5 July, 2017
I. Introduction
On May 8, 2017, the Supreme Court of India (‘SC’) pronounced its decision in an appeal filed by the Competition Commission of India (‘CCI’) contesting the decision of the Competition Appellate Tribunal (‘COMPAT’) to limit the penalty levied on multi-product companies to the turnover arising from/attributable to the relevant product alone (‘Relevant Turnover’). In M/s Excel Crop Care Limited v. Competition Commission of India & Ors.2, the COMPAT disagreed with the CCI’s approach of computing the amount of penalty leviable under Section 27 of the Competition Act, 2002 (‘Act’) on the basis of the entire turnover of the infringing enterprise for multi-product companies and held that the word ‘turnover’ used in Section 27(b) of the Act and proviso should be limited to the turnover of the relevant product alone in such cases.
The SC has upheld the COMPAT’s decision and suggested that CCI formulate detailed guide- lines on computation of penalty including identifying possible mitigating factors. This article focusses on the decision of the SC and its possible ramifications.
II. Background and Brief Facts
In 2011, the Food Corporation of India (‘FCI’) filed information before CCI alleging certain anti-competitive agreements between Excel Crop Care Limited (‘ECCL’), United Phosphorous Limited (‘UPL’), and Sandhya Organics Chemicals (P) Ltd (‘SOCL’) (ECCL, UPL, and SOCL are collectively referred to as the ‘Parties’) in relation to tenders issued by the FCI for Aluminium Phosphide Tablets (‘APT’). CCI opined that the Parties had acted in contravention of provisions of Section 3 of the Act and imposed a penalty of 9% of the average total turnover of the Parties for the 3 preceding years. On appeal, COMPAT affirmed the decision of CCI.
However, it modified the penalty imposed on the Parties to be applicable to the turnover of the relevant product i.e., APT and not the entire turnover of the Parties.
On appeal, SC considered the following issues in its decision:
- The retrospective operation of the Act over anti-competitive conduct that occurred before the operation of the Act (i.e., before May 20, 2009);
- The expansion of scope of investigation by the Director General, CCI (‘DG’);
- Whether a bid-rigging cartel existed on the facts of the case; and
- The calculation of penalty under Section 27 of the Act – whether it should be cal- culated on the basis of the ‘total turnover’ or the ‘relevant turnover’ of an enterprise.
III. Retrospective Operation of the Act
SC was called on to adjudicate whether certain agreements entered into between the Parties be- fore the enforcement of the cartel provisions of the Act on May 20, 2009 (‘Effective Date’) could be sanctioned. The question was largely one of whether the sanctions under the Act could be retrospectively applied.
SC held that while actions taken prior to the Effective Date would not in and of themselves be sanctionable (and therefore the Act did not have retrospective effect), such actions could be looked into if the effects of such an agreement continued after that date. In light of the facts of the case, the SC held that while it was true that the Parties had submitted the tenders prior to the enforcement of the Act, the bidding process (including price negotiations) itself continued well beyond the date of enforcement, and therefore CCI had sufficient jurisdiction and was well within its right to sanction such conduct.
This is a logical interpretation of the provisions of the Act and follows the line of reasoning adopted by the Bombay High Court in the Kingfisher Airlines3 case. The Supreme Court has emphasized that the Act cannot be retrospectively applied, but allows sanctioning actions that are taken by parties after the Effective Date, but pursuant to a cartel agreement reached prior to that date.
In such instances, the decision suggests that the CCI will be required to establish that the contravening enterprise continued to play an “active role” in furtherance of the cartel agreement even after the Effective Date, but is silent on what this “active role” would include.
IV. Expanding the Scope of the Investigation by DG
SC then deliberated on whether the scheme of the Act allowed CCI to ‘expand’ the scope of the in- vestigation conducted by its DG, beyond the original complaint and therefore beyond the imme- diate factual scope of CCI’s initiation order under Section 26(1) of the Act (‘Initiation Order’).
SC observed that limiting DG’s investigatory powers to only the facts of the information would render the entire purpose of an investigation nugatory. SC further noted that even when CCI forms a prima facie opinion on the receipt of information, it cannot possibly predict wheth- er a violation of the Act would be found through the course of an investigation and if so, the nature of such violation.
Consequently, SC stated that the DG would have the appropriate jurisdiction to expand the scope of the investigation – both in terms of the allegations originally raised as well as the par- ties against whom such allegations were raised by the information provider.
While the DG should certainly be permitted a broad remit to collect information during the course of its investigation, SC’s decision might be interpreted to further broaden the scope of DG’s investigatory powers even beyond the mandate of CCI’s original initiation order under Section 26(1) of the Act. For one, SC notes that the scope of DG’s investigation is not confined to the facts identified in CCI’s original initiation order and that DG is free to investigate additional facts that might come up during the course of its investigation. Secondly, the SC has not placed any fetters on the DG from investigating additional substantive contraventions that may not even have been identified in the Initiation Order. The SC, therefore, implicitly suggests that the DG could while looking into a cartel investigation, also investigate whether there was an abuse of dominance or a vertical restraint violation. Thirdly, the SC has held that the DG’s investiga- tion need not be confined to the parties originally named in the initiation order. This appears to be a broadening of the scope of the DG’s investigation beyond what is originally identified in the Initiation Order. This could be problematic, since a DG’s investigation is an intrusive and time-consuming process and the scope of the DG’s investigation itself must have some relation to the underlying basis for the complaint. Absent such a requirement, the DG’s investigations could become fishing expeditions and could go far beyond the original cause of action. Interest- ingly, in a recent order, the CCI has taken a different view on the scope of investigation of the DG in FX Enterprise Solutions India Pvt. Ltd. & St. Antony’s Cars Pvt. Ltd. v. Hyundai Motor In- dia Limited4. The CCI relied on Competition Commission of India v. Steel Authority of India & Ors.5 to hold that in the absence of (i) any information stating that Hyundai had contravened the provisions of Section 4 of the Competition Act and (ii) CCI’s prima facie finding and direc- tion to the DG to investigate Hyundai for any violation of Section 4 of the Act, the DG Report, in so far as it relates to an investigation of whether Hyundai had contravened Section 4 of the Competition Act, was ex facie void.
V. Was the allegation of bid rigging made out?
On the issue of allegations of bid rigging, the SC agreed with the findings of COMPAT that the Parties had rigged the bids in question. The finding was based on several facts, including iden- tical prices quoted by the Parties in their bids over a period of 10 years for the tenders; and a simultaneous decision by all the Parties to not to participate in the 2011 tender.
VI. Calculation of Penalty
The SC upheld COMPAT’s finding and held that the imposition of penalties under Section 27(b) of the Act should be based on the ‘relevant turnover’ of the company, rather than its total turno- ver, and viewed this interpretation as being “more in tune with ethos of the Act”. The SC’s deci- sion is essentially based on what it considered would be an ‘inequitable’ and ‘disproportionate’ outcome, if the penalty was imposed on the total turnover of the company. Notably, the SC observed:
- The concept of total turnover may bring out inequitable results with respect to the burden of penalty to be paid by the enterprises as some enterprises may be ‘single product enterprises’ and others may be ‘multi-product enterprises’;
- There seems to be no justification for including other products of an enterprise for the purpose of imposing penalty when the agreement leading to contravention of Section 3 involves only one product; and
- The doctrine of ‘proportionality’ would suggest that the SC should lean in favour of ‘relevant turnover’. There is no doubt that the aim of the penal provision was to ensure that it acted as a deterrent for other enterprises, however a position that would deviate from “teaching a lesson” to the violators and lead to the “death of the entity” itself, could not be countenanced. If the criteria of total turnover of a company were adopted, it would bring about shocking results that could not be comprehended under the rule of law.
The SC in its decision does not specifically deal with the question of whether the relevant turnover of an enterprise pertaining to infringing products includes the turnover generated from the sale of these products/services outside of India. However, COMPAT’s order, which this decision upholds, does specifically state that the “relevant turnover” is not restricted to sales only in the domestic market (and will include export sales). In fact, COMPAT holds that it is the ‘whole turnover’ regarding the infringing product which will be considered by CCI while deter- mining a penalty. This has not been specifically overturned by SC in its decision, and may imply therefore, an endorsement of COMPAT’s view. However, please note that neither COMPAT nor the SC addresses themselves to a situation where a global company has revenues from the sale of an infringing product, of which only one part is generated in India. It is unclear in such situations whether CCI may use the value of the global sales of the infringing product of such a company as the benchmark for calculating relevant turnover.
VII. Guidelines for Determination of the Appropriate Penalty
In a separate concurring judgment, Justice Ramana said that any penal law imposing punish- ment is made for the general good of the society and as a part of equitable consideration, only those should be punished who deserve it and to the extent of their guilt.
He further provided a two-step methodology for calculating a penalty: (i) determination of relevant turnover – rel- evant turnover should be the entity’s turnover pertaining to products and services that have been affected by a contravention; and (ii) determination of appropriate percentage of penalty based on aggravating and mitigating circumstances, and listed out some of the aggravating and mitigating factors.
SC’s decision to regulate CCI’s discretion in imposing penalties is an important development. It ensures that penalties imposed on enterprises are not arbitrary and disproportionate. The decision however is not entirely clear on whether CCI can impose penalties on turnover arising outside of India.While the concept of “affected turnover” read with the preamble of the Act suggests limiting the turnover to the value of affected products sold in India – SC has left the COMPAT’s view untouched and this issue is likely to need further clarification.
VIII. Conclusion
The judgment of the SC is a welcome decision as it has now settled the issues regarding ret- rospective operation of the Act, DG’s ability to expand the scope of the investigation, and the appropriate methodology for calculating the penalty to be imposed. The guidelines laid out by the SC will help eliminate the application of disproportionate penalties on enterprises and dem- onstrate appropriate mitigating circumstances for imposition of a lesser penalty.
1 Civil Appeal No. 2480/2014
2 Civil Appeal No. 2480 of 2014
3 (2010) 4 Comp. LJ 557 (Bom).
4 Case Nos. 36 & 82 of 2014
5 Civil Appeal No. 7779 of 2010
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
