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Sidhant Singh is a 3rd Year Law Student at Hidayatullah National Law University
- Introduction
Free and unrestricted market entry is one of the major benefits of capitalist economies for all producers and service providers. However, this idea of free and fair competition becomes distorted when the market is shaped by anticompetitive conducts like collusion, bid rigging, and cartelization. These practices become a major hindrance to new entrants, enabling monopolistic cartels to set prices as they wish. This, in the long run, is detrimental to both the producers and consumers as it distorts the market and its operations. To counter these issues, the Competition Act, 2002 (Competition Act) and the Competition Commission of India (CCI) were established to administer and enforce the competition laws. The CCI succeeded the Commission on Monopolies and Restrictive Trade Practices (MRTP) in taking full control of the cases, investigations, and actions under section 36A(1)(x) of the MRTP Act pertaining to ‘Unfair Trade Practices’ as envisaged under section 66(8). The CCI is empowered to review or reissue the orders for investigation and the scope of the discretion is wide enough to prevent unfair business practices.
As per Sections 26 to 31 of the Competition Act, the CCI can issue orders in accordance with the facts and circumstances of that particular case after a lawful investigation. In particular, the CCI can direct changes to the agreements that contravene Section 3, sever the enterprises that hold the dominant position, and alter the combinations wherever required to protect against abuse or infringement of law. The CCI can also impose fines as high as 10% of the average annual turnover of the company for the last three years. When it comes to cartels, the offenders may be forced to pay up to three times the amount of their profits or 10% of their turnover whichever is higher for each year of the anti-competitive agreement. Unlike fixed penalties, the fines under Section 27 of the Act are variable depending on the value of the goods or services or the profitability of the offending business. The term “turnover” is defined as the “value of the sale of goods or services,” in Section 2(y) of the Competition Act, but the penalty provision does not specify whether it should be calculated based on global/national or total/relevant turnover. In the early years of its operation, the CCI used the total turnover as the basis for calculating fines aiming to include the maximum amount. This approach, especially the concept of using total turnover as a base for penalties has recently been a topic of debate and discussion.
- Total vs Relevant Turnover In Competition Law
The concepts of global and relevant turnover have developed through various statutes, judicial rulings, and pre-existing theories. This section discusses the statutory and precedential antecedents of turnover while the following section highlights the theoretical underpinnings of turnover. Section 2(y) of the Competition Act defines ‘turnover’ as the ‘value of the sale of goods or services.’ The Competition Act does not prescribe industry-based thresholds for determining turnover. It looks at the total turnover and not just the turnover from the specific relevant product market. The CCI made a target exemption notification in 2017 regarding the filing of combination notices and this gave more light on how the assets of combining entities should be evaluated. However, it only required that turnover should be ‘certified by the statutory auditor in accordance with the most recent audited financial statements.
In the case of Shamsher Kataria v. Honda Siel Cars India Ltd., the Competition Appellate Tribunal (COMPAT) made two key observations: first, that the appellants had abused their dominant position by imposing unfair terms on licensed dealers and original equipment suppliers, in contradiction to Section 4(2)(a)(i) of the Competition Act; and second, that they had prevented independent vehicle repair shops from gaining access to replacement parts contrary to Section 4(2)(c) of the Act. Based on these observations, the CCI levied a total penalty of INR 2,544 crores (which is 2% of the vehicle manufacturers’ average annual turnover) on 14 companies for abuse of dominance. This case illustrates how “total turnover” has been used as a measure of penalty for anti-competitive behaviour.
In a later case of Excel Corp Care Ltd. v. CCI, 2017 (Excel Crop Care) the Supreme Court made it clear that for the companies that are engaged in the production of multiple products/services, the penalties should be restricted to the turnovers of the particular product/service which is in violation and not the turnovers of the entire company. This approach is called “relevant turnover.”
The abovejudgment by the Supreme Court laid down a legal precedent for the CCI and the COMPAT in assessing penalties on firms and has provided a standard that considers a wider view of turnover. From these cases, it may be concluded that enforcement and adjudicating authorities have been quite holistic in determining which type of turnover should be considered for imposing penalties.
- Proportionality And Strict Interpretation In Competition Law Penalties
Following the enactment of the Competition (Amendment) Act, 2023, (Amendment act) the approach of CCI towards the imposition of penalty has changed. The amendment act provides for a new standard of using the global turnover to penalise a person or enterprise for violation of the Competition Act, 2002 as opposed to the existing norm of using relevant turnover as the base for calculation of penalty. Under this new framework, the CCI can impose penalties ranging from 0% to 10% of the global turnover. The earlier approach, as endorsed by the Supreme Court in the Excel Crop Care case, favoured using relevant turnover to impose penalties, this reliance aligns with two foundational legal theories: proportionality and strict interpretation. This section discusses these theories and assesses whether or not the use of relevant turnover instead of global turnover is appropriate in penalising defaulting companies.
- THEORY OF PROPORTIONALITY
“You must not use a steam hammer to crack a nut if a nutcracker would do” — Lord Diplock, in R v. Goldsmith.
The doctrine of proportionality which is one of the fundamental principles in administrative law provides that a penalty imposed should be fair and reasonable to the offender and proportional to the offence committed. An administrative decision considered disproportionate to the offence at the time the decision was made may be unlawful. In Excel Crop Care, the Supreme Court used this theory where it was held that penalties under the Competition Act must not be excessive or produce ‘shocking’ results. The Court also ruled that the principle of proportionality is part of the Constitution based on Articles 14 and 21. Two models of proportionality have been developed over the years.
i) The British Model: State-Limiting Proportionality
The British model of proportionality was developed by the Privy Council in de Freitas v Permanent Secretary and further elaborated by Lord Stynn in R v. Secretary of State. This model employs a three-part test to assess proportionality:
a) The legislative or executive intent has to be compelling enough to warrant the restriction of a right.
b) There must be a relationship between the legislative intent and the steps taken to achieve such intent.
c) The restriction on rights must be limited to what is necessary to achieve the goal.
After carefully evaluating these 3-step tests, it shows that the role of the Court is to make sure that the decision-makers select the least intrusive means to accomplish their goals. In this model, proportionality does not mean that costs and benefits should be maximized, but rather, the outcomes should be met in the least invasive or costly manner.
ii) The European Model: Optimising Proportionality
The European model of proportionality takes a different approach, posing four key questions:
- Based on Legitimacy: Is the measure under review aimed at achieving a reasonable goal within the context of the right in question?
- Based on Effectiveness: Can the measure help to achieve that goal?
- Based on Necessity: Is the measure the least intrusive way of achieving the goal?
- Based on Fairness: Does the benefit of achieving the goal outweigh the restriction on rights?
Unlike the British model, the European model is institutionally neutral, meaning that it does not intend to direct the courts on how to apply it to other governmental agencies. Rather, it seeks to strike a balance between the public interest (goal) on one hand, and the curtailment of rights on the other. This model is known as the ‘optimisation conception of proportionality’ because it aims to find the best balance between the goal that needs to be achieved and the rights that need to be restricted.
In the Indian context, the need for proportionality in the competition penalties was clarified in the case of Excel Crop Care. The Supreme Court identified two key considerations in determining competition penalties:
- The harm caused to society by the infringer, justifying the imposition of penalties.
- The infringer’s right not to face penalties disproportionate to the seriousness of the violation under the Competition Act, 2002.
The Excel Crop Care case emphasized that the purpose of the Competition Act is not to destroy businesses through excessive fines but to deter and eliminate anti-competitive practices for the benefit of consumers and the market. This is achieved by Section 27 of the Competition Act, which provides for penalties in relation to the offence; the sanctions here play the dual role of deterring offenders and preventing future violations in the interest of the public and the national economy. The court also noted that calculating penalties based on relevant turnover complies with the objectives of the act ensuring proportionality and fairness in punishment.
- THEORY OF STRICT INTERPRETATION
The principle of strict interpretation, as described by Maxwell states that “when an ambiguous word or phrase creates reasonable doubt, the benefit of the doubt should go to the subject and not the legislature which failed to clarify the matter.”
Under this principle, if a law can be interpreted in multiple ways, the interpretation that avoids imposing punishment or liability should be preferred. This principle is well-established and widely applied in criminal as well as civil laws. Whenever a punitive provision is ambiguous, the court should prefer the interpretation that would not impose punishment. Following this reasoning, in the Excel Crop Care case, the court ruled that penalties should be based on relevant turnover rather than global turnover, as it would protect the offenders from facing harsher penalties.
- Conclusion & Way Forward
There is no doubt that good theory results in good practice. It is clear that the drafters of the laws that govern our daily lives have certainly invested much effort into crafting these laws and the smooth functioning of our economy is a testament to their efforts. However, statutory provisions, being based on sound theoretical frameworks, can sometimes become rigid. This means that while they may be theoretically sound, their practical application in a dynamic 21st-century environment often requires constant revision and updating.
Despite the Supreme Court’s decision in Excel crop care case, which advocated using relevant turnover as the basis for imposing penalties, the CCI faced significant challenges in implementing this approach particularly when penalizing entities involved in hub-and-spoke agreements or those with global operations and diverse revenue resources. Consequently, the Amendment act has shifted the penalty basis from ‘relevant turnover’ to ‘total global turnover’. However, imposing penalties based on total global turnover may lead to unforeseen outcomes. Initially, when the competition regime was established, it was reasonable to calculate the penalties based on the total turnover. This was reasonable at that time because there were no multiproduct industries and intricate multi-market cartels. Thus, total turnover was considered as “relevant turnover” in the first decade of the implementation of the Act. However, in the current environment of market relations, it is much more logical to use relevant turnover as the basis for penalties. This change brought by the amendment act is welcome as it provides much-needed rationality to the practice of the CCI where it levies fines anywhere between 0% to 10% of the global turnover of the violators without much correlation between the severity of the violation and the percentage of the fine.
This lack of consistency was evident in cases like Excel Crop Care, where the CCI imposed a penalty amounting to 9% of total turnover, while in In Re: Director v. Shree Cement, the respondents were fined only 0.3% of their total turnover. Such discrepancies exposed the absence of objective standards in the punishment system of CCI. Many of the CCI’s orders failed to provide sufficient reasoning behind the percentage penalties imposed, making it difficult to understand why different percentages were applied in different cases.
Considering these inconsistencies, the shift to using relevant turnover as the basis for penalties will be a welcome change. This approach will assist in making CCI’s decisions more transparent to the market players and provide corporations with a better understanding of the potential liabilities for certain actions; the possibility of a conditional decrease in penalties, or even possible leniency. Furthermore, this predictability may lead to the increased use of the commitment and settlement mechanisms that foster cooperation and speed up the process of conflict resolution between the corporations. Lastly, employing the relevant turnover as a penalty base could open up the door for the inclusion of other efficient methods of dispute resolution like arbitration within the Indian competition law, making it a quicker process in terms of time and money.
