2022 (7) TMI 34 - NAPA - GST

Profiteering - allegation is that the benefit of reduction on the ITC not passed on by way of commensurate reduction in the price - contravention of section 171 of CGST Act - penalty - time limitation - methodology in the CGST Act to calculate profiteering - period of investigation - base price discrepancies - claim of benefits like discounts or by way of price reduction post supply of goods to recipients by way of price reduction - increased quantity of grammage on certain SKUs - increase of Customs Duty on certain products - GST already collected needs to be deducted or not - netting off of higher benefits passed in respect of certain SKUs - loss due to reduced fiscal incentive under budgetary support scheme - computation of profiteering for luxury products - refund of profiteered amount if any - absence of any show cause notice (violation of principle of natural Justice) - absence of a Judicial member (Constitution of the authority is unconstitutional or not) - constitutional validity of section 171 of the CGST Act and Rules - Rules 126, 127 and 133 of the CGST Rules suffer from the vice of excessive delegation or not? Whether proceedings are time-barred under the provisions of Rule 133? - HELD THAT - The time limits prescribed under Rule 133(1) and Rule 129(6) are not mandatory and hence all the contentions of the Respondent on the ground of not observing the time limits are untenable and hence rejected. Whether in absence of any prescribed methodology in the CGST Act to calculate profiteering or the procedure prescribed by Authority, the whole proceedings are arbitrary and liable to be dropped? - HELD THAT - This Authority under Rule 126 has been empowered to determine Methodology & Procedure and not to prescribe it. Similarly, the facts of the cases relating to the sectors of Fast Moving Consumer Goods (FMCG), restaurant service, construction service and cinema service are completely different from each other and therefore, the mathematical methodology adopted in the case of one sector cannot be applied to the other sector. Moreover, both the above benefits are being given by the Central as well as the State Governments as a special concession out of their tax revenue in the public interest and hence the suppliers are not required to pay them from their own pocket and therefore, they are bound to pass on the above benefits as per the provisions of Section 171 (1) which are abundantly clear, unambiguous, mandatory and legally enforceable. The above provisions also reflect that the true intent behind the above provisions, made by the Central and the State legislatures in their respective GST Acts, is to pass on the above benefits to the common buyers who bear the burden of tax and who are unorganised, voiceless and vulnerable. It is abundantly clear from the above narration of the facts and the law that no elaborate mathematical calculations are required to be prescribed separately for passing on the benefit of tax reduction and computation of the profiteered amount. The Respondent cannot deny the benefit of tax reduction to his customers and enrich himself at the expense of his buyers as Section 171 provides clear cut methodology and procedure to compute the benefit of tax reduction and the profiteered amount. Whether period of investigation has been selected in arbitrary manner? - HELD THAT - It is absolutely clear from the provisions of Section 171 (1) 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. and therefore, every such person who has not passed on the above benefits is liable to be investigated till he passes on the benefits. Rule 129(2) also specifies that the DGAP shall conduct investigation and collect necessary evidence to determine whether the above benefits have been passed on. Accordingly, investigation has to be carried out till the date the benefit of tax reduction is not passed on by the Respondent which in this case is limited till 31.12.2018 but can be extended till he passes on the benefit. Therefore, there are clear cut provisions under the above Act and the Rules till what period the investigation is to be conducted and it cannot be restricted to a period of 3 months as contended by the Respondent as there is no such provision in the Act or the Rules or any justifiable ground and hence the above claim of the Respondent is not maintainable - the contention of the Respondent regarding arbitrariness of period of investigation is not sustainable and hence is rejected. Whether base price discrepancies have resulted in inflated profiteered amount? - HELD THAT - The value of the supply does not include any discount which was given before or at the time of the supply if such discount had been duly recorded in the invoice issued in respect of such supply and thus, the GST was chargeable on the actual transaction value after excluding any discount (conditional as well as unconditional) and therefore, actual transaction value has been considered for computation of profiteering. Since, the DGAP has compared the transaction values of a SKU mentioned by the Respondent in his pre and post rate reduction invoices there is no question of comparing the net price of SKU (Gross price net of discounts) prior to reduction of tax with the gross price of SKU post reduction of tax in respect of certain SKUs - the contention of the Respondent regarding incorrect method of determination of profiteered amount due to discrepancies in the base price is unsustainable and is rejected. Whether claim of benefits like discounts or by way of price reduction post supply of goods to recipients by way of price reduction is considerable? - HELD THAT - In view of the findings of the Authority in respect of the documents/evidences produced by the Respondent in support of his contention that GST rate reduction has been passed on through such trade discounts including credit notes, the Authority holds that such submission of the Respondent is not sustainable and hence is rejected. Whether increased quantity of grammage on certain SKUs can be permitted as commensurate reduction under section 171 (1) of the Act? - HELD THAT - The Authority do not concur with the contention of the Respondent that increase in grammage would be covered within the ambit of the term commensurate reduction in price of goods and hence the said contention is rejected. Whether increase of Customs Duty on certain products needs to be considered for calculating the profiteered amount? - HELD THAT - The Authority finds that the Respondent has not been able to provide adequate supportive documents to claim that there has been an impact on the pricing of the product due to any increase in the Customs Duty. Hence, the Authority does not find any merit in this submission of the Respondent. Whether GST already collected needs to be deducted from the profiteered amount? - HELD THAT - It is informed by the Respondent that the GST collected over and above the higher base price has been duly deposited with the Government and it cannot be alleged to have been profiteered in respect of amount not retained by him. The Authority finds no merit in this submission of the Respondent. The Authority holds that if any registered person has charged any excess tax from any recipient of supply, the statutory provisions under Section 171 of the CGST Act, 2017, would require that such amount be refunded to the eligible recipients. It is the obligation of the Supplier to return/pass on such amount and it is the vested right of the recipient as vested in him by the Statute. In this connection it would be appropriate to mention that the Respondent has not only collected excess base prices from his customers which they were not required to pay due to the reduction in the rate of tax but he has also compelled them to pay additional GST on these excess base prices which they should not have paid. The Respondent has thus defeated the objective of both the Central and the State Governments to provide the benefit of rate reduction to the ordinary customers by sacrificing their tax revenue. The Respondent was legally not required to collect the excess GST and therefore, he has not only violated the provisions of the CGST Act, 2017 but has also acted in contravention of the provisions of Section 171 (1) of the said Act as he has denied the benefit of tax reduction to the ordinary buyers by charging excess GST. Had he not charged the excess GST, the customers would have paid less price while purchasing goods from the Respondent and hence the above amount has rightly been included in the profiteered amount as it denotes the amount of benefit denied by the above Respondent. It would also be appropriate to state here that price includes GST. The profiteered amount can also not be paid from the GST deposited in the account of the Central and the State Governments by the Respondent as the above amount is required to be deposited in the Consumer Welfare Funds (CWFs) as per the provisions of Rule 133 (3) (a) of the CGST Rules, 2017 along with the interest. Whether higher benefits passed in respect of certain SKUs, as claimed by Respondent, can be considered and netted of? - HELD THAT - The Authority finds that the interpretation of DGAP in the matter is correct inasmuch as Section 171 of the CGST Act, 2017 provides that benefit of reduction in tax rate or the ITC has to be passed on to each and every supply individually. This will ensure equity and fairness to all the recipients of such goods and services, where the tax rates have been reduced or the ITC benefit has been made available. If the reduction in rate of tax is not applied uniformly for commensurate reduction in the prices, one recipient would be additionally benefited at the expense of another. The concept of zeroing will keep a check upon the registered person in not permitting biased or uneven passing of benefits to recipients, where the tax rates have been reduced. The Authority finds that the contention raised by the Respondent does not merit any consideration and is hence rejected. Whether loss due to reduced fiscal incentive under budgetary support scheme can be considered to calculate the profiteered amount? - HELD THAT - The Authority finds that the GST was implemented from 1.7.2017 and the above said provision of refund was in operation since then. However, the case of profiteering has been investigated by the DGAP after Notification No 41/2017-CT dated 14.11.2017, whereby the GST rates on certain products supplied by the Respondent were reduced. Further, DGAP in its calculations has taken the average price of pre-GST rate reduction for the period from 1.9.2017. Hence, the withdrawal of budgetary support w.e.f. 01.07.2017, may not be a factor during the period 1.9.2017 to 14.11.2017, when the average price was determined for the purpose of calculating profiteering - the contention of the Respondent regarding impact on the price of the product on account of budgetary support scheme is not sustainable and is rejected. Whether profiteering should not be computed for luxury products? - HELD THAT - The fact remains that if the prices of such products have not been reduced after reduction in the tax rates under Notification dated 14.11.2017; such products would undoubtedly come under the ambit of profiteering in term of Section 171 of the CGST Act, 2017. This contention of the Respondent is unsustainable and hence rejected. Whether profiteered amount, if any, can be refunded to recipients of the Respondent? - HELD THAT - The Authority has discussed the object and intention of the Government in enactment of the provisions under section 171 of the CGST Act 2017 and the rules made thereunder in the earlier paragraphs. As mentioned earlier, this beneficial clause of the Act provides for transfer of the sacrifice of the Government revenue to the common person or the end users. The Respondent in his defence has informed that he has distributors, modern trade retailers, ecommerce and canteen stores as his customers. All these customers i.e. distributors, modern trade retailers, e-commerce and canteen stores, etc may have certain business agreements amongst them but ultimately the products supplied by the Respondent reaches to-the common person on payment of consideration. As such, distributors, modern trade retailers, e-commerce and canteen stores are intermediary in the process of transferring the consideration from the ultimate recipients to the Respondent - In this connection it would be relevant to state that it has been clarified several times by the Union Finance Minister, the Central Government and the GST Council that the benefit of tax reduction is required to be passed on to the ordinary customer, who bears the burden of tax - the contention of the Respondent that in case the profiteered amount is determined, such amount should be transferred to distributors, modern trade retailers, e-commerce, etc. is rejected. Whether in absence of any show cause notice proceedings initiated are in violation of principle of natural Justice? - HELD THAT - The Authority finds that the Respondent was duly served show cause notices after receipt of the investigation Reports in which it was clearly stated that it appeared that he had violated the provisions of Section 171 and hence his liability for profiteering was proposed to be fixed. Therefore, it is abundantly clear that due notices were served on the Respondent to impose the consequences mentioned in Rule 133. Accordingly, the above claim of the Respondent is far from truth and not acceptable. Whether in absence of a Judicial member, the Constitution of the authority is unconstitutional? - HELD THAT - It can be concluded that this Authority has not replaced any Courts, cannot be equated to a Court or a Tribunal and hence the mandate of having a Judicial Member cannot be said to apply to this Authority. Whether section 171 of the CGST Act and Rules made thereunder are unconstitutional and violative of article 14 and 19(1) (g) of the Constitution of India? - HELD THAT - The intent of this provision is the welfare of the consumers who are voiceless, unorganised and vulnerable. This Authority is charged with the responsibility of ensuring that both the above benefits are passed on to the general public as per the provisions of Section 171 read with Rule 127 and Rule 133 of the CGST Rules, 2017. Hence, the anti-profiteering related Rules and Section 171 of the Act have express approval of the Parliament, all the State Legislatures, the Central and all the State Governments and the GST Council and therefore, Section 171 and the Rules are constitutional and are not violative of Article 14 and Article 19 (1) (g) of the Constitution. This Authority has nowhere interfered with the business decisions of the Respondent and therefore, there is no violation of Article 14 and Article 19 (1) (g) of the Constitution. Whether Rules 126, 127 and 133 of the CGST Rules suffer from the vice of excessive delegation? - HELD THAT - These rules have been framed by the Central Government under Section 164 of the CGST Act, 2017 on the recommendation of the GST Council which is a constitutional body established under the 101st Amendment of the Constitution and comprises of all the Finance/Taxation Ministers of the States and the Union Finance Minister. Hence, the above Rules have express approval of the Parliament, all the State Legislatures, the Central and all the State Governments and the GST Council and therefore, constitution of this Authority under above Rules is legal and does not amount to excessive delegation. It is also mentioned that the Rule 122 only prescribes the qualifications of the members of the Authority whereas its constitution has been duly provided in Section 171 (2). Further it has been specifically provided in Section 171 (3) that The Authority referred to in sub-section (2) shall exercise such powers and discharge such functions as may be prescribed. and hence, the functions and powers conferred on this Authority under Rule 127 also have mandate of the Parliament, the State Legislatures, the Central and the State Governments as well as of the GST Council and hence the conferring of powers and functions under the above Rules on this Authority does not tantamount to excessive delegation. Penalty - HELD THAT - Tthe Respondent has denied the benefit of rate reduction to the recipients of his goods in contravention of the provisions of Section 171 (1) of the CGST Act, 2017. The Respondent has committed an offence by violating the provisions of Section 171 (1) during the period from 15.11.2017 to 31.12.2018, and therefore, he is liable for imposition of penalty under the provisions of Section 171 (3A) of the above Act. However, perusal of the provisions of the said Section 171 (3A) shows that it has been inserted in the CGST Act, 2017 w.e.f. 01.01.2020 vide Section 112 of the Finance Act, 2019 and it was not in operation during the period from 15.11.2017 to 31.12.2018 when the Respondent had committed the above violation. Hence, the said penalty under Section 171 (3A) cannot be imposed on the Respondent retrospectively. Accordingly, notice for the imposition of penalty is not required to be issued to the Respondents. Application disposed off.

Summary

Issues Involved:
1. Limitation under Rule 133.
2. Methodology for calculating profiteering.
3. Period of investigation.
4. Base price discrepancies.
5. Discounts and post-supply price reductions.
6. Increased quantity/grammage as commensurate reduction.
7. Impact of increased Customs Duty.
8. Inclusion of GST in profiteered amount.
9. Zeroing and higher benefits passed on certain SKUs.
10. Impact of reduced fiscal incentives under budgetary support.
11. Calculation of profiteering for luxury products.
12. Refund of profiteered amount to recipients.
13. Violation of principles of natural justice.
14. Constitutionality of the Authority without a Judicial Member.
15. Constitutionality of Section 171 and related Rules.
16. Excessive delegation under Rules 122, 127, and 133.

Detailed Analysis:

1. Limitation under Rule 133:
The Respondent contended that the proceedings were time-barred under Rule 133. The Authority clarified that the time limits under Rule 133(1) and Rule 129(6) are directory, not mandatory, as no consequences for non-adherence are prescribed. The Supreme Court's judgment in Mahadev Govind Gharge v. Special Land Acquisition Officer (2011) and P.T. Rajan v. T. P. M. Sahir and Ors. (2003) were cited to support this position. The Authority also noted that the Respondent had ample opportunities to defend himself and that the proceedings were not in violation of natural justice.

2. Methodology for calculating profiteering:
The Respondent argued that the absence of a prescribed methodology led to arbitrariness. The Authority held that Section 171(1) of the CGST Act provides a clear methodology for passing on the benefit of tax reduction, which is by commensurate reduction in prices. The Authority emphasized that no elaborate mathematical calculations are required, and the benefit should be passed on by maintaining the pre-rate reduction prices and charging the reduced GST rate.

3. Period of investigation:
The Respondent claimed that the period of investigation was arbitrarily chosen. The Authority clarified that the period of investigation is from the date of rate reduction until the benefit is passed on. The period of investigation in this case was from 15.11.2017 to 31.12.2018, which was deemed appropriate.

4. Base price discrepancies:
The Respondent contended that discrepancies in the base price calculation led to inflated profiteering amounts. The Authority found that the DGAP had adopted a suitable methodology by comparing the average pre-rate reduction price with the actual post-rate reduction price. The methodology was deemed appropriate given the voluminous transactions and varying prices.

5. Discounts and post-supply price reductions:
The Respondent argued that post-supply discounts should be considered in calculating profiteering. The Authority rejected this claim, stating that the benefit of tax reduction must be passed on by commensurate reduction in prices, not through discounts or promotional schemes. The credit notes and invoices provided by the Respondent were found to be related to advertising and promotional services, not GST rate reduction.

6. Increased quantity/grammage as commensurate reduction:
The Respondent claimed that the benefit of tax reduction was passed on by increasing the quantity of products. The Authority held that the statutory provisions under Section 171 mandate only commensurate reduction in price as the method of passing on the benefit. The increase in grammage was not considered equivalent to price reduction.

7. Impact of increased Customs Duty:
The Respondent argued that increased Customs Duty should be considered in calculating profiteering. The Authority found that the Respondent had not provided adequate supportive documents to substantiate this claim. The selling prices of the products remained the same despite the alleged increase in Customs Duty.

8. Inclusion of GST in profiteered amount:
The Respondent contended that GST collected and deposited with the Government should not be included in the profiteered amount. The Authority held that the excess GST collected due to inflated base prices must be refunded to the recipients or deposited in the Consumer Welfare Fund.

9. Zeroing and higher benefits passed on certain SKUs:
The Respondent argued that higher benefits passed on certain SKUs should be considered, and the DGAP's methodology of zeroing was incorrect. The Authority rejected this claim, stating that the benefit must be passed on to each recipient for each supply individually, and netting off benefits is not permissible.

10. Impact of reduced fiscal incentives under budgetary support:
The Respondent claimed that reduced fiscal incentives under the budgetary support scheme impacted pricing. The Authority found that the refund of CGST or IGST was proportionate to the tax paid in cash, and there was no adverse impact on margins due to the reduction in tax rates.

11. Calculation of profiteering for luxury products:
The Respondent argued that luxury products should be excluded from profiteering calculations. The Authority rejected this claim, stating that all products impacted by the GST rate reduction are subject to the provisions of Section 171.

12. Refund of profiteered amount to recipients:
The Respondent contended that the profiteered amount should be refunded to identifiable recipients. The Authority held that the benefit must be passed on to the end consumers, not intermediaries like distributors or retailers.

13. Violation of principles of natural justice:
The Respondent claimed that the proceedings violated principles of natural justice due to the absence of a show cause notice. The Authority found that the Respondent was given adequate opportunity to defend himself, and the proceedings were conducted fairly.

14. Constitutionality of the Authority without a Judicial Member:
The Respondent argued that the absence of a Judicial Member rendered the Authority's constitution improper. The Authority held that its functions are quasi-judicial and do not require a Judicial Member. The composition of the Authority is in accordance with the CGST Act and Rules.

15. Constitutionality of Section 171 and related Rules:
The Respondent contended that Section 171 and related Rules are unconstitutional and violate Articles 14 and 19(1)(g) of the Constitution. The Authority rejected this claim, stating that the provisions aim to benefit consumers by ensuring that tax reductions are passed on to them.

16. Excessive delegation under Rules 122, 127, and 133:
The Respondent argued that these Rules suffer from excessive delegation. The Authority held that the Rules have the approval of the Parliament, State Legislatures, Central and State Governments, and the GST Council, and do not constitute excessive delegation.

Conclusion:
The Authority determined that the Respondent had profiteered an amount of Rs. 1,86,39,57,508/- by not passing on the benefit of GST rate reduction to his customers. The Respondent was directed to reduce prices commensurately and deposit the profiteered amount along with interest in the Consumer Welfare Funds of the Central and State Governments. The Authority also directed further investigation to ascertain whether the benefit was passed on after 31.12.2018.