SETTLING THE ‘TURNOVER’ FOR PENALTY IMPOSITION – A STEP IN THE RIGHT DIRECTION

– Gajendra Bhansali[1]

Nearly a couple of months after the ruling in Coordination Committee,[2] the Supreme Court (“SC”) in a landmark judgement,[3] has clarified a crucial issue in competition enforcement by shedding light on the quantum of penalty that can be imposed by the Competition Commission of India (“CCI”) for an anti-competitive agreement, upholding the principle of “relevant turnover” for penalty-imposition.

GENESIS OF THE APPEAL

In 2012, the CCI found three agro-chemical companies – Excel Crop, United Phosphorus, Sandhya Organic Chemicals (“manufacturers”) guilty of bid-rigging in tenders floated by the Food Corporation of India (FCI) for the procurement of Aluminum Phosphide Tablets (“APT”). Thus, found in contravention of Section 3(3) of the Competition Act, 2002 (“Act”), the CCI imposed penalty @ 9% of their average annual turnover for the last three years.

On appeal of both, the penalty and infringement of the Act, the Competition Appellate Tribunal (“COMPAT”) upheld the CCI’s order qua contravention of the Act. However, the COMPAT accepted the arguments assailed by the manufacturers that they generated limited revenues from the sale of APT since their business is structured on multi-product lines. Although retaining the rate of penalty at 9%, the COMPAT restricted the base of revenue computation to “relevant turnover” of the two manufacturers. (The third manufacturer, Sandhya Organic was solely engaged in the production of APT)

The COMPAT reasoned its ruling on the modification of penalties on the finding that the term “turnover[4] under the Act would mean relevant turnover signifying the turnover accrued from the sale of goods and services, forming the subject of infringement of the Act.

THE VERDICT

The SC’s decision came on cross-appeals by the manufacturers, led by Excel Crop and CCI against the COMPAT’s Order. While the CCI contended that the Act doesn’t restrict the import of an enterprise’s ‘turnover’ to ‘relevant’, the manufacturers rebutted that the CCI’s interpretation led to adding of the word ‘total’ or ’entire’ before the term ‘turnover.’ The CCI also argued the purpose of its discretion under the Act[5] to impose huge penalties is to ensure deterrence.

The Apex Court, although approving the CCI’s findings on contravention of the Act, endorsed the view opined by the COMPAT on penalty.  In a logically reasoned fashion, taking note of illustrations, the SC demonstrated that pursuing the ‘total turnover’ basis in all cases would inequitably discriminate against the enterprises having presence in multi-product/business lines in the same contravention. Further, placing reliance on judgements which held the interpretation that leads to inequitable or absurd results has to be avoided, the SC eschewed the CCI’s line of interpretation.

Moreover, stressing on the principle of proportionality, the SC also shed light on the legislative intent behind the Act. By including other products of an enterprise for penalty-imposition, while the contravening agreement involves a single product, the excessively high fines thus arrived at may over-deter, by discouraging potential investors which isn’t the intention of the Act.

Furthermore, along with the strict interpretation of penalizing provisions, the SC endorsed the view that in case of an ambiguity arising as a result of two interpretations then the one leaning in the favour of an infringer has to be adopted.

Underscoring the purpose and policy behind the Competition Act, the SC said that it defies common-sense to levy penalty on combined turnover of an enterprise where the cartel relates to a single infringing product. On purposive interpretation and reliance on South African Competition Appeal Court’s judgement,[6] it strengthened its view that statutory purpose cannot be to “finish” enterprises by imposing disproportionate penalties but to “teach a lesson” to the violators, which is better served by penalizing on relevant turnover.

Also, the CCI’s argument of inherent statutory discretion by the usage of the phrase “as it may deem fit[7] was met by the SC’s observation that the discretion has to be governed by the rule of law and not by arbitrary vague or fanciful considerations. Accordingly, on all the aforesaid counts, it countenanced the consideration of relevant turnover as the correct one for determining penalties.

The SC also cleared the air as to additional pertinent issues raised in this matter. With respect to an anti-competitive agreement indulged in before May 20th 2009, (date of enforcement of the antitrust provisions) the SC noted that since the effects of the purported arrangement and the further negotiations for the bids, extended well beyond the date of the provision’s enforcement, hence the conduct would be squarely subjected to the Act. On the issue pertaining to the scope of Director General’s (DG) investigative powers, the SC taking cue from the statutory procedural aspects triggering and the purposes behind investigation made a reasoned finding. It ruled that depending on the CCI’s Order directing investigation, if during the investigation the DG unearths evidence revealing contravention of the Act beyond the allegation, then the DG would be within the contours of his powers into enquire into such infringement.

STEP-WISE COMPUTATION OF PENALTY

In a separate but concurring opinion of Honorable Justice N.V. Ramana, although not laying down any penalty guidelines, a step-wise methodology for computation of penalties is devised.

Step 1 – Determination of Relevant Turnover

It has to be delineated as pertaining to the products and services that have been affected by the contravention. But the SC clarifies that the aforesaid way of calculation isn’t exhaustive.

Step 2 – Determination of Appropriate Percentage of Penalty based on Aggravating and Mitigating Circumstances

An illustrative list of several factors like the nature, gravity, extent of contravention, role played by the infringer etc., to count a few, which have to be considered while arriving at such percentage.[8]

KEY INSIGHTS

The judgement invariably lays the foundation for a stricter but balanced regime for penalty imposition, ensuring transparency and certainty. The ruling from the Apex Court is thus to be followed in all matters where the issue of ‘turnover’ has not received the final ink, whether at the CCI or COMPAT or for that matter the SC as well. The ruling inevitably comes as a respite for the enterprises under the CCI scanner or are awaiting final outcomes at the CCI.

(A version of this Article is considered for publication in Kluwer Competition Law Blog.)

[1] 4th year student, B.A.LL.B. (Hons.), National Law University, Jodhpur (Rajasthan, India).

[2] CCI v. Coordination Committee of Artists and Technicians of WB Film and Television & Ors., Civil Appeal No. 6691 of 2014.

[3] Excel Crop Care Ltd. v. CCI & Anr., Civil Appeal No. 2480 of 2014.

[4] Section 27(b).

[5] Section 27 employs the phrase “as it may deem fit”.

[6] Southern Pipeline Contractors Conrite Walls (Pty) Ltd. v The Competition Commission, Case No. 105/CAC/Dec 10) (106/CAC/Dec 10); endorsing the view of “affected turnover” (relevant turnover) for penalization.

[7] Section 27 of the Act.

[8] The percentage of penalty leviable cannot be more than 10% of the turnover under the Act.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s