Relevant Turnover Debate
Position in India:
The main reason behind the liberalisation of the Indian Economy in 1991 was the creation of wealth. There was an increase in internal competition as the liberalisation brought new investments and global players into the market. With the changing economic scenario, there was a need to regulate and control the markets and the MRTP Act was enacted to curb the growth of monopolies and unfair or restrictive practices that they indulged in. However, it proved to be inadequate and obsolete in certain important aspects, particularly in the light of international economic developments relating to competition law.The Indian Competition Act was, therefore enacted in 2002 to protect and nurture competition in the internal markets in India. The Competition Act, 2002 is a regulatory legislation enacted to maintain free market so that the Adam Smith’s concept of invisible hand operates un-hindered in the background. The act aims to prevent practices having adverse effect on competition, promote and sustain competition in markets, protect interests of consumers and ensure freedom of trade carried on by other participants.
The Competition Act has created a seven member regulatory and adjudicatory body which is the Competition Commission (‘CCI’) and a three member Competition Appellate Tribunal (‘COMPAT’), chaired by a sitting or retired Chief Justice of a High Court or Judge of the Supreme Court, to hear appeals from orders of the CCI and to adjudicate on claims for compensation. The Act gives the CCI and COMPAT wide discretionary powers to deal with transgressions of the law. The CCI can (i) pass ‘cease and desist’ orders in respect of anti-competitive practices, as well as orders to modify such anti-competitive agreements, (ii) impose heavy monetary penalty (calculated as percentage of turnover or multiple of profit) (iii) impose fines and/ or imprisonment for not complying with an order/direction of the Director General( ‘DG’) and the CCI.
It is observed that competition law does not lay down guidelines on how the CCI should calibrate the amount of penalty/fine to be imposed. The Act, under Section 27(b), only prescribes a ceiling. The penalities imposed by the CCI in most of the recent cases have been questioned and revised by the COMPAT. There is a lot of ambiquity and confusion regarding the penalty to be imposed whether relevant turnover or the total turnover should be considered while calculating the penalty. There is no credible framework for deciding the penalty and we can see it evolve over time. It has been mostly derived from globally accepted benchmarks to decide to the final quantum of the penalty. The rulings of the COMPAT and the Supreme Court will play a crucial role in shaping this framework and install regulatory certainity.
The relevant case laws on imposing penalties and COMPAT modifications of fines imposed by the CCI and the reasons therein are discussed below.
Reduction in CCI- imposed penalty by the COMPAT
In Coal India Limited (CIL) V. Gulf Oil Corporation Ltd (G0CL), Hyderabad
Boycott of Electronic Reverse Action and bid- rigging by the OP’s were found to be in violation of Section 3(3)(b) and (d) by the CCI. It imposed a penalty of three percent of the average turnover of three years, aggregating to Rupees 58.83 crores. Nine- explosive suppliers filed an appeal to the COMPAT. It agreed with the CCI’s order on breach of Section 3(3)(d) but held that the CCI had not considered ‘mitigating circumstances’, The Penalty was then reduced to ten percent of the amount as per the CCI order which was Rupees 5.88 crores.
A Foundation For Common Cause ; People Awareness v PES Installations Pvt. Ltd
The CCI found breach of Sec 3(3)(d) read with Sec 3(1) and imposed a penalty of five percent of turnover on the OP’s. The CCI relied on circumstantial evidence for finding bid-rigging in supply and installation of Modular Operation Theatre (‘MOT’). It also considered the comments of the Central vigilance Commission and the Comptroller & Auditor-General qua these bidders in other contracts. The total penalty aggregated to Rupees 3 crores. On appeal, in MDD Medical Systems India Private Limited v. Foundation for Common Cause & People Awareness, the COMPAT agreed with the CCI findings and agreed that there was breach of Sec 3(3)(d).
But with regard to the punishment the COMPAT observed that the CCI should have considered the aggravating as well as the mitigating circumstances. The COMPAT also considered the fat tat parties were cartelising for the first time and also the MOT worked well during the Delhi Commonwealth Games and gave credit to MDD. But the penalty was reduced to three percent of the turnover which was Rupees 1.81 crores.
In Re: Suo-Moto Case Against LPG Cylinder Manufacturers
The CCI identified and found evidence of caramelisation among few LPG cylinder manufacturers and held them guilty of bid-rigging which is a breach of Section 3(3) read with Section 3(1). A total penalty of Rs. 165.59 crores which is seven percent of the turnover was imposed on them. The COMPAT on an appeal in M/S International Cylinder (P) Ltd. v. Competition Commission of India & Ors agreed that there was a breach of Section 3(3).
Regarding the penalty, the COMPAT observed that ” where a particular concern is a multi-commodity company, the relevant turnover should be considered and not the total turnover”.The COMPAT also noted certain things like, India being a nascent jurisdiction, the companies were first time offenders and also the possibility of industrial activity being choked because of the hefty penalties. These issues were not raised before the CCI and as an exception, it allowed the parties to go back to the CCI with the same arguments and ordered for re-assessment of penalty by the CCI.
After re-consideration, the CCI imposed the same earlier fines and corrected a factual error for one party whose penalty reduced.
Analysis of the orders:
From the above orders, a lot of different approaches between the competition authorities can be found mainly with regard to award of penalty. In some cases, the COMPAT reduced the penalty awarded on the grounds that the CCI had not computed penalty on ‘relevant turnover’ or that the CCI had not considered ‘mitigating circumstances’ etc and in few cases it upheld the findings and the penalty awarded by the CCI.
It can be clearly seen that there is no specific formula or method that emerged from the penalties imposed but have raised certain aspects which are to be noted when imposing punishment. There s no clarity as to if the ‘relevant turnover’ or the ‘total turnover’ should be used. Except the statutory ceiling laid down in the Act, there are no guidelines for the exercise of discretion by the CCI while awarding penalty.
However, the Supreme court delivered a landmark judgment and upheld the principle of “relevant turnover ” for determination of penalties in competition law contraventions and tried to settle this critical issue which was highly debated amongst all stakeholders. The CCI in most of the rulings fined companies on the “total turnover” of companies and this decision will now bind the CCI to limit it to “relevant turnover” only.
An analysis of the case, Excel crop care,
The above judgment arised out of a proceeding involving a contravention of Section 3(3) of the Competition Act, 2002 in the public procurement of Aluminium Phosphide (ALP) Tablets by the Food Corporation of India (FCI). The Competition Commission of India (CCI) found a violation of Section 3(3) of the Competition Act and imposed a penalty at the rate of 9% of the total turnover of the concerned ALP manufacturers namely, Excel Corp Care Limited (Excel), United Phosphorus Limited (UPL) and Sandhya Organic Chemicals Private Limited (Sandhya).
The Competition Appellate Tribunal (COMPAT) in its final order upheld the CCI’s order as to the existence of the contravention under the Competition Act. However, it significantly reduced the penalties imposed by the CCI. COMPAT’s modification of penalties was based on the principle that the reference to the term “turnover” in Section 27(b)1 of the Competition Act would, in the facts and circumstances of the case, mean “relevant turnover”, i.e. turnover derived from the sales of goods or services, which are found to be the subject of contravention.
COMPAT’s order was challenged by the CCI before the Supreme Court. CCI contended that the term “turnover” as used in the Competition Act must always be interpreted as “total turnover” of the enterprise in contravention. The CCI contended that the COMPAT had added words to the Competition Act by inserting the word “relevant” before the term “turnover”.
The Supreme Court held that while deciding the issue of penalties, the parameters for imposing penalty should be the “relevant turnover” rather than the “total turnover” of the enterprise. The Supreme court felt that limiting the penalty to “relevant turnover” to be more appropriate considering all the aspects of Competition Act and all other legal provisions which relate to the imposition of penalities. The court also relied upon other relevant principles in the European union, United Kingdom and South Africa. The main factors which were favourable to the ruling that “relevant turnover” rather than “total turnover” should be considered as a basis for imposing fine are,
1) A violation of the Competition Act must relate to an “agreement”, which in turn relates to particular product(s) even when there are other unaffected products, which must not be subject to inequitable treatment;
2) Interpretation which brings out inequitable or absurd results has to be eschewed;
3) If two interpretations are possible, one that leans in favour of infringer has to be adopted on the principle of strict interpretation of penal provisions;
4) It defies common sense to fine companies based on products/services that do not contribute to the infringement;
5) Under the doctrine of proportionality, the penalty cannot be disproportionate and it should not lead to shocking results;
6) Applying the doctrine of “purposive interpretation” the nature of contravention and benefit derived therefrom must form the basis of penalizing; and
7) Section 27 of the Competition Act is aimed at achieving the objective of punishing the offender and acts as deterrent to others. Such a purpose can adequately be served by taking into consideration the relevant turnover.
This judgement gives clarity, certainty and transparency in penalty imposition. This will help in building a framework. This is a big advantage for large multi-product companies where the infringement might be related only to one product. This also lays down that the penalties imposed should not be arbitrary and should in tune with the doctrine of proportionality. It should also consider other factors like mitigating factors and aggravating factors.
Through various rulings of the COMPAT and Supreme court the CCI’s approach to assessment of penalties will evolve over time. This judgment will play a critical role in shaping this evolution. The discussion of various aspects like the doctrine of proportionality, mitigating and aggravating factors, social and economic aspects will provide framework for determination of penalties. This would help the competition regulatory authorities to build its credibility and install regulatory certainty.