Parallel Imports: Good, Bad, Ugly?

Parallel imports can be a headache for trademark owners, but India's legislation adequately protect against it

Parallel imports and exports in India is currently considered as the most opaque and confusing phenomena of international trade. On one hand, parallel importers strictly follow the laws of the market; yet on the other hand, they invariably infringe intellectual property right (IPR) provisions.

While multinational IT companies are pressing for general barriers in order to maintain price differences of goods among various countries, consumers find such differences puzzling in a world that is increasingly heading towards international trade and the removal of trade barriers. Easy resolution of the problem is not in sight.

While parallel imports are not new to the Indian market, factors like diversion of piled-up inventories from recession hit countries to emerging markets like India, where GDP growth rates are expected to be much higher compared to the rest of the world, has already started in a big way.

According to industry expert, "Parallel imports are not a permanent feature. It is exploited by opportunists."

This cover story attempts to simply put forward the views of the channels, importers, associations and the IT industry, without taking sides to the discussion.

*PARALLEL IMPORTS LEGITIMATE IN INDIA *

Parallel imports can be a headache for trademark owners, but India's legislation adequately protect against it. There has been several debates and discussions on the permissibility over parallel imports. Parallel imports saga has seen many twists and turns, with conflicting views emerging from the court and the custom authorities.

The topic has come to the center stage after the recent Delhi High Court rulings against Samsung and the Ministry of Finance notifications indicate that the Indian Government recognizes legality of parallel imports.

In a landmark judgment, on October 3, 2012, a Division Bench of the Delhi High Court ruled that parallel importation is authorized under Indian Trademark laws and does not infringe the trademark of the rights-holder. In the Bench of Justices Pradeep Nandrajog and Siddharth Mridul overruled the findings of a Single Judge, who held in February 2012 that all imports of trademarked goods into India has to take place through the authorized distribution chain of the trademark-holder Samsung Electronics or with their permission, failing which imports would amount to infringement under the Trademark Law. The court order also touches on the issue of trademark infringement in the case of meta-tagging.

*ACTION TAKEN AGAINST IMPORTERS*

For last few months, some IT vendors have been adopting all possible desperate actions to successfully block parallel imports, by taking undue advantage of some circulars which are worded in such a manner that may create confusion. The vendors thus mete out a step-motherly treatment to importers.

Recently, Acer India sent caution notice to its partners against Delhi based Techcom Technologies, who has been importing Acer TFT monitors. Earlier this year, while pressing charges against some of the parallel importers, Dell managed to get an Indian Customs notification to confiscate goods imported by parallel importers. Dell released a caution notice in a leading daily following an ex-parte interim injunction awarded in its favor by the Delhi High Court in a case against an importer, Pioneer Computronix. The notice cautioned the public against buying Dell-branded products from parallel importers.

In other case Commissioner of Customs, Mumbai not only allowed the parallel imports of Dell computers into the country but also ordered Dell to pay demurrage and warehousing charges to the importers whose goods had been seized for over 2 months due to a complaint filed by Dell. The Customs department found that around 500 Dell laptops imported by Venktron Digital Systems, Sapphire Micro Systems and Momentum Technologies, from China were "genuine and were not prohibited" under the law.

Even after considering all possible aspect of IPR and legality of the consignments of which clearing was suspended, Customs Authority passed the order which was self explanatory in all respect. Even that order was challenged/appealed, with the help of the claims which are away from the fact. The timely action by finance ministry and its clarification will have far reaching effects.

*PARALLEL IMPORTS SCENARIO*

Despite all the earlier trials, will the Delhi High Court order (it is now further being challenged to the Supreme Court) and government clarification gives any relief to the parallel importers, who are being harassed by IT companies time to time?

In the view of importers, with the release of Customs circular, MNCs will have to look for newer harassment tactics to dampen the spirit of importers, adhering to all the business ethics, who are offering genuine products at reasonable price to the consumers. Though MNCs may call it 'Unethical Imports'.

According to Sandeep Kanwar, director, Momentum Technologies, a Delhi based importer, "Yes the Customs have been following this government clarification but indeed due to lot of negative publicity by vendors the import products are slowing down as sales are dipping. Now the percentage of import products has considerably reduced due to warranty issues and currency fluctuations."

Similarly another Mumbai based importer, on the request of anonymity commented, "It is just a clarification, which every business house was aware of including vendors. Words were twisted at the behest of MNCs in Customs procedures, which came into force during last couple of years, solely due to 'efforts' of handful of MNCs. And that is not the end of the road for those biggies, as they (IT companies) have started spending now under the umbrella of organizations like Assocham and others to lobby with government. Vendors still do not miss to create obstacles to competitors though abundantly cleared by law machinery."

On the other hand, vendors are still not showing any readiness to accept the clarifications. Reacting to the Finance Ministry clarification, Dell spokesperson commented, "As communicated to the Customs department and various parties involved, we reiterate our stand against, parallel imports involve the illegal distribution of legitimate Dell-branded products manufactured for a specific country or market into another country or market. Products manufactured for a specific country or market have specific and unique warranty support, which may create significant differences in the user experience based on the products having been tailored for a specific country or market."

The latest circular issued by the Ministry of Finance does not direct the various field formations to permit parallel imports or to stop all parallel imports. There is an existing dispute on the interpretation of Sec. 30 (3) (b) of the Trade Marks Act as to whether Section 30(3)(b) exempts cases of parallel imports from infringement and this question of interpretation has not been foreclosed by the circular. To the extent that the said provision has been interpreted and applied by the High Courts/Supreme Court in a certain manner, the Customs will have to follow the said interpretation.

*DIP IN PARALLEL IMPORT BUSINESS*

Parallel imports, that is imports of a non-counterfeit product imported from another country without the permission of the intellectual property owner, of IT hardware products has declined to 20% due to falling prices of these products and constant awareness drive by the vendors, a trend that augurs well for the industry.

"Growing parallel imports was a threat few years ago but now that has reduced to 10-20% due to domestic price reductions and companies education drive," said Mumbai based authorized distributor and also a member of Genuine Dealers Association (GDA), Vijay Goel.

Generally, consumables are often imported from the overseas market. Consumables include products like paper, pens, file folders, computer disks, toner or ink cartridges. In the IT hardware products, printers, laptops and networking products are imported.

According to the industry, parallel imports are mostly coming from China (laptop bags), Malaysia (IT furniture), Singapore (pen drives, memory cards), Korea (battery, cells), and Thailand (computer cabinet).

*DOES IT DISTURB DISTRIBUTION EQUILIBRIUM?*

All brands are popular and are parallely imported, but mostly Dell, Samsung, HP, Lenovo, Acer, Intel are more in demand. At Canon, around 20% of the cartridges market is occupied by parallel importers. In case of reconditioned copiers, almost half of the business for this industry is lost due to parallel imports. In India, Delhi, Mumbai, Kolkata and Chennai are big centers for these imports.

Vendors and authorized channel partners are of the opinion that parallel import disturbs the 'distribution equilibrium' to a large extent, as it brings in a discomfort to vendors existing partners. Also these parallel imports don't create any new channels to any sort of business groups, they work on very thin margin or sometimes negative and supply to the existing channels, who has been loyal to any OEM brand network groups.

Alankar Pandian, sales and marketing director of D+M Group Singapore informed, "Parallel imports would always be a big concern for D+M Group, as we hold 60% of the AV market in India and AV products are usually sold by our AV channel who does a customized offering to our end customers, these parallel imports has only one thing to offer that is price better than the market operating price, rest all support structure are left high and dry on the brands."

For those company's appointed distributors and dealers who are already sitting on high inventory, parallel import definitely spells bad news. They will have to take deeper price-cuts to match their prices with that of parallel products and that may also mean booking loses unless of course the vendors are willing to provide substantial price protection.

The glut in parallel imports also threatens to prolong the inventory cycle of distributors, many of whom are still sitting on 30 to 40 day inventory.

Many authorized channel partners which include sub-distributors, regional distributors, resellers, and dealers of vendors like Dell, HP and others, have faced the challenges due to parallel imports and alleged counterfeit products.

Elaborating upon these issues, Vijay Goel, director, Miracle Tech Distributors said, "Repacked and refurbished units are sold in this market at lower rates and the customers are duped as they are do not get the products as expected by the consumers. Following this, there are warranty issues on such products. Such incidents have created lot of problems for genuine dealers and distributors."

N Sudarshan Reddy from Compage Computers, Hyderabad, mentioned, "As a vendor, the brand is their own property and it should be the primary duty of the vendors to take care of the channel partners. We spend years in developing a brand and the vendors should ensure that the business of the channel partners is healthy."

Objecting to the vendors stand, Kanwar replied, "No we don't agree with the vendor theory. All the theories have been manipulated in favor of the vendor as per them. The warranty issue is one of the major issues for all importers. We have been selling import products at lower prices-which is true as we get better deals internationally and benefit is passed to the customers and not pocketed by us (which is very well visible in the market). We are earning small decent margins enough to cover the warranty at our ends. The price is the only factor which is driving imports but recently the price gap has come down between import and channel products due to rising dollar (currency fluctuation)."

Unfortunately nobody in this world is comfortable even with authorized channel. As per vendors and channels, 'Distribution Equilibrium' means unquestioned hefty margins, than naturally any competitor brings discomfort to these company owned partners. Therefore, it is only a myth, that vendors' support structure is satisfactory. Even, one can substantiate with claims of 'unfortunate customers' who wait and waste months to get attended, and finally go to associations/consumer forums or just forget the failed product.

"As against that, parallel importers are always on their toes to support in most flexible manner to their customers, including advance replacement. Try yourself calling a support center, and their service book is heavier than Constitution of India," lamented an importer from Mumbai. He added, "Importers also offer choice to select the products from across the globe, which is not being sold by brand owners in India, as high value products do not sell in good quantity, so vendors whose only business is to dump, may not bring such elite products. Therefore, we try to bring higher products at better prices to create a new market."

Parallel importers offer very competitive prices, latest products, personalized and flexible services and support. This has been proved and established in Court of Law as well in recent cases. Many advanced models are first offered by importers and then when vendors exhaust their old technology goods, they launch those models, long after importers.

"Our business is like peanuts to the volume that authorized channels do, but yes MNCs do try to sell what they want to sell. It is not by customer's choice but vendor's choice. Like if customer wants basic laptop without complete cover warranty, he has no choice, but to buy with that cover warranty whose price is heavily bundled into the product," pointed out Kanwar.

According to a Mumbai importer, "Though, not very sure, why it is a concern at all for vendors, but for very sure parallel importers would find it difficult to continue with imports, as they face harassment in Customs, undue negative campaign by vendors in local market stops buyer from buying superior but parallel import product at more competitive price and personalized service."

*ANY END TO THIS DEBATE?*

As per the importers, it purely depends on vendor's vision and preparedness. Why brands like Sony/ Apple and some few brands are never afraid of parallel imports. No parallel import ever happens with these brands.

IT companies have gone on records to accept that they import products at much higher prices than that prevailed in international market, with my limited understanding, tax evasion may only serve the purpose for this high valuation, whereby India looses foreign exchange, and consumers end up paying very high prices.

To some extent, some vendors have been trying to maintain one price policy across the globe.

Pandian added, "We at D+M have ensured that we have the same price points as in other countries. Also, we have in country priority service warranty support for products bought in that region; by this we have been able to tackle the parallel imports."

As of now we have been able to tackle this parallel imports, but in case of headphones, end users tend to buy from other markets as the duty structure in India is very huge compared to our ASEAN nations. The duty structure and the margin by the distributors and dealers make way to parallel imports.

In his view, the end customer prices would need to be worked by the IT vendors to ensure the price points are the same when compared to any other countries.

*WARRANTY PAIN*

Several channel partners buy products in bulk from overseas locations and sell them in the Indian market after duly paying all import duties and local taxes. As these products are cheaper overseas, it helps the partner in maintaining healthy profit margin. However, most vendors deny local warranty support on these products.

What is worse, in case of some brands, the option of 'international warranty' is denied to bulk purchasers even if they show willingness to bear that additional cost.

Most of the importers want when India is an open market then why do vendors not offer local warranty on their genuine products imported legally by channel partners?

The terms and conditions of international warranty are individually set by the principal companies. But as a normal person or customer, the understanding is clear that international warranty means he will get warranty around the globe for the products he purchased. But the fact is else in India only where international warranty is guided by new set of guidelines which confuses and conflicts all terms and conditions of warranty.

On the prevailing confusion over international warranty, Kanwar explained, "This is only happening in India. The vendors say that cost and product specification differs from country to country, yes I agree to it and also like to say that any product brought in Singapore has cost of warranty included for warranty in Singapore (since the manpower is much higher than in India), so how can the cost be more if the company has to give warranty in India whose warranty cost was paid at an expensive country. It is for people to think who is right?

As the world is shrinking and parallel imports are becoming more aggressive, some of the vendors have already started taking initiatives to start offering international warranty. Thus, it is believed that others will follow suite too; however, it may take some time for all to follow the same path. But in case of Dell, the company continues to take its stand. In a statement Dell said, "Unauthorized imports misguide and misrepresent customers and are not adequately supported by warranties in the country of sale and cause serious inconveniences and losses to our customers and endanger our brand reputation."

*ASSOCIATION SUPPORTS PARALLEL IMPORTS*

On the ethics front, IT vendors as well as associations stand divided. IT associations are very much concerned that should these MNCs succeed in lobbying for a change in the Trade Mark/Patent Laws, the importers who are legally engaged in parallel imports will be completely ruined. Moreover, it will also be against the existing government policy of augmenting growth of SMBs and small manufacturer. And the MNCs will go on to become monopolistic and unchecked with no competition whatsoever for their products and their exorbitant pricing.

Mahinder Aggarwal, president, ADCTA, argued, "Most of the countries encourage parallel imports with a view to benefit the financially weaker sections of the consumers. The principle of International exhaustion is followed everywhere including India."

Swarn Singh, joint secretary, ADCTA mentioned, "The MNCs in their own interest want to have a monopolistic control and exploit the huge Indian market potential. Thus there is a strong case for the continuance of the parallel imports."

According to V Krishnan, executive secretary, PCAIT, "If parallel imports are not allowed, what check would be there on these MNCs and what would happen to the consumers who cannot afford the higher price, is anybody's guess?"

Therefore, associations once again are pressing on the government of India for the need of continuance of legal parallel imports and consequent clarification of this policy openly for public benefit so that the MNCs do not go about harassing the parallel importers as is the present case.

*CUSTOMER IS THE 'KING'*

As a last comment, one can add that parallel import or no parallel import is for the customer to decide. Thus this debate has no end. As the importer are cursed by the channels and vendors, but parallel importers are also operating other business and should be treated at par by all channel and government authorities. For it is the customer who at the end of the day; after paying the price, is carrying the product home. Let customer decide whether he wants to shell out his money for a product vendor's warranty or not?