/Resources/Turning over a ‘Globally Relevant’ Leaf: Examining the Shift from “National” to “Global” Turnover under competition law

Turning over a ‘Globally Relevant’ Leaf: Examining the Shift from “National” to “Global” Turnover under competition law

Anushikha Pokhriyal


Free and unrestricted market entry is supposedly the gift capitalist economies strive to give to all producers and providers of goods and services alike. However, free and fair competition becomes a distant dream when the market exists in the shackles of anticompetitive agreements like collusion, bid-rigging, and cartelization. These agreements act as barriers to entry for newer producers, and help the monopolising cartelists to set prices as high as their whims please. The implication hereby becomes that these agreements erode the market as a whole, harming both producers and consumers alike. To their rescue, and for the all-encompassing check and balance of the Indian Competition regime, there thankfully exists the statutory provision of Competition Act 2002, and the Competition Commission of India to facilitate its implementation. The Commission on Monopolies and Restrictive Trade Practices was superseded by the CCI. All ongoing investigations and processes pertaining to unfair trade practices under section 36A(1)(x) of the MRTP Act that were under consideration before the Director General were transferred to the CCI pursuant to section 66(8). It was granted total authority over certain issues. It may even issue a new order for the probe to be conducted however it sees suitable. According to sections 26 to 31 of the Act, the CCI is authorised to issue any orders it may see fit given the specific facts and circumstances of a case after conducting the investigation in compliance with the law. More specifically, it has the authority to order the modification of agreements if they violate Section 3, the division of an enterprise holding a dominant position, and the modification of combinations wherever it thinks it's necessary, to prevent abuse or violation of the law. In addition, the CCI has the authority to sanction an offending firm up to 10% of its average yearly revenue over the previous three years. This sum may be far greater in circumstances of cartels, where participants may face fines of up to three times their profits or 10% of their turnover for each year the anti-competitive agreement remained in place. The penalty assessed under Section 27 of the Competition Act is not a set sum, in contrast to conventional punitive measures. It is essentially connected to the worth of the products or services (or, more accurately, the profitability) of an infringing business. Although "value of sale of goods or services" is the definition of turnover under the Competition Act, the penalty clause did not clarify whether the calculation should be based on global/ national or total/ relevant turnover. During its initial years, the CCI attempted to include the greatest feasible sum for the purpose of levying fines, using total turnover as a baseline. This specific bit on overarching total turnover being a basis for quantifying penalties has been a subject of debate and a bone of contention in recent times.

Total Turnover vs Relevant Turnover: Comparison and Implications

The concepts of global and relevant turnover have evolved through various statutes, judicial pronouncements, and pre-existing theories. This section deals with the statutory and precedential background of turnover, while the subsequent section sheds light on the theoretical bases of the same.

Section 2(y) of the Competition Act defines “turnover” and includes "value of sale of goods or services" in the same. According to the statute, there are no standards set for turnover to determine industry-specific thresholds. What is considered is the whole turnover, not only the turnover for the relevant product market. CCI released a target exemption notification in 2017 regarding the filing of combination notices, wherein although they offered sufficient direction on how to determine the combining entities' assets, it only specified that turnover "shall be as certified by the statutory auditor on the basis of the most recent set of audited financial statements of the company."

In Shamsher Kataria v Honda Siel Cars India Ltd the COMPAT held two major observations – One; by placing unjust terms on the sale or purchase of products or services for their licenced dealers and original equipment suppliers, the appellants are abusing their dominant position and breaking Section 4(2)(a)(i) of the Act. Two; through their actions, the appellants violated Section 4(2)(c) of the Act by denying independent vehicle repair shops access to the aftermarket for replacement components. Based on these, the CCI levied a total fine of INR 2,544 crores (fine equal to 2% of each vehicle company's average annual turnover) on 14 vehicle manufacturers for abuse of dominance. This was an example of usage of “total turnover” as the basis of penalising anticompetitive behaviour.

Subsequently, in the case of Excel Corp Care Ltd. v. CCI the COMPAT indicated that the proper measure of penalty for a multi-product firm would be the turnover of the product or service in connection to the claimed violation, rather than the turnover of the entire multi-product company. This is known as "relevant turnover".

The Supreme Court's decision to base punishment on a large number of enterprises has set a standard for the CCI and the COMPAT in determining the penalty for accused parties. The inference that can be drawn here is that all the relevant enforcement and adjudicating authorities took a holistic look at the concept of “turnover” in order to determine what form of it is the valid one to base penalties on.

Theoretical Bases: Rules of Proportionality and Strict Interpretation

The paradigm shift that was the advent of relevant turnover becoming a basis of penalty under the Amendment Act was made in accordance with two axiomatic theories – the theory of proportionality, and the theory of strict interpretation. This section attempts to analyse the two theories, and assess the validity of subjugating those principles for using relevant turnover instead of global turnover to penalise defaulting companies.

Theory of Proportionality

You must not use a steam hammer to crack a nut if a nut cracker would do” - Lord Diplock, in the matter of R v. Goldsmith.

A well-established administrative law theory rooted in fairness and reason is the doctrine of proportionality, which states that the severity of a penalty must correspond to the offence committed. According to the theory, any administrative judgement that is in any way out of proportion to the crime at the time it was made may be declared illegal. The Supreme Court decided that fines under the Competition Act could not be unreasonable and should not have "shocking" outcomes while applying the theory in the Excel Crop Care case. It further noted that proportionality was a right guaranteed by the constitution, with roots in both Article 14 and Article 21. Over time, two distinct models of proportionality developed –

i) The British Model, or the state-limiting conception of proportionality

The Privy Council's decision in de Freitas v. Permanent Secretary is the source of the British approach as articulated by Lord Stynn in R v. Secretary of State. In that instance, a three-pronged test for evaluating proportionality was developed, which came to be known as the British Model. According to this model, a decision is said to be proportionate if:

a) The legislative (or executive) goal is significant enough to warrant restricting a basic right.

b) There is a logical relationship between the legislative (or executive) purpose and the methods intended to achieve it.

c) The methods employed to restrict rights or liberties are only those and only to the extent that are required to achieve the goal.

An examination of the three-step test would indicate that the court's primary goal would be to guarantee that the body making decisions makes the right choice with reference to the least invasive method. Accordingly, proportionality in this approach refers to pursuing predetermined goals using the least intrusive or most efficient ways, rather than maximising costs and benefits.

ii) The European Model, or the optimising conception of proportionality

Conversely, what the European model does, in an attempt to assess proportionality, is pose four questions with respect to the decision in question:

Question 1, based on legitimacy – In the framework of the relevant right, does the conduct that is being reviewed seek a justifiable general goal?

Question 2, based on sustainability – Can the act accomplish that goal?

Question 3, based on necessity – Is the action the least invasive way to reach the targeted degree of goal realisation?

Question 4, based on fairness – When the degree of goal realisation is weighed against the decrease in rights enjoyed, does that act constitute a net gain?

It becomes evident from the examination of the formulation that it is institutionally neutral. Its definition is not intended to assist courts in determining how it relates to other government agencies. More significantly, it concentrates on maximising or striking a balance between the public interest or goal—which the proposed measure aims to accomplish—and the rights—which are viewed as protected interests and are restricted by the proposed action. This is why it is referred to as the optimisation conception of proportionality.

In the Indian context, the need for proportionality in competition penalties was elucidated in the Excel Corp Care case. Here, the apex court talked about and weighed two considerations that come into play while dealing with competition penalties, which are –

“harm caused to the society by the infringer which gives justification for penalising the infringer on the one hand and the right of the infringer in not suffering the punishment which may be disproportionate to the seriousness of the Act (the Competition Act 2002)”

The Excel Crop Care case served as a reminder that the Competition Act's goal was not to "finish" businesses completely by enforcing prohibitively high fines. Instead, to dissuade and eradicate anti-competitive behaviour for the good of consumers and the market. This goal was partially achieved by the penalty measures under Section 27 of the Competition Act, which sought to both penalise the offender and prevent future offenders. As the provision assured serving both the public and the national economy's interests, using relevant turnover as the suitable metric was seen as consistent with the goal of the provision.

Theory of Strict Interpretation

where an equivocal word or an ambiguous sentence leaves a reasonable doubt of its meaning which the canons of interpretation fail to solve, the benefit of the doubt should be given to the subject and against the legislature which has failed to explain itself”.

- Maxwell, on Interpretation of Statutes

According to the strict interpretation principle, the reading that favours the infringement must be chosen if there are several viable interpretations of a legislation. It is a well-established principle of criminal and civil law construction that the court must choose the interpretation that spares the subject from punishment over the one that imposes it if there are multiple plausible and reasonable interpretations of a punitive provision, in accordance with the strict interpretation principle. Keeping in mind the theory of strict interpretation, the court held in the Excel Crop Care case that the penalty should be determined by relevant turnover since it spares the violators from additional liability that could be imposed if the penalty were determined by global turnover.

Conclusion & Way Forward

Good theory leads to good practice, there is not a modicum of doubt on that. The makers of statutes that govern our lives had certainly put a lot of thought behind the same and we owe the smooth functioning of the economy to them.

However, statutory provisions are also stationary provisions. Meaning, as much as their theoretical objectivity makes complete sense, the practical subjectivity vis-à-vis their implementation in the 21st century remains everchanging and requisite of constant updating and reviewing. During the inception of the Competition regime, using total turnover as the basis of penalty made complete sense because of the absence of multiproduct industries and corresponding multi-market cartels. Total turnover was the Relevant turnover in the first decade of the implementation of the Act. In the contemporary market, it is far more rational to use relevant turnover as the basis for penalty because it brings the long overdue clarity to CCI’s stance of levying fines equivalent to 0-10% of the global turnover with no obvious, deducible pattern connecting the punishment percentage to the seriousness of the act committed. This lack of objectivity is evident in cases Excel Crop Care case, where the CCI penalized the parties at 9% of their total turnover, while In Re: Director v. Shree Cement, respondents were penalized only 0.3% of their total turnover. This demonstrated that the CCI's punishment system lacked uniformity and was used without reference to any objective standards. The majority of the CCI's orders lacked enough justification for the penalty percentages' establishment. As a result, it was unable to determine the rationale behind the methodology used to determine why different percentages were chosen in various situations. With all these incidents considered, it is indeed a welcome change for CCI to use Relevant turnover as a penalty basis.

Furthermore, this approach goes a long way in making the conduct and practice of CCI more predictable for other players of the market. This consistency in the behaviour of CCI would enable corporations to have a certain, more clear idea on what kind of penalty exists for what kind of action, what conditional reductions and leniencies correspond them etc. The overarching added benefit of this phenomena is that it further incentivises these corporations to use the commitment and settlement mechanism, which essentially is a framework that encourages collaboration and speeds up conflict resolution. The shift to relevant turnover to levy penalties would pave the way to incorporate alternate dispute resolution mechanisms such as arbitration in the realm of Indian competition regime, making the process both cost and time effective.