Examining the Correct Basis of Penalty: Relevancy of ‘Relevant Turnover’ after Competition (Amendment) Act, 2023
The Competition Act, 2002 (‘the Act’) was passed to protect and defend the Indian economy from the adversaries of the competition in the market. The Act set up the Competition Commission of India (‘CCI’) with the powers to impose penalties and inter alia investigate anti-competitive agreements and abuse of dominant position. Section 27 of the Act gives CCI the power to impose a penalty of up to ten per cent of the enterprise’s average turnover of the three preceding financial years, contravening Section 3 or Section 4 of the Act. With the recent enactment of the Competition (Amendment) Bill, 2023, the approach of CCI towards the imposition of penalty will change. Once the Section 20 of the amendment Act is notified and comes into effect, CCI will have the authority to impose fines on the basis of global turnover, which is currently limited to relevant turnover. In this piece, I will discuss how this was a much needed move on the part of the government and its significant potential benefits on the economy.
Turnover is classified into two kinds for the imposition of penalty: global and relevant turnover. Global turnover refers to the turnover of an enterprise resulting from all the goods and services it is dealing in, while relevant turnover refers to the turnover of the specific goods or services affected by the infringement. The CCI had been penalising firms for several years, interpreting Section 27 of the Act to mean that the fines shall be imposed on the entire global turnover of the entity concerned. However, the Competition Appellate Tribunal (‘COMPAT’) in Excel Crop Care Ltd., In re has indicated that the appropriate measure of penalty in the case of a multi-product company would be only the turnover of the product or service in relation to which the contravention is alleged, and not the turnover of the entire multi-product company. The Supreme Court upheld this decision in Excel Crop Care Ltd. v. CCI (‘Excel Crop’), relying primarily upon the principles of strict interpretation and proportionality. As per the principle of strict interpretation, whenever more than one interpretation of any statute is possible, the one leaning in the infringer's favour must be adopted. “It is a well-settled rule of construction of penal statutes that if two possible and reasonable constructions can be put upon a penal provision, the court must lean towards that construction which exempts the subject from penalty rather than the one which imposes penalty.” Consequently, the court observed that the penalty should be based on relevant turnover as it exempts the violators from the additional liability that may be charged if the penalty were to be awarded on the basis of global turnover. The court also followed the principle of proportionality as per which the punishment must be proportional to the harm caused by the infringer. “‘Proportionality’ is a principle where the court is concerned with the process, method or manner in which the decision-maker has ordered his priorities, reached a conclusion or arrived at a decision.” Court reasoned that a penalty based on relevant turnover is proportional as the infringer must only be punished subject to the particular market in which the anti-competitive practices have been conducted.
Relevancy of Relevant Turnover
After the amendment’s enactment, the principles that influenced the Supreme Court’s decision seem irrelevant. The principle of ‘strict interpretation’ no longer comes into play as the law has been cleared and ambiguity has been resolved. The law no longer offers more than one interpretation to consider relevant turnover as the basis for penalty. Regarding the principle of proportionality, it cannot be ascertained in any way that the penalty on the basis of global turnover is disproportionate. Section 45 of the amended act has provided measures to ensure proportionality; namely, the guidelines shall be issued to guide CCI in determining the appropriate amount of penalty, and the order shall give reasons for awarding a fine different from the appropriate one specified in the guidelines. It can be said without doubt that penalties should not be disproportionate, but it does not mean that they should not be based on global turnover. After all, the penalty can vary from zero to 10 percent of the global turnover, depending on the gravity of the infringement.
Besides, a penalty based on global turnover is more viable than the relevant turnover in several ways. Subsequent arguments would show how the penalty based on global turnover is proportionate and should be the basis for imposing the penalty.
First, there are situations when it is difficult to impose a penalty on the basis of relevant turnover. One such example would be ‘hub and spoke’ agreements.
“Hub and Spoke (“H&S”) agreements are a combination of two anti-competitive agreements, a set of vertical agreements, all having a common party (the “hub”) and a different party for each agreement (the “spokes”). The spokes are competitors operating at the same level, whereas the hub is at a different level at the production chain. The second anti-competitive agreement is among the spokes, under which they transfer information to each other or collude in any other manner via a hub, which removes the need for direct communication.” Accordingly, in such a case, the hub may not have any direct income/turnover from the product, which is the subject matter of the cartel allegation. Thus, enforcing penalties based on relevant turnover may result in no charges being imposed on ‘hubs’ as they are generally not engaged in the same line of business as the spokes.
Also, it would be difficult to impose penalties on digital market platforms based on the relevant turnover. Recently, CCI imposed penalties on MakeMyTrip, Goibibo and OYO for abusing the dominant position. Although it abstractly imposed a penalty of 5% on the relevant turnover, it construed relevant turnover as aggregate turnover from all segments. It observed, “In case of digital market platforms, restricting revenue to just one segment would not appropriately capture the interdependent and integrated nature of the ecosystem…Accordingly, in such markets, for the purposes of revenue determination, the entire platform has to be taken as one unit.”
Similarly, the ‘relevant turnover’ criteria fail to cover the bidders engaged in the different business lines who participate in collusive bidding. In the case of Nagrik Chetna Manch, the violators were not involved in the same line of business but indulged in bid rigging to assist the other enterprise. They argued before the CCI, citing the Excel Crop, that the ‘relevant turnover’ of their enterprise was zero as they are engaged in different lines of business, and hence no penalty can be imposed. CCI rejected the argument and distinguished the case from Excel Crop. It observed that the penalty on ‘relevant turnover’ in this case would lead to no imposition of liability on the violators who have contravened the provisions of the Competition Act, thereby defeating the object and purpose of the Act. Thus, the turnover was construed as global turnover, and the penalty was imposed.
It hints at subsequent questions as to how the CCI would be able to penalise enterprises based on relevant turnover who do not operate in the same horizontal relevant market or operate in the related vertical market or another adjacent market but are nonetheless engaged in cartel activities on the horizontal market, either as facilitators or co-conspirators. These practices would require CCI to again delineate from the Excel Crop decision, thus questioning its viability.
Second, the ‘relevant turnover’ criteria fail while penalising the abuse of the dominant position. Section 27(b) provides penalties for the violators involved in anti-competitive agreements and abuse of dominant position. The Excel Crop Case did not distinguish between the violations of Section 3, entering into the anti-competitive agreements and Section 4, abuse of dominant position. While a penalty on relevant turnover may be considered equitable in anti-competitive agreements where it is easier to delineate a certain product as the subject of the agreement, such delineation becomes difficult in abuse of dominance cases. Any enterprise could be using its dominance in one market to affect the competition in other markets, and it would be difficult to impose a penalty based on relevant turnover.
Third, the Competition Act was passed to resolve the issue of ‘misallocation of resources’ in the economy. However, the penalty based on relevant turnover is inadequate to counter the same. Let us assume that there is an economy in its ‘initial’ equilibrium and a competition violator using its market force increases the price of commodity A. It will lead to the relocation of resources from the production of B to A as the producers now will have more profit in producing A than B. This will, in response, reduce the supply of B, and consequently, the price of B will rise. It will again cause the relocation of resources from C’s production to B, which will continue until the economy reaches its new ‘final’ equilibrium. The difference between the initial and final equilibrium is the misallocation of resources. Thus, the impact of the violator’s practice was not just limited to any one product in which he was dealing, in this case, A, but to the whole economy. Hence, the penalty should not be based on the relevant turnover of the infringed product but on the enterprise's global turnover to ensure proportionality.
Fourth, the objective of a penalty is to punish as well as to deter. The penalty based on global turnover creates a deterrent effect which generally cannot be incorporated with relevant turnover. “To ensure that fines can achieve their deterrent effect, fines should be larger than the expected illegal gains from anticompetitive conduct or the presumed damage to consumers in the relevant market.” It is possible that the illegal gains of the violator from the market may be higher than the penalty itself. For example, in Belaire Owners' Association vs DLF Limited, CCI imposed Rs. 630 crores penalty on DLF Ltd. as 7% of its average total turnover of the three preceding years. The relevant market determined in the case was the market for services of developers/builders in respect of high-end residential accommodation in Gurgaon. If the CCI had been imposing penalties on the basis of the relevant turnover, it would be causing no deterrent effect as the violator had sizable presence across several key cities (Delhi NCR, Mumbai, Bangalore, Chennai, Kolkata, Chandigarh, and other parts) and business in Gurgaon constitutes only a portion. Thus, the resultant penalty on its relevant turnover would be too low to instil any fear or deterrent effect. Therefore, it is argued that CCI should at least have the authority to impose more considerable fines whenever the case requires. Hence, it can be asserted that global turnover is a more justified measure of imposing a penalty on the infringers as it is direct and unambiguous. It provides proportional punishment to the violators who cause disturbance in the economy. Now, let us examine how competition authorities of the European Union (‘E.U.’) and the United Kingdom (‘U.K.’) have set the penalty regime to punish and deter the violators.
Comparison at the ‘Global’ Level
While we looked upon the Indian jurisprudence, it is pertinent to see how the mature competition law jurisdictions, such as the E.U. and U.K., tackle the issue and which approach they have followed. Let us first discuss the penalty regime followed by the E.U. to impose penalties on competition law violators.
A. European Union
E.U. follows a set of European Commission Guidelines (‘ECG’) while determining the penalty to be imposed on the violator. ECG mentions a two step methodology that needs to be followed while calculating the amount of liability. Step 1: Determining the Basic Amount – The basic amount of the fine is calculated based on the value of sales of goods and services of the enterprises. The starting point taken is 30% of the relevant turnover. The Commission then multiples the penalty subject to the number of years for which the infringement had been going on. Further, the Commission will add to the basic total a sum of 15-25% of the turnover to add a deterrent effect in the market. Step 2: Adjustment for Aggravating or Mitigating Factors – After the introductory amount of fine has been determined, the Commission will adjust it upwards or downwards depending on the existence of aggravating or mitigating factors. The Commission may increase the penalty if it finds any aggravating factors, such as the enterprise has violated the regulations in the past, the infringer refuses to cooperate, acted as an instigator or role of a leader etc. Likewise, the Commission may decrease the fine if it finds any mitigating factors, such as the enterprise fully cooperated with the investigation beyond its legal obligation, the enterprise supplies evidence that the violation has been done only due to negligence etc.
Moreover, while imposing the penalty, the Commission bears in mind the maximum amount of penalty that has been capped at 10% of the total turnover of the enterprise in its preceding business year. Now, let us look at the approach followed by the U.K.
B. United Kingdom
Like the E.U., the U.K. follows the penalty guidance issued by the Competition Market Authority (‘CMA’). It has adopted a six-step methodology to impose the penalty on the infringer.
Step 1: Starting Point – CMA first identifies the relevant market affected by the undertaking’s infringement. It then imposes a basic penalty as a starting point which may go up to 30% of the relevant turnover of the enterprise in its last business year, depending upon the seriousness of the infringement, the extent of harm likely to be caused in the market etc.
Step 2: Adjustment for Duration – CMA may then increase the basic amount or decrease, in particular circumstances, depending upon the number of years for which the infringement had been carried out.
Step 3: Adjustment for Aggravating or Mitigating Factors – Similar to E.U. Guidelines, CMA then adjust the basic amount subject to aggravating or mitigating factors.
Step 4: Adjustment for Specific Deterrence – CMA may increase the amount of penalty obtained after following the three steps above to incorporate the deterrence factor. It is done in case the financial benefit from the infringement is above the level of the penalty reached at the end of step 3 and to ensure that the penalty that is imposed is sufficient to deter undertakings from breaching the law in future.
Step 5: Adjustment for Proportionality – At this step, CMA checks if the penalty is proportional to the infringement and should not exceed the legal maximum permissible of 10% of the global turnover of the undertaking in its last business year. This is where the CMA ‘takes a step back’ and reassesses the quantum of the penalty to be imposed.
Step 6: Adjustment for Application of Reduction – Under this last step, CMA finally considers the applications of reduction filed by undertaking on the basis that if it has a leniency agreement with the CMA, has a settlement with CMA etc. In exceptional circumstances, CMA may also consider the undertaking’s inability to pay the penalty. E.U. and U.K. have 10% of the enterprise’s global turnover as the upper limit for imposing the penalty.
In Singapore, Section 69(4) of the Singapore Competition Act refers to the turnover of the undertaking as opposed to the relevant turnover for determining the penalty. Thus, global turnover is considered as an apt basis to cap the penalty even in matured jurisdictions. It has given them a free hand to impose the just amount of penalty as the case requires while CCI is confined only to impose penalty as per the relevant turnover.
The Competition Law Review Committee determined that the ‘relevant turnover’ formula was insufficient for dealing with all possible cartel situations. It poses more inadequacy than solutions. While the E.U. and the U.K. penalise up to 30% of relevant turnover for just figuring out the starting point of the fine, the Supreme Court fixed the upper limit of the final penalty merely as 10% of relevant turnover, which seems highly inappropriate. The Report of the High-Level Committee on Competition Policy (Raghavan Committee Report, 2000), whose recommendations were the genesis of the Competition Act, stated, “It (Competition Act) will deal effectively against specified anti-competitive practices and will have powers to mete out deterrent punishment to those who violate its provisions.” It shows that one purpose of enacting the Competition Act was to deter the violators, but the penalties based on the relevant turnover would be too low and would not be able to instil any deterrent effect in the market. Also, determining relevant turnover is a complex and imprecise process as the infringer will try to narrow down the definition of the relevant market as much as possible, and the CCI would oppose the same, which only leads to additional litigation.
Competition law violation leads to an adversarial effect on the economy and disturbs the market equilibrium. It directly hampers the economic growth of a nation and therefore requires a commensurate penalty. Therefore, the penalty must be based on the global turnover, though the penalty percentage ought to be decided in accordance with the guidelines and regulations considering the factors of proportionality and deterrence. Thus, the amendment is a long drawn call that is answered and provides for the correct interpretation of the law.Naman Aggarwal is a third-year BA.LLB. student at RMLNLU, Lucknow.