Nexus vs. Net Worth: An Analysis of the CCI’s Penalty Guidelines

Introduction

In the midst of the ongoing Apple App Store abuse of dominance proceedings, Apple has filed a petition before the Delhi High Court, challenging the constitutionality of the Competition Commission of India (Determination of Monetary Penalty) Guidelines, 2024 (‘Guidelines’). Apple contends that, according to the Guidelines, the allegations against the multinational corporation in the app store market could result in penalties of around USD 38 billion to be imposed by the Competition Commission of India (‘CCI’) on the basis of its global revenues from iPhones, iPads, and wearables. This marks a fundamental departure from the established relevant national revenue approach, as adopted by the CCI in the Amreesh Neon Private Limited, Mahindra Electric Mobility Ltd., and Alphabet Inc. cases.

The article examines the implications of the Guidelines and their potential application in the Apple App Store case. Benchmarking against the European Union (‘EU’) and the United Kingdom (‘UK’) practices, the author observes that the Guidelines conflict with the principles of proportionality and non-retrospectivity, create an illogical nexus by relying on global turnover for Indian contraventions, and confer excessive discretion on the CCI. The article advocates a transparent and standardised approach, including clearly specified turnover periods and lower multipliers when global revenues are considered, to promote a business-friendly environment. 

Evolution of the Penalty Framework

Pre-2023, Section 27(b) of the Competition Act, 2002 (‘Act’) merely stipulated that penalties were to be calculated on the basis of the ‘average of the turnover of the enterprise for the last three preceding financial years’. The CCI interpreted this to mean the global turnover of the enterprise and imposed penalties accordingly in the Shri Shamsher Kataria and Matrimony.com cases. However, in 2017, Excel Crop Care challenged this interpretation and the imposition of a penalty based on global turnover, prompting the Supreme Court to settle the ambiguity. The Court ruled that, for the sake of proportionality, the term “turnover” must be interpreted as relevant turnover, i.e., turnover from the infringing product or service in India. This ensured that the penalties bore a rational nexus to the contravention, whereas reliance on global turnover could result in fines disproportionate to the conduct under scrutiny.

In 2023, in a stark departure from the Supreme Court verdict, the legislature enacted the Competition Amendment Act, 2023 (‘2023 Amendment’), amending Section 27(b) of the Act to permit the CCI to impose penalties up to 10% of the global turnover of the preceding three years. This includes turnover earned from all products and services, regardless of whether those markets were involved in the alleged contravention or whether the revenue was earned in India. In furtherance of the same, the CCI issued the Guidelines under Section 64B of the Act, which provide that the base amount for calculating penalties may be up to 30% of the relevant turnover of the preceding three years and confer upon the CCI the discretion to adopt global turnover as the base amount in two circumstances: where it is not feasible to calculate the relevant turnover of the enterprise (feasibility test) or where an enhanced penalty is considered necessary to achieve deterrence (deterrence test).            

 Deterrence vs. Due Process: A Critical Examination of the Guidelines

Principle of Proportionality

A major criticism raised by global tech giants is that the global turnover rule is arbitrary and grossly disproportionate, rendering it ultra vires of Articles 14 and 21 of the Constitution of India, 1950. The Supreme Court in the Excel Crop Care case notably held that “the imposition of a penalty on the principle of proportionality is a constitutionally protected right under (i) equality before law; and (ii) protection of life and personal liberty.” The Court went on to state that penalties, while meant to act as a deterrent for others, should not “deviate from ‘teaching a lesson’ to the violators and lead to the ‘death of the entity’ itself.”

In In re: Federation of Hotel & Restaurant Associations of India, the CCI laid down that “the twin objectives behind the imposition of penalty are: (a) to reflect the seriousness of the infringement, and (b) to ensure that the threat of penalties will deter the infringing undertakings from indulging in similar conduct in the future.” The principle of proportionality was also followed by the Supreme Court in determining the penalties in Bhagat Ram v. State of Himachal Pradesh and Ranjit Thakur v. Union of India.   

Another argument supporting the relevant turnover approach is that, where an enterprise’s global turnover significantly exceeds its operations in the specific relevant market in India in which the alleged anti-competitive conduct occurred, imposing penalties of up to 10% of global turnover would amount to an overreach. Such penalties bear no meaningful link to the impugned conduct and may discourage foreign businesses from establishing business operations in India. The usage of global turnover also raises risks of double jeopardy. For instance, an enterprise found to have engaged in anti-competitive conduct across multiple jurisdictions, such as India and the EU, may face penalties in India based on its global turnover, while the European Commission may also levy fines based on turnover within the EU, resulting in the enterprise paying an exorbitant, unjust amount.

Principle of Non-Retrospectivity

The CCI proceedings against Apple were initiated in 2021, whereas global turnover was adopted as the standard for determining the base amount for penalty calculation only in 2023. The current application of the Guidelines violates lex prospicit non respicit, i.e., the principle of non-retrospectivity of statutes. In another instance, the CCI has applied the Guidelines to compute the total penalty in the Nagrik Chetna Manch case, even though the proceedings had commenced in 2015, long before the Guidelines were enforced. Applying this new method of penalty calculation retrospectively would amount to a gross violation of the principle of non-retrospectivity.

In Hitendra Vishnu Thakur v. State of Maharashtra, the Supreme Court held that “a statute which affects substantive rights is presumed to be prospective in operation unless made retrospective, either expressly or by necessary intendment.” The 2023 Amendment that altered the base amount for penalty from relevant turnover to global turnover is a substantive change that increases Apple’s potential liability from millions to an unprecedented USD 38 billion. A similar approach to the prospectivity of new laws was also held in Commissioner of Income Tax-I, New Delhi v. Vatika Township, Govind Das v. The Income Tax Officer, Moti Ram v. Suraj Bhan, and Ram Kishor Arora v. Directorate of Enforcement, where the Supreme Court consistently held that legislations which impose new obligations or attach new disabilities must be construed as prospective, unless the statute expressly provides otherwise. 

Illogical Nexus

Paragraphs 3(1) and 3(2) of the Guidelines provide that the Commission shall first determine an initial base amount of up to 30% of the average relevant turnover or average income of the enterprise, taking into account the circumstances surrounding the contravention, including the nature and gravity of the contravention, the characteristics of the industry affected, and the broader implications on the economy. The Commission may adjust this base amount by taking into account mitigating and aggravating factors to arrive at the final penalty, subject to a statutory cap of 10% of the global turnover. Suggested factors for this purpose include the duration of the contravention, the role of the enterprise in orchestrating the infringing conduct, the past conduct, admission of the contravention, if any, and the stage at which such admission is made, the extent of cooperation during the inquiry, and the voluntary termination of the alleged anti-competitive conduct.  

Paragraph 3(6) of the Guidelines is inconsistent and fallacious because it adopts 30% of the global turnover as the base penalty amount, only to later limit the final amount to a statutory maximum of 10% of global turnover. There is a high likelihood that the penalty calculated, even after accounting for mitigating factors, may exceed this cap. In such circumstances, the rule stipulates that the penalty be reduced to the statutory 10% of the global turnover. As a result, all the resources deployed in determining the fine are rendered meaningless. Hence, for penalty calculation purposes, the CCI must strictly adhere to using the relevant turnover of the enterprise.

India’s penalty calculation practices are largely consistent with the norms of the EU and the UK, except for this one rule. Under the EU Fining Guidelines, the European Commission’s established approach is to first determine a base amount, which may be up to 30% of the relevant sales, i.e., the sales of the products covered by the infringement during the last full year of the infringement. This percentage is decided based on the seriousness of the infringement, considering factors such as the nature and the geographic scope of the infringement. The base amount is then multiplied by the duration of the infringement. Thereafter, aggravating and mitigating factors, such as the undertaking’s role in the infringement, the extent of cooperation, and the recurrent nature of the conduct, are taken into account to calculate the final amount. This final amount is subject to a cap of 10% of the global turnover in the preceding year.

Under the UK Penalty Guidance, the base point for determining the penalties may be up to 30% of the relevant turnover of the enterprise, reflecting the nature of the product, the seriousness of the infringement, as well as its actual or potential effects on competitors and consumers. This base amount may be adjusted to account for the duration of the contravention. The Competition and Markets Authority (‘CMA’) may consider the undertaking’s turnover in markets beyond the UK if its turnover in the UK is negligible. For large enterprises, the CMA often applies an additional uplift of up to 10% of the relevant turnover to ensure deterrence. Aggravating and mitigating factors, such as the role of the undertaking, retaliation, internal compliance measures, and timely termination of the conduct, are given due regard to calculate the final penalty. The final amount cannot exceed 10% of the undertaking’s global turnover in the year preceding the imposition of the fine. Notably, neither jurisdiction permits the use of a percentage of global turnover as the base amount for penalty calculation for deterrence purposes, as envisaged under the Indian Guidelines.

That said, the author concedes that in a circumstance where information regarding the relevant turnover is unavailable or negligible, the CCI may inevitably have to rely on global turnover as the base amount. In such cases, there are two possible approaches. The first approach is to increase the cap beyond 10% of global turnover. The second, and relatively more pragmatic, approach is to commence the penalty calculation with a very low multiplier, such as 1 or 2% of the global turnover, and thereafter arrive at the final penalty after considering the aggravating and mitigating factors. This method would minimise the likelihood of the final penalty exceeding the statutory ceiling in most cases.

Unfettered Discretion

The language of the Guidelines is vague. Paragraphs 3(1)(c) and 3(2)(j) contain catch-all clauses permitting the CCI to take into account “any other factor” while determining the penalty, expanding the scope for arbitrary enforcement. Such clauses negate the entire purpose of issuing the Guidelines, which is to ensure a more consistent and transparent method of penalty calculation. Further, the Guidelines also do not specify the weightage to be accorded to individual aggravating or mitigating factors.

Paragraph 3(7) provides that, if the penalty computed based on the factors set out in paragraphs 3(1) and (2) is insufficient to ensure sufficient deterrence, the CCI may increase the penalty up to the legal maximum. However, the Guidelines fail to lay down any criteria that the CCI must consider while determining whether the computed penalty is inadequate to ensure deterrence. This essentially allows the CCI to arbitrarily enhance the penalty up to the statutory maximum without providing any justification.   

The Guidelines further fail to specify the relevant period for which the turnover is to be considered. Paragraph 3(3) stipulates that, under ordinary circumstances, the CCI may consider the relevant turnover of the three years of the enterprise preceding the year in which the Director General’s report is received. A proviso clause further states that in “appropriate cases,” the CCI may instead consider the relevant turnover of three years preceding the contravention. Once again, the Guidelines do not clarify the factors that distinguish an “ordinary” case from an “appropriate” one. The author submits that the relevant period must be the three years preceding the contravention. This way, the penalty shall reflect the economic size and capacity of the company at the time it committed the contravening act. Further, taking the period before the contravention of the act is more objective and stable as compared to a period linked to a procedural step by the CCI, which may be delayed in many circumstances. In any event, this decision must not be left to the unfettered discretion of the CCI and must be clearly standardised, either through a definitive interpretation by the Supreme Court or by way of a legislative amendment.

Conclusion

Ultimately, the onus falls to the judiciary or the legislature to determine whether the CCI’s discretion to rely on global turnover for deterrence is a constitutionally valid objective that overrides the principle of proportionality and non-retrospectivity, shaping the fate of penalties in future cases. While one of the core objectives of the CCI is deterrence, in a jurisdiction with developing markets and competition laws, adherence to proportionality is the need of the hour. A balanced approach is necessary to cultivate a business-friendly landscape while continuing to attract foreign investment.

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This article has been authored by Deva Priya N, a student at Maharashtra National Law University, Nagpur. This blog is part of RSRR's Rolling Blog Series.