Trisha Shreyashi is a legal professional and a columnist. She is also a panelist on the Harvard Business Review Advisory CouncilMore From The Author >>
‘Relevant Turnover’ Turning Irrelevant in Digital Era?
CCI recognized that digital market platforms are inter-dependent. Therefore, restricting revenue to one segment does not capture the reality of these marketplaces that derive their strength from various verticals.
Photo Credit : KNN India ,
A debate has sparked since it has been a public knowledge that the GoI is set to introduce the Competition Amendment Bill post recess. It recommends modifications to the antitrust provisions, merger control provisions and provisions concerning the powers of the Director General.
Recently, the Competition Commission of India (CCI) had imposed 5% penalty on MMT-GO and OYO, on the basis of relevant turnover. This was ₹223.48 crores and ₹168.88 crores respectively.
The companies were found liable for abuse of dominant position by imposing unfair and discriminatory conditions of purchase in contracts with Fabtree and Treebo; and denial of market access to other players by indulging in anti-competitive agreement of refusal to deal.
CCI recognized that digital market platforms are inter-dependent. Therefore, restricting revenue to one segment does not capture the reality of these marketplaces that derive their strength from various verticals. Following the principle of deterrence for the purpose of revenue determination, entire platform is considered as one unit.
In effect, the relevant turnover in MMT-GO is the total turnover of companies. Currently this decision is in appeal before National Company Law Appellate Tribunal (NCLAT).
This is not the first time that CCI has recognized that ‘relevant turnover’ is a faulty metric when it comes to two-sided platforms. In Matrimony.com v. Google (2018), CCI observed that relevant turnover cannot be applied to technology platforms like Google. It imposed a penalty of ₹135.86 crores and observed that the pedantic approach of penalty based on relevant turnover is apt only for traditional markets with multi-product companies.
Pre-Excel Crop, as per Section 27 of the Competition Act, 2002; CCI was empowered to impose penalty ‘as it deems fit’ on average turnover. The provision does not specify relevant or total turnover.
However, in 2017 in Excel Corp, the Supreme Court in an appeal from CCI order, observed that penalty can only be imposed on tainted products. Excel Crop was a case about cartel, where parties were multi-product companies. Therefore, imposing penalty on relevant turnover of tainted product could be based on proportionality.
But the case did not distinguish between Section 3 violations i.e., anti-competitive agreements vis a vis Section 4 violations of abuse of dominant position. While penalty on relevant turnover can be considered equitable in anti-competitive agreements where it is easier to de-lineate a certain product as the subject of the agreement; such de-lineation becomes difficult in abuse of dominance cases. A company could be using its dominant position in one sector to indulge in anti-competitive conduct in another sector.
For example, in DLF Belaire case (2011), CCI imposed penalty on total turnover. If CCI had used relevant turnover metric to calculate penalty,CCI could have only considered the revenue generated from the ‘Belaire Housing Complex’ as the tainted product and not DLFs total revenue and DLF could not have been penalized for ₹630 crores. This would have resulted in no deterrence effect.
The 2022 Competition Law Amendment Bill was tabled in Lok Sabha and was referred to the Standing Committee on Finance for suggestions. The Standing Committee made its suggestions public in the 52nd and the 53rd report.
During the budget session, the Central Government introduced the draft Competition (Amendment) Bill, 2023 in Lok Sabha. The Ministry of Corporate Affairs has brough out additional amendments to this Bill, recognizing the inadequacy of penalty on ‘relevant turnover’.
An addendum appears to have been proposed in the definition of ‘average turnover’ by adding an explanation to mean ‘global turnover derived from all products and services by a person or an enterprise’. This means that while under the current law, CCI can impose a penalty of 10% of the average turnover for the last three preceding financial years upon the infringing person; under the new law, CCI can impose a penalty of 10% of global turnover of all products and services, including exports.
Essentially, this changes the current formula of calculating penalty from ‘relevant turnover’ to ‘total turnover’.
Even in 2019, Competition Law Review Committee (CLRC) published a report which was the basis of draft Competition Amendment Bill of 2020. CLRC found the ‘relevant turnover’ formula to be inadequate to even address all situations of cartels. It cited an example of a hub and spoke agreement and emphasized that a hub which might indulge in a different business than the spokes, would be left scot-free under the current penalty formula. Upon a review of penalty provisions and guidelines of jurisdictions like European Union, CLRC appreciated their two-step methodology.
Firstly, to determine the fine of a basic amount which is based with reference to value of sales of the goods or services to which the infringement directly or indirectly relates. Secondly, to adjust the basic amount upwards or downwards.
The maximum penalty at the end of this two-step method is 10% of the total turnover in the preceding business year. The basic amount is also calculated based on the gravity of the offence as well as the duration for which the infringer partook in the offending activity. For adjusting the fines, European Competition Commission then ensures that the penalty should have sufficient deterrent effect and the fines can be increased for companies that have a particularly large turnover beyond the sale of good or services to which the infringement relates to.
This can be best understood through the Google Shopping case of 2017. Google was found guilty of abusing its dominant position in the market for online general search services in 13 countries in the European Economic Area.
With regards to the penalty, the basic amount was based on Google’s revenue from comparison shopping services, with the gravity being assessed on the fact that Google was dominant in all 13 countries. However, the fine was then adjusted upwards to ensure that it has sufficient deterrent effect not only on Google and Alphabet (parent company of Google) but also on other similar undertakings.
Comparing this with the situation in India, while CCI also considers concepts like gravity and duration of the offence while deciding the penalty, the law currently does not provide for consideration of total turnover of the company or increase in fine for deterrence effect.
MMT-GO decision is important because CCI appears to have looked at the factors that European Commission considers while computing penalty. CCI considered the twin objectives of penalty i.e., to reflect the seriousness of infringement and to ensure a threat of deterrence. CCI also considered entity specific factors like MMT being a dominant platform serving as a gateway for online hotel booking.
It is to capture situations specific to digital markets but also for other substantive infringements like abuse of dominant position, that CLRC perhaps recommended that CCI should issue penalty guidance which brings in the concept of relevant turnover to be considered by CCI as the starting point for calculating penalty. Such an approach is expected to maintain both the doctrine of proportionality and the deterrent effect of Section 27.
In line with these suggestions, the Competition Amendment Bill, 2022, seeks to give CCI the power to issue guidance notes on matters including calculation of penalty for greater transparency and certainty in their enforcement practice.
The 2023 bill seeks to increase CCI’s powers to impose penalty and provide a framework for computing such penalty. This is necessary to ensure that Section 27 is not abused by the parties, as even under the ‘relevant turnover’ regime, most penalties imposed by CCI are challenged in appeals.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
Around The World