The Doctrine of Single Economic Entity And The Direction & Control Test

The supreme court of the USA, in the case of Copperweld Corp. v Independence Tube Corp.1,held that a parent corporation and its wholly owned subsidiary would be constituted as a single entity.

In India, the concept of Single Economic Entity is reflected through the definition of 'enterprise' under section 2(h) of the Competition Act, 2002. As per this definition, an "enterprise means a person or a department of the Government which is engaged in any activity, either directly or through one or more of its units or divisions or subsidiaries. "

An enterprise therefore, is the equivalent of a single economic entity in India. An enterprise and its subsidiaries make up one big single unit. Each individual company will have its own separate legal identity but all together, the parent company will be considered a single economic unit. An enterprise entering into an agreement with one of its subsidiaries would not be considered a threat to the competition in the market.

Even though there is no explicit mention of the single economic entity doctrine in the laws of India, the definition of enterprise is the closest and a rather similar concept. It can however not be said to be identical since there is a little deviation in the criterion to determine the existence of a single economic unit.

Direction and Control Test

The European Commission's guidelines on Horizontal Cooperation talk about 'decisive control' over a subsidiary by a parent company for them to be considered as a single economic entity.

In P Viho BV v. Commission 2, the European Court of Justice explains "control" in terms of autonomy in decision - making. The concept is further elaborated in the Kapoor Glass Private Limited v. Schott Glass India Private Limited3, wherein legal control, single centre of decision making, unity in economic decisions and exercise of decisive influence were considered as factors to determine the competitive relationship between the companies.

Similarly, in the case of Shamsher Kataria v. Honda4, direction and control test was used to conclude that the agreement between Hyundai Motor Company and Hyundai Motor India Limited was not anti- competitive since the parent - subsidiary relationship between the two companies granted the decisive control of the latter to the former.

The listed cases make it clear that control is determined in the context of decision making. The decisions of subsidiaries are controlled by their holding company. Even though the subsidiaries are separate legal entities and manage their day to day affairs on their own, their major decisions are under the control of their parent company. This applies in both positive and negative sense. The infringements on part of subsidiaries are attributed to their parent company.

This is where it is evident that the doctrine of a single economic entity is based on the doctrine of lifting of the corporate veil. Even though the subsidiaries have independent legal existence from their holding company and act in their own name, it is a common parent company behind the corporate veil. The parent company can therefore be held liable for the acts of its subsidiary due to having a control over its decisions.

Situation in India

In India, as far as the definition of enterprise is concerned, the test of direction and control is not always applied.

In Public Insurers Case5 , the status of a single economic entity was not granted because the companies in question performed business activities in different areas.

EC guidelines were ignored and the definition of enterprise under the Competition Act, 2002 became the sole determiner of existence of a single economic entity, more specifically, an enterprise. In another instance, in Volkswagen Case6 , the existence of a single economic entity was determined on the basis of share capital structure. However, in Shamsher Kataria v. Honda7, the control test was put to use. The situation thus remains ambiguous. The Public insurers case gives an indication that the concept of enterprise eliminates the need of single economic entity doctrine in India . What the doctrine aims to achieve, the concept of enterprise already fulfils. This is however arguable and needs to be settled.

The concept of a single economic entity developed under EU Competition Law and used the control and direction test to ensure the existence of a single economic entity. A single economic entity has decisive control over its subsidiaries and the agreements it has with them are not considered anti- competitive. The doctrine is applicable in many countries throughout the world and has gained acceptance in India as well. However, the Anti - Trust Laws in India need to work on it to remove ambiguity surrounding it. The question whether the concept of enterprise is enough to eliminate the single economic entity doctrine needs to be answered. Regardless, it is evident that the concept of a single economic entity is a part of competition law in India.

1.467 U.S. 752 (1984)

2 P Viho Europe BV v. Commission Case, C-73/95 [1996] ECR 1-5457.

3 CCI March 29, 2012

4 (2019) PL (Comp. L) June 77, June 6, 2019

5 National Insurance Companies Ltd. and Ors. v. Competition Commission of India (2017) Comp LR 1

6 Exclusive motors pvt ltd v. Automobili Lamborghini SPA [2014] 121 CLA 230 (CAT), p 8-11, 14

7 supra note 4