2018 (12) TMI 1599 - NAPA - GST

Profiteering - manufacture and supply of consumer goods comprising of four major categories, viz. Home Care, Personal Care, Foods and Refreshments - Respondent had not reduced the Maximum Retail Prices (MRPs) of the products which were being sold by him although GST rates were reduced - it is also alleged that the Respondent had increased the base prices of his products, so that the MRPs continued to be the same even after reduction in the rates of GST - recovery of excess Input Tax Credit (ITC) on the stocks of his brands lying with them. Held that - It is established that the increase in his profits was entirely due to the increase in the base prices made by the Respondent through which he had denied the benefit of tax reduction to his customers and appropriated the tax benefits himself. Hence, it is established beyond any iota of doubt that the Respondent has committed breach of the provisions of Section 171 of the CGST Act, 2017 by resorting to profiteering. The basic aim is to ensure that both the benefits of reduction in the rate of tax and ITC are passed on to the consumers by commensurate reduction in the prices. As per the provisions of the above Rule the Authority has power to determine and not prescribe the methodology. During the course of the present proceedings the Respondent was repeatedly asked to suggest alternate methodology if he was not satisfied with the computation of the profiteered amount made by the DGAP but the Respondent has failed to do so. The Respondent has also calculated the profiteered amount himself and deposited the same in the CWF which clearly shows that he was aware of the concepts of profiteering, commensurate and reduction in the prices. Therefore, all the objections raised by him in this behalf are frivolous and cannot be accepted. The Respondent has also referred to the dictionary meaning of profiteering and claimed that he had not resorted to profiteering. However, it is quite clear from the record that he had illegally and wrongly increased the base prices of the products on which the rates of tax had been reduced w.e.f. 15.11.2017, the day from which this reduction had come in to force. Therefore, it is established that he had earned disproportionately large and grossly unfair profit by exploiting an unusual situation in which the rates of tax had been reduced and hence his act squarely falls within the definition of profiteering being unethical, immoral, illegal, malafide and contumacious. It is apparent from the record that the Respondent had tried to mislead the authorities by making false claims as he had acted quite contrary to the claims which were made by him in his above letters. Instead of passing on the benefits he had increased the base prices, had compelled the customers to pay more price than what they were legally required to pay, had forced them to pay additional GST on the increased prices and also earned extra margins on the enhanced prices. He had even illegally compelled his RSS to deposit the ITC which they could have legally claimed due to reduction in the rates of tax which would have resulted in commensurate reduction in the prices and therefore, all the claims of having passed on the benefit of tax reduction sincerely and faithfully made by the Respondent are false and malafide. Admissibility of TRAN-2 Credit as deduction - The relevant provision under which the transitional credit was claimed as TRAN-2 credit in this particular case is Section 140 (3) of the Act - Held that - The fact that the Respondent has availed the TRAN-2 credit of ₹ 76.06 Crores is not in dispute as he has failed to produce any evidence to prove, either before DGAP or before the Authority that this benefit of Tran-2 credit has been passed on by way of reduced prices. Moreover, the Respondent, on page 23, point (d) of his written submissions dated 14.09 2018 has mentioned that the law did not mandate passing of TRAN-2 credit, which is not correct and hence his contention cannot be accepted. In the light of the above facts, it can be concluded that the Respondent has not passed on the benefit of TRAN-2 credit to any of his recipients, which under Section 140 (3) read with Section 171 of the Act, he was required to pass on. Therefore, the plea of the Respondent to claim this amount of ₹ 76.06 Crores of Tran-2 credit as a deduction from the profiteered amount is rejected. Admissibility of grammage benefit as deduction - Grammage benefit given more than the GST rate reduction - Held that - The Authority is of the view that Section 171 of the CGST Act, 2017, puts the onus of passage of any benefit of the GST rate reductions or ITC to the recipient on the supplier. The keyword to be emphasised here is commensurate reduction . The law expects that commensurate reduction to the extent of the rate reductions should be given by the Respondent. Any greater reduction in prices is entirely a business call taken by the Respondent well within his right and hence there is no ground to compensate him on this ground - The amount of profiteering has to be calculated by keeping the recipient at the centre. This implies that one particular recipient may have bought one product from the Respondent at a price which he was entitled to pay when the rates of tax were reduced but simultaneously there is another recipient who has paid more than what he was supposed to pay for some another product of the Respondent. The additional benefit given to one recipient cannot be offset with the denial of benefit to another recipient, as this is not the spirit of the law - the Respondent s claim for deduction of ₹ 39.08 Crores on account of the more benefit given to the customers from the profiteered amount devoid of merit and cannot be accepted. An amount of ₹ 68.77 Crores can be allowed to be deducted from the profiteered amount on account of the benefit which has been passed on by the Respondent in the shape of additional grammage as per the following table however the balance amount claimed by him cannot be allowed. Therefore, it is made clear that this deduction has been given to the Respondent due to the fact that the anti-profiteering measures have been incorporated in the tax laws for the first time and he had tried to pass on the benefit of tax reductions by increasing the quantity of his products. However, in future in case there is any reduction in the rate of tax or benefit of ITC is made available the same shall be passed on by him in the shape of commensurate reduction in the prices as per the provisions of Section 171 of the above Act and in case it is not possible to do so the amount so realised shall be deposited in the CWF. Area based fiscal incentives denied - Held that - The DGAP is right in his assessment that there was no loss in absolute terms to the Respondent, since he was still eligible to get the same proportionate refund of actual CGST/IGST paid in cash as was available to him prior to the reduction in the rates of GST. Moreover, there exists no direct correlation between the MRP of the product (which is same over all-India) and the area based exemption benefit. The claim of the Respondent to the extent of ₹ 45.31 Crores is not justified in as much as there is no evidence to show that the products manufactured with these concessions were sold at a lower rate. Also, there is no evidence to show that these products are different from the products manufactured in other areas and were sold at the old MRPs. The products whether manufactured with concessions or without concessions are being sold at the same price. Admittedly, these prices were not reduced inspite of rate reductions - claim of the Respondent is not legally sustainable and is thereby rejected. Reimbursement to the Modern Trade - Held that - It has been repeatedly observed by the Authority that the Respondent has not been able to appreciate the fact that the idea behind including the anti-profiteering mechanism in the GST laws, is solely to protect the interest of the consumers by preventing the supplier from unjustly enriching himself at the cost of the end-consumer. His claim that he had provided various discounts to the MT dealers to further pass on the benefit to the consumers is not established as it is not evidenced by any credible documentary evidence. Further the consumer would have never got the benefit of tax reductions unless the MRP was revised by the Respondent on the packs and the bar codes were changed, which does not seem to have happened. The Authority, thereby finds his claim short of any credence and hence the same cannot be accepted. Packing material write off - Held that - The law was very clear when it gave the suppliers the relief to do re-stickering instead of incurring additional cost on new packaging material. It was a business call taken by the Respondent to not do re-stickering and rather go for fresh packing material. It is an admitted fact by the Respondent that vide office letter No. WM-10(31)/2017, dated 16.11.2017 issued by the Ministry of Consumer Affairs, Food and Public Distribution, it was clearly allowed by the Government to refix the stickers - this Authority finds that the deduction claimed by the Respondent, on account of packing material write off, is not supported by any legal provisions and therefore it is inadmissible. Tax collected on profiteered amount - Held that - This Authority is of the view that since, the recipients of the Respondent have been compelled to pay extra GST which should be included in the profiteered amount. Hence, the Respondent s claim to deduct this amount is dismissed. Sales to CPF and CRPF - Held that - The Authority is in absolute agreement with the DGAP s revised opinion and allows the deduction of the above amount from the profiteered amount as no excess realization had taken place. This benefit of ₹ 3.80 Crores is being extended as there was no increase in the base prices of these supplies. Sales of semi-finished goods - Held that - As per Annexure-12 & 13 of his written submissions dated 09.08.2018 the Respondent has provided details of return of one product namely Coffee but for other products no evidence has been provided to prove that these goods were returned to him for further processing. In the case of Coffee also, the Respondent has not been able to provide any clear and conclusive proof to establish that the sent and the received back goods pertained to the same Batch or were exchanged during the same period of time. The Respondent has also not claimed that the prices had been reduced and his only claim is that it was a semi- finished product. Therefore the claim of the Respondent to the extent of ₹ 2.63 Crores made on this ground cannot be accepted. Wrongly collected the ITC credit from RSs - Held that - Since this amount has been held to be profiteered amount by this Authority the same shall be deposited in the Central and the CWF of the concerned States as per the calculation to be made by the DGAP and released by him accordingly as an amount of ₹ 36.19 Crores has already been deposited by the Respondent out of the above amount of ₹ 36.25 Crores - the total profiteered amount on account of denial of benefit of ITC is determined as ₹ 76.06 ₹ 2.91 Crores i.e. ₹ 78.97 Crores. This amount of ₹ 78.97 Crores availed through TRAN-2 statements shall be deposited by him in the Central CWF as this amount pertains to the Central taxes and the duties. Thus, it can be concluded that Respondent has resorted to profiteering being very well aware of the law and the rules which warranted him to pass on the benefit of GST rate reductions. Further he has also consciously and illegally recovered the excess realisation which was due to his RSS as ITC and thereby denied the benefit of tax reductions to the customers - Since the Respondent has been held guilty of profiteering and has also been found to have violated the provisions of Section 122 (1) (i) of the CGST Act, 2017 a fresh notice be issued to him asking him to explain why penalty should not be imposed on him. Decided against respondent.

Summary

Issues Involved:
1. Whether the rates of GST were reduced in respect of the products supplied by the Respondent w.e.f. 15.11.2017.
2. If the rates were reduced, whether the benefit of such reduction in the rates of tax was passed on to the consumers in terms of Section 171 of the GST Act, 2017.
3. If not, what was the quantum of profiteering by the Respondent.

Issue-wise Detailed Analysis:

1. Reduction in GST Rates:
The Central Government, on the recommendation of the GST Council, reduced the GST rates on several products from 28% to 18% and from 18% to 12% effective from 15.11.2017. The Respondent admitted that the GST rates on the goods supplied by him were reduced w.e.f. 15.11.2017.

2. Passing on the Benefit of GST Rate Reduction:
The Respondent failed to pass on the benefit of the reduction in the rates of tax to his consumers. Instead of reducing the prices commensurately, the Respondent increased the base prices of his products, thus maintaining the same selling prices even after the reduction in GST rates. This was evident from the fact that the Respondent manipulated his software to increase the base prices of 12,016 items from 15.11.2017. The DGAP's investigation revealed that the Respondent had not reduced the MRPs or increased the fill levels as claimed. The DGAP's report emphasized that Section 171 of the CGST Act, 2017 mandated that any reduction in the rate of tax or benefit of input tax credit must result in a commensurate reduction in prices, which the Respondent failed to comply with.

3. Quantum of Profiteering:
The DGAP's investigation determined that the Respondent had profiteered an amount of ?419.67 Crores by increasing the base prices of products after the reduction in GST rates. Additionally, the Respondent availed an amount of ?76.06 Crores as TRAN-2 credit, which was not passed on to the consumers, resulting in a total profiteering amount of ?495.73 Crores. The Respondent had deposited ?124.04 Crores in the Consumer Welfare Fund (CWF), but this was not sufficient to cover the entire profiteered amount.

Admissibility of Deductions Claimed by the Respondent:

1. Grammage Benefit:
The Respondent claimed that he passed on the benefit of GST rate reduction by supplying additional quantity (grammage) of products for the same price. The Authority allowed a deduction of ?68.77 Crores on account of grammage benefit, considering it as a legitimate mode of passing on the benefit in the FMCG sector.

2. Area-based Fiscal Incentives:
The Respondent claimed a deduction of ?45.31 Crores due to the reduction in area-based incentives. However, the Authority rejected this claim, stating that the Respondent was still eligible for the same proportionate refund of actual CGST/IGST paid in cash, and there was no loss in absolute terms.

3. Reimbursement to Modern Trade:
The Respondent claimed a deduction of ?26.37 Crores for trade discounts reimbursed to Modern Trade dealers. The Authority rejected this claim as the Respondent failed to provide credible evidence that the benefit was passed on to the end consumers.

4. Packing Material Write-off:
The Respondent claimed a deduction of ?7.80 Crores for the cost of writing off old packaging material. The Authority rejected this claim, stating that the law allowed re-stickering of old MRPs, and the Respondent's decision to write off the packaging material was a business call, not a legal requirement.

5. Tax Collected on Profiteered Amount:
The Respondent claimed a deduction of ?57.80 Crores for the extra GST collected on the increased base prices. The Authority rejected this claim, stating that the extra amount collected from the recipients was part of the profiteering and could not be deducted.

6. Sales to CPF and CRPF:
The Respondent claimed a deduction of ?3.80 Crores for sales made to CPF and CRPF at base rates excluding GST. The Authority allowed this deduction as there was no increase in the base prices for these supplies.

7. Sales of Semi-finished Goods:
The Respondent claimed a deduction of ?2.63 Crores for sales of semi-finished goods to third-party manufacturers. The Authority rejected this claim as the Respondent failed to provide conclusive proof that the goods were returned for further processing.

8. ITC Credit Collected from RSs:
The Respondent collected ?36.19 Crores from his Redistribution Stockists (RSs) as excess realization on closing stocks. The Authority held this amount as profiteered and directed it to be deposited in the CWF.

Final Determination:
The Authority determined that the Respondent had profiteered an amount of ?455.92 Crores on account of denial of benefit to customers due to the reduction in GST rates. Additionally, the Respondent availed ?78.97 Crores as TRAN-2 credit, which was not passed on to consumers, resulting in a total profiteering amount of ?534.89 Crores. After allowing deductions of ?68.77 Crores for grammage benefit and ?3.80 Crores for supplies to CPF and CRPF, the net profiteering amount was ?383.35 Crores. The Respondent was directed to deposit this amount along with interest in the Central and State Consumer Welfare Funds (CWFs) within three months. The DGAP was also directed to conduct further investigation to ascertain if the Respondent had passed on the benefit of tax reductions for all products sold.