ARBITRARY CONTOURS OF PENALTY IMPOSITION: ASSESSING CCI’S ASTRAY DISCRETION

[Ashutosh Rajput is a third-year student at Hidayatullah National Law University, Raipur]


In the recent case of ISWAI v. Uttarakhand Agricultural Marketing Board (“ISWAI Case”), the Competition Commission of India (“CCI/Commission”) has held that the Opposite Party 1 (“OP-1”) has acted in contravention of the Liquor Wholesale Order which, thusly, violated the Competition Act, 2002 (“Act”). Accordingly, the CCI imposed a fine of Rupees 1 Crore on the OP-1 under section 27(b) of the Act, and consequently, absolved the other opposite parties (“OPs”) who were merely sub-wholesalers. The said imposition of fine, according to the author, has done away with the precedents irrespective of the fact that the Act does not prohibit the imposition of a fine on mitigating circumstances.


Facts and Ratio Decidendi

The informant ‘ISWAI’ filed a case under Sec. 19(1)(a) of the Act alleging dominance and anti-competitive behaviours of OPs. The informant was a representative body of nine companies among which United Spirits Limited (“USL”) and Pernod Ricard India Private Limited (“Pernod”) were two. OP-1 was appointed as the exclusive wholesale licensee for alcoholic beverages, including Indian Made Foreign Liquor (“IMFL”) pursuant to the Liquor Wholesale Order dated 27/04/2015 in the State of Uttarakhand. OP 2 and OP 3 were appointed as the exclusive sub-wholesalers for alcoholic beverages. Vide order of 2016, the licensees were ceased to operate. It was alleged by the informant that from 2015 to 2016, IMLF brands that were supplied, had less demand, as a result, the market share of USL got reduced from 61% in August-October 2014 to 2% in August-October 2015. Similarly, the market share of Pernod in the supply of IMFL reduced from 21.8% in August-October 2014 to 1.67% in August-October 2015. This whole scenario led the Commission to believe that OP-1 did violate section 4(2)(c), 4(2)(b)(i) and 4 (2)(a)(i) of the Act.

Critical Analysis

CCI prudently ascertained the dominance of OP-1 in supplying less IMLF than as demanded by the two of the most competitive and dominant enterprises before 2015. The CCI likewise very well noted that OP-2 and OP-3 were sub wholesalers because of which they ought not to be held for the discriminatory supply of IMLF. However, as far as the imposition of a fine is concerned, the order lacks somewhat in reasoning. The CCI noted that OP-1 has generated a revenue of Rupees 10.98 crores during the period of contravention i.e., the period of operation of Liquor Wholesale Order, and had an unhindered monopoly over that period of time. It also noted the contention of OP-1 that it incurred a significant loss of Rupees 31.81 crore in FY 2020-21 due to the prevailing conditions, and imposition of the said fine would be a detriment to both, the enterprise as well as to the public exchequer (Paragraph 139, ISWAI Case).

To defend the said penalty, OP-1 relied upon the decision of CCI in Cochin Port Trust v. Container Trailer Owners Coordination Committee wherein the Commission shunned imposing a penalty on the parties owing to certain mitigating factors which certainly, exists in the present case as well. Besides, OP-1 has already clarified that it had undertaken this activity for the first time and therefore should be exempted from the imposition of a fine (Paragraph 140, ISWAI Case). CCI countered OP-1’s contention by expressing that “The Commission observes that in the present case the anti-competitive conduct on the part of OP-1 had not ceased of its own accord (as cited in the above case), but on account of change in the policy of Government whereby earlier Liquor Wholesale Order ceased to have any effect and OPs were released from performance of the activity of procurement and distribution of liquor.” (Paragraph 140, ISWAI Case)

To substantiate the said contention of the CCI in respect of arbitrary imposition of fine, the author would first exploit Sec. 27 of the Act, latter, would rely on the precedents, and at last, would ascertain whether the penalty imposition needs a further relook.

Section 27 of the Act encapsulates that where the Commission after an inquiry finds that any agreement is in contravention of section 3 or Sec. 4 of the Act, may direct such association or enterprise to discontinue and not to re-enter into such dominant position [(Section 27(a)], or shall impose a penalty [(Section 27(b)], or shall direct to modify the agreements in consonance to the order by the Commission [(Section 27(d)], or direct the enterprises to abide by Commission’s orders [(Section 27(e)] or shall pass any order as it may deem fit [(Section 27(g)]. Section 27(b) clearly states that the imposition of a fine should be based on an average turnover for the last three preceding financial years. Nonetheless, in the present case, the contravention was only for one financial year, thus, income/profit in that financial year has to be looked upon. In Reliance Big Entertainment Pvt Ltd v. Tamil Nadu Film Exhibitors Association it was enunciated that since the association does not have turnovers, the penalty should be imposed on the profit thus accrued. Accordingly, as noted above, the revenue that was generated during the period of contravention was 10.98 crores and the fine imposed is rupees 1 crore which is not more than 10% of the profit at the violation period, thus it is within the threshold of the imposition of the fine. Notwithstanding, the reason for such a penalty has not been unmistakably spelt out even though OP-1 is incurring huge losses. It must not be forgotten that the CCI is a quasi-judicial authority hence their orders must clearly spell out reasons which show the application of mind. In M/s Excel Crop Care Limited v. Competition Commission of India and Ors. The CCI emphasized that relevant turnover should be calculated by considering the financial aspect of the company. The CCI also opined that the imposition of a fine should also consider the first-time breaches. In particular, the CCI noted “…Generally the award of penalty should be in proportion to the wrong done. While considering the wrong done, of course the authority would be justified in taking into consideration all the aspects including mitigating and aggravating circumstances.” Similarly, in M/s Maharashtra State Power Generation Co Ltd v M/s Mahanadi Coalfields Ltd and M/s Coal India Ltd, it was held that the imposition of penalty should depend upon the mitigating and aggravating circumstances of the case. (Paragraph 132, Maharashtra State Power).

It can be argued that CCI could have imposed a fine much lower than what has been imposed. Ascertainably, a fine of rupees 1 crore is nearly equal to 10% of the profit accrued during the contravention i.e., 10.98 crores, however, in several cases, 1-5% fine has been imposed on the profit accrued by an association by a defence of hindering circumstances. In Indian Sugar Mills Association v. Indian Jute Mills Association, the Commission by acknowledging the then mitigating factors of the jute industry imposed a penalty at 5% of the annual turnover of the last three years. Apparently, on appeal, the Competition Appellate Tribunal (“Tribunal”) set aside the order on the grounds of violation of principles of natural justice. The tribunal also enumerated that the penalty imposed by the Commission was disproportionate and without setting out any cogent reasons. Additionally, in M/s Gulf Oil Corp Ltd. v. CCI, the Tribunal held that in addition to giving reasons to support the quantum of penalty, the Commission, should look consider the mitigating circumstances and then should the fine be imposed.

From the above, it can be observed that well-established precedents have already been laid down by the CCI as to the imposition of fine, however, still, the CCI didn’t restrict itself from imposing the fine even when OP-1 is accruing losses in the current financial year. This presumes that CCI justified its discretion of imposing a fine by relying upon section 27(g) of the Act which gives wide power to the Commission to pass any order as it may deem fit. It is also true that the Act does not explicitly evade the liability of infringing parties to pay a fine.

Conclusion

Considering these aspects, the CCI could have imposed only a deterrent fine which OP-1 could have unreservedly given owing to the present circumstance of its financial breakdown. Wide discretion on the part of the CCI provokes them to impose fines at their whims and fancies. ISWAI case being the recent order of the CCI, continued to assert the fact that Commission has unrestricted discretion. Therefore, the discretion of the Commission in the imposition of a penalty needs a relook. The Competition (Amendment) Bill, 2020 to does not proposes an amendment as to the ascertainment of imposition of fine in aggravating circumstances. Moreover, the ambit of Section 27(g) of the Act should be limited since it could be misused in case of imposition of penalties.


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