India’s Shifting Stance on Computation of Fines: From Turnover to Relevant Product Turnover to Global Turnover
Since September 2018, when the Indian government set up a Competition Law Review Committee (“CLRC”) to review India’s Competition Act, India has seen continuous deliberations aimed at overhauling India’s dated competition law framework. The deliberations resulted in a report submitted by the CLRC in 2019, a Draft Competition Act in 2020, a Bill in 2022, a Parliamentary Standing Committee report (“Parliamentary Committee Report”), and finally, a bill in 2023 (‘2023 Bill”) that recently received presidential assent to become the 2023 Act.
Touted as Competition Law 2.0, this overhaul exercise has led to various amendments to India’s competition law (as discussed in an earlier piece on this blog), including the introduction of a deal value threshold, a shorter merger review timeline, a mechanism for settlements and commitments, and a provision aimed at curbing hub and spoke cartels, among numerous other reforms.
However, a noteworthy amendment that was not contemplated before it surprisingly found a place in the 2023 Bill and has caught keen eyes: the definition of “turnover” when used for sanctioning firms will now imply “global turnover derived from all the products and services by a person or an enterprise”. India’s Competition Act uses the term “enterprises” for firms. This amendment will have significant repercussions for firms that had concluded, post the Indian Supreme Court judgment in Excel Crop Care Ltd. v. Competition Commission of India (“Excel Crop”), that “turnover” referred only to a specific product of the firm that violated India’s competition law, and not to the turnover of the entire multi-product firm. In essence, this turnover computation came to be known as the relevant product turnover.
Computation of fines is not known to be a forte of the Indian competition law regulator, the Competition Commission of India (“CCI”), a shortcoming highlighted in another blog post. The addition of a fining mechanism based on global turnover is bound to bring a new saga to the CCI’s abstract fines computation framework.
This blog post will assess the Indian competition law fining regime and analyze (i) the reasons for the government’s adoption of a global turnover computation mechanism and (ii) the risks involved with an incomplete adoption of this new turnover definition.
The CCI’s Abstract Fines Computation Framework
Since its inception, the CCI has faced criticism for not supporting its calculations on the quantum of the fines with suitable justifications and, therefore, levying arbitrary fines in several rulings. In a recent judgment by an appellate tribunal in India, the CCI was directed to re-examine the INR 17.88 billion fines imposed on domestic tyre manufacturers for cartelization that contained arithmetical and inadvertent errors. In a similar case, a constitutional court set aside a CCI order on account of not applying adequate mind while computing the fine imposed.
Section 27(b) of the 2002 Act, which deals with the CCI’s fines-imposing powers, faced a constitutional challenge on the ground that it did not provide any guidance, and therefore, the section was void and arbitrary. In Excel Crop, the need for the issuing of guidance was highlighted by the Supreme Court while spelling out the definition of turnover in the 2002 Act.
Not only the definition of turnover but other important elements linked with the computation of fines, like the leniency program of the CCI, have also faced criticism for their regularly inconsistent approach. Probably, the low fines realization rate of the CCI (8.4% in the financial year 2021-22) has its roots in the abstract criteria adopted by the CCI to compute fines, which often leads to the appellate tribunals granting relief to firms regarding the quantum of the fines imposed. A step in the right direction has now been taken and the 2023 Act requires a deposit of 25% of the fine amount before a firm challenges a CCI order. However, a more appropriate measure could be to incentivize the firms with a reduced fine of up to 25% if they choose to pay the full fine before filing an appeal, similar to what Peru’s legal regime provides for.
Shifting Stance: The Government’s (Could-Be) Rationale
Unfortunately, no express view of the government or the CCI on the rationale behind this shift in position is available considering this amendment. Therefore, second-guessing remains the only viable option to evaluate the shift in the stance.
Firstly, the fear that global firms maintaining no physical presence in India while generating profit in India could distort their national-specific turnover comes across as the primary reason behind the shift. This can allude to a comment by India’s finance minister that called for the CCI’s intervention to guard Indian businesses and consumers against global firms.
Secondly, the CLRC report highlighted how the reference to the relevant product turnover while computing fines might result in no fines being imposed in cases concerning hub and spoke cartels, where the ‘hubs’ are not engaged in the same line of business as the ‘spoke’. This could also be a concern that the government resonated with.
Thirdly, in a recent order, the CCI imposed a fine of $113 million on Google. In computing the fine, the CCI asked for details of revenue and profit generated from India, regardless of the location or jurisdiction where the transactions were conducted, or the turnover was generated. Google objected and appealed, arguing that the fine was not based on relevant turnover. It is not far-fetched to believe that the Indian government might be setting a high cap on fines to limit challenges to CCI’s computation of fines.
Additionally, global harmonization has been recognized as an essential factor for Indian firms in another recent competition law parliamentary committee report, as it enables them to compete effectively on a global scale. Various jurisdictions such as Italy, Germany, the EU and the UK take into account the firm’s global turnover to come up with the maximum limit for a fine. India’s shift in stance is a step in that direction, and whether it has merit or not will be assessed in the following section.
The Case Against Incomplete Adoption
None of the previously mentioned jurisdictions sanction firms solely based on their global turnover. A common idea running through all these jurisdictions is that global turnover is only used to come up with the maximum limit, and the calculation of the initial measure is where the intricacy of the calculation lies. For example, the EU and UK attribute the turnover to the location of the customer to determine the initial measure of the fine, while Italy considers up to 30% of the value of sales related to the infringement. In Germany, the starting value is calculated basis of a turnover amount, so that the turnover amount only reflects the effects of the infringement in Germany. Other jurisdictions such as Argentina, Brazil, and Switzerland take into account the total jurisdiction-wide turnover, as opposed to the global turnover of the firms to come up with the maximum limit for the fines and to offset the maximum cap on fines by taking into account a base fine as an initial measure. Even otherwise, the difference between total jurisdiction-wide turnover and global turnover is enormous.
When global firms in India are fined excessively based on their total turnover across all products and territories, it is likely to reduce overseas investor interest even if their turnover in India is minimal. Likewise, Indian firms expanding globally will face difficulties if a single violation under the Competition Act results in a fine of up to 10% of their revenue from sales outside of India, adversely impacting their long-term ability to compete globally.
Additionally, excessive fines might push a firm into bankruptcy and cause it to exit the market permanently, leading to less competition. This thought process has found a place in the European Commission’s (“EC”) perspective and practice, albeit with a touch of cynicism. Joaquín Almunia, a former EC Vice-President in charge of Competition, stated that inability-to-pay claims would be accepted only when the fine clearly would send a firm into bankruptcy. Furthermore, in practice, the EC has, in limited cases, reduced fines that mostly involved inability-to-pay requests from smaller firms or independent entities operating on low-profit margins, enabling them to avoid bankruptcy.
Concluding Remarks
It is not the author’s take that the current position on turnover, i.e., relevant product turnover, be continued considering the various grounds deliberated above. However, the implementation of the new computation must be accompanied by the issuing of guidance that brings into play the globally-prevalent concept of a base fine calculation as the initial measure.
Also, it is important to note that the Indian Supreme Court is known for being highly conscious of policy matters, and has often revised or invalidated government policy decisions on these grounds. Therefore, it is essential that apart from the firms, the Supreme Court also considers the intention behind the overturning of its decision to be well thought-out. The introduction of guidance on the computation of fines and different levels of computation (including a base fine) will be a workable middle ground between a restricted relevant product turnover and a ludicrous global turnover, considering the Supreme Court itself suggested the issuance of fining guidance in Excel Crop.
A constitutional challenge to this new proposed law before the Supreme Court or other constitutional courts in India is almost inevitable when the initial firms are penalized based on the new turnover definition. In an unlikely situation, this challenge could also arise even before a firm disputes the fine imposed on it in the form of a public interest litigation, which is quite common in India.
