Non-reduction of MRP invokes Anti-profiteering law

[Dr. Sanjiv Agarwal]

The National Anti-profiteering Authority (NAA) has held that non-reduction of prices (MRP) after GST rate reduction amounts to indulgence in profiteering so as to invoke section 171 of the CGST Act, 2017 on anti-profiteering measures.

In the matter of DGAP, CBIC, New Delhi v. JP & Sons, Delhi (2018) 12 TMI 472 (NAA), the NAA vide its Order dated 06.12.2018 has directed the business entity to reduce the prices of products by making commensurate reduction in  prices vis-à-vis reduction in tax rates and pass on the benefit to buyers, besides depositing the amount so profiteered alongwith interest @ 18 percent to the Government exchequer. It also found the business entity guilty of issuing wrong invoices by not showing the correct basic prices and held it liable for offence committed under section 122(l)(i) of the CGST Act, 2017 for which penalty was imposable after following the adjudication process.

Brief Facts

In the instant case, the DGAP initiated investigation against M/s J.P. & Sons dealing in Johnson & Johnson products, viz, Baby Shampoo and Baby Powder on the recommendation of the Standing Committee. The tax on these products was reduced w.e.f. 15.11.2017 from 28% to 18% [vide Notification No. 41/2017-CT(Rate) dated 14.11.2017] but the benefit was not passed by it maintaining the same MRP of these products. Infact, instead of reduction in MRP, base price was increased in violation of section 171 of the CGST Act, 2017. The following two invoices were taken on record as evidence of anti-profiteering.

S.No.	Invoice No. and Date	Description of Products	Base Price (Rs.)	Rate of GST	Price Charged Inclusive of GST (Rs.)
1.	JJGST1707093 12.10.2017	Baby Shampoo 100 ml.	57.24	28%	73.27
		Baby Powder 200 Gms.	80.82	28%	103.45
2.	JJGST1709322 16.11.2017	Baby Shampoo 100 ml.	62.10	18%	73.28
		Baby Powder 200 Gms.	87.67	18%	103.45

The business entity who was distributor of Johnson & Johnson Pvt. Ltd. (J & J) was supposed to sell the above goods on the base prices which were being charged by him before 15.11.2017 and levy GST so that the benefit of reduction in the rate of tax could be passed on to the customers.

Submissions by Distributor

On notice, it was contended by the business entity that :

1. Billing software was being controlled by J & J and distributor could not do any changes / modification therein..
2. GST rate was reduced but it took few days to make changes in the billing software.
3. Price charged was not more than the MRP mentioned on products.
4. Invoices taken as evidence were generated prior to updation of software by J & J.
5. It was bound to use the J & J software only and its ownership rights etc were with company only.
6. Base prices could be changed by the company only and not by distributor.
7. It was bound to charge the increased prices as per the terms of the agreement with J & J.
8. It had deposited the due tax which it had charged from the customers at the rate of 18% and had not misused the Input Tax Credit (ITC) availed off as had been calculated by the DGAP.
9. It was only an intermediary between the Company and the customers and was ready to pay the difference of tax, if any but no penalty should be imposed since the circumstances were beyond its control and it had no intention to retain the profit on revised rates.

Submissions by J & J (Company)

On notice to the main company, it was submitted that it had in fact reduced the base prices after reduction in the rate of tax from to 28% to 18%. It also submitted the details of the base prices, tax and the invoice prices from J & J to the Distributor, from the Distributor to the Retailer and from the Retailer to the consumer upto 14.11.2017, and from 17.11.2017 onwards as follows:-

JB Powder 200 Gms                                      (in  Rs.)
Particular	J&J to Distributor		Distributor to Retailer		Retailer to Consumers
	Upto 14.11.17	W.e.f 17.11.17	Upto 14.11.17	W.e.f 17.11.17	Upto 14.11.17	W.e.f 17.11.17
Base Price	74.76	79.74	80.82	86.21	93.75	100.00
Tax	20.93	14.35	22.63	15.52	26.25	18.00
Invoice Price	95.69	94.09	103.45	101.72	120.00	118.00

 

JB Shampoo (TBP) 100 ml.                         (In Rs.)
Particular	J&J to Distributor		Distributor to Retailer		Retailer to Consumers
	Upto 14.11.17	W.e.f 17.11.17	Upto 14.11.17	W.e.f 17.11.17	Upto 14.11.17	W.e.f 17.11.17
Base Price	52.95	54.06	57.25	58.45	66.41	67.80
Tax	14.83	9.73	16.03	10.52	18.59	12.20
Invoice Price	67.78	63.79	73.28	68.97	85.00	80.00

DGAP Findings

The DGAP investigation revealed that by increasing the base prices of these products and having maintained the pre-GST rate reduction MRPs, the benefit of GST rate reduction was not passed on to the customers by the business entity. From the price list, it was observed that it had raised the base prices of both the products during the period between 15.11.2017 to 18.11.2017. The base price of Baby Shampoo (100 ml). was increased from ₹ 57.24 to Rs.  62.10 and the same was increased in respect of Baby Powder (200 gms)., from ₹ 80.82 to ₹ 87.67.

Further, during the period from 19.11.2017 to 31.03.2018, the business entity had re-fixed the base price of Baby Powder (200 gms) from RSA 80.82 to ₹ 86.21 which was slightly lower than the price prevalent between 15.11.2017 to 18.11.2017 and the base price of Baby Shampoo (100 ml.) was re-fixed from ₹ 57.24 to ₹ 58.44 which was also slightly lower than the price between 15.11.2017 to 18.11.2017, however, still both the base prices were not commensurate with the reduction in the rate of tax and were higher than what they should have been.

After analysing the entire outward supplies made by the business entity, it had been observed that during the period w.e.f. 15.11.2017 to 31 03.2018, it had sold 223 products comprising of 32 HSN codes out of which 134 products comprising of 14 HSN codes were affected by the reduction in the rate of GST from 28% to w.e.f. 15.11.2017.

In the case of 123 products, it was observed that the base prices of 121 products were increased after 15.11.2017 and in the case of 2 products, the base prices were reduced after 15.11.2017. Therefore, the DCAP concluded that in respect of the 130 products, supplied by the business entity during the period between 15.11.2017 to 31.03.2018, the amount of profiteering came to ₹ 5,01,646/- on account of increase in their base prices.

NAA Findings & Conclusion

The NAA observed that the Central Government vide Notification No. 41/2017- Central Tax (Rate) dated 14.11.2017 had reduced the rate of GST from 28% to in respect of the subject two products with effect from 15.11.2017, the benefit of which was required to be passed on to the recipients by the business entity as per the provisions of Section 171.

Based on documentary evidences, it had no doubt that the business entity had increased the base prices of the above products w.e.f. 15.11.2017 by the amount as shown in table, whereas it was required not to increase them and after charging GST @ 18%, it was legally bound to charge the reduced prices so as to pass on the benefit of reduced tax rate to its customers and hence it had indulged in profiteering. It also concluded that it is established that the business entity had acted in contravention of the provisions of Section 171 of the CGST Act, 2017 and had not passed on the benefit to its customers by commensurate reduction in the prices of these products. Accordingly, the amount of profiteering made by the business entity had been determined as ₹ 501,646/- as per the provisions of Rule 133 (1) of the CGST Rules, 2017.

The business entity was duly registered under the CGST/SGST Act, 2017 and it was  bound to follow the Notification dated 14.11.2017 vide which the rate of GST was reduced from 28% to 18% on 130 products which it was selling. It cannot escape the legal obligation which was imposed upon it by the said Notification by shifting its accountability on the ground that it had no control over billing.

Moreover, it had also not produced any evidence to show that it had made any correspondence with J & J to inform that he was bound to reduce the prices due to reduction in the rate of tax and J & J should either not increase the base prices or compensate it for the benefit it was bound to pass on to his customers, therefore, it is quite apparent that he had deliberately charged the enhanced prices with an intention to pocket the amount which he was bound to pass on to the recipients.

Further, mere charging of the tax @ 18% after 15.11.2017 cannot be construed to have resulted in passing on of the benefit when the base prices had been deliberately increased.

It had increased the base prices illegally and also forced its customers to pay additional GST on the increased prices otherwise there would have been further reduction in the prices and hence it has acted in violation of the provisions of Section 171 of the CGST Act.

It had issued incorrect invoices while selling all these products to its customers as it had not correctly shown the basic prices which it should have legally charged from them. It had also compelled them to pay additional GST on the increased prices through the incorrect tax invoices which would have otherwise resulted in further benefit to the customers which it had failed to pass on.  It was also established from the record that the business entity has deliberately and consciously acted in contravention of the provisions of the CGST Act, 2017 by issuing incorrect invoices which is an offence under Section 122 (1) (i) of the CGST Act and hence it is liable for imposition of penalty under the above Section read with Rule 133 (3) (d) of the CGST Rules, 2017.

In view of these findings, the NAA passed the Order confirming the allegation of profiteering in terms of Section 171 with the following directions / orders:

1. To reduce the prices of these products as per the provisions of Rule 133 (3) (a) of the CGST Rules, 2017 by making commensurate reduction in their prices keeping in view the reduction in the rate of tax so that the benefit is passed on to the recipients.
2. To deposit the profiteered amount of ₹ 5,01,646/- along with the interest to be calculated @ 18% from the date when the amount was collected from customers till the said amount is deposited.
3. Since the buyers were not identifiable, directed the DGAP to get the amount of profiteering of ₹ 5,01,646/- along with interest deposited from the business entity in the Consumer Welfare Fund of the Central and the concerned State Governments as per the provisions of Rule 133 (3) (c) of the CGST Rules, 2017.
4. In case of non-deposition of this amount within 3 months, directed DGAP to initiate recovery as per the CGST Act.
5. Since investigation in the instant case covered the period upto 31.03.2018 only, directed DGAP to further investigate the quantum of profiteering which the business entity has made thereafter and submit report.
6. Based on principles of natural justice, directed to issue fresh notice asking it to explain why penalty should not be imposed.

End Note

The Anti-profiteering Authority has issued a very clear Order that if the MRP is not reduced by the supplier, be it manufacturer or distributor or retailer, it would be a case of profiteering and no plea, whatsoever, be considered as a defence when it comes to dent the pricing for the buyer. The only and ultimate beneficiary has to be the customer only. Also, if required, the investigation could be taken to a logical conclusion by extending the scope.

In many cases, it has now been concluded that if profiteering has been done in contravention of provisions of Section 171 of the CGST Act, 2017, it would automatically result in offence of issuing wrong or incorrect invoices and attract penal provisions. It is high time that business entities start falling in time to avoid monetary cost, penalties and reputation risk.