On 8 May, 2017, in a landmark judgment, the Hon’ble Supreme Court (bench consisting of Hon’ble Mr. Justice A.K. Sikri and Hon’ble Mr. Justice N.V. Ramana) upheld the principle of “relevant turnover” for determination of penalties in competition law contraventions; and settled a critical issue in India’s antitrust jurisprudence, which was heavily debated amongst all stakeholders for over five years.
The above ruling arises out of a proceeding involving an alleged contravention of Section 3(3) of the Competition Act, 2002 (Competition Act) in the public procurement of Aluminium Phosphide (ALP) Tablets by the Food Corporation of India (FCI). The Competition Commission of India (CCI) found a violation of Section 3(3) of the Competition Act and imposed a penalty at the rate of 9% of the total turnover of the concerned ALP manufacturers – namely, Excel Corp Care Limited (Excel), United Phosphorus Limited (UPL) and Sandhya Organic Chemicals Private Limited (Sandhya).
The Competition Appellate Tribunal (COMPAT) in its final order upheld the CCI’s order as to the existence of the contravention under the Competition Act. However, it significantly reduced the penalties imposed by the CCI. COMPAT’s modification of penalties was based on the principle that the reference to the term “turnover” in Section 27(b) of the Competition Act would, in the facts and circumstances of the case, mean “relevant turnover”, i.e. turnover derived from the sales of goods or services, which are found to be the subject of contravention.
COMPAT’s order was challenged by the CCI before the Supreme Court. CCI contended that the term “turnover” as used in the Competition Act must always be interpreted as “total turnover” of the enterprise in contravention. The CCI contended that the COMPAT had added words to the Competition Act by inserting the word “relevant” before the term “turnover”. ALP tablets manufacturers, led by Excel, on the other hand, opposed the same by contending that it was the interpretation extended by the CCI, which led to adding the word “total” or “entire” before the term “turnover”.
Ultimately, the Supreme Court held that the imposition of penalty adopting the criteria of “relevant turnover” will be “more in tune with ethos of the Act and the legal principles which surround matters pertaining to imposition of penalties.”
Role of Equity in Penalty Imposition
The Supreme Court held that accepting the CCI’s interpretation of the term “turnover” as “total turnover” in all situations would “bring about very inequitable results”. Relying on various judgments stating that interpretation that brings out inequitable or absurd results has to be eschewed, the Supreme Court held that the interpretation extended by CCI does not commend acceptance.
In this regard, the Supreme Court took note of illustrations demonstrating that imposition of penalty on the basis of “total turnover” in all cases would inequitably discriminate against enterprises committing the same contravention depending on the manner in which their product/business lines are structured.
The Supreme Court also justified its conclusion and found that the principle postulating strict interpretation of “penal” statutes would also support and supplement the consideration of “relevant turnover” rather than “total turnover”.
In light of the principle of strict interpretation (relying on a recent Constitution Bench decision in Abhiram Singh and Ors v C.D. Commachen (Dead) by L.Rs and Ors) the Supreme Court held that, “even if two interpretations are possible, the one that leans in favour of infringer has to be adopted” and that there was “no justification for including other products of an enterprise for the purpose of imposing penalty” when the agreement leading to contravention involves one product.
Proportionality and Purposive Interpretation
As regards the arguments of the CCI on the objective to discourage and stop anti-competitive practices, the Supreme Court held, “the penalty cannot be disproportionate and it should not lead to shocking results”. It was held that the aim of deterrence cannot be justified to give an interpretation that may lead to “the death of the entity” itself. The Supreme Court emphasised that the doctrine of proportionality, which is based on equality and rationality, is a “constitutionally protected right which can be traced to Article 14 as well as Article 21 of the Constitution”.
The Supreme Court noticed that the doctrine of purposive interpretation and doctrine of proportionality have certain overlaps. It held that the purpose of the Competition Act cannot be to “finish” certain enterprises. Relying on the South African judgment in Southern Pipelines, the Supreme Court repeated that “there is a legislative link between the damage caused and the profits which accrue from the cartel activity”. Accordingly, the purposive interpretation of the term “turnover”, the Supreme Court found, also favours consideration of “relevant turnover”.
The concurring judgment by Hon’ble Mr. Justice N.V. Ramana held that “proportionality needs to be imbibed into any penalty imposed under Section 27” of the Competition Act. Accordingly, it laid down step-wise methodology to be followed by the CCI in imposing penalties.
Step-wise Methodology for Penalty Imposition
Step 1: Determination of Relevant Turnover
“Relevant turnover” refers to the “entity’s turnover pertaining to products and services that have been affected by such contravention”. The Supreme Court has clarified that the above definition is not exhaustive.
Step 2: Determination of Appropriate Percentage of Penalty Based on Aggravating and Mitigating Circumstances
The Supreme Court provided an illustrative list of factors to be considered when determining such percentage.
Final Step: The penalty imposed “should not be more than overall cap of 10% of the entity’s relevant turnover”.
The Supreme Court’s approach in this judgment indicates a healthy respect for foreign jurisprudence, which is tempered by the motivation to evolve indigenous jurisprudence based on, and appropriate to, the Indian constitutional and legal framework.
- The judgment lays the foundation for penalty imposition under the competition law regime in India, leading to greater certainty and transparency in penalty imposition. The same will benefit all stakeholders functioning within the framework of the Competition Act.
- This judgment, from the highest court of the land, is likely to be followed in all cases where the issue of “relevant turnover” is pending or raised either before the DG/CCI or at the Appellate Stage or even before the Supreme Court itself.
 The provision authorizing CCI to impose penalties in case of contraventions of Section 3 or Section 4 of the Competition Act.
 AIR 2017 SC 401.
* Cyril Amarchand Mangaldas represented Excel Crop Care Limited
** The author was assisted by Anu Monga, Principal Associate