Definition of “Undertaking” under GDPR needs to be Debated

GDPR is liked by some as a good law to protect privacy of individuals and is often looked upon as an “Emerging Standard”.  Many companies are working towards calling themselves “GDPR Compliant” since it makes a good marketing sense though GDPR does not apply to them. Even the Whitepaper on Data Protection Law which the Justice Srikrishna  Committee made references to GDPR frequently giving a perception that Indian Data Protection law will be a reflection of GDPR in some way.

At the same time GDPR is hated by the IT Companies because it increases their cost of Privacy compliance and also holds the Damocles sword on their head with the obnoxious penalty clause of Administrative Fines.

In most privacy laws, the emphasis is to provide direct protection to the data subject by giving him compensation for adverse consequences of data breach. In order to reduce the possibility of privacy breach, the law also provides certain standards of compliance and to goad the companies to take compliance seriously, imposes fines and penalties for non compliance. The fine is meant to act as deterrence against neglect of “Due Diligence” requirements.

GDPR has used Administrative fines as a means of causing a “Chilling Effect” on the industry that they are at the mercy of the “Supervisory Authorities” who have been given powers to impose unreasonably large penalties.

Article 83 (4) and 83 (5) prescribe the penalties.

Under Article 83(4), certain infringements will be subject to administrative fines upto 10 million Euros (1 Euro=Rs 80) or in the case of an undertaking , upto 2% of the total worldwide annual turnover  of the preceding financial year whichever is higher. 

Under Article 83(5) certain infringements will be subject to administrative fines upto 20 million Euros (approx Rs 160 crores) or in the case of an undertaking , upto 4 % of the total worldwide annual turnover  of the preceding financial year whichever is higher. 

The lower fine is in respect of  the following articles

Article 8: Child’s Consent

Article 11: Processing which does not require identification

Article: 25 to 39: Various obligations such as privacy by default, impact assessment, data breach notification failure etc

Article 42 and 43 : Certification related

The Higher fine is in respect of the following articles

Articles 5,6,7 and 9: violation of basic principles for processing including consent

Articles 12 to 22: Infringement of Data Subject’s Rights

Articles 44 to 49: Transfer of personal data to third countries

and non compliance of member state laws and order of a supervisory authority

In the penalty clause what strikes the eye is that in case of an “Undertaking” the penalty may be 2% or 4% of the total worldwide turnover.

To understand the impact of this clause, we need to understand what constitutes an “Undertaking” under the law applicable in this context.

The meaning of “Undertaking” is defined under articles 101 and 102 Treaty On the Functioning of European Union (TFEU).

One obvious way of determining the scope of this word is to consider that where one company exercises “Control” over another company, they form a single economic entity and hence are part of the same undertaking.

This means that if a company is a holding company and the subsidiary company is the one subject to penalty, the holding company may become part of the global undertaking. If the holding company is in EU and the subsidiary companies are in one or more other countries, then all of them will become part of the “Undertaking”.  Beyond this, it would be the specific ruling that any Court may give or which the supervisory authority may imply.

If therefore, Infosys (an example only) is an Indian company and has subsidiaries in EU where it is a Data Controller and is subject to some fine, then the turnover of Infosys becomes part of the turnover of the undertaking. Now if Infosys subsidiaries in other countries also hold cross holdings in the EU entity, then some crazy EU court may add the global turnover of Infosys as the turnover of the undertaking to determine the fine.

This may mean that the revenue generated by the employees of the Company in India out of their operations here which have no relevance to EU operations will be taxed in EU.

The legality of such a measure is considered debatable.

Also, when Infosys-EU signs a Data Controller contract and creates a charge on the earnings in India which are enforceable against the EU subsidiary, the share holder’s of the Indian Company may have reasons to ask if their wealth gets eroded.

At first glance, the addition of “Global Turnover” in the computation of the penalty appears to be an over reach in law and may not sustain a proper scrutiny. But this is some thing which NASSCOM has to address and consult international law experts such as Harish Salve and clarify.

In the meantime, Indian companies having some operations through EU subsidiaries need to ensure that the “Holding Company Turnover” does not become a factor that increases the potential liability of the EU subsidiary. This can be done through shedding the “Holding Company Status” and ensuring that the EU subsidiary and the Indian parent (hitherto) company maintain an arms length relationship without any director level control or shareholder level control.

When companies who donot require to follow GDPR want to adopt GDPR as a “Standard” they should ensure through proper disclosures that “The adoption of GDPR compliance as a business strategy across all the global units of the undertaking” is not treated as a prima facie admission that there exists a global networking relationship across all such companies exposing the aggregate turnover of all such companies to the risk of being considered for fine computation.

I look forward to a response from NASSCOM on this matter.


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