What is “Turnover” for the Purpose of Penalty under Competition Act?

The Competition Act, 2002 (hereinafter referred to as the “Act”) empowers the Competition Commission of India (CCI) to regulate anti-competitive practices and ensure a fair and competitive market environment in India. One of the critical aspects of the penalty framework under the Act is the use of the term “turnover” to calculate fines imposed on enterprises or individuals violating its provisions.

Despite its seemingly straightforward meaning, the term “turnover” under the Competition Act has a nuanced legal interpretation that has evolved over time. 

Importance of Turnover in Competition Law Penalties

Penalties under the Competition Act are primarily monetary and are based on a percentage of an enterprise’s turnover. This is significant because:

• It ties the penalty amount to the size and economic capacity of the offender.
• It ensures that penalties are impactful enough to deter anti-competitive behaviour.
• It avoids fixed or arbitrary fines which may be insignificant for large companies or crippling for small businesses.

Hence, understanding the concept of “turnover” is key to grasping how penalties are calculated and applied under the Act.

Statutory Basis of Turnover in the Competition Act, 2002

Sections Relevant to Turnover-Based Penalties

The Competition Act prescribes turnover-based penalties under multiple provisions:

• Section 27: This section empowers the CCI to impose penalties of up to 10% of the average turnover of an enterprise for contraventions of certain key provisions such as:
  • Section 3(3): Cartels, including price fixing, market allocation, and production control.
  • Section 3(4): Anti-competitive vertical restraints such as exclusivity or resale price maintenance.
  • Section 4: Abuse of dominance, including unfair pricing and denial of market access.
• Section 43A: Imposes a penalty of up to 1% of turnover on enterprises that fail to obtain CCI approval before implementing a combination (merger or acquisition) that breaches the prescribed thresholds or execute it prematurely.
• Section 48: Holds individuals liable by allowing the imposition of penalties up to 10% of their average income (interpreted as turnover for individuals) for failing to prevent or for giving effect to anti-competitive conduct.

Different Interpretations of Turnover

Total Turnover

In the early years following the Act’s enactment, the CCI interpreted “turnover” to mean the total turnover of the enterprise. This meant the aggregate revenue from all products and services offered by the company across all locations and business lines.

Issue with this approach: For companies dealing in multiple products or operating across multiple sectors, this could lead to disproportionate penalties. For example, if a company engages in anti-competitive conduct only in one product category, penalising based on total turnover from all categories (even unrelated ones) would be unfair.

Relevant Turnover

To address this concern, the concept of “relevant turnover” was developed. This refers to turnover generated only from the specific goods or services and the relevant geographic market that are involved in the contravention.

This interpretation was finally settled by the Supreme Court of India in the landmark case of Excel Crop Care Ltd. v. CCI (2017), where the Court held that:

• Turnover for penalty purposes must relate to the infringing product and market, not the company’s entire business.
• This approach aligns with the doctrine of proportionality, ensuring that penalties are fair and proportionate to the offence.
• It prevents companies from being punished for unrelated business activities.

Global Turnover

The Competition (Amendment) Act, 2023 introduced a further refinement by adding an explanation to Section 27(b), defining “turnover” as global turnover. This means turnover generated from all products and services worldwide by an enterprise.

Why this change? To align India’s penalty framework with global standards and ensure that multinational corporations cannot escape substantial penalties by limiting turnover calculations to Indian operations alone.

However, the use of global turnover is subject to the guidelines issued by the CCI, including the CCI (Determination of Monetary Penalty) Guidelines, 2024, which require the CCI to balance global turnover with fairness and proportionality.

How is Turnover Computed?

Average Turnover for Penalty Calculation

The Act and CCI practice generally calculate turnover as the average of the turnover for the last three financial years preceding the contravention. This smoothens fluctuations and provides a fair basis for penalty assessment.

Source of Data

• For Enterprises:
  • Audited financial statements are the primary source of turnover data.
  • If audited accounts are not available, turnover certified by a Chartered Accountant may be accepted.
  • For relevant turnover, turnover data must be segregated by product and geography.
• For Individuals (under Section 48):
  • Turnover is interpreted as gross income from all sources (excluding capital gains and income from house property).
  • The individual’s income tax returns serve as the evidence.
  • If returns are unavailable or filed in multiple jurisdictions, income must be certified by a Chartered Accountant along with an affidavit.

Determination Process (Simplified)

1. Identify the applicable turnover type: relevant, total, or global.
2. Collect turnover data for the last three years.
3. Calculate the average turnover: sum of three years divided by three.
4. Adjust turnover according to the relevant product/service and market (if applicable).
5. Verify and certify data accuracy.

Legal and Regulatory Guidelines on Turnover

CCI (Determination of Turnover or Income) Regulations, 2024

These regulations clarify how turnover or income should be determined for penalty purposes. They specify documentation requirements, such as audit reports, CA certificates, and affidavits, to establish turnover reliably.

CCI (Determination of Monetary Penalty) Guidelines, 2024

The guidelines establish a stepwise method for penalty calculation, reflecting turnover concepts:

• Step 1: Calculate the relevant turnover.
• Step 2: Determine the base penalty, generally up to 30% of the average relevant turnover or income.
• Step 3: Adjust the penalty based on factors such as the nature and gravity of the offence, sectoral impact, and mitigating/aggravating circumstances.
• Step 4: Ensure the penalty does not exceed the legal maximum (10% of turnover for Section 27 cases; 1% for Section 43A).
• Step 5: Use global turnover only when relevant turnover is not feasible to compute

Judicial Approach to Turnover and Penalties

Doctrine of Proportionality

Indian courts, including the Supreme Court, emphasise the need for proportionality in penalty imposition:

• Penalties should be proportionate to the offence’s nature and severity.
• They should neither be excessive to the point of crushing the enterprise nor too lenient to fail as deterrents.
• The penalty should relate to the benefit gained or harm caused by the contravention.

Preferential Interpretation for the Offender

Where a statute’s wording allows two interpretations, courts favour the one that is less burdensome on the offender. This principle underpinned the Supreme Court’s rulingin Excel Crop Care, leading to the relevant turnover interpretation.

Conclusion

Understanding what constitutes “turnover” under the Competition Act, 2002, is crucial for enterprises and individuals subject to competition law enforcement in India. The concept has evolved from a blunt application of total turnover to a nuanced approach that emphasises relevant turnover and now includes global turnover considerations.

This evolution reflects India’s effort to balance fairness, proportionality, and deterrence in its penalty framework. Enterprises must proactively maintain detailed records, understand the nature of their business segments, and engage transparently with the CCI to navigate the penalty regime effectively.