[Nileena Banerjee is a student at National University of Advanced Legal Studies, Kochi]
Introduction: The Pre-Amendment Landscape
The shift from basing penalties on an infringing company's total turnover, to its relevant turnover in the affected market, to most recently its global turnover across all markets, signified a substantial evolution in the methodology of penalty imposition within the framework of competition law. Under Section 27 of the Competition Act, the CCI is vested with the authority to levy penalties of up to ten percent based on the average turnover derived from the preceding three financial years of the infringing entity. Central to this determination is the definition of “turnover” provided in Section 2(y) of the Competition Act refers to the “value of sale of goods or services.” However, the legislation does not explicitly clarify whether this encompasses total or relevant turnover. This article deals with the implications and analysis of the shift to global turnover for penalty imposition under the Competition (Amendment) Act, 2023.
Total Turnover: Inconsistencies and Impact
In the initial eight years post-enactment of the Act, the CCI adopted a broad approach, relying on total turnover as the principal metric for penalty assessment. This encompassed all sales of goods or services by the enterprise, irrespective of their connection to the breach of the Competition Act. Penalties ranged from below 1% to 10% of turnover, lacking a discernible pattern correlating penalty rates with the severity of infringements. Consequently, disparate penalties were imposed on single-product and multi-product enterprises for akin violations.
For example, in the case of Excel Crop Care, the CCI imposed a penalty equivalent to 9% of the total turnover of the implicated entities. Conversely, in a matter concerning bid rigging among cement manufacturers, the penalty levied amounted to a notably lower 0.3% of their total turnover. Similarly, instances of price fixing witnessed varying penalties, with the Bengal Chemists and Druggists Association facing a penalty of 10% of their total turnover, while airlines involved in fuel surcharge fixing received a more lenient penalty of 1% of their total turnover. Disparities were also evident in cases of abuse of dominance; for instance, DLF incurred a penalty amounting to 7% of its total turnover for unfair conditions imposed on apartment buyers, whereas Schott Glass faced a penalty of 3% of its total turnover for analogous conduct. In leveraging abuse cases such as the Google Android matter, Google was penalized at 10% of its turnover for leveraging the dominant position of the Play Store, whereas automobile manufacturers implicated in the Shamsher Kataria case received a penalty of 2% of turnover for leveraging dominance in the spare parts market. These inconsistencies underscored opacity within the CCI's penalty regime, prompting increased litigation via appeals to the COMPAT and the Supreme Court due to insufficient reasoning behind penalty determinations.
Relevant Turnover: Examining the Excel Crop Case
In response to inconsistencies in penalty enforcement, the Supreme Court intervened in the case of Excel Crop Care Ltd. v. CCI, guided by principles of strict interpretation and proportionality. The Court clarified that turnover, as stipulated in penalty provisions of the Competition Act, should be construed as relevant turnover, derived from products or services directly implicated in the contravention. Central to the Court's rationale was the principle of strict interpretation, wherein, amidst multiple plausible interpretations, the judiciary is mandated to favor the construction that exempts the subject from liability rather than the one that imposes it. Consequently, the Court advocated penalties based on relevant turnover to avert additional liability stemming from global turnover. Additionally, in line with the principle of proportionality, the Court argued that penalties should reflect the harm caused by the infringer. Thus, penalizing based on relevant turnover ensures proportionality by confining penalties to the specific market of anti-competitive practices, aligning with the objectives of fairness and deterrence.
The Rationale Behind The Amendment
While the landmark decision in the Excel Crop Care case offered clarity regarding the application of turnover for penalty determination, the CCI encountered ongoing challenges in its implementation, particularly evident in cases where relevant turnover could not be readily applied. This predicament stemmed from the lack of objective criteria governing penalty imposition, particularly in cases such as hub-and-spoke agreements and involving entities within the domain of Big Tech companies.
Lack of Objective Criteria for Imposing Penalties
India has grappled with the absence of definitive penalty guidelines, thereby lacking objective criteria essential for adjudicating penalties. Despite recognizing this deficiency in foundational reports like the High-Level Committee on Competition Policy, tangible steps to rectify this have been elusive. The CLRC in its deliberations in 2019, reiterated the need for penalty guidelines, recommending that the CCI provide clear guidance. Both the COMPAT and the Supreme Court have emphasized the importance of such guidelines. The continued absence of these guidelines has led to ambiguity and inconsistency in applying the CCI's penalty regime, resulting in increased litigation.
Hub and Spoke Agreements
Hub and spoke agreements entail two distinct types of anti-competitive arrangements. Firstly, vertical agreements exhibit a hierarchical structure comprising a central entity, termed the “hub,” and peripheral entities, referred to as the “spokes,” which operate as competitors at the same level within the market. Secondly, these agreements entail collaboration among the spokes, facilitated by the hub, whereby they engage in activities such as sharing information or colluding indirectly. The hub may not directly derive income from the product implicated in the cartel allegation. The application of penalties based solely on relevant turnover may therefore fail to inculpate the hubs, given their discernibly distinct operational roles from the spokes, potentially absolving them of charges in the same line of business.
Big Tech Players
Penalizing Big Tech entities based solely on relevant turnover proves inadequate due to their global operations and diverse revenue sources. These firms often operate across interconnected markets and provide free services, posing challenges for traditional penalty assessment methods. In cases like Matrimony.com v. Google, the CCI acknowledged these limitations, particularly for digital enterprises. For instance, if Google asserts that its free search service generates no turnover and thus evades penalties, it could undermine the deterrent function of competition law. To address this, the CCI advocated treating the entire platform as a unified entity and assessing total revenue. Similarly, in cases like XYZ v. Google and MakeMyTrip-Go-Ibibo, the CCI faced similar hurdles and adopted a platform-based total turnover approach to penalties. This strategy ensures that in situations where various segments are interconnected and one product or service strengthens others, disregarding global turnover would diminish the deterrent impact of penalties on enterprises.
The Introduction Of The Amendment Act
The Amendment Act introduces significant alterations to the penalty framework of the Competition Act, challenging the precedent established by the Supreme Court in the Excel Crop Care case. Firstly, it grants authorities the authority to levy penalties of up to 10% of either the average turnover or ‘income’ of enterprises involved in anti-competitive practices or abuse of dominant position. Secondly, it broadens the turnover definition to encompass “global,” enabling the CCI to penalize based on global turnover, covering revenues from export sales and unrelated products or services. Moreover, the Amendment Act mandates the CCI to formulate penalty guidelines and provide reasons for deviations. The Ministry of Corporate Affairs issued guidelines for penalties based on global turnover.
The Implications Of Imposing Penalty On Global Turnover
In India, penalties for violations of competition law serve the dual purpose of emphasizing the seriousness of the offense and deterring future violations. However, basing penalties on total global turnover may yield unforeseen and disproportionate outcomes, deviating from these objectives. One major concern is the risk of “double jeopardy” for enterprises operating in multiple jurisdictions. In such scenarios, if an enterprise engages in anticompetitive behavior in both India and another jurisdiction, it risks facing punishment twice for the same offense, precipitating severe financial repercussions. Moreover, if an entity's global turnover significantly exceeds its operations in India, imposing penalties of up to 10% of global turnover could be unjustly disproportionate, hindering business operations in India. It is essential to recognize that the implications of penalties based on total global turnover extend beyond foreign multinationals to affect Indian entities with global operations as well. Such penalties could deter foreign investment and inflate compliance costs, thereby impeding business growth and competitiveness. No other Indian regulation grants a regulator the unchecked authority to penalize based on global turnover for conduct related to India, presenting a disproportionate concentration of power.
Recommendations And Way Forward
A successful penalty system must strike a delicate balance between deterring anti-competitive behavior and averting excessive financial harm. This balance can be achieved by reserving the application of a global turnover definition for exceptional cases, accompanied by transparent criteria delineating when such an approach is justified. Penalty determination across jurisdictions typically revolves around turnover within specific geographic markets. While the EU and UK have the authority to impose penalties based on global turnover, they also consider anti-competitive effects beyond their borders. Conversely, while the CCI does not adopt a global relevant market definition to ascertain violations, the Amendment Act grants it the authority to impose penalties based on global turnover. To ensure consistency and mitigate legal challenges, if the CCI confines its assessment to effects within India, any penalty it levies should be restricted to revenue earned in or from India. Additionally, in alignment with the mandate for a sector-agnostic competition regime, regulations should eschew ipso facto application of maximum turnover computation to specific sectors or markets. Instead, factors such as circumstances, mitigating and aggravating factors, and market realities should be carefully assessed to determine the appropriate penalty.
Before imposing penalties based on global turnover, the CCI must consider jurisdictional rules to preempt jurisdictional disputes. Levying penalties based on revenue derived from activities in another sovereign jurisdiction risks inciting jurisdictional conflicts. Enhanced communication among antitrust regulators globally could effectively address antitrust concerns while fostering regulatory harmony. In all other instances, strict adherence to the principles delineated by the Supreme Court in the Excel Crop Care case is imperative, as it meticulously scrutinized the components of a robust penalty structure. Therefore, when the CCI seeks to levy penalties to the fullest extent permitted by law, it is essential for the Commission to provide comprehensive justifications in the final decree, thereby upholding transparency and accountability.
Conclusion
The transition to “global” turnover from “relevant” turnover as the basis for penalties under the Competition (Amendment) Act, 2023, marks a significant shift in India's competition law landscape. While the Amendment Act aims to enhance penalty imposition mechanisms, it also raises concerns about potential ramifications of penalties based on global turnover. The rationale behind the amendment addresses deficiencies in the previous penalty framework, notably the absence of objective criteria. However, this shift introduces complexities, particularly in cases involving hub and spoke agreements and big tech players, where relevant turnover may not accurately reflect the gravity of the offense. While the Amendment Act aims to align with international standards, careful consideration of jurisdictional rules and market realities is crucial to ensure fairness and proportionality in penalty imposition. Given these observations, recommendations for a balanced penalty system include reserving the use of global turnover for exceptional cases, alongside enhanced communication between antitrust regulators worldwide. Ultimately, while the Amendment Act represents progress in refining the penalty regime, its full impact requires continued evaluation and adjustment as necessary.
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