Analysing the impact of SC verdict, curtailing CCI’s penal powers

November 14,2017
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Apurv Sardeshmukh (Partner, Legasis Partners)

Background:

The Competition Act, 2002 (‘Act’) has provided the Competition Commission of India (‘CCI’) with wide ranging powers. Under Section 27 of the Act, the CCI can impose penalties on entities which have entered into anti-competitive agreements or abused their dominant position in the market. The Act provides that, the CCI as it deems fit, can impose such penalty, which shall be not more than ten per cent of the average of the turnover for the last three preceding financial years of the entity which has been party to such agreements or abused their dominant  position.

Section 27 gained prominence recently when the CCI passed an order against Excel Corporation Care Limited, United Phosphorus Limited, Sandhya Organics Chemicals Private Limited. Ltd. and Agrosynth Chemicals Limited (‘Affected Companies’) and imposed a penalty of 9% of average 3 years of the “total turnoverof the Affected Companies  under Section 27(b) of the Act in relation to anti- competitive agreements entered by the  Affected Companies. The CCI investigated the arrangements between the Affected Companies on the basis of a letter by the Food Corporation of India to the CCI alleging that the Affected Companies had formed a cartel by entering into an anti-competitive agreement amongst themselves and submitted their bids for eight years by quoting identical rates in the tenders invited by the FCI for the purchase of Aluminium Phosphide tablets.

The Affected Companies approached the Competition Appellate Tribunal (‘COMPAT’) by way of separate appeals. By a common order, dated October 29, 2013, COMPAT held that in case of multi-product companies, only “relevant turnover” of the product/service in question should be taken into consideration while imposing penalty. Aggrieved by the order of the COMPAT, CCI preferred an appeal in the Supreme Court.  The Supreme Court vide its judgement dated May 8, 2017 restrained the penalty imposed by the CCI on the Affected Companies and held that where the CCI was justified in imposing a penalty under Section 27(b) of the Competition Act, 2002 (“Act”) on the Affected Companies, the penalty imposed should only be calculated on the turnover relevant to a case in dispute and not their overall turnover as directed by the CCI.

Analysis of Section 27 and the Supreme Court Judgement:

It has been corporate India’s major grouse that the CCI has been inconsistent in levying penalties in cases where it has found companies guilty of anti-competitive practices.  It has been seen that the CCI has failed to provide reasons for the amount of fines imposed in many cases. It has been often observed that imposition of fines  were required to be supported with more robust reasons and consideration when imposing penalties.

Section 27 of the Act uses the term ‘average of the turnover’ and does not specify that the turnover has to be with respect to the acts or agreements in question.  The Supreme Court in its ruling in the present case also observed the same and stated that Section 2(y) of the Act which defines the term ‘turnover’ 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.

The CCI contended that penal provisions have to be strictly interpreted and hence turnover should mean overall turnover and not relevant turnover.  The counter argument for that (which was used by the Affected Companies as well) is that punishments should always be based on the universal principle of proportionality and hence, including the turnover of the company which did not relate to the acts in question would be absurd.

Foreign Competition laws have always calculated penalties taking into account the relevant turnover with respect to the act for which the penalty has been imposed and not the entire turnover of the Company. The European Union guidelines enumerate that the penalty in case the principles of competition law are violated, should be calculated on the relevant turnover of a company and not the overall turnover. The Supreme Court referred to these guidelines as well as to a judgment of the Competition Appeal Court of South Africa in the case of Southern Pipeline Contractors Conrite Walls (Pty) Ltd. v. The Competition Commission. The Supreme Court observed that the case revealed 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.

It must be noted that Section 27(b) of the Act allows the CIC to impose such penalty, “as it may deem fit” which shall be not more than ten per cent. It was only vide an amendment in 2007 that the word ‘shall’ in section 27 (b) was replaced by the word ‘may’. The intention of the amendment was to confer discretion upon the commission to impose appropriate penalty.  However, the Supreme Court Judgement which states that the penalty imposed under section 27 should only be calculated on the turnover relevant to a case in dispute and not their overall turnover, may act as a catalyst in removing the discretionary power given to the CCI under section 27 (b).

Impact of the judgement:

The Supreme Court judgement might lead to clarity in relation imposition of penalties under section 27 of the Act. Certain observations of the Supreme Court will also lay down grounds on how penalties should be imposed under section 27 of the Act.   For instance in its judgement, the Supreme Court has observed that where penal provisions have to be interpreted, the interpretation should not be absurd in nature.

The judgement may also act as a source of relief for some companies. CCI has fined several entities for anti-competitive practices in the last three years or so. In 2014 the CCI had imposed a penalty of Rs. 2,554 Crores on 14 car companies. In 2016 the CCI had imposed a penalty of Rs. 6,715 Crores on 11 cement companies. Earlier this year the CCI had imposed a penalty of Rs. 591 Crores on Coal India. The Supreme Court Judgement might encourage a few of these entities to appeal against the CCI order and seek revision or alteration of the fines imposed on them.

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