Supreme Court on Competition Act Applicability to Lottery Tenders: Competition Commission of India vs. State of Mizoram (2022)

Introduction

Date of the Judgment: 19 January 2022

Citation: Not Available

Judges: Sanjay Kishan Kaul, J., M.M. Sundresh, J.

Can the Competition Commission of India (CCI) investigate allegations of bid rigging in the tender process for state lotteries? The Supreme Court of India addressed this question in a recent judgment, clarifying the interplay between the Competition Act, 2002 and the Lotteries (Regulation) Act, 1998. This case arose from a complaint about the tendering process for lottery distributors in Mizoram, where allegations of cartelization and bid rigging were made. The Supreme Court held that the CCI does have jurisdiction to investigate such matters, even when the lottery business is regulated by specific legislation. The judgment was delivered by a two-judge bench comprising Justice Sanjay Kishan Kaul and Justice M.M. Sundresh.

Case Background

The State of Mizoram, through its Director of Institutional Finance and State Lottery (IF&SL), issued an Invitation for Expression of Interest (EoI) on December 20, 2011, for appointing lottery distributors and selling agents. The EoI was for both conventional paper and online lottery systems. The minimum bid rates were set at Rs. 5 lakh per draw for Bumper lotteries and Rs. 10,000 per draw for other lotteries.

Four bids were accepted, all quoting the minimum rate of Rs. 10,000 per draw for online lotteries. One of these also bid the minimum rate of Rs. 5 lakh for the bumper draw. The selected distributors were required to provide substantial security deposits, advance payments, and prize pool contributions.

Respondent No. 4 filed a complaint with the CCI on May 16, 2012, alleging that the identical bids indicated cartelization and bid rigging, violating Section 3 of the Competition Act. They also alleged that the State of Mizoram abused its dominant position by imposing unfair financial conditions, violating Section 4 of the Competition Act.

Timeline

Course of Proceedings

The CCI, based on the complaint, found prima facie evidence of cartelization and bid rigging and directed the Director General (DG) to investigate. The DG’s report concluded that the bidders had colluded and engaged in bid rigging, violating Section 3(1) read with Section 3(3) of the Competition Act. However, the CCI did not find any prima facie case against the State of Mizoram under Section 4 of the Competition Act.

The State of Mizoram filed a writ petition in the Gauhati High Court, challenging the DG’s report and the CCI’s order. The High Court issued an interim order preventing the CCI from passing a final order. Subsequently, other bidders also filed writ petitions seeking to quash the DG report and the proceedings before the CCI. The High Court admitted these petitions and continued the interim order.

The CCI then approached the Supreme Court against the High Court’s interim order. While the Supreme Court allowed the High Court to proceed with the matter, the High Court ultimately ruled that the Competition Act did not apply to lottery activities, as they were considered res extra commercium (outside the scope of commerce). The CCI then appealed to the Supreme Court against this final order of the High Court.

Legal Framework

The Competition Act, 2002 aims to prevent practices that have an adverse effect on competition, promote and sustain competition in markets, protect consumer interests, and ensure freedom of trade.

Section 3 of the Competition Act prohibits anti-competitive agreements. Specifically, Section 3(1) states that no enterprise or association shall enter into any agreement that causes or is likely to cause an appreciable adverse effect on competition within India. Section 3(3) presumes that certain agreements, including cartels and those resulting in bid rigging, have an appreciable adverse effect on competition.

Section 3(1) of the Competition Act, 2002 states:

“3. Anti-competitive agreements (1) 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(3) of the Competition Act, 2002 states:

“(3) Any agreement entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise or practice carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision of services, which—
(a) directly or indirectly determines purchase or sale prices;
(b) limits or controls production, supply, markets, technical development, investment or provision of services;
(c) shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way;
(d) directly or indirectly results in bid rigging or collusive bidding,
shall be presumed to have an appreciable adverse effect on competition:
Provided that nothing contained in this sub-section shall apply to any agreement entered into by way of joint ventures if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.
Explanation.— For the purposes of this sub-section, “bid rigging” means any agreement, between enterprises or persons referred to in sub-section (3) engaged in identical or similar production or trading of goods or provision of services, which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding.”

Section 4 of the Competition Act prohibits the abuse of a dominant position by an enterprise or group.

Section 4(1) of the Competition Act, 2002 states:

“4. Abuse of dominant position. – [ (1) No enterprise or group shall abuse its dominant position.]”

Section 4(2) of the Competition Act, 2002 states:

“(2) There shall be an abuse of dominant position 4 [under sub-section (1), if an enterprise or a group],—
(a) directly or indirectly, imposes unfair or discriminatory—
(i) condition in purchase or sale of goods or service; or
(ii) price in purchase or sale (including predatory price) of goods or service.”

Section 26 of the Competition Act outlines the procedure for an inquiry, which includes the CCI directing the DG to conduct an investigation if a prima facie case exists.

Section 26(1) of the Competition Act, 2002 states:

“26. Procedure for inquiry under section 19. – (1) On receipt of a reference from the Central Government or a State Government or a statutory authority or on its own knowledge or information received under section 19, if the Commission is of the opinion that there exists a prima facie case, it shall direct the Director-General to cause an investigation to be made into the matter:
Provided that if the subject-matter of an information received is, in the opinion of the Commission, substantially the same as or has been covered by any previous information received, then the new information may be clubbed with the previous information.”

Section 26(2) of the Competition Act, 2002 states:

“(2) Where on receipt of a reference from the Central Government or a State Government or a statutory authority or information received under section 19, the Commission is of the opinion that there exists no prima facie case, it shall close the matter forthwith and pass such orders as it deems fit and send a copy of its order to the Central Government or the State Government or the statutory authority or the parties concerned, as the case may be.”

Section 26(3) of the Competition Act, 2002 states:

“(3) The Director General shall, on receipt of direction under sub-section (1), submit a report on his findings within such period as may be specified by the Commission.”

Section 26(4) of the Competition Act, 2002 states:

“(4) The Commission may forward a copy of the report referred to in sub-section (3) to the parties concerned:”

The definition of ‘service’ under Section 2(u) of the Competition Act includes any service made available to potential users, including services related to business or commercial matters.

Section 2(u) of the Competition Act, 2002 states:

“2. Definitions. – In this Act, unless the context otherwise requires,—
xxxx xxxx xxxx xxxx
(u) “service” means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial matters such as banking, communication, education, financing, insurance, chit funds, real estate, transport, storage, material treatment, processing, supply of electrical or other energy, boarding, lodging, entertainment, amusement, construction, repair, conveying of news or information and advertising;”

The definition of ‘goods’ under Section 2(i) of the Competition Act refers to the definition under the Sale of Goods Act, 1930, which excludes actionable claims.

Section 2(i) of the Competition Act, 2002 states:

“2. Definitions. – In this Act, unless the context otherwise requires,—
xxxx xxxx xxxx xxxx
(i) “goods” means goods as defined in the Sale of Goods Act, 1930 (8 of 1930) and includes—
(A) products manufactured, processed or mined;
(B) debentures, stocks and shares after allotment;
(C) in relation to goods supplied, distributed or controlled in India, goods imported into India;”

Section 2(7) of the Sale of Goods Act, 1930 states:

“2. Definitions.— In this Act, unless there is anything repugnant in the subject or context,—
xxxx xxxx xxxx xxxx
(7) “goods” means every kind of moveable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;”

Arguments

Appellant (CCI):

• The CCI’s concern was not with the regulation of the lottery business itself, but with the potential bid rigging in the tender process for appointing lottery distributors.

• There is no conflict between the Competition Act and the Lotteries (Regulation) Act. The CCI has jurisdiction over the competition aspects of a regulated commodity.

• The sale or distribution of lottery tickets constitutes a “service” under Section 2(u) of the Competition Act, as it is a service made available to potential users.

• The definition of “service” is expansive and includes any service made available to potential users, and the inclusive part does not narrow the scope of the definition.

• If Parliament intended to exclude any service from the application of the Competition Act, it would have specifically stated so.

• The doctrine of res extra commercium applies to the State’s power to regulate certain trades, not to the business of acting as distributors/selling agents.

• The High Court should not have entertained a petition under Article 226/227 of the Constitution of India as an order passed under Section 26(1) of the Competition Act was in the nature of an administrative direction.

Respondent No. 1 (State of Mizoram):

• The State claimed that it had never prayed for quashing of the proceedings against the private parties.

• The State argued that it was a victim of cartelization and would cooperate with the CCI.

Respondent No. 5 (M/s. Summit Online Trade Solution Pvt. Ltd.):

• Section 3(1) of the Competition Act does not apply as there are no “goods” or “provisions of services” involved.

• Lottery tickets are not “goods” under Section 2(i) of the Competition Act, as they are considered actionable claims under the Sale of Goods Act, 1930.

• Respondent No. 5 is merely a distributor and does not provide any services to potential lottery users.

• Lottery business is res extra commercium and strictly regulated by the State; thus, the Competition Act does not apply.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue addressed was:

1. Whether the Competition Act, 2002 applies to the tendering process for appointment of lottery distributors and selling agents, specifically concerning allegations of bid rigging and cartelization.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Cases:

• B.R. Enterprises v. State of UP [1999] 9 SCC 700 (Supreme Court of India): This case was cited by the High Court to support its view that lotteries are not trade and commerce within the meaning of Articles 301-303 of the Constitution of India.

• Sunrise Associates v. Government of NCT of Delhi [2006] 5 SCC 603 (Supreme Court of India): This case was cited to show that lottery tickets have no value in themselves and are merely actionable claims.

• Union of India v. Martin Lotter Agencies Ltd. [2009] 12 SCC 209 (Supreme Court of India): This case was cited to support the view that lotteries are akin to gambling and fall under the doctrine of res extra commercium.

• CCI v. Bharti Airtel [2019] 2 SCC 521 (Supreme Court of India): This case was referred to by the CCI to emphasize that the function of the CCI is distinct from other regulatory bodies and that the CCI’s mandate is to examine anti-competitive agreements and abuse of dominant position.

• Black Diamond Beverages v. Commercial Tax Officer [1998] 1 SCC 458 (Supreme Court of India): This case was cited by the CCI to support its argument that the inclusive part of a definition does not narrow the scope of the main part.

• State of Punjab v. Devans Modern Breweries [2004] 11 SCC 26 (Supreme Court of India): This case was cited by the CCI to argue that the business of acting as distributors/selling agents does not fall under the doctrine of res extra commercium.

• Competition Commission of India v. Steel Authority of India & Anr. [2010] 10 SCC 744 (Supreme Court of India): This case was referred to by the CCI to show that the CCI is expected to form an opinion about the existence of a prima facie case for contravention of certain provisions of the Competition Act and then passes a direction for the DG to cause an investigation into the matter.

• R.D. Goyal & Anr. V . Reliance Industries Ltd. [2003] 1 SCC 81 (Supreme Court of India): This case was cited by Respondent No. 5 to show that debentures were excluded from the definition of ‘goods’ under the Monopolies and Restrictive Trade Practices Act, 1969 where there was no such inclusion.

Statutes:

• Competition Act, 2002: The primary statute under consideration in the case.

• Lotteries (Regulation) Act, 1998: The statute regulating the lottery business.

• Sale of Goods Act, 1930: Used to define “goods” and to argue that lottery tickets are not goods but actionable claims.

• Telecom Regulatory Authority of India Act, 1997: Referred to in the context of CCI v. Bharti Airtel to show the interplay of different regulatory bodies.

• Monopolies and Restrictive Trade Practices Act, 1969: Referred to in the context of R.D. Goyal & Anr. V . Reliance Industries Ltd.

Authority Table

Judgment

How each submission made by the Parties was treated by the Court?

How eachsubmission made by the Parties was treated by the Court?

The Supreme Court’s decision can be summarized as follows:

• Jurisdiction of CCI: The Supreme Court held that the Competition Commission of India (CCI) has the jurisdiction to investigate allegations of bid rigging and cartelization in the tendering process for appointing lottery distributors, even when the lottery business is regulated by other legislation.

• Definition of Service: The Court clarified that the sale or distribution of lottery tickets constitutes a “service” under Section 2(u) of the Competition Act, as it is a service made available to potential users. The Court emphasized that the definition of “service” is expansive and inclusive, and the inclusive part does not narrow the scope of the main part.

• Doctrine of Res Extra Commercium: The Court rejected the argument that the lottery business is res extra commercium and thus outside the purview of the Competition Act. The Court held that while the State has the power to regulate certain trades, the business of acting as distributors/selling agents does not fall under this doctrine. The Court noted that the doctrine of res extra commercium applies to the State’s power to regulate certain trades, not to the business of acting as distributors/selling agents.

• Interplay of Competition Act and Other Legislations: The Court found no conflict between the Competition Act and the Lotteries (Regulation) Act. The Court stated that the CCI has jurisdiction over the competition aspects of a regulated commodity.

• High Court’s Intervention: The Court held that the High Court should not have entertained a petition under Article 226/227 of the Constitution of India, as an order passed under Section 26(1) of the Competition Act was in the nature of an administrative direction.

• State’s Cooperation: The Court noted that the State of Mizoram had claimed to be a victim of cartelization and was willing to cooperate with the CCI. The Court directed the State to assist the CCI in its investigation.

Flowchart of the Case

Conclusion

The Supreme Court’s judgment in the case of Competition Commission of India vs. State of Mizoram & Ors. (2022) has clarified that the Competition Act, 2002 applies to the tendering process for appointing lottery distributors and selling agents, particularly in cases of alleged bid rigging and cartelization. The Court emphasized that the definition of “service” under the Competition Act is broad enough to include the distribution of lottery tickets. It also held that the doctrine of res extra commercium does not preclude the application of the Competition Act to anti-competitive practices in the lottery business. This judgment has significant implications for the regulatory landscape in India, as it reinforces the Competition Commission’s role in ensuring fair competition, even in sectors regulated by specific legislation.