Dismissed

Tamil Nadu Generation and Distribution Corporation Limited v. Eastern Coalfields Limited and Others

CCI30 Jun 202202/2022

Case brief

AI extract

What is this about?

The Competition Commission examined an Information alleging abuse of dominant position by Coal India Ltd and subsidiaries over grade slippage in non-coking coal supply. The Commission found no prima facie case of contravention, noting grade disputes are for the Coal Controller and the TPS mechanism provided third-party safeguards, closing the case.

What did the court decide?

Matter closed forthwith no prima facie case of contravention of the Act made out against the opposite parties.

Tamil Nadu Generation and Distribution Corporation Limited… — Company and Corporate | CCI (2022)

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COMPETITION COMMISSION OF INDIA Case No. 02 of 2022

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In Re:

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Tamil Nadu Generation and Distribution Corporation Limited 6^th Floor, TANTRANSCO Building, 144, Anna Salai, Chennai - 600002 Informant And Eastern Coalfields Limited Sanctoria, PO- Disergarh, Dist – Burdhwan- 713333, West Bengal. Opposite Party No. 1 Mahanadi Coalfields Limited P.O. - Jagriti Vihar, Burla, Sambalpur – 768020, Odisha. Opposite Party No. 2 Coal India Limited Premise No-04 MAR, Plot No-AF-III, Action Area-1A, Newtown, Rajarhat, Kolkata -700156, West Bengal Opposite Party No. 3

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CORAM Mr. Ashok Kumar Gupta Chairperson Ms. Sangeeta Verma Member

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Mr. Bhagwant Singh Bishnoi Member

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Order under Section 26(2) of the Competition Act, 2002

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The present Information has been filed by the Tamil Nadu Generation and Distribution Corporation Limited (‘ Informant ’/‘ TANGEDCO’ ) under Section 19(1)(a) of the Competition Act, 2002 (‘ the Act’ ) against Eastern

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Coalfields Limited (‘Opposite Party No. 1’/‘ECL’/‘OP-1’ ) and Mahanadi Coalfields Limited (‘Opposite Party No. 2’/‘MCL’/‘OP-2’ ), both wholly owned subsidiaries of Coal India Limited (‘Opposite Party No. 3’/ ‘CIL’/‘OP-3’ ) [collectively referred to as ‘ the OPs ’], alleging, inter alia , contravention of the provisions of Section 4 of the Act.

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The Informant is a State Public Sector Undertaking engaged in power generation. In order to secure inputs for thermal power generation, TANGEDCO enters into coal procurement arrangements with CIL and its subsidiaries, who are stated to be the only source of supply of non-coking coal in India. CIL is a Maharatna company and is stated to be the single largest coal producer in the world. CIL functions through its subsidiaries in 85 mining areas spread over eight States.

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It is stated in the Information that, in order to source coal for thermal power generation, TANGEDCO had, inter alia , entered into a long-term coal supply agreement ( LTCSA ) with ECL, valid for a period of 20 years, commencing from 26.06.2009. This agreement sets out the terms and conditions of supply, including the quality to be delivered, annual contracted quantity, end-use restriction, modalities for assessment of stone, sampling, etc . From 2009– 2021, TANGEDCO procured 211.49 lakh tonnes of non-coking coal from ECL.

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The Informant has submitted that there was huge variation in the Gross Calorific Value ( GCV ) of the coal supplied by ECL to TANGEDCO during the period between March 2017 and May 2020. The declared grade of coal to be supplied by ECL ought to have been G4 (6101–6400 kcal/kg) or G5 (5801– 6100 kcal/kg), but the actual deliveries to TANGEDCO were of much lower grade of coal, ranging between G9 (4601–4900 kcal/kg) and G16 (2501–2800 kcal/kg). This grade slippage of the coal supplied was discovered pursuant to sampling and testing by the Central Institute of Mining and Fuel Research ( CIMFR ) – a constituent laboratory under the aegis of the Council of Scientific and Industrial Research ( CSIR ).

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It is further alleged by TANGEDCO that, subsequent to such findings of CIMFR, ECL tampered referee samples of TANGEDCO and similarly placed other power utilities, resulting in favourable results in the testing conducted at the referee labs. It was highlighted that the samples taken at the loading point, which are the reference for any further dispute, are kept in the custody and premises of ECL, as per the Third-Party Sampling ( TPS ) agreement entered into between ECL, CIMFR, and TANGEDCO on 28.11.2016. This agreement provides for a revised mechanism for sampling and testing of the coals supplied to TANGEDCO.

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The Informant further averred that, upon raising the above issues at multiple levels and the introduction of Rationalised Matrix for Centre/State Gencos under Linkage Rationalization Policy on 04.11.2020, the coal linkages of TANGEDCO with ECL were transferred to MCL. However, ECL and MCL, vide their letters dated 05.05.2021 and 06.05.2021, respectively, have informed that the said transfer would take effect only after obtaining the noobjection certificate ( NOC ) from ECL. The said NOC would be provided by ECL only upon payment of INR 748 crores towards coal supplied by it to TANGEDCO, with respect of which grade slippage dispute has arisen and pending resolution/reconsideration.

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It is alleged by the Informant that the OPs enjoy a dominant position in the supply of non-coking coal to thermal power generators in India as they enjoy statutory exclusivity in operations. It is further alleged that the consistent failures of ECL to supply the declared grade of coal, tampering of referee samples by ECL, and insisting for NOC of ECL by MCL to commence supplies of the linkage quantities transferred from ECL are in contravention of the provisions of Section 4 of the Act.

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Based on the above allegations and averments, TANGEDCO has, inter alia , prayed the Commission to hold CIL and its subsidiaries guilty of contravention of the provisions of Section 4 of the Act, CIL and its

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subsidiaries to be restrained and ordered to cease and desist from the impugned conducts and CIL and its subsidiaries to be directed to adopt a fair and transparent third-party sampling mechanism.

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The Commission considered the Information and decided to obtain replies of the OPs thereon. The Informant was also allowed to file its rejoinder to the replies of the OPs. The replies and rejoinder have since been received .

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OPs have filed their separate replies on similar lines and a gist thereof is being noted. At the outset, it was submitted by OPs that determination of whether OPs would fall under the purview of the Act is pending before the Hon’ble Supreme Court and the issues raised in this Information have already been considered by the Commission, which is further pending final adjudication before the Hon’ble National Company Law Appellate Tribunal (NCLAT) and the Hon’ble Supreme Court.

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OPs further submitted that the Information has been filed to divert attention from the Informant’s failure to pay its dues. According to OPs, the Informant owes INR 792.31 crores to ECL for coal supplied till May 2020, out of which, dues amounting to INR 676.09 crores are undisputed. In light of the above, OP-2 emphasised that refusal to supply coal to TANGEDCO on account of failure to comply with their payment obligations and requiring a NOC before they start supply is a fair, legitimate, and reasonable response to protect its commercial interests.

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OPs also stated that the issues at hand, such as grade slippage and alleged tampering with referee samples, do not pertain to competition law violations, and the Informant has made no meaningful efforts to fulfil its obligations of reconciliation under the Fuel Supply Agreement ( FSA ) and TPS agreements.

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It was also submitted by the OPs that the terms in relation to referee sampling are fair and have not been imposed on TANGEDCO in any manner. In fact, they have been formulated through detailed discussions between CIL, power

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producers, Ministry of Power, and Ministry of Coal. Additionally, they submitted that declaration of grade is the prerogative of a statutory authority, i.e., Office of the Coal Controller ( CCO ), with no influence of CIL and its subsidiaries, and the present case is also being pursued before CCO by TANGEDCO.

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In its rejoinder, TANGEDCO submitted that the instant case before the Commission does not concern any commercial dispute. TANGEDCO is a State PSU and it has never had any payment disputes with CIL Group in the past, and in the instant case, the payments have been withheld because of the discovery of grade slippages of the coal supplied pursuant to sampling and testing by CIMFR.

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It is also submitted by TANGEDCO that it has pursued legal recourse before the Commission based on the observations and findings of the Office of Accountant General and CIMFR. It further submitted that the instant matter is not merely concerned with the terms of the coal supply agreement and the sampling policy adopted by CIL, and allegations in this regard cannot be seen in isolation. Rather, the provisions of the coal supply agreement and sampling policy need to be seen in the context of the alleged abusive behaviour of CIL Group.

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On the issue of forum shopping, the Informant submitted that it has raised issue regarding grade slippage before the Coal Controller and Apex Committee; however, this is not the appropriate forum to decide upon competition law violations. Additionally, on the issue of referee sampling being fair and not imposed in any manner, the Informant has submitted that the retention of referee sample on the premises of coal companies and tampering them places all the risks on consumers. As such, only an impartial investigation would reveal that the essential safeguards that ought to have been assured by a dominant player have not been included in the sampling system and practice by CIL Group.

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The Commission has carefully considered the Information, replies of the OPs, and rejoinder filed by the Informant thereto.

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On perusal of the allegations levelled in the Information, it is observed that the Informant is essentially aggrieved of grade slippage in supply of noncoking coal, alleged tampering of the referee samples by ECL, and demanding payment of dues from TANGEDCO without resolving the grade slippage dispute by ECL.

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Before adverting to the merits of the case, it would be appropriate to deal with the preliminary issues raised by OPs in their replies challenging the maintainability of the present proceeding.

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It is submitted by OPs that various cases under the Act related to CIL and its subsidiaries are pending before the Hon’ble NCLAT and the Hon’ble Supreme Court. An appeal was filed by CIL against an order of the erstwhile Hon’ble Competition Appellate Tribunal ( COMPAT ), finding CIL guilty of abuse of its dominant position. In the appeal, CIL raised certain grounds of constitutional import which will have a bearing on all cases against CIL. Thereafter, in 2019, CIL filed the Transfer Petition before the Hon’ble Supreme Court seeking transfer of ongoing pending matters involving CIL and its subsidiaries which are pending before the Hon’ble NCLAT to the Hon’ble Supreme Court. The Hon’ble Supreme Court, vide order dated 16.08.2019, directed proceedings in all the matters before the Hon’ble NCLAT to be stayed. Therefore, given that the question regarding the application of Act to CIL under the constitutional framework is presently pending final adjudication before the Hon’ble Supreme Court, and the Hon’ble Supreme Court has directed a stay of proceedings before the Hon’ble NCLAT on all cases involving CIL and its subsidiaries, the Commission should await the Hon’ble Supreme Court’s decision on the matter.

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The Commission has noted the plea and is of the considered opinion that the same is misconceived, as the Hon’ble Supreme Court’s direction dated

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16.08.2019 is limited to only the existing proceedings, that too, pending before the Hon’ble NCLAT only, and no such direction was issued for the Commission or with respect to any future cases relating to OPs on the alleged violation of the provisions of the Act.

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The Commission now proceeds to analyse the allegations within the framework of Section 4 of the Act. For analysing the cases within this framework, to begin with, the relevant market is required to be delineated, followed by assessment of dominance, and thereafter, the abusive conduct is examined.

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With regard to relevant product market, the Commission opines that the relevant product market appears to be ‘ production and sale of non-coking coal to thermal power generators ’, after considering the physical characteristics of non-coking coal and its use in power plants, there being no effective substitute available for non-coking coal used by the thermal power plants in India. As the condition for supply of coal in the entire country is uniform and homogenous, the relevant geographic market may be taken as ‘entire India’ and imported coal cannot be considered as a substitute for domestic coal on account of several factors, including the peculiar design and specifications of the boilers used in the majority of Indian thermal power plants.

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Accordingly, the relevant market in the instant case appears to be ‘ production and sale of non-coking coal to thermal power generators in India ’ .

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With respect to the issue of dominance of the OP in the relevant market, the Commission notes that CIL and its subsidiaries virtually command monopolistic power in the above-defined relevant market by virtue of the provisions of legacy legislation, i.e., the Coal Mines (Nationalization) Act, 1973, whereby and whereunder, production and distribution of coal was vested in the hands of the Central Government and thence to CIL and its subsidiary companies. In view of this statutory background, the coal companies (i.e., CIL and its subsidiaries) have acquired a dominant position

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in relation to the production and supply of coal in India, and it is unnecessary to further dilate on this aspect.

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On the abusive conduct, the Informant has firstly alleged that there was significant and consistent grade slippage in supply of non-coking coal to TANGEDCO by ECL during the period between March 2017 and May 2020, which was discovered pursuant to sampling and testing by CIMFR.

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On the issue of grade slippage, the Commission notes that TANGEDCO has raised the same before CCO and the Apex Committee. The Commission further observes that, under the Colliery Control Order, 2000 (now Colliery Control Rule, 2004), the functions of the CCO include, inter alia , laying down procedure and standard for sampling of coal, inspection of collieries so as to ensure the correctness of the class, grade or size of coal, issuing directives for the purpose of declaration and maintenance of grades of a seam mined in a colliery, and acting as the appellate authority in case of disputes between parties arising out of the declaration of grade and size of coal. Therefore, CCO is a suitable and independent mechanism to redress the grievances arising out of grade slippage, as noted by the decision of the Commission in previous coal cases .

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The dispute in the present Information centres around the sampling procedure. The Informant alleges that the sampling policy of CIL, whereunder the referee samples are to be kept in the premises of ECL/similar subsidiaries of CIL, has made the sampling and testing system of the dominant player vulnerable to tampering of samples by the conflicted supplier .

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The Commission notes that, in present dispute, the mechanism for sampling and testing of the coals supplied to TANGEDCO is governed by the TPS agreement entered into between ECL, CIMFR, and TANGEDCO on 28.11.2016 .

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The Commission notes that the parties themselves have submitted that the mechanism under TPS was an improvement over the earlier sampling mechanism, where the coal samples and their testing were largely under the control of CIL and its subsidiaries. The Commission also, in previous coal cases, had found such sampling mechanism to be in contravention of the provisions of the Act. Subsequently, Ministry of Coal, Government of India, on 26.11.2015, notified guidelines on third-party sampling at the loading end after multiple levels of deliberations across various stakeholders, including power producers, Ministry of Coal, and Ministry of Power . Thereafter, Tripartite Agreement based on notified guidelines was entered into between TANGEDCO, ECL, and CSIR-CIMFR on 28.11.2016 for third-party sampling containing details on the modalities of collection, handling, storage, preparation, and ensuring safety of samples .

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The Commission further notes that the TPS Agreement and the safeguards therein provide for CIMFR as the third party tasked with the work of sampling and analysis of coal. As per the TPS Agreement, the samples challenged for referee analysis are stored by and transported to designated referee laboratories on rotation basis by CIMFR. The samples are only stored in the ECL premises but effectively under the control and custody of CIMFR through provision and safeguards provided under the TPS . In case the seals of referee sample are suspected to be tampered, remedies of the Informant would therefore lie elsewhere.

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As regards insistence for NOC from ECL by MCL, the Commission is of the opinion that the issue is more in the nature of commercial prudence, keeping in view the pending disputes between the parties due to the alleged nonpayment of dues by TANGEDCO. Therefore, requiring an NOC prior to resuming supply of the transferred quantities does not per se appear to be abusive.

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In view of the foregoing, the Commission is of the opinion that no case of contravention of the provisions of the Act is made out against the OPs, and

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the matter is ordered to be closed forthwith in terms of the provisions contained in Section 26(2) of the Act.

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It is, however, made clear that nothing contained in this order should be construed as an expression of opinion on the intrinsic commercial bilateral dispute between the parties, and the closure of this case by the Commission shall not preclude the Informant from taking/availing any other remedy(s) available to it in accordance with law. It is further made clear that the Commission has not expressed any opinion on the new sampling procedure put in place by coal companies.

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