PROFITEERING ON SUPPLY OF RESIDENTIAL FLATS

[Dr. Sanjiv Agarwal]

Of late, there are large number of complaints by buyers of residential flats across the country alleging profiteering and contravention of Section 171 of the CGST Act, 2017 by builders / developers. In one such case in Abhishek and DGAP, New Delhi v. Signature Global Developers Pvt. Ltd., New Delhi 2019 (11) TMI 1085 - NATIONAL ANTI-PROFITEERING AUTHORITY  complainant had purchased a flat in Gurugram, and alleged that the supplier had not passed on the benefit of Input Tax Credit (ITC) to him by way of commensurate reduction in price, in terms of Section 171 of the Central Goods and Services Tax Act, 2017 and had charged GST on the pre-GST base price of  4000 per sq. ft.

The said complaint was examined by Standing Committee on Anti-profiteering and later investigated by DGAP for the period 1.7.2017 to 31.12.2018.

The supplier submitted that it was a single housing project construction company and was developing the present project at Gurugram under the Affordable Housing Scheme, under the Pradhan Mantri Awas Yojna. It was not directly engaged in any construction activity and all the work related to the project was assigned to various sub-contractors, who procured all the required raw materials on their own except Steel, Cement and RMC which were supplied by the Respondent on free of charge basis. However, the project was executed under the supervision of the staff employed by it. In the pre-GST regime, “under-construction properties” were covered by the definition of works contract and attracted Haryana VAT @ 4.5% (approximately) with full ITC of VAT paid on goods involved in the execution of works contract. Affordable housing was, however, exempt from Service Tax, vide Notification No. 9/2016-ST dated 01.03.2016. He further contended that in the GST regime, construction of low cost houses upto a carpet area of 60 square meters per house in a housing project approved by any State Government, was taxable @ 12% (effectively @ 8% after 113rd abatement for the value of land), vide Notification No. 01/2018-Central Tax (Rate) dated 25.01.2018 and earlier the GST rate on affordable housing was 18% and the effective rate was 12% after 1/3rd abatement for the value of land.

The NAA observed that the provisions of Section 171 of the CGST Act, 2017 are aimed at ensuring that the recipients get the commensurate benefit, in the form of reduction in price, in case of any tax rate reduction and/or incremental benefit of ITC which has become available to them due to sacrifice made by the State and the Central Government from their own tax kitty to provide accommodation to the vulnerable section of society under the Affordable Housing Scheme. The method of interpretation of this provision has been given in the text of Section 171 of the CGST Act, 2017 itself. It clearly links profiteering to be a function of each supply of goods or services or both and hence, profiteering needs to be computed at the level of each tax invoice. Further, the total quantum of profiteering by a registered person is the sum total of all the benefits that stood denied to each of the recipients/consumers individually. The Respondent was under legal obligation to pass on the benefit of ITC to his buyers and it cannot be allowed to appropriate the same.

Based on DGAP report, the NAA noted that the ITC as a percentage of the turnover that was available to the supplier during the pre-GST period from April, 2016 to June, 2017 was 4.00% and during the post-GST period from July, 2017 to December, 2018, it was 6.61%. The Respondent had benefited from the benefit of additional ITC to the extent of 2.61% [6.61% (-) 4.00%] of the turnover.

The DGAP has computed the profiteering by comparing the applicable tax rate and ITC available in the pre-GST period when only VAT c@ 4.50% was payable with (1) the post-GST period from 01.07.2017 to 24.01.2018, when the effective GST rate was 12% and (2) with the GST period from 25.01.2018 to 31.12.2018, when the effective GST rate was  8%. Accordingly, the DGAP had calculated the profiteered amount or the benefit to passed on for the period from 01.07.2017 to 24.01.2018, as  59,85,094/- for the residential flats and commercial shops, which includes 12% GST on the base profiteered amount of  ₹ 53,43,834/-.

The total benefit of ITC which was required to be passed on during the period from 01.07.2017 to 31.12.2018, came to  ₹ 1,42,06,267/- which includes GST © 12% or 8% on the base profiteered amount of  ₹ 1,29,27,035/-.

The NAA under Rule 133 (3) (a) of the CGST Rules, 2017 ordered the Respondent to reduce the prices to be realized from the buyers of the flats commensurate with the benefit of ITC received by it. As per the provisions of Rule 133 (1)(b) of the CGST Rules,  2017, it was further ordered that the Respondent shall refund the above profiteered amount to the flat without taking in to account the benefit which he has claimed to have passed on. However, no further benefit was needed to be passed on to the Applicant as he had already got the benefit of Rs,  15,812/- which was due to him as confirmed by the DGAP. The above amount shall be passed on by the Respondent alongwith interest @18% payable from the date from which the excess amount was collected by the Respondent from the buyers till the date of its payment within a period of 3 months from the date of this order failing which the same shall be recovered by the concerned Commissioner CGST/SGST and paid to the eligible house buyers as per their entitlement as per the provisions of CGST/SGST Acts.

The NAA further held that any further benefit of additional ITC which might accrue to the Respondent shall also be passed on by it to the eligible buyers. The Commissioner CGST/SGST shall ensure that the above benefit is passed on by the Respondent to his recipients as per the provisions of Section 171 of the CGST Act, 2017. In case if the above benefit is not passed in future the Applicant or any other buyer shall be at liberty to approach the Haryana State Screening Committee to launch fresh proceedings against the Respondent as per Section 171 of the CGST Act, 2017.

The Respondent had denied benefit of ITC to the buyers of the flats and the shops being constructed by it in contravention of the provisions of Section 171 (1) of the CGST Act, 2017 and has committed an offence under Section 171 (3A) of the above Act and therefore, it was also liable for imposition of penalty under the provisions of section 171(3A).

The Authority as per Rule 136 of the CGST Rules, 2017 also directed the Commissioners of CGST/SGST, Haryana to monitor this order under the supervision of the DGAP by ensuring that the amount profiteered by the Respondent as ordered by the Authority is passed on to all the eligible buyers.