e-commerce
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This article has been written by Ojas Chitre.

Introduction

E-commerce means buying and selling of goods over electronic and digital platforms. There have been many allegations that e-commerce giants are responsible to harm healthy competition in the market. Economies of scale and advancements of logistical companies has helped e-commerce companies to ship goods to any corner of world. However, as a need of hour, small businesses have been actively using e-commerce. This article discusses take of Competition Commission of India on e-commerce giants with reference to All India Online Vendors Association v Flipkart case. This article focuses mainly on AIOVA v Flipkart case but for proper understanding, it considers Flipkart v Assistant Commissioner of Income Tax section 4 of competition act equally important.

Background

Competition Commission had received information from AIOVA under section 19(1)(a)[1] alleging contraventions of section 4 of Competition Act 2002[2].

Parties involved:

  • Competition Commission of India (CCI)

Competition Commission of India is a statutory body created by Competition Act 2002, advocating healthy competition in market. Competition Act is a replacement to MRTP (Monopolies and Restrictive Trade Practices) Act 1969. Competition Act objects abuse of dominant position. Competition Commission considers entity’s structure rather than its size in order to investigate abuse of dominant position.

  • All India Online Vendors Association (AIOVA) [Informant]

AIOVA is an association of sellers selling goods online. This association consists of more than 2000 online sellers selling products on online marketplaces like Amazon, Flipkart etc.

  • Flipkart [OPs]

Flipkart is a Bangalore based e-commerce company founded in 2007, valued at approx. $20 billion. Flipkart roughly employs more than 30,000 individuals. Myntra, PhonePe, Ekart, Upstream Commerce Ltd, Mallers Inc etc are subsidiaries of Flipkart. Flipkart owned WS Retail Pvt. Ltd. Till 2012, which was largest seller and revenue contributor for Flipkart. The information was filed against Flipkart India Pvt. Ltd. [OP1] and Flipkart Internet Pvt. Ltd. [OP2] which are collectively called [OPs].

Information provided by AIOVA stated that Flipkart India Pvt. Ltd. Sells products to companies such as WS Retail at discounted price and the products so acquired by WS Retail were sold on platform operated by Flipkart Internet Service Ltd. Further, it was stated that such practices amounted to preferential treatment to certain sellers.

Flipkart India Pvt. Ltd. v Assistant Commissioner of Income Tax

Flipkart India Pvt. Ltd. v Assistant Commissioner of Income Tax[3] is important case in Tribunal of Income Tax showing how companies like Flipkart operate. Following were the outcomes of the case which are relevant for this article.

  • Assessment officer noticed that Flipkart India Pvt. Ltd. has been buying goods for say ₹100 and has been selling the same product to retailers such as WS Retail Pvt. Ltd. for ₹80 and those retailers would sell such goods on internet platforms for discounted rate. After excluding closing stock of finished goods, purchases and sales, there was approx. 2.52% loss on purchase cost.
  • Senior vice president of Flipkart India Pvt. Ltd. told assessing officer that this strategy was adopted by the company in order to capture larger market share and earn profits in long run.
  • The assessing officer concluded that the strategy was to establish customer goodwill and brand value in long run.
  • Assessment officer also referred to the fact that Flipkart India Pvt. Ltd. during assessment year 2014-15, sold equity share of face value of ₹1was sold at premium of ₹18,999 per equity share based on valuation under Discounted Cash Flow Method.
  • DCF (Discounted Cash Flow) estimates the cash flows in future and uses appropriate discounting factors to arrive at current enterprise value.

AIOVA alleged that the way of conducting operations of OPs is contravening section 4(2)(a) of Competition Act. AIOVA also pointed out that the companies like Flipkart has strong backing of large investors and they have access to venture capital funds, that’s why they are able to sell goods at discounted rate. Further, AIOVA alleged that such strategy to capture market denies access of market to individuals who are not backed by venture capital, which contravenes section 4(2)(c). Flipkart was also alleged that leveraging their dominant position to enter into new market, which violates section 4(2)(e).

Requests for Judgement by AIOVA

Following requests for judgement were made to CCI by AIOVA[4]

  1. Provide interim relief under section 33 (power to issue interim orders) by ordering OPs to restrict such practices.
  2. Not to approve any combination[5] regarding OPs under section 5.
  3. Invite objections under section 29(3) (procedure for investigation) if there has been any notice filed under section 6 (regulation of combination).
  4. Investigate e-commerce sector at large.
  5. If there is any combination is allowed in this sector without proper studies, it’ll lead to permanent damage to the industry.
  6. Impose severe penalty on Flipkart India Pvt. Ltd. and Flipkart Internet Pvt. Ltd. to set an example in the industry.

Has Flipkart Abused Its Dominant Position?

  1. Defining Relevant Market-

In order to decide whether Flipkart has abused its dominant position, it is necessary to determine in which market they operate.

  • As per AIOVA relevant marketplace for Flipkart is ‘services provided by online marketplaces for selling goods in India’.
  • Flipkart India Pvt. Ltd. is a wholesaler which is in the business of selling the goods to resellers. This is why Flipkart argued that they were not in the business of B2C.
  • Flipkart Internet Pvt. Ltd. provides online marketplace for the sellers.
  • As per Flipkart, although Flipkart India Pvt. Ltd. and Flipkart Internet Pvt. Ltd. forms part of overall retail supply chain, these two companies operate in two different markets altogether, with different end consumer and characteristics as well as competition in those markets are different.
  • Flipkart urged CCI to consider B2B as relevant market for Flipkart India Pvt. Ltd. and B2C as for Flipkart India Pvt. Ltd.
  • After examining submissions made by both parties, commission declared that in the its opinion, submission made by Flipkart is not appropriate.
  • Competition Commission defined relevant market as ‘service provided by online marketplace for selling goods in India’.
  1. Analysing whether Flipkart has dominant position in Market
  • Market Share

AIOVA had stated that Flipkart has 40% market share, however AIOVA failed to submit credible source for such information.

  • Competition

There are multiple competitors in online marketplaces but size and resources of Flipkart are large as compared to many of such competitors.

  • Closest Competitor

As per information available in public domain, Amazon is Flipkart’s closest competitor. Amazon’s valuation is approx. $700 billion, and it has global presence.

  • Entry Barriers

There are various companied who have entered or proposed to enter in e-commerce market segment.

  • Conclusion

Point 29 of case no 20 of 2018 states, ‘It does not appear that any one player in the market is commanding ant dominant position at this stage pf evolution of market.’

  1. Since Flipkart is not dominant in the market of ‘service provided by online platforms for selling goods in India’, question of abusing dominant position does not arise.

Section 4 of the Competition Act

In AIOVA vs Flipkart case, proper understanding of section 4 of competition act 2002 is very important. As we know, Competition Act is not against possessing dominant position in the market but it objects abusing such dominant position. Section 4 of this act deals with ‘abuse of dominant position’.

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  • What is dominant position?

Dominant position in a market means, position of strength, enjoyed by an enterprise, in relevant market in India, which enables such entity to-

  1. Operate independently of competitive forces prevailing in the relevant market; or,
  2. Affects its competitors or consumers or relevant market in its favour.
  • What is predatory pricing?

There are 3 elements in predatory pricing, if pricing strategy complies with those elements then the pricing strategy is said to be ‘predatory pricing’.

  1. Sale of goods or provision of services,
  2. Such provision or sales is below cost of production or provision of services (Cost of provision of services and cost of production is determined by regulations),
  3. With a view to reduce competition or eliminate competitors.
  • What is abuse of dominant position?

Section 4(2) lays down various provisions to determine whether an entity has abused its dominant position. An entity shall have abused its dominant position if its operations consists of any of the following practices.

  1. If the entity directly or indirectly imposes unfair and discriminatory-
  2. Condition in purchase or sale of goods or services; or,
  3. Price in purchase or sale (including predatory price) of goods or services.

However, if the company imposes unfair or discriminatory condition or price in sale of goods (including predatory prices) or provision of supply, which may be adopted to meet competition shall not be considered as abuse of dominant position.

  1. If the entity limits or restricts-
  2. Production of goods or provision of services or market; or,
  3. Technical or scientific development relating to the goods or services with a view to harm consumers
  • If the entity which indulges in practice which results in denial of market access in any manner.
  1. If the entity is using its dominant position to force other party to enter into another contract in order to conclude the main contract. Provided, such other contract has no commercial or natural connection with main contract
  2. If the entity uses dominant position in one relevant market-
  3. To enter into another relevant market; or,
  4. To protect another relevant market.

Government Initiatives

Following are some of the provisions which were introduced in press note no. 2 (2018)[6] issued by Department of Industrial Policy & Promotion, effective from February 1, 2019.

  • 100% FDI allowed under automatic route is permitted in marketplace model.
  • However, FDI is not allowed in inventory based model.
  • E-commerce entity providing marketplace will not exercise ownership or control over the inventory.
  • An entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by ecommerce marketplace entity or its group companies, will not be permitted to sell its products on platforms run by such marketplace entity.
  • E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field.
  • Services should be provided by ecommerce marketplace entity or other entities in which e-commerce marketplace entity has direct or indirect equity participation or common control, to vendors at platforms at arm’s length[7] and in a fair and non-discriminatory manner.
  • E-commerce entity will not mandate any seller to sell any product exclusively on its platform.
  • E-commerce marketplaces can provide support services to sellers.

Conclusion

  • In 2017 size of e-commerce industry was US $38.5 billion. It was predicted that Indian e-commerce industry is expected to grow at 31% per year and it shall be $200 billion industry by 2026.
  • As e-commerce industry is emerging sector with high potential of growth, government has to introduce some policies to promote healthy competition in this industry.
  • Government has to anticipate current loopholes in regulations and amend it is such a way that instead of harming MSME sector, e-commerce industry flourishes along with MSME. There is need of publication of professional research and analysis in ecommerce industry.
  • E-commerce industry should be strictly monitored; however, government should avoid unnecessary interventions.
  • Although ecommerce giants like Flipkart and Amazon are not abusing their dominant position, allegations made by AIOVA raises concern about sustainability of medium and small scale industries against competitors such as WS Retail Pvt. Ltd. and Cloudtail India Pvt. Ltd.

Endnotes

[1] Sc 19 of Competition Act deals with Inquiry into certain agreements and dominant position of enterprise.

[2] Abuse of dominant position.

[3] Flipkart India Pvt. Ltd. v Assistant Commissioner of Income Tax ITA No.202 /Bang/2018 (Assessment Year 2015-16 (See here)

[4] Point 7 from case no. 20 of 2018 (Competition Commission of India) ) (See here)

[5] Acquisition, merger, amalgamation of companies specified under section 5 of competition act are treated as                  combination

[6] D/o IPP File No.: 5/3/2015-FC-I dated: 26th September 2018. (See here)

[7] Providing service at arm’s length denotes, ‘service provided freely and independently, as if there is no relationship between the parties’


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