2020 (1) TMI 1370 - NAPA - GST

Profiteering - FMCG - that the Respondent had not passed on the benefit of reduction in the rate of GST on the Fast Moving Consumer Goods (FMCGs) being supplied by him, when the rate of GST was reduced - extension sought for period of Investigation - Contravention of provisions of section 171 of the Central Goods and Services Tax Act, 2017 - penalty. HELD THAT - It is revealed that the DGAP vide his Report dated 5-7-2019 has computed the profiteered amount as ₹ 2,16,49,61,535/- which has been shown at the Table given in his Report dated 23-12-2019. However, vide Sr. No. 2 of the Table, the DGAP has submitted that an amount of ₹ 19,75,12,265/- can be reduced from the above profiteered amount on account of rectification of the non-averaging of the base prices where description was used for comparison ((1-10-2017 to 14-11-2017 (Goods Desc.) and 1-9-2017 to 30-9-2017 (Goods Desc.)). However, the DGAP has also stated that the above rectification could be made if it was decided to do so by this Authority. The DGAP has not mentioned the reasons on the basis of which such an approach can be approved by this Authority. He has also not explained why the above approach was not applied by him at the time of preparing of his Report dated 5-7-2019. Vide Sr. No. 3 of the Table the DGAP has also submitted that an amount of ₹ 4,80,88,937/- can be excluded from the original profiteered amount due to rectification of inconsistency in the sequence followed by him in respect of certain line items in case it is so decided by this Authority. However, no explanation has been given why the above inconsistency cannot be rectified by him in case such an error has taken place. This Authority cannot pass any order on the above issue unless all the facts are placed before it by the DGAP along with the reasons why this inconsistency has taken place. The DGAP has also stated vide Sr. No. 4 of the Table produced, that an amount of ₹ 5,18,75,235/- could be subtracted from the profiteered amount on the ground of rectification of the adopted average price on description wherever comparable product code was used subject to the approval of this Authority. However, no reasons have been given why the above approach was more appropriate as compared to the approach which was adopted by the DGAP while computing the profiteered amount vide his Report dated 5-7-2019. It is clear from the above narration of the facts that the DGAP has left the rectification of the above claims on this Authority however; no grounds have been mentioned on the basis of which this Authority can decide why the above recommendations of the DGAP should be accepted. In the absence of clear cut findings on the above issue this Authority cannot pass reasoned and just order - In view of the the Reports dated 5-7-2019 and 23-12-2019 furnished by the DGAP cannot be accepted and he is directed to cause further investigation on the above issues and furnish fresh Report in terms of Rule 133(4) of the CGST Rules, 2017. Perusal of the Respondent's submissions also shows that he has not furnished the following details pertaining to his claim of having passed on the benefit of rate reduction by increasing the grammage/volume of his products - (i) Name of the SKU (ii) Base price of the SKU pre-rate reduction with documentary evidence (iii) Weight/Volume of the SKU pre-rate reduction with documentary evidence (iv) Commensurate base price of the SKU post-rate reduction with details of computations (v) Commensurate increase in the weight/Volume required post-rate reduction with computations (v) Increase in the weight in grams/mls (vi) Whether the increase is commensurate with the rate reduction (vii) Date of passing on the benefit of tax reduction with documentary evidence (viii) Amount of benefit of tax reduction passed on the SKU (ix) Amount of benefit of tax reduction passed on State/Union Territory wise Accordingly, the Respondent is directed to supply the above information to the DGAP within a period of 30 days from the date of this order. The above information shall be examined by the DGAP and his findings shall be included in the fresh Report to be filed by him in consequence of this Oder. The Respondent is further directed to supply the required information and extend all co-operation to the DGAP during the course of the fresh investigation - The DGAP is also directed to supply detailed list of the SKUs impacted by the rate reduction w.e.f. 15-11-2017 along with the pre-rate reduction base price and the commensurate reduced base price post-rate reduction with percentage of increase/reduction made by the Respondent in respect of such SKU. Documents to be supplied, after which the decision will be made.

Summary

Issues Involved:
1. Allegation of not passing on GST rate reduction benefits.
2. Methodology for calculating profiteering.
3. Consideration of increased costs and other factors.
4. Treatment of credit notes and discounts.
5. Impact of customs duty increase.
6. Calculation discrepancies and rectifications.
7. Passing on benefits through increased grammage.
8. Duration of investigation period.
9. Legal and procedural aspects of anti-profiteering provisions.

Issue-wise Detailed Analysis:

1. Allegation of Not Passing on GST Rate Reduction Benefits:
The case centered around the allegation that the Respondent did not pass on the benefit of GST rate reduction from 28% to 18% on Fast Moving Consumer Goods (FMCGs) effective from 15-11-2017. The DGAP's investigation revealed that the Respondent increased base prices post-rate reduction, leading to profiteering of ?2,16,49,61,535. The DGAP's report indicated that the Respondent did not comply with Section 171 of the CGST Act, 2017, which mandates passing on the benefit of tax reduction to recipients.

2. Methodology for Calculating Profiteering:
The DGAP calculated profiteering by comparing pre- and post-reduction base prices of products. The Respondent argued that the DGAP's methodology was flawed, suggesting alternative approaches such as using weighted average base prices or considering the latest MRP. The DGAP acknowledged some discrepancies and suggested rectifications, but ultimately left the decision to the Authority.

3. Consideration of Increased Costs and Other Factors:
The Respondent claimed that increased costs, such as higher customs duty and loss of area-based fiscal incentives, should be factored into the calculation of profiteering. The DGAP rejected these claims, stating that Section 171 did not provide for adjustments based on increased costs. The Respondent also argued that the business decision to not increase MRPs during GST implementation should be considered, but the DGAP dismissed this argument.

4. Treatment of Credit Notes and Discounts:
The Respondent issued credit notes and discounts to pass on the benefit of GST rate reduction. The DGAP found that many credit notes were related to services like advertising and promotion, not GST rate reduction. The DGAP also noted that there was no SKU-wise correlation between discounts and the benefit of GST rate reduction. The Respondent argued that these discounts should be considered in the calculation of profiteering, but the DGAP disagreed.

5. Impact of Customs Duty Increase:
The Respondent argued that the increase in customs duty from 10.30% to 22% on imported products post-1-2-2018 should be considered in the calculation of profiteering. The DGAP addressed this concern in the report but maintained that the increase in customs duty did not justify not passing on the GST rate reduction benefit.

6. Calculation Discrepancies and Rectifications:
The Respondent identified several discrepancies in the DGAP's calculations, such as non-averaging of base prices and incorrect sequence of steps. The DGAP acknowledged some errors and suggested rectifications, which could reduce the profiteering amount. The Authority directed the DGAP to conduct further investigation and provide a fresh report.

7. Passing on Benefits Through Increased Grammage:
The Respondent claimed to have passed on the benefit of GST rate reduction by increasing the quantity of products while maintaining the same MRP. The Authority directed the Respondent to provide detailed information on SKUs, base prices, and increased quantities to verify this claim. The DGAP was instructed to include these findings in the fresh report.

8. Duration of Investigation Period:
The Respondent contested the investigation period from 15-11-2017 to 31-12-2018, arguing that it was arbitrary and lacked statutory basis. The DGAP explained that the period was chosen based on the reference received from the Standing Committee on Anti-profiteering. The Authority did not provide a conclusive decision on this issue.

9. Legal and Procedural Aspects of Anti-Profiteering Provisions:
The Respondent argued that the absence of prescribed methodology for calculating profiteering violated principles of natural justice. The DGAP countered that Section 171 of the CGST Act was clear in requiring commensurate reduction in prices. The Respondent also claimed that the proceedings were initiated without a proper show cause notice, but the DGAP maintained that the investigation was conducted based on the reference received.

Conclusion:
The Authority directed the DGAP to conduct further investigation and provide a fresh report addressing the identified issues and discrepancies. The Respondent was instructed to supply detailed information on SKUs and increased quantities to support their claim of passing on the benefit of GST rate reduction. The final decision on the calculation of profiteering and other related issues was deferred pending the DGAP's fresh report.