CCI (Determination of Monetary Penalty) Guidelines, 2024: A Long-Awaited Move

[Srishti Multani, Amritanshu Pushkar, and Aryan Birewar are 4th Year BBA LLB (Hons.) students at Symbiosis Law School, Pune]

On March 6, 2024, the Competition Commission of India (‘CCI’) notified the CCI (Determination of Monetary Penalty) Guidelines, 2024 (‘Guidelines’) to help the CCI determine the penalty to be imposed for infractions of the Competition Act, 2002 (‘Act’). They provided the much-needed clarity on the methodology, amount, and factors to be considered while computing the penalty. While these guidelines, issued under section 64B of the Act, are not binding, they have laid down a transparent framework for levying penalties.

A day before the notification of the Guidelines, the Ministry of Corporate Affairs (‘MCA’) notified the amended sections 27 and 48 via the Competition (Amendment) Act, 2023 (‘Amendment Act’). Post this, ‘turnover’ in the context of determining the penalty will be substituted with ‘global turnover’, referring to the turnover derived from all the goods and services provided by an enterprise. This amendment marks a radical departure from the erstwhile position of the penalty framework, wherein turnover was interpreted as the ‘relevant turnover’ of the enterprise, referring to the turnover derived from the products or services in violation only.

This post provides a prelude to the turnover debate, punctuating the shortcomings in both the approaches, and discusses the clarifications provided by the Guidelines.

Supreme Court’s Ruling in Excel Crop Care Ltd. v. CCI

The Act had not clarified the scope of the turnover referred to in section 27(b). The judiciary was urged to intervene and delineate the necessary scope.

In this case, three enterprises involved in bid-rigging for tenders were penalized based on 9% of their global turnover. Two of these enterprises functioned as multi-product enterprises, whose contravening business represented a minor portion of their total business. In light of these facts, the three-judge bench of the Supreme Court ruled that ‘turnover’ in section 27(b) of the Act refers to relevant turnover and not global turnover. The court placed reliance on two doctrines –

The doctrine of proportionality, which is based on the principles of equity and rationality, proposes that global turnover will lead to shocking and disproportionate results. It seeks to attain a balance between the harm caused to society by the contravener and the right of the contravener to not be subject to a disproportionate punishment. Having said this, if the aim of section 27 is to prevent anti-competitive practices, this is effectively achieved through imposing penalties based on relevant turnover. In contrast, penalties based on global turnover compel enterprises to pay amounts beyond their financial capacity.

The doctrine of purposive interpretation involves deciding the intention of the legislation by examining its purpose and objective. This approach allows the interpreter to look beyond the strict letter of the law to achieve a just and reasonable outcome that upholds the legislative intent. The Supreme Court concurred with the findings of the South African Tribunal in the case of South African Pipeline Contractors Conrite Walls (Pty) Ltd. v. Competition Commissionto observe that there must be a ‘legislative link’ between harm caused and profits derived. Having considered this correlation, while imposing the penalty, it is the relevant turnover that comes out to be the correct yardstick.

Drawbacks of Relevant Turnover

While the Excel Crop Care ruling defined the scope of section 27(b) from the lens of proportionality and purposive interpretation, some drawbacks were yet to be addressed.

Big-Tech Sector

The CCI took a contrarian stand to Excel Crop Care in the case of v. Google, where it noted that applying relevant turnover in multi-sided markets defeats the object of the Act, and hence, the entire platform must be viewed as a single or whole unit. An apt example was also quoted in XYZ v. Alphabet Inc. – “Google is a platform that does not generate any revenue from its search engine component; its primary source of revenue is from the advertising space”. Additionally, in MMT-GoIbibo, the CCI reiterated that the relevant turnover approach is viable in traditional markets; however, in digital/tech markets where the segments are minutely interconnected with each other, it establishes the presence of network effects, the employment of such an approach will defeat the effect of deterrence envisioned by the penalties.

Hub-and-Spoke Cartels (‘H&S Cartels’)

Another fallout can be seen in the case of H&S Cartels. These are arrangements with horizontal restrictions on the supplier level (‘spokes’) executed via vertically related players (‘hub’). The hub orchestrates competition or horizontal collusion between the spokes without any direct communication between themselves. If we were to apply the relevant turnover approach, the hub would not incur any penalties for violating the Act, as it does not generate any turnover from the business activities of the spokes. This issue came to light in the matter of Nagrik Chetna Manch v. Fortified Security Solutions, where a violation of section 3(3)(d) of the Act was alleged. Since the opposite party was not involved in a similar line of business, they argued that no penalty shall be levied as there is no ‘relevant turnover’ derived from the subject matter of the infraction. While rejecting the contentions of the opposite party, the CCI observed that if the ruling in Excel Crop Care is to be applied, then no penalty on relevant turnover shall be levied in the present case, thereby defeating the legislative object of the Act.

Abuse of Dominance

The application of the ‘relevant turnover’ approach becomes problematic in cases of abuse of dominance because an enterprise might exploit its dominant position in one market to impact competition in other markets. Consequently, imposing a penalty using the relevant turnover approach becomes challenging.

Drawbacks of Global Turnover 

The shortcomings discussed above, coupled with the lack of legislative backing, compelled the legislature to reconsider the ratio decidendi in the Excel Crop Care ruling. Consequently, section 27(b) was amended by the Amendment Act, 2023. However, there were certain drawbacks to the global turnover approach, as discussed below:

Disproportionate Penalties

The CCI could levy higher penalties on enterprises earning lesser revenue ensuing from the unlawful conduct only by existing in a multi-product segment. Suppose X, an Indian company, and Z, a global conglomerate, cartelize in the Indian market of boxing gloves. Despite the possibility that X’s illegal actions may have generated higher revenue than Z’s, Z would face a larger penalty due to its global presence and diverse range of products, highlighting the impact of its global reach and product diversity on the penalty amount.

Dual Penalisation

Imposing penalties in certain situations might result in a form of ‘double jeopardy.’ Suppose company B engages in anti-competitive behavior in both India and the United States (‘US’); it could face separate penalties in each jurisdiction. However, in the US, the penalty would be based only on its turnover there, whereas in India, it would be calculated based on its global turnover, including that from the US. This means B could face double penalties for the same misconduct, potentially crippling the company financially, especially in cartelization cases.

Notification of the Monetary Penalty Guidelines

It was clear that neither approach was error-free, so the debate could not be settled. In this regard, many stakeholders suggested the penalty computation approaches adopted by the European Union (‘EU’) and Competition and Markets Authority (‘CMA’) in the United Kingdom.

A two-step test was suggested by N.V. Ramana, J. in the Excel Crop Care ruling, wherein first, the relevant turnover is to be determined, followed by computation of the appropriate percentage based on the aggravating and mitigating circumstances. Despite receiving a judicial push, this penalty structure was devoid of statutory recognition. In 2019, the Competition Law Review Committee Report (‘CLRC’) too concurred on the need for penalty guidelines or a guidance note on levying penalties. Further, in the matter of Mahindra and Mahindra v. CCI, the Delhi High Court observed that section 27(b) lacks guidance on the computation of penalty to ensure fairness, application of mind, and uniformity.

Following the enactment of the Amendment Act last year, the regulatory body, in March of this year, notified the much-awaited Monetary Penalty Guidelines, providing the methodology to compute penalties. It is vital to understand the methodology before analyzing its effectiveness. To ascertain the penalty to be imposed against an entity engaged in anticompetitive conduct under section 27(b) of the Act, the CCI follows a structured approach-

First, the CCI determines the ‘relevant turnover’ of an enterprise, which includes turnover directly or indirectly derived from the sale of goods and services connected to the contravention. Under some situations, the CCI may consider the relevant turnover of an enterprise for three years preceding the term in which the Director General’s Investigation Report has been received. However, if determining the relevant turnover is not feasible, the CCI may choose the enterprise’s global turnover.

Second, the CCI computes the ‘Base Penalty Amount,’ which can be capped at 30% of the relevant turnover. This calculation evaluates several factors, such as the nature and gravity of the contravention, the industry of the enterprise, its total effect on the economy, and other relevant factors as deemed appropriate by the CCI.

Third, the CCI may adjust the base penalty amount on additional considerations, including the nature and duration of the contravention, the enterprise’s role in perpetuating it, whether it is a repeated contravention, and whether the party has confessed to the contravention, coupled with other behavioral factors such as the degree of cooperation extended in the DG’s investigation and the CCI proceedings. The CCI may also consider other mitigating factors in determining the penalty, such as the enterprise’s efforts in establishing and implementing a compliance program and effectiveness in battling anti-competitive behavior.

The last two stages assist the CCI in easing the penalty against the enterprise, based on the ceiling limit as enshrined under section 27(b) of the Act (subject to the ‘Legal and Statutory Maximum’, i.e., 10% of the global turnover). The CCI must reduce the penalty down to the legal maximum if the penalty imposed against relevant turnover exceeds the former. On the other hand, if the penalty based on the relevant turnover seems insufficient for the CCI to create a significant deterrence, the CCI can raise the penalty bar to the legal maximum. The calculation of penalties involves a comprehensive assessment of various factors to ensure fairness and proportionate levy of penalties against the contravening enterprises.

Unfolding Effectiveness of the Monetary Penalty Guidelines

Having understood the computation method, it’s appropriate to assess whether the Guidelines have adequately tackled the limitations of the two approaches mentioned earlier.

These guidelines allow the CCI to impose penalties based on global turnover when computing the relevant turnover is not feasible. Additionally, to crystallize adequate deterrence, the CCI may choose to increase the determined penalty amount, subject to the legal maximum.

Concerning the H&S Cartels, the Guidelines lack clarity on the process and determination of penalties. The cartels need to be treated differently, unlike ordinary cartels, since there is a lack of direct communication between the spokes. Currently, under special provisions for the ordinary cartels, the maximum penalty can be up to 10% of the enterprise’s turnover or three times its profits after tax (‘PAT’) for each year of the cartel’s continuation, whichever is higher. The process of penalty determination for such cartels needs to be more clearly defined to offer significant deterrence against such types of cartelization.

Concerning the global turnover approach, the computation methodology categorically mentions the use of relevant turnover for computing the base penalty amount. The global turnover only comes into play when computation of relevant turnover is unfeasible, or the regulator believes there is insufficient deterrence. Therefore, the primary concerns of disproportionate penalties on multi-product enterprises and dual penalization shall be mitigated by the above framework.

The Guidelines have effectively tackled most of the shortcomings present in both approaches by imposing penalties based on relevant turnover within the legal maximum limit, ensuring a fair and proportional imposition of penalties.

Concluding Remarks

Upon analyzing the notification, the primary concern before the Monetary Penalty Guidelines was the imposition of penalties based on global turnover, which significantly impacted both multi-product companies and Small and Medium Enterprises (‘SMEs’) in the business market. However, the notification of the Monetary Penalty Guidelines has given relief to all the stakeholders by crystallizing a clear concurrence with the EU and CMA Guidance Notes, thereby respecting the principles of proportionality and purposive interpretation in the entire procedure. These guidelines will ensure uniformity and consistency in India’s penalty regime. Consequently, creating a reduction in litigation arising from uncertainties, arbitrariness, and disproportionate imposition of penalties.

Srishti Multani, Amritanshu Pushkar & Aryan Birewar

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