however, they would serve as functional substitute to the same. Therefore, the OPs are not in a dominant position or abusing the same in any manner, whatsoever. Further, the OPs have sold only 23 Ceretom CT Scan machines on pan India basis since 2013. Hence, they cannot be a dominant player by any stretch of imagination.
(d) In relation to servicing of the machine, it has been submitted that all passwords for operation of the machine/unit as also the user manual etc. were shared with the Informant. The Informant is well-aware from the outset that only properly trained and skilled technicians can access and repair the machine; any untrained person trying to calibrate the machine may cause radiation accidents and therefore, the same is not advisable. The Informant has no right to demand technical know-how etc. from OP-4 as the same will be against the terms of Exclusive Distributorship Agreement entered into between OP-1 and OP-4. The know-how and details sought by the Informant are proprietary to the manufacturer and therefore, OP-4 is not in a position to disclose the same to the Informant. It is OP-1 who holds rights in the patents, pending patents, trade secrets, trademarks, copyright, etc. vested in the machine purchased by the Informant. Considering vested IP Rights of OP-1 in the machine, refusal to share the same with the Informant cannot be seen as an abuse of dominant position. Further, the present case is nothing but a ruse by the Informant to extract proprietary information from the OPs and misuse the same along with its technology partners.
(e) Regarding downtime penalty, it was submitted that during non-subsistence of maintenance contract, there can be no downtime penalty.
(f) OP-4, regarding software upgrade, OP-4 submitted that it never forced the Informant to take/upgrade any software or otherwise. Software are essential for operational efficiency and accuracy of the machine and therefore, it is advisable to install and keep it upgraded. It was the decision of the Informant all along to take the same or have the upgrade.
(g) Regarding procurement of spare parts, it has been submitted that the Informant is free to procure spare parts and services from the open market. Many of the spare parts are freely available in the market. OP-4 does not have any dominance in spare part and services market as well. It never forced the Informant to purchase spare parts from it; in fact, there have been instances when the Informant procured certain parts (batteries) from third party providers, and OP-4 assisted the Informant in installing the same without taking any objection to it. Further, although OP-4 is the exclusive authorised service provider for the machine in question, it has no objection if the Informant decides to get the machine serviced from anywhere else. However, in such situation, OP-4 cannot be held liable for any errors or malfunctions in the machine thereafter.
18. As sought by the Commission, OP-4 also provided copies of the agreements entered into between itself and certain other customers as well as submitted the charges (In ₹) collected from the Informant for providing aftersales services by OP-4, which are as follows:
(In ₹)
