From Relevant to Global Turnover: Examining the Basis for Penalty under Competition (Amendment) Act, 2023
ABSTRACT
In this article, the authors analyze the progression made in the interpretation of the term “Turnover” in the Competition Act of India. Further, the authors try to analyze the rationality and proportionality of the penalties imposed in the event of any violation in light of the Supreme Court ruling, which remains relevant irrespective of the amendments introduced.
INTRODUCTION
The existence of competition is very important due to the advantages that it brings, like advancement in technology, efficiency in the functions and operation of enterprises, benefits concerning freedom of trade, improvement of infrastructure, and benefits to the ultimate consumers. Even during the existence of socialist or controlled economic regimes in India, its need was felt and legislation in the form of the Monopolies and Restrictive Trade Practices Act (MRTP Act) was brought forward in the year 1969 which was the first such legislation in India. However, since then the economy has undergone a significant change with the introduction of economic reforms, totally changing the nature of the economy from a controlled regime to a free regime, whereby the control of the government significantly reduced.
However, the significance of competition remained and the MRTP Act failed to serve the changing needs. The Monopolies and Restrictive Trade Practices Act (MRTP Act) proved to be very narrow in scope as it did not include any other practice other than monopoly, or restrictive, or unfair trade practices within its scope of influence. Due to the pressing needs, which arose as a result of changes in the economy, a new legislation, known as the Competition Act was brought forward in the year 2002. It includes within its scope elements such as abuse of dominant position, regulation of combination, and prohibition on certain kinds of agreements that affect the competition within India[1].
The Competition Act, 2002 provides for the establishment of a commission on the order of the Central Government at a place specified. It may also be established at any other place in India, as the Central Government may specify. The commission is to be considered a “body corporate”, having perpetual succession, and a common seal, with the power to acquire, hold, and dispose of property, and to sue or be sued. Section 27(b) of the said act provides that in case of any agreement entered into between or among parties that has any appreciable effect on the competition within India, the very agreement is void. The penalty can also be imposed if the party is found to be abusing its dominant position. The penalty, so imposed, is not to exceed ten percent of the turnover of the enterprise in the last three preceding years. It can be imposed on all persons or institutions which are parties to the agreement. However, if the offender is a cartel, then the penalty has to be imposed upon each seller, producer, distributor, trader, or service provider, which is equivalent to three times the profit made as a result of the agreement or ten percent of the average turnover of the cartel for the preceding three financial years, whichever is higher.[2]
Section 2(y) of the Competition Act, 2002 defines the term “Turnover” as “value of sale of goods or services”.[3] The contention that arises in this aspect is whether this turnover means a turnover of the enterprise, producing different goods globally or, domestically as a whole or a turnover concerning the product about which the violation has been found. The former forms a case of global turnover, while the latter, relates to the case of relevant turnover. Although both are aimed at preventing violations, the road to achieving it becomes different with regard to the stringency and quantum of penalty. Hence, it becomes imperative, that a proper method is chosen so that a satisfactory result, within the limits of the law, is achieved.[4]
STRINGENT PENALTIES FOR BREACH
Before the 2023 amendment, the Competition Commission of India (CCI) could only levy a penalty or impose a fine based on the “Relevant Turnover”[5] ,i.e., the revenue generated from infringing products and services. This was done with the view to interpret the statute by avoiding absurdity as well as irrationality. The Competition Commission of India (CCI) had the authority to levy penalties up to 10% of the average turnover from the previous three financial years. However, recent changes in competition law have led to stricter penalties, allowing the Competition Commission of India (CCI) to consider the “Global Turnover”[6] of enterprise, which means penalties can now be imposed not only on the affected products but also on all other products and services of the enterprise with fines of up to 10% of the average total global turnover.
With the introduction of the “Global Turnover” concept for penalty imposition, the Government essentially overturned a landmark judgment of 2017 of the Hon’ble Supreme Court (bench consisting of Hon’ble Mr. A.K. Sikri and Hon’ble Mr. N.V. Ramana) that limited CCI’s power of imposing penalties. The Supreme Court had ruled that turnover for penalty calculation could only be based on “Relevant Turnover” i.e. revenue generated from infringing goods or services.
The Supreme Court of India, in 2017, while dealing with the Excel Crop Care case[7], dealt with the question as to whether the “turnover” mentioned in Section 27(b) relates to total turnover or turnover of the product in question, i.e., whether the turnover relates to the establishment or the product. The court while deciding the matter took the view that wherever a situation arises where two interpretations can be provided to a statute, which is penal in nature, the one which exempts or provides leniency to the offender has to be adopted. The court finally held that penalties should be determined based on the relevant turnover, which refers to the turnover of products linked to anti-competitive behavior. Penalties calculated using the total turnover were considered excessive, as it would be disproportionate to give a penalty greater than the harm caused and would be violative of Articles 14 and 21 of the Constitution, as per the ruling of the Supreme Court.[8] Thus, the concept of equity and proportionality has to be maintained.
The levy of penalties on a “Global Turnover” basis can indeed pose significant challenges for multinational companies operating across multiple jurisdictions and also for those enterprises that deal in multiple products or services. On one hand, it may increase the financial burden and on the other, augment the complexity of compliance. However, experts also view this approach as a way to empower competition authorities like the Competition Commission of India (CCI) to effectively deter potential violators of antitrust laws, thereby promoting fair competition in the market.
The introduction of “Global Turnover” as a benchmark for the levying of penalties for abuse of a dominant position by enterprises is indeed a significant feature of the amended law. Through this, the legislature aims to ensure that penalties are proportional and effective in deterring anti-competitive behavior across borders.
IMPACT OF DISSUASION
Under Section 27 of the Competition Act, penalties are not fixed amounts but are linked to the value of the goods or services of the contravening enterprise.[9] This approach aims to ensure that penalties are proportionate to the impact of the anti-competitive behavior on the market. Furthermore, the ambiguity in the definition of “turnover” within the penalty provision of competition law led to the Competition Commission of India (CCI) initially using total turnover as the benchmark for penalties. This approach resulted in disproportionately harsh penalties for single-product companies compared to multi-product companies, even for the same offense. This highlights the importance of clarity in defining terms like “turnover” in the Competition Act to ensure fair and consistent application of penalties. In 2017, the Supreme Court of India stepped in and interpreted “turnover” to mean “relevant turnover”, i.e. turnover of the products or services central to the violation.
Subsequently, the Competition Commission of India (CCI) commonly imposed fines using the concept of “relevant turnover”. Nevertheless, in later instances, particularly concerning Big Tech cases, the CCI observed[10] that while the “relevant turnover” method might be suitable for the conventional markets, it might not be suitable when different segments are closely interconnected, and products or services benefit from the others. The Competition Commission of India (CCI), further concluded that excluding the overall turnover in these instances (such as online businesses or digital markets) would undermine the intended impact of penalties on companies.
DIRECTIVES BY CCI
The Competition Commission of India, through The CCI (Determination of Monetary Penalty) Guidelines, 2024 provides that in case a penalty has to be imposed upon an enterprise under section 27(b) may consider the relevant turnover or income of three years of the enterprise preceding the year in which the Director General’s investigation report is received by the Commission. However, in case it becomes difficult to determine the relevant turnover of the enterprise with respect to the product or service in question, the global turnover of the enterprise, from all the products and services, can be taken into consideration for the calculation of the amount of penalty. In case the amount is insufficient to create deterrence, the amount can be increased within the limit prescribed by law.[11]
In the case of Federation of Hotel and Restaurant Associations of India and Ors. v. MakeMyTrip India Pvt. Ltd. and Ors.[12], The enterprise MMT-GO is an intermediary and acts as a facilitator in the business. The activity involved in the business is so interconnected or interwoven that one activity supports the other. By taking into consideration the nature of the business and the effective application of the regulation, the Commission took into account the entire turnover of the enterprise, i.e., the earnings of the enterprise from different sources and not only one source will become relevant. Taking into account only one segment would not appropriately reflect the above scenario and such a step would not act as a deterrent which the statute aims to achieve. Therefore, the entire turnover will have to be considered as a relevant turnover.
In the case of XYZ (Confidential) and Ors. v. Alphabet Inc. and Ors[13], it was laid down that among the various issues that cropped up during the Excel Corp case before the Supreme Court, one major issue was figuring out the penalty. In furtherance of that, the court opined on the concept of relevant turnover, stating that it would be in tune with the goals that the Act aims to achieve and the interpretations that can be applied to it. The court provided that only that product or service upon which the claim of violation of the provisions of the act has been found will be taken into consideration and not every product or service which the firm renders.
In this particular case, where the claim is against an enterprise that is a technology platform, the nature of the business is such that one prospect is interrelated and interwoven with the other and they derive strength from each other. For instance, the operation is so maneuvered that as consumers increase the advertisers, too, get motivated to exploit the platform for their benefit. The question then is not about the singular product or the service but the entire ecosystem. So, while determining the penalty, the entire platform has to be taken into consideration, and the earnings generated by them become relevant.
By taking into account the above situations, it can be said that the concept of global turnover too has certain rationalities. For instance, when the enterprise is a multi-product enterprise the enterprise uses its influence over one of its products to affect the sale of its other products. In such a case taking into consideration only one product would fail to meet the purpose of the act. By adhering to this belief, it can safely be laid down that the concept of global turnover has a focus on the turnover of the enterprise rather than the product. The turnover earned by the enterprise from its various products, whether by its operation in India or abroad, would be taken into consideration.[14]
However, such virtue does not mean that it should give a free hand to the authority in imposing penalties. Rationality still has to be exercised, as far as possible, to ensure that the penalties must not be exorbitant, thereby ensuring fairness.
During the hearing of the Excel Corp case[15], a comparison was tried to be made between India and certain other countries with regard to the calculation of the penalty, concerning relevant turnover. Concerning the concept of global turnover, a similar kind of approach can be found in the practice of the European Union. The regulations[16] provided by the Council of the European Union, particularly Article 23 of the Regulation[17] provide that in case an undertaking is found to indulge in practices prohibited by it, whether intentionally or negligently a penalty which can go up to 10% of the total turnover of the undertaking has to be applied. During the fixation of the amount of penalty, two things are provided to be dealt with: i). the gravity of the infringement, and, ii). the duration up to which it remained in force.
However, it was also stated that these jurisdictions have appropriate guidelines to make sure that the amount of penalty does not exceed the degree of harm that the infringement caused, by taking into view several factors. If in India such a view is taken then it would cause greater harm to all those establishments that deal in more than one product, and hence there will be no equity as such, because for the same infringement the amount of penalty be different between a multi-product establishment and a single-product establishment.[18]
In conclusion, it can be said that even though global turnover is brought in place of the relevant turnover, the basic objective of the Act remains the same, i.e., to punish the offender and create a deterrence. At the same time, the fact that the penalty awarded should also reflect the harm that is caused by the offender also remains the same. In other words, the penalty should not be excessive but should be analogous to the infringement and align with the objectives that the legislature aims to achieve with the legislation.
[1] The Competition Act, 2002, No. 12, Acts of Parliament, 2002 (India).
[2] The Competition Act, 2002, §27(b), No. 12, Acts of Parliament, 2002 (India).
[3] The Competition Act, 2002, §2(y), No. 12, Acts of Parliament, 2002 (India).
[4] Excel Corp Care Limited v. Competition Commission of India and Another, 8 SCC 47(2017).
[5] Business Line, https://www.thehindubusinessline.com/economy/competition-law-infringements-cci-to-issue-norms-for-stricter-penalties/article67291617.ece, (last visited Mar. 17, 2024).
[6] Ibid.
[7] Excel Corp Care Limited v. Competition Commission of India and Another, 8 SCC 47(2017).
[8] Ibid.
[9] Live mint, https://www.livemint.com/news/cci-proposes-draft-rules-on-penalty-under-amended-law/amp-11703305140094.html, (last visited Mar. 18, 2024).
[10] Business Line, https://www.thehindubusinessline.com/economy/competition-law-infringements-cci-to-issue-norms-for-stricter-penalties/article67291617.ece, (last visited Mar. 17, 2024).
[11] The CCI (Determination of Monetary Penalty) Guidelines, 2024, Gazette of India, 2024, Part III, Section4.
[12] Federation of Hotel and Restaurant Associations of India and Ors. v. MakeMyTrip India Pvt. Ltd. and Ors. (2022) MANU/CO/0087/2022.
[13] XYZ (Confidential) and Ors. v. Alphabet Inc. and Ors. (2022) MANU/CO/0091/2022.
[14] India Briefing, India Proposes to Levy Antitrust Penalty on Global Turnover: Implications (india-briefing.com), (last visited Mar. 19, 2024).
[15] Excel Corp Care Limited v. Competition Commission of India and Another, 8 SCC 47(2017).
[16]LexUriServ, https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12012E/TXT:en:PDF,(last visited Mar. 19, 2024)
[17] EUR-lex, https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex%3A32003R0001, (last visited Mar. 19, 2024)
[18] Excel Corp Care Limited vs. Competition Commission of India and Another, 8 SCC 47(2017).
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Author: Aditya Kumar is a second-year law student at Chanakya National Law University in Patna. Alongside Aditya Narayan, also a second-year student at Chanakya National Law University, he co-authored this article.
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