It is true that competition is healthy for any market in the world. It forces the parties in the market to adopt innovation and research & development to keep themselves alive in the Market. It leads to the growth of the market which ultimately ensures the growth of any nation. But it becomes unhealthy when the competition is not maintained in a legal manner which brings instability in the market.
Indian Competition law framework has come a long way in the previous five years. It is now at par with various developed nations’ legal systems. From the Monopoly and Restrictive Trade Policies ( MRTP ) Act to the Competition Act, it has witnessed a lot of amendments and landmark cases to cater to the present needs and has been established as one of the remarkable Competition laws in the world.
The Supreme Court decision in the case of Excel Crop Care Ltd. Vs. Competition Commission of India led to the new development in the Competition law framework wherein for the first time, the concept of relevant turnover was discussed. The Supreme Court, while limiting the penalty power of CCI, ruled that the penalties imposed on the parties involved in anti-competitive practices should be calculated on the basis of “relevant turnover” instead of “total turnover”.
Relevant turnover refers to the turnover of the product in respect of which provisions of the Act were contravened whereas total turnover refers to the entire turnover of the offending company consisting of all the products.
To maintain the smooth functioning of the market and to allow everyone to participate in it, India prohibited companies from executing Anti-Competitive Agreements. Anti-Competitive Agreements could be in the form of Horizontal or Vertical. Section 3 of the Competition Act, 2002 deals with the Anti-Competitive Agreements.
Horizontal Agreements are those agreements which are formed among the parties having similar or identical trade of goods or services or are at the same line of chain. Cartel is the prime example of the Horizontal Agreements. These Agreements could also be formed among the rival parties to determine the sale prices or to do bid rigging or collusive rigging.
Horizontal Agreements could be in the form of mere understanding among the parties or in the form of practice or decision taken by them. Horizontal Agreements prima facie affects the market and hence it is not necessary to prove the Appreciable Adverse Effect on Competition ( AAEC ), unlike the Vertical Agreements where it has to be proved.
In the present case between Excel Crop Care Ltd. Vs. Competition Commission Of India, the petitioner along with three other companies were the only bidders of the government tender of Aluminum Phosphide Tablets ( APT ) for many years. As there were only four companies which used to bid for APTs, they undertook the practice of quoting identical prices during bidding for many years and refrained from bidding whenever they found the bidding price to be high.
Further, The companies used to quote higher prices even if the raw material cost in the market gets reduced which led to the determination of price by the parties. The Supreme Court referred to the case of U.K. Court of Justice in Dyestuffs,1 wherein it was held that “Although parallel behaviour may not itself if identified with a concerted practice, it may, however, amount to strong evidence of such a practice.”
The Supreme Court relied on the above case and held that the companies are in violation of Section 3 of the Act as they formed a cartel among themselves which undertakes the concerted practice of Bid Rigging and determination of price.
Section 27(b) of the Competition Act, 2002 provides for the imposition of penalty on the parties which are found in contravention of Section 3 and 4 of the Act. The Act provides that penalty upto 10% of the average of the turnover for the last three preceding financial years.
In the Excel Corp case, the CCI imposed the penalty of 9% on the average total turnover of preceding three years on the companies under Section 27(b) of the Act which was modified in the order of the COMPAT wherein the penalty was imposed on the ‘relevant turnover’ instead of the ‘total turnover’. CCI challenged the order in the Supreme Court to challenge the COMPAT decision to impose the penalty on the relevant turnover.
The SC upheld the decision of the COMPAT and settled a critical issue which was the bone of contention for a very long time. It laid down two-step procedures to determine the quantum of penalty that should be imposed on the parties. The first step deals with determining the relevant turnover of the company, while the second step deals with the determination of the appropriate percentage of the penalty based on mitigating and aggravating factors.
The ruling of the Supreme Court in the present case came as a relief to many corporate bodies as well as the CCI and COMPAT. The following are the key takeaways from this case :
Scope of Director General Investigations
In the instant case, the companies challenged the decision of the COMPAT on the ground that the Director-General does not possess the power to investigate the FCI tender for the year 2011 because the informant in its initial letter did not mention it. Also, the order passed by the CCI under Section 26(1) of the Act to direct the Director-General to investigate did not talk about the 2011 FCI tender.
The Supreme Court completely agreed with the decision of CCI and the view taken by COMPAT while upholding the decision. The COMPAT took the view that the DG has the power to investigate the 2011 FCI tender and accepted that DG must record its findings. The COMPAT held that the scope of investigations depends on the language of the CCI’s orders. In this case, the language of CCI’s order was broad enough to allow DG to investigate the tenders beyond 2009.
The Supreme Court went one step ahead of the COMPAT decision and gave certain findings, regarding the scope of investigations done by DG, which were not limited to the current case but to the investigations done by the DG generally.
The SC has found that the purpose of a DG investigation is to “cover all necessary facts and evidence in order to see as to whether there are any anti-competitive practices adopted by the persons complained against”. Therefore, “the starting point of the inquiry would be the allegations contained in the complaint” but during the course of the investigation “if other facts also get revealed and are brought to light”, according to the SC, “the DG would be well within his powers to include those as well in his report”.
The SC has decided the above on the basis that at the initial stage, the CCI “cannot foresee and predict whether any violation of the Act would be found upon the investigation and what would be the nature of the violation revealed through investigation”. Accordingly, the SC holds that a restriction of the investigation process “would defeat the very purpose of the Act”.2
The Supreme Court, by its order, broadened the scope of the investigations done by the DG. It had a far-reaching impact on the nature of investigations being conducted by the DG. It was expected that this ruling would be relied on in various judgements in the coming time and it stood by its expectations and was relied on by various High Courts and Tribunals.
The Delhi High Court in the case of Cadila Healthcare Ltd. v. Competition Commission of India3 relied on the Excel case and broadened the scope of DG’s investigation by granting power to add the other parties into the investigations. Similarly in the Madras High Court case of Hyundai Motor India Ltd. v. Competition Commission of India4, the court relied on the Excel case and found that investigation of parties who were not mentioned in the complaint is within the jurisdiction of DG’s investigation power.
The companies were found violative of Section 3 of the Act on the grounds that their prices were identical which suggested the cartel among the parties. The companies defended themselves by contending that there are very few manufacturers of the APTS and therefore the identical pricing is a natural occurrence.
The Court held that it cannot be a coincidence that the prices quoted by all the bidders on almost every tender are exactly the same. Also, all the companies are situated in different parts of the country and hence their cost of production would definitely vary from each other and so does profit margin. The court also noted that for every tender different price were quoted but still the price quoted by all the parties in a single tender was always identical.
The Court found these evidence sufficient enough to prove that there is a cartel among the parties and concluded with upholding the decision passed by the COMPAT.
Relevant Turnover Vs. Total Turnover
Excel Crop case became a landmark case in the history of Competition law as for the first time the concept of relevant turnover was discussed in detail by the apex court which cleared the much-debated ambiguity between relevant turnover and total turnover.
The CCI in the present case passed an order under Section 27(b) of the Act imposing the penalty of 9% on the average turnover of the preceding three years. The COMPAT held that the penalty would be levied on relevant turnover and not total turnover which was accepted by the Supreme Court.
The Supreme Court held that “Section 2(y) which defines `turnover’ does not provide any clarity to the aforesaid issue. It only mentions that turnover includes the value of goods or services. In the absence of specific provision as to whether such turnover has to be product-specific or entire turnover of the offending company, we find that adopting the criteria of `relevant turnover’ for the purpose of imposition of penalty will be more in tune with ethos of the Act and the legal principles which surround matters pertaining to imposition of penalties.”
Further, the Court discussed the following doctrines to clear the ambiguity between the relevant and total turnover :
The Doctrine of Proportionality:
The Supreme Court applied the doctrine of proportionality to strike a balance between the object of the Act to discourage anti-competitive practices and the right of the infringer in not suffering the punishment which may be disproportionate to the seriousness of the Act. The Act seeks to penalize offenders of the Act. However, the Court held that the penalty should not be disproportionate and offenders should be suitably punished.5
The doctrine of Purposive Interpretation:
The Supreme Court applied the doctrine of ‘purposive interpretation’ to state that “there was a legislative link between the damage caused and the profits which accrue from the cartel activity.” Further, the Court stated that “there had to be a relationship between the nature of offence and the benefit derived from such offence. Therefore, keeping in mind such co-relation, the affected turnover, i.e., ‘relevant turnover’ becomes the yardstick for imposing a penalty.”
The Supreme Court came up with a two-step procedure to determine the relevant turnover and the quantum of penalty under Section 27 of the Competition Act, 2002 :
Step 1: Determination of Relevant Turnover
“At this point of time, it needs to be clarified that relevant turnover is the entity’s turnover pertaining to products and services that have been affected by such contravention. The aforesaid definition is not exhaustive. The authority should have regard to the entity’s audited financial statements. Where audited financial statements are not available, the Commission may consider any other reliable records reflecting the entity’s relevant turnover or estimate the relevant turnover based on available information.”
Step 2: Determination of appropriate percentage of penalty based on aggravating and mitigating circumstances
“After such initial determination of relevant turnover, commission may consider appropriate percentage, based on facts and circumstances of the case and by taking into consideration various factors such as the nature, gravity, extent of the contravention, role played by the infringer, the duration of participation, the intensity of participation, loss or damage suffered as a result of such contravention, market circumstances in which the contravention took place, nature of the product, market share of the entity, barriers to entry in the market, nature of involvement of the company, bona fides of the company, profit derived from the contravention etc. But such a penalty should not be more than the overall cap of 10% of the entity’s relevant turnover.”
The Supreme Court has solved the problems of many cases that are pending in the Tribunals or Courts due to the ambiguity. The concept of relevant turnover is just and would be much appreciated by the corporate sector. There are various companies which deal with multiple products and if the company violated norms of competition law with respect to a single product, the penalty should not be levied on the total turnover because not only would it be unjust but also bring out inequitable results.
The Supreme Court while delivering this landmark judgement provides relief to the multi-product enterprises by limiting the extent of penalties that can be imposed by CCI. The Supreme Court has laid down the foundation for penalty imposition under the competition law regime in India with this judgment. It leads to greater certainty and transparency in the imposition of penalty by the courts. It benefitted all the stakeholders present within the Act and is followed and relied upon various courts and tribunals to determine the issue of relevant turnover.
Further, the judgment not only clarifies the ambiguity of the term ‘turnover’ to mean relevant turnover but has also provided an illustrative list of factors to be considered while determining the percentage of penalty. Companies now have been saved from being imposed extortionately high amounts of penalty which would have been not proportionate to the offence committed by them.
However, companies which have gained high amounts of profits by practising anticompetitive activities could be liable for up to three times of profit for each year the company has made under proviso of Section 27(b) of the Act. These could be possible when the profits exceed 10% of turnover of the company.
- (1972) ECR 619
- 2018 SCC OnLine Del 11229
- Competition Appeal (AT) No. 6 of 2017, decided on 19-9-2018.
Student, NLIU, Bhopal
Archit Jain is a 4th-year law student at National Law Institute University, Bhopal. He has developed his interest in corporate and commercial laws and is very enthusiastic and keen at making a career out of it. Apart from the corporate, he has an interest in Antitrust/Competition Law as well. For any Clarifications, feedback, and suggestion, you can reach him at firstname.lastname@example.org