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By Mr. Dhruv Rajain (Partner at Cyril Amarchand Mangaldas) and Ms. Srishti Chhabra (Associate at Cyril Amarchand Mangaldas)
1. INTRODUCTION
The Competition Commission of India (CCI) was established under the Competition Act, 2002 (Act) with the primary objective of ensuring free and fair competition amongst businesses. The Act prohibits business practices which are in the nature of (a) collusion amongst competitors to fix prices, limit or control production, or divide markets, (b) anti-competitive vertical restraints imposed on market participants at different levels of the value chain (such as resale price maintenance and exclusivity obligations), and (c) abuse of dominant market position to the detriment of competitors and consumers. Further, the Act requires transactions (such as mergers and acquisitions), which breach financial thresholds prescribed under the Act, to be approved by the CCI before they are given effect.
The CCI is empowered to impose penalties for failure to comply with the provisions of the Act. Such penalties have the effect of imposing punitive sanctions for past/current non-compliance as well as having a deterrent effect for future non-compliance. Turnover-based penalties assume importance, especially in instances where an enterprise engaged in contravention of the Act did not record a profit during the period of contravention. Turnover-based penalties also assume importance in instances where officials of the non-compliant enterprise are sought to be penalised for their role in either giving effect to or not preventing contravention of the Act.
This article discusses the power of the CCI to levy penalties, the imposition of turnover based penalties, and the way turnover would be computed for the purpose of penalty computation.
2. POWER OF THE CCI TO LEVY PENALTIES
2.1 Turnover-based penalties
Penalties on enterprises: Under Section 27 of the Act, the CCI is empowered to impose a penalty of up to 10% of the average turnover of an enterprise for the preceding 3 financial years in the following cases:
(a) Contravention of Section 3(3): Collusion amongst competitors to fix prices, whether directly or indirectly, limit production or supply of goods or services, or allocation of markets amongst competitors. The CCI also has the discretion to impose a penalty of up to 10% of the aggregate turnover of the enterprise during the period of the collusion.
(b) Contravention of Section 3(4): Imposition of anti-competitive vertical restraints on market participants placed at different levels of the value chain. The Act provides an inclusive list of restraints that may be considered anti-competitive, such as tie-in or bundling arrangements, exclusivity obligations, resale price maintenance, and refusal to deal.
(c) Contravention of Section 4: Abuse of dominant position by an enterprise to adversely affect competitors or consumers in a ‘relevant market’ in favour of the dominant enterprise. A dominant enterprise is said to be abusing its position in cases involving the imposition of unfair or discriminatory prices, limiting or restricting production of either goods/services or scientific development of goods/services to the prejudice of customers, denial of market access to other market participants, imposition of unrelated contractual obligations, or leveraging of dominance in one relevant market to enter another relevant market.
Further, the CCI is empowered under Section 43A to impose a penalty of up to 1% of the turnover of the enterprise that either fails to seek the CCI’s approval for a transaction that breaches applicable thresholds or gives effect to the transaction prior to the CCI’s approval.
Penalties on individuals: Under Section 48 of the Act, relevant individuals within a non-compliant enterprise may also be penalised up to 10% of their average ‘turnover’ for the preceding three years, for either giving effect to or failing to prevent a contravention of Sections 3(3), 3(4), or 4. Further, in case of contravention of Section 3(3) of the Act, the CCI is empowered to impose a penalty of up to 10% of the individual’s aggregate ‘turnover’ during the period of the computation.[1]
Pertinently, the CCI’s power to impose a penalty on individuals was challenged in Mahyco Monsanto Biotech (India) (P) Ltd. v. CCI[2] before the Delhi High Court. It was argued that since an individual cannot be said to have any ‘turnover’ attributable to them, the CCI cannot impose penalties on individuals. In its 2018 judgment, the Delhi High Court held that the rule of purposive interpretation would have to be applied and held that an individual’s income would be considered their ‘turnover’.
In 2024, the CCI issued the CCI (Determination of Turnover or Income) Regulations, 2024 which further clarified that the income of an individual would be determined on the basis of their gross income (excluding income from capital gains and income from house property) as captured in the individual’s income tax returns filed in India.[3]Further, if the income tax returns of the individual are not available/required to be filed or if income tax returns are filed in multiple jurisdictions, the individual’s gross income would have to be certified by a Chartered Accountant and supported by an affidavit from the individual.[4]
2.2 Profit based penalties
In cases of collusion amongst competitors, the CCI’s penalty powers also include the power to impose a penalty of up to 3 times of the business’ profits during the period of collusion if it is higher than 10% of the average turnover of the business during the period of collusion.[5]
2.3 Asset based penalties
In cases involving failure to seek the CCI’s approval for a transaction or giving effect to the transaction prior to the CCI’s approval, the CCI’s penalty powers also include the power to impose a penalty of up to 1% of the asset value of the business which failed to comply if it is higher than 1% of the turnover of the business.[6]
3. COMPUTATION OF PENALTIES BASED ON TURNOVER
Over time, there have been various changes to the way turnover based penalties are computed:
(a) Rationalising the scope: ‘Relevant Turnover’
(i) The Supreme Court (SC) in its 2017 decision in Excel Crop Care Limited v. CCI[7] laid down the principles for the imposition of turnover based penalties for contraventions of Sections 3(3), 3(4) or 4 of the Act. The SC observed that the term ‘turnover’ would mean ‘relevant turnover’, i.e., the entity’s turnover pertaining to products and services that have been affected by such contravention and not the total turnover of the violator. The decision of the SC was premised on three factors, namely statutory interpretation, the doctrine of proportionality, and the absence of guiding principles.
(ii) Pertinently, the ‘relevant turnover’ principle would not be applicable in cases wherein a penalty is imposed under Section 43A for the failure to notify a transaction to the CCI or giving effect to a transaction prior to the CCI’s approval.
(b) Expanding the scope over time: Penalties on the basis of ‘global turnover’
The definition of “turnover” was amended vide Competition (Amendment) Act, 2023, through the addition of an explanation to Section 27(b), which defines the term “turnover” to mean ‘global turnover’ derived from all the products and services by a person or an enterprise. The imposition of penalty on the basis of global turnover is subject to the guidelines provided under the Competition Commission of India (Determination of Monetary Penalty) Guidelines, 2024 (Penalty Guidelines).
(c) Introduction of guiding principles: The Penalty Guidelines
In 2024, the CCI released the Penalty Guidelines to provide further clarity on the methodology for determining the penalty under Sections 27, 43A and 48 of the Act. For determination of penalty, the scheme of the Penalty Guidelines is, as follows:
(i) Penalties under Section 27 of the Act: As the first step, the CCI is required to compute the relevant turnover. As the second step, up to 30% of the average relevant turnover or average income would be considered as the base penalty. As the third step, the CCI may adjust the base penalty by considering the following factors:
(A) Nature and gravity of the contravention;
(B) Nature of the industry or sector affected because of the contravention and its implications on the economy; and
(C) Any other factor which the CCI may deem appropriate in the facts and circumstances of each case.
As the last step, the CCI may adjust the penalty amount further (subject to the legal maximum of 10% of the turnover[8]) after further considering the factors provided under paragraph 3(2) of the Penalty Guidelines. Pertinently, in cases where the CCI is of the view that the penalty amount computed is not sufficient to create deterrence, it may increase the penalty amount subject to the legal maximum.
Only in cases where it is not feasible to determine the relevant turnover for computing the penalty, the CCI may consider the global turnover derived from all products and services of the business.
(ii) Penalties under Section 48 of the Act: The CCI shall not impose a penalty of more than 10% of the average turnover or average income for the preceding three years of the individual liable for the anti-competitive conduct under Section 48(1) or 48(3) of the Act. Further, while determining the penalty, the CCI may give regard to the factors mentioned in paragraph 5(2) of the Penalty Guidelines.[9]
(iii) Penalties under Section 43A of the Act: The CCI may levy a penalty of up to 1% of the total turnover or assets or the value of transaction whichever is higher, of a combination under inquiry. The CCI may take into consideration the factors provided under paragraph 6(2) of the Penalty Guidelines, such as consummation or part-consummation of the transaction, violation of standstill obligations, non-furnishing of information, voluntary filing of notice, conduct of parties including voluntary disclosures, and cooperation with the CCI’s inquiry.
The factors provided in the Penalty Guidelines are general in nature and leave adequate room for flexibility and allow the CCI to consider other factors as they deem fit.
4. GLOBAL APPROACH ON PENALTIES
Comparative reference may be made to understand the global practices on penalty computations for competition law violations:
(a) The European Commission (EC) follows a two-pronged approach to impose penalties.[10] As a first step, the penalty is determined as per the set numerical formula and thereafter the EC considers several mitigating and aggravating factors to adjust the penalties to arrive at the final amount.
(b) The Competition and Markets Authority (CMA) in the United Kingdom follows a six-step process to impose penalties[11]. The process begins by calculation of a starting point[12] having regard to the seriousness of the infringement and the relevant turnover of the undertaking, followed by adjustments made relating to the (i) duration of the contravention; (ii) aggravating and mitigating factors; (iii) specific deterrence aimed to be achieved; (iv) ensuring proportionality and that the maximum penalty of 10% of the worldwide turnover of the undertaking is not exceeded; and (v) adjustments made for leniency[13], settlement discounts and approval of a voluntary redress scheme. Whilst the starting point for determining the penalties is the relevant turnover of the enterprise, the CMA may assess the aggregate turnover of the undertaking in the wider market beyond the UK if the turnover of the undertaking in the UK is very low or equal to zero[14].
5. CONCLUSION
Turnover-based penalties have been widely used by the CCI for maintaining competitive markets in India. By linking penalties to turnover, the fines reflect the economic size of the parties involved in anti-competitive conduct thereby ensuring that larger companies face appropriately substantial penalties. Though the step of revamping the penalty regime for the competition law framework is a welcome step, much is dependent on the interpretation of the Penalty Guidelines. Consistency and sound economic rationale behind the penalties can lead to a less litigious outcome in the future.
Disclaimer: This article is intended for general information purposes only and does not constitute legal advice. Please consult legal counsel for legal advice.
[1] The Competition Act 2002, s 27(b).
[2] Mahyco Monsanto Biotech (India) (P) Ltd. v. CCI 2018 SCC OnLine Del 12991.
[3] CCI, CCI (Determination of Turnover or Income) Regulations, 2024 4(1).
[4] CCI (n 3) Regulations 4(2) and 4(3).
[5] The Competition Act 2002, s 27(b).
[6] The Competition Act 2002, s 43A.
[7] Excel Crop Care Limited v. CCI (2017) 8 SCC 47.
[8] As per paragraph 2(f) “legal maximum” is the maximum amount of monetary penalty leviable under the relevant provisions of the Act.
[9] In determining the percentage of the average income to be considered in a given case, the CCI may have due regard to all or any of the following factors: -
(a) nature and gravity of contravention by the company, for whose conduct such person has been held liable under Section 48 of the Act;
(b) role, extent and duration of involvement of such person in the contravening conduct;
(c) extent of cooperation by the person during the Director General’s investigation or the CCI’s proceedings;
(d) repeated contravention;
(e) furnishing of cogent evidence showing that his or her involvement in the contravention was substantially limited; and/ or
(f) any other factor which the CCI may deem appropriate in the facts and circumstances of each case
[10] European Commission, Fines for Breaking EU Competition Law (Nov 2011).
[11] Competition and Markets Authority, CMA’s Guidance as to appropriate amount of penalty, 2021.
[12] The CMA will apply a starting point of up to 30% to an undertaking’s relevant turnover.
[13] CMA (n 11).
[14] CMA (n 11).
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