India: COMPAT's Underwhelming Power: LPG Cylinder Manufacturers' Cartel

Last Updated: 14 December 2016
Article by Divye Sharma

The Competition Appellate Tribunal (COMPAT), through an order earlier this year, remanded the LPG cylinder manufacturers' cartel case back to the Competition Commission of India (CCI), for assessing the imposition of penalty under Section 27(b) of the Competition Act, 2002 (Act). This is the second time the COMPAT has remanded this case to the CCI for assessing the penalty, the first time being through its order dated 20th December 2013. Although the COMPAT had agreed with the findings of the CCI on the instances of cartelization, it did not agree with the quantum of penalty that was imposed on all the 44 LPG cylinder manufacturers.

It is pertinent to note that under provisions of sub-section 3 of Section 53B of the Act, on receipt of an appeal, the COMPAT may, after giving the parties to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the direction, decision or order appealed against. Therefore, the Act has sufficiently empowered the COMPAT itself to modify the orders and decisions made by CCI. However, in the instant case, the COMPAT decided against exercising its powers to modify the CCI's order on the issue of penalty. Although the COMPAT has on several occasions remanded the case when it does not agree with the rationale of the CCI, it is interesting to note that through its order dated 1st March 2016, the COMPAT has refused to modify the order itself and has directed the CCI to look into the merits of the arguments on penalty by the LPG cylinder manufacturers for the third time.

The objective of this article is to critique the decision taken by the COMPAT to remand the matter to the CCI for the second time, solely on the basis of the quantum of penalty, and thereby extending the proceedings in a matter that has been ongoing since early 2011. The article further aims at discussing the provisions of Section 53B of the Act, and the powers conferred upon the COMPAT thereby, and how it has failed to exercise the same in the instant matter.

FACTUAL BACKGROUD

By way of an order dated 24th February 2012, the CCI had held 47 LPG cylinder manufacturers to be in contravention of the Act, by cartelizing amongst themselves and bid rigging in a tender floated by M/s. Indian Oil Corporation Limited, for supply of 14.2 Kg capacity LPG cylinders. The CCI, on analysis of the bids furnished by the LPG cylinder manufacturers and on the basis of other circumstantial evidence, arrived at the conclusion that they were acting in consonance with each other and had collectively agreed to bid for the tender at a significantly higher price. Though, no significant arguments were made on the issue of quantum of penalty, the CCI in its order imposed a uniform penalty of 7% of the average turnover of the 47 LPG cylinder manufacturers, amounting to a total value of Rs. 165 crores.

Out of the 47, 44 LPG cylinder manufacturers had appealed to the COMPAT, requesting it to set aside the order passed by the CCI. The COMPAT, on analysis of the CCI order and taking note of the submissions made by the appellants, agreed with the observation of the CCI and upheld its decision, through an order in December 2013. However, with respect to the quantum of penalty to be imposed for such contravention of the Act, COMPAT opined that the CCI was incorrect in uniformly imposing a penalty of 7% on the average turnover, and stated that the CCI had arbitrarily determined the same, without giving due consideration to certain factors, most importantly that some of these companies were relatively new and small scaled, and a hefty penalty would lead to these companies being wiped out. Additionally, some of the companies were multi-commodity companies, and LPG cylinder manufacturing was a single segment of their business, however the penalty being imposed was on the overall turnover and not the relevant turnover, i.e. revenue generated from the supply of 14.2 kg capacity LPG cylinders. This coupled with the fact that the parties had failed to argue on the issue of quantum of penalty before the CCI, instigated the COMPAT to remand the case back in December 2013.

It is pertinent to note that although the matter was remanded by way of COMPAT's order passed in December 2013, (in a matter that was initiated in early 2011) the contravention of Section 3(3)(d) was determined by the CCI as early as February 2012. The LPG cylinder manufacturers through their submissions before the CCI proceeded to argue on the quashing of penalty altogether and stated that there were certain mitigating factors that the CCI did not give due consideration to at the time of imposing penalty. Though multiple mitigating factors were argued before the CCI by the LPG cylinder manufacturers, the fact that many of these manufacturers were multi-product industries and that LPG cylinder supply constituted a minor segment of their overall businesses, was argued upon in length. However, the CCI failed to take due cognizance of the same and in their order stated that since parties had failed to disclose their portfolio of multi-products that they are engaged in, such argument of the LPG cylinder manufacturers cannot be considered valid for reduction in imposition of penalty. Therefore, the CCI upheld its prevision decision and did not reduce the quantum of penalty, i.e. 7% of the annual turnover of the LPG cylinder manufacturers through their second order dated 6th August 2014.

Distressed by the CCI's reaffirmation on the quantum of penalty imposed, the LPG cylinder manufacturers, once again approached the COMPAT. In its order dated 1st March 2016, COMPAT had discussed the plethora of mitigating factors that the CCI had failed to take cognizance of, especially with respect to the multi-product industries. Reliance was placed by COMPAT on various competition law matters1 wherein it was discussed that the penalty to be imposed ought to be on the relevant turnover, i.e. income generated from the product/service for which the competitors had cartelized. Additionally, the COMPAT also dwelled into the provisions of Section 27, and arrived at the conclusion that, since the legislature has not laid down any criteria for imposing penalty, the CCI is duty bound to consider all the relevant factors like – nature of industry, nature of goods manufactured by it, the availability of competitors in the market and the financial health of the industry.2 COMPAT also placed reliance on case laws3, which have clearly established that levy of penalty is not only discretionary in nature but such discretion is required to be exercised on the part of the competent authority keeping the relevant factors and circumstances in mind. The COMPAT opined that the CCI, in its second order dated 6th August 2014 had ignored the principles laid down by the Supreme Court and the High Courts on the interpretation of statutes, and had without giving due cognizance to the mitigating factors, imposed a whooping penalty of 7%. Further, it was also held that the CCI committed grave error by passing its order without calling upon the appellants to furnish statements of their turnover of LPG cylinders of 14.2 Kg capacity.

On the basis of these observations made, the COMPAT set aside the second order dated 6th August 2014 passed by the CCI and remitted the case back to it for deciding the issue relating to imposition of penalty under Section 27(b) of the Act.

CASE LAWS

Further, the provision of sub-section 3 of Section 53B of the Act empowers the COMPAT to confirm, modify or set aside the direction, decision or order appealed against. Therefore, the COMPAT has the authority to modify the order passed by CCI, once it has heard the arguments posed by the parties and thinks fit to amend the same, including the penalty imposed thereby. Historically, the COMPAT in past cases, where it determined that the quantum of penalty imposed by the CCI on the party/parties is not equivalent to the nature of the anti-competitive conduct, it has amended the same.

In the case of MDD Medical Systems India Private Limited v. Foundation of Common Cause & People Awareness & Ors.4, the COMPAT held that since the CCI had not taken into account the aggravating and the mitigating circumstances while determining the penalty. In the aforesaid matter, CCI had imposed a penalty at the rate of 5% on the total turnover of the parties in contravention. However, the COMPAT after assessing the relevant facts and circumstances in light of certain mitigating factors determined that the excessive penalty was being imposed, and therefore reduced the same to 3%.

Similarly in the case of M/s. Excel Crop Care Limited & Ors. v. Competition Commission of India & Ors.5, although COMPAT upheld the penalty imposed by the CCI on M/s. Excel Crop Care Limited and M/s. United Phosphorous Limited, the COMPAT deemed fit to reduce the quantum of penalty imposed on M/s. Sandhya Organic Chemicals Private Limited. It is pertinent to note that various arguments were raised by M/s. Sandhya Organic Chemicals Private Limited, wherein it attempted to establish that it was not in a position to cartelize with the other infringing parties. Although the COMPAT did not accept its plea, it opined that since the size of M/s. Sandhya Organic Chemicals Private Limited was not comparable to the other two infringing parties, and therefore its penalty was reduced to 10% of the penalty awarded by the CCI.

ANALYSIS OF THE LPG CYLINDER MATTER

On analysis of the foregoing case laws, it can be determined that the COMPAT, in the past, has modified the order passed by the CCI with respect to the penalty imposed, where it was of the opinion that the quantum of penalty is unreasonable and mitigating factors have not been considered by the CCI while determining the same. Seeing that COMPAT has taken upon itself to assess factors and thereafter amend the penalty imposed on the parties in contravention of the Act, it is perplexing to comprehend why such analysis and determination of penalty could not have been undertaken by it in the LPG matter.

In its second order dated 6th August 2014, COMPAT held that the CCI had failed to take note of the relevant turnover of the LPG cylinder manufacturers with respect to the sale of 14.2 Kg of LPG cylinders, and had instead imposed a penalty on the average of their total turnover. In light of the same, COMPAT remanded the case to the CCI for fresh assessment of the imposition of penalty under Section 27(b). It is pertinent to note that through its first order dated 20th December 2013, COMPAT clearly stated that the CCI ought to decide upon the penalty to be imposed on the parties before 1st May 2014.6 Seeing that the second order of the COMPAT in the LPG cylinder matter was passed 1st March 2016, i.e. 22 months after the expiry of the original outer limit set by the COMPAT for the CCI to determine the quantum of penalty to be imposed on the LPG cylinder manufacturers, it is surprising that the COMPAT deemed it fit to further extend the already elongated proceedings.

Under the provision of Section 53B (3) of the Act, COMPAT has been given explicit authority to modify the order passed by the CCI. This read with the provision under Section 53A (1) (a), which states that the COMPAT has the authority to hear and dispose appeals against any direction issued or decision made or order passed by the CCI including but not limited to Section 27, clearly substantiates that COMPAT has all the authority to determine the quantum of penalty and modify the penalty awarded by the CCI. However, in the instant case, the COMPAT did not take upon itself to act on the legislative authority so bestowed upon it. Such non-confirmative stand taken by the COMPAT, has merely led to an unwarranted extension of proceedings in a matter that could've been settled at a fairly early stage. It is the author's opinion that COMPAT ought to have suo moto made an assessment on the imposition of penalty on the LPG cylinder manufacturers, as the CCI had failed in calculating the same. Under the provisions of the Act, the COMPAT has ample power to modify the penalty imposed by the CCI on the infringing parties and the same ought to have been exercised in the instant matter.

Footnotes

* Divye Sharma is an Associate in the Competition Law Practice Group at the Firm. He graduated from National Law University, Delhi in 2014 with a degree in B.A.,LL.B. (Hons.). He has been engaged in various cases involving complicated competition law issues including the use of economic theory to put forth arguments before the Competition Commission of India and the Competition Appellate Tribunal, in addition to making merger filings before the Competition Commission of India. Divye has acted for clients engaged in various fields, including, e-commerce, chemicals and drugs, sugar manufacturers, cargo shipping lines and food service industry.

1. L.H. Hiranadani v. CCI & Ors., Appeal No. 19 of 2014, order dated 18th December 2015.

2. Paragraph 28 of the COMPAT order dated 1st March 2016.

3. Dilip N. Shroff v. Joint CIT, [2007] ITR 519; and Hindustan Steel Ltd. v. State of Orissa, [1970] SC 253.

4. Appeal No. 93 of 2012, order dated 25th February 2013.

5. Appeal Nos. 79/80/81 of 2012, order dated 29th October 2013.

6. Paragraph 59 of the COMPAT order dated 20th December 2013.

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