July 06 2017
In a landmark judgment of May 8 2017, the Supreme Court has upheld a Competition Appellate Tribunal (COMPAT) decision, holding that the penalty for anti-competitive practices found to be in violation of the Competition Act 2002 should be based on relevant turnover relating to a particular product and not on total turnover, particularly for multi-product companies.
The Competition Commission of India (CCI) took notice of the letter sent by the Food Corporation of India (FCI), which alleged bid rigging in relation to tenders issued by the FCI for the supply of aluminium phosphide tablets of 3 grammes between 2007 and 2009. The bid rigging was allegedly committed by the three suppliers who responded to the tenders: Excel Crop Care Limited, United Phosphorous Limited and Sandhya Organics Chemicals Ltd (the appellants) and Agrosynth Chemicals Limited. It was alleged that the appellants quoted identical rates in the tenders invited by the FCI for the purchase of aluminium phosphide tablets.
After the investigation the director general confirmed the FCI's allegations that the appellants had entered into an anti-competitive agreement for bid rigging. The director general found that between 2002 and 2009 (but not including 2009), all four parties mentioned above quoted identical rates. In their defence, the appellants stated that the price rise was mostly attributable to an increase in prices from China during the Beijing Olympics. However, it was noted that even during a period when the price of phosphorous had decreased, this was not reflected in the high prices quoted by the appellants. The appellants even had a differing cost structure. The director general found that the appellants had contravened Sections 3(3)(a), 3(3)(b) and 3(3)(d) read with Section 3(1) of the Competition Act.
After an inquiry the CCI agreed with all of the director general's findings. The CCI rejected the appellants defence and concluded that they had entered into an agreement or understanding and taken part in bid rigging while submitting their bids in response to the tenders issued by the FCI. The CCI imposed a penalty at the rate of 9% of the average of the last three years' annual turnover on each of the appellants under Section 27 of the Competition Act.
Following an appeal to COMPAT, the appellants' contentions were rejected on their merits. However, COMPAT accepted the contention of the appellants that the penalty should be restricted to 'relevant turnover' (ie, the turnover or revenue derived from the supply of the relevant product and not on the total turnover derived from the sale of all of that company's products). Further, COMPAT reduced the penalty imposed on Sandhya Organics to one-tenth of the penalty imposed by the CCI.
After a detailed examination of the parties' defences, the Supreme Court upheld the order of COMPAT both on the merits of finding the existence of bid rigging as well as the terms of the penalty. The Supreme Court ruled that the CCI was within its jurisdiction to investigate and penalise the tender. Even though the tender process was started before the enforcement of Section 3 of the Competition Act on May 20 2009, the tender process continued even after that date. Further, the appellants' repeated quoting of identical prices on multiple occasions without any plausible explanation was conclusive proof of the existence of an anti-competitive agreement between them.
On the question of the penalty, the Supreme Court noted that Section 27(b) of the Competition Act does not use the words 'total' or 'relevant' when describing the penalty terms. The court noted that a situation may arise – as in this case – where an enterprise may be a multi-product company. The imposition of a penalty based on the total turnover, as the CCI did in this case, brings about inequitable results. If a penalty leads to inequitable or absurd results this is not a fair penalty. The Supreme Court also accepted the concept of the doctrine of proportionality used by COMPAT in its order and held that the penalty must be proportionate and should not lead to shocking results. As a result, the Supreme Court dismissed the appeals.
In a separate but concurrent judgment, Justice Ramana of the Supreme Court held that the starting point for the imposition of the penalty would be the relevant turnover. The court held that after determining the relevant turnover, the CCI may consider aggravating and mitigating factors including:
It was determined that the final penalty should not be more than 10% of the entity's relevant turnover.(1)
This landmark judgment by the Supreme Court removes the doubt surrounding the imposition of penalties in cases involving violations of the Competition Act, such as those involving cartels. It is hoped that this judgment will lead to the issuance of guidelines for the imposition of penalties by the CCI in due course.
For further information on this topic please contact Man Mohan Sharma at Vaish Associates by telephone (+91 11 4929 2525) or email (firstname.lastname@example.org). The Vaish Associates website can be accessed at www.vaishlaw.com.
(1) Supreme Court of India, May 8 2017 – for the full text see here.
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