Testing the Penalty Yardstick of the Amended Competition Law Against the Dogma of Doctrine of Proportionality

Introduction

The Competition (Amendment) Act, 2023¹ was given assent to by the President in April of 2023. The new Amendment Act is a means to rise up to the challenges of the changing market needs and to set new deal value thresholds, settlements, and commitments provisions, and to further discourage anti-competitive practices like that of hub-and-spoke cartels. Many of the mechanisms introduced in the amendment shall be dependent on the regulations that are to be issued by the Competition Commission of India.

The Competition (Amendment) Act, 2023 has provided for a new standard of using the worldwide turnover to penalise a person(s) or enterprise(s) for violation of the Competition Act, 2002², as opposed to the existing norm of using relevant turnover as the base for calculation of penalty, which was imposed under Section 27(b) of the Competition Act, 2002³ before the amendment. The practice of using “relevant turnover” as the baseline for the calculation of penalty to be imposed under Section 27 of the Competition Act, 2002 withstood scrutiny of the Supreme Court and served the objects of the Competition Act within the boundary set by the “doctrine of proportionality”. Thus, a comparative analysis must be undertaken between both these standards to adjudge their efficacy in serving the legislative intent within the ambit of the rule of law and as per the precedent set by the Supreme Court in the landmark case of Excel Crop Care Ltd. v. CCI.⁴

The existing jurisprudence so far

The Competition Act was amended in 2007 to change the mandatory nature of the penalty provision into a discretionary power of the Commission. The word “shall” was substituted with “may” to bring the proviso in tune with the rest of Section 27, which uses the expression “it may pass all or any of the following order” and the main part of clause (b), which conferred discretion upon the Commission to impose penalty as it may deem fit, subject to the rider that it shall not be more than 10% of the average of the turnover for the last three preceding financial years. Clauses (c) and (d) of Section 27 also use the word “may”, which signifies that the Commission has the discretion to pass a particular order, which it may deem proper as per the facts and circumstances of the case.

The Commission in Western Coalfields Ltd. v. SSV Coal Carriers (P) Ltd.⁵ noted that the twin objectives behind imposition of penalty under the Competition Act are: (a) to reflect the seriousness of the infringement; and (b) to ensure that the threat of penalties will deter the infringing undertakings. Therefore, it was justifiable and in line with the principles of natural justice that the quantum of penalty imposed correspond with the gravity of the offence and the same must be determined after having due regard to the mitigating and aggravating circumstances of the case. The National Company Law Appellate Tribunal (NCLAT) has held in Pushpa M. v. CCI⁶ that appropriate reasons for imposition of penalty should be given by the adjudicating authority while giving a decision as per the judgment of the Supreme Court in S.N. Mukherjee v. Union of India⁷, and therefore the Commission should as well give appropriate reasons before the imposition of penalty under Section 27(b) of the Act.

The Supreme Court of India in Excel Crop Care case⁸, while providing the interpretation of Section 27(b) of the Act, observed that the “relevant turnover” is an appropriate yardstick for imposing penalty as per “the doctrine of proportionality” and also as per “the doctrine of purposive interpretation”, and the Court further observed that it was for this reason that the Competition Appeal Court of South Africa in Southern Pipeline Contractors v. Competition Commission⁹ became relevant in the Indian context as well inasmuch as the Supreme Court has also repeatedly relied on the same principle of interpretation, as there needs to be an established legislative link between the damage caused and the unlawfully gained profits thereof. Therefore, keeping this principle in mind, it is the “relevant turnover” which comes out to be the legally sound yardstick for the imposition of penalty as it passes the test of the doctrine of “purposive interpretation” as well as that of “the doctrine of proportionality”. Thereon the Competition Commission and NCLAT have relied on the Supreme Court’s judgment in Excel Crop Care case¹⁰ to levy a penalty for infringement of the competition law.

Worldwide turnover as a base to penalise in the Indian competition landscape

The penalty provision as amended by the Competition (Amendment) Act, 2023 is now going to penalise a person or an entity based on the derived global turnover which can bring about anomalous results. The penalty so levied can be very irregular with industries of different sizes alleged to have committed the same crime being penalised differently and some more harshly than others depending on their size and not as per the affected product(s) turnover. This can lead to contravention of the fundamental right to equality before law as guaranteed by Article 14 of the Indian Constitution¹¹.

Section 27(b) as amended by the Competition (Amendment) Act, 2023 stands in contravention of the “doctrine of proportionality” which is guaranteed under Article 14 of the Constitution as was opined in Excel Crop Care case¹², unless regulations are introduced by the Competition Commission which brings about provisions or regulations that address the issue of arbitrariness and proportionality with respect to the discretion given to Competition Commission of India under Section 27(b) to impose a penalty. The current reading of the amended provision is wide, and without a definitive scope to define equalising factor(s) that the Commission must follow to ensure that the penalty being levied for a similar contravention on different enterprise(s) or person(s) is similar and not manifestly arbitrary. This deficiency in the Act can be cured by introducing relevant guidelines under the power granted to it by Section 64 of the Competition Act, 2002¹³.

In its multiple pronouncements the Supreme Court has held that a punishment should befit the crime and the emphasis of the Court has been on imposition of just and proportionate sentences commensurate with the nature and gravity of crime, and the principle of proportionality should be the basis of imposition of a penalty for a crime or a contravention of a statute. It was iterated again by the Supreme Court in Excel Crop Care case¹⁴ wherein relying on its pronouncement in Coimbatore District Central Cooperative Bank v. Employees Assn.¹⁵, the Supreme Court further noted that it is well established that the principle of proportionality requires that the fine imposed must not exceed of what is appropriate and necessary for attaining the object pursued and that as a part of equitable consideration, courts should strive to only punish those who deserve it and only to the extent of their guilt. Section 27(b) of the Competition (Amendment) Act, 2023 can lead to deviation from such penalty standard from the “doctrine of proportionality”, and therefore can be said to be in contravention of fundamental rights guaranteed under Articles 14 and 21¹⁶ as they are the legal rationale behind the enforcement of “doctrine of proportionality” in our Constitution.

Article 19(1)(g) and worldwide turnover

The Supreme Court introduced the proportionality standard in determining violations of fundamental rights, particularly the right to privacy in K.S. Puttaswamy v. Union of India¹⁷, and this doctrine was affirmed in the judgments of five out of the nine Judges on the Bench. Subsequently, a Constitution Bench in K.S. Puttaswamy v. Union of India¹⁸ fleshed out the contours of a proportionality analysis and applied it to determine the constitutionality of the Aadhaar scheme and the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016¹⁹. The Supreme Court conducted a comparative analysis of the types of proportionality analysis globally and elucidated an approach that could be suitable for the Indian Constitution and laid down the test of proportionality with a four-pronged test, which is:

1. a measure restricting a right must have a legitimate goal (legitimate goal stage);

2. it must be a suitable means of furthering this goal (suitability or rational connection stage);

3. there must not be any less restrictive but equally effective alternative (necessity stage); and

4. the measure must not have a disproportionate impact on the right holder (balancing stage).

In TMA Pai Foundation v. State of Karnataka²⁰, the Supreme Court went on to elaborate on the scope of Article 19(1)(g)²¹ encompassing four expressions viz. profession, occupation, trade and business so as to cover all activities of a citizen in respect of which income or profit is generated, and which can consequently be regulated under Article 19(6), and these fundamental rights can only be taken away by a process established by law and that law must be in consonance with the doctrine of proportionality. The Supreme Court while perusing the penalty provision under Section 27(b) of the Competition Act in Excel Crop Care case²² came to the conclusion that the doctrine of proportionality is aimed at bringing out “proportional result or proportionality stricto sensu”, and that it is a result-oriented test as it examines the result of the law, and that the doctrine of proportionality achieves balancing between two competing interests of harm caused to the society by the infringer which gives justification for penalising the infringer on the one hand, and the right of the infringer in not suffering the punishment which may be disproportionate to the seriousness of the Act. The Court further held that the objective of the Competition Act was also to ensure that the penalty levied should act as a deterrent for others, but such objective should be met cautiously ensuring that the penalty levied does not lead to the death of the contravening entity.

In perusing “turnover” in light of proportionality the Court had considered the consequences of the adoption of “total turnover” of an entity as the base for imposition of penalty in the Excel Crop Care case²³ where the Court analysed that the adoption of the criteria of total turnover of a company would bring within its sweep the other products manufactured by the company which are not connected with the anti-competitive activity that an entity is being punished for and therefore the Court came to the conclusion that it would bring about shocking results which cannot be comprehended in a country governed by rule of law. Thus, the Court held that on critically analysing the penalty provision from this angle it is the relevant turnover i.e. turnover of the affected product which is to be taken into consideration and not the total turnover of the violating entity.

The Supreme Court delved into the purpose and objective behind the Act and concluded that it was to discourage and stop anti-competitive practices and observed that the then existing penal provision contained in Section 27 of the Competition Act served this purpose as it is aimed at achieving the objective of punishing the offender and acts as a deterrent to others and that the purpose was being adequately served by taking into consideration the “relevant turnover”. The Supreme Court further went on to state that thriving industries leading to maximum production was in the public interest as well as in the interest of the national economy, therefore, it cannot be said that the purpose of the Act is to “finish” those industries altogether by imposing those kinds of penalties which are beyond their means. It also serves the purpose of the Act to not punish the violator in respect of products or turnover which are not related to any anti-competitive practices and in respect of which the penal provisions of the Act are not attracted. Thus, it can be safely concluded that the test of proportionality stated above is not satisfied as the amended Section 27(b) of the Competition Act, 2002 is not the suitable means of furthering the goals of the Competition Act, 2002, as there are less restrictive but equally effective alternatives, and the measure has a disproportionate impact on the right holder.

Analysing Section 27(b) of the Competition (Amendment) Act, 2023 in light of the Supreme Court’s decision in Excel Crop Care case²⁴ and Aadhaar case²⁵ it can be construed that the imposition of penalty on “relevant turnover” was helping the regulator achieve the legitimate goal of the statute by having a rational connection with the contravention an entity was found guilty of. Moreover, it was less restrictive and did not have a disproportionate impact on the right holder. The “relevant turnover” served as a tool to punish that part of the turnover that was tainted by the contravention, but worldwide turnover can lead to the death of the entity itself by a disproportionate fine on its worldwide turnover.

Thus, the observations of the Supreme Court in Aadhaar case²⁶ and Excel Crop Care case²⁷ can be construed to come to the conclusion that the penalty under Section 27(b) of the Competition Act has to pass the test of proportionality, and the proportionality so envisaged by the legislature must pass the test laid down by the Supreme Court in Aadhaar case²⁸. Thus, use of worldwide turnover as the penalty yardstick must pass this test in order to be intra vires. The first test is that the measure restricting a right must have a legitimate goal (legitimate goal stage), and it can be seen that the worldwide turnover has a legitimate goal i.e. using it as a way of furthering objectives of the Competition Act, 2002, and to be a reformative and punitive scale of justice to punish and act as a deterrent. Secondly, the measure must be a suitable means of furthering the goal (suitability or rational connection stage), though worldwide turnover is suitable, the Court has already held in Excel Crop Care case²⁹ that using relevant turnover is a more suitable method of furthering the goal of the Competition Act. Thirdly, there must not be any less restrictive but equally effective alternative (necessity stage), and as analysed above, a more suitable, effective, and less restrictive measure was already in effect which withstood the scrutiny of the Supreme Court. Fourthly, the measure must not have a disproportionate impact on the right holder (balancing stage) and as observed above, using the worldwide turnover instead of the relevant turnover or the affected turnover is disproportionate and can lead to the death of the entity itself.

The way forward

The Competition Commission must come out with penalty regulations that are more in line with the doctrine of proportionality. Worldwide turnover is used in the guidelines governing the European Union³⁰, Competition and Markets Authority³¹ (CMA) in the UK, Competition Commission, South Africa³² and many other jurisdictions as the upper limit of imposition of fines whereby a penalty amount can only be up to a certain percentage of worldwide turnover (up to 10% in most cases) and cannot exceed it. These jurisdictions take affected turnover or relevant turnover as the base for calculation of penalty and the worldwide turnover as a ceiling limit against which the penalty amount is checked and adjusted to ensure that it is not exceeded. Some similar mechanism needs to be used by the Competition Commission of India to ensure that the threshold of proportionality is met as per the tests discussed above and that the purpose and objective of the Competition Act is achieved without the shadow of manifest arbitrariness. The worldwide turnover as the base for calculation of penalty will lead to an arbitrary and disproportionate penalty regime and it is only through the Regulation³³ which the Competition Commission of India can bring under the powers granted to it by the Competition Act, through which worldwide turnover can be used judiciously, within bounds of proportionality.