Rethinking Penalty Assessment: Examining the Shift from Relevant to Global Turnover

This article conducts a meticulous examination of the underlying rationale behind penalty assessments under the Competition (Amendment) Act, of 2023, tracing the evolutionary trajectory from past interpretations to present practices. Further it also advocates for alternative approaches, drawing insights from global best practices, and emphasizes the paramount importance of striking a delicate balance between deterrence and equity. By advocating for a recalibration of penalty assessment methodologies, this article endeavours to foster a competitive landscape in India that not only upholds fundamental rights but also nurtures a conducive environment for economic growth and innovation write Sameer Rahman and Sameer Goyal.

INTRODUCTION

In pursuit of a dynamic and globally competitive economy, the Indian government has set its sights on positioning the nation as a premier destination for foreign companies. Through a series of visionary initiatives, India aims to cultivate an environment conducive to attracting and fostering international business partnerships. For instance, the Make in India initiative envisioned to promote India as the most preferred destination for global manufacturing.¹ Furthermore, the Union Cabinet recently approved the amendment in the Foreign Direct Investment (FDI) policy on the space sector² to enhance the Ease of Doing business in the country and to streamline and enhance the flow of FDI leading to more investments, employment, growth, and income.

While the government is taking steps to increase foreign investment and make it easier to do business in the country, on the other hand, it has amended the Competition Act of 2002³ (The Act) and passed the Competition (Amendment) Act of 2023⁴ (The Amendment Act) imposing strict penalties upon enterprises involving in anticompetitive agreements or abusing their dominant position on the market based upon their global turnover. This amendment will have significant financial aftermaths on Indian businesses with a global presence and on foreign businesses operating in the country.

The Competition Commission of India (CCI) is empowered to levy a penalty of up to 10% of its average turnover for the last three years on enterprises found to be violating the Competition Act either by entering into an anti-competitive agreement⁵ or abusing their dominant position⁶ under Section 27 of the Act⁷. The criteria to assess the turnover was not defined in the act. During the initial eight years after the passing of the act, the turnover was interpreted as the “total” turnover associated with all the goods and services dealt by the enterprise in question. Later the Hon’ble SC in 2017 intervened and interpreted turnover as “relevant” turnover which included the value of only the concerned goods. But now under the amendment, the turnover is expanded to “global” turnover.

PREVIOUS REGIME: THE JOURNEY FROM GLOBAL TO RELEVANT

The CCI had expounded on Section 27(b) of the Act⁸ in several instances and had held that the “turnover” in the said section must be interpreted as the global turnover to impose a penalty on the businesses. Thus, the position was that if the entity was under scrutiny for entering into anti-competitive agreements or abusing its dominant position and it had an expatriate presence or was a conglomerate dealing in multiple goods and services, the penalty sought to be imposed on the turnover of such entity was also imposed on the turnover generated from its international dealings as well as its trade in other goods and services as opposed to the turnover of the relevant goods or services affected by the dereliction.

The competition landscape of India witnessed a significant shift in the aforesaid position in the case of Excel Crop Care Ltd. v. CCI (‘Excel Crop Care’)⁹. The major issue in this case was to resolve the legislative lacuna regarding the interpretation of Section 27 of the Act¹⁰ as to whether the “turnover” in the said section should mean global turnover or relevant turnover. The Competition Appellate Tribunal in its decision, which was subsequently upheld by the Hon’ble Supreme Court of India, interpreted the word “turnover” to mean relevant turnover in stark contrast to the earlier position.

The Supreme Court based its ruling on the doctrine of strict interpretation and principles of proportionality. The doctrine of strict interpretation postulates that in case myriad interpretations of a legal provision are possible, the one that furthers the case of the transgressor and exempts him from liability or penalty should be adopted rather than the one that exposes him to criminal liability, Thus, the word “turnover” was interpreted to mean “relevant turnover” as it shields the transgressing entity from the additional penalty it would have incurred had the provision has been interpreted otherwise.

The court also applied the principle of proportionality to arrive at this conclusion. This constitutionally embedded principle enshrines that the Court must strike a delicate equilibrium between two opposing concerns: the impact on society and the liberties of the offending individual, while also safeguarding against excessive retribution concerning their offense. Therefore, the court after testing the two possible interpretations, i.e., “relevant turnover” and “global turnover” on the touchstone of the principle of proportionality, opined that the former survives the threshold of proportionality.

RECENT AMENDMENT: TURNING THE CLOCK BACK?

The report released by the Competition Law Review Committee (CLRC) in 2019¹¹ significantly impacted the proposal for the 2020 Draft Competition Amendment Bill¹². The report highlighted deficiencies in the "relevant turnover" formula, particularly when faced with cartel scenarios such as hub-and-spoke arrangements. CLRC demonstrated that, according to existing penalty calculations, a hub enterprise may elude consequences if it diverges from its spokes' practices. The CLRC preferred a two-step approach influenced by the modus operandi of the European Union.¹³ This method initially ascertains the fundamental amount of penalty followed by assessing its deterring efficacy. Such an approach considers both societal and financial ramifications on transgressing corporations, following the paramount objective of imposing sanctions. These recommendations were considered, and the amendment act was passed by the parliament on 03.04.2023 which received the assent of the Hon’ble President on 11.04.2023 which was further notified by the Ministry of Corporate Affairs on 06.03.2024.

The Amendment Act broadened the scope of anti-competitive agreements by substituting "Exclusive supply agreement" with "Exclusive dealing agreement," encompassing both selling and purchasing aspects. It also applies to enterprises involved in analogous trades and extends the definition of cartels to encompass indirect participants such as hubs and spokes.¹⁴ The Act now levies penalties determined by the global turnover of all goods and services, potentially leading to escalating fines after investigating agreements or abuses of dominant positions.

Following the amendment, CCI has introduced three new regulations and guidelines to align the country's competition law with global standards and remove previous limitations on punitive actions. These regulations include the CCI (Settlement) Regulations, 2024,¹⁵ which allow for settlements during investigations; the CCI (Commitment) Regulations, 2024,¹⁶ which enable proactive remedies; and the CCI (Determination of Turnover or Income) Regulations, 2024,¹⁷ which establish clear measures for penalty assessment. Additionally, the CCI (Determination of Monetary Penalty) Guidelines, 2024¹⁸ have been implemented to ensure fair consequences for anti-competitive behaviour. These measures streamline procedures, promote market correction, and enhance fairness and accountability.

UNRAVELLING THE FLAWS: ANOMALIES IN THE AMENDMENT ACT

There are numerous anomalies in the amended law. It has opened a Pandora’s box for businesses having an Indian presence. A pertinent issue with the recent amendment is that it has turned the clock back and it is at odds with the principle of proportionality that formed the rationale of the Coimbatore District Central Cooperative Bank v. Employees Assn,¹⁹ which was subsequently upheld in the Excel Crop Care case.²⁰ It allows the CCI to impose penalties based on the global turnover of the entity. This opens the room for the imposition of hefty penalties on entities irrespective of the profit or revenue generated by them concerning the goods or services that are affected. It will lead to exactly what the court wanted to prevent: the “death” of business entities and the “finishing” of entities altogether by levying penalties that are disproportionate to their acts and thus violating Article 14 of the Indian constitution.

The amendment to the Competition Act is antithetical to the very objects and purposes of the imposition of penalty under the Act. The imposition of penalties for violating competition law in India serves two objectives: to emphasize the gravity of the infringement; and to deter any potential breaches by offending enterprises in subsequent instances. These twin objectives go for a toss if the penalty imposed on the erring entity is disproportionate as it results in the “financial devastation” of the entity.

The amendments may also expose an entity to “double jeopardy” or the fear of being exposed to legal penalty for the same offence more than once.²¹ For instance, consider entity A which carries out business dealings in both India and Australia. If the said entity is under scrutiny for indulging in anti-competitive practices or abusing its dominant position, it will be penalised in Australia as per the anti-competition laws of Australia. In addition to it, since the amended competition act exposes an entity to a penalty on its global turnover, entity A will also be penalised in India even for its turnover generated by the abuse of its position in Australia for which it had already been penalised.

In the absence of greater global cooperation among anti-competition watchdogs, jurisdictional brawls are bound to arise in the post-amendment scenario. This would particularly apply in the cases of an Indian entity having a global presence and foreign companies carrying out business transactions in India. In case these entities indulge in competition-distorting practices or abuse their prepotent position outside India, the authorities of the country where the entity has indulged in such practices would have the authority to penalise it. Additionally, the CCI could use its “global turnover” card to penalise the entity for the said foreign transaction as well.

As discussed earlier, the Amendment Act poses a threat to the ease of doing business in the country and also hampers the FDI. The penalties based on global turnover will have repercussions on businesses in India, particularly concerning foreign investors. Grappling with the intricate process of calculating global turnover will substantially raise compliance costs, particularly burdening global enterprises. Also, smaller domestic companies might find it challenging to handle penalties commensurate with their global turnover, potentially leading to closures meaning the death of the enterprise. Hefty fines have the potential to deter foreign investment, undermining the government's efforts to attract FDI. The lack of clear regulations on global turnover calculation could exacerbate uncertainty and foster litigation. These concerns collectively risk diminishing India's allure as a business hub and hampering both competition and innovation.

Furthermore, there are apprehensions about how this amendment intersects with Article 19(1)(g) of the Indian Constitution²², which guarantees the right to practice any profession, trade, or business. The burden imposed by navigating a complex system and the possibility of facing disproportionate penalties could be construed as encroaching upon this fundamental right. Hence, the amendment could be seen as infringing upon the freedom to engage in economic activities without undue hindrance, thus raising constitutional concerns about its compatibility with Article 19(1)(g)²³.

Building on what we have established earlier, the Supreme Court has established a proportionality standard to evaluate laws affecting fundamental rights, ensuring they have a legitimate goal, have suitable means in furtherance of the goal, lack less restrictive alternatives, and do not disproportionately impact rights holders.²⁴ The amendment act fails on these standards. The initial examination is whether the limitation on a right has an appropriate purpose. However, it appears that applying a penalty over global turnover functions as both a punishment and deterrent for reformative justice, but such purpose can also be achieved by the previous framework as well.

Secondly, the method should be an appropriate way to advance the objective. Previously in the Excel Crop Care case, it was decided by the Hon’ble Apex Court that applying relevant turnover is a better approach for achieving the aims of the Act. Next comes the point where there shouldn't be any alternative that's less limiting but just as capable, and from what has been examined before, a more fitting measure exists that is also effective and not so restrictive. Lastly, the action should not unfairly affect the person with the rights. As mentioned before, if we consider global turnover rather than relevant turnover, it will lead to disproportionality and might even cause the company to go out of business.

WAY FORWARD

The government should take a cue from the practices prevalent in global jurisdictions for instance the Competition and Markets Authority (“CMA”)²⁵ and the European Commission (“EC”) guidelines²⁶. Both the CMA and EC incorporate the principle of relevant turnover as the jumping-off point. This relates to both the relevancy of the goods and services affected and to the geographic area. Thus, the government should rethink the shift from “relevant” to “global” at the very outset.

The government justified this amendment by stating that it would achieve the object of creating deterrence among entities but such deterrence can be achieved without jumping from “relevant” to “global”. A possible approach to do so can be by reasonably increasing the upper threshold of 10 percent of the relevant turnover itself. This would ensure that the concerns of the government are addressed, and the entities do not face financial devastation or disproportionate penalties.

An alternate approach to this can be a hybrid of both global and relevant turnovers. This can be ensured by levying penalties based on global turnover of only relevant or affected goods and services. This approach incorporates the possible advantages of levying penalties on the transactions undertaken outside the territorial jurisdiction of India while at the same time limiting the penalty amount only to the goods and services concerning which the dominant position has been abused.

Lastly, the provision of imposing a penalty on global turnover should be used as a last resort, and that too in exceptional circumstances. These circumstances can include recurring infringements by the enterprise, denial to coordinate with the investigating authority, etc. Even in these exceptional circumstances, the authority should take into account aggravating and mitigating circumstances and the conditionalities of the market. After considering these parameters, if the authority is convinced to use global turnover as the threshold for levying the penalty, it should do so by rendering a detailed order enunciating the reasons for arriving at such a conclusion.

CONCLUSION

The recent amendments shifting the assessment of penalties based on global turnover rather than relevant turnover, though well-intentioned, have sparked valid concerns regarding proportionality, ease of conducting business, and constitutional rights. A nuanced approach is imperative to tackle these concerns. The government must draw insights from global best practices and evaluate its exclusive reliance on assessing penalties solely rooted in global turnover. It should achieve the objective of deterrence by adopting the alternative strategies enunciated above. It is also imperative to foster increased global cooperation among anti-competition watchdogs to aid in the prevention of jurisdictional conflicts and to ensure a harmonised approach to address cross-border anti-competitive practices. Even the preamble of the Act enshrines the principle of ensuring freedom of trade. Therefore, CCI should ensure that the dearest preamble of the Act is not crushed to smithereens.