On 8 May 2017, the Supreme Court of India (Supreme Court) decided the appeals preferred by Excel Crop Care Limited and others, affirming the concept of “relevant turnover” while imposing a penalty under Section 27 of the Competition Act, 2002 (as amended) (Competition Act).
The Competition Commission of India (CCI) had imposed penalties on Excel Crop Care Limited, United Phosphorus Limited and Sandhya Organic Chemicals (P) Limited (Appellants) at 9% of the total turnover of the companies of the last three years i.e., INR 317.91 crore, who were found to have indulged in bid rigging while participating in the tenders issued by the Food Corporation of India (FCI) for supply of Aluminum Phosphide Tablets.
In the first appeal, the Competition Appellate Tribunal (COMPAT) rejected Appellants’ case on merits. However, the COMPAT found that that the penalties imposed by the CCI were unreasonable and revised the penalties to 9% of the average “relevant” turnover i.e., the turnover in respect of the quantum of supplies made with respect to the affected product to which the cartel related. The Appellants were then required to pay penalties of INR 10.02 crore.
The Appellants as well as the CCI approached the Supreme Court in appeal. While the Appellants challenged the findings of the COMPAT on merits, the CCI’s appeal was limited to the question of imposition of penalties. The Appellants argued that the purported bid rigging took place in March 2009 i.e., prior to 20 May 2009, the date of the enforcement of Section 3 of the Competition Act and the Competition Act did not apply to the conduct. The Supreme Court held that even though the bids were submitted before 20 May 2009, the bid was not completed by 20 May 2009 and since the effects of the infringement continued post the enforcement of the Competition Act, the statute was applicable and the CCI did have jurisdiction over the conduct of the Appellants and its effects.
The Appellants also challenged the jurisdiction of the Director General (DG) and the CCI to investigate the boycott of the 2011 tender by the Appellants since the FCI had not complained about that tender. The Supreme Court held that when the CCI forms a prima facie opinion on receipt of a complaint and directs the DG to conduct the investigation, the CCI cannot foresee and predict every violation of the Competition Act that would be found upon investigation. Thus, the investigation process must not be restricted so that it would defeat the very purpose of the Competition Act.
On merits of the case, the Supreme Court relied on the past identical bid prices in other unrelated tenders, being illustrious of mens rea of the Appellants and concluded that the Appellants had violated the Competition Act by engaging in collusive bidding which continued until 2011.
While deciding the issue of the quantum of penalties, the Supreme Court held that the correct parameter for imposing penalty should be the “relevant” turnover rather than the “total” turnover of a person or enterprise. The Supreme Court found the interpretation limiting the penalty to “relevant” turnover to be “more in tune with ethos of the Competition Act and the legal principles which surround matters pertaining to imposition of penalties”. It also relied upon the fining principles evolved in jurisdictions such as the European Union, United Kingdom and South Africa. Among others, the following factors weighed in favour of ruling that “relevant” turnover rather than “total” turnover should be the appropriate basis for fining:
- A violation of the Competition Act must relate to an “agreement”, which in turn relates to particular product(s) even when there are other unaffected products, which must not be subject to inequitable treatment;
- Interpretation which brings out inequitable or absurd results has to be eschewed;
- If two interpretations are possible, one that leans in favour of infringer has to be adopted on the principle of strict interpretation of penal provisions;
- It defies common sense to fine companies based on products/services that do not contribute to the infringement;
- Under the doctrine of proportionality, the penalty cannot be disproportionate and it should not lead to shocking results;
- Applying the doctrine of “purposive interpretation” the nature of contravention and benefit derived therefrom must form the basis of penalizing; and
- Section 27 of the Competition Act 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.
Consequently, the penalties imposed by the COMPAT on the basis of relevant turnover were upheld by the Supreme Court.
Justice N. V. Ramana, by a separate concurring order, held that while imposing penalty, the statutory discretion should be governed by “rule of law” and not by “arbitrary, vague or fanciful considerations”. Further, the principle of proportionality requires the fine imposed must not exceed what is appropriate and necessary for attaining the object pursued. A two-step process should be followed while imposing a penalty under Section 27 of the Competition Act. As a first step, the appropriate relevant turnover should be determined and at the second step the appropriate percentage of penalty should be determined based on facts and circumstances of the case. The concurrent opinion elucidates certain illustrative factors that should be considered in determining the percentage of the penalty, including the role played by the infringer, the duration of the conduct, intensity of the participation, loss or damage suffered etc.
This decision now indisputably binds the CCI to limit its fining to “relevant” turnover. The CCI had continued to fine companies on the “total” turnover of corporations, despite several rulings from the COMPAT that penalties must be based on “relevant” turnover.
This comes as a big relief to large multi-product companies where the infringement may relate to a small product line. This order also clarifies that the penalties under the Competition Act must not be arbitrary and should be based on established canons of proportionality and that the CCI must consider aggravating and mitigating factors surrounding a particular case. The Supreme Court also clarified some of the finer issues such as the scope of investigative powers of the DG when the allegations under the complaint are limited and the jurisdiction of the CCI over anti-competitive conduct prior to the enforcement of the Competition Act, all having far reaching consequences on the functioning of the CCI in future cases and also those cases pending appeal at the COMPAT.