Does competition law apply to intra-group agreements?

Sections 3(3) and 3(4) of the Competition Act, 2002, prohibit anti-competitive agreements between enterprises at the same level of the production chain and between those at different levels of the production chain respectively. However, the prohibition is not absolute.

Under section 3(3), a horizontal anti-competition agreement raises a rebuttable presumption that it would cause an appreciable adverse effect on competition (AAEC). Similarly, a restrictive arrangement between enterprises at different levels of the production chain constitutes an infringement of section 3(4) only if it causes an AAEC in India. However, an absolute qualification on both section 3(3) and section 3(4) is that the impugned agreement must be an agreement between distinct “enterprises”.

Agreements between a holding company and its subsidiaries have long been the subject of intense debate with respect to anti-competitive clauses. The “single economic entity” doctrine – consistently followed by competition authorities worldwide – lays down that elements within a single economic entity are not separate undertakings or enterprises and thus any agreements between them cannot be considered as “agreements between distinct undertakings/enterprises”.

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The single economic entity doctrine is also called the Copperweld doctrine, after the celebrated US Supreme Court case of Copperweld Corp v Independence Tube Corp. In that case, the court held that a corporation cannot form a combination or conspiracy with its wholly owned subsidiary in violation of section 1 of the Sherman Act.

In the EU, article 101 of the Treaty for the Functioning of the European Union (TFEU) bars anti-competitive agreements between undertakings. The idea that entities belonging to the same economic group fall outside the purview of article 101 goes back to the 1971 case of Beguelin Import v GI Import Export.

The EU’s guidelines on the applicability of article 101 of the TFEU to horizontal cooperation agreements lay down that when a company exercises decisive influence over another company, the companies form a single economic entity and hence are part of the same undertaking. The guidelines further specify that this would also be applicable in the case of “sister companies” over which decisive influence is exercised by the same group. Agreements between them would not be subject to analysis under article 101.

The Indian perspective

Initially, the decisions of the Competition Commission of India (CCI) showed a tendency to treat a parent company and its subsidiaries, even when wholly owned, as distinct enterprises for the applicability of section 3 of the Competition Act. In the case of the merger between Tata Chemicals and Wyoming 1 (Mauritius), the CCI held that a subsidiary is a de facto and de jure separate and distinct enterprise from its holding company. However, this was a merger control decision under sections 5 and 6 of the act and not one relating to agreements under section 3.

February 2012 amendments to the CCI Combination Regulations exempted combinations of a parent company with its wholly owned subsidiary or between enterprises which are wholly owned by the same group from the CCI’s notification requirements. This is similar to the position of “sister companies” in the EU guidelines on horizontal agreements.

The debate was finally laid to rest by the CCI in its decision in the case of Exclusive Motors Pvt Ltd v Automobili Lamborghini SPA, which explicitly stated that: “Agreement between opposite party and its group company ‘Volkswagen India’ cannot be considered to be an agreement between two enterprises as envisaged under section 2(h) of the Act. Agreements between entities constituting one enterprise cannot be assessed under the Act. This is also in accord with the internationally accepted doctrine of ‘single economic entity’.”

The decision further stated that: “As long as the opposite party and Volkswagen India are part of the same group, they will be considered as single economic entity for the purposes of the Act. Any internal agreement between them is not considered as an agreement for the purposes of Section 3 of the Act.”

The CCI observed that a company has a right to open an office in any country and directly import cars through that office or to constitute a subsidiary company to import its cars in another country. There is neither abuse nor any competition issue involved. To establish a contravention under section 3, an agreement is required to be proved between two or more enterprises.

Conclusion

Under the scheme of the Competition Act and taking into consideration the decisions of the CCI, agreements entered into by entities within the same group would be considered as internal agreements and thus would not fall foul of section 3 of the act. This coincides with the established practice in the EU and US.

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Udwadia Udeshi & Argus Partners is a full-service law firm with offices at Mumbai, Delhi, Bangalore, Kolkata and Chennai. R Sudhinder is a partner and Vaibhav Manu Srivastava is an associate at the firm. The views expressed in this article are the personal views of the authors and do not reflect the views of the firm.