PROFITEERING TESTED NEGATIVE IN FABINDIA CASE

[Dr. Sanjiv Agarwal]

In over a dozen of complaints adjudicated by National Anti-profiteering Authority (NAA), majority of the cases have been decided in favour of trade and industry and against the complainant, for want of evidence or complaint proved to be non sustainable.

In yet another case of Fabindia Overseas Pvt. Ltd. Hyderabad, the NAA has ordered in favour of Fabindia ruling that  there is no contravention of section 171 of the CGST Act, 2017 as profiteering was not established.

In Mandalika Sakunthala, Hyderabad and DGAP, New Delhi v. Fabindia Overseas Pvt. Ltd., Hyderabad (2018) 11 TMI 1011 (NAA), the NAA vide its Order dated 16.11.2018 has concluded that the complaint was based on wrong pre-GST tax rates in respect of two items, viz, ‘bathing bar’ and ‘instant drink power (50gms)’ and as such, there was no case for charging more rate. Infact, for both the products being procured by inter-state sale from sole vendors, post GST rate had been increased by 3.5% from 14.5% w.e.f. 1^st July, 2017. The company reduced the base price to maintain the same MRP as in pre-GST regime, although there was an increase in tax rate in both products. It observed that since the reduction in the base prices of these products is more than the additional ITC eligible thereon, the allegation of profiteering is not established.

In the instant case, the customer (complainant) filed two complaints making the allegation that the company had not passed on the benefit of reduction in the rate of tax, when she had bought 'bathing bar' and 'instant drink powder 50 gms.' (products). These products were being sold at the MRP of ₹ 95/- and ₹ 50/- respectively which had 12.5% Excise Duty & 14.5% Value Added Tax (VAT), total 27% incidence of tax, built in the MRP till 30.06.2017 and after the implementation of the GST w.e.f. 01.07.2017, when the rate of tax was fixed as 18% on the above products they were still being sold at the above MRP by increasing their base prices. Thus, the company had indulged in profiteering in contravention of the provisions of Section 171 of CGST Act, 2017 and therefore, action should be taken against it.

The complaint was examined and investigated as per procedure. The company submitted that there was increase in the rate of tax and hence no benefit could be passed on by it and that it was procuring both the products on inter-state basis from their sole vendors and his tax liability had increased by 3.5% post implementation of GST from 14.5% VAT to 18% GST w.e.f. 01.07.2017 and therefore, it had suffered loss in his margin on sale of both the products.  It  also submitted that MRP of the products sold by the company was constant for the last 3 years and there was no rate reduction or increase, after implementation of the GST although the rate of tax had increased.

It was reveled in investigation that Value Added Tax (VAT) was applicable on these products @ 14.5%.  The effective tax rate on both the products before coming in to force of the GST on 01.07.2017 was not 27% (12.5% Central Excise Duty + 14.5% VAT), as had been claimed by complainant, but it was 14.5% with Nil Central Excise duty + 14.5% VAT in the case of “bathing bar” and 16.5% with 2% Central Excise duty + 14.5% VAT in the case of “instant drink powder 50 gms.” which had been increased to 18% after the implementation of the GST w.e.f. 01.07.2017 and hence there was no reduction in the rate of tax. Further, when the pre-GST stock of bathing bar in the GST regime was compared with its stock in the pre GST regime, no change was found the in the Input Tax Credit (ITC) and the cost price had also remained the same at ₹ 28.64 per piece. After the rate of tax had increased from 14.5% to 18% on implementation of the GST, the above product was supplied by the company in the GST regime at the same MRP of ₹ 95/- by reducing his margin of profit from his base price from ₹ 82.97 to ₹ 80.51 by suffering loss of ₹ 2.46 per bathing bar in gross margin during the GST regime. According to DGAP report, as the reduction in the base price was more than the lTC, the allegation of profiteering was not established.

In case of Milk powder, there was no change in it he ITC and the company’s cost price had remained the same at ₹ 18.86. When the sale of old pre-GST stock of the above product in the GST era was compared with the sale in the pre-GST regime, although the rate of tax had increased from 14.5% to 18% after the implementation of the GST the company had still sold the above product at the same MRP of ₹ 501-, by reducing his base price from ₹ 43.67 to ₹ 42.37 and had thus suffered a loss of ₹ 1.30 in his gross margin in the GST regime. In this case also since the base price had been reduced to maintain the same MRP inspite of increase in the tax rate, the anti-profiteering provisions contained in Section 171 (1) of the CGST Act, 2017 were not attracted.

Based on these findings, DGAP recommended that although the rate of tax had increased in respect of both the above products but the company had reduced his base prices and the profit margins to maintain the same MRP inspite of the increase in the tax rate, therefore, the anti-profiteering provisions contained in Section 171 (1) of the CGST Act, 2017 had not been contravened by the company.

The Authority concluded and passed the order that the company has not contravened the provisions of Section 171 (1) of the CGST Act, 2017 and hence there was no merit in the applications filed by the complainant and the same was accordingly dismissed.