Appreciable Adverse Effect on Competition in India

Appreciable Adverse Effect on Competition: A Cornerstone of Indian Competition Law

Introduction

The concept of "Appreciable Adverse Effect on Competition" (AAEC) is central to the architecture of the Competition Act, 2002 (hereinafter "the Act") in India. It serves as the critical benchmark for determining the legality of business agreements, the conduct of dominant enterprises, and the permissibility of mergers and acquisitions. The Act's preamble explicitly states its objective to prevent practices having an AAEC, to promote and sustain competition in markets, to protect the interests of consumers, and to ensure freedom of trade carried on by other participants in markets in India. The Supreme Court of India has reiterated that "the purpose of the Act is not only to illuminate practices having adverse effect on the competition but also to promote and sustain competition in the market" (Rajasthan Cylinders And Containers Limited v. Union Of India (S), (2020) 16 SCC 615). This article delves into the statutory framework, judicial interpretation, and practical application of AAEC under Indian competition law, drawing upon key legislative provisions and jurisprudential developments.

Statutory Framework of AAEC in India

The Act addresses AAEC across its substantive provisions, primarily under Sections 3 (anti-competitive agreements), 4 (abuse of dominant position), and Sections 5 and 6 (regulation of combinations).

Section 3: Anti-Competitive Agreements

Section 3(1) of the Act lays down a general prohibition: "No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India." Section 3(2) declares any agreement contravening Section 3(1) to be void.

Section 3(3): Per Se Rule and Presumption of AAEC

A significant aspect of Section 3 is sub-section (3), which identifies certain horizontal agreements as being presumptively anti-competitive. These include agreements between enterprises or persons engaged in identical or similar trade of goods or provision of services which:

  • (a) directly or indirectly determine purchase or sale prices;
  • (b) limit or control production, supply, markets, technical development, investment or provision of services;
  • (c) share the market or source of production or provision of services by way of allocation of geographical area, type of goods or services, or number of customers; or
  • (d) directly or indirectly result in bid rigging or collusive bidding.

Such agreements "shall be presumed to have an appreciable adverse effect on competition" (Competition Commission Of India v. State Of Mizoram And Others, Supreme Court Of India, 2022). This presumption, however, is not conclusive but rebuttable. The Supreme Court, drawing parallels with general principles of evidence as seen in cases like Sodhi Transport Co. And Others v. State Of U.P And Others (1986 SCC 2 486), clarified in Rajasthan Cylinders And Containers Limited v. Union Of India (2020) 16 SCC 615 that "agreements mentioned in Section 3(3) raise a presumption that such agreements shall have an appreciable adverse effect on competition. It follows, as a fortiorari, that the presumption is rebuttable". This view has been consistently followed by the National Company Law Appellate Tribunal (NCLAT) in cases like M/s Yash Solutions & Ors Through its AR Mr. Praveen Kumar Agarwal v. Competition Commission of India (CCI) (NCLAT, 2024) and BTP Structural India Pvt. Ltd. v. Competition Commisiion of India (NCLAT, 2022).

This marks an evolution from some earlier interpretations by the Competition Commission of India (CCI), such as in Aluminium Phosphide Tablets Manufacturers, In Re (CCI, 2012), where it was suggested that if Section 3(3) is contravened, an examination of factors under Section 19(3) might not be necessary. The Supreme Court's clarification mandates that if the presumption is rebutted, a full AAEC analysis under Section 19(3) is required.

The proviso to Section 3(3) exempts efficiency-enhancing joint ventures from this presumption if such agreements increase efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.

Section 19(3): Factors for Determining AAEC

Section 19(3) of the Act enumerates the factors that the CCI "shall have due regard to" while determining whether an agreement has an AAEC under Section 3. These factors are:

  • (a) creation of barriers to new entrants in the market;
  • (b) driving existing competitors out of the market;
  • (c) foreclosure of competition by hindering entry into the market;
  • (d) accrual of benefits to consumers;
  • (e) improvements in production or distribution of goods or provision of services; or
  • (f) promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.

This analysis is crucial for agreements not falling under the presumption of Section 3(3) (i.e., vertical agreements and other horizontal agreements not listed therein) and for assessing rebuttal evidence concerning Section 3(3) agreements (Competition Commission Of India v. Coordination Committee Of Artistes And Technicians Of West Bengal Film And Television And Others, (2017) 5 SCC 17). The CCI applied these factors in Yashoda Hospital & Research Centre Ltd., Ghaziabad Informant v. India Bulls Financial Services Ltd., New Delhi Opposite Parties (CCI, 2011), where it found that prepayment penalties on loans created barriers for new entrants, hindered consumer choice, and did not accrue benefits to consumers, thus causing AAEC.

Section 4: Abuse of Dominant Position

Section 4 of the Act prohibits the abuse of a dominant position by an enterprise or group. While the term "appreciable adverse effect on competition" is explicitly used in Section 3, the underlying principle of preventing harm to competition is inherent in Section 4. The very definition of "dominant position" in Explanation (a) to Section 4 refers to a position of strength which enables an enterprise "to operate independently of competitive forces prevailing in the relevant market; or affect its competitors or consumers or the relevant market in its favour."

The assessment of abusive conduct often involves evaluating its impact on competition. In Google Llc And Another v. Competition Commission Of India And Others (2023 SCC ONLINE SC 88), the Supreme Court upheld CCI's directives against Google's anti-competitive practices, which were found to stifle competition. The analysis in abuse of dominance cases often requires an "effects requirement," as highlighted in COMPETITION COMMISSION OF INDIA v. SCHOTT GLASS INDIA PVT. LTD. (Supreme Court Of India, 2025), which noted that the statute contemplates findings that the impugned practice not only falls within descriptive clauses but also "results in, or is likely to result in, an appreciable adverse effect on competition ('AAEC')." The legislative history and preamble support this effects-oriented approach.

Sections 5 & 6: Regulation of Combinations

Section 6(1) of the Act prohibits any person or enterprise from entering into a combination (as defined in Section 5) which causes or is likely to cause an AAEC within the relevant market in India, and declares such a combination to be void.

Section 20(4) provides a list of factors that the CCI shall consider while inquiring whether a combination has caused or is likely to cause an AAEC in India. These include, inter alia, the actual and potential level of competition through imports, extent of barriers to entry, level of combination in the market, degree of countervailing power, likelihood that the combination would result in the parties being able to significantly and sustainably increase prices or profit margins, extent of effective competition likely to sustain in a market, extent to which substitutes are available, market share of the persons or enterprises in a combination, likelihood of removal of a vigorous and effective competitor, nature and extent of vertical integration, possibility of a failing business, and the relative advantage by way of contribution to economic development.

The CCI routinely assesses AAEC in merger reviews. For instance, in cases like Notice Given By Viscas Corporation (2015 SCC ONLINE CCI 5), Notice Given By Fmc Corporation (2015 SCC ONLINE CCI 25), Notice Given By Jsw Energy Limited (2015 SCC ONLINE CCI 15), and Notice Given By Bradken Operations Pty. Limited (2015 SCC ONLINE CCI 11), the Commission, after considering the factors under Section 20(4), concluded that the proposed combinations were not likely to have an AAEC in India.

Judicial and Commission's Approach to AAEC

The Rebuttable Presumption under Section 3(3)

The Supreme Court's judgment in Rajasthan Cylinders And Containers Limited v. Union Of India ((2020) 16 SCC 615) is pivotal. It clarified that the presumption of AAEC under Section 3(3) is rebuttable. If enterprises provide evidence to dispel this presumption, the CCI must then undertake a full inquiry considering the factors in Section 19(3) to determine if an AAEC is established. The Court stated: "once CCI finds that case is covered by one or more of the clauses mentioned in sub-section (3) of Section 3, it need not undertake any further enquiry and burden would shift upon such enterprises or persons, etc. to rebut the said presumption by leading adequate evidence. In case such an evidence is led, which dispels the presumption, then CCI shall take into consideration the factors mentioned in Section 19 of the Act and to see as to whether all or any of these factors are established." This approach signifies a shift from a strict *per se* illegality to a *per se* presumption of AAEC, allowing for a more nuanced assessment.

The 'Rule of Reason' and 'Effects-Based' Analysis

For agreements not falling under Section 3(3) (e.g., vertical agreements, other horizontal agreements), the Act adopts a "rule of reason" approach. This necessitates a comprehensive analysis by the CCI, weighing the pro-competitive benefits against the anti-competitive harms, guided by the factors in Section 19(3). The emphasis is on demonstrating actual or likely adverse effects on competition.

The "effects requirement" is crucial. As observed in COMPETITION COMMISSION OF INDIA v. SCHOTT GLASS INDIA PVT. LTD. (Supreme Court Of India, 2025), "the Preamble records that the Act is enacted 'to prevent practices having adverse effect on competition'". This implies that mere description of conduct is insufficient; it must be shown to have a detrimental effect on the competitive process or consumers. In Amazon Seller Services Private Limited v. Competition Commission Of Inida (Karnataka High Court, 2021), one of the grounds of challenge to a CCI prima facie order was the alleged lack of analysis regarding AAEC.

Defining the Relevant Market

The assessment of AAEC is intrinsically linked to the definition of the "relevant market," as specified in Section 2(r) of the Act. The AAEC must be within "the relevant market in India." Section 19(5) mandates that the CCI, for determining the relevant market, shall have due regard to the "relevant geographic market" and "relevant product market." Sections 19(6) and 19(7) further list factors for defining these markets, respectively (Competition Commission Of India v. Coordination Committee Of Artistes And Technicians Of West Bengal Film And Television And Others, (2017) 5 SCC 17). An accurate market definition is foundational to any AAEC analysis, as it delineates the competitive landscape where the effects are to be measured.

Pro-Competitive Justifications and Efficiency Arguments

The Indian competition law framework allows for the consideration of pro-competitive justifications. Section 19(3) itself includes factors that are inherently pro-competitive, such as "accrual of benefits to consumers" (clause d), "improvements in production or distribution of goods or provision of services" (clause e), and "promotion of technical, scientific and economic development" (clause f). Furthermore, the proviso to Section 3(3) explicitly carves out an exception for joint ventures that increase efficiency. This framework enables a balanced assessment, where potential anti-competitive harms can be weighed against demonstrated pro-competitive benefits and efficiencies.

Challenges and Nuances in AAEC Assessment

Evidentiary Thresholds

Establishing AAEC, particularly "likely" AAEC, presents significant evidentiary challenges. It often requires sophisticated economic analysis, empirical data, and expert testimony to demonstrate the counterfactual scenario – what the market conditions would have been "but for" the impugned agreement or conduct. The CCI and appellate bodies grapple with determining the quantum and quality of evidence sufficient to meet this threshold.

Dynamic and Digital Markets

Applying traditional AAEC frameworks to dynamic and digital markets poses unique challenges. These markets are often characterized by network effects, zero-price services, data-driven advantages, and multi-sided platforms. Assessing market power and competitive effects in such environments requires adapting analytical tools and considering novel theories of harm. The case of Google Llc And Another v. Competition Commission Of India And Others (2023 SCC ONLINE SC 88) illustrates the CCI's engagement with anti-competitive practices in the digital sector.

Balancing Type I and Type II Errors

In enforcing competition law, regulators face the perennial challenge of balancing Type I errors (incorrectly condemning pro-competitive or benign conduct) and Type II errors (incorrectly permitting anti-competitive conduct that harms the market). A robust and nuanced AAEC analysis is critical to minimizing these errors and ensuring that enforcement actions genuinely promote competition and consumer welfare.

Penalties and Proportionality

While the Supreme Court in Excel Crop Care Limited v. Competition Commission Of India And Another ((2017) 8 SCC 47) focused on the interpretation of "turnover" for penalty imposition under Section 27(b) of the Act (clarifying it means "relevant turnover"), the finding of an AAEC is a fundamental prerequisite for any penalty. The magnitude and nature of the AAEC caused or likely to be caused by an infringement can be a significant factor in determining the proportionality of the penalty imposed, ensuring it acts as a deterrent without being unduly punitive.

Conclusion

The concept of "Appreciable Adverse Effect on Competition" is undeniably the linchpin of India's competition law regime. It guides the assessment of anti-competitive agreements, abuse of dominance, and mergers. The Indian legal framework, through the Competition Act, 2002, provides a structured approach, combining a rebuttable presumption of harm for certain hardcore cartels with a rule-of-reason analysis for other agreements and conduct, all centered on the evaluation of AAEC using the factors enumerated in Section 19(3) or Section 20(4) as applicable.

The jurisprudence, particularly the Supreme Court's clarification in Rajasthan Cylinders regarding the rebuttable nature of the Section 3(3) presumption, has refined the understanding and application of AAEC. This ensures a balanced approach, preventing practices that genuinely harm competition while allowing for conduct that may be benign or even pro-competitive. The Competition Commission of India plays a crucial role in meticulously applying these principles, supported by robust economic and legal analysis, to foster a vibrant and competitive market environment in India, ultimately benefiting consumers and promoting economic development. The evolving nature of markets, especially in the digital era, will continue to test and shape the interpretation and application of AAEC in the years to come.