Determination of Monetary Penalty: Decoding CCI's Guidelines

On March 6, 2024, the Competition Commission of India (CCI) came out with important notifications pertaining to the imposition of penalties on enterprises and individuals for contravening provisions of the Competition Act, 2002. While the CCI (Determination of Turnover or Income) Regulations, 2024, provide for the determination of turnover or income of enterprises and individuals for imposing penalty under Sections 27 and 48, the CCI (Determination of Monetary Penalty) Guidelines, 2024, provide the methodology for determination of penalty under various provisions of the Act.

Penalty based on average of the turnover or income

In case of contravention of provisions contained in Sections 3 and 4, pertaining to anti-competitive agreements and abuse of dominant position, the Commission may, after holding an inquiry, impose a penalty under Section 27(b). The said Section was amended vide the Competition (Amendment) Act, 2023, which was notified in April 2023. As per the amended provision, the penalty leviable on the person or enterprise which is a party to such agreement or has abused its dominant position, cannot be more than 10% of the average of the turnover or income for the last three preceding financial years.

Section 48(1) specifies that when the Act’s provisions are contravened by a company, every person in charge of the company and responsible for the conduct of its business at the time of contravention, along with the company would be liable. The penalty that may be imposed on such persons cannot exceed 10% of the average of the income for the last three preceding financial years.

The 2023 Amendment Act also enabled enterprises, against whom an inquiry has been initiated under Section 26(1) for contravening Section 3(4) or Section 4, to submit applications for settlement of proceedings or for offering commitments. The regulations regarding settlement and commitment were notified by the Commission on the same day as the penalty guidelines, i.e., March 6, 2024.[1]

Determination of turnover or income

  • Turnover or income of enterprises

    When it comes to enterprises, the turnover or income includes the value of sales (or revenue or receipts, by whatever name called), and other operating revenue as per their audited financial statements. All other income, indirect taxes, trade discounts and intragroup sales will not be considered for determining the enterprise’s turnover or income.

  • Income of individuals

    The income of an individual will be the gross total income as per the income tax returns. However, in a deviation from the draft regulations, Regulation 4(1) of the notified regulations expressly states that income from house property and capital gains are excluded. This deviation is pursuant to the receipt of stakeholder comments proposing to consider “relevant income” instead of “gross total income” of individuals.

Methodology for determination of penalty

One of the notable changes brought in by the amendment and the regulations is the expansion of the scope of turnover to mean global turnover derived from all the products and services by a person or an enterprise. In this regard, the new guidelines provide for the determination of penalty, leviable under Section 27(b), in stages; at the outset, the Commission has to consider an amount of up to 30% of the average relevant turnover or average income of the enterprise. The same should be done upon considering the nature and gravity of the contravention, the nature of the industry or sector affected because of the contravention and its implications on the economy, and any other relevant factor.

The amount so arrived at by the Commission can be adjusted for imposing the penalty, based on factors listed under paragraph 3(2) of the guidelines including duration of the contravention, cooperation during the Director General’s (DG) investigation, etc. but the same is subject to the legal maximum.

The enterprise’s relevant turnover or income for three years preceding the year in which DG’s report is received by the Commission can be considered for determining the average relevant turnover or average income. It is specified that if it is not feasible to determine the relevant turnover under paragraph 3(3), the global turnover of the enterprise can be considered for determining the penalty.

In case of contravention by companies, the guidelines reiterate that the penalty leviable, under Sections 48(1) and (3), on persons cannot exceed 10% of the average income of the person for the last three preceding financial years. Here, the percentage of the average income to be considered has to be decided based on factors such as the nature and gravity of the contravention, the extent of the person’s involvement in the contravening conduct and such other factors as listed under paragraph 5(2). Additionally, it is stated that the Commission will consider the income tax returns of the person for the same years as that of the company for whose conduct such person has been held liable.

However, in exceptional circumstances, the Commission can deviate from the methodology provided under the guidelines subject to the condition that the reasons for the same are recorded in writing.

Implications

The penalty guidelines are definitely a positive step in streamlining the method of calculating penalties and would assist CCI in providing a basis for the imposition or calculation of such penalties. CCI has also been provided discretion which has to be exercised judiciously by supplying reasons for it while determining the penalties.

The settlement and commitment regulations provide an opportunity for entities under investigation to submit settlement or commitment terms to CCI for its acceptance. The Commission may accept or reject such terms at its discretion. Settlement and commitment options are available to entities under investigation prior to CCI passing a judgment on the matter. Entities involved in legal issues with CCI have been given an opportunity to short circuit their disputes by settling the same and/or by paying penalties as settlement amounts and making commitments. Entities are not required to make any admission on violations in such cases. There is also no provision for appeal from any commitment or settlement accepted by CCI.

In case of contravention by companies, the guidelines reiterate that the penalty leviable, under Sections 48(1) and (3), on persons cannot exceed 10% of the average income of the person for the last three preceding financial years. Here, the percentage of the average income to be considered has to be decided based on factors such as the nature and gravity of the contravention, the extent of the person’s involvement in the contravening conduct and such other factors as listed under paragraph 5(2). Additionally, it is stated that the Commission will consider the income tax returns of the person for the same years as that of the company for whose conduct such person has been held liable.

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