2020 (5) TMI 285 - NAPA - GST

Profiteering - Fly Ash Blocks supplied by the Respondent - allegation that the benefit of reduction in the rate of tax not passed on and instead increased the unit base price - contravention of section 171 of CGST Act - penalty - HELD THAT - It is revealed that the Central Government, on the recommendation of the GST Council, had reduced the GST rate on the Fly Ash Blocks supplied by the Respondent from 12% to 5% w.e.f. 01.01.2019, vide Notification No. 24/2018-Central Tax (Rate) dated 31.12.2018 which has also not been contested by the Respondent. Therefore, it is evident that rate of tax has been reduced on the above product which was admittedly being supplied by the Respondent. Therefore, the provisions of Section 171 (1) which state that any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices. squarely apply in this case and the Respondent is bound to pass on the benefit of the above tax reduction to his recipients w.e.f. 01.01.2019. The Respondent has acted in contravention of the provisions of Section 171 of the CGST Act, 2017 and has not passed on the benefit of reduction in the rate of tax to his recipients by commensurate reduction in the prices. Accordingly, the profiteered amount is determined as ₹ 55,60,340/- as per the provisions of Rule 133 (1) of the CGST Rules, 2017. The Respondent is therefore directed to reduce the prices of his products as per the provisions of Rule 133 (3) (a) of the CGST Rules, 2017, keeping in view the reduction in the rate of tax so that the benefit is passed on to the recipients. Penalty - HELD THAT - The Respondent has denied the benefit of rate reduction of GST to his recipients in contravention of the provisions of Section 171 (1) of the CGST Act, 2017 and has thus resorted to profiteering. Hence, he has committed an offence under Section 171 (3A) of the CGST Act, 2017 and therefore, he is apparently liable for imposition of penalty under the provisions of the above Section - Accordingly, a Show Cause Notice be issued to him directing him to explain why the penalty prescribed under Section 171 (3A) of the above Act read with Rule 133 (3) (d) of the CGST Rules, 2017 should not be imposed on him.

Issues Involved:
1. Alleged profiteering by the Respondent.
2. Non-passing of GST rate reduction benefits.
3. Investigation methodology and findings by DGAP.
4. Respondent's defense on cost increase and ITC blockage.
5. Calculation of profiteered amount.
6. Penalty and compliance directives.

Issue-wise Detailed Analysis:

1. Alleged Profiteering by the Respondent:
The Gujarat State Screening Committee on Anti-profiteering forwarded an application alleging profiteering by the Respondent in respect of "Fly Ash Blocks." The Applicant No. 1 claimed that the Respondent did not pass on the benefit of GST reduction from 12% to 5% and instead increased the unit base price.

2. Non-passing of GST Rate Reduction Benefits:
The DGAP confirmed that the GST rate on "Fly Ash Blocks" was reduced from 12% to 5% w.e.f. 01.01.2019, as notified by the Central Government. The Respondent was accused of not passing this benefit to the recipients, which is a violation of Section 171 of the CGST Act, 2017.

3. Investigation Methodology and Findings by DGAP:
The DGAP conducted a detailed investigation and reported that the Respondent increased the base prices of "Fly Ash Blocks" to offset the GST rate reduction. The DGAP's methodology involved comparing the average base price of the product before and after the GST rate reduction. The DGAP rejected the Respondent's claim that the price increase was due to higher raw material costs and ITC blockage, stating that such increases could not coincide exactly with the GST rate reduction.

4. Respondent's Defense on Cost Increase and ITC Blockage:
The Respondent argued that the increase in base prices was due to a rise in raw material costs and the blockage of ITC due to the inverted duty structure. The Respondent also claimed that the DGAP's calculations were flawed and did not consider freight expenses. However, the DGAP rebutted these claims, stating that the increase in raw material costs could not have occurred overnight and that the Respondent was not eligible for ITC on input services and capital goods since the inception of the CGST Act.

5. Calculation of Profiteered Amount:
The DGAP calculated the profiteered amount by comparing the average base prices before and after the GST rate reduction. The total profiteered amount was determined to be ?55,60,340/-, including ?299/- in the case of Applicant No. 1. The DGAP's methodology was found to be reasonable and in accordance with the provisions of Section 171 of the CGST Act, 2017.

6. Penalty and Compliance Directives:
The Respondent was directed to reduce the prices of his products and deposit the profiteered amount of ?55,60,340/- along with 18% interest in the Consumer Welfare Funds (CWFs) of the Central and State Governments. A Show Cause Notice was also issued to the Respondent for imposition of penalty under Section 171 (3A) of the CGST Act, 2017.

Conclusion:
The Respondent was found to have contravened the provisions of Section 171 of the CGST Act, 2017 by not passing on the benefit of GST rate reduction to the recipients. The total profiteered amount was determined to be ?55,60,340/-, which the Respondent was directed to deposit along with interest. The Respondent was also issued a Show Cause Notice for penalty imposition.

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