The Confederation of Indian Alcoholic Beverage Companies (‘CIABC’) and Association of Distillers, Brewers and Vinters of India (‘AD’) (AD and CIABC are collectively referred to as ‘Informants’) had collectively filed information that Kerala State Beverages (Manufacturing and Marketing) Corporation Limited (‘KSBC’) acted in contravention of Section 4 of the Act.^[1] CIABC is an industry association representing alcohol beverage companies in India. AD is an association of large, small and medium scale distillers in Kerala. KSBC is an authority entrusted with exclusive control over the procurement, wholesale and retail sale of liquor in Kerala.

 Informant’s Allegations and KSBC’s Submissions

The Informants alleged that KSBC being a statutory authority responsible for procurement, wholesale and retail sale of liquor in Kerala, was dominant in the market for ‘procurement and distribution of branded alcoholic beverages in Kerala’. The Informant alleged that KSBC had imposed unilateral terms and conditions in the tenders issued for the purchase of alcohol, which had resulted in alcohol manufacturers having to sell liquor products to KSBC at losses. This had also resulted in the exit of few alcohol manufacturers from the market. It was further alleged that while the tender conditions provided for negotiations between KSBC and alcohol manufacturers for determining the sale price of liquor products, in practice, any such request for negotiation of prices was ultimately rejected by KSBC. This is despite the increasing costs of raw material that had to be absorbed by alcohol manufacturers. Ultimately, KSBC decided on all the prices for the purchase of products without allowing any suggestions of the alcohol manufacturers. This unilateral right exercised by KSBC was alleged to be both an ‘unfair condition’ and ‘unfair price’ in contravention of Section 4(2)(a)(i) read with Section 4(2)(a)(ii) and Section 4(1) of the Act.

KSBC, on the other hand, submitted that the tender process required alcohol manufacturers to submit a cost sheet containing the costs involved in the manufacture and sale of liquor products, including the profit margin for each brand. These cost components are then taken into consideration while fixing the selling price of a liquor product. Accordingly, the allegation that the prices for liquor products are unilaterally decided by KSBC was incorrect. KSBC also submitted that each alcohol manufacturer enjoyed significant margins and therefore, any exits in this market would likely be on account of the inability of such companies to compete in the market or due to other administrative reasons, and cannot be attributed to KSBC.

The Informants further alleged that KSBC grants preferential treatment and favorable conditions to Travancore Sugar & Chemicals Limited (‘TSCL’) (which was a Government owned alcohol brand) in terms of price increase, lower cash discount, and by instructing retail shops to sell Government brands on top priority, over the private brands. Such conduct of KSBC in removing the level playing field was alleged to be an abuse of dominant position by KSBC in contravention of Section 4(2)(a)(i) and Section 4(2)(a)(ii) read with Section 4(1) of the Act.

KSBC, on the other hand, submitted that TSCL is the only state-owned entity and that concessions that are given to TSCL are required for a public sector undertaking after duly following all norms, rules and statutory provisions in public interest. Further, such limited preferential allotment granted to one supplier (out of at least 100 suppliers that sell liquor products) would not distort competition or affect the profitability of other suppliers.

The Informants were also aggrieved by the cash discounts of varying ranges set out in the tender issued by KSBC. Initially, cash discount was stated to be levied at 2% which was subsequently increased to 7%, and is now at 7.75% for ranked brands, and 21.75% for non-ranked brands. Such high percentage of cash discounts sought by KSBC was alleged to have dampened the economic viability of the suppliers, and was alleged to be in violation of Sections 4(2)(a)(i) and 4(2)(a)(ii) of the Act.

KSBC justified such high cash discounts on the grounds that these discounts are used towards operating and running physical outlets for storing liquor products. KSBC further submitted that the higher cash discount rate is levied for non-ranked brands, which are special brands where alcohol manufacturers enjoy higher profit margins.

 CCI’s Findings

CCI in its order held that KSBC, being an entity responsible for the procurement and distribution of liquor products, was engaged in commercial activities and would accordingly qualify as being an ‘enterprise’ under Section 2(h) of the Act. For assessing KSBC’s dominance, CCI defined the relevant market as the ‘market for wholesale procurement and distribution of branded alcoholic beverages in the state of Kerala’. A separate relevant geographic market for Kerala was delineated as alcohol is a subject in the State List under the Seventh Schedule of the Constitution of India and accordingly, the regulations governing the procurement and distribution of liquor vary from state to state. On dominance, given that KSBC was granted the statutory power to be the sole entity that would procure and distribute alcohol products in Kerala, KSBC was considered to be prima facie dominant in this relevant market.

CCI held that, while reviewing the tender price quoted by alcohol manufacturers, KSBC takes into consideration various cost components of alcohol manufacturers which include factory costs, prime costs, administrative overheads and production cost. The cost sheet (accounting for all the cost components) is required to be confirmed by a chartered accountant of each manufacturer. The purchase price is ultimately determined by KSBC based on a detailed analysis of the cost sheet and taking into consideration all the cost components of each alcohol manufacturer. The Informants further alleged that there were regular delays by KSBC in the finalisation of fresh tenders which delayed alcohol manufacturers from getting a price increase for alcohol products. During the period prior to issue of fresh tender, alcohol manufacturers were duty bound to supply alcohol products at the original agreed rates and would accordingly, have to bear the increased production costs.

CCI also held that there was no evidence submitted by alcohol manufacturers for the losses that they allegedly faced on account of delayed tenders issued by KSBC. In the absence of any losses faced by alcohol manufacturers, the conduct of KSBC cannot be faulted. CCI further noted that the right vested in KSBC to determine the price of alcohol products does not prima facie amount to abuse, and it is not for a competition regulator to determine what the appropriate price of liquor products should be. CCI also noted that while price fixation should be an outcome of economic factors of demand and supply, that in itself cannot prevent the State or its instrumentality from exercising the powers of price determination when done within the framework of law, especially considering the nature of the underlying product. CCI also noted that no player had exited the market due to unviability of supply in face of alleged abusive conduct of KSBC.

Regarding the preferential treatment meted out to TSCL, CCI noted that such preferential treatment is being undertaken pursuant to a policy declared upfront, and that certain clauses of KSBC’s tender allow such preferential treatment to be done in public interest. CCI also noted that such preferential treatment was only with respect to one entity, and that the overall competition in the market was not distorted as a result of such preference. CCI also noted that the Informants were not able to provide any concrete proof on how these discounts result in either losses to manufacturers or in impairing their capabilities of effective supply of brands produced by them.

In sum, given that there was no actual harm caused in the market by KSBC’s conduct, CCI closed the matter under Section 26(2) of the Act.

[1] Confederation of Indian Alcoholic Beverage Companies and Others, v. Kerala State Beverages (Manufacturing and Marketing) Corporation Limited and Others, Case No. 10 of 2021, Order dated October 21, 2021.