Supreme Court Says CCI’s Penalties Should Not Result In ‘Death Of The Entity’
Has the Supreme Court diluted the competition regulator’s penalty powers?
Among the first reasons why India’s fairly young competition regulator shot to fame was the headline grabbing penalties it imposed on those found guilty of violating competition law.
So if 14 car companies were fined Rs 2544 crore – 2 percent of the average turnover, Coal India was fined Rs 591 crore – 1 percent of turnover, DLF was Rs 630 crore – 7 percent of turnover... But now the Supreme Court has clipped CCI’s penalty wings.
The genesis of this debate can be traced back to 2013 when the Competition Appellate Tribunal (COMPAT), in Excel Crop Care’s case, had interpreted the Competition Commission of India’s (CCI) penalty powers. In this case, the CCI had imposed a penalty on Excel Crop and two other manufacturers of aluminium phosphide tablets based on each company’s average turnover over three years.
While the COMPAT upheld CCI’s finding of cartelisation and collusive bidding by the three companies, it reduced the penalty amount on grounds that the relevant turnover and not total turnover should be the basis of penalty.
The penalty cannot be on the ‘total turnover’ of these establishments, and has to be restricted to 9 percent of the ‘relevant turnover’, i.e. the turnover in respect of the quantum of supplies made qua the product for which cartel was formed and supplies made. In other words, it had to relate to the goods in question, namely, APT (aluminium phosphide tablets), and turnover of other products manufactured and sold by the establishments, which were without blemish, could not be included for calculating the penalty.COMPAT Order, Excel Crop Care & Others
But this COMPAT order failed to deflect CCI’s penalty shots.
Avaantika Kakkar, a competition law partner at law firm Khaitan & Co. told BloombergQuint that industry was repeatedly surprised that even after the Excel Crop judgment of the COMPAT, the CCI was calculating penalties on total turnover of the enterprise that would include completely unrelated businesses.
We’ve often asked the CCI - has the COMPAT order been stayed by the Supreme Court? But that question remained largely unanswered during the hearing.Avaantika Kakkar, Partner, Khaitan & Co.
This week the Supreme Court of India answered what the CCI refused to.
SC: Turnover vs Relevant Turnover
In interpreting the CCI’s penalty imposing powers under Section 27 of the Competition Act, 2002, the apex court applied the principle of equitable consideration and proportionality.
Principle of Equitable Consideration
It pointed out that the law allows imposition of penalty under two circumstances:
- An anti-competitive agreement
- Abuse of dominant position
The apex court stated that the anti-competitive nature of an agreement between persons or enterprises may relate to a particular product, even when such persons or enterprises have production in more than one product. And that if penalties are calculated on total turnover, it would lead to inequitable results.
Principle of Proportionality
The Supreme Court pointed out that while the objective of the Competition Act is to stop anti-competitive practices and punish the perpetrators, penalties cannot be disproportionate. Otherwise, the apex court added, excessively high fines may over-deter, by discouraging potential investors, which is not the intention of the Act.
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 well established by this Court that the principle of proportionality requires the fine imposed must not exceed what is appropriate and necessary for attaining the object pursued.Supreme Court, Excel Crop Care & Others
Ravi Nair, a competition law partner at law firm ELP told BloombergQuint it’s a welcome judgment and that now industry has the clarity it’s been looking for.
This won’t have a retrospective effect on penalties that have been paid but on penalties that are in appeal before the COMPAT and if the parties have argued this point, the Supreme Court order will have an impact. But if this argument has not been made in a pending case, the parties will have to weave it in now and move amendment applications.Ravi Nair, Partner, ELP
Kakkar too welcomed the apex court’s conclusion. CCI regularly dealt with multi-product companies and if it found a department or a vertical guilty, it asked the whole corporation to pay for it; that didn’t result in any equitable outcome, she added.
Competition Act is not a law of damages where deep pockets are supposed to compensate victims of a wrong. It’s a penal consequence.Avaantika Kakkar, Partner, Khaitan & Co.
While the apex court has made the distinction for multi-product companies, some lawyers are wondering if this will result in a narrow determination of relevant turnover.
Nair said the determination will have to be a logical one.
It can’t be that if you’re looking at, for instance, high-end residential apartment as the relevant market, you look at the turnover of only high-end residential apartment. May be you can say turnover in the National Capital Region as opposed to national turnover. So you’ll have to craft those arguments.Ravi Nair, Partner, ELP
Scope Of Investigation
Besides the issue of penalty, this apex court order clarifies another contentious area between industry and the CCI. And that is the scope of the CCI Director General’s (DG) investigation.
The three manufacturing companies had argued that the DG had exceeded its brief by examining tenders that the CCI had not directed it to do. The apex court dismissed this argument saying this interpretation would defeat the purpose of investigation.
…the starting point of inquiry would be the allegations contained in the complaint. However, while carrying out this investigation, if other facts also get revealed and are brought to light, revealing that the ‘persons’ or ‘enterprises’ had entered into an agreement that is prohibited by Section 3 which had appreciable adverse effect on the competition, the DG would be well within his powers to include those as well in his report.Supreme Court
Kakkar said that this would enable the regulator to conduct a thorough investigation. She pointed out that companies often resisted any such expansion of investigation by filing writs with high courts alleging that the regulator was exercising discretion in an unreasonable manner. Now, that will be difficult to do so, she added.