Full Judgment
(i) the company with a view to marketing its products, viz., paints, varnishes, distemper, enamels, etc., properly and promoting the sales and effective recovery thereof efficiently within the time-limit as specified by the company from time to time to the best advantage possible within the territory of ..... (hereinafter referred to as "the said territory") was desirous of appointing a suitable party as its selling agent.
6. During the subsistence of this agreement, the selling agent shall not, in the said territory, represent or act on behalf of any other person, firm or company dealing in similar products as those of the company." 2. The respondent controverted the allegations of restrictive trade practices and in the reply filed by them it is stated that the Director-General misunderstood the information furnished to him while the factual position is summarised as below : (i) The sole selling agents appointed by the respondent for various territories are Ashoka Agencies of Ludhiana for the territory of Punjab, Haryana, Jammu and Kashmir ; Sharad Enterprises of Patna for the State of Bihar ; Pinakin Shah and Co., Ahmedabad for the State of Gujarat; J.S. Paintal and Co., New Delhi for Delhi District and towns Faridabad, Ghazia-bad and Hardwar, and Bans Sales Organizers, Lucknow, for the State of Uttar Pradesh. It is stated that the respondent has sent to the Director- General copies of price list and statement of discounts of the dealers on net price list, and 38th annual report along with letter No. 9938, dated August 9, 1986.
It is submitted by the respondent that not all the selling agents purchase the goods from the respondent for they merely took orders from customers on the stationery of the respondent and then the goods are despatched either from the factory or from the depot. The bills are raised in the name of the respondent while the agents merely follow up the customers and collect sales tax and also collect cheques from customers and deposit the same in the bank account of the respondent. Of course, the selling agents employ their own field-staff for booking orders and for the collection of dues and the travelling expenses of the field-staff are borne by the selling agents.
(ii) Agents are paid commission at the rate of 6.25 per cent, on net sales. The selling agents are responsible for looking after the maintenance of stocks in the godown of the respondent situated in their respective territories.
(iii) The selling agents prepare the bills and challans on behalf of the respondent in the name of the respondent. In the case of sales to Government Departments, the selling agents are paid commission at the rate of not less than 2 1/2 per cent, and not more than 6.25 per cent.
(iv) The Central Government accorded approval to the appointment of selling agents on terms and conditions mentioned in the respective agreements.
3. It is stated that the selling agents do not occupy the position of stockists, dealers, distributors or purchasers. Instead of appointing its own sales manager and other staff, the respondent has, in a few territories, appointed persons as agents to book orders and promote the sale of the products. The allocation of territory is merely for administrative convenience for the booking of orders. Since they are not stockists, distributors or purchasers, the arrangement of territory does not bring the trade practice within the mischief of Section 33 of the Monopolies and Restrictive Trade Practices Act.
4. As regards the impugned Clause (6), it is stated that it is not hit by Clause (e) of Sub-section (1) of Section 33 of the Monopolies and Restrictive Trade Practices Act inasmuch as the said clause applies only to purchasers and not to selling agents. Since the respondent is hot the seller and the selling agent is not the purchaser of the goods, the restriction that the selling agent will not act on behalf of any other person, firm or company dealing in similar products as that of the respondent company is not a restriction as contemplated under Clause (c) of Sub-section (1) of Section 33 of the Monopolies and Restrictive Trade Practices Act.
5. On November 18, 1987, a preliminary issue was framed which reads as follows : (1) Does the allegation of the Director-General disclose any restrictive trade practice having regard to the specimen copy of the agreement filed as annexure A disclosing the appointment of selling agents only.
6. By an order dated May 3, 1988, of the Chairman, this case was transferred to this Bench of the Commission to hear arguments on the above said preliminary issue and dispose of the same accordingly. The case for arguments on the preliminary issue as framed came up before us on December 16, 1988. On behalf of the Director-General, arguments were addressed by Shri O.P. Dua, advocate, while on behalf of the respondent, the case was discussed by Shri M.L. Sachdev, advocate. It seems that clauses 3 and 4 as described in the application of the Director-General may have been taken from some letter of the respondent-company addressed to the Director-General in the course of preliminary investigation. Regrettably, we find that the letter from which particulars of Clauses 3 and 4 have been taken is not so far available on the records of this case. Clause (6), however, does correspond with Clause (6) of the specimen agreement, annexure A, mention of which is made in the preliminary issue.
7. It seems that the preliminary issue in the context of the terms and conditions as stipulated in the specimen copy, annexure A, is to be adjudicated upon as to whether it establishes a relation of principal to principal or principal to agent between the respondent-company and the distributors, called as selling agent. As defined in Section 182 of the Indian Contract Act, 1872, an agent is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented is called the principal. In Loon Karan Sohan Lal v. Firm John and Co., AIR 1967 All 308, it has been stressed that agency depends on the true nature of the relationship. The mere use of the words "agency agreement" and "agent" by the parties in a contract does not necessarily establish a relationship of agency in the legal sense.
Under Section 212 of the Indian Contract Act, 1872, an agent is bound to conduct the business of agency with as much skill as is generally possessed by persons engaged in similar business unless the principal has notice of his want of skill. The agent is bound to act with reasonable diligence and to use such skill as he possesses. He is also bound to make compensation to his principal in respect of the direct consequences of his own neglect, want of skill or misconduct. It is needless to say that the main distinction that makes for the relationship as between principal arid principal, and between principal and agent is that in the former case, the title/dominion or risk as respects the goods passes on to the distributors whereas in the latter case, the property in the goods continues to vest in the principal.
8. By virtue of Clause 3 of the specimen copy of the agreement, annexure A, the selling agent is to be paid commission at the rate of 6.25 per cent, on all the sales effected by the selling agent within his territory. The commission is to be computed on the net sales arrived at after deducting trade discount or quantity discount given in the invoice or by credit note, sales tax and surcharge whether shown in the invoice or not, cash discount on account of payment within 30 days, freight and octroi charges incurred for sending the goods to the depot and excise duty, if any, payable by the manufacturer. However, the commission would be payable to the selling agent only alter the respondent has realised the amount in respect of the sales effected by the selling agent. Under Clause 7 of the specimen agreement, the selling agent has to deposit with the respondent a sum of Rs. 5,000 as security which would carry interest at the rate of 9 per cent, per annum. Under Clause 8, the respondent is entitled to appropriate 10 per cent, of the commission accruing due to the selling agent as further security deposit. It will also carry interest at the rate of 9 per cent, per annum. Besides this, the selling agent can be called upon to furnish further deposit equivalent to over-due outstandings and/or equivalent to dues which are likely to become bad in course of time.
This additional security deposit will not carry any interest. It is also provided that if the selling agent fails to make such additional deposit, he would be liable to pay interest to the respondent at the prevailing bank rate on credit facilities. Under Clause 8 of the annexure appended to the specimen agreement, the respondent will bear bad debts only to the extent of 50 per cent, implying thereby that the residual 50 per cent, of the bad debts is to be borne by the selling agent. In the case of the dues becoming unrecoverable from a new customer introduced by the selling agent, the respondent is not to share any part of the unrecoverable dues. Similarly, where the goods are supplied to old customers of the respondent and these old customers happen to be persons who are not making payment within the stipulated credit period, yet goods are supplied by the respondent on the request of the selling agent, then also the whole liability to make good any loss as regards payment of dues has to be borne entirely by the selling agent.
9. The selling agent is responsible to engage a sufficient number of competent sales representatives, technical representatives and other staff to promote sales within his territory. It is also the responsibility of the selling agent to ensure that the outstanding bills are collected from the constituents within the stipulated credit period and remitted to the company in time. The selling agent is also liable to indemnify the respondent company against all costs, charges, expenses and losses resulting from non-submission of sales tax forms or from non-acceptance of goods by the concerned parties. The agent is also liable to. indemnify the respondent for bank charges in case of non-payment or non-acceptance of hundis and other incidental expenses where goods are returned. In all such cases, the respondent-company will bear charges and losses subject to the maximum of Rs. 500 per annum. The godown management expenses may be reimbursed by the respondent on the basis of mutually agreed upon percentage of the net sales effected from a particular godown or, at the option of the respondent, it may reimburse the actual expenses incurred by the selling agent in this regard.
10. We have made reference to these few striking features of the agreement because the issue as framed requires a decision as to the restrictive character of the terms and conditions stipulated in the specimen copy of agreement (annexure A). It is, however, somewhat obscure as to how it is that learned counsel for the parties, in the course of their arguments, did not pointedly refer to the various clauses of the agreement as per annexure A. Even though there is no specific plea made in the written reply by the respondent that because of the distributor being a selling agent, the provisions of the Monopolies and Restrictive Trade Practices Act or for the matter of that Section 33 and Section 2(o) do not apply to the business relationship between them, yet, the trend of arguments addressed at the Bar gives it to understand as if the sole consideration is whether any distributor described as sole agent is or not exempt from the observance of various provisions of Section 33 and Section 2(o) of the Act. It may be mentioned that a reading of the various clauses of the specimen agreement as discussed supra does not necessarily render non-sequitur the inference that the relationship between the respondent-company and its so-called selling agent is that of principal to principal because if the property in the goods does not pass and vest in the selling agent, he cannot be held liable for any outstanding dues from the customers except where the loss may have occurred owing to negligence or want of care on the part of the selling agent. It may not be impertinent to say that in all likelihood, this sort of agreement just represents the motive to save central sales tax and not to clothe the so-called selling agent with the characteristic of true agency. However, this finding is not to be taken conclusive and decisive because, in the first instance, the specimen agreement, annexure A, has not been discussed at the Bar and further much will depend upon the evidence to be adduced by the parties as to how the various clauses of the agreement are being acted upon and what its real effect is on the relationship between the parties to the agreement. Let us now examine Clauses 3, 4 and 6 as, described in the application of the Director-General which, it seems, were in the contemplation of learned counsel for the parties while addressing arguments in the context of the relationship being principal and selling agent between the parties to the agreement. Now, under Clause 6 of the agreement, the selling agent is debarred from representing or acting on behalf of any other person, firm or company dealing in-similar products as that of the company. This provision is identical to the provision in Clause 5 of home-products agreements which was the subject of discussion by the Commission in Registrar of Restrictive Trade Agreements v. Cent-ton Industrial Alliance P. Ltd. 813. Clause 5 of the said home-products agreement imposed a restriction on the selling agent against dealing directly or indirectly in similar products of any other company. In the reported case, it was observed (at page 829 of 48 Comp Cas) : "However, Clause 5 does restrict the persons or class of persons form whom goods are bought; Home-products are not buying any goods form the respondent but according to Clause 5 of the agreement, they undertook not to deal directly or indirectly with similar products of any other company. This would include an undertaking not to purchase directly or indirectly similar goods of any other company. To this extent, Clause 5 is restrictive in nature under Section 33(1)(a) of the Monopolies and Restrictive Trade Practices Act". It may be mentioned that Clause 6 as reproduced by the Director-General in his application leads to a similar restriction on the selling agent and, therefore, it will be a restrictive trade practice within the meaning of Section 33(1)(a) of the Monopolies and Restrictive Trade Practices Act. As regards the territorial restriction, that is the allocation of a particular territory to a selling agent, we feel that in the case of genuine selling agency, the area restriction will not come within the purview of Section 33(1)(g) of the Monopolies and Restrictive Trade Practices Act because, for marketing convenience, it has to be left open to the company to decide as to how much area can be served through a particular agent. Since the agent represents the manufacturer, it cannot be said that, the area restriction will impair competition particularly where the goods are to be sold at prices fixed by the manufacturer. In Delhi Cloth and General Mills Co. Ltd., Delhi, In re (RTPE No. 22 of 1976), a case decided by Justice S. Rangarajan and Mr. H. M. Jhala on May 17, 1978, reference has been made to' the observations of Justice Fortas of the Supreme Court of U. S. A. in the case reported as United States v. Arnold, Schwinn, It is observed by Justice Fortas that restraints as to territory or customers, vertical or horizontal, are unlawful if they are ancillary to the price fixing or, if the price fixing is an, integral part of. the whole distribution system. The Commission field that defining of areas and the payment of remuneration as commission to the wholesale agents in the various areas as set out in the agreement are permissible modes of transacting the respondent's own business of sale through its several wholesale agents. So, if it were a genuine agency agreement, the territorial restriction will not come in the way and would be permissible ; otherwise, as we have said, if it is likely that the agreement may be construed to create a relationship as between principal and principal between the parties to the agreement, then the territorial restriction will prima facie fall within the mischief of Section 33(1)(g) of the Monopolies and Restrictive Trade Practices Act.
As regards the quantity rebate on turnover under Clauses (3) and, (4), we feel that it presents a mixed question of law and fact and can more appropriately be decided not as a preliminary issue but after complete evidence is adduced by the parties both as regards relationship and as regards whether it amounts to a concession or benefit given in connection with or by reason of dealings, or whether it is connected with the quantum of sale ; of course, in Registrar of Restrictive, Trade Agreements v. Allied Distributors and Co. [1976] Tax LR 1280, the Commission in the context of the facts and the state of evidence therein held that incentive discounts to increase the sale of any special item of production is not hit by Section 33(1)(e) of the Monopolies and Restrictive Trade Practices Act. Nevertheless, a final and decisive finding will be possible only after a full-fledged enquiry.
11. As a result of discussion as above, it is held that the enquiry cannot be disposed of on the basis of the preliminary issue as framed, that the agreement in question prima facie cannot be said to create in entirety a relationship of principal and agent between the parties to the agreement, that prima facie even if it were a selling agency agreement, Clause (6) would bring the restriction within the purview of Section 33(1)(a) and that territorial restriction will relate to restrictive trade practice if the relationship were riot as between principal and agent, while Clauses (3) and (4) of the agreement, with respect to quantity rebates, are not susceptible of a clear finding at this initial stage as to whether or not the relationship between the parties is supposed to be that of principal and agent. The preliminary issue is decided accordingly. Declining to terminate the enquiry at this preliminary stage, it is ordered that the enquiry shall proceed for decision on merits.