PROFITEERING CHARGES ON SUPPLY OF FLY ASH BLOCKS CONFIRMED: REDUCED RATE BENEFIT NOT PASSED ON

[Dr. Sanjiv Agarwal]

Section 171 of CGST law is an important provision when it comes to protection of consumer’s inerests and acts as a check against unjust enrichment by supplier of goods and/or services which is deterimental to the interest of consumers. In one such case relating to supply of ‘fly ash blocks’ by supplier on earlier rate (12%) as against reduced rate (5%), the National Anti-profiteering Authority confirmed the charges of contravention of provisions of section 171 and also imposed penalty.

In SH. APOORVE TALERA, PROPRIETOR, SHREE GAUTAM TRADERS, DIRECTOR GENERAL OF ANTI-PROFITEERING, CENTRAL BOARD OF INDIRECT TAXES & CUSTOMS, VERSUS M/S. LITECON INDUSTRIES PVT. LTD. [2020 (5) TMI 285 - NATIONAL ANTI-PROFITEERING AUTHORITY];  complainant alleged profiteering by the Respondent in respect of “Fly Ash Blocks” supplied by the Respondent enclosing  two invoices of Fly Ash Blocks supplied by the Respondent along with complaint viz, Invoice No. 4204 dated 18.12.2018 and Invoice No. 4481 dated 02.01.2019.

The complainant had also alleged that the Respondent did not pass on the benefit of reduction in the GST rate from 12% to 5% w.e.f. 01.01.2019 notified vide Notification No. 24/2018- Central Tax (Rate) dated 31.12.2018 and instead increased, the unit base price.

The invoice details were as under:

Name of the product supplied	Pre GST rate revision on 31.12.2018			Post GST rate revision on 01.01.2019			Difference (in Rs.)
	Invoice No. & Date	GST Rate	Price excluding GST (in Rs. Per cu.mt.	Invoice No. & Date	GST Rate	Price excluding GST (in Rs. Per cu.mt.
Fly Ash Blocks	4204 dated 18.12.2018	12%	2232.14	4481 dated 02.01.2019	5%	2380.95	148.81

The matter was referred to DGAP for investigation who submitted the report dated 24.09.2019 covering the period from 01.01.2019 to 31.03.2019.

The respondent submitted:

1. That there was an increase in the cost of each and every raw material required for the manufacture of the said “Fly Ash Blocks”, as compared to the month of December, 2019 and the increase in the cost of raw materials ranged from 0.28% to as high as 22%.
2. That the cumulative effect of increase in the prices of raw materials when factored with their proportion in the total cost of the product came to 1.73%.
3. That the product was made taxable @ 5% from 01.01.2019 but the inputs, capital goods and input services for the final product “Fly Ash Blocks” attracted taxable rate higher than 5% leading to accumulation of ITC.
4. All the inputs were taxable at the rate of more than 5%, such as Soluble Oil, Cement and the like.
5. All the input services were taxable at the rate of more than 5% such as legal services, security services, telephone/mobile/internet services and the like. Barring transportation, all the input services of the Respondent were taxable at the rate of 18%.
6. All the capital goods were taxable at the rate of more than 5%. Generally, all the capital goods of Chapter 84 and 85 of the Custom Tariff Act, 1975 were taxable at the rate of 18%.
7. Partial increase in the base price of the product manufactured by it i.e. “Fly Ash Blocks” was due to blockage of the accumulated ITC pertaining to input services.
8. That due to delayed payment, interest @18% was chargeable. The interest on delayed payment was adjusted by way of increase in the base price of the product supplied.

DGAP observed that  the Central Government had reduced the GST rate on the “Fly Ash Blocks” supplied by the Respondent from 12% to 5% w.e.f. 01.01.2019, vide Notification No. 24/2018-Central Tax (Rate) dated 31.12.2018. Further, the increase in the cost of raw materials/input services, if any, had no relevance in the context of GST rate reduction w.e.f. 01.01.2019. Section 171 of the CGST Act, 2017 did not provide any scope for adjustment of increase in the cost against the benefit of reduced tax rate and it could not be argued that the elements of cost were affected by the downward revision of the output GST rate.

The Respondent supplier did not reduce the selling price of the “Fly Ash Blocks 600 x 200 x 75”, when the GST rate was reduced from 12% to 5% w.e.f. 01.01.2019, vide Notification No. 24/2018 Central Tax (Rate) dated 31.12.2018 and hence profiteered an amount of ₹ 1043/- on particular Fly Ash Blocks item (size) and thus, the benefit of reduction in the GST rate was not passed on to the recipients by way of commensurate reduction in the price, in terms of Section 171 of the CGST Act, 2017.

The amount of profiteering by the Respondent on account of contravention of the provisions of Section 171 of CGST Act, 2017 was ₹ 55,60,340/- which included the profiteering of ₹ 299/- in case of the complainant. The place (State or Union Territory) of supply-wise break-up of the total profiteered amount of ₹ 55,60,340/- was in four states / UTs.

DGAP concluded that the allegation that the base prices of the “Fly Ash Blocks” were increased when there was a reduction in the GST rate from 12% to 5% w.e.f. 01.01.2019, so that the benefit of such reduction in the GST rate was not passed on to the recipients by way of commensurate reduction in prices, was sustainable and it appeared that the base prices of the “Fly Ash Blocks” were indeed increased by the Respondent post GST rate reduction w.e.f. 01.01.2019. Thus, by increasing the base prices of the goods subsequent to the reduction in the GST rate, the commensurate benefit of reduction in the GST rate from 12% to 5%, was not passed on to the recipients. The total amount of profiteering covering the period from 01.01.2019 to 31.03.2019 was ₹ 55,60,340/-.

The NAA considered the DGAP report alongwith  submissions. It observed that rate of tax had been reduced on the product which was admittedly being supplied by the Respondent. Therefore, the provisions of Section 171 (1) which state that “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.” squarely apply in this case and the Respondent was bound to pass on the benefit of the above tax reduction to his recipients w.e.f. 01.01.2019.

The NAA concluded that the Respondent has acted in contravention of the provisions of Section 171 of the CGST Act, 2017 and has not passed on the benefit of reduction in the rate of tax to his recipients by commensurate reduction in the prices. Accordingly, the profiteered amount is determined as ₹ 55,60,340/- as per the provisions of Rule 133 (1) of the CGST Rules, 2017. The Respondent was therefore, directed to reduce the prices of his products as per the provisions of Rule 133 (3) (a) of the CGST Rules, 2017, keeping in view the reduction in the rate of tax so that the benefit is passed on to the recipients.

The Respondent supplier was directed to deposit the profiteered amount of ₹ 55,60,340/- along with the interest to be calculated @ 18% from the date when the above amount was collected from the recipients till the above amount is deposited in terms of the Rule 133 (3) (b) of the CGST Rules, 2017. Since, rest of the recipients in this case were not identifiable, the Respondent was also directed to deposit the amount of profiteering of ₹ 55,60.340/- along with interest in the Consumer Welfare Fund (CWFs) of the Central and the concerned State Governments as per the provisions of Rule 133 (3) (c) of the CGST Rules, 2017 in the ratio of 50:50 along with interest @ 18% till the same is deposited. The said amount shall be deposited within a period of 3 months by the Respondent, from the date of receipt of this order, failing which the same shall be recovered by the concerned Commissioners of the Central and the State GST, as per the provisions of the CGST/SGST Acts, 2017 under the supervision of the DGAP and shall be deposited as has been directed.

Since the Respondent supplier had denied the benefit of rate reduction of GST to recipients in contravention of the provisions of Section 171 (1) of the CGST Act, 2017 and has thus resorted to profiteering, it had committed an offence under Section 171 (3A) of the CGST Act, 2017 and therefore, it was apparently liable for imposition of penalty under the provisions of the above Section.

The NAA also mentioned in the Order that as per the provisions of Rule 133 (1) of the CGST Rules, 2017 this order was required to be passed within a period of 6 months from the date of receipt of the Report furnished by the DGAP under Rule 129 (6) of the CGST Rules. However, due to prevalent pandemic of COV1D-19 in the country the order could not be passed before the above date due to force majeure.