2008 (5) TMI 409 - SC - Companies Law

Whether the Notice of Enquiry (NOE) is not maintainable for the preliminary objection taken by the appellant in its reply to the NOE? Whether the appellant has indulged in or is indulging in the alleged restrictive trade practices? Whether the alleged restrictive trade practices are not prejudicial to public interest? Held that - Appeal filed by the appellant is allowed with costs and the impugned judgment passed by the Monopolies and Restrictive Trade Practices Commission is set aside. In the instant case neither the notice nor the application even allege that the appellant has ever indulged in or that the alleged trade practice has or may have the effect of preventing distorting or restricting competition in any manner and in particular it inter alia tends to obstruct the flow of capital or resource into the stream of production or tends to bring about manipulation of prices or conditions of delivery or to affect flow of supplies into the market in such a manner so as to impose unjustified costs and/or restrictions on the consumers of goods in question and therefore ex facie neither notice nor the application are maintainable. Thus the Commission must be extremely careful before issuing notices to the parties because it has serious consequences on the reputation and credibility to the activities of those parties. Frivolous notices breed long-drawn avoidable litigation before various forums.

Summary

Issues Involved:
1. Maintainability of the Notice of Enquiry (NOE)
2. Alleged restrictive trade practices by the appellant
3. Prejudice to public interest by the alleged restrictive trade practices
4. Relief

Issue-wise Detailed Analysis:

1. Maintainability of the Notice of Enquiry (NOE):
The appellant contested the maintainability of the NOE on the grounds that the practices alleged do not fall under section 2(o) of the Monopolies & Restrictive Trade Practices Act, 1969 (MRTP Act). Section 2(o) defines "restrictive trade practice" as a trade practice that has the effect of preventing, distorting, or restricting competition. The Commission, however, found no merit in this preliminary objection, stating that the practices in question did fall under section 2(o) and thus warranted an enquiry.

2. Alleged Restrictive Trade Practices:
The Commission examined several clauses in the dealership agreement that were alleged to be restrictive:

- Territorial Restriction (Section 33(1)(g)): The Commission concluded that the dealership appointment letter, which stated "dealer at Rajkot," implied a territorial restriction. This was seen as limiting competition by confining the dealer to a specific area, thus impairing market competition and consumer choice. The appellant's argument that the identification of Rajkot was merely for establishing necessary facilities was not accepted due to lack of evidence showing freedom to sell outside Rajkot.

- Sales Targets (Section 33(1)(b)): The Commission found that setting sales targets for various products amounted to a tie-up arrangement, compelling the dealer to purchase certain products as a condition of purchasing others. This practice was deemed to fall under section 33(1)(b) as it imposed conditions on the dealer's purchases.

- Price Fixation (Section 33(1)(f)): The Commission observed that the dealership agreement allowed dealers to sell at lower than the recommended retail prices, which was beneficial to consumers. Thus, the charge of price fixation did not fall under section 33(1)(f) as it did not impose unjustified costs on consumers.

3. Prejudice to Public Interest:
The Commission held that the territorial restriction was prejudicial to public interest as it limited consumer choice and could lead to unfair dealings by confining consumers to a particular dealer. However, the price fixation clause was found to be in public interest as it allowed for lower prices, benefiting consumers.

4. Relief:
The Commission directed the appellant to cease the practice of territorial restriction and desist from repeating it in the future. The appellant was required to comply with this order within six weeks and file an affidavit of compliance within four weeks thereafter.

Appellant's Arguments:
The appellant argued that the practices alleged did not constitute restrictive trade practices under section 33(1)(b), (f), and (g) of the MRTP Act. They contended that the identification of Rajkot was for establishing necessary facilities and not for restricting sales territory. They also argued that setting sales targets was a motivational tool and did not compel dealers to purchase specific products. Furthermore, the price fixation clause allowed dealers to sell at lower prices, which was beneficial to consumers.

Judgment:
The Supreme Court allowed the appeal, setting aside the impugned judgment of the Commission. The Court emphasized that the Commission must be careful before issuing notices as they have serious consequences on the reputation and credibility of the parties involved. The Court found that the notice and application did not meet the legal requirements and were not maintainable. Consequently, the appellant was awarded costs.