ANTI-PROFITEERING MECHANISM IN GST – RECENT DELHI HIGH COURT ORDER

[Dr. Sanjiv Agarwal]

The law on anti-profiteering are contained in the GST law as per following provisions:

CGST Act, 2017	Section 171 on Anti-profiteering measures.
IGST Act, 2017	Section 20 which stipulate that provisions of the GST Act, 2017 shall apply mutatis mutandis to IGST Act.
UTGST Act, 2017	Section 21 which stipulate that provisions of GST Act, 2017 shall apply mutatis mutandis to UTGST Act.
SGST Act, 2017	Section 171 on Anti-profiteering measures.

The Rules for Anti Profiteering are contained in Chapter XV (Rule Nos. 122 to 137) of the Central Goods and Services Tax Rules, 2017.

The GST law contains a provision on anti-profiteering measure as a deterrent for trade and industry to enjoy unjust enrichment in terms of profit arising out of implementation of Goods and Services Tax in India, i.e., anti-profiteering measure would obligate the businesses to pass on the cost benefit arising out of GST implementation to their customers. Section 171 provides that it is mandatory to pass on the benefit due to reduction in rate of tax or from input tax credit to the consumer by way of commensurate reduction in prices.

As per Section 171 of the CGST/SGST Act, 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. An authority had been constituted by the government to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him. The said authority, National Anti-profiteering Authority (NAA) has since been dissolved and presently Competition Commission of India (CCI) adjudicates the Anti-profiteering cases.

Section 171 of the CGST Act deals with anti-profiteering measures and prescribes that any reduction in the rate of tax on supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of a commensurate reduction in prices.

Order may be for any of the following:

●     Reduction in prices

●     Returning money to the customer along with interest

●     Depositing money in customer welfare fund in case the customer does not claim it or is not identifiable

●     Imposition of penalty equivalent to the amount of profiteering

●     Cancellation of registration

Delhi High Court recently decided a total of 107 petitions filed to challenge the constitutional validity of Section 171 and related rules as well as legality of the notices proposing imposition or orders imposing penalty issued by NAA. Companies from diverse businesses ranging from hospitality, fast-moving consumer goods (FMCG) to real estate (Hindustan Unilever, Nestle and Reckitt Benckiser, Patanjali etc) were the petitioners. The constitutional validity of Section 171 of Act, 2017 as well as Rules 122, 124, 126, 127, 129, 133 and 134 of the Rules, 2017 has been upheld.

Recent Delhi High Court Order dated 29.01.2024 has ruled as under:

• Section 171 of CGST Act 2017 provides for anti-profiteering provisions to prohibit profiteering out of tax benefit accruing to taxpayers due to GST regime and obligates to pass on the benefit to consumers.
• Section 171 is constitutionality valid and is within the legislative competence of the Parliament and it does not delegate any essential legislative function.
• Section 171 is not a price fixing mechanism and does not violate either article 19(1)(g) or article 14 or article 300A of Constitution.
• Section 171 is a beneficial provision and ought to receive liberal construction. The proceedings of section 171 cannot be said to abate on lapse of time of furnishing the report by DGAP.
• Where any arbitrary power is exercised, order can be struck down and not the provision itself .
• If legislature does not provides for any right to appeal against an order of NAA, it alone cannot be a ground to declare a provisions unconstitutional.
• Amounts foregone from the public exchequer in favour of consumers cannot be appropriated by businesses to allow them to do so as it would amount to unjust enrichment.
• In absence of such anti profiteering provisions, there would be no legal obligation to pass on the benefit of GST regime and consequently, the intended objective of reducing overall tax rates and mitigating the cascading effect would not be achieved.
• ‘One size fits all approach’ formula cannot be prescribed as each industry is different.
• NAA performs functions which are to be discharged by domain experts. There is no requirement for any judicial member.
• Benefit in the form of reduction in price to customer cannot be substituted by additional or free supply or other discounts. 

The court observed that it is possible that there may be cases of arbitrary exercise of power under the anti-profiteering mechanism by enlarging the scope of the proceedings beyond the jurisdiction or on account of not considering the genuine basis of variations in other factors such as cost escalations on account of which the reduction stands offset, skewed input credit situations etc. However, the remedy for the same is to set aside such orders on merits. What will be struck down in such cases will not be the provision itself which invests such power on the concerned authority but the erroneous application of the power.

The Delhi High Court order in all probability would be challenged, given the stakes and number of companies involved. While Delhi High Court has upheld the constitutional validity only, merit based decisions are awaited. Companies have filed appeals / petition in various High courts in the country which are yet to be decided. GST Tribunals, once set up will have to dig out analysis of factual matrix which are industry specified and complex Delhi High Court has expressed that ‘one size formula’ would not fit in all cases. The absence of cost analysis and industry based specifies parameters add to the complexity in determining the ‘anti-profit’ component. The lack of expertise adds to the woes of businesses. The efficiency and effectiveness of section 171 will depend upon how the businesses, tax authorities and judiciary understand and interpret its objectives for effective implementation, based upon factual matrix of each case.

[Source: RECKITT BENCKISER INDIA PRIVATE LIMITED, M/S. PYRAMID INFRATECH PRIVATE LIMITED, MASCOT BUILDCON PRIVATE LIMITED, LIFESTYLE INTERNATIONAL PVT. LTD., SHARMA TRADING COMPANY, HINDUSTAN UNILEVER LIMITED, M/S. J.P. & SONS THROUGH: SHRI ANKIT KHANDELWAL, PROPRIETOR, M/S. EXCEL RASAYAN AND OTHERS VERSUS UNION OF INDIA THROUGH: ITS SECRETARY & ORS. NATIONAL ANTI-PROFITEERING AUTHORITY & ORS. - 2024 (1) TMI 1248 - DELHI HIGH COURT]