COMPETITION COMMISSION OF INDIA Case No. 35 of 2018 In Re: M/s Karni Communication Informant No. 1 Private Ltd., G-22, Hemkunt Chambers, 89 Nehru Place, Delhi- 110019 M/s Karni Telnet Private Ltd. Informant No. 2 G-63, Ground Floor, East of Kailash, New Delhi – 110065 And Haicheng Vivo Mobile (India) Opposite Party No. 1 Private Ltd. O-16, 2nd & 3rd Floor, Lajpat Nagar Part-II New Delhi- 110024 Vivo Mobile India Private Ltd. Opposite Party No. 2 10th & 11th Floor, Palm Springs Plaza (Complex) Village Wazirabad, Sector-54, Gurugram, Haryana-122003 Vivo Communication Opposite Party No. 3 Technology Co. Ltd. No. 281, Wu Sha Bub U Gao Street, Chang An Town, Dongguan, Guangdong- 523860 Case No. 35 of 2018 1 CORAM: Mr. Ashok Kumar Gupta Chairperson Mr. U. C. Nahta Member Ms. Sangeeta Verma Member Present: For Informants: Mr. Rajshekhar Rao, Advocate, Mr. Abdullah Hussain, Advocate, Mr. Divye Sharma, Advocate, Ms. Prerna Parashar, Advocate, Mr. Karthik Sundar, Advocate, Mr. Om Baheti, Managing Director (Informant No. 1), Ms. Ananta Baheti, Executive Director (Informant No.1) For Opposite Party – 1: Mr. Vaibhav Gaggar, Advocate, Ms. Neha Mishra, Advocate, Ms. Aayushi Sharma, Advocate, Ms. Niti Richhariya, Advocate, Ms. Fiona, Finance Manager, Ms. Cindy, HR Manager For Opposite Party – 2: Mr. Aaditya Vijay Kumar, Advocate, Mr. Aneesh Sadhwani, Advocate, Mr. Manvendra Deo, Legal Counsel For Opposite Party – 3: None Order under Section 26 (2) of the Competition Act, 2002 1. The Information in the present case has been filed under Section 19(1)(a) of the Competition Act, 2002 (“Act”) by M/s Karni Communication Private Limited (“Informant No. 1”) and M/s Karni Telnet Private Limited (“Informant No. 2”), collectively referred to as Informants, against Haicheng Vivo Mobile (India) Pvt. Ltd.(“OP-1”), Vivo Mobile India Private Ltd.(“OP-2”) and Vivo Communication Technology Co. Ltd.(“OP-3”), collectively referred to as Opposite Parties (“OPs”), alleging contravention of provisions of Section 3(4) read with Section 3(1) of the Act. 2. As stated in the Information, OP-1 is in the business of trading and distribution of mobile handsets in India. OP-1, entered into a ‘Distributor Agreement’, with Informant No. 1, on 19.01.2017, wherein it was appointed as the non-exclusive distributor for the region Case No. 35 of 2018 2 of ‘South Delhi Part – I’, ‘South Delhi Part-II’ and ‘South Delhi Part-III’, for distribution of mobile handsets under the brand name, ‘Vivo’. OP-1 is stated to have entered into another ‘Distributor Agreement’ with Informant No. 2 in April, 2017, wherein it was appointed as a distributor for the region of ‘South Delhi Part –IV’ for distributorship of mobile handsets under the brand name Vivo. 3. The Informants have submitted that they were appointed as distributors for mobile handsets under the brand ‘Vivo’, accessories of mobile handsets ‘Vivo’ and such other products that OP-1 may supply from time to time, in consultation with the Informants. 4. It has been alleged that the representatives of OP-1 started approaching the Informants, since early 2017, stating that the retailers of the Informants were not adhering to the terms of the Distributor Agreements with respect to the following aspects: a) Restriction on online sales i) The Informants have submitted that pursuant to the aforementioned Distributor Agreements entered into between the Informants and OP-1, the Informants were bound by certain obligations towards OP-1, under clause 3 therein. Under these obligations, at sub-clause (p), the Informants were to take full responsibility for its retailers to ensure that no online sales take place, thereby implying that the sale of Vivo mobile handsets and accessories would not be allowed through the online channels of distribution to either the Informants or their retailers. ii) The Informants have made reference to the notifications with respect to ‘Goods being sold through online and below Minimum Operation Price’ (“MOP”), issued by OP-1. Through these notifications, the sales team of Vivo, including Informant No. 1, were informed about OP-1’s policy of strictly prohibiting online sales of its products and the penalty to be imposed on the members of sales team, in case they failed to adhere to these conditions. iii) The Informants have alleged that OP-1 was levying heavy penalties on the Informants and its retailers, in case sales were made via online marketplace. The Informants have submitted minutes of meeting held on 25.02.2017, at the office of OP-1. Case No. 35 of 2018 3 iv) The Informants have further submitted that as per OP-1’s ‘Shop Boy-Special Boost up Scheme’, each of Vivo branded mobile handsets must be sold in accordance with the MOP and must not be sold via online platform. Further, the scheme also dictated that in case OP-1 found out that any such sale of Vivo branded mobile handsets has been made online, OP-1 will cancel all payouts to the distributor. v) The Informants averred that according to the ‘Vivo All GT Dealer Monthly Scheme’, for February 2018, OP-1 restricted sale of Vivo branded mobile handsets via online platform by cancelling all payouts to the distributor who did not adhere to such restrictions. b) Market Infiltration Policy (“MIP”) i) As regards MIP, the Informants submitted that in gross violation of provisions of the Act, the OPs were collectively imposing a scheme of penalising the distributors/ retailers in the event they were found to be indulging in MIP. It has been submitted that Clause 3 of the Distributor Agreement lists the obligations of the Informants towards OP-1. Sub-clause (h) and (o), of the said distributor agreements explicitly imposed a restriction together with provision for imposition of penalties on the Informants, mandating them to comply with the condition that no sales will be made either by the Informants or by their retailers beyond the Authorised Distributor Zone. The aforesaid clauses are as follows: Clause 3(h) - “will not sell to any person or body corporate, the goods which they know or have reason to believe are intended for resale outside the Authorised Distributor Zone.” Clause 3(o) - “will take full responsibility to manage its retailers for any wholesale or any sale which they know or have reason to believe are intended to be market infiltration.” ii) The Informants have further submitted the following, to substantiate their allegation against MIP of OP-1: Case No. 35 of 2018 4 a. Minutes of the meeting attended by the distributors of OP-1 on 25.02.2017, which contained that several retailers were not maintaining the MIP in the relevant market due to which OP-1 was facing penalties from its Head Office. b. Notifications issued to the sales team of OPs, their distributors and retailers imposing penalties for violating the MIP. c. OP-1 was illegally levying penalties by way of issuing various Debit Notes on Informants. However, when it was brought to the notice of OP-1 that its own officials, were in fact indulging in market infiltration, a revised debit note was issued on Informant No. 1 and the amount of penalty levied was reduced. It is also relevant to mention that a debit note bearing no. DN-DL001 was arbitrarily revised on three different dates by the OPs for an alleged violation of MIP by Informants. Additionally, when the Informants approached representatives of OP-1 to raise their concerns over imposition of such arbitrary penalties for market infiltration, the representatives of OP-1 merely forwarded an e-mail containing the agreement which reiterated the market infiltration clauses that required ratification from retailers to not sell the products outside the geographic area. d. Imposition of penalties on Informant No. 1 for an alleged violation of the MIP. e. E-mail dated 13.02.2017 by OP-1 sent to distributor that the payout to the retailer for January 2017 would not be given as the retailer’s stock was found to have been sold in a territory outside the authorised distributor zone. f. E – mail trail between OP-1 and the Director of Informant No. 2 requesting the latter to become mystery shopper and catch infiltrators violating the MIP. c) MOP violation i) The Informants alleged that practice of the OPs mandating a MOP is Anti- competitive and in violation of the Act. It has been submitted that Clause 7 of the Distributor Agreements clearly mandates the MOP as follows: “The First Party (OP-1) shall be entitled to suggest MOP in respect of the resale or disposal by the Second Party’s (Informants) stock of the Products supplied to the DISTRIBUTOR as per orders Case No. 35 of 2018 5 placed by the Second Party. The Second Party shall ensure its retailers to sell not less than MOP suggested by First Party but he may at his discretion charge prices higher than the suggested MOP.” 5. The Informants have averred that due to the abovementioned reasons, OP-1 imposed an arbitrary penalty of five times the MOP on the Informants. 6. As per the Informants, OPs, also sent a list of International Mobile Equipment Identification (“IMEI”) numbers for stocks which were sold by the Informants to the retailers and found that the said IMEI numbers were sold in other states or wholesale markets, resulting in breach of the MIP. The Informants have further averred that prima facie such a MIP/ territorial allocation to dealers and distributors, is in contravention of the Act. The Informants have also submitted that all their requests to waive off the alleged penalties incurred on them were denied by OP-1.