Appeal No 1117NCM of 1976
From the Judgment dated the 2571975 of the Monopolies  Restrictive Trade Practices Commissioner New Delhi in RTPE No 1 of 1974 NA Palkhivala FS Nariman Ashok H Desai Ravinder Narain B Dadachanji OC Mathur section Swarup Talat Ansari Shri Narain John and DN Mishra for the Appellant
Lal Narain Sinha Mrs Shayamla Pappu GA Shah RN Sachthey Girish Chandra and BB Sawhney for the Respond ent
R Narain J B Dadachanji OC Mathur section Swarup Talat Ansari Interveners for Ms Hindustan Livers Ltd Ashok Leyland Ltd Escorts Ltd K J John for Ms Hindustan Livers Ltd Anil B Divan R Narain LB
Dadachani OC Mathur section Swarup Talat Ansari section Narain Interveners for CIBA Geigy of India Ltd Ashok M Desai R Narain J
B Dadachanji OC Mathur Talat Ansari section Swarup  DN Mishra Interveners for Batliboi  Co P Ltd The Judgment of the Court was delivered by RAY CJ This appeal is under Section 55 of the Monop olies and RestrictiveTrade Practices Act 1969 referred to as the Act against 688 the judgment and order of the Monopolies and Restrictive Trade Practices Commission referred to as the Commission dated 25 July 1975
The principal question for consideration in this appeal is whether the agreement between the appellant referred to as Telco and its dealers allocating territories to its deal ers within which only the dealers can sell bus and truck chassis referred to as the vehicles produced by the company constitute a restrictive trade practice
Section 2o of the Act defines restrictive trade prac tice to be a trade practice which has or may have the effect of preventing distorting or restricting competition in any manner and in particular i which tends to obstruct the flow of capital or resources into the stream of produc tion or ii which tends to bring about manipulation of prices or conditions or delivery or to affect the flow of supplies in the market relating to goods or services in such manner as to impose on the consumers unjustified costs or restrictions
Section 33 of the Act provides that any agreement relat ing to a restrictive trade practice falling within one or more of the categories a to 1 specified in sub 2section1 thereof shall be subject to registration
Section 37 of the Act provides that the Commission may enquire into any restrictive trade practice whether the agreement if any relating thereto has been registered under Section 35 or not which may come before its enquiry and if after such enquiry it is of opinion that the prac tice is prejudicial to the public interest the Commission may by order direct that a the practice shall be discon tinued or shall not be repeated b the agreement relating thereto shall be void in respect of such restrictive trade practice or shall stand modified in respect thereof in such manner as may be specified in the order
Section 38 of the Act provides that a restrictive trade practice shall be deemed to be prejudicial to the public interest unless the Commission is satisfied of any one or more circumstances mentioned in that section
The circum stances mentioned inter alia are these
The restriction is reasonably necessary having regard to the character of the goods to which it applies to protect the public against injury in connection with the consumption or installation or use of these goods
The removal of the restriction would deny to the public
as purchasers consumers or users of any goods other specific and substantial benefits or advantages enjoyed or likely to be enjoyed by them as such whether by virtue of the restriction itself or of any arrangements for operations resulting therefrom
The restriction is reasona bly necessary to counteract measure taken by any one person not party to the agreement with a view to preventing or restricting competition in or in relation to the trade or business in which the persons thereto are engaged
The restriction is reasonably required for purposes in connec tion with the maintenance of any other restriction accepted by the parties whether under the same agreement or  689 under any other agreement between them being a restriction which is found by the Commission not to be contrary to the public interest upon other grounds other than specified in this paragraph
The restriction does not directly or indirectly restrict or discourage competition to any materi al degree in any relevant trade or industry and is not likely to do so
The Commission is also to be satisfied that the restriction is reasonable having regard to the balance between the circumstances and any detriment to the public or to persons not parties to the agreement being purchas ers consumers or users of goods produced or sold by such parties or persons engaged or seeking to become engaged in the trade or business of selling such goods or of producing or selling similar goods resulting or likely to result from the operations of restriction
The expressions purchasers consumers and users include persons purchasing consuming or using for the purpose or in course of trade or business or for public purposes
Section 38 of the Act is described in the phraseology of restrictive trade practices as providing gateways to trade
The essence of the section is that when it is found by the Commission that such restrictions are necessary or justified in the circumstances mentioned in the section restrictions are permitted
Again the balancing clause after clause h in section 38 of the Act indicates when the restriction is not unreasonable having regard to the balance between the circumstances mentioned in the section and detriment to the public resulting from the operation of the restriction
Telco is a public limited company and is a leading manufacturer of heavy and medium commercial vehicles
The capital investment required for a new factory in this trade is of a high order
At present there are only four princi pal manufacturers of commercial vehicles
These are The Hindustan Motors Ltd Premier Automobiles Ltd and Ashok Leyland Ltd and Telco
The supply of commercial vehicles is said to be below the demand
The scarcity of supply is particularly accentu ated in the case of Telco s vehicles as they are in great demand all over the country and abroad
The export of Telco was over 80 of the total exports of commercial vehicles from the country during the year 1974 75
The marked consumer preference for Telco s vehicles has been maintained because of the high quality if its products and also because of elaborate and comprehensive net work of after sales service provided by Telco s dealers
Telco has of its own initiative introduced
certain procedures for a fair and wide geographical distribution of its vehicles which seek to ensure that the new vehicles are supplied not only to the urban areas of the country where there is a high demand  but also to the remote areas such as Tripura Naga land Himachal Pradesh etc
Telco has notified to its dealers the maximum price for each model of vehicle which they could charge to consumers
In May 1972 Telco intro duced a procedure to regulate the booking of 690 orders by its dealers and effecting the delivery of vehicles against such orders with a view to ensuring distribution of its vehicles in the chronological order in which orders had been registered with the dealers
When Telco sells vehicles it has the responsibility of providing facilities for servicing and repairing the vehi cles marketed by it
It is essential that in the interest of the consumers such facilities are widely distributed throughout the country
Even in remote areas where the demand of new vehicles is less it is necessary to provide facilities for after sales service in order to enable the owners of the vehicles to keep them in operation
These facilities are provided by Telco through all India net work of 68 dealers 69 service centres of sub dealers and 13 zonal offices of Telco
Each dealer has to maintain premises for a show room and  a service station and to keep special tools as welt as a comprehensive range of spare parts supplied by Telco
Further a dealer has also to employ technically qualified personnel some of whom have been trained by Telco in its Apprentice School at Jamshedpur
In addition Telco maintains its own staff of trained engineers and mobile vans in each of its zonal offices
The Registrar Restrictive Trade Agreements made an application under Section 10a iii of this Act before the Commission for enquiry under Section 37 of the Act into restrictive trade practices alleged therein
The allega tions in the petition were these
Clauses 1 and 3 of the agreement between Telco and its dealers provide for territo rial restriction or allocation of area or market and clauses 6 and 13 provide for resale price maintenance and clause 14 provides for exclusive dealership
The Registrar submitted that Clauses 1 3 6 and 14 show that the company is in dulging in restrictive trade practices inter alia relating to allotment of territoriesareas among its dealers and exclusive dealings and Telco is not willing to abandon the restrictive trade practices
It is significant to notice that no particulars of such alleged restrictive trade practices were set out in the application
Clauses 1 3 6 and 14 in so far as they are appropriate to the present appeal are as follows  1
a The Dealer agrees to buy from the Regional Sales Office of the Company regularly from time to time on principal to principal basis all such new Tata diesel truck and bus chassis with or without cab andor body hereinafter referred to as the said vehi cles for resale within the territory de scribed hereunder hereinafter called the said territory in accordence with the provisions of this
Agreement
b This Agreement shall not preclude the Company from entering into or continuing any dealership agreement or agreements with any other person or persons within the said terri tory for sale of the said vehicles and resale by 691 that person thereof in the said territory this Agreement with the Dealer does not con stitute him a selling agent of the Company in the said territory much less a sole selling agent
The Dealer shah not either directly or indirectly and
either alone or in conjunction with others promote the sale of or sell any of the said vehicles to any person or party outside the said territory nor shall  he sell the same to any person within the said terri tory if the said vehicles are intended to be used outside the said territory
a The Dealer shaH at his own expense maintain within the said territory such organ isation for the sale of the said vehicles as may in the opinion of the Company which shall be binding be deemed to be necessary to adequately cover the said territory and ensure the best possible results
Except with the written permission of the Company first obtained the Dealer shall not during the pendency of this Agreement either directly or indirectly engage in or promote the sale of or use handle or sell any truck or bus chassis which is not manufactured or supplied by the Company
 Telco denied that any of the alleged clauses amounted to restrictive trade practices
Telco submitted as follows First though alleged clauses imposed restrictions on the dealers these did not amount to restrictive trade prac tices within the meaning of the Act
Second Clauses 1 and 3 which deal with certain defined territories allocated to the dealers are intended to avoid unequal and unfair distribution of the vehicles among the customers
Third any restriction as to maximunm price at which goods can be resold to the Telco s dealers particularly when Clause 6 1 ii specifies what is implicit therein namely that the dealer may sell below the maximum price fixed by Telco cannot possibly amount to restrictive trade practice
Fourth Clause 14 which prohibits a distributor from dealing in products of other manufacturers would normally not be restrictive trade practice unless there are special circumstances which exist and indicate that the agreement has the effect of preventing distorting or restricting competition
Telco finally submits that none of the restrictions imposed in Clauses 136 and 14 are unreasonable having regard to the balance between the circumstances set out in section 38 of the Act and any alleged detriment to the customers of Telco and or the competitors of Telco allegedly resulting or likely to result from the operation of these restrictions
10 112SC177 692 The Commission held that the moment an agreement con tained a trade practice falling within any of the clauses in Section 331 of the Act the trade practice must be regard ed as a restrictive trade practice
The Commission held that all the clauses alleged in the petition of the Regis trar amounted to restrictive trade practices
The Commis sion further said that in regard to Clauses 6 and 13 in the light of the assurance given by Telco that in its future price lists it would specifically state that the dealer is free to charge on the resale of Telco s vehicles prices lower than the maximum prices fixed by Telco no order was required to be passed regarding the alleged practice of maintenance of minimum resale prices
The Commission further held that although the contractu al term that the dealers could deal only in Telco s vehi cles was a restrictive trade practice it was not against public interest as it fell within subclauses a b and
h and the balancing clause of Section 381 of the Act
The Commisssion however held that the practice of allo cation of territories to Telco s dealers was not justified
In the result the Commission declared that Clauses 1 and 3 of the Agreements in so far as they related to allocation of any territory or area or market to any of the dealers for the distribution of the vehicles constituted restrictive trade practice and therefore void and restrained Telco from continuing or repeating the practice
Before the Commission Telco contended that the applica tion of the Registrar was not in accordance with Regulation 55 of the Monopolies and Restrictive Trade Practices Com mission Regulations 1974 referred to as Regulations
Under the Regulations an application under section 10aiii of the Act must contain facts which in the Registrar s opinion constitute a restrictive trade practice and if it is in relation to any agreement set out such portions of the agreement as may be necessary to bring out the facts complained of
It has to be stated that in the present case Telco is right in contending that beyond making mere references to clauses of the agreement and bald allegations that the clauses constitute restrictive trade practice no facts or features are set out in the petition to show or establish as to how the alleged clauses consti tute restrictive trade practice in the context of facts
The Solicitor General contended as follows
First the definition of restrictive trade practice includes all trade practices permissible or forbidden provided they restrict competition or even tend to restrict competition
The instances set forth in the definition of restrictive trade practice emphasize the factors which go to establish a restrictive trade practice
Clauses i and ii in Section 20 of the Act afford graver instances of restrictive trade practice
Second Section 33 of the Act requires an agreement falling within the Clauses thereof to be registered
In short an agreement which amounts to a restrictive trade practice will be first registered and then 693 an enquiry will be made under Chapter VI of the Act as to whether the restrictive trade practice is prejudicial to the public interest
Irrespective of the injurious or beneficial consequence of a trade practice which restricts or may restrict competition it may fall within the defini tion
Injurious or beneficial result of the restriction is relevant only for purposes of Sections 37 and 38 of the Act
Section 33 of the Act states that any agreement relat ing to a restrictive trade practice falling within one or more of the categories mentioned therein shall be subject to registration in accordance with the provisions of Chapter V of the Act
Clauses a and d in subsection 1  of Section 33 are relevant in the present case
These are inter alia a any agreement which restricts or is likely to restrict by any method the persons or clauses of persons to whom goods are sold or from whom goods are bought and d any agreement to purchase or sell goods or to tender for the sale or purchase of goods only at prices or on terms or conditions agreed upon between the sellers or purchasers
The definition of restrictive trade practice is an exhaustive and not an inclusive one
The decision whether trade practice is restrictive or not has to be arrived at by applying the rule of reason and not on that doctrine that any restriction as to area or price will per se be a re strictive trade practice
Every trade agreement restrains or binds persons or places or prices
The question is whether the restraint is such as regulates and thereby promotes competition or whether it is such as may suppress or even destroy competition
To determine this question three matters are to be considered
First what facts are peculiar to the business to which the restraint is applied
Second what was the condition before and after the re straint is imposed
Third  what is the nature of the re straint and what is its actual and probable effect
Section 331 of the Act deals with registration of certain types of restrictive trade practices which have the subject matter described in categories mentioned in clauses a to 1 of Section 331 of the Act
An agreement will be registrable when it will have both the effect of re stricting competition within the meaning of Section 20 of the Act and also deal with the subject matter described in Clauses a to 1 of sub section 1 of Section 33 of the Act Clauses a to 1 aforesaid describe some species of agreement which require registration
if they are within the genus of restrictive trade practice defined in Section 20 of the Act
A practice which is not restrictive under section 2 0 of the Act cannot be restrictive trade prac tice only because 0f Clauses a to 1 of sub section 1 of Section 33 of the Act
Section 33 does not provide statutory illustrations to Section 20 of the Act but only enumerates some types of trade practices which
if they are restrictive within Section 20 of the Act require registra tion
Section 33 fixes categories of restrictive trade prac tices
Section 33 states that any agreement relating to a restrictive trade practice falling within one or more of the categories mentioned therein shall 694 be subject to registration
Therefore before an agreement becomes registrable it has to be a restrictive trade prac tice in accordance with the definition of Section 20 of the Act
At the threshold it has to be found out whether an agreement constitutes a restrictive trade practice
In Section 33 it is stated for example that any agreement which restricts or is likely to restrict by any method the persons or clauses of persons to whom goods are sold or from whom goods are bought is one of the categories of a regis trable restrictive trade practice
In the present case it has to be found out first whether the agreement of exclusive dealership between Telco and the dealers containing the restriction on the dealer not to sell the commercial vehi cles of Telco in other territories falls within the vice of a restrictive trade practice
Under the Act action can be taken against a restric tive
trade practice
Therefore when the authorities under the Act want to challenge any agreement or any prac tice as a restrictive trade practice it has t0 be estab lished that it is a restrictive trade practice within the definition of the Act
If it is found to
be a restrictive trade practice the next stage is to register agreements relating to a restrictive trade practice
Section 33 states that any agreement relating to a restrictive trade practice failing within one or more of the categories mentioned
therein shall be subject to registration
The authorities have to examine the agreement and find out whether it fails within the vice of a restrictive trade practice before the authorities can ask that the agreement be registered under Chapter V of the Act
It is only after an agreement has been registered that there is an enquiry under Chapter VI of the Act
This enquiry under Section 37 0f the Act is to find out whether a restrictive trade practice is prejudicial to the public interest
Section 38 of the Act lays down the circumstances under which a restrictive trade practice is presumed to be in the public interest and not to be deemed to be prejudi cial to the public interest
In the present case the question is whether the dealer ship agreement between Telco and the dealers whereby the dealers are not permitted to sell the commercial vehicles outside their zones amounts to a restrictive trade practice
The questions posed are Does it prevent distort or restrict competition in any manner Does it affect the flow of sup plies in the market relating to goods or service in such manner as to impose on the consumers unjustified costs or restrictions
The evidence about the features of the trade is this
The medium and heavy vehicles in the trade are restricted to those licensed by Government for manufacture in the country
The capital investment required for a new factory is of a very high order namely almost Rs 100 crores
At present the only manufacturers of commercial vehicles are Telco which produces Tats Vehicles Hindustan Motors Ltd which produces Hindustan Vehicles Premier Automobiles which produces Premier Vehicles and Ashok Leyland Ltd which produces Leyland vehicles
The supply of commercial vehicles is far below 695 the requirement of the industry
The gap between the demand and the supply is increasing with the passage of time as the trade is developing at a faster pace than the growth in the number of vehicles produced
The Government of India esti mated during the year 1974 75 the production of 56300  medium and heavy vehicles
The production however is now likely to be of the order of 35000
The Fifth Five Year Plan for the production is said to be increased to 80100
It is said that against this target the installation capaci ty today is 46300 vehicles
Even if the expansion pro gramme is fully implemented the installed capacity by the end of the Fifth Five Year Plan will be only 66975 vehicles per year
The scarcity which is a feature of this trade is accen tuated in the case of Telco s vehicles because they are in great demand all over the country and even in the export market n 1974
it is said that Telco exported vehicles amounting to 86 of the total export from the country
The export earnings are said to be Rs 729 crores for 1101 vehicles
At the time of arguments it was suggested that Telco exports now vehicles worth Rs 10 crores
The clauses relating to territorial restriction in the present case do not constitute restrictive trade practice for the following reasons The domestic market in India is spread over this vast sub continent with very divers conditions of roads popula tion and demand
It is essential for the community the consumer and the manufacturer to have an equitable geograph ical distribution of his vehicles
Vehicles may be required for operation in any part of India and public interest requires that the channels of communication should be open throughout the country
These vehicles should ply even in the remotest areas like Ladakh Nagaland etc
A user of Telco vehicles expects to get all over the country the service of a high standard enjoined by Telco upon its dealers
Telco on its part also needs a country wide network of dealers so that sales take place and the dealers can maintain the service stations spare part stocks and workshops with the requisite equipment machinery and trained personnel all over the country
This also enables the consumers to rely on Telco s vehicles since they in turn can expect services repairs and spare parts all over India
Telco has thus to ensure an all India network of dealers including those which will serve remote areas
It is evidence that commercial vehicles is a highly complex mechanical product
When Telco sells a vehicle it also
has a responsibility that the vehicle is kept running and maintained in the optimum condition Telco must preserve its reputation and ensure that the vehicles are only sold by dealers who have the requisite facilities and organisation to give the proper after sales service
Unlike most consum er products a commercial vehicle involves a continuous relationship between a dealer and a consumer
The consumer looks to the dealer for keeping the vehicle running and for all attendent facilities like 696 service stations workshops and spare parts
Reliability and repair of a vehicle which represents a substantial invest ment for the consumer is vital also to the public as a whole and there must be constantly available throughout the country a network of dealers with adequate repair and main tenance service
Even before the delivery of a commercial vehicle to the consumer there is a meticulous pre delivery inspection and service by the dealer
After delivery Telco gives three free services
Telco also gives a war ranty for a period of six months from the date of registra tion or 12 months from the date of delivery of vehicle from the factory or for a period in which the vehicle has run for a distance of 32000 kilometers whichever expires earlier
There are outstanding distinctions between a car dealer and a commercial vehicle dealer
The peculiar characteris tics of dealers  in commercial vehicles are theseThe pur chase of a car in India rarely represents the substantial or the bulk of the investment of a purchaser
The purchase of a commercial vehicle however represents the substantial and often the only capital investment of the owner
A chassis manufactured by Telco is sold to the customer at almost a lakh of rupees and the body costs him about Rs 15000 for a truck and about Rs 40000 for a bus
Over 80 of per sons owning trucks are individual owners having not more than two trucks and mostly only one truck
The vehicle is normally constantly on the road and is put to the maximum possible use with often more than one driver plying it
Thus a vehicle plies on an average over a lakh of kilometers per year
The heavy investment also makes it necessary that a vehicle should be constantly on the move
The owner can ill afford to waste time and requires easily accessible and prompt Service Stations Workshops and stocks of spares
The purchaser regards the truck as a life time investment
The purchaser looks to the dealer for prompt after sales service and repairs
Since 80 of truck operators are individual operators and often have scant mechanical knowl edge they have to depend upon the dealer for keeping the truck moving with the necessary trained personnel work shop service stations and stocks of spares
As a result of these characteristics the relationship between a dealer and the truck purchaser is much more constant than with the car purchaser
The standard of service he expects is more vigorous and prompt
Vehicles of Telco are in keen demand both because of their quality as also because of the assurance of efficient after sales service by the network of Telco dealers
These requirements cannot be met unless there is a network of dealers with specific territories
It is essential from the angle of the consumer Telco and the public that there should be widest and equitable geographical distribution of the vehicles of Telco
Public interest itself requires that the vehicles should not be concentrated in metro centres or urban areas where there is a high demand for them to the determent of the remote areas or sami urban areas
The consumer also plies trucks all over the country and expects that where ever he goes whether to Kerala or Assam there should be a dealer a service station a workshop trained personnel and spare parts which can attend to Telco trucks
697 Urban area centres like Bombay Delhi and Calcutta have a very large demand as compared to the rest of the country
But at the same time Telco
has to ensure sales in places like Kashmir Nagaland
and Tripura where the demand is much less
In fact in some of these areas there are no alternative means of communication and transport like rail ways and the life of the community is largely dependent upon road transport
Even where the demand is less there has to be a dealer with the necessary facilities and organisation for after sales service Telco appoints dealers
for different territories in India
The geographical network is natural to the industry itself
The purchaser will purchase and get his vehicle serviced in his own territory
The purchaser looks to a dealer in his own territory with whom he has relationship and who will give him credit facilities who will render after sales service and from whom he can purchase spares who will handle warranty claims and with whOm he can have constant relationship for purchases in future
Unless a dealer is assured of customers in his own area and zones he will not have the necessary incentive to maintain the optimum level of service stations workshops and spare part stocks nor can the dealer plan his resources including technical personnel capital equipment and financial resources for his future commitment
Telco regards after sales service of crucial importance to serve its consumers
It is natural and cheaper for a purchaser to buy and service his vehicles in his own terri tory
After sales service of Telco is fairly elaborate and complex and it is because of the standard of this service that Telco has been able to maintain the reputation
Each dealer is required to provide one premises for show room service station workshop spare parts shop canteen and also a rest house for drivers b equipment and machinery for maintenance and repairs c set or sets of special tools specially designed for carrying out repairs to Telco s vehicle d Technical personnel including person nel trained by the appellant at its factory in Jamshedpur and
e adequate stock of spare parts to meet the potential demand in the territory
Telco has set up 13 zonal offices throughout India at New Delhi Kanpur Ahmedabad Indore Bombay Bangalore Madras Vijyawada Bhubaneshwar Jamshedpur Gauhati Jul lunder and Jaipur
If the territorial restriction is re moved there will be a tendency for persons to book orders in areas thus starving the consumers of that area of their equitable share and disrupting the flow of vehicles in both areas
This will create pockets of artificial scarcity and dislocate the network
If the dealer is not assured of a steady demand in his territory he may have no incentive or may not find it economic to organise proper after sales service
This would also result in dealers diverting their supplies to metro centres starving the semi urban and rural areas
Network of dealers and service stations has a direct relation with the territorial assurances given to each dealer
It is as a result of such assurances that a dealer is able to maintain the whole chain of dealership network service stations stocks of spare parts trained per 698 sonnel equipment special tool kits and given the optimum service as laid down by Telco to its vehicles
Some of the dealers have even maintained mobile service vans
The dealer has to invest a large amount in providing all these facilities
The dealer is familiar with his territory and in view of the potential sales takes steps to improve his organisation
If these clauses are omitted the dealer would not make investment and would neglect the service facilities to the detriment of the consumer
In the light of scarcity in the supply of vehicle s and the need to distribute Vehicles to all the dealers in India Telco makes equitable distribution of its products by taking into account these factors a Population of commercial vehicles in the dealer s territory b Orders from customers pending with the dealer c Preference for Tata diesel vehicles as against other makes in the territory of the dealer d Past sales performance of the dealer e Effective after sales service provided by the dealers f Special requirements of the territory during the erection of Government Projects such as steel plants construction of dams etc
 g Emergency requirements of the territory on account of drought flood relief etc h Government recom mendations for meeting certain specific requirements i Dependence of the particular territory on road transport and j Requirements of State Government and nationalised trans port undertakings which are procured through dealers
The demand for the vehicles has always exceeded the supply making it imperative for Telco to ensure equitable distribution of the vehicles to the various parts of the country
There are many commercial agreements under which the territories are divided among distributors and such agreements do not constitute restrictive trade practice where the whole object is to ensure fair efficient and even distribution particularly of a commodity which is in short supply and in great demand
If these were not done and it was permitted for one dealer to encroach on the territory of another this would affect the flow of vehicles into the market leaving some territories unsupplied
In order to prevent this undesirable position that dealers were appointed for different territories and care was taken consistently to see that all parts of the country are treat ed equally and fairly
The exclusive dealings do not impede competition but promote it
Such dealings lead to specialisation and im provement in after sales service
The exclusive dealership agreements do not restrict distribution in any area or prevent competition
The customer has the choice of buying any make he likes
The advantage of exclusive dealership is that a dealer specialises in his own type of vehicle with all the attending advantages of trained personnel special service stations workshops and spare parts
Each set of special tools costs approximately Rs 55000
The set is suitable for servicing one vehicle at a time
Some dealers like the United Motors Pvt Ltd Bombay have four sets at Colaba Wadi Bunder Jogeshwari and Chembur
The invest ment of United Motors is approximately Rs 24 lakhs
It is estimated that one service station with special tools of Telco and workshop equipment will cost as much as Rupees five lakhs
699 It is by specialising in each make of vehicle and pro viding the best possible service that the competition between the various makes is enhanced
It is practically not possible for the same dealer to have parallel lines of service stations workshops spare parts trained personnel for different makes
It is also not practical for the dealer to maintain different and competitive standards laid down by different companies which may differ from manufac turer to manufacturer
If a dealer has more than one fran chise the competition between the various makes will be reduced
It will be difficult for the manufacturer to make the dealer responsible for his make and concentrate on it
There may be conflicts between his responsibility for after sales service
Telco commenced appointing dealers in 1954
At that time 25 or 26 dealer s were appointed
The number increased to 68
There are also sub dealers
Each dealer is required to make a security deposit varying from Rs 1 lakh to Rs 6 lakhs
Telco pays interest on deposits and security depos its
A dealer has to invest a minimum of Rs 5 lakhs in his establishment
The range of investment would vary from Rs 5 lakhs to Rs 50 lakhs depending upon the largeness of the place
Dealer Apprentices are trained by Telco in its factory at Jamshedpur
Telco also trains Trade Apprentices
The dealer also pays the apprentice stipend
If territorial restrictions are removed there will be unequal distribu tion of vehicles in various territories
While there will be shortage in some territories there will be larger sup plies in others
Vehicles are supplied by Telco according to territorial requirements
Various factors are taken into consideration in assessing the requirements of territo ries
By making it s dealers exclusive to Telco there cannot be said to be any prevention distortion or restriction of competition in the territory in which a dealer operates either between manufacturers of the same type of vehicles or between dealers in these vehicle
Any manufacturer of vehicles such as those of Telco may manufacture and sell its vehicles in a territory in which Telco s dealers operate
Any other manufacturer of vehicles similar to those of Talco is also free to appoint dealers of its choice in the same territory covered by Telco s dealers
The channels for outlet for vehicles have not been blocked by the fact that the dealers appointed by Telco are exclusive to Telco nor it can be said that Telco has by its exclusive arrange ment with its dealers affected the flow of supplies of vehicles into the market
If Telco Sold themselves in each territory it could not be said that Telco was pursuing any restrictive trade practice
Would the position change if Telco asked their dealers not to sell Telco bus chassis outside the dealer s territory Just as Telco could not complete with itself similarly dealers would not compete with one another
The competition would be between Telco products and the products of the other manufacturers Premier Hindustan and Leyland Restrictive trade practice is based on reason embodied in Section 20 of the Act
When trucks are in short supply and dealers are 700 restrained from selling at above the maximum price they cannot sell below the maximum price and compete with one another
Dealers of the same manufacturer do not compete with one another in every case irrespective of the market conditions or the character of the product sold
Competition between dealers appointed by the same manu facturer can be reduced when there is a practical possibili ty of such competition as for example When the goods are in abundance
When there is an acute scarcity of goods and there is no possibility of dealers selling the product at less than the permissible price it would be irrational to talk of territorial limits restricting competition
Restric tion on competition postulates the existence or the possi bility of competition
On the facts proved in the present case the only competition possible is between the dealers and the manufacturer section The territorial restriction pro motes competition between the four manufacturers in every part of India while it has no effect of any theoretical competition between the dealers because such competition between dealers does not and cannot exist
The question of competition cannot be considered in vacuo or in a doctrinaire spirit
The concept of competi tion is to be understood in a commercial sense
Territorial restriction will promote competition whereas the removal of territorial restriction would reduce competition
As a result of territorial restriction there is in each part of India open competition among the four manufacturers
If the territorial restriction is removed there will be pockets without any competition in certain parts of India
If the dealer in Kashmir is allowed to sell anywhere in India wealthy cities like Delhi Bombay Calcutta will buy up trucks allocated for Kashmir and the buyer in Kashmir will not be able to get the trucks
The other three manufactur ers whose trucks are not in equal demand will have Kashmir as an open field to them without competition by Telco
Therefore competition will be reduced in Kashmir by the successful competitor being put out of the field
The real reason for exclusive dealership is that instead of diminishing competition between four manufacturers each dealer tries to do his best for his own trucks bus and thus reduce keen competition among the four manufacturers
If one dealer deals in trucks of one or more manufacturers one cannot be expected to compete with itself it is therefore clear that exclusive dealership promotes instead of re tarding competition
Clauses 1 and 3 are in the interest of the consumer and ensure equal distribution as far as possible of the goods at a fair price
These provisions do not tend to obstruct the flow of capital or resources into the stream of production or to bring about manipulation of prices or conditions of delivery or to affect the flow of supplies in the market relating to goods or services in such manner as to impose on the consumers unjustified costs or restrictions
701 In the present case the restriction imposed by Telco on dealers not to sell bus and chassis outside their territo ries does not restrict competition for the foregoing rea sons
The other term of exclusive dealership in clauses 6 and 14 of the agreement between Telco and the dealers that the dealer will not sell commercial vehicles of other manufac turers does not amount to a restriction in competition because other manufacturers can appoint other persons to deal in their commercial vehicles
It is also in public interest to see that vehicles of other manufacturers are sold in the same territory by other dealers
Therefore there will be competition between the manufacturers of different commercial vehicles and as far as exclusive dealership of Telco commercial vehicles is concerned it will be in public interest  and not be a restriction in competition
The two terms of restriction on dealers namely sale being confined within the territory and the other being confined to dealing in only Telco vehicles are not prejudi cial to public interest
The Commission found that exclu sive nature of dealership of being confined to Telco vehi cles is not prejudicial to public interest
The territorial restriction is also
in public interest and the Commission was in error in thinking that it is not so
For the foregoing reasons the appeal is accepted
The decision of the Commission is set aside
We hold that the agreement in the present case is not within the vice of restrictive trade practice and is therefore not registra ble
We make it clear that in a given case sale of commodi ties being confined to a territory may amount to a restric tive trade practice
In the special features and facts and circumstances of the exclusive dealership agreement between Telco and the dealers the territorial restriction imposed on the sellers not to sell vehicles outside their territories is not a restrictive trade practice
Parties will pay and bear their own costs
PBR Appeal allowed


Summary:
Section 2o of the Restrictive Trade Practices Act 1969 defines restrictive trade practice to be a trade practice which tends to bring about manipulation of prices or conditions of delivery or to affect the flow of supplies in the market relating to goods or services in such manner as to impose on the consumers unjustified costs or re strictions
Section 33 provides that any agreement relating to a restrictive trade practice falling within one or more of the categories a to I specified in sub s1 thereof shall be registered
Section 37 enacts that the Monopo lies and Restrictive Trade Practices Commission may inquire into any restrictive trade practice whether the agreement relating thereto had been registered under section 35 or not
Under section 38 when the Commission finds that such re strictions are necessary or justified in the circumstances mentioned in the section it may permit such restrictions
The appellant is a manufacturer of heavy and medium commercial vehicles
The appellant enters into an agreement with dealers in regard to sale of its vehicles
Clause 1 a of the agreement provides that a dealer shall buy from the Regional Sales Office of the company a new Tata diesel truck for resale within the territory described in accord ance with the provisions of the agreement
Clause b provides that the agreement shall not preclude the company from entering into any dealership agreement with any other person or persons within the said territory
Clause 3 prohibits the dealer from selling the vehicles either di rectly or indirectly to any person outside the territory
Clause 6a provides that the dealer shall maintain an organisation for the sale of the vehicles in accordance with the directions of the appellant
Clause 14 prohibits the dealer from handling or selling vehicles manufactured or supplied by any other company
In a petition under section 10aiii of the Act the Regis trar of the Restrictive Trade Practices alleged that cls
1 and 3 of the agreement between the appellant and its dealers provided for territorial restrictions or allocation of areas or market cl
6 provided for resale price main tenance cl 14 provided for exclusive dealership and all these clauses of the agreement showed that the appellant was indulging in restrictive  trade practices relating to allo cation of territories or areas among its dealers and that the appellant was not willing to abandon the restrictive trade practices
The Commission held inter alia
that cls
1 and 3 of the agreement
constituted restrictive trade practices and therefore void
It was contended on behalf of the respondent that irrespec tive of the injurious or beneficial consequences of a trade practice which may restrict competition an agreement may fall within the definition of that term in section 20 of the Act
An injurious or beneficial result Of the restriction is relevant only for purposes of section 37 and section 38 and not for the purposes of section 33
Allowing the appeal HELD The agreement in the present case was not within the vice of restrictive trade practice and was not registra ble
686 1 An agreement will be registrable when it will have both the effect of restricting competition within the meaning of section 20 and also deal with the subject matter described in sections 331a to I
A practice which is not restrictive under section 20 of the Act cannot be a restrictive trade practice only because of cls
a to 1 of section 331
Section 33 does not provide statutory illustrations to section 20 of the Act but only enumerates some types of trade practices which if they are restrictive within section 20 require registration
693 F G 2 The definition of restrictive trade practice is an exhaustive and not an inclusive one
The decision whether a trade practice is restrictive or not has to be arrived at by applying the rule of reason and not on doctrine that any restriction as to area or price will per se be a restrictive trade practice
The question in each case is whether the restraint is such as regulates and thereby promotes competi tion or whether it is such may suppress or even destroy competition
To determine this question three matters are to be considered namely 1 what facts are peculiar to the business to which the restraint is applied 2 what was the condition before and after the restraint was imposed and 3 what was the nature of the restraint and what was its actual and probable effect
693 D F 3 When the authorities under the Act want to challenge any agreement or any practice as a restrictive trade prac tice it has to be established that it is a restrictive trade practice within the definition of section 20
If it is found that it is a restrictive trade practice it has to be registered under s 33
It is only after an agreement had been registered that there is an enquiry under Chapter VI of the Act
This enquiry under section 37 is to find out whether a restrictive trade practice is prejudicial to the public interest
692 H 693 A 4 The two terms of restriction on dealers namely one confining sales within the territory and t_he other confin ing dealers to dealing in only the appellant s vehicles are not prejudicial to public interest
The territorial re striction is also in public interest and the Commission was in error in thinking that it was not so
701 C D In the instant case the supply of commercial vehicles is far below the demand and the gap between supply and demand is growing
The vehicles of the appellant were in great demand not only in the country but outside the country as well
Clauses relating to territorial restric tion do not constitute restrictive trade practice because the domestic market is spread all over the country to meet the needs of the users of vehicles the appellant has a countrywide network of dealers who maintain service sta tions workshops requisite equipment machinery and trained personnel
The appellant ensures that the vehicles are only sold by dealers who have the requisite facilities and organisation to give after sales service
The appellant gives a warranty in respect of the vehicles
A geographical network is natural to the industry which the appellant has set up
The appellant has zonal offices throughout the country
If the territorial restriction is removed there will be a tendency for person to book orders in all areas thus starving the consumers of a particular area of their equitable share and disrupting the flow of vehicles in both areas
If the dealer is not assumed of a steady demand in his territory he may have no incentive or may not find it economic to organise proper after sales service
Some of the dealers have even maintained mobile service vans
694 H 695 A The exclusive dealings of the appellant do not impede competition but promote it
Such dealings lead to special isation and improvement in after salesservice
The exclu sive dealership agreements do not restrict distribution in any area or prevent competition
By making its dealers exclusive it cannot be said that there is prevention distortion or restriction of competition in the territory in which the dealer operates
Any manufacturer of vehicles similar to those of the appellant is also free to appoint dealers of its choice in the Same territory covered by the appellant s dealers
The channels for outlet for vehicles have not been blocked
699 F G 687 When there is acute scarcity of the goods and there is no possibility of dealers selling the product at less than the permissible price it would be irrational to talk of territorial limits restricting competition
Territorial restriction promotes competition between the different manufacturers in every part of India
700 B C Clauses 1 and 3 are in the interest of the consumer and ensure an equal distribution as far as possible of the goods at a fair price
Clauses 6 and 14 do not amount to a restriction in competition because other manufacturers could appoint other persons to deal in their commercial vehicles
It is also in public interest to see that vehi cles of other manufacturers are sold in the same territory by other dealers
701 B C