PETITIONER:
TATA ENGINEERING & LOCOMOTIVE CO. LTD., BOMBAY
Vs.
RESPONDENT:
THE REGISTRAR OF THE RESTRICTIVE TRADEAGREEMENT, NEW DELHI
DATE OF JUDGMENT21/01/1977
BENCH:
RAY, A.N. (CJ)
BEG, M. HAMEEDULLAH
SINGH, JASWANT
CITATION:
1977 AIR 973 1977 SCR (2) 685
1977 SCC (2) 55
ACT
Monopolies & Restrictive Trade Practices Act, 1969--ss.
2(0) and 33--Scope of.
Agreement--If amounts to a restrictive trade
practice--Tests for deciding.
HEADNOTE
Section 2(o) 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-s.(1) 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 s. 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 6(a) 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 s. 10(a)(iii) 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 s. 2(0) of the
Act. An injurious or beneficial result Of the restriction
is relevant only for purposes of s. 37 and s. 38 and not
for the purposes of s. 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 s. 2(0) and also deal with the subject matter
described in ss. 33(1)(a) to (I). A practice which is not
restrictive under s. 2(0) of the Act cannot be a restrictive
’trade practice only because of cls. (a) to (1) of s.
33(1). Section 33 does not provide statutory illustrations
to s. 2(0) of the Act but only enumerates some types of
trade practices which, if they are restrictive within s.
2(0), 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 s. 2(0). 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 s. 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]
JUDGMENT
CIVIL APPELLATE JURISDICTION:Civil Appeal No. 1117(NCM) of
1976.
(From the Judgment dated the 25.7.1975 of the Monopolies
& Restrictive Trade Practices Commissioner New Delhi in
R.T.P.E. No. 1 of 1974)
N.A. Palkhivala, F.S. Nariman, Ashok H. Desai, Ravinder
Narain, B. Dadachanji, O.C. Mathur, S. Swarup, Talat Ansari,
Shri Narain, John and D.N. Mishra, for the Appellant.
Lal Narain Sinha, Mrs. Shayamla Pappu, G.A. Shah, R.N.
Sachthey, Girish Chandra and B.B. Sawhney, for the Respond-
ent.
R. Narain, J B. Dadachanji,
O.C. Mathur, S. Swarup, Talat
Ansari, Interveners for M/s. Hindust*an Livers Ltd., Ashok
Leyland Ltd. Escorts Ltd.
K. J. John, for M/s.
Hindustan Livers Ltd.
Anil B. Divan, R. Narain, LB.
Dadachani, O.C. Mathur, S.
Swarup, Talat Ansari, S. Narain, Interveners for CIBA
Geigy of India Ltd.
Ashok, M. Desai R. Narain
J. B. Dadachanji, O.C. Mathur,
Talat Ansari, S. Swarup &
D.N. Mishra, Interveners for Batliboi & Co. (P) Ltd.
The Judgment of the Court was delivered by
RAY, C.J.--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 2(o) 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-
2section(1) 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 10(a) (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 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.
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 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.
3. 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.
6. (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.
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."
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 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.
10--112SC1/77
692
The Commission held that the moment an agreement con-
tained a trade practice falling within any of the clauses in
Section 33(1) 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 38(1) 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
10(a)(iii) 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
2(0) 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 33(1) 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 33(1) of the Act. An agreement will
be registrable, when it will have both the effect of re-
stricting competition within the meaning of Section 2(0) 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
2(0) 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 2(0) of the Act but only
enumerates some types of trade practices which. if they are
restrictive within Section 2(0) 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 2(0) 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 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 80,1.0,0.
It is said that against this target the installation capaci-
ty today is 46,300 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 66,975 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. 7.29 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 32,0.00 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 these:The 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. 15,000/- for
a truck and about Rs. 40,000/- 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. 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 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 2(0) 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’s. 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.
P.B.R.
Appeal allowed.
702