Case: Tata Engineering &amp; Locomotive Co. Ltd., Bombay Vs. The Registrar of the Restrictive Trade Agreement, New Delhi

9. 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 principal manufacturers of commercial vehicles. These are The Hindustan Motors Ltd., Premier Automobiles Ltd. and Ashok leyland Ltd. and Telco.10. The supply of commercial vehicles is said to be below the demand. The scarcity of supply is particularly accentuated in the case of Telcos 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 market consumer preference for Telcos vehicles has been maintained because of the high quality of its products and also because of elaborate and comprehensive network of after-sales service provided by Telcos 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, Nagaland, 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 introduced a procedure to regulate the booking of 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.11. When Telco sells vehicles it has the responsibility of providing facilities for servicing and repairing the vehicles 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 entice the owners of the vehicles to keep them in operation.12. These facilities are provided by Telco through all India network of 68 dealers; 69 service centers/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 well 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.13. The Registrar, Restrictive Trade Agreements made an application under Section 10(a)(iii) of the Act before the Commission for enquiry under Section 37 of the Act into restrictive trade practices alleged therein. The allegations in the petition were these. Clauses (1) and (3) of the agreement between Telco and its dealers provide for territorial restriction or allocation of area or market and Clauses 6 and 13 provide for re sale price maintenance and Clause 14 provides for exclusive dealership. The Registrar submitted that Clauses 1, 3, 6 and 14 show that the company is indulging in restrictive trade practices inter alia relating to allotment of territories/areas 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.14. 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 and/or body (hereinafter referred to as the said vehicles) for resale within the territory described hereunder (hereinafter called the said territory) in accordance 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 territory for sale of the said vehicles and resale by that person thereof in the said territory, this Agreement with the Dealer does not constitute him a selling agent of the Company in the said territory, much less a sole selling agent.3. The Dealer shall 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 territory if the said vehicles are intended to be used outside the said territory.6.(a) The Dealer shall, at his own expense, maintain within the said territory such organisation 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.14. 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.15. 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 practices 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 maximum price at which goods can be resold by the Telcos dealers particularly when Clause 6(b)(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.16. Telco finally submits that none of the restrictions imposed in Clauses 1, 3, 6 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.17. The Commission held that the moment an agreement contained a trade practice falling within any of the clauses in Section 33(1) of the Act, the trade practice must be regarded as a restrictive trade practice. The Commission held that all the clauses alleged in the petition of the Registrar amounted to restrictive trade practices. The Commission 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 Telcos 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.18. The Commission further held that although the contractual term that the dealers could deal only in Telcos vehicles was a restrictive trade practice, it was not against public interest as it fell within Sub-clauses (a), (b) and (h) and the balancing clause of Section 38(1) of the Act.19. The Commission however held that the practice of allocation of territories to Telcos 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.20. Before the Commission Telco contended that the application of the Registrar was not in accordance with Regulation 55 of the Monopolies and Restrictive Trade Practices Commission Regulations, 1974, referred to as Regulations.

Reasoning:
21. Under the Regulations an application under Section 10(a)(iii) of the Act must contain facts which, in the Registrars 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 constitute restrictive trade practice in the context of facts.23. Section 33 of the Act states that any agreement relating 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 Sub-section (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 per sons or classes of persons to whom goods are sold or from whom goods am 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.24. 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 the doctrine that any restriction as to area or price will per se be a restrictive trade practice, Every trade agreement restrains or binds persons or places or prices.30. 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 Tata 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 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 estimated during the year 1974-75 the production of 56,300 medium and heavy vehicles. The production however, is now likely to be of the order of 35,000. The Fifth Five Year Plan for the production is said to be increased to 80,100. It is said that against this target the installation capacity today is 46,300 vehicles, Even if the expansion programme is fully implemented the installed capacity by the end of the Fifth Five Year Plan will be only 66,975 vehicles per year.31. The scarcity which is a feature of this trade is accentuated in the case of Telcos vehicles because they are in great demand all over the country and even in the export market. In 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. 7.29 crores for 1101 vehicles. At the time of arguments it was suggested that Telco exports now vehicles worth Rs. 10 crores.32. The clauses relating to territorial restriction in the present case do not constitute, restrictive trade practice for the following reasons:33. The domestic market in India is spread over this vast sub-continent with very diverse conditions of roads, population and demand. It is essential for the community, the consumer and the manufacturer to have- an equitable geographical 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.34. 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 Telcos vehicles since they in turn can expect services, repairs and spare parts all over India. Telco has thus to ensure an all India net work of dealers, including those which will serve remote areas.35. It is in evidence that commercial vehicles is a highly complex mechanical pro duct. 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 consumer pro ducts, 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 attendant facilities like service stations, work shops and spare parts. Reliability and repair of a vehicle, which represents a substantial investment 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 maintenance 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 warranty for a period of six months from the date of registration 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 32,000 kilometres, whichever expires earlier.36. There are outstanding distinctions between a car dealer and a commercial vehicle dealer. The peculiar characteristics of dealers in commercial vehicles are these : The purchase 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. 15,000/- for a truck and about Rupees 40,000/- for a bus. Over 80% of persons 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 in vestment. 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 knowledge, they have to depend upon the dealer for keeping the truck moving with the necessary trained personnel, workshops, 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.37. 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 centers or urban areas where there is a high demand for them, to the detriment of the remote areas or semi-urban areas. The consumer also plies trucks all over the country and expects that wherever 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. Urban area centers 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 railways 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.38. 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.39. 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 territory. 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 Telcos vehicles; (d) Technical personnel including personnel trained by the appellant at its factory in Jamshedpur and (e) Adequate stock of spare parts to meet the potential demand in the territory.40. Telco has set up 13 zonal offices throughout India at New Delhi, Kanpur, Ahmedabad, Indore, Bombay, Bangalore, Madras, Vijyawada, Bhubanashwar, Jamshedpur, Gauhati, Jullunder and Jaipur. If territorial restriction is removed, there will be a tendency for persons to book orders in (other?) 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 cent res starving the semi-urban and rural areas.41. 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 dealer ship network, service stations, stocks of spare parts, trained personnel, equipment, special tool kits and give 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 largo 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.42. In the light of scarcity in the supply of vehicles 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 dealers 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; (£) 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 recommendations for meeting certain specific requirements; (i) Dependence of the particular territory on road transport and (j) Requirements of State Government and nationalised transport undertakings which are procured through dealers.43. 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 pre vent this undesirable position dealers were appointed for different territories and care was taken consistently to see that all parts of the country are treated equally and fairly.44. The exclusive dealings do not impede competition but promote it. Such dealings lead to specialisation and improvement 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. 55,000. 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 investment 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 lakhs45. It is by specialising in each make of vehicle and providing 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 manufacturer to manufacturer. If a dealer has more than one franchise, the competition between the various makes will be reduced. It will be difficult for the manufactures to make the dealer responsible for his make and concentrate on it. There may be conflicts between his responsibility for after-sales-service.46. Telco commenced appointing dealers in 1954. At that time 25 or 26 dealers were appointed. The number in creased 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 deposits. A dealer has to invest a minimum of Rs. 5 lakhs m his establishment. The range of investment would vary from Rs. 5 lakhs to Rs. 50 lakhs depending upon the largeness of the place.47. Dealer Apprentices are trained by Telco in its factory at Jamshedbur. Telco also trains Trade Apprentices. The dealer also pays the apprentice stipend. If territorial restrictions are removed, there will be unequal distribution of vehicles in various territories. While there will be shortage in some territories, there will be larger supplies in others. Vehicles are supplied by Telco ac cording to territorial requirements. Various factors are taken into consideration in assessing the requirements of territories.48. By making its 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 vehicles. Any manufacturer of vehicles such as those of Telco may manufacture and sell its vehicles in a territory in which Telcos dealers operate. Any other manufacturer of vehicles similar to those of Telco is also free to appoint dealers of its choice in the same territory covered by Telcos dealers. The channels for outlet for vehicle 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 arrangement 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 dealers territory? Just as Telco could not compete with itself similarly dealers would not compete with one another.49. 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 2(o) of the Act. When trucks are in short supply and dealers are restrained from selling at above the maximum price they cannot sell below the maximum price and compete with one an-other. 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.50. Competition between dealers appointed by the same manufacturer can be reduced when there is a practical possibility 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. Restriction on competition postulates the existence or the possibility of competition. On the facts proved in the pre sent case the only competition possible is between the dealers and the manufacturers. The territorial restriction promotes 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.51. The question of competition cannot be considered in vacuo or in a doctrinaire spirit The concept of competition 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 with out any competition in certain parts of India. If the dealer in Kashmir is allowed to sale 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 manufacturers 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.52. 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 and buses and thus reduces(?) keen competition among the four manufacturers. If one dealer deals in trucks of one or more manufacturers one cannot be expected to compete with it self. It is, therefore, clear that exclusive dealership promotes instead of retarding competition.53. Clauses 1 and 3 are in lite interest of the consumer and ensure an 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 like market relating to goods or services in such manner as to impose on the consumers unjustified costs or restrictions.54. In the present case the restriction imposed by Telco on dealers not to sell bus and chassis outside their territories does not restrict competition for the foregoing reasons.55. The other term of exclusive dealership in Clauses 6 and 14 of the agreement between Teloo and the dealers that the dealer will not sell commercial vehicles of other manufacturers, 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.56. 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 pre judicial to public interest. The Commission found that exclusive nature of dealership of being confined to Telco vehicles 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.