Why Supreme Court’s Ruling in Excel Crop case on Relevant Turnover is Problematic
The penalty provisions of the Competition Act, 2002, which once caused the real estate company DLF Ltd to be penalized Rs 630 crore, will no more have the same rigour. The Supreme Court, in Excel Crop v Competition Commission of India (2017), upheld a decision of the Competition Appellate Tribunal (COMPAT), and said that the turnover for penalty in Section 27(b) of the Act must mean ‘relevant turnover’. Even as the soundness of the Court’s reasoning remains questionable, this decision will have immense impact on all cases, and on the Competition Commission of India’s (CCI) perception, a regulator known for the large penalties it has imposed.
Excel Crop is a bid rigging case in the sector of Aluminium Phosphide Tablets, a common insecticide. The CCI took the case based on a complaint by Food Corporation of India, which said that Excel Crop and three other firms had indulged in cartel-like behaviour by quoting same prices in tenders for several years. The CCI found a violation of Section 3(3)(d), which was upheld by the COMPAT. However, on the question of penalty, the COMPAT said that CCI had consistently failed to provide reasons for the kinds of penalty imposed, and ruled that for the given case and its peculiar circumstances, relevant turnover for the specific products had to be considered and not the average turnover. The Supreme Court took it a step further and said only relevant turnover could be considered for penalty in general. The apex court found that penalties imposed on the basis of total turnovers would lead inequitable situations, especially when multiproduct firms were involved.
Where does the phrase ‘relevant turnover’ come from? The Indian law on the point is clear. The text of Section 27(b) only requires the CCI to find that there is a violation of either Sections 3 or 4 of the Act to be able to impose a penalty ‘as it deems fit’ which is ‘not more than’ ten per cent of the ‘average turnover’ of the previous three financial years of the infringing person or enterprise. An exception is carved out for cartels for a higher penalty, indicating the deterrent nature of the same. Turnover, under Section 2(y) is an inclusive definition but does not bring in the concept of relevance.
The question of relevant turnover in this case first surfaces in the 2013 decision of the COMPAT, where lawyers for the appellants, Excel Crop and others, argued that the CCI’s penalties had the potential to ‘wipe out’ their profits. The question is, with a clear finding of violation of competition law, should these companies be entitled to profits made through such anti-competitive activity? Going further, does the Competition Act envision such accommodation for violating companies? The answer is in the negative, as any such exception or accommodation has been clearly specified in other provisions. For instance, leniency provisions allow companies to pay lesser penalty in exchange for full and true disclosure of cartels.
The Supreme Court uses several rulings and precedents to establish its reasoning on relevant turnover based on the doctrine of proportionality and not penalising entities beyond the scope of violation. A lot of these precedents are either foreign cases or tax related cases. It is a question worth asking as to whether one can compare cases under taxation to those under competition laws, given the different approaches and intents of the law.
The two-judge bench of the Supreme Court, in Excel Crop, decides to read in the word ‘relevant’ in the penalty provision especially in case of multiproduct firms. In CCI v Steel Authority of India Ltd (2010), a three-judge bench of the Supreme Court noted, albeit as obiter, that “it is not necessary for the court to implant, or to exclude words, or overemphasise language where it is plain and simple.” It is contended that the language of Section 27(b) isn’t vague or complicated requiring such an interpretation. Further, the present reading of the provision by the Court ensures that penalty effectively becomes nothing more than a rap on the knuckles for these multiproduct entities.
Additionally, it is safe to assume that multiproduct entities are largely bigger companies capable of having diverging business interests. Often, these entities have the market power and size to influence other players and end-use consumers. The Court’s decision on relevant turnover, in addition to making the penalty provision almost of no consequence, also has the potential to make multiproduct entities more confident of exerting market pressures, as any violation would be limited to a particular sector.
Finally, the lack of consistency that the Supreme Court shows in terms of interpreting penal provisions is a fact that cannot be ignored after Excel Crop. The Supreme Court is deeply concerned with not imposing heavy penalties unfairly, and the focus of the discussion becomes the penal nature of Section 27 requiring a ‘legislative link’ between the harm caused by the entity violating competition law and the penalty for the same. This, necessarily, has to be contrasted with another two-judge bench decision of the same court, which while deciding on rights of individuals in light of a criminal law provision, refused to read it in a way to protect consenting individuals from heavier penalties like imprisonment. In the case of reading down the provision of Section 377 of the Indian Penal Code for consenting individuals in private, the Supreme Court said that it could not engage in judicial legislation and said it was the role of the Parliament.
As such, given the ratio of the Excel Crop decision, all cases, including the famed DLF case, which is pending in the Supreme Court, will now face very little penalty. DLF, for example, was penalised Rs 630 crore, but the case related to only three of their Gurgaon projects. The final penalty, whenever it is decided, will be much less if only those three projects are considered. Will the penalty then deter DLF? Or for matter of fact, any other company of that magnitude?