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Karnataka HC once again dismisses Amazon, Flipkart appeal to stop CCI probe

The probe into the two e-commerce giants was kickstarted in 2020 when a smartphone traders’ group accused Amazon of giving preferential treatment to some sellers on its platform.

A division bench of the Karnataka High Court dismissed an appeal filed by Amazon and Flipkart challenging an earlier ruling that had allowed the probe by the Competition Commission of India (CCI) to resume, CNBC TV18 reported on Friday.

Why this matters? CCI initiated a probe into the multiple allegations against Amazon and Flipkart in January 2020, but the investigation was immediately put on hold due to legal challenges. On June 11, after nearly a year and a half, the investigation was set to resume after the Karnataka HC dismissed the pleas by Amazon and Flipkart, but the two companies once again filed an appeal. The ruling today clears the path for CCI to continue with its investigation.

What did the court say?

“Amazon and Flipkart’s appeals are devoid of merit and substance and deserve to be dismissed,” the two-judge division bench said. “The applicants should not feel shy in facing inquiry by CCI if they are not in violation of the Competition Act,” the bench added, according to the CNBC report.

However, according to sources cited by the Economic Times, Flipkart and Amazon might approach the Supreme Court challenging the latest order.

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“We respect the judgment passed by the Hon’ble High Court and we will review the judgment in detail to determine any next steps,” an Amazon spokesperson told MediaNama.

“We are waiting to receive a copy of the order of the Division Bench of the Karnataka High Court and will review it as soon as we get it,” a Flipkart spokesperson told MediaNama.

Praveen Khandelwal, Secretary-General, Confederation of All India Traders (CAIT), tweeted that CAIT welcomes the order of the court and said that CCI should begin the probe with no further delay.

Changes to e-commerce rules on the horizon

The CCI probe is set to resume at a time when the government is considering changes to the e-commerce regulations in response to repeated complaints against Amazon and Flipkart.

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The government on June 21 proposed amendments that give the existing Consumer Protection (E-Commerce) Rules, 2020 more teeth. The proposed changes include new rules to address abuse of FDI regulations, the establishment of a grievance redressal mechanism, new display and labelling criteria for foreign goods, the prohibition of flash sales, introduction of fallback liability, among other things. Many of the proposed changes are in fact aimed at preventing e-commerce platforms from engaging in the alleged practices that the CCI is currently investigating.

The last date to submit comments and feedback on the proposed amendments was July 21.

What is CCI investigating?

The CCI’s probe against Amazon and Flipkart was ordered to investigate four alleged violations:

  1. Exclusive launch of mobile phones
  2. Promoting preferred sellers on their websites
  3. Deep discounting practices
  4. Prioritising some seller listings over others

The CCI had initiated the probe following a complaint filed by the Delhi Vyapar Mahasangh (DVM), a group of MSME (Micro, Small and Medium Enterprises) smartphone traders. DVM had accused that Amazon has certain agreements with sellers (that are allegedly controlled by the company) and that it gives these sellers unfair preferential treatment over others.

Other trade bodies have also filed complaints against Amazon and Flipkart with CCI. The All India Online Vendors Association (AIOVA), a trade union representing online sellers, filed an antitrust suit against Amazon India in August 2020, alleging preferential treatment to some sellers, and predatory pricing. According to AIOVA’s legal filing, the body alleged that Amazon India buys goods in bulk from manufacturers and then sells them at a loss to sellers such as Cloudtail, who then offer the same goods on Amazon at heavily discounted prices. The group also alleged that Cloudtail pays Amazon a fee of a little over 6% compared to the 28% that smaller sellers have to pay.

Reuters in February this year reported that thirty-five sellers, Cloudtail one of them, accounted for two-thirds of Amazon’s sales in India. The agency’s reporting revealed how Amazon used legal manoeuvres to sidestep Indian regulations aimed at curbing deep discounting and limiting Foreign Direct Investment

According to India’s rules on FDI in e-commerce, which were enacted in February 2019, marketplaces, such as Amazon and Flipkart, cannot exercise control or ownership over the inventory of vendors on their platforms. If they exercise any kind of control over the inventory, they’ll be considered as an inventory-based e-commerce platform. The rules also say that if a marketplace has an equity stake in a vendor/seller, or if it controls its inventory, the vendor is not permitted to sell its products on the marketplace.

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Timeline of events

January 13, 2020: The CCI launched an investigation in January last year after multiple allegations against Amazon and Flipkart claimed that the firms were violating FDI regulations and are hurting smaller sellers by promoting certain preferred sellers. However, the Karnataka HC stayed this investigation after Amazon and Flipkart challenged it saying that CCI had no evidence that the two companies were harming competition. Since February last year, the investigation has been on hold.

October 26, 2020: The Supreme Court refused to hear a plea filed by the CCI, which sought to remove the Karnataka HC-directed stay on its probe against Amazon and Flipkart. Instead, the apex court directed the HC to decide on the matter within six weeks.

June 11, 2021: A single-judge bench of the Karnataka HC dismissed pleas by Amazon and Flipkart to quash the CCI investigation into the business practices of the firms. Justice PS Dinesh Kumar, while dismissing the petitions by Amazon and Flipkart and refusing them any further relief, was quoted by Reuters as saying, “It would be unwise to prejudge the issues … at this stage and scuttle the investigation.” and refused them any further relief.

June 15, 2021: Reuters reported that CCI will expedite the restarted investigation. People familiar with the matter told the news agency that CCI plans to demand information from both the e-commerce giants “as quickly as possible.”

June 17, 2021: Both Amazon and Flipkart challenged the Karnataka HC decision. In the appeal filed by Flipkart, the e-commerce company argues that the decision by the court to allow the probe to resume “was erroneous and must be put on hold”, the report by Reuters stated. “Irreparable injury will be caused to the appellant if the investigation was to continue pending the present appeal,” said Flipkart. Amazon filed a similar challenge, the report stated.

Update (23 July, 5:34 pm): Added comment from Flipkart spokesperson

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