The Merchant of Flipkart: Analyzing What NCLAT’s Recent Decision Means For The Indian E-Commerce Market

[By Hitoishi Sarkar and Mr. Animesh Anand Bordoloi]

Hitoishi is a student at Gujarat National Law University and Animesh is pursuing his LL.M from the National University of Singapore (NUS), Law.

On 4th March 2020, the National Company Law Appellate Tribunal (India) (NCLAT) set aside an earlier order by the Competition Commission of India (CCI), which refused to investigate Flipkart India on charges of abuse of dominant market position under section 4 of the Competition Act, 2002. The informant’s primary contention was that Flipkart India sold goods to companies such as WS Retail Services Private Limited owned by its founders at heavily discounted rates and the same companies later listed these goods on Flipkart’s e-commerce platform thereby making it a clear case of preferential treatment.

The decision is significant because it may open the floodgates of antitrust litigation for e-commerce companies such as Amazon, which are also battling increasing anti-trust litigation in Indian courts.[[i]] This post aims to expound on the broader implications of this decision for the e-commerce sector while also addressing the Indian statutory framework on competition law.

Background

The CCI has recently stepped up its enforcement activities in the e-commerce space. For instance, in January 2020, it released a Market Study on E-Commerce, which identified platform neutrality as a critical concern in the operation of such platforms. The Study is significant as for the first time it analyzed the issue of preferential treatment meted out to certain vendors’ by e-commerce platforms from the standpoint of anti-trust laws. However, interestingly the CCI had, in its earlier decision which was set aside by the NCLAT, refused to investigate Flipkart despite its alleged preferential treatment to promoter owned companies such as WS Retail Services Private Limited, holding that “the terms and conditions on which sellers access the Flipkart marketplace are standard and the incentive is based on objective criteria such as quality of product and volume and value of sales.”

Likewise, the Ministry of Commerce & Industry vide its revised FDI policy dated 26th December 2018, prohibited e-commerce platforms from exercising ownership or control over the goods purported to be sold on their platforms. However, this policy has been heavily critiqued for its implications from the standpoint of customer dissatisfaction.

Legal Analysis

The NCLAT concurred to the appellant, in this case, the All India Online Vendors Association’s (AIOVA) argument of there being a ‘prima facie’ case of abuse of dominant position under section 4(2)(a)(ii) of the Competition Act, 2002. This is for the reason that Flipkart India Private Limited sold goods to its promoter owned company (WS Retail Private Limited) at unjustifiably low rates. Interestingly, the evidence of such predatory pricing was drawn from an earlier order of the Income Tax Appellate Tribunal (ITAT)(Bangalore Bench), which found that the parties purchasing products from Flipkart India were unrelated third parties, including WS Retail Services Private Limited. The CCI’s order refusing an investigation against Flipkart hinged on the aforementioned ITAT’s exoneration of Flipkart. However, the NCLAT rejected the CCI’s misplaced reliance on the ITAT’s order, ruling that the ITAT was “dealing only with the question of applicability of the concerned provisions of the Income Tax Act to the facts which were found by the Assessing Officer.”

Furthermore, the NCLAT found the facts recorded in the same ITAT order to be of significant relevance to its adjudication as the facts provided scathing evidence against Flipkart of having sold goods to WS Retail Private Limited at preferential rates. For instance, the ITAT order records that Flipkart’s business model was based on a practice of “buying goods at say Rs.100/- and selling them to the retailers at Rs.80/-.” Such practices as was highlighted by the Assessing Officer before ITAT contrary to popular opinion was not an ‘irrational economic behavior’ of suffering continuous losses but that of predatory pricing which was used to enhance branding as well as market intangibles so as to increase their valuations, leading to more venture capitalist’s investment. Such predatory pricing by established players in the market, is additionally harmful to the small retailers and could lead to a contravention of section 4(2) and 3(4) of the Competition Act.

CCI’s dilemma in investigating Flipkart and other such entities for anti-competitive practice is further aggravated by the absence of the definition of “competition” from the Competition Act, 2002. Although the CCI has treated “competition” by leaning towards the US approach of following a consumer welfare standard which focuses on the price of goods and services rather than the number of players in the market, the theoretical ambiguity around the meaning of the term has also clouded the understanding of “dominance” given that its assessment depends significantly on the economic considerations. It is argued that while dealing with digital firms the meaning of dominance must be extended to include non-price considerations thereby extending the ambit beyond the traditional metrics so that the unique nature of online services provided by digital platforms is kept in check.

 However, if we are to rely on the international understanding of dominance, it is pertinent here to note the ruling of the European Court of Justice in the United Brands v. Commission, which defined dominance as “a position of economic strength enjoyed by an undertaking, which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers.” Flipkart’s practices scratch the ambit of this definition given their multi-layered business model which has helped them achieve deep discounts to see off competitions, at the risk of making huge losses, which also points out the economic strength enjoyed by such platforms. Interestingly, the Supreme Court, in Uber India Systems v. Competition Commission of India, had held such losses bereft of any economic sense suffered by companies to see off competitors as a prima facie indication of their position of strength. It would only be logical given the current circumstances to extend the findings to e-commerce platforms as well.

Conclusion

The CCI has so far been reluctant to interfere with the e-commerce space, a highlight of which was its opinion in the 2018 order where it stated that “looking at the present market construct and structure of online marketplace platforms market in India, it does not appear that any one player in the market is commanding any dominant position at this stage of evolution of the market.” This seems to be for the reason that, like the American paradigm, the CCI also seems to consider consumer welfare to be the central yardstick in its anti-trust investigation.[[ii]] This is for the reason that American antitrust law seeks evidence of competition in the prices of goods and services and not in the number of market players. Such a restricted contemporary view brings with it the fear of ignoring the broader aspects of dominance through market power that these established players bring in their platforms that allows companies like Flipkart, Amazon, and others to escape the indicators that trigger antitrust actions. Given the nascent stage of digital markets in India, the reluctance by CCI is understandable, but with the e-commerce market now shaping towards a duopoly, this might be the right time to strike chords with a new yardstick for determining dominance. Therefore, with what is at stake, the NCLAT order seems to be in the right direction to address the grave need to realign as e-commerce markets start acquiring a dominant position in the Indian market.

 Endnotes:

[i] MM Sharma, Amazon Wins The First Battle -Karnataka High Court Stays CCI Order Directing Investigation Against Amazon And Flipkart, Mondaq, (5 August, 11:50 pm), https://www.mondaq.com/india/antitrust-eu-competition-/920918/amazon-wins-the-first-battle-karnataka-high-court-stays-cci-order-directing-investigation-against-amazon-and-flipkart#:~:text=In%20a%20major%20relief%20to,vide%20its%20order%20dated%2014.2.&text=Ltd%20(%22Flipkart%22)%20have,Effect%20on%20Competition%20in%20India.

[ii] Udai S Mehta & Ujjwal Kumar, Digit Economy- Hitting the Reset Button on Competition and Regulatory Governance, Competition and Regulation in India 2019, CUTS International, p 32-33 (2020).

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