dsc08224

This article is written by Saurabh Mishra, a student of  HNLU, Raipur.

INTRODUCTION

The Competition Appellate Tribunal (‘COMPAT’) in the appeal M/s. DLF Limited (‘DLF’) v. Competition Commission of India (‘CCI’) and Others[1] upheld a penalty of INR 6,300 million (USD 140 million) on real estate firm DLF at the rate of 7% of the average turnover for the last three financial years, for abusing their dominant position in industry against buyers.

In 2011, the CCI had slapped the penalty after complaint filed by Belaire Owners Association, a flat buyer association of DLF project in Gurgaon. The CCI pronounced DLF guilty for grossly abusing its dominant market position in the concerned relevant market and imposing unfair conditions in the sale of flats/apartments to home buyers/consumers in contravention of the provisions of the Competition Act, 2002 (‘Act’).[2]

In the present case, COMPAT had clubbed all the appeals against the orders of CCI where it held similar view in complaints made by other flat buyer associations, Park Place Resident Welfare Association and Magnolia Flat Owners Association of respective DLF projects in Gurgaon (all three together ‘informants’).

Now the only option DLF has is to appeal to the Supreme Court against the present COMPAT order within 60 days of the communication of the order.[3]

BACKGROUND­

DLF announced the launch of Group Housing Complexes, known as The Belaire, Park Place and Magnolia upon which the informants booked the apartments and entered into the Apartment Buyer’s Agreements (‘ABA’). Also by that time informants had already paid substantial amount as they hardly had any option but to adhere to the dictates of DLF.

The DLF unilaterally without intimating the informants modified the original scheme in the following manner[4]:

Name of Complex Original Scheme Modified Scheme
Belaire 5 multi-storied residential building, each of this building was to consist of 19 floors Added 10 floors to each building
Park Place 13 multi-storied residential building, each of this building was to consist of 19 floors Added 5-7 floors to each building
Magnolia 19 multi-storied residential building, each of this building was to consist of 17 floors Added 5-9 floors to some buildings

Therefore the DLF increased the number of apartments by 53% combining all the three projects of Belaire, Park Place and Magnolia.[5]

Consequently, on the grounds of the construction being abnormally delayed and substantial compression of the common areas and facilities originally earmarked for each apartment, a complaint was filed by the Informants against DLF, Haryana Urban Development Authority and Department of Town and Country Planning, State of Haryana under Section 19 (1)(a)[6] of the Act. The Informant alleged in the complaint that DLF, by abusing its dominant position, had imposed highly arbitrary, unfair and unreasonable conditions on the Informant.

The CCI on the basis of DG’s in-depth investigation held that the Act is applicable in the instant case. It delineated the relevant market on the basis of services provided by developers for construction of ‘high end buildings’ in Gurgaon. The CCI analysed the dominant position of DLF by placing reliance on each of the factors as mentioned in Section 19 (4)[7] of the Act and held DLF to be abusing its dominant position under Section 4(2)(a) [8].

APPELLANT’S SUBMISSION

The DLF appealed before the COMPAT against this order of CCI on various counts such as the ABA is neither sale of ‘goods’ or ‘services’ and therefore outside the scope of the Act.[9] Further, Section 4 of the Act came into force on 20.05.2009 and all the ABA’s were entered into in 2006-07, therefore, the Act is not applicable to ABA’s as it is not having retrospective operation.[10] Moreover, the determination of the relevant market is grossly wrong[11], and the DLF is not a dominant player in the market[12] and there is no act of abuse of that alleged dominance by DLF[13].

INFORMANT’S SUBMISSION

The Informant submitted that the sale of apartments amount to ‘services’ and hence the act is applicable and further since the ABA is in force after coming into force of ‘abuse of dominance’ provision therefore these provisions will apply to ABA. They alleged further that the DLF had used its position of strength in dictating the terms of the ABA and imposed unilateral and one-sided clauses. DLF had excluded itself from any obligations and liabilities; and on the contrary has compelled the Informant to agree to all the terms of the Agreement in toto. The Informant has alleged that the various clauses of the agreement and the action of DLF pursuant thereto are prima facie unfair and discriminatory, thus attracting the provisions of Section 4 (2)(a) of the Act.

 

KEY ISSUES

The CCI on the basis of the DG’s report framed four major issues for consideration which are as follows[14]:

Issue 1: Whether the provisions of Competition Act, 2002 applied to the facts and circumstances of the instant case?

Issue 2: What was the relevant market, in the context of section 4 read with section 19 of the Act?

Issue 3: Whether DLF is occupying a dominant position in the above relevant market?

Issue 4: If yes, whether DLF has abused its dominant position in the relevant market?

The CCI in its order has ruled in favour of informants and answered all the above issues in affirmative. The COMPAT in appeal has dealt with all the issues again and mostly approved the CCI’s order however it differed majorly in the approach while answering the first issue in affirmative.

The issues can be discussed as follows:

  • Issue 1: Applicability of the Act to the present dispute

CCI ordered that the act is applicable to the present dispute. DLF appealed against this on following counts:

  • ‘Sale of an apartment’ can neither be termed as sale of goods nor sale of service, and thus section 4(2)(a) of the Act is not relevant and inapplicable in the present case because it can be invoked only when there is purchase or sale of either goods or service.
  • The terms and conditions of the agreements were executed in December 2006 and 2007 prior to coming into effect of the provisions relating to abuse of dominant position under the Act. The application of these provisions being prospective in nature could not have been made applicable to a period prior to the coming into force. (‘May 20, 2009’)
  • It was also urged that prior to the provisions of the Act coming into force, there was no legally recognized concept of an enterprise having a dominant position. Therefore, the dominance of an enterprise can be seen only on or after May 20, 2009 in terms of section 4 of the Act and it is only thereafter the question of contravention of section 4 would arise, if any unfair or discriminatory condition is imposed.

COMPAT verdict:

COMPAT dealt with each of the above submissions individually.

Whether ‘sale of apartment’ would constitute ‘service’ under the Act?

The appellant relying on case of Magus Constructions Pvt. Ltd. v. UOI[15] argued that if the title or ownership of the property was retained by the Appellant while constructing the apartment, it could not be said to be providing services to the apartment owners to earn his title or ownership only after the sale deed executed between the Appellant and flat purchaser.[16] COMPAT rejected this argument by saying that, before ABA was executed there was an understanding that the Appellant will give a particular apartment to a particular allottee and it will be constructed exactly as per the instructions of the allottees, therefore it was providing a service.[17]

The COMPAT also placed reliance on several Supreme Court judgments[18] and concluded that housing activities undertaken by development authorities are considered as services and covered within the definition of service as provided under section 2(o)[19] of the Consumer Protection Act, 1986. Relying on this definition along with section 2(u)[20] of the Act, COMPAT agreed with the CCI order which held that “it is clear that the meaning of ‘service’ as envisaged under the Act is of very wide magnitude and is not exhaustive in application, thereby including the activities undertaken by DLF within its ambit.”

Whether provisions relating to abuse of dominant position can be applied retrospectively?

Looking into the aspects of applicability of the Act to agreements entered prior to the coming into force of the Act, the CCI relied on the recent judgment passed by the Bombay High Court in the matter of Kingfisher Airlines Ltd. v. CCI[21] and held that the Act applies not only to all existing agreements but also covers those agreements, entered into prior to the coming into force of the provisions under the Act, and implemented now.

In contrast, COMPAT held that the approach by the CCI in examining ABA in this way is a serious error. As section 4 of the Act was not available on the day when these agreements were executed, the CCI could not have examined the clauses of ABA, which were valid at the time when it was executed in December 2006-07. CCI was wrong in examining the abuse on the part of the Appellant on this count alone.[22] However, COMPAT specifically said that it has not commented on merits or demerits of these clauses in the ABA. These observations were also said to be limited only to the ABA executed prior to 20th May, 2009.[23]

Yet COMPAT held that CCI had jurisdiction in the case even though it cannot look into the clauses of ABA, because there are various other acts of the appellant after May 20, 2009 which are “imposition” of unfair and discriminatory conditions amounting to abuse of dominance. The CCI has the duty and jurisdiction to take into account such impositions and complaints about the breach of section 4 of the Act.[24] These acts will be discussed further in Issue 4.

  • Issue 2: Determination of Relevant Market

CCI ordered that the relevant product market (‘RPM’) is of service of developer/ builder in respect of ‘high-end’ or ‘luxury’ residential accommodation and the relevant geographic market (‘RGM’) is Gurgaon. The DLF appealed against this order on following counts:

  • There is no difference between luxurious or high-end residential accommodation on one hand and economic or low-end residential units on the other. Therefore both belong to same product market.
  • The RGM for the purposes of this case should be National Capital Region. Gurgaon in itself does not constitute the RGM.

COMPAT Verdict:

COMPAT completely agreed with the CCI and its finding on RPM as well as RGM.

RPM: COMPATheld that a “luxury” apartment has to be differentiated from an ordinary apartment. The factor of additional facilities such as club, dispensary, swimming pool, etc being made available to high-end luxury apartments not only differentiates them from an ordinary housing scheme of the private builders, but such luxury apartments do stand on their own separate distinctively higher pedestrian. Therefore it constitutes a separate and distinct market from the ordinary market of residential accommodation.[25]

RGM: COMPAT after considering several factors including local specification requirements and consumer preferences held that the relevant market is the market for services of developer/builder in respect of high-end residential accommodation in Gurgaon. A decision to purchase a high-end apartment in Gurgaon is not easily substitutable by a decision to purchase a similar apartment in any other geographical location.[26]

COMPAT also accepted CCI’s application of SSNIP Test that small increase in price does not affect the customers as they will not move to non-luxurious apartments or outside Gurgaon.[27] Further it held the CCI’s view as correct which relied upon the CMIE data as available in the public domain and refused to place reliance on the JLLM report by concluding that high end residential apartments in Gurgaon would constitute the relevant market.

  • Issue 3: Determination of Dominance

CCI ordered that DLF ltd. is a dominant player in the relevant market determined above. The DLF appealed against this order on following counts:

  • There being intense competition in the market, none of the market players are in a dominant position.
  • It does not enjoy ‘position of strength’ in the relevant market, there is no entry barriers as number of new developers has entered into the market, and also there is no question of countervailing buying power.
  • The DG’s conclusion on the market share was derived through a faulty ‘All India Sales Figure’ as a large number of real estate companies were not considered and no reliable analysis of market share could have been made on basis of sales figure alone.

COMPAT Verdict:

COMPAT do not find any error in the consideration given by the CCI about the dominance of the DLF in the market. It affirmed CCI’s order that DLF had the highest market share (45%), vis-à-vis the market share of the nearest competitor (19%) which was more than twice of its competitor, leading to hardly any competitive constraints. Further, DLF had a clear early mover’s advantage and occupies a leadership position as real estate is a sector with natural entry barriers due to high cost of land and brand value of incumbent market leaders. The CCI while analysing several factors held that DLF due to its level of vertical integration, presence in real estate sector and financial strength was way ahead of its competitors. The market having low level of concentration, DLF faced negligible threat from its rivals and enjoys sufficient ‘position of strength’ in the market. Therefore COMPAT held that the DLF was a dominant player in the relevant market.[28]

  • Issue 4: Abuse of Dominance by DLF

CCI ordered that the DLF has abused its dominant position in the market. DLF appealed against this order on following counts:

  • Alleging mere abuse is not enough unless the same is corroborated with necessary evidence.
  • The conditions imposed in the agreement are standard clauses inserted as per industry practice and are in no way a reflection of abuse of dominant position. At the same time several benefits have been provided by DLF to the buyers and the same must not be ignored.
  • Further, there is no law which acts as an impediment to launching new projects prior to submitting building plans/lay-out plans of the project.
  • All agreements have been entered between the parties consensually and are thus binding; thereby the issue of abuse of dominant position does not arise.

COMPAT’s Verdict

COMPAT reiterated its view that CCI is not in a position to examine the clauses of ABA’s which came into existence when section 4 of the Act was not available to the parties. CCI was wrong in holding that those clauses are one-sided, unfair and heavily leaned in favour of the DLF.[29]

However COMPAT held that the DLF has abused its dominant position in the relevant market on account of the following ‘impositions’ of unfair and discriminatory conditions in sale of services within the meaning of Section 4(2)(a):

  • The mysterious silence on the part of the DLF, to let the informants know the number of additional floors, which they planned to and would be constructing, which in fact they knew at the very moment of starting of the construction. Further the intimation about the increase of the number of floors after 20th May, 2009 amounts to an imposition of unfair condition.[30]
  • The ‘magnanimous’ offer of the DLF to the informants to move to a higher floor was also not an absolute option as the DLF reserved its discretion in allowing the movement. As the power can discriminate between individual buyers it amounts to imposition of unfair and discriminatory condition.[31]
  • The unfairness lies on the sinister silence on part of DLF about the increase in number of floors. The informants did not have even a ghost of idea, as to how many persons they would have to share lifts with or their common area, or for that matter their swimming pool and gymnasium. There was a duty on the part of the DLF to let the informants know about proposed increase and obtain their views about the same.[32]
  • Also by decrease in the common area due to increase in number of floors, the DLF breached the ABA which became possible only due to its dominance as informants had no other option but to accept the same since the exit option was unimaginably costly.[33]
  • The adding a new condition that in order to be liable to get the compensation on account of delayed construction, the concerned person would have to concur the increased holding charges. This unilateral increase in the holding charges and the threatened consequence amounts to rewriting of the contract and is therefore amounts to an unfair condition.[34]
  • The DLF started constructing additional floors before the final approval from the concerned authorities which came in 2009, is wholly illegal and unauthorized. Therefore the DLF was actually offering to the informants a piece of illegal and unauthorized construction, which amounts to imposing unfair conditions against the wishes of the consumer.[35]

Thus COMPAT held that the DLF has abused its dominant position and committed breach of section 4(2)(a)(i) and section 4(2)(a)(ii) of the Act. Accordingly COMPAT confirmed the findings of the CCI to the extent discussed above.[36]

PENALTY

The CCI in its order of 2011 has inflicted a penalty of INR 6,300 million which is 7% of the turnover of the DLF. COMPAT refused to bring down the penalty and confirmed the order of CCI.[37] However on the point of imposing similar penalty in other two cases of Park Place and Magnolia as well, the COMPAT refused as all the three ABAs were practically identical therefore penalty was not imposed again.[38]

CONCLUSION

This judgment will restore the balance between the real estate developers and property buyers. It has although imposed a lot of penalty upon the realty developer DLF of INR 6,300 million, but we can see there is no individualistic remedy provided to the ultimate consumers i.e. apartment allottees of Belaire, Park Place and Magnolia. The tribunal refused to modify the ABA clauses as they were outside the jurisdiction of Competition Act because of its execution before May 20, 2009.[39] Further there is no provision of compensation to the customers under the Competition Act which is a big lacuna of the Act.

The DLF has however announced that it will move the Supreme Court under Section 53T of the Act against this judgment of COMPAT.[40]

[1] MANU/TA/0012/2014 decided on 19.05.2014.

[2] Case No. 19 of 2010, MANU/CO/0044/2011 decided on 12.08.2011; see also NDA Hotline.

[3]Section 53T of the Competition Act, 2002.

[4] MANU/TA/0012/2014 ¶ 99.

[5] Id. at ¶ 104.

[6] Section 19(1): The Commission may inquire into any alleged contravention of the provisions contained in subsection (1) of section 3 or sub-section (1) of section 4 either on its own motion or on—

(a) receipt of any information, in such manner and accompanied by such fee as may be determined by regulations, from any person, consumer or their association or trade association.

[7] The Commission shall, while inquiring whether an enterprise enjoys a dominant position or not under section 4, have due regard to all or any of the following factors, namely:—

(a) market share of the enterprise;

(b) size and resources of the enterprise;

(c) size and importance of the competitors;

(d) economic power of the enterprise including commercial advantages over competitors;

(e) vertical integration of the enterprises or sale or service network of such enterprises;

(f) dependence of consumers on the enterprise;

(g) monopoly or dominant position whether acquired as a result of any statute or by virtue of being a Government company or a public sector undertaking or otherwise;

(h) entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers;

(i) countervailing buying power;

(j) market structure and size of market;

(k) social obligations and social costs;

(l) relative advantage, by way of the contribution to the economic development, by the enterprise enjoying a dominant position having or likely to have an appreciable adverse effect on competition;

(m) any other factor which the Commission may consider relevant for the inquiry.

[8] Section 4: Abuse of dominant position.—

(1) No enterprise shall abuse its dominant position.

(2) There shall be an abuse of dominant position under sub-section (1), if an enterprise,—

(a) directly or indirectly, imposes unfair or discriminatory—

(i) condition in purchase or sale of goods or services; or

(ii) price in purchase or sale (including predatory price) of goods or service.

[9] MANU/TA/0012/2014 ¶ 47

[10] Id. at ¶ 57

[11] Id. at ¶ 80

[12] Id. at ¶ 86

[13] Id. at ¶ 94

[14] Id. at ¶ 42

[15] (2008) 15 VST 17 (Gauhati)

[16] MANU/TA/0012/2014 ¶ 47

[17] Id. at ¶ 52

[18] Lucknow Development Authority vs. M.K.Gupta (1994) 1 SCC 243

[19] Section 2(o) “price”, in relation to the sale of any goods or to the performance of any services, includes every valuable consideration, whether direct or indirect, or deferred, and includes any consideration which in effect relates to the sale of any goods or to the performance of any services although ostensibly relating to any other matter or thing.

[20] “service” means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial matters such as banking, communication, education, financing, insurance, chit funds, real estate, transport, storage, material treatment, processing, supply of electrical or other energy, boarding, lodging, entertainment, amusement, construction, repair, conveying of news or information and advertising.

[21] [2011] 100 CLA 190 (Bom)

[22] MANU/TA/0012/2014 ¶ 73

[23] Id. at ¶ 97 & 118

[24] Id. at ¶ 76

[25] Id. at ¶ 80

[26] Id. at ¶ 84

[27] Id. at ¶ 80 & 83

[28] Id. at ¶ 93

[29] Id. at ¶ 96

[30] Id. at ¶ 101

[31] Id. at ¶ 102

[32] Id. at ¶ 104

[33] Id. at ¶ 108 & 111

[34] Id. at ¶ 117

[35] Id. at ¶ 121

[36] Id. at ¶ 123

[37] Id. at ¶ 126

[38] Id. at ¶ 94

[39] Id. at ¶ 128

[40] http://www.thehindubusinessline.com/companies/competition-appellate-tribunal-upholds-ccis-rs-630cr-fine-on-dlf/article6025288.ece

Did you find this blog post helpful? Subscribe so that you never miss another post! Just complete this form…

LEAVE A REPLY