PROFITEERING UPHELD ON SUPPLY OF FLATS

[Dr. Sanjiv Agarwal]

Of late, there have been large number of complaints by residential apartments / flats buyers all over the country and more particularly in NCR and western parts. Most of such complaints are against developer or seller of flats for not passing on the benefit of input tax credit (ITC) and / or non-reduction in final price of the flats.

In one such complaint in Re: Sushil Kumar Jain and DGAP, New Delhi v. Sarvpriya Securities Pvt. Ltd., Gurugram  2019 (12) TMI 1264 - NATIONAL ANTI-PROFITEERING AUTHORITY , complainant had purchased a flat in the Respondent’s project in Gurugram  under the Affordable Housing Scheme and alleged that the it had not passed on the benefit of input tax credit to him by way of commensurate reduction in price, in terms of Section 171 of the Central Goods and Services Tax Act, 2017. The said complaint was examined by the Screening Standing Committee on Anti-profiteering and then investigated by Director General of Anti-profiteering (DGAP) for the period 1.7.2017 to 31.08.2018.

The supplier of  flats submitted that it was not directly engaged in the construction activity and all the work related to the project was assigned to various sub-contractors, who procured all the required 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.

Further, in the pre-GST regime, under the provisions of Haryana Value Added Tax Act, 2003, “Under-Construction Properties” were covered under the definition of ‘Works Contract’ and subjected to Haryana VAT @ 4.5% (approximately) with full ITC of VAT paid on the goods involved in the execution of works contracts. He also clarified that under the Service Tax regime, “Construction Services” were subjected to Service Tax @ 4.5% but the Affordable Housing was exempted from Service Tax, vide Notification No. 9/2016-ST dated 01.03.2016 with effect from 01.03.2016. He then submitted 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 1/3rd abatement for the value of land), vide Notification No. 01/2018-Central Tax (Rate) dated 25.01.2018 (earlier the rate of tax on affordable housing was 18% and the effective rate was 12% after 1/3rd abatement for land value).  Therefore, the total indirect tax burden on the project was increased by 3.5% after the introduction of GST.

The National Anti-profiteering Authority (NAA) observed that  the expression “profiteering” as explained under Section 171 of the CGST Act, 2017, means the amount determined on account of not passing the benefit of reduction in rate of tax on supply of goods or services or both or the benefit of input tax credit to the recipient by way of commensurate reduction in the price of the goods or services or both. The implication thereof, in respect of the instant case, is that the benefit of ITC which becomes available to the supplier, has to be passed on to the recipients, irrespective of whether the supplier utilizes the benefit or not. In other words, what is relevant to the computation of profiteering is the amount of ITC that became available to the supplier (i e. the Respondent) and the actual utilization/ reversal thereof is irrelevant for this purpose of the said computation. Also, what is relevant for the purpose of computation of profiteering is the comparative availability of ITC in the pre-GST and post GST periods (and not what is done therefrom, which could either be payment of tax or reversal as has been done in this case).

The fact that the Respondents supplier did benefit on account of ITC is sufficient for the purpose of inclusion of the entire ITC for the computation of the amount of profiteering in terms of section 171 of the CGST Act, 2017, irrespective of whether and how such ITC was utilized by the Respondent.

Further, the NAA observed that the provisions of Section 171 (1) of the CGST Act, 2017 are aimed at ensuring that the recipients get the commensurate benefit, in the form of reduction in prices, 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 Governments 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. The said provision 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. It is amply clear that 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. Therefore, it was held that the Respondent was under legal obligation to pass on the benefit of ITC to his buyers and he cannot be allowed to appropriate the same.

Further, the fact that the Respondent supplier had unutilized credit in his electronic ledger account, which he chose to reverse voluntarily, has no bearing on the computation of profiteering under Section 171 of the CGST Act, 2017. Hence, reversal of ITC affected by the Respondent supplier on its own accord does not alter the computation of profiteering by the DGAP in any manner.

Based on DGAP report, the NAA noted on ITC reversal that the reversal of the unutilized credit has been effected by the Respondent even before occupancy certification/ completion certificate was issued by the competent authority. The said voluntary reversal of the credit has been effected by the Respondent only in March, 2019, i.e. much after the expiry of the period of investigation of the DGAP i.e. from 01.07.2017 to 31.12.2018. Further, Rule 42 of the CGST Rules, 2017 lays down the mode of computation of mandatory reversal of the unutilized input tax credits in respect of unsold portions of a real estate project at the time of receipt of completion/ occupancy Certificate or on the date of first Occupancy, whichever is earlier. This is the only method prescribed for reversal of credit under the CGST Rules and the same necessitates that such reversal is effected only after the date on which completion/ occupancy certificate has been issued or from the date of first occupancy, whichever is earlier. However, Respondent had effected the reversal much before the prescribed date and hence the said reversal may be viewed as an act that was carried out with the mala-fide intent of denying the passage of benefit of ITC to his customers/ homebuyers.

In this case profiteering was computed by the DGAP on the basis of comparison of the ratios of Input Tax Credit to the total taxable turnover for the pre and post GST periods and NAA found no infirmity in the computation made by the DGAP.

Thus, the ITC as a percentage of the turnover that was available to the Respondent during the pre-GST period from April, 2016 to June, 2017 was 4.75% and during the post-GST period from July, 2017 to December, 2018, it was 15.40% and hence it was established that the Respondent has benefited from the additional ITC to the extent of 10.65% [15.40% (-) 4.75%] of the turnover.

DGAP had calculated the profiteered amount or the benefit to be passed on for the period from 01.07.2017 to 24.01.2018, as  2,88,98,231/- for the residential flats and commercial shops, which includes 12% GST on the base profiteered amount of ₹ 2,58,01,992/-. The amount of benefit of ITC or the profiteered amount that needs to be passed on by the Respondent to recipients during the period from 25.01.2018 to 31.12.2018 was computed at  ₹ 7,07,20,406/- which includes 12% GST on commercial shops and 8% GST on residential flats, on the base profiteered amount of ₹ 6,52,80,958/-. Therefore, the total benefit of ITC which is required to be passed on during the period from 01.07.2017 to 31.12.2018, comes to  ₹ 9,96,18,637/- which includes GST @ 12% or 8% on the base profiteered amount of Rs.  9,10,82,950/-.

The NAA under Rule 133 (3) (a) of the CGST Rules, 2017 ordered that the Respondent shall reduce the prices to be realized from the buyers of the flats commensurate with the benefit of ITC received. 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 buyers without taking in to account the benefit which he has claimed to have passed on. The above amount shall be passed on by the Respondent along with 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 the 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.

Further, any further benefit of additional ITC which might accrue to the Respondent shall also be passed on by him 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.

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

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.