India: Supreme Court Clears Ambiguity On 'Turnover' Of Enterprises For CCI To Determine Penalty

Last Updated: 28 June 2017
Article by Vikrant Rana and Rupin Chopra

Introduction:

The Supreme Court, in the case of Excel Crop Care Limited Versus Competition Commission of India and Another dated May 8, 2017 held that the penalty to be imposed on enterprises involved in anti-competitive practices should be calculated on the basis of 'relevant turnover' of the enterprise and not the 'total turnover'.

Facts of the case:

  • Food Corporation of India submitted a letter to the Competition Commission of India (hereinafter referred to as "CCI") dated February 4, 2011 alleging execution of anti-competitive agreements between four companies-M/s. Excel Crop Care Limited, M/s. United Phosphorous Limited, M/s. Sandhya Organics Chemicals (P) Ltd. and M/s Agrosynth Chemicals Limited.
  • These companies were involved in the manufacturing of Aluminium Phosphide Tablets (hereinafter referred to as "APT") and were alleged to have formed a cartel by entering into an anti-competitive agreement amongst themselves.
  • On receipt of such compliant by CCI, an investigation was conducted by the Director General of CCI who found that since 2002 to 2009, these companies had been submitting their bids by quoting identical rates in the tenders invited by the FCI for the purchase of APT. The report of the Director General of CCI found these companies to be in violation of section 3(3) of the Competition Act, 2002 (hereinafter referred to as the "Act") which prohibits anti-competitive agreement.
  • On the basis of the report of the Director General, CCI, and objections filed by the four companies, the CCI concluded vide order dated April 23, 2012 that M/s. Excel Crop Care Limited, M/s. United Phosphorous Limited, M/s. Sandhya Organics Chemicals (P) Ltd (hereinafter referred to as "appellants") had violated section 3 of the Act and therefore, imposed penalty on them at the rate of 9% on the average total turnover of these establishments for the last three years, under section 27 (b) of the Act.
  • The appellants filed appeals against the order of CCI at COMPAT (Competition Appellate Tribunal). COMPAT found the appellants to be violative of section 3 of the Act. However, the COMPAT held that while assessing imposition of penalty under section 27(b) on multiproduct companies, only 'relevant turnover' should be considered and not 'total turnover'. Relevant turnover refers to the turnover in relation to the product in question in respect of which provisions of the Act were contravened whereas total turnover refers to the entire turnover of the offending person/enterprise covering all the products.
  • Thereafter, the appellants approached the Supreme Court requesting it to declare the findings of COMPAT as untenable and to set aside the penalty imposed on them. The CCI also filed appeal to the Supreme Court to set aside that part of the order of COMPAT wherein it held that penalty upon suppliers should be restricted to relevant turnover and not total turnover.

Issue:

  1. Section 27(b) of the Act empowers the CCI to impose penalty on persons or enterprises in contravention of section 3 or 4 of the Act to the extent as it deems fit but not exceeding 10% of the average of the turnover for the last three preceding financial years. The issue before the court was whether 'turnover' as occurring under Section 27 of the Act meant 'relevant turnover' or 'total turnover'.
  2. Another issue before the Court was that whether CCI had jurisdiction to conduct inquiry in respect of a tender that was submitted by the parties before commencement of Section 3 of the Act. Section 3 of the Act had come into operation on May 20, 2009.

JUDGMENT:

I. Issue of determination of turnover

The concept of 'turnover' for multiproduct enterprises:

When a multiproduct enterprise has entered into an anti-competitive agreement such anti-competitive agreement may be in respect of a single product. Therefore, imposing penalty on the total turnover of such enterprise would bring out inequitable results. Such inequitable or absurd results are to be eschewed. When an agreement which is in violation of Section 3 involves one product, there seems to be no justification for including other products of an enterprise for the purpose of imposing penalty. Hence, the turnover should be of the infringing product.

The doctrine of proportionality:

The Supreme Court applied the doctrine of proportionality to strike a balance between the object of the Act to discourage anti-competitive practices and the right of the infringer in not suffering the punishment which may be disproportionate to the seriousness of the Act. The Act seeks to penalize offenders of the Act. However, the Court held that the penalty should not be disproportionate and offenders should be suitably punished.

The doctrine of purposive interpretation:

The Supreme Court applied the doctrine of 'purposive interpretation' to state that there was a legislative link between the damage caused and the profits which accrue from the cartel activity. Further, the Court stated that there had to be a relationship between the nature of offence and the benefit derived from such offence. Therefore, keeping in mind such co-relation, the affected turnover, i.e., 'relevant turnover' becomes the yardstick for imposing a penalty.

Calculation of Penalty:

The Supreme Court relied on various principles to determine the necessity of using 'relevant turnover' to assess the penalty of offending enterprises. In furtherance of this, the Court also laid down a two-step test to calculate the penalty under section 27 of the Act.

  • Step 1: Determination of relevant turnover:

    Relevant turnover has been held to be the entity's turnover pertaining to products and services that have been affected by such contravention. The Court held that while assessing the penalty to be imposed on an offender, the assessing authority should have regard to the entity's audited financial statements, and in the absence of such audited financial statements, relevant records reflecting the entity's relevant turnover or estimate relevant turnover may be considered.
  • Step2: Determination of appropriate percentage of penalty based on aggravating and mitigating circumstances

    Factors that are to be taken while imposing appropriate percentage of penalty include nature, gravity, extent of the contravention, role played by the infringer, the duration and intensity of participation, loss or damage suffered as a result of such contravention, market circumstances in which the contravention took place, nature of the product etc. However, such penalty should not be more than the overall cap of 10% of the entity's relevant turnover.

In view of the above principles, the Supreme Court upheld the penalty imposed on the appellants as calculated by COMPAT on the basis of relevant turnover of the enterprises.

II. Issue of CCI to conduct inquiry for tender prior to commencement of the Section 3

The Supreme Court held that the inquiry conducted by CCI into the tender of March 2009 was covered by Section 3 of the Act as the tender process, though initiated prior to the date when Section 3 became operation, continued much beyond May 20, 2009, the date on which the provisions of Section 3 of the Act were enforced.

Takeaway:

The decision from the apex court of the country to determine penalty on the basis of relevant turnover of enterprises has set a landmark precedent for the CCI and COMPAT to calculate penalty of offenders henceforth. Not only the ambiguity of the term 'turnover' has been cleared to mean relevant turnover, the Supreme Court has also provided an illustrative list of factors to be considered while determining percentage of penalty. Companies have been spared from being imposed exorbitantly high amounts of penalty which would have been disproportionate to their offence.

However, it is to be noted that companies which have gained high amounts of profits by entering into cartels may still stand the chance of being imposed higher penalties because proviso of section 27(b) of the Act empowers CCI to impose a penalty of up to three times the profit of the company if it is higher than 10% of the turnover of the company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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