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Loyalty Rebates And Discounting Schemes By Companies In India

India, with its spreading domestic firms and phenomenal brand building by the emerging companies has become one of the world‘s fastest growing economies. Competition in the market is ever increasing and in order to compete in the market, retain customers and increase consumer base, the companies adopt different schemes like giving hefty discounts and loyalty rebates. Providing with performance bonuses, loyalty discounts, reimbursements and target sales have always been a part of business. These schemes can be either anti-competitive or can be justified economically by exploring the consequence in the market. Every discounting scheme and rebate practice is analyzed individually by looking into whether the enterprise is dominant the relevant market and if so then whether the practice had strengthen a business in such a way that the market is not only blocked for new entrant but also for the existing non-dominant rivals.

Loyalty rebates are the refunds offered in exchange of exclusive agreements between the customer and the company. Such arrangements are prevalent in Indian e-commerce market in the form of cash backs offered by companies for buying goods and services from them, such cash could be used in future for buying goods or services from the same company. Some airlines offer extra travel miles to the customers for every mile they travel with them, these can be used in future for buying tickets from the same airlines. Some companies offer credits which can be used as cash while buying goods or services from those companies. These schemes are not only favorable for attracting customers by offering goods and services at lower price but also helps in retaining them.

Provisions Under The Competition Act, 2002

Under Indian competition law, fidelity rebates and discounts are not prohibited per se but they can be probed by CCI for the schemes resulting in exclusive agreements which can be anti-competitive. These practices are considered legitimate for the purpose of sustaining and competing in the market on the merit of business when there is proper justification. The question of such practices being anti- competitive arise when the conduct of enterprises shows their intention to distort competition in the market by creating entry barriers and driving out competition for same products and services.

The Competition Act, 2002 under section 3 prohibits “anti – competitive” agreements entered into by any enterprise. Specifically section 3(4) deals with vertical agreements, the loyalty rebates and discounts and they can be considered anticompetitive if they have appreciable adverse effect on competition.

Loyalty rebates when offered by dominant players in the market can also be scrutinized under section 4(1) of the act which states no enterprise shall abuse its dominant position.

Position Held By The Competition Commission of India
As per CCI, one of the key factors to determine dominance[1]in the relevant market is market share of the enterprise in question. A company not holding dominant position in the relevant market does not come under scanner of CCI for causing foreclosure. It is generally accepted view that high market share for a long duration can indicate dominance and less competition constraints. In the view of CCI it cannot be applied to all business.

Since, there is no numerical threshold for dominant market share in the act; the determination of dominance depends on the case by case analysis of the market dynamics, competitive strategies of dominant firms, implication of dominance along with market share. Market share of more than 50% does not lead to presumption of dominance[2].It is important to establish dominance of an enterprise before alleging its discounting strategies as anti- competitive.

The excessive loyalty rebates and heavy discounts provided by a new entrant are seldom objected by CCI. As in the case of provision of free 4g internet services by Reliance Jio[3], CCI took the view in absence of dominant position in the market, the question of abuse does not arise. Demonstration of reduction of competition or elimination of any competitor is required to hold a company in breach of provisions. Dominance in the relevant market and anti-competitive objective are to be proved for making such rebates and discounts anti-competitive. CCI took a liberal stand stating that in a competitive market scenario, where there are already big players operating in the market, it would not be anticompetitive for an entrant to incentivize customers towards its own services by giving attractive offers and schemes. Such short-term business strategy of an entrant to penetrate the market and establish its identity cannot be considered to be anti-competitive in nature and as such cannot be a subject matter of investigation under the Act. According to CCI if such practices were to be objected then expansion and growth of the market would be limited.

In the case of HMIL[4], CCI examined various issues including that maximum retail price and maximum permissible discount which could be given by dealers, effectively amounts to setting a minimum resale price, thereby resulting in RPM (Resale Price Maintenance) and concluded that setting a limit on maximum discount is RPM and that analysis of this shall include intra and inter brand competition along with the factors given under section 19(3) of the act. CCI noted that HMIL has made it compulsory for all dealers to buy engine oil from only two designated venders and noncompliance leading to termination of dealership agreement was a tie-in agreement and was in contravention of section 3(4) (a) of the Act. CCI took a pro-business approach in deciding the case affirming that exclusivity is not anti-competitive per se[5].

Position Held By The European Union
The traditional approach of EU as reinforced by ECJ in theTomra[6]decision was the per se approach ,a rebate programme by a dominant firm will be per se violation if such rebates are given in exchange for customer loyalty and are not based on efficiencies or genuine cost savings. ECJ was of the view that when any dominant entity makes use of the information about its central customers to set rebate thresholds in such a manner as to compel customers to make most of their purchases from the dominant firm then its excluding rival entities from the relevant market (this situation is termed an "individualized" rebate); or applying the discount not only to purchases over a certain threshold, but to a customer's entire order, the dominant firm thereby penalizes customers who do not purchase all of their requirements from the dominant entity (such rebates are termed "retroactive"). Under the per se approach, such individualized and retroactive rebate schemes are viewed as preventing customers from making purchases from alternative suppliers, as doing so would in effect penalize the customers through the denial of the discount and the imposition of associated switching costs. In the per se view, these rebate schemes are therefore deemed to be a barrier to entry that prevents other competitors from entering into or expanding in the market.

But in the case of Intel[7], In May 2009 the Commission imposed a fine of €1.06 billion, the largest fine ever imposed on a single undertaking, on Intel for an abuse of a dominant position in the market for computer processing units (‘CPUs’) by off erring rebates to computer manufacturers conditional upon them purchasing all or the great majority of their CPUs from it. ECJ reversed the ruling considering the Commission Guidance Paper[8], stated that the only type of rebates that are illegal per se are the ones which are conditioned on exclusivity. When the dominant entity does not raise any exclusion defense, then analysis of the scheme on merit is must be undertaken. Commission diverted from the per se approach stating that there is no per se illegality attached to rebate schemes by dominant companies and the analysis to be made is that whether the rebate programme would drive out efficient competitors from the market. If such practice leads to exit of an inefficient competitor from the market then such practice is not anti-competitive but a part of the competition. This is a relief for the companies as they have better scope for making compliant and innovative rebate schemes without fearing the inclusion in category of abusive rebate.

The business friendly approach adopted by both CCI and ECJ are in favor of market since rebates are often pro-competitive. Such schemes adopted by companies promote other equally efficient competitors to become more competent. The Commissions have changed their view from, heavy discounts and rebates offered by dominant companies leads to the driving out of potential and present competitors to the pro competitive effects like the contest between companies to lower cost and become more innovative, effective and advance to survive competition. The consumer being at the end will receive benefits fulfilling the objective of consumer benefit. In the ever improving technology and fast evolving market, the restriction of freedom of companies will limit innovation not being in business interest.

[1]In Re: Mr. Vilakshan Kumar Yadav and othersv. M/s ANI Technologies Private Limited, Case No. 21 of 2016, CCI, decided on August 31, 2016
[2]In Re: Fast Track Call Cab Pvt. Ltd. and other v. ANI Technologies Private Limited,Case No.6 & 74 of 2015 ,CCI, decided on July 19, 2017
[3]In Re: Bharti Airtel Limitedv.Reliance Industries Limited and others, Case No. 03 of 2017, CCI, decided on June 6, 2017
[4]In Re: Fx Enterprise Solutions India Pvt. Ltd. and Hyundai Motor India Limited, Case No. 36 & 82 of 2014, CCI, decided on June 14, 2017
[5]Dr. L.H. Hiranandani Hospital V Competition Commission of India & another, Appeal No. 19 of 2014
[6]Tomra Systems ASA and Others v European CommissionCase C-549/10 P [2012] ECR 0000.
[7]Intel v Commission, EU: T: 2014:547, appealed C-413/14 P - Intel Corporation.
[8] Communication from the Commission: Guidance on its enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, OJ C 45, 24.2.2009, p. 7–20

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