Alerts & Updates 18th Mar 2024

CCI publishes the CCI (Determination of Monetary Penalty) Guidelines, 2024

Authors

Ravisekhar Nair Partner | Bengaluru
Abhay Joshi Partner | New Delhi | Noida
Parthsarathi Jha Partner | New Delhi | Noida
Aayushi Sharma Principal Associate | Delhi NCR
Bhaavi Agrawal Associate | Delhi NCR
Pavan Kalyan Associate | Delhi NCR
Raagini Agarwal Associate | Delhi NCR

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  • I. Background

    On March 6, 2024, the CCI published the CCI (Determination of Monetary Penalty) Guidelines, 2024 (Penalty Guidelines). A day earlier, the MCA notified the amended Section 27 and 48 of the Act (as amended by the Amendment Act), that have now been enforced. The Penalty Guidelines have been issued under Section 64B of the Act to determine the penalty that can be imposed on account of contraventions of the Act. While the Penalty Guidelines are not binding on the CCI, it will have to consider them in cases wherein it imposes a penalty under the Act.

  • II. Methodology for determination of penalty by the CCI
    • The Penalty Guidelines have introduced new methodologies for calculation of the penalty for specific contraventions. The chart below explains the methodology in context of Section 27(b) of the Act (i.e., contraventions of Sections 3 and/or 4 of the Act other than contravention of Section 3(3) of the Act).
    Calculation of penalty to be imposed under Section 27(b) of the Act
    Steps for calculation Illustration

    Step 1: The CCI would ascertain ‘relevant turnover’ of an enterprise.

    ‘Relevant turnover’ is turnover derived ‘directly or indirectly’ from the sale of goods and services to which the contravention relates.

    Notes:

    • In appropriate cases, the CCI may consider relevant turnover of three years of the enterprise preceding the year in which the DG’s investigation report is received by the CCI.
    • In cases where the determination of relevant turnover is not feasible, the CCI may consider “global turnover” (i.e., turnover derived from sales of all goods and services of an enterprise).
    X’s average turnover for the past 3 preceding years is INR 100,000 while the average turnover generated from the infringing products/ services is INR 80,000.

    Under the Penalty Guidelines, the ‘relevant turnover’ would be INR 80,000.

     

     

    Step 2: The CCI would compute the ‘base penalty amount’ which can be up to 30% of the ‘relevant turnover’, considering factors like nature and gravity of the contravention; nature of the industry; its implications on economy; and any other factor which CCI deems appropriate. The CCI, after looking at the nature of the contravention and other factors, can arrive at a maximum base penalty amount of INR 24,000.
    Step 3: The CCI may further adjust the ‘base penalty amount’ determined in the step above based on the following factors:

    • Nature of contravention: Duration of the contravention, role of the enterprise in orchestrating it, whether it is a repeated contravention and whether the party admitted to the contravention.
    • Behaviour of the contravening party: Extent of cooperation in the DG’s investigation and CCI proceeding, voluntary measures to address the anti-competitive behaviour, and implementation of a compliance programme.
    Based on the factors mentioned in Para. 3(2) of the Penalty Guidelines, CCI will take further consider aggravating and mitigating factors in the instant case to adjust the penalty.

    Let’s assume that this was X’s first violation and it has put in place an internal compliance program to make sure this does not happen again. The CCI can consider these mitigating factors and adjust the penalty amount to INR 20,000.

    Step 4: If the amount determined in the above step exceeds the ‘legal maximum’, then CCI will adjust it to reduce it to the legal maximum.

    ‘Legal maximum’ is the ceiling for any monetary penalty determined under the Penalty Guidelines and cannot exceed the maximum amount of penalty envisaged under the Act i.e., in context of Section 27(b) of the Act, 10% of the global turnover of an enterprise.

    The penalty calculated above (INR 20,000) is higher than the legal maximum in the present case (i.e., INR 10, being 10% of the total turnover of the entity). The CCI will adjust it downwards and bring it to the legal maximum.

    Therefore, the final penalty that the CCI may impose on X would not exceed INR 10,000.

    Step 5: Under the Penalty Guidelines, after calculating the penalty based on the factors enumerated under Para. 3(1) and (2), if the CCI is of the opinion that the determined penalty would not result in sufficient deterrence, it may increase the penalty up to the ‘legal maximum’. However, the Penalty Guidelines do not provide any factors that it would consider to measure the deterrent effect. For example, if a contravening enterprise ‘Y’, global turnover is INR 1000 and relevant turnover is INR 100. The legal maximum in the present case is INR 100. Under Para. 3(1) of the Penalty Guidelines, the CCI may begin with a penalty base of INR 30 and post adjustments under Para. 3(2), it considers that adjusted penalty amount is not sufficient, it could raise the penalty to up to legal maximum i.e. INR 100.
    • Cartels (Proviso to Section 27(b) of the Act).

    The above methodology also applies to cartel cases except that base amount would be based on profit after tax instead of “relevant turnover”.

    • Flexibility to calculate penalty based on financial statements submitted either 3 years: (1) before receipt of the DG Report by the CCI; or (2) before the CCI’s final order.

    Previously, the CCI’s approach was usually to direct an enterprise to submit its financial statements for 3 years, prior to the receipt of the DG Report. However, under the Penalty Guidelines, now the CCI can request an enterprise to submit financial statements for the 3 years preceding the contravention. While the Penalty Guidelines are not clear, it should logically mean 3 years preceding the final order of the CCI establishing the contravention and not 3 years preceding the act of contravention.

    • Determination of penalty for individuals.

    The average income of the individual would be determined by looking at the gross total income from the individual’s income tax return (ITR) while excluding (1) income from house property and (2) income from capital gains. These returns would be considered for the same period as the enterprise employing the individual. Where the ITR is not available for an individual, the average income would be based on the total income certified by a CA, along with an affidavit by the individual.

    • Factors to be considered by CCI for imposition of other fines or penalties.

    The Penalty Guidelines also provide for factors to be considered by the CCI while imposing a penalty in other situations contemplated under the Act:

    Penalty Factors provided by the Penalty Guidelines
    Penalty imposed on individuals.
    • Nature and gravity of contravention of the Act by the enterprise employing the individual.
    • Role, extent and duration of involvement of the individual in the contravening conduct and repeated contraventions if any.
    • Extent of cooperation of the individual with the DG investigation or the CCI proceeding.
    Penalty imposed for gun-jumping or not submitting information under Section 20(1) of the Act.
    • Any consummation or part consummation of the combination without giving notice.
    • Violation of any substantive or procedural standstill obligations prior to or after filing notice with the CCI under Section 6(2A) of the Act.
    • Not submitting information during an inquiry under Section 20(1) of the Act.
    • Voluntary filing of notice with the CCI.
    • Conduct of the parties Including making voluntary disclosures, cooperation during the inquiry, furnishing all requisite material or documents in response to the information sought by the CCI.
    • Any other factor deemed appropriate by the CCI.
    Non-compliance with the CCI’s order.
    • Minimum and maximum penalty under the Act.
    • Extent of non-compliance or non-cooperation and the reasons.
    • Nature of misleading information.
    • Knowledge about the information furnished being untrue or incomplete.
    • Repeated contravention of the Act.
    • Any other factor deemed appropriate by the CCI.
    Failure to comply with the directions of the CCI and the DG.
    Making a false statement or omission to furnish material information.
    Contraventions related to submission of information.
    ELP COMMENTS
    • Implication of broadening the scope of ‘Relevant Turnover’. The broadened definition of ‘relevant turnover’, which also includes the turnover generated ‘indirectly’ from the sale of goods or provision of services, may have a significant bearing on entities in certain cases, in particular entities in the digital and tech sectors. The CCI may likely account for the ‘network effects’ from the infringing products as being attributable to sales of non-infringing products, in which case, revenues from sale of non-infringing products may be included in relevant turnover. This may significantly increase the ‘relevant turnover’ for companies and consequently the final penalty amounts that the CCI might determine.
    • Implication of the CCI’s flexibility to calculate penalty based on financial statements submitted either 3 years (1) before the DG Report or (1) before the CCI’s final order. In cases where there is a time-gap between receipt of the DG Report by the CCI and the eventual final order by the CCI, the Penalty Guidelines allow the CCI to base its penalty on more recent financial statements instead of financial statements preceding the submission of the DG investigation Report. In scenarios where an enterprise has witnessed an increase in revenues in the period between when the DG Report was received and the CCI’s final order, CCI could take into account more recent financial statements leading to higher penalty amount.
  • III. Conclusion

    The Penalty Guidelines are certainly a welcome step in providing some clarity on the CCI’s approach towards penalty computation. The CCI has, till now, been following the ‘relevant turnover’ approach towards penalty computation, according to the Supreme Court’s judgment in the Excel Crop Care case, under which the penalty was capped at 10% of the ‘relevant turnover’. The amended Act has enhanced the powers of the CCI as it can now look at the global turnover based on the entire portfolio of products of a company. This may in some cases drastically enhance the potential monetary liability in case of infringements.

    We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

    Ravisekhar Nair, Partner, Email – ravisekharnair@elp-in.com

    Parthsarathi Jha, Partner, Email – parthjha@elp-in.com

    Abhay Joshi, Partner, Email – abhayjoshi@elp-in.com

    Aayushi Sharma, Principal Associate, Email – aayushisharma@elp-in.com

    Bhaavi Agrawal, Associate, Email – bhaaviagrawal@elp-in.com

    Pavan Kalyan, Associate, Email -pavankalyan@elp-in.com

    Raagini Agarwal, Associate, Email – raaginiagarwal@elp-in.com

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.