CCI should Impose penalty on relevant turnover not on whole Turnover: SC

38) The aforesaid table shows identical pricing by these parties even in respect of tenders floated by the U.P. State Warehousing Corporation and Punjab State Civil Supplies Corporation. It was repeated in respect of 2008 tender floated by the Central Warehousing Corporation. Tenders up to S. No. 7 above, no doubt, relate to the period which is earlier to coming into force of the provisions of Section 3. At S. No. 8 is the tender of the FCI of March, 2009, which is held to be covered on the principle of retroactivity, as already held above. However, insofar as tenders mentioned at S. Nos. 9 to 16 are concerned, they all pertain to the period after Section 3 became operational. These are clear cut examples of identical pricing by the three appellants. No doubt, the appellants cannot be penalized in respect of tenders mentioned at S. Nos. 1 to 7 as there was no provision like Section 3 at that time. However, such illustrations become important in finding out the mens rea of the appellants, i.e. arriving at an agreement to enter into collusive bidding which continued with impunity right up to 2011. Further, this trend of quoting identical price in respect of so many tenders, not only of FCI but other Government bodies as well, is sufficient to negate all explanations given by the appellants taking the pretext of coincidence or economic forces.

39) We may record here the submission of Mr. Krishnan Venugopal, learned senior counsel appearing for M/s. Excel Crop Care Limited, that the APT pesticide is needed only by the FCI and the Central Warehousing Corporation or the Central and State Warehousing Corporations and it creates a monopoly situation where buyer is in a dominant position. There are only four suppliers who are given ‘MFN’ status, but since the supply is only to the aforesaid Government agencies, the supplier is entirely dependent upon these parties for supplies. It creates oligopoly market. It was argued that since dominant position is enjoyed by the buyer, it leads to parallel pricing and this conscious parallelism takes place leading to quoting the same price by the suppliers. The explanation, thus, given for quoting identical price was the aforesaid economic forces and not because of any agreement or arrangement between the parties. It was submitted that merely because same price was quoted by the appellants in respect of the 2009 FCI tender, one could not jump to the conclusion that there was some ‘agreement’ as well between these parties, in the absence of any other evidence corroborating the said factum of quoting identical price. In respect of this submission, Mr. Venugopal had also referred few judgments.

40) The aforesaid argument is highly misconceived. A neat and pellucid reply of Mr. Kaul, which commands acceptance, is that argument of parallelism is not applicable in bid cases and it fits in the realm of market economy. It is for this reason the entire history of quoting identical pricebefore coming into operation of Section 3 and which continued much after Section 3 of the Act was enforced has been highlighted. There cannot be coincidence to such an extent that almost on all occasions price quoted by the three appellants is identical, not even few paisa more or less from each other. That too, when the cost structure, i.e. cost of production of this product, of the three appellants sharply varies with each other. Following factors in this behalf need to be highlighted:

(a) there is a 10 years’ history of quoting identical prices;

(b) there are only four suppliers of the product in the market out of which three are the appellants;

(c) even when the cost of production is different, they have quoted identical price;

(d) even when the geographical location of the three suppliers is different, strange coincidence of identical pricing is found, that too repeatedly;

(e) profit margins would be different, still quotations are same; and

(f) to different parties in respect of different tenders, different rates are quoted. Still whatever price is quoted in respect of one particular tender, that is identical. It would be too much of a coincidence, difficult to believe.

Thus, onus was on the appellants in view of Section 3 of the Act, and that too heavy onus, to justify the above trend, but they have failed to discharge this burden. We are, therefore, of the opinion that ingredients of Section 3 stand satisfied and the CCI rightly held that provisions of Section 3(3)(a), 3(3)(b) and 3(3)(d) have been contravened by the appellants.

41) It needs to be emphasized that collusive tendering is a practice whereby firms agree among st themselves to collaborate over their response to invitations to tender. Main purpose for such collusive tendering is the need to concert their bargaining power, though, such a collusive tendering has other benefits apart from the fact that it can lead to higher prices. Motive may be that fewer contractors actually bother to price any particular deal so that overheads are kept lower. It may also be for the reason that a contractor can make a tender which it knows will not be accepted (because it has been agreed that another firm will tender at a lower price) and yet it indicates that the said contractor is still interested in doing business, so that it will not be deleted from the tenderee’s list. It may also mean that a contractor can retain the business of its established, favored customers without worrying that they will be poached by its competitors.

42) Collusive tendering takes many forms. Simplest form is to agree to quote identical prices with the hope that all will receive their fair share of orders. That is what has happened in the present case. However, since such a conduct becomes suspicious and would easily attract the attention of the competition authorities, more subtle arrangements of different forms are also made between colluding parties. One system which has been noticed by certain competition authorities in other countries is to notify intended quotes to each other, or more likely to a central secretariat, which will then cost the order and eliminate those quotes that it considers would result in a loss to some or all members of the cartel. Another system, which has come to light, is to rotate orders. In such a case, the firm whose turn is to receive an order will ensure that its quote is lower than the quotes of others.

43) We are here concerned with parallel behavior. We are conscious of the argument put forth by Mr. Venugopal that in an oligopoly situation parallel behavior may not, by itself, amount to a concerted practice. It would be apposite to take note of the following observations made by U.K. Court of Justice in Dye stuffs:

“By its very nature, then, the concerted practice does not have all the elements of a contract but may inter alia arise out of coordination which becomes apparent from the behavior of the participants. Although parallel behavior may not itself if identified with a concerted practice, it may however amount to strong evidence of such a practice if it leads to conditions of competition which do not respond to the normal conditions of the market, having regard to the nature of the products, the size and number of the undertakings, and the volume of the said market. Such is the case especially where the parallel behavior is such as to permit the parties to seek price equilibrium at a different level from that which would have resulted from competition, and to crystalline the status quo to the detriment of effective freedom of movement of the products in the [internal] market and free choice by consumers of their suppliers (emphasis added.

At the same time, the Court also added that the existence of a concerted practice could be appraised correctly by keeping in mind the following test:

“If the evidence upon which the contested decision is based is considered, not in isolation, but as a whole, account being taken of the specific features of the products in question.”

44) It would be significant to note that in Dyestuff’ judgment, the Court rejected the argument predicated on Oligopolistic market structure, after finding that the market is not a pure oligopoly: rather it was one in which firms could realistically be expected to adopt their own pricing strategies, particularly, in view of the compartmentalization of the markets along national boundaries. In the instant case, argument of oligopoly market was not even raised either before the CCI or COMPAT. Moreover, with the eloquent facts, mentioned above, staring at the appellants, we do
not agree with the arguments put forth by Mr. Venugopal.

45) At this juncture, we would advert to tender of May, 2011. It is not in dispute that all the three appellants, as well as M/s. Agrosynth Chemicals Limited did not participate in the said tender. These are the four manufacturers in all. When this fact is not in dispute, the only question is as to whether it was a concerted action on the part of the appellants herein. According to all the appellants, their decision not to participate in the aforesaid bid was the onerous, unreasonable, arbitrary and unquestionable conditions that were put in the said tender. As these were not acceptable to them, they individually decided not to take part in the tender, which was a valid business decision and not result of pre- concerted agreement of the appellants.

46) The conditions which are perceived as ‘onerous’ by these appellants are the following:

2) Earnest money deposit was raised from `10 lakhs to `30 lakhs.

3) Supply required as per this standard was 75 MT per month which was too high a demand/ requirement and it was difficult to effect supplies of this magnitude every month.

M/s. Sandhya Organics Chemicals (P) Ltd. additionally submitted that they had placed on record that their production capacity was much less and supplying 75 MT of APT every month was beyond their means. Therefore, they were unable to tender against the said NIT. Before the COMPAT, M/s. Excel Crop Care Limited attempted to project their bona fides by showing that they had even written letter dated May 26, 2011 to the FCI conveying their inability to take part in that tender.

47) The COMPAT, after discussing the matter, arrived at the conclusion that it was clearly an after-thought move, inasmuch as the tender was published on April 28, 2011 and the last date for submitting the price bids was May 27, 2011, but only a day before i.e. on May 26, 2011, such a letter was sent by M/s. Excel Crop Care Limited to the FCI. Insofar as M/s. UPL is concerned, it did not even bother to give any representation. Likewise, M/s. Sandhya Organics did not approach the FCI at all with the representation that the quantities to be supplied were huge and the tender conditions be suitably modified.

48) We feel that COMPAT has examined the matter in right perspective. After examining the record, one finds that important fundamental conditions were the same which used to be in the earlier tenders. In 2009 tender, a specific quantity of 600 MT was prescribed. At that time, all the three appellants participated and did not object to the same. As against this in 2011 tender, the tentative annual requirement of APT was stated to be 400 MT and not 75 MT per month. The condition referred to by the appellants was not for supply of 75 MT per month. It only stated that in a given month the tenderer should have capacity to supply 75 MT. It was nowhere stated that 75 MT will have to be supplied by the successful tenderer every month. In any case, from the conduct of the three appellants, it becomes manifest that reason to boycott the May 2011 tender was not the purported onerous conditions, but it was a concerted action. Otherwise, if the appellants were genuinely interested in participating in the said tender and were aggrieved by the aforesaid conditions, they could have taken up the matter with the FCI well in time. They, therefore, could request the FCI to drop the same (in fact FCI dropped these conditions afterwards when the matter was brought to their notice). However, no such effort was made. As pointed out above, M/s. Excel Crop Care wrote the letter only a day before, just to create the record which cannot be termed as a bona fide move on its part. UPL did not even make any such representation in writing. Likewise, M/s. Sandhya Organics Chemicals (P) Ltd. would not have liked itself to be rendered disqualified and silently swallowed this situation. After all, it would have liked to remain a supplier of APT to FCI having regard to the fact that the said product is consumed by handful of Government sector undertakings. Therefore, not making any sincere effort in this behalf by any of the appellants clearly shows that they were in hand in glove in taking a decision not to bid against this tender. This conclusion gets strengthened by the fact that these are the only four suppliers (including three appellants) in the market for this product. Reaction of not participating in the said tender by four suppliers could have been perceived otherwise, had there been a number of manufacturers in the market and four out of them abstaining. Abstention by hundred percent (who are only four) makes the things quite obvious. Events get quite apparent when examined along with past history of quoting identical prices, an aspect already commented above.

49) Since collusion stands proved by the aforesaid conduct of the appellants in abstaining from the bidding in respect of May 2011 tender, requirement of Section 3(3)(d) of the Act read with ‘explanation’ thereto stands satisfied, viz., concerted action based on an agreement/ arrangement between the appellants, resulted in restricting or manipulating competition or process of bidding, since the said act was collusive in nature.

50) We, therefore, agree with the conclusions of the COMPAT on this aspect as well.

51) Issue No. 4

Re: Penalty

After giving its finding that there was a contravention of the provisions of Section 3 of the Act by the appellants, the CCI imposed the following penalties on the three entities/ appellants:

52) Under Section 27(b) of the Act, penalty of 10% of the turnover is prescribed as the maximum penalty with no provision for minimum penalty. CCI had chosen to impose 9% of the average turnover keeping in view the serious nature of the breach on the part of these appellants.

53) The COMPAT has maintained the rate of penalty i.e. 9% of the three years average turnover. However, it has not agreed with the CCI that ‘turnover’ mentioned in Section 27 would be ‘total turnover’ of the offending company. In its opinion it has to be ‘relevant turnover’ i.e. turnover of the product in question. Since, M/s. Excel Crop Care and UPL were multi-product companies, products other than APT could not have been included for the purpose of imposing the penalty. It, therefore, held that penalty of 9% would be limited to the product/ service in question– in this case, the APT– which was the relevant product for the inquiry. The penalty, thus, stands substantially reduced in the cases of M/s. Excel Crop Care and UPL as can be seen from the following chart:

54) Insofar as M/s. Sandhya Organics Chemicals (P) Ltd. is concerned, the ‘relevant turnover’ and ‘total turnover’ is the same as this company produced only APT tablets. CCI had imposed penalty of `1.57 crores on the basis of their turnover of this product. However, in its case also, penalty is reduced on the ground that it is relatively a small enterprise. Moreover, in respect of May 2011 tender, it could not have taken part since its production capacity was only 25 MT a month. Though, the aforesaid plea was not accepted while discussing the merits of the case, the COMPAT deemed it proper to take this aspect into consideration when it came to imposition of penalty. On the aforesaid basis, COMPAT reduced the penalty to 1/10thof penalty awarded by CCI i.e. `15.70 lakhs.

55) The CCI is not happy with the aforesaid outcome whereby penalty imposed by it is sharply reduced by the COMPAT. Against this part of the impugned judgment, CCI is in appeal.

56) In the aforesaid backdrop, the moot question is as to whether penalty under Section 27(b) of the Act has to be on ‘total/ entire turnover’ of the company covering all the products or it is relatable to ‘relevant turnover’, viz., relating to the product in question in respect whereof provisions of the Act are contravened. Section 27 of the Act stipulates nature of the orders which the CCI can pass after enquiry into agreements or abuse of dominant position. This Section empowers CCI to pass various kinds of orders the nature whereof is spelt out in clauses (a), (b), (d) and (g) (clauses (c) and (f) stand omitted). As per clause (b), CCI is empowered to inflict monetary penalties, the upper limit whereof is 10% “of the average of turnover for the last three preceding financial years”. Operative portion of Section 27 of the Act is reproduced below:

“27. Orders by Commission after inquiry into agreements or abuse of dominant position.– Where after inquiry the Commission finds that any agreement referred to in section 3 or action of an enterprise in a dominant position, is in contravention of section 3 or section 4, as the case may be, it may pass all or any of the following orders, namely:-

xxx xxx xxx

(b) impose such penalty, as it may deem fit which shall be not more than ten per cent. of the average of the turnover for the last three preceding financial years, upon each of such person or enterprises which are parties to such agreements or abuse:

[provided that in case any agreement referred to in section 3 has been entered into by a cartel, the Commission may impose upon each producer, seller, distributor, trader or service provider included in that cartel, a penalty of up to three times of its profit for each year of the continuance of such agreement or ten per cent of its turnover for each year of the continuance of such agreement, whichever is higher.]”

57) Extensive as well as intensive argument of Mr. Kaul, learned Additional Solicitor General, was that in S. 27(b) of the Act, there is no reference to ‘relevant turnover’. On the contrary, clause (b) of S. 27 in clear terms, stipulates penalty on the ‘turnover’ i.e. average of the turnover for the last three preceding financial years and it plainly suggests that this ‘turnover’ has to be of the enterprise which had contravened the provisions of Section 3 or Section 4. He submitted that clear intention of the Legislature was to take into consideration entire turnover of the enterprise. Reading the word ‘relevant’ thereto would be doing violence to the plain language of the statute, by adding the word which is not there.

58) According to him, the expression ‘turnover’ is not limited or restricted in any manner and introduction of concept of ‘relevant turnover’ amounts to adding words to the statute. He premised his submission on well- settled principle of statutory interpretation that where the language of a statute is plain and clear, the Court ought not to add words to limit or alter the meaning of the statute and cited the following judgments in support : Prabhudas Damodar Kotecha & Ors. Vs. Manhabala Jeram Damodar & Anr.10 ; Raghunath Rai Bareja & Anr. Vs. Punjab National Bank & Ors.11 ; V.L.S. Finance Ltd. Vs. Union of India & Ors.12 ; and Bharat Aluminium Company Vs. Kaiser Aluminium Technical Services Inc.13.

59) Mr. Kaul also placed heavy reliance on the following discussion in the case of Steel Authority of India Ltd. in the context of the Competition Act:

“52. A statute is stated to be the edict of legislature. It expresses the will of legislature and the function of the court
is to interpret the document according to the intent of those who made it. It is a settled rule of construction of statute that the provisions should be interpreted by applying plain rule of construction…

xx xx xx

56. Thus, the court can safely apply rule of plain construction and legislative intent in light of the object sought to be achieved by the enactment. While interpreting the provisions of the Act, it is not necessary for the court to implant, or to exclude the words, or overemphasize language of the provision where it is plain and simple. The provisions of the Act should be permitted to have their full operation rather than causing any impediment in their application by unnecessarily expanding the scope of the provisions by implication.”

60) According to him, a plain reading of Section 27 as a whole, which includes Section 27(a) as well, also makes it clear that the target of the penalty is the ‘person’ or ‘enterprise’ that has acted in violation of the Act, and not the ‘product’ or the ‘service’ alone which is made the subject of the violation. As such, the expression ‘turnover’ must necessarily mean the turnover of the ‘person’ or the ‘enterprise’ which is party to the anti-competitive agreement or abuse of dominance.

61) Critiquing the approach of the COMPAT, he submitted that it has introduced the concept of ‘relevant’ turnover in Section 27 despite the absence of the word ‘relevant’, failing to notice that wherever the Act wanted to introduce the concept of ‘relevance’ the word ‘relevant’ has, in fact, been used in the appropriate sections. In this regard, he referred to Sections 2(r), 2(s), 2(t), 4(2)(e), 6, 19(6), 19(7), etc. where the expression ‘relevant’ is specifically used. He also referred to the definition of ‘turnover’ as contained in Section 2(y) of the Act, which includes value of goods or services, and submitted that it is the aforesaid definition of ‘turnover’ which has to be applied wherever this expression occurs in the Act and it cannot be read to have different criteria for determining penalty and the thresholds applicable for regulation of combinations. He also sought to highlight that where the expression is used in the same section, it should generally be given the same meaning, as held in Suresh Chand Vs. Gulam Chisti and Raghubans Narain Singh Vs. Uttar Pradesh Government through Collector of Bijnor.

62) Taking this very argument further, he submitted that interpretation given by the COMPAT would render the proviso after Section 27 redundant, as the said proviso specifically provides for situations where more than one member of a group (each may be producing different products/ services) is part of the anti- competitive conduct.

63) Mr. Kaul went to the extent of arguing that even if purposive interpretation is to be given to the provisions of Section 27(b) of the Act, main purpose which cannot be lost sight of and ignored is that it is a deterrent provision. The purpose behind such a provision is to give a message that the persons or enterprises should not indulge in such anti- competitive activities, as otherwise they will be inflicted with heavy penalties. According to him, the kind of cartalisation formed by the appellants in this case is a clear example of ‘hardcore cartel’ behavior which is deprecated by even the OECD as such hardcore cartels benefit only the cartel members and are extremely injurious to the interest of all others, with extraordinary adverse affect on the market and the consumers. He further submitted that formation of cartels reduces social welfare and the COMPAT has ignored these factors as well while giving restricted interpretation to ‘turnover’ by making it product specific and not person/ enterprise specific.

64) Advancing this very argument further, he even drew parallel with the laws in other jurisdictions by stating the comparative legal position in European Union, United Kingdom, Australia, etc. and submitted that it could be discerned from the law enacted in those jurisdictions that everywhere overall cap is of 10% of ‘worldwide turnover’ and is not restricted to ‘relevant turnover’.

65) He further submitted that the aforesaid provision imposed a cap on the penalty by stipulating that it shall not be more than 10%. Thus, the CCI had the discretion to impose the penalty from 0% to 10% and this was sufficient safeguard to take care of the proportionality aspects of the penalty wherever penalty on total turnover is found to bring
unreasonable results. In other words, in respect of multi- product companies where the turnover covering non- offending products, is quite high, the CCI can always impose much lesser rate of penalty so that the penalty does not sound to be excessive and unconscionable and remains proportionate to the nature of contravention. However, it is not permissible to tinker the language of a statute.

66) Adverting to the specific case of M/s. Sandhya Organics Chemicals (P) Ltd., submission of Mr. Kaul was that the reason given by COMPAT in reducing the penalty was self-contradictory inasmuch as contention of this appellant that it did not bid in May 2011 tender of FCI was because of the reason that its production capacity was mere 25 MT per month was specifically rejected by the COMPAT, but this very rejected contention formed the basis of reducing the penalty. It was also submitted that in any case there was no justification in reducing the penalty to 1/10th of the penalty imposed by the CCI, i.e. from 9% to 0.9%, when the COMPAT itself observed that the nature of breach committed by the appellants was very serious and going by this consideration, the COMPAT maintained the penalty @ 9% in the case of the other two appellants.

67) Learned counsel appearing for the three appellants attempted to put an astute and sagacious answer to the aforesaid arguments of the Learned Additional Solicitor General. Justifying the approach of the COMPAT in this behalf, it was argued that even the plain language of Section 27(b) leads to the interpretation that is given by the COMPAT. They also stressed that this provision being a penal provision, has to be strictly construed. No wider meaning can be given to it. The learned counsel quoted the illustration in cases where identical infringement is alleged in respect of several enterprises, some of which may be ‘single product companies’ and others may be ‘multi- product companies’ (which was the position in the instant case itself), and submitted that there would be no justification for prescribing the maximum penalty based on the total turnover of the enterprise, as it would result in prescribing a higher maximum penalty for multi-product companies, as against the single product companies, thereby bringing very inequitable results. For identical infringement, there would be no justification for prescribing such differential maximum limits. Keeping this aspect into consideration, it is all the more reason for interpreting Section 27(b) on the basis of its plain language as the word ‘total’ was also not prefixed with ‘relevant’ by the Legislature. Since it was a provision relating to penalty, which was to be imposed on ‘turnover’, the said ‘turnover’ was necessarily relatable to the offending product only and Legislature never intended to punish any person or enterprise even in respect of unblemished product. It was also emphasized that penalty under Section 27(b) is to be levied for contravention of Section 3 in respect of any ‘agreement’ resulting in appreciable adverse effect on competition. Therefore, it would not relate to all the products of the company included in the total turnover of the enterprise. As such, when penalty is being imposed in respect of any infringing product, the turnover of that product would be relevant. The learned counsel criticized the approach of the CCI in imposing penalties by taking the maximum penalty as the starting point of determination and then purporting to reduce it suitably, as totally incorrect approach. It was argued that the quantum of appropriate amount of penalty has to be first determined after taking into consideration the relevant factors. The relevance of the maximum penalty is only for the limited purpose to ensure that the quantum so determined, does not exceed the maximum penalty.

68) Learned counsel for the appellants also advocated for applying the doctrine of proportionality which has universal application and lays down that ‘the broad principles that the punishment must be proportioned to the offense is or ought to be of universal application’ as held in Arvind Mohan Sinha Vs. Amulya Kumar Biswas & Ors. Attention of the Court was also drawn to another judgment of this Court in State of Haryana & Ors. Vs. Sant Lal & Anr. where penalty for evasion of tax sought to be levied on the basis of 20% of the value of the tax was held to be ultra vires. Likewise, application of this doctrine of proportionality applied in Bhagat Ram Vs. State of Himachal Pradesh & Ors. was emphasized by referring to the following passage therein:

“16…It is equally true that the penalty imposed must be commensurate with the gravity of the misconduct, and that any penalty disproportionate to the gravity of the misconduct would be violative of Article 14 of the Constitution…”

69) Countering the argument of the learned Additional Solicitor General predicated on the parallel drawn with the law in the other countries, it was submitted that in other jurisdictions specific guidelines were issued which formed the basis of exercising the discretion in an objective manner. In contra- distinction, no guidelines are prescribed under the Act in India and it was submitted that a perusal of the guidelines issued by the European Union as well as the Office of Fair Trading in the United Kingdom would show that for determining the appropriate quantum of penalty, the ‘relevant turnover’, i.e. the turnover of the infringing product, is taken into consideration. This assumes great importance in cases where an enterprise is a multi- product company.

70) In addition to the aforesaid arguments, learned counsel appearing for UPL submitted that since it was a multi-product company, its average of the total turnover of three years was `2804.95 crores. By imposing penalty of 9% on the total turnover, the CCI had levied penalty of `252.44 crores, which was highly disproportionate as even the total production and sale of APT tablets, for the three years, was much less than the aforesaid penalty. It was pointed out that the average total turnover of the APT tablets comes to `77.14 crores only, which is hardly 3% of the total turnover. On that basis it was argued that by taking total turnover for the purpose of penalty clearly amounted to disproportionate penalty as it was more than 300% of the total turnover of APT tablets. This, according to the learned counsel, itself provided full justification in the approach of the COMPAT by reading the concept of ‘relevant turnover’ while interpreting Section 27(b) of the Act.

71) We have given our serious thought to this question of penalty with reference to ‘turnover’ of the person or enterprise. At the outset, it may be mentioned that Section 2(y) which defines ‘turnover’ does not provide any clarity to the aforesaid issue. It only mentions that turnover includes value of goods or services. There is, thus, absence of certainty as to what precise meaning should be ascribed to the expression ‘turnover’. Somewhat similar position appears in EU statute and in order to provide some clear directions, EU guidelines on the subject have been issued. These guidelines do refer to the concept of ‘relevant turnover’. Grappling with the same very issue, the judgment of the Competition Appeal Court of South Africa in the case of Southern Pipeline Contractors Conrite Walls (Pty) Ltd. Vs. The Competition Commission provides the answer in the following manner:

“51. The concept of ‘turnover’ is not defined in the Act and is only referred to in Section 59(2), being annual turnover. There is thus some uncertainty as to the precise meaning of ‘turnover’. However, Section 59(3) refers on more than one occasion to ‘the contravention’, in particular, in dealing with the nature, duration, gravity and extent ‘of the contravention’, the loss or damage suffered as a result of the ‘contravention’ the market circumstances in which ‘the contravention’ the market circumstances in which ‘the contravention’ took place and the level of profit derived from ‘the contravention’. Thus there is a legislative link between the damage caused and the profits which accrue from the cartel activity. The inquiry, in terms of Section 59(20), appears to envisage that consideration be given to the benefits which accrue from the contravention: that is to amount to affected turnover. By using the baseline of affected turnover’ the implications of the doctrine of proportionality that is between the nature of the offense and benefit derived there from, the interests of the consumer community and the legitimate interests of the offender can be taken more carefully into account and appropriately calibrated.”

[Emphasis supplied]

72) Judgement in the case of Southern Pipeline Contractors Conrite Walls (Pty) Ltd. reveals that the Court therein was concerned with the provisions of Section 59 of the Competition Act, 1998 of South Africa which also provides for maximum penalty of 10% of the annual turnover. The Court held that the appropriate amount of penalty had to be determined keeping into consideration the damage caused and the profits which accrue from the cartel activity. The Appeal Court used the words ‘affected turnover’. It determined the amount of penalty on the basis of these guidelines issued by the European Union (EU) and the Office of Fair Trade (OFT). In that case the concerned company Southern Pipeline Contractors was a multi-product company and the ‘affected turnover’ was comparatively small.

73) It is interesting to note that the parties on either side are resting their cases on the same principle of statutory interpretations. Pertinently, Section 27(b) of the Act while prescribing the penalty on the ‘turnover’, neither uses the prefix ‘total’ nor ‘relevant’. It is in this context, taking aid of the applicable and well- recognized principle of statutory interpretations we have to determine the issue.

74) In the absence of specific provision as to whether such turnover has to be product specific or entire turnover of the offending company, we find that adopting the criteria of ‘relevant turnover’ for the purpose of imposition of penalty will be more in tune with ethos of the Act and the legal principles which surround matters pertaining to imposition of
penalties. For arriving at this conclusion, we are influenced by the following reasons:

(a) Under Section 27(b) of the Act, penalty can be imposed under two contingencies, namely, where an agreement referred to in Section 3 is anti- competitive or where an enterprise which enjoys a dominant position misuses the said dominant position thereby contravening the provisions of Section 4. In case where the violation or contravention is of Section 3 of the Act it has to be pursuant to an ‘agreement’. Such an agreement may relate to a particular product between persons or enterprises even when such persons or enterprises are having production in more than one product. There may be a situation, which is precisely in the instant case, that some of such enterprises may be multi- product companies and some may be single product in respect of which the agreement is arrived at. If the concept of total turnover is introduced it may bring out very inequitable results. This precisely happened in this case when CCI imposed the penalty of 9% on the total turnover which has already been demonstrated above.

(b) Interpretation which brings out such inequitable or absurd results has to be eschewed. This fundamental principle of interpretation has been repeatedly made use of to avoid inequitable outcomes. The Canadian Supreme Court in Ontario Vs. Canadian Pacific Ltd. wherein the expression ‘use’ occurring in Environment Protection Act was given restricted meaning. The principle that absurdity should be avoided was explained in the following manner:

“The expression “for any use that can be made of the natural environment has an identifiable literal or “plain” meaning when viewed in the context of the EPA as a whole, particularly the other paragraphs of s. 13(1). When the terms of the other paragraphs are taken into account, it can be concluded that the literal meaning of the expression “for any use that can be made of the natural environment” is “any use that can conceivably be made of the natural environment by any person or other living creature”. In ordinary circumstances, once the “plain meaning” of the words in a statue have been identified there is no need for further interpretation. Different considerations can apply, however, in cases where a statute would be unconstitutional if interpreted literally. This is one of those exception cases, in that a literal interpretation of s. 13(1)(a) would fail to meet the test for over breadth established in Heywood.

The state objective underlying s. 13(1)(a) EPA is, as s. 2 of the Act declares, “the protection and conservation of the
natural environment”. This legislative purpose, while broad, is not without limits. In particular, the legislative interest in safeguarding the environment for “uses” requires only that it be preserved for those “uses” that are normal and typical, or that are likely to become normal or typical in the future. Interpreted literally, s. 13(1)(a) would capture a wide range of activities that fall outside the scope of the legislative purpose underlying it, and would fail to meet s.7 over breadth scrutiny. There is, however, an alternative interpretation of s.13(1)(a) that renders it constitutional. Section 13(1)(a) can be read as expressing the general intention of s. 13(1) as a whole, and paras. 13(1)(b) through (h) can be treated as setting out specific examples of “impairment(s) of the quality of the natural environment for any use that can be made of it”. When viewed in this way, the restrictions place on the word “use” in paras. (b) through (h) can be seen as imported into (a) through a variant of the ejusdem generis princile. Interpreted in this manner, s.13(1)(a) is no longer unconstitutionally over broad, since the types of harms captured by paras. (b) through (h) fall squarely within the legislative intent underlying the section. In light of the presumption that the legislature intended to act in accordance with the constitution, it is appropriate to adopt this interpretation of s.13(1)(a). Thus, the subsection should be understood as covering the situations captured by paras. 13(1)(b) through (h), and any analogous situations that might arise.”

We would also like to quote the following observations from State of Jharkhand and Another Vs. Govind Singh :

“20. While interpreting a provision the court only interprets the law and cannot legislate it. If a provision of law is misused and subjected to the abuse deemed necessary. [See CST Vs. Popular Trading C. : (2000) 5 SCC 511 : AIR 2000 SC 1578] . The legislative casus omissus cannot be supplied by judicial interpretative process.”

Likewise, following passages from the judgment of this Court in Commissioner of Income Tax, Bangalore Vs. J.H Yadagiri shed light of similar nature.

“45. In the case of K.P. Varghese Vs. IT0 [(1981) 4 SCC 173 1981 SCC (Tax) 293 : (1981) 131 ITR 597] this Court emphasized that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided.

46. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the Court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction. The task of interpretation of a statutory provision is an attempt to discover the intention of the Legislature from the language used. It is necessary to remember that language is at best an imperfect instrument for the expression of human intention. It is well to remember the warning administered by Judge Learned Hand that one should not make a fortress out of dictionary but remember that statutes always have some purpose or object to accomplish and sympathetic and imaginative discovery is the surest guide to their meaning.

47. We have noted the object of Section 16(3) of the Act which has to be read in conjunction with Section 24(2) in this
case for the present purpose. If the purpose of a particular provision is easily discernible from the whole scheme of the
Act which in this case is, to counteract the effect of the transfer of assets so far as computation of income of the assessee is concerned then bearing that purpose in mind, we should find out the intention from the language used by the Legislature and if strict literal construction leads to an absurd result i.e. result not intended to be sub served by the object of the legislation found in the manner indicated before, and if another construction is possible apart from strict literal construction then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction. Furthermore, in the instant case we are dealing with an artificial liability created for counteracting the effect only of attempts by the assessee to reduce tax liability by transfer. It has also been noted how for various purposes the business from which profit is included or loss is set off is treated in various situations as assessee’s income. The scheme of the Act as worked out has been noted before.

In Southern Motors Vs. State of Karnataka and Others, the Court explained the task that is to be undertaken by a Court while interpreting such statutes:

“33. The following excerpts from Tata Steel Ltd. (supra), being of formidable significance are also extracted as here under.

Xxx xxx xxx

“25. In Oxford University Press Vs. Commissioner of Income Tax [MANU/SC/0052/2001]:(2001) 3 SCC 359, Mohapatra, J. has opined that interpretation should serve the intent and purpose of the statutory provision. In that context, the learned Judge has referred to the authority in State of T.N. Vs. Kodaikanal Motor Union (P) Ltd. [MANU/SC/0127/1986] : (1986) 3 SCC 91 wherein this Court after referring to K.P. Varghese Vs. ITO [MANU/SC/0300/1981] : (1981) 4 SCC 173 and Luke v. IRC (1964) 54 ITR 692 has observed:

The courts must always seek to find out the intention of the legislature. Though the courts must find out the intention of the statute from the language used, but language more often than not is an imperfect instrument of expression of human thought. As Lord Denning said it would be idle to expect every statutory provision to be drafted with divine prescience and perfect clarity. As Judge learned Hand said, we must not make a fortress out of dictionary but remember that statutes must have some purpose or object, whose imaginative discovery is judicial craftsmanship. We need not always cling to literalness and should seek to endeavor to avoid an unjust or absurd result. We should not make a mockery of legislation. To make sense out of an unhappily worded provision, where the purpose is apparent to the judicial eye ‘some’ violence to language is permissible.

“26. Sabharwal, J. (as His Lordship then was) has observed thus:

…It is well- recognized Rule of construction that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. It was held that construction suggested on behalf of the Revenue would lead to a wholly unreasonable result which could never have been intended by the legislature. It was said that the literalness in the interpretation of Section 52(2) must be eschewed and the court should try to arrive at an interpretation which avoids the absurdity and the mischief and makes the provision rational, sensible, unless of course, the hands of the court are tied and it cannot find any escape from the tyranny of literal interpretation. It is said that it is now well-  settled Rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the court may modify the language used by the legislature or even “do some violence” to it, so as to achieve the obvious intention of the legislature and produce a rational construction. In such a case the court may read into the statutory provision a condition which, though not expressed, is implicit in construing the basic assumption underlying the statutory provision….

34. As would be overwhelmingly pellucid from herein above, though words in a statute must, to start with, be extended their ordinary meanings, but if the literal construction thereof results in anomaly or absurdity, the courts must seek to find out the underlying intention of the legislature and in the said pursuit, can within permissible limits strain the language so as to avoid such unintended mischief.”

(iii) The principle of strict interpretation of a penal statute would support and supplement the aforesaid conclusion arrived at by us. In a recent Constitution Bench judgment in the case of Abhiram Singh and Others Vs. C.D. Commachen (Dead) by L.Rs. and Ors., this Court scanned through the relevant case law on the subject and applied this principle even while construing “corrupt practice” in elections which is of a quasi criminal nature. We would like to reproduce following discussion from the said judgment :

“98. Election petitions alleging corrupt practices have a quasi-criminal character. Where a statutory provision implicates penal consequences or consequences of a quasi-criminal character, a strict construction of the words used by the legislature must be adopted. The Rule of strict interpretation in regard to penal statutes was enunciated in a judgment of a Constitution Bench of this Court in Tolaram Relumal Vs. State of Bombay [(1951) 1 SCR 158 = AIR 1954 SC 496] where it was held as follows:

“…It may be here observed that the provisions of Section 18(1) are penal in nature and it is a well settled Rule of construction of penal statutes that if two possible and reasonable constructions can be put upon a penal provision, the Court must lean towards that construction which exempts the subject from penalty rather than the one which imposes penalty. It is not competent to the Court to stretch the meaning of an expression used by the Legislature in order to carry out the intention of the Legislature. As pointed out by Lord Macmillan in London and North Eastern Railway Co. Vs. Berriman, “where penalties for infringement are imposed it is not legitimate to stretch the language of a rule, however beneficent its intention, beyond the fair and ordinary meaning of its language.

This principle has been consistently applied by this Court while construing the ambit of the expression ‘corrupt practices’. The Rule of strict interpretation has been adopted in Amolakchand Chhazed Vs. Bhagwandas; MANU/SC.0086/1976 : (1977) 3 SCC 566. A Bench of three Judges of this Court held thus:

“12….Election petitions alleging corrupt practices are proceedings of a quasi-criminal nature and the onus is on the person who challenges the election to prove the allegations beyond reasonable doubt.”

(iv) In such a situation even if two interpretations are possible, one that leans in favor of infringer has to be adopted, on the principle of strict interpretation that needs to be given to such statutes.

(v) When the agreement leading to contravention 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. This is also clear from the opening words of Section 27 read with Section 3 which relate to one or more specified products. It also defies common sense that though penalty would be imposed in respect of the infringing product, the ‘maximum penalty’ imposed in all cases be prescribed on the basis of ‘all the products’ and the ‘total turnover’ of the enterprise. It would be more so when total turnover of an enterprise may involve activities besides production and sale of products, like rendering of services etc. It, therefore, leads to the conclusion that the turnover has to be of the infringing products and when that is the proper yardstick, it brings home the concept of ‘relevant turnover’.

(vi) Even the doctrine of ‘proportionality’ would suggest that the Court should lean in favor of ‘relevant turnover’. No doubt the objective contained in the Act, viz., to discourage and stop anti- competitive practices has to be achieved and those who are perpetrators of such practices need to be indicted and suitably punished. It is for this reason that the Act contains penal provisions for penalizing such offenders. At the same time, the penalty cannot be disproportionate and it should not lead to shocking results. That is the implication of the doctrine of proportionality which is based on equity and rationality. It is, in fact, a constitutionally protected right which can be traced to Article 14 as well as Article 21 of the Constitution. The doctrine of proportionality is aimed at bringing out ‘proportional result or proportionality stricto sensu’. It is a result oriented test as it examines the result of the law in fact the proportionality achieves balancing between two competing interests: harm caused to the society by the infringer which gives justification for penalising the infringer on the one hand and the right of the infringer in not suffering the punishment which may be disproportionate to the seriousness of the Act.

No doubt, the aim of the penal provision is also to ensure that it acts as deterrent for others. At the same time, such a position cannot be countenanced which would deviate from ‘teaching a lesson’ to the violators and lead to the ‘death of the entity’ itself. If we adopt the criteria of total turnover of a company by including within its sweep the other products manufactured by the company, which were in no way connected with anti- competitive activity, it would bring about shocking results not comprehended in a country governed by Rule of Law. Cases at hand itself amply demonstrate that the CCI’s contention, if accepted, would bring about anomalous results. In the case of M/s. Excel Crop Care Limited, average of three years’ turnover in respect of APT, in respect whereof anti-competitive agreement was entered into by the appellants, was only 32.41 crores. However, as against this, the CCI imposed penalty of Rs. 63.90 crores by adopting the criteria of total turnover of the said company with the inclusion of turnover of the other products as well. Likewise, UPL was imposed penalty of 252.44 crores by the CCI as against average of the three years’ turnover of APT of Rs. 77.14 crores. Thus, even when the matter is looked into from this angle, we arrive at a conclusion that it is the relevant turnover, i.e., turnover of the particular product which is to be taken into consideration and not total turnover of the violator.

(vii) The doctrine of ‘purposive interpretation’ may again lean in favor of ‘relevant turnover’ as the appropriate yardstick for imposition of penalties. It is for this reason the judgment of Competition Appeal Court of South Africa in the Southern Pipeline Contractors Conrite Walls as quoted above, becomes relevant in Indian context as well inasmuch as this Court has also repeatedly used same principle of interpretation. It needs to be repeated that there is a legislative link between the damage caused and the profits which accrue from the cartel activity. There has to be a relationship between the nature of offense and the benefit derived therefrom and once this co-relation is kept in mind, while imposing the penalty, it is the affected turnover, i.e., ‘relevant turnover’ that becomes the yardstick for imposing such a penalty. In this hue, doctrine of ‘purposive interpretation’ as well as that of ‘proportionality’ overlaps.

In fact, some justifications have already appeared in this behalf while discussing the matter on the application of doctrine of proportionality. What needs to be repeated is only that the purpose and objective behind the Act is to discourage and stop anti-competitive practice. Penal provision contained in Section 27 of the Act serves this purpose as it is aimed at achieving the objective of punishing the offender and acts as deterrent to others. Such a purpose can adequately be served by taking into consideration the relevant turnover. It is in the public interest as well as in the interest of national economy that industries thrive in this country leading to maximum production. Therefore, it cannot be said that purpose of the Act is to ‘finish’ those industries altogether by imposing those kinds of penalties which are beyond their means. It is also the purpose of the Act not to punish the violator even in respect of which there are no anti-competitive practices and the provisions of the Act are not attracted.

We may mention that Mr. Kaul, learned Additional Solicitor General had referred to the statutory regimes in various other countries in his endeavor to demonstrate that it is the concept of total turnover which was recognized in other jurisdictions as well. The attempt was to show that the principle of ‘total turnover’ was prevalent across the globe wherever such laws are enforced. On the contrary, the learned counsel for the appellants pointed out the provision contained in similar statutes of some countries where the concept of relevant turnover had been adopted. South Africa is one such example and, in fact, COMPAT has referred to the judgment of Southern African Competition Appeal Court in this behalf, i.e., Southern Pipeline Contractors Conrite Walls (Pty) Ltd. case. In such a scenario, it may not be necessary to deal with the statutory provisions contained in different countries. In view of interpretation that is given by us to the provision at hand, we would, however, like to comment that in some of the jurisdictions cited by Mr. Kaul, learned Additional Solicitor General, the guidelines are also framed which ensure that the penalty does not become disproportionate, for example, in the UK, the Office of Fair Trade (OFT) has ‘guidelines as to the appropriate amount of penalty’. In contrast, there are no similar guidelines issued as far as India is concerned and in the absence thereof imposition of penalty, taking into consideration total turnover, may bring about disastrous results which happened in the instant case itself with the imposition of penalty by the CCI.

Thus, we do not find any error in the approach of the order of the COMPAT interpreting Section 27(b).

75) The upshot of the aforesaid discussion would be to dismiss the appeals of the appellants as well as the appeals filed by the CCI. There shall, however, be no order as to costs.