Basis for penalty in competition law

Source- The post is based on the article “Basis for penalty in competition law” published in the “Business Standard” on 16th May 2023.

Syllabus: GS3- Indian economy

Relevance– Regulation issues related to the economy

News- The Competition (Amendment) Act, 2023 was introduced recently

What are some facts about the Competition Act, 2002?

The Competition Act, 2002, aims to defend the economy from anti-competitive practices.

It empowers the Competition Commission of India to impose penalties for anti-competitive practices and abuse of dominant position.

The CCI has the authority to impose a penalty of up to 10% of the average turnover for the three preceding financial years. The Act defines “turnover” to include the value of goods or services sold.

What was the ruling of the apex court in In Re: Excel Crop Care Limited case related to calculation of turnover?

The CCI imposed a penalty at 9% of the total turnover. CCI statute was not clear whether the turnover was related to the product or the person.

An appeal in this matter was filed in apex court in 2017. It adopted “relevant” turnover for imposing a penalty. It clarified that “relevant” turnover was the person’s turnover pertaining to products and services affected by the violation of law.

For this purpose, it relied on two principles: (i) strict interpretation — if two interpretations are possible — one that leans in favour of the infringer should be adopted.

(ii) Punishment should be proportionate to the harm caused by the infringer.

What are some provisions of the Competition (Amendment) Act, 2023?

The Competition (Amendment) Act, 2023 defines turnover for purposes of penalty as “global” turnover. It is the turnover derived from all the products and services by the person concerned.

It mandates the CCI to publish guidelines to determine an appropriate amount of penalty for violating the provisions of the Act.

It further mandates the CCI to consider these guidelines for imposing penalties and provide reasons in the case of any divergence from them.

The amended law does not enable more than one interpretation. So, there is no need to use the principle of strict interpretation.

It provides three levers to ensure proportionality– (1) The penalty can vary from zero to 10% of the global turnover, depending on the gravity of the Violations.

(2) The guidelines shall guide determining the appropriate amount of penalty.

(3) The order shall give reasons for awarding a penalty different from the one specified in the guidelines.

What are the advantages of Global turnover as compared to relevant turnover?

There are situations where it is difficult to use relevant turnover for imposing a penalty. An example is the hub-and-spoke agreement.

A hub is typically not engaged in the same line of business as the spoke. Since its relevant turnover is nil, the penalty based on such turnover would be nil. IT encourages the hub to contravene the law with impunity.

Determining relevant turnover is often complex and imprecise. An example is the abuse of dominance in health insurance.

The infringer would argue for a narrower definition of the product. The competition authority would take the opposite view. This will only add to litigation.

Why does global turnover make eminent sense for determining penalties?

Enforcement is an important aspect of any law. The effectiveness of enforcement depends on the probability of conviction of the violator of the law and the level of sanction or punishment.

A higher probability of conviction can assure compliance even at a lower level of sanction and vice versa. However, the probability of conviction is less in economic legislation like competition law because it relies on the rule of reason.

Therefore, the level of sanction must be higher. So, use of global turnover is justified for imposing penalties.

Competition law addresses market failure arising from market power. If a person abuses market power to, it triggers a process of resource reallocation. This trigger settles down after moving resources across products and sectors.

It kills several enterprises, and possibly creates new ones. This yields a new equilibrium, which is different from the initial equilibrium.

The difference is the misallocation of resources. So, the entire economy suffers. Thus, the impact of the abuse is not limited to the products or services underlying the contravention.