Ministry of Corporate Affairs Vs. Apollo Tyres Ltd. & Ors. (Competition Commission of India)
The Competition Commission of India (CCI) had passed a final order dated 31.08.2018 against five Tyre companies namely Apollo Tyres Ltd., MRF Ltd., CEAT Ltd., JK Tyre and Industries Ltd., Birla Tyres Ltd. and their association i.e. Automotive Tyre Manufacturers Association (ATMA) for indulging in cartelisation by acting in concert to increase the prices of cross ply/bias tyres variants sold by each of them in the replacement market and to limit and control production and supply in the said market, thereby contravening the provisions of Section 3(3)(a) and 3(3)(b) read with Section 3(1) of the Competition Act, 2002 (‘the Act’).
Earlier, the said order of the CCI had been kept in sealed cover as per the directions of the Hon’ble Madras High Court, issued in W.A. No. 529 of 2018, preferred by MRF Limited. Thereafter, the Division Bench of the Hon’ble Madras High Court vide an order dated 06.01.2022, dismissed the aforesaid writ appeal. Aggrieved with the same, the tyre companies preferred SLPs before the Hon’ble Supreme Court, which were dismissed vide its order dated 28.01.2022.
This case was initiated on the basis of a reference received from the Ministry of Corporate Affairs (MCA) under Section 19(1)(b) of the Act. The said reference was based on a representation made by All India Tyre Dealers Federation (AITDF) to the MCA.
The Commission noted that the tyre manufactures had exchanged price-sensitive data amongst them through the platform of their association, namely, Automotive Tyre Manufacturers Association (ATMA), and had taken collective decisions on the prices of tyres. The Commission also found that ATMA collected and compiled information relating to company-wise and segment-wise data (both monthly and cumulative) on production, domestic sales and export of tyres on a real-time basis. Thus, the Commission noted that the sharing of such sensitive information made the co-ordination easier amongst the tyre manufacturers.
Accordingly, the CCI held the five tyre manufacturers and ATMA guilty of contravention of the provisions of Section 3 of the Act, which prohibits anti-competitive agreements including cartels, during 2011-2012.
The CCI imposed penalties of Rs. 425.53 crore on Apollo Tyres, Rs. 622.09 crore on MRF Ltd., Rs. 252.16 crore on CEAT Ltd., Rs. 309.95 crore on JK Tyre and Rs. 178.33 crore on Birla Tyres, besides passing a cease and desist order. In addition, a penalty of Rs. 0.084 crore was also imposed on ATMA. ATMA was also directed to disengage and disassociate itself from collecting wholesale and retail prices through the member tyre companies or otherwise.
Further, certain individuals of the aforesaid tyre companies and ATMA were held liable for the anti-competitive conduct of their respective companies/association in terms of the provisions of Section 48 of the Act.
FULL TEXT OF THE ORDER OF COMPETITION COMMISSION OF INDIA
Order under Section 27 of the Competition Act, 2002
1. The present matter has been initiated on the basis of a reference received from the Ministry of Corporate Affairs (MCA) under Section 19(1)(b) of the Competition Act, 2002 (the Act) wherein it was alleged that domestic tyre manufacturers such as Apollo Tyres Limited (‘OP-1’), MRF Ltd. (‘OP-2’), CEAT Ltd. (‘OP-3’), JK Tyre and Industries Ltd. (‘OP-4’), Birla Tyres Ltd. (‘OP-5’) and Automotive Tyre Manufacturers’ Association (‘ATMA’/‘OP-6’) have violated the provisions of Section 3 of the Act.
2. The said reference was based on a representation made by Shri S P Singh, convener of All India Tyre Dealers Federation (AITDF) to the MCA, wherein it was alleged that OP-1 to OP-5 who controlled over 90% of the tyre production in India were engaged in price parallelism under the aegis of ATMA. It was contended that the OPs raised the prices of tyres and tubes on the pretext of increase in prices of natural rubber and other inputs, but subsequent reduction in the prices of these raw materials was not followed by a corresponding decrease in the price of tyres, which should otherwise have occurred in a competitive market.
3. It was alleged that in 2005, when the natural rubber prices increased from Rs. 78/kg to Rs. 114/kg, the tyre prices were raised across the board by 12-15%. However, when the prices of rubber went down to Rs. 82/kg, the subsequent roll back in tyre prices was only to the tune of 3-4%. Again in 2008 when the natural rubber prices went up from Rs. 75/kg to Rs. 142/kg and crude oil prices also shot up from $65/barrel to $140/barrel, prices increased across all categories of tyres by 17-22%. However, when in December 2008/ January 2009, natural rubber prices dropped to Rs. 69/Kg, crude oil prices decreased and excise duty on tyres was also slashed, the tyre prices were not rolled back. Also in 2011-12, when the natural rubber prices shot up to Rs. 240/kg, tyre prices were hiked by 18-25%, but when the natural rubber prices dropped to Rs. 145/kg in 2013-14, there was no corresponding drop in the tyre prices.
4. Therefore, it was stated that the benefit from a steep decline in the natural rubber prices was not being transferred to the tyre consumers as the domestic tyre industry was maintaining a self-styled ‘price control’ on tyre pricing and their trade practice, by strangulating the free and fair play of market forces leading to a zoom in the ‘declared’ margins for the leading domestic tyre companies. It was further alleged that OP-1 to OP-5 were also imposing tariff and non-tariff barriers through their trade association OP-6 to strengthen their control on the domestic tyre market. Furthermore, closing down or acquisition of inefficient players had led to the concentration of the Indian tyre market in the hands of a few players.
5. Based upon such allegations, the Commission framed a prima facie opinion, and vide its order dated 24th June, 2014 passed under Section 26(1) of the Act, observed that the act of not passing on the benefit of reduction in prices of major raw materials/ inputs by the OPs to the tyre consumers indicated lack of competition amongst them and some sort of understanding between them especially in the replacement market. The Commission was therefore prima facie of the opinion that the case required investigation by the DG to find out the presence of any ‘agreement’ or ‘understanding’ within the meaning of Section 3 of the Act between the market players (OP-1 to OP-5) and the role of the association i.e. OP-6 in maintaining/ increasing the tyre prices. The Commission hence, directed the DG to cause an investigation into the matter and submit its report.
Investigation by the DG
6. The DG, after investigating the matter, submitted its report on 8th December, 2015. It examined the structure of the domestic tyre market and found it to be highly concentrated with OP-1 to OP-5 having combined market share in terms of turnover of around 83% of the total industry turnover. Truck-bus bias (TBB) tyre segment constituted about 74% of the total domestic sales as compared to about 26% of Truck-Bus Radial (TBR) tyre segment. For its investigation, the DG found that cross ply or bias tyre constituted about 38% of the total revenue of the domestic tyre industry and thus, identified it as the representative tyre segment for further analysis. Further, the DG for the purpose of price comparison or analysis, observed that the prevailing price of tyres in the domestic market was primarily driven by the Net Dealer Price (NDP) applicable across the country as the same is not only inclusive of local freight charges, but also that it is upon the dealers to pass on the discounts or incentives to the end customers depending upon the market conditions. Therefore, the data of NDP/NBP of truck-bus tyre of the OPs was considered for the purpose of price comparison/ analysis.
7. The DG, on examining the price trend of natural rubber and other key raw materials including the derivatives of crude oil, observed that the prices of raw materials increased considerably in the years 2010-11 and 2011-12, which resulted in decline in the operating margins (EBITDA) for the OPs in the said period. However, on easing of input cost pressures in 2012-13 and 2013-14, the operating margins (EBITDA) of the OPs increased significantly. Further, despite considerable decline in key raw material prices in the year 2013-14, the OPs reduced the TBB tyre prices by a small range only. The evidences strongly indicated that the OPs had acted in a concerted manner to increase and maintain the tyre prices at higher levels despite significant decline in the prices of natural rubber and other key raw materials. The price level of the OPs could not have been possible had there been any real competition between them in the replacement market.
8. The DG noted a comparative analysis of the impact of key raw material costs of the OPs as a percentage of their sales revenue indicates that after touching a peak height of nearly 70% in the year 2010-11, the same moderated gradually and came down to around 60%. For instance, in the case of OP-5, the raw material cost which went up as high as 79.45% in year 2011-12 declined by about 13% by 2013-14. The impact of fluctuations in raw material cost had a direct impact on the operating margin (EBITDA) of the OPs over these years and high and disproportionate growth in the operating margins of the OPs when compared with the turnover growth of the OPs indicates that the benefit of decline in input cost was not passed on to the consumers especially in the years 2012-13 and 2013-14.
9. The DG analysed the price movement of tyres of the OPs by comparing the top selling and most representative variant of the TBB tyre segment during the five year period (1st March, 2009 to 28th Feb, 2014) and found that the prices of the OPs moved in tandem and in similar direction during the said period. The DG concluded that in absolute terms of the prices of tyres, price revision by the OPs exhibited strong price parallelism in the domestic tyre industry. The DG found high degree of positive pairwise correlation between the absolute tyre prices charged by the OPs during the period of 2011-2014 thereby indicating movement of tyre prices in tandem. On analysing the yearly price increase by the OPs, it was observed by the DG that in the years 2011-12 and 2012-13, the percentage of price increase was nearly identical in-spite of the fact that the OPs operated at different efficiency levels.
10. It was observed by the DG that mere parallel pricing in an oligopolistic market structure alone is not sufficient to infer about the existence of a cartel amongst the OPs. Therefore, certain ‘Plus Factors’, something beyond ‘Conscious Parallelism’, identified in the present case, was required to add credence to the conclusion of a cartel amongst the OPs. The DG found that the record of ATMA (OP-6) clearly reveals that the association, through various meetings of expert group level and sub-group level (comprising of only five member companies i.e. OP-1 to OP-5), of which no minutes were maintained and this provided the OPs ample opportunities to meet and discuss about the cost, price and profit margin, at regular intervals. OP-6 also provided them a platform to not only formulate a common pricing strategy but also to monitor the outcome. Further, email communications relating to commercially sensitive information/ pricing strategy between the OPs were found which defy any business rationale except the intent for a coordinated action. Discussion on ‘RM cost increase Vs price increase’ in February 2011 based on raw material consumption for TBB, under the aegis of OP-6, strongly indicated coordinated price increase (of approximately same magnitude) by the OPs, particularly in the years 2011-12 and 2012-13. Email communications in the month of May 2011 between MRF (OP-2) and Apollo (OP-1) through the Director General, OP-6 with regard to pricing strategy for price increase despite softening of natural rubber prices to maintain a healthy EBITDA margins, suggested active collusion in the form of an ‘agreement’ in terms of Section 2(b) of the Act, to indirectly determine the tyre prices.
11. The DG further found that unusual stability in production and the inter se market share of the OPs, particularly in the replacement market, during the period 2011-12 to 2013-14 are significant plus factors in the case. The capacity utilisation figures of the OPs indicated excess capacity in the TBB tyre segment, but despite that the OPs chose not to compete in the market and settled for stable shares.
12. It was found that the decision of the OPs regarding price increase was invariant with the fluctuations in demand in the domestic market, which is very uncommon in a competitive market. The non-transparent process of decision making on price changes followed by the OPs and their failures to justify such decisions, also substantiates the inference about the existence of a cartel amongst them.
13. The DG also concluded that the analysis of financial performance of the OPs also strongly suggested about success of a cartel, as the OPs could achieve unusually high growth in operating margins (EBITDA) when compared with the growth in demand/turnover of TBB tyres during the three year period from 2011-12 to 2013-14.
14. The DG further unearthed a bunch of email correspondences regarding price rise exchanged between the OPs. One of such emails is sent by Mr. Rajiv Budhraja, DG ATMA/OP-6 (from [email protected]) to Mr. Neeraj Kanwar of OP-1 on 18th May, 2011 at 9.50 AM on his email address [email protected]. Further, the DG has also relied upon two other emails that were sent by Shri Budhraja on the same date to Shri Kanwar regarding his meeting with Shri Varghese.
15. Based on the above, the DG concluded that OP-1 – OP-5, under the aegis of the association OP-6, indulged in cartel activity by indirectly determining the sale prices of TBB tyres from 2011-12 to 2013-14 in the domestic tyre market in contravention of the provisions of Section 3(3) (a) read with Section 3(1) of the Act.
16. The DG also found the following key persons to be liable under the provisions of Section 48 of the Act:-
i. Shri Neeraj Kanwar, Vice-Chairman and Managing Director (OP-1)
ii. Shri Satish Sharma, President Asia Pacific, Middle East and Africa (OP-1)
iii. Shri K.M. Mammen, Chairman and Managing Director (OP-2)
iv. Shri Koshy K Varghese, Executive Vice- President (Marketing) (OP-2)
v. Shri Anant Goenka, Managing Director (OP-3)
vi. Shri Arnab Banerjee, Executive Director (Operations) (OP-3)
vii. Shri Nitish Bajaj, Vice-President (Marketing) (OP-3)
viii. Shri Raghupati Singhania, Chairman and Managing Director (OP-4)
ix. Shri Vikram Malhotra, Marketing Director (OP-4)
x. Shri Arun Kumar Bajoria, President (OP-4)
xi. Shri Basant Kumar Birla, Chairman (OP-5)
xii. Shri Ashwani Maheshwari, President (OP-5)
xiii. Shri Arvind Kumar Singh, President/ Chief Executive Officer (OP-5)
xiv. Shri Rajiv Budhraja, Director General (OP-6)
xv. Shri Neeraj Kanwar, Ex-Chairman, Managing Committee (OP-6)
Consideration of the DG Report by the Commission
17. The Commission considered the investigation report submitted by the DG in its ordinary meeting held on 18th February, 2016 and vide its order of even date decided to forward copies thereof to the OPs and the aforesaid individuals for filing their respective replies/ objections thereto, if any.
Replies/ Objections/ Submissions of the Parties
18. The contentions raised by the various tyre manufacturers/ OPs in their written replies/ objections/ suggestions as well as before the Commission during the oral hearing are summarised below:
Replies/ Objections/Submissions of OP-1/ Apollo Tyres Ltd. (Apollo)
19. It was submitted by OP-1 that the DG’s analysis of price movements is incorrect and misleading as there are serious calculation errors while comparing the rate of change in prices of tyres in the TBB segment. Consequently, the inference made by the DG that price changes were similar as well as simultaneous is grossly incorrect. Further, the degree of association between coefficient of correlation of price changes by the OPs is significantly lower than what has been concluded by the DG when analysed over the period of alleged cartelisation. The correlation analysis has been done by the DG for a longer period i.e. from 2009-2014, longer than the alleged cartel period (2011-14). It was pointed out that the consistency in the errors in various calculations done by the DG strongly indicates an intention to reach a finding of infringement by the OPs.
20. Objection was also raised regarding incomparable products being analysed by the DG during the investigation and it was submitted that the products compared are not actually competing and more specifically that the products of OP-3 and OP-4 are not competing products. There was no effort by the DG to investigate changes in prices of other comparable products and the DG ought to have analysed a larger product group that can be considered representative of the segment.
21. The DG’s reliance on email containing the discussion about the trends in raw material prices and pricing strategy between OP-1 and OP-2 through Mr. Rajiv Budhraja, has been controverted by submitting that the discussion involves data available in the public domain and it was for a prior time period. It was also averred that not only the context of exchange of email has been ignored by the DG but the DG has also not been able to show that OP-1 had altered its pricing strategy based on the same discussion. It was further stated that the primary purpose of OP-6 is to act as a channel of communication between the industry and the government departments and its role is limited to reporting trends in relation to raw materials. The evidence gathered by the DG shows that the DG has not been able to establish a collusive ‘agreement’ among the OPs and the case is built on pure speculation and conjectures.
22. It was submitted that comparing Net Dealer Price/ Net Billing Price of the OP’s products is wholly misconstrued and not reflective of the actual market scenario as NDP/NBP does not include discounts, schemes, freight etc. that are included while determining the final price to be paid by the dealer.
23. OP-1 also controverted the DG’s finding that the companies have a centralised process for making decisions in relation to pricing and the same is settled without any deliberations on various factors attributing to price increase or decrease and stated that it has submitted multiple internal emails involving price deliberations based on independent reasoning. It further stated that the DG has also failed to consider the capital investments made by OP-1 to set up its facility for radial tyres and other factors such as overhead costs, administrative expenses, interest on working capital, employee benefit cost, depreciation and finance costs etc. and to substantiate the same. Attention was drawn to the statement made by Mr. Satish Sharma during examination by the DG, explaining various factors leading to price change.
24. It was submitted that based on stray instances of sub-group meetings of OP-6, the DG’s conclusion that these meetings facilitated concerted action is misconstrued and the DG has failed to establish regularity in such meetings and their anti- competitive effect.
25. The findings by the DG with respect to plus factors have also been averred to be inaccurate. The analysis of combined Operating Margins to Turnover by the DG to show higher operating margins despite slack in demand was termed as misleading by OP-1 by submitting that profitability is linked to cost structure of an enterprise and not to its turnover and operating margins are not a good indicator of performance of a company.
26. The analysis by the DG with respect to annual sales of TBB tyre for each OP in the replacement market concluding that their market shares over the years remained stable due to understanding amongst them, was objected to by relying on monthly sales figures of the OPs and inferring existence of appreciable shifts in the market share of each OP on account of increase in the share of radial tyres in TBB segment.
27. With respect to the DG’s finding regarding relationship between demand and price of TBB tyres, that their price changes were not driven by competitive pressures of the market, OP-1 responded by stating that the DG has failed to account for the increase in share of radial tyres in the truck bus segment and demand fluctuations which are due to increase in popularity of TBR tyres which are substitutable with TBB tyres.
28. The DG’s finding that despite having excess capacity, the OPs colluded not to compete in the market and settle for stable shares, was attributed to weaker demands as well as gradual shift from bias tyres to radial tyres and rapid increase in the capacity of the TBR segment.
29. It was stated that the DG failed to consider the effect of imports of TBR tyres on TBB tyre segment which constitutes a significant part of the domestic tyre industry and is inter-changeable with the TBB tyres. It was submitted that the percentage of total imports to total tyre production had been substantial during the alleged cartel period and ranged from 7.22% to 13.59 %. Thus, any increase in the domestic prices of tyres was immediately countered by an increase in imports which provided a significant competitive constraint on the domestic tyre industry.
30. It was further submitted that wide varieties of tyres are offered by the OPs depending upon end-use, load, overload and mileage which cannot be considered homogeneous and sufficient to reach a finding of violation on that basis alone. The retreading tyre market also provides a viable alternate market acting as a competitive constraint on the tyre manufacturers. The fluctuations in demand in the replacement market depending upon overloading norms, retreading intensity, miles driven etc. being less cyclical prevents collusion amongst the OPs.
31. It was stated that the DG has failed to observe the principles of natural justice during the course of investigation as before drawing an adverse inference from the information / data submitted by OP-1, no opportunity to be heard was granted by the DG to it, despite repeated written requests in each of its replies / submissions. It was further submitted that the reference filed by MCA is not in conformity with Section 19(1) (b) of the Act read with Regulations 2(j), 10 and 11 of the Competition Commission of India (General) Regulations, 2009 (General Regulations). It was averred that the MCA forwarded the representation sent by AITDF which did not contain any specific allegations against any OP and thus, the Commission ought not to have directed the DG to commence an investigation.
32. It was further stated that the DG has demanded irrelevant information / documents to be produced by the OPs during the course of the investigation and by compelling OP-1 to produce the entire email dump of K.M. Mammen, the DG has exceeded its jurisdiction as envisaged under the Act and the General Regulations. It was also submitted that the information sought by the DG is beyond the mandate of the prima facie order wherein the Hon’ble Commission had found a violation of the provisions of the Act by the OPs for the period subsequent to 2011-12. However, the DG, in the notice issued on 11th March, 2015, had sought information from OP-1 for the period from 2009 to 2014.
33. It was also stated that the DG had not permitted the legal representatives of OP-1 to be present during the recording of statements of its persons and in the absence of any specific prohibition under the Act, the presence of legal representatives cannot be restricted.
34. The DG, after analysing certain structural characteristics of the Indian tyre industry, has concluded that it is conducive to the formation and maintenance of a cartel. The characteristics relied upon by DG for arriving at the above conclusion as stated in the reply of OP-1 are:
a) Heavy concentration and entry barriers
The DG has stated that there is heavy concentration in the domestic tyre industry where the OPs have a combined market share of 83% and in the TBB segment, the same is stated to be about 94%. However, bias and radial tyres are substitutable. Further, import of radial tyres from China which are considerably cheaper (almost 30% cheaper than domestic bias tyres) provide very stiff competition to the domestic tyre manufacturers in the truck bus segment.
b) Homogenous product
The DG has stated that due to the homogenous nature of the product, the tyre industry is conducive for cartelisation. However, there is a wide range of products that are offered and at the broadest level, tyres vary depending on the vehicle into which they are to be fitted such as commercial vehicles (buses and trucks), passenger cars, off road and tractors. Even within each of these categories, there exist sub-categories based on size, quality and end-usage of tyres.
c) Consumer dependence
The DG has stated that consumers in the TBB segment are highly dependent on the domestic tyre manufactures. However, it is stated that the DG has ignored the fact that there is a persistent threat to demand from retreaded tyres which are viewed as an important substitute to new tyres.
d) Predictable demand
The DG has stated that due to the predictability of demand in both Original Equipment Manufacturer (OEM) and replacement markets, the tyre industry is conducive to cartel. However, the demand from the OEM segment is highly cyclical as it is closely related to the demand for automobiles. Similarly, the demand in the replacement segment is highly non-cyclical and it depends on the on-road vehicle population, road conditions, vehicle scrapping, overloading norms, re-treading intensity, and miles driven etc.
e) Active trade association
The DG has stated that an active trade association provides a platform for anti-competitive activities. It was submitted that OP-6 acts as a representative of ten tyre manufacturers but only five parties have been considered in the investigation which is arbitrary. There are 28 other manufacturers in the market which reduces the stability of cartel amongst the OPs. A reference was also made to an observation in RTPE Case No. 20 of 2008 titled In re: All India Tyres Dealers’ Federation against Tyre Manufacturers regarding OP-6 that OP-6 conducts legitimate activities for the tyre industry. OP-6 is a highly compliant industry association and now all OP-6 meetings are conducted under the supervision of a competition law expert. Besides, the legal counsel of OP-6 regularly educates its members regarding competition law provisions and any developments thereto.
35. On the issue of penalty, it was submitted that should penalty be imposed on OP-1, the penalty be computed based upon turnover arising from the product in case only in which the infringement is established and in the present case, it be restricted to the turnover of sales of Apollo 10.00-20 16 PR XT 7 (“XT 7”), i.e. a tyre variant sold in the TBB segment in the replacement market as all the allegations in the DG report pertain only to the said segment. It was submitted that the principle of proportionality must also be followed while imposing any penalty.
Replies/ Objections/Submissions of OP-2/ MRF Tyres Ltd. (MRF)
36. OP-2 has submitted that the DG has failed to show the existence of an ‘agreement’ amongst the OPs to prove a cartel under Section 3(3) (a) and 3(3) (b) of the Act which is a condition precedent to establish an allegation of cartel. The report also fails to show Appreciable Adverse Effect on Competition (AAEC) as per Section 19 (3) of the Act. Further, the DG has wrongly relied on theoretical approach of economic principles of price parallelism. The DG has ignored facts and data given by OP-2 and the entire investigation is a fishing and roving enquiry with presupposed mind without any cogent data.
37. It was further submitted that the investigation report has a fatal flaw as the findings of price parallelism are based on incomparable tyres. The tyre sizes chosen by the DG for OP-1, OP-2, and OP-3 relate to overloading application whereas the tyre sizes chosen for OP-4 and OP-5 are mileage tyres and thus, the two cannot be compared. Next, the report for different OPs compares net dealer prices which does not indicate whether the sales invoice reflect discounts like turnover discounts given vide credit notes, volume discounts, schemes etc. and thus, in the absence of any clarification in this regard and not comparing the actual price paid to the OPs, the exercise by the DG is not according to the definition of price under the Act.
38. The computational errors with respect to the annual price increase in percentage terms in the DG report has led to wrong conclusions of price parallelism. The correct data, when analysed, shows that by no stretch of imagination, increase in prices by the various OPs can be considered as parallel pricing. The inter relationship between the prices of the OPs’ was much weaker during the alleged cartel period than before the cartel period. It was further argued that it is incorrect to base a finding of cartel on strong correlation coefficient since the market participants in any trade or industry act independently and merely because the correlation coefficient is high, it does not imply that there is a logical nexus between price rise of one OP with the other, or that one is the cause of the other.
39. The DG has stated that the combined market share of the OPs is about 83% of the total industry turnover. OP-2 has questioned this as to why has the DG considered only 83% out of the total, when in his report he has noted that there are 39 tyre companies in India out of which 10 companies together have 95% share in the market. The basis for excluding 5 tyre companies which include multinational giants namely Michelin, Goodyear, Bridgestone and Continental, from the ambit of investigation, has not been stated by the DG.
40. It was further stated by OP-2 that as TBR tyres are substitutable products for TBB tyres, the Truck and Bus segment needs to be seen as a whole. It is significant to note that the use of radial tyres in passenger cars is almost 100%. At present, share of radial tyres in truck bus segment is 33% and therefore, the said segment cannot be excluded in the investigation. Global multinational tyre manufacturers sell TBB tyres in multiple countries and given their global presence and reach across most countries, global turnover and R&D expenditure, the competition faced by OP-2 from global multinational tyre manufacturers cannot be excluded from consideration in the investigation.
41. It was stated by the DG that the quantum of price increase by OP-1 to OP-4 despite decline in the prices of key raw materials in 2012-13 strongly indicates that there was coordination causing price increase. However, as per OP-2, it is wrongly assumed that decline in prices of key raw materials will result in decrease in tyre prices. The prices of natural rubber are extremely volatile so much so that the Tariff Commission has recommended that this aspect of the selling price trends in natural rubber and its corresponding relation with the cost of production needs to be studied. In these circumstances, the question of OP-2 reducing tyre prices arises only if there were a foreseeable stability in the natural rubber prices along with other market factors and forces including competition with other tyre companies. As per OP-2, the decrease and increase of raw material prices is not the sole criteria for pricing of the product and increase in operating margin by itself does not indicate any coordinate action.
42. With respect to the operating margins (EBITDA) of OP-2’s tyres for the years 2009-10 to 2013-14, it was stated that the Hon’ble Commission in its order dated 30th October, 2012 in RTPE Case No. 20 of 2008 exonerated the tyre companies including OP-2 which covered the period from 1st April, 2005 to 31st March, 2010 and in fact, AITDF referred to the price revision on 1st July, 2011 (para 71 of the said order). However, it may be noted that the margins for 2011-12 were higher than the margins for 2010-11. Also, increase in EBITDA is not contrary to law. EBITDA increased in 2012-13 and 2013-14 for the tyre industry as a whole. The margins of 2011-12 were higher than that of 2010-11 and continued to rise in 2012-13. It was argued by the learned counsel for OP-2 that there is no law limiting the operating margins of the companies. There was no disproportionate growth in the operating margin of OP-2 which had gone up generally. There is no law mandating that decline in input costs must be passed on to the consumers. It must be appreciated that prices are not normally reduced immediately unless one sees a sustainable reduction in costs. Considering the relatively lower margins and consequently lower profits earned during 2010-11 and 2011-12, it was a natural response from market participants in the tyre industry to be gradual in reducing the prices.
43. The DG has alleged that decision making process of OP-2 is not transparent to which it was submitted that OP-2 follows a detailed process of discussion with Sales and Marketing team on the status of the product, competitive market scenario, capacity utilisation, costs and the product segments to which the tyre belongs. The competitive market scenario is periodically assessed, documented and approved by the Executive Vice President after obtaining inputs from the finance department, sales and product groups and considering various data/ documents. The DG has completely ignored these facts in its report.
44. The DG has relied on email communications of May 2011 between the market leaders i.e. OP-2 and OP-1 through the DG, OP-6 with regard to the strategy for price increase despite the softening of Natural Rubber prices to maintain healthy EBITDA suggesting active collusion to indirectly determine tyre prices. OP-2 has denied exchanging any email communication in May 2011 with OP-1 through the DG of OP-6 with regard to pricing strategy, as alleged. No copy of the email dated 18th May, 2011 at 9:50 AM from the DG, OP-6 to OP-1 was marked to it and it was not aware of the existence of such email till 4th November, 2015 when confronted by the DG while recording the statement of Mr. Koshy Varghese. It was submitted that OP-2 had revised its prices on 12th May, 2011 and consequently the question on any discussion on prices for deciding a ‘price strategy’ cannot and does not arise. The price increase of 1011% referred in the said email did not take place. On the contrary, but for an increase 3-5% during June 2011, there was absolutely no further price increase till 1st March, 2012.
45. It was observed by the DG that OP-1 and OP-4 in the year 2013-14 had held up the tyre prices. As per OP-2, the charge of coordination must fail since OP-4 had increased prices whereas the other OPs had reduced prices ranging from 0.80% to 5.22%. There was wide variation in the selling prices during 201314. It was pointed that the range of price revisions to the extent that price increase by OP-4 was 1.21% and price reduction by OP-5 was 5.22%.
46. As per the DG, it was the active role of OP-6 which led to an agreement on the pricing of tyres. Frequent meetings of various Expert Groups and Sub Groups in which no minutes were maintained provided a forum for formulating common strategy. However, OP-2 denied OP-6 having any role in its pricing decisions. Also, four sub group meetings were held for transacting specific agenda. Non-OP tyre manufacturers were also invited/ had attended these meetings through their purchase heads and not marketing heads.
47. As far as the issue of ‘plus factors’ is concerned, it has been made evident that the market of the OPs changed during 2011-12 to 2013-14. Further, the alleged stability in the production was due to broadly stagnant T&B market. The growth in operating margins was an industry wide phenomenon witnessed globally. The decision making of OP-2 was based on relevant data and the alleged sensitive information that was collated by OP-6 was to enable it to respond to the Government, Parliament and other agencies, targeting the domestic tyre industry with complaints.
Replies/ Objections/Submissions of OP-3 / Ceat Ltd. (Ceat)
48. OP-3 in its reply to the DG Report, submitted that the DG investigation is beyond the scope of the order of the Commission passed under Section 26(1) of the Act as the investigation is on a particular size of TBB tyres, excluding the different market segments referred to in that order of the Commission. It was submitted that the DG failed to include TBR tyres and global giants including Bridgestone, Yokohama, Michelin, Continental, Goodyear and others having global presence, in its investigation. Further, the direction of the Hon’ble Commission was to conduct an investigation for the period subsequent to the year 2011-12 whereas the investigation has been extended from 2009 to 2014.
49. Responding to the evidence relied upon and conclusion arrived at by the DG in relation to establishment of an ‘agreement’ amongst the OPs, it was submitted that the emails relied upon by the DG did not establish movement of price in collusion. The DG ought to have examined the relationship of price with the OPs’ profits in the preceding years which in the opinion of OP-3 would contradict any such collusion whatsoever. The DG failed to consider the factors set out in Section 19(3) of the Act to establish AAEC in the tyre industry.
50. On the issue of strong price parallelism, in terms of actual quantum and percentage change in product prices, it was submitted that the report contains arithmetical errors because of which inference and conclusion that prices were in tandem is erroneous and a patent error on the facts on record. The percentage variation in prices of OP-3 vis a vis the market leaders OP-1 and OP-2 shows wide variation and negates any claim of price parallelism and does not demonstrate the existence of a cartel.
51. It was stated by OP-3 that in the replacement market, it sells its product to the tyre dealers at the net dealer price along with discounts to promote inter- brand competition. It argued that it was erroneous on part of the DG to find correlation between net dealer price/ net billing price. Responding to the exchange of sensitive information via email in February 2011 with respect to raw material cost increase vs price increase undertaken by the OPs, it was submitted that the allegation does not manifest in the price changes effected in 2011-2012; neither the report establishes that OP-3 was furnished with the email prior to or subsequent to the meeting of the Purchase Committee on 21st February, 2011 nor does it establish that OP-3 acted in any manner in the direction of the alleged sensitive information. Also, such data cannot be considered to be commercially sensitive as it is factual information available in the public domain and furnished in the past years to the Government in response to the questions raised in Parliament or other authorities.
52. Further, the DG has made a fundamental error in analysing the sales/margins (EBITDA) of the OPs and concluding that the operating margins of the OPs have shown significant improvements from 2011-12 onwards, particularly in 2012-13 and 2013-14. The DG has also analysed whether there was a strong indication of price parallelism from 2011-12 to 2013-14. The DG itself in its summary has concluded that there was a decline in EBITDA of OP-3 in FYs 2010-11 and 2011-12. This, according to OP-3, establishes that the investigation report has been made in haste and in total disregard of the factors like impact of increased crude prices, competition in the market, reduction in net sales realisation of TBB tyres, variation in financial performance or margins of OP-3 etc.
53. It was further submitted that the DG has wrongly sought to create a nexus between the sub groups of OP-6 and the alleged price fixing of tyres in the TBB segment which is a mere fishing and roving exercise. The DG has investigated Mr. John M. John of OP- 3 who had clarified that the meeting on 16th May, 2011, which is relied on by the DG to allege collusion, was specifically to discuss the demand of Carbon Black manufacturers to increase the price of carbon black.
54. The DG has relied upon the email dated 18th May, 2011 sent by Mr. Rajiv Budhraja of OP-6 to the representatives of the member tyre companies of OP-6 on Raw Material Price Trend – Compound Cost Indexation to show exchange of sensitive information on pricing strategy. However, it was submitted that the discussion had nothing to do with TBB tyres and was only with respect to quarterly movements in common raw materials such as natural rubber, carbon black, rubber chemicals, butyl etc. On the contrary, the email clearly brings out the fact that the views expressed therein were personal and intended to help in capacity expansion. Also, the said email was neither shown to Mr. Anant Goenka nor to Mr. John M. John of OP-3 at the time of their deposition, nor brought to the attention of OP-3 thereafter.
55. The DG has alleged that certain characteristics of the domestic tyre market, particularly in the TBB segment, like high level of concentration, homogeneous product, high entry barriers, no significant technology changes, heavy dependence of customers, excess capacity of the OPs and active trade/ industry association, are factors conducive for cartelisation. In this regard, it was submitted that the DG has categorically conceded that the market is oligopolistic in nature as there is high degree of interdependence among the firms, which takes into account the likely reaction of other firms while formulating plans and strategies to arrive at decisions on pricing and output. This as per OP-3 reiterates its point that there exists competition in the market and pricing strategy is based on pricing by the competitors.
56. It was lastly submitted that OP-6 does not have any role to play in managing the affairs of OP-3 and its marketing strategy is independent of other tyre manufacturers. Issues commonly faced by the tyre industry were discussed at OP-6 meetings which are within the realm of law.
Replies/ Objections/Submissions of OP-4 / JK Tyres Ltd. (J K Tyres)
57. At the outset, it was requested that the DG report be rejected solely on the ground of gross negligence on the DG’s part for providing incorrect facts and figures which form the basis of the conclusions drawn by the DG. It was further submitted that it was premature on the part of the Commission to initiate proceedings under Section 48 of the Act against OP-4’s key individuals when a finding of contravention of Section 27 of the Act has not been made by the Commission.
58. It was submitted that the DG has conducted investigation with gross negligence and carelessness. It has been demonstrated in detail that the DG has committed several errors in calculating the annual price increase in percentage terms of the OPs. The DG has also made incorrect findings of facts and has drawn misleading conclusions to further the observation on price parallelism and has concluded that OP-4 has been a part of the cartel. In the absence of such incorrect and misleading observations, no such case can be made out against OP-4.
59. Claiming the DG report to be barren and devoid of cogent direct as well as indirect evidences to establish an agreement amongst the OPs to fix the prices of TBB tyres or to establish that OP-4 was part of any such agreement, it was submitted that even from the analysis of various emails relied upon by the DG, there is no proof that data in relation to tyre prices was shared or discussed with OP-4 in any of the OP-6 purchase group meetings. The DG’s conclusion that OP-4, under the aegis of OP-6, has indulged in cartelisation is clearly unsubstantiated and cannot be upheld. It was also argued by the learned counsel for OP-4 that OP-6 is not the only association which has sub-groups or committees which are responsible for various functions. Various associations such as Cellular Operators Association of India (COAI), Indian Sugar Mills Association (ISMA), and Indian Paper Manufacturers Association (IPMA) also have similar sub-groups and committees.
60. The DG’s findings of violation of the provisions of the Act are stated to be purely based on circumstantial evidences relating to alleged ‘price parallelism’ which is factually incorrect. The DG has miscalculated the annual changes in the OPs’ prices and correct calculations demonstrate varied price changes amongst the OPs which do not reflect any cartelisation. There is absolutely no pattern or similarity in terms of quantum or frequency of price changes over the five years analysed by the DG so as to denote any form of parallelism. The DG has incorrectly considered correlation of absolute prices and even for correlation of percentage changes in prices, weak correlation is demonstrated.
61. Clarifying the context of the email dated 18th February, 2011 received from OP-6 that was copied to Mr. Swaranjit Singh and Mr. V. K. Mathur of OP-4 in relation to a meeting dated 21st February, 2011, it was stated that various domestic/ international tyre manufacturers such as Bridgestone, Goodyear, TVS, Modi etc. were also marked in the same email but they have not been investigated by the DG because of which this email cannot be shown as evidence of the alleged cartel even so when the same was sent during non-cartel period i.e. from 1st March, 2010 to 28th February, 2011.
62. Attention has been drawn to the arguments made by the learned counsel for OP -6 that these emails on OP-6 purchase group meetings refer to information required by the Government in relation to imposition of Anti-Dumping Duty (ADD) and all these emails date prior to 12th August, 2011, the date on which OP-6 filed its request for the ‘sunset review’ of ADD. Moreover, there is no material on record to suggest that OP-4 indulged in any price discussion on tyre prices with any of the OPs. In fact, Mr. Swarnjit Singh who was the recipient of the email dated 18th February, 2011 on behalf of OP-4 and had also attended the OP-6 purchase group meetings, has not been held responsible by the DG under Section 48 of the Act and therefore, it would be fair to presume that OP-4 had no role to play in the alleged cartel.
63. It was further submitted that the plus factors identified by the DG have not been evaluated in consonance with the accepted economic theory and practice. The DG has ignored or misrepresented data and has not considered the characteristics of the Indian TBB market while analysing the alleged plus factors.
64. It was reiterated that the pricing decisions of OP-4 are based on its independent decision making and are not a result of any collusive conduct. The DG’s conclusion demonstrates an abject failure on its part to appreciate that the structure of the tyre industry will inevitably lead to independent yet similar business decisions by each market participant in response to its competitors.
65. Responding to the allegation that collusion resulted in improving profitability during the alleged cartel period (2011-12 to 2013-14), it was submitted that OP-4’s profit margins in the alleged cartel period were lower than or similar to its profit margins during 2009-10, the year for which the Commission had previously concluded that there was no cartel, and 2010-11, the year regarding which no allegation or finding has been made. Moreover, though the investigation has been limited to the TBB segment, but while analysing the profitability, the DG has relied on the consolidated profits of OP-4 from all the tyre segments. The DG has failed to assess other factors that may have been responsible for OP-4’s improved profitability.
66. Pointing to the DG’s finding on assessment of price and cost change leading to TBB tyre price increase even though the cost of natural rubber decreased, it was stated that the DG has placed undue reliance on net dealer price instead of net effective price and the net dealer price does not reflect the changes on account of discount. Considering the changes in prices of natural rubber vis-a-vis changes in total cost of sales, it is wrong to allege that the OPs cartelised solely on the basis that the tyre prices did not change in line with the price of natural rubber. Further, it was stated that OP-4 did adjust the prices with falling cost of production. Hence, the DG’s observation of collusion among the OPs is completely unfounded.
67. With regard to the DG’s finding on the role of OP-6 as a platform for the other OPs to share sensitive information and reach an agreement on pricing of tyres, it was submitted that there was no impact of dissemination of indexed raw material cost increase data on actual raw material costs of OP-4. Further, the analysis of price changes by the OPs with the timing of OP-6 purchase group meetings does not indicate any trend between price changes and these meetings.
68. The DG’s reliance on stable production and market shares of the OPs in the replacement segment as a critical plus factor was controverted by submitting that the DG failed to recognise that market shares may be stable due to transition in the market for tyres from TBB tyres to TBR tyres. Also, the analysis by the DG does not compare monthly market shares during the alleged cartel period which indicates that the OPs have not colluded amongst themselves.
69. Responding to the finding of reduced monthly capacity utilisation in the TBB segment, it was stated that OP-4’s capacity utilisation during the investigation period has mostly been remarkably high and similar in both the non-cartel period (2009-11) as well as the alleged cartel period (2011-13). Further, because of factors such as strikes in Kankroli and Vikrant plants, increase in use of radials, increase in stock build-up, fall in production of trucks and buses, etc., capacity utilisation in 2011-12 and 2012-13 should not be seen as a ‘plus factor’.
Replies/ Objections/Submissions of OP-5 / Birla Tyres Ltd. (Birla Tyres)
70. At the very outset, OP-5 has denied any involvement in colluding with any of the other Opposite Parties (or any other tyre manufacturer). It was submitted that OP-5 has always acted independently in its decision making process of revising the price of tyres. The DG has completely ignored the submissions of various individual tyre dealers who have clearly stated that there was no simultaneous increase of tyre prices in the Truck Bus Tyre segment and there was no discernible common price trend in the pricing of Truck Bus Tyre by the various tyre manufacturers. Further, the DG has also not considered the submissions of the individual tyre dealers in relation to supply wherein they have stated that there was no shortage of supply of tyres. It was therefore, submitted that the DG has ignored the statements made by various individual tyre dealers and has proceeded with a pre-conceived notion against the OPs so as to arrive at a finding of cartelisation against them. The DG, in the course of investigation, has also violated the principles of natural justice causing grave injustice and prejudice to OP-5.
71. It was pointed that the DG has not provided any reasons for excluding other tyre manufacturers who were also members of OP-6 at the time of alleged contravention of the Act (i.e., Michelin, Bridgestone and Goodyear). The DG has cherry-picked the OPs as opposed to investigating the conduct of all the members (i.e. 9 members who were part of OP-6 at the time of the alleged contravention). Further, the DG has failed to provide any reasoning for distinguishing/differentiating the practice/conduct of the above-mentioned entities with the Opposite Parties which led to the DG limiting the investigation only to the Opposite Parties.
72. OP-5 has alleged random sampling of evidence and non-application of mind by the DG as it has only investigated the replacement market and further narrowed the area of investigation to the Truck-Bus tyre segment in the replacement market. The DG, devoid of any merit or reasoning, has further narrowed the investigation in Truck Bus Tyre segment to only Cross ply (Bias) tyre, thereby excluding radial tyres, even though the radial tyre comprises 24% of the Truck Bus Tyre segment based on domestic sale estimates provided by OP-6. As such, it appears that such a minute delineation of market for the purpose of investigation has been done by the DG with the sole intention of investigating only the Opposite Parties.
73. Replying to the conclusion drawn by the DG that despite a significant decline in the input costs particularly in 2012-13 and 2013-14, the tyre prices were kept at a higher level, which otherwise could not have been possible without an agreement amongst the OPs, it was submitted that the DG has examined the impact of price movement of natural and synthetic rubber in the cost structure of the OPs, but it has failed to appreciate that the cost impact of the price movements of natural and synthetic rubber in relation the OP-5 is at complete variance with the other OPs. In this regard, a table comparing the cost structures for natural and synthetic rubber of the OPs was provided as is reproduced below:
Table 1
