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TMI Blog2020 (1) TMI 1370X X X X Extracts X X X X X X X X Extracts X X X X ..... e above Rules and it was decided to refer the matter to the DGAP to conduct a detailed investigation in the matter, in its meeting held on 13-12-2018. 2. The DGAP had issued Notice under rule 129(3) of the CGST Rules, 2017 on 15-1-2019 to the Respondent, to submit his reply as to whether he admitted that the benefit of reduction in the GST rate w.e.f 15-11-2017, had not been passed on to his recipients by way of commensurate reduction in prices and if so, to suo motu determine the quantum thereof and indicate the same in his reply to the Notice as well as to furnish all the documents in support of his reply. The Respondent was also afforded an opportunity to inspect the non-confidential evidences/information which formed the basis of the said Notice, during the period from 21-1-2019 to 23-1-2019, which the Respondent had availed and inspected the documents on 23-1-2019. 3. The DGAP has conducted the present investigation from 15-11-2017 to 31-12-2018. He had also sought extension of the time limit to complete the investigation from this Authority, which was granted to him. 4. The DGAP has stated that the Respondent had replied to the Notice vide his letters/e-mails dated 22-1-20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered while determining the quantum of profiteering, if any:- (i) Post Supply Price Reduction (Discount): Respondent claimed that he had passed on the benefit of GST rate reduction amounting to Rs. 75.70 Crore by way of issuing Credit Notes to his customers, viz. distributors/modern retailers etc. Since the exercise of determining the revised MRPs was time-consuming which could be made effective only from January, 2018, till such time, the revised MRP based GST discount claim system was in place and the price reduction in the range of 5% to 12.5% of the sale price was given to the distributors/modern retailers. The reduced prices to be charged by his distributors/modern retailers were duly communicated to them by the Respondent. The direct reduction in the prices of the products impacted by the GST rate reduction was given effect to after the revised MRPs were reflected on the packages. (ii) Price reduction and MRP reduction on package: The methodology adopted by the Respondent for calculating the reduction in price and MRP was by comparing the pre-GST MRP less pre-GST taxes (VAT, Central Excise Duty/CVD on finished/imported products and Service Tax credit reversal on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of factors like oil prices and foreign exchange rate fluctuations etc. Such increased costs were required to be factored in while determining the post GST rate reduction prices of the products. (vi) Loss of benefit on account of Area-Based Fiscal Incentives: Under the erstwhile Central Excise Duty regime, the manufacturers were entitled to the benefit of area-based fiscal incentives in respect of units operating in certain States, where the output Central Excise Duty was not payable, subject to the condition that no CENVAT credit would be allowed to such units on their procurements. The Respondent had set up a unit in Baddi, Himachal Pradesh and was availing the benefit of such area-based fiscal incentive. Further, his sub-contractors were also availing the benefit of these fiscal incentive. With the introduction of GST, upfront exemption from payment of tax was withdrawn and these units were required to pay GST, avail input tax credit and claim refund of a certain percentage of GST paid in cash. The Respondent submitted that with reduced rate of GST, the amount of refund got reduced, consequently resulting in increased cost and accordingly, the same should be considered for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rry on business and therefore, was violative of his fundamental right enshrined under Article 19(1)(g)of the Constitution of India. g. The Respondent, vide his e-mail dated 25-6-2019, informed that he had revised the amount of net benefit passed on to his recipients by way of Post Supply Price Reduction (Discount), from Rs. 75.70 Crore to Rs. 73.59 Crore, due to review of his records. 5. The DGAP stated that the Respondent has submitted the following documents/information:- a. List of all GSTINs. b. GSTR-1 & GSTR-3B Returns for the period from October. 2017 to December, 2018 for all the registrations held all over India. c. Details of invoice-wise outward taxable supplies during the period from October, 2017 to December, 2018. d. Price Lists (pre and post November, 2017) for all the products, specifically indicating the SKUs impacted by GST rate reduction w.e.f. 15-11-2017. e. Sample copies of invoices issued to the dealers, pre and post 15-11-2017. f. Sample copies of Credit Notes issued by the Respondent to his customers. g. Sample copies of agreements entered into with the CSD and Sub-contractors. 6. The DGAP has stated that the main issues to be examined were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the month of July-18 91,58,550 8 5100078260 5-9-2018 Volume Incentive for the month of June-18 85,00,000 9 5100058554 5-7-2018 Volume Incentive for the month of May-18 70,00,000 10 5100043401 3-5-2018 Shoppers Stop Ltd. Sponsorship Service 11,17,694 11 5100054358 14-6-2018 Lifestyle International (P.) Ltd. Brand Promotion Service 13,67,574 8. The DGAP has further stated that the said invoices/Credit Notes nowhere indicated that they were related to the benefit of reduction in the GST rate from 28% to 18% w.e.f. 15-11-2017. No SKU wise correlation could be made between the claim texts appearing in the calculations and the details of the invoice wise outward supplies submitted by the Respondent and as such the deduction claimed on account of payments made by the Respondent towards advertising, sales promotion, sponsorship and brand promotion services supplied by his trade partners, could not be considered as the benefit of GST rate reduction w.e.f. 15-11-2017. The DGAP has also claimed that there was no proximity between the date of GST rate reduction and the date of the supply of the service and/or the Credit Notes. The method adopted by the Respondent for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n increase in cost, which was directly attributable to the reduced GST rate, the same should be considered for the purpose of the ongoing investigation into the alleged profiteering by him, it is contended by the DGAP that as per Notification No. 10(11/2017-DBA- 11/NER dated 5-10-2017, the eligible units were entitled to a refund of 58% of the CGST or 29% of the IGST paid through debit in the Cash Ledger Account, in terms of section 49(1) the Central Goods and Services Tax Act, 2017, after utilization of the input tax credit of the CGST or the IGST. Accordingly, prior to 15-11-2017, the Respondent was entitled to proportionate refund of CGST or IGST paid through Cash Ledger. w.e.f. 15-11-2017, the liability of the Respondent to make payment in cash might have got reduced due to reduction in the rate of GST, resulting in reduced refund in absolute terms. However, there was no loss to the Respondent in relative terms as he was still eligible to get the same proportionate refund of the CGST/IGST paid in cash as was available prior to the reduction in the rate of GST. Moreover, such refund of CGST or IGST paid in cash was also a function of and dependent on the amount of input tax cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (HSN- 3401 & 3402), would attract the provisions of section 171 of the Central Goods and Services Tax Act, 2017 read with Chapter XV of the Rules as these were to be treated as supply of goods by the Respondent. The Respondent has also contended that the FMCGs industry in which he operated, the units usually undertook periodic price revision every 5-6 months, considering the impact of various factors like change in costs and market outlook etc. 13. The DGAP has computed profiteering and stated that from the invoices made available by the Respondent, it appeared that the Respondent has increased the base prices of the goods when the rate of GST was reduced from 28% to 18% w.e.f. 15-11-2017, so that the commensurate benefit of GST rate reduction was not passed on to the recipients and on the basis of aforesaid pre and post-reduction GST rates and the details of outward taxable supplies (other than zero rated, nil rated and exempted supplies) of the impacted products during the period from 15-11-2017 to 31-12-2018, as furnished by the Respondent, the amount of net higher sales realization due to increase in the base prices of the impacted goods, despite the reduction in the GST rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 087 7,32,19,717 29 Sikkim 11 33,90,135 - 33,90,135 30 Tamil Nadu 33 4,93,77,808 2,40,93,400 7,34,71,209 31 Telangana 36 4,35,23,595 2,44,69,926 6,79,93,521 32 Tripura 16 25,75,247 11,12,857 36,88,103 33 Uttar Pradesh 9 11,18,10,948 5,47,89,889 16,66,00,837 34 Uttarakhand 5 1,13,07,779 56,71,751 1,69,79,530 35 West Bengal 19 12,53,36,512 6,04,34,066 18,57,70,577 Grand Total 1,51,81,26,324 64,68,35,211 2,16,49,61,535 14. From the above, the DGAP has concluded that the Respondent has increased the base prices after rate reduction from 28% to 18% w.e.f. 15-11-2017 and has contravened the provisions of section 171 of the CGST Act, 2017. 15. After perusal of the DGAP's Report, this Authority in its meeting held on 9-7-2019 decided to hear the DGAP and the Respondent on 2-8-2019 and accordingly notice was issued to both the parties. On behalf of the DGAP Sh. Bhupinder Goyal, Assistant Director (Cost) was present and the Respondent was represented by Sh. Anand Nagda. General Manager-Tax, Sh. V. Lakshmikumaran, Sh. K. Srikanth, Sh. G. Gokul Kishore, Sh. D. Macchar and Sh. Tushar Mittal. Advocates. Further hearings were hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tabulated as under, as provided by the Respondent: Category Product HSN Impacted Category Hair Care Shampoo, Conditioner, Serum etc. 3305 Yes (except Hair Oil) Hair Color L'Oreal Paris, Garnier 3305 Yes Skin Care Cream 3304 Yes Make Up Kajal, Maybelline. etc., 3304 Yes (except Kajal) Luxury Products Giorgio Armani, Diesel, etc, 3303 Yes The Respondent has further stated that he was supplying the above products to more than 1,300 customers grouped under the following categories: (i) General Trade (GT) (Distributors) (ii) Modern Trade (MT) (iii) E-Commerce Platforms (iv) Canteen Stores Department (CSD) it CPC, etc. 19. The above products were either being manufactured by him in his factories located at Baddi and Chakan (Pune) or by his contract manufacturers. The Respondent also imported goods from outside India and the customers of the Respondent either directly sold his products to the consumers or further sold them to other wholesalers and distributors in the market and products eventually reached the consumers through a chain of such distributors, wholesalers and retailers. 20. The Respondent has further stated that with hundreds of SKUs bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reduction. The Respondent also ensured mass awareness about price reductions by publishing advertisements in leading newspapers. Thus, the Respondent made all efforts to communicate to its recipients through its huge and robust marketing and sales department to ensure that reduced MRP is effectively implemented in the market L'Oreal also ensured that retailers communicate reduced prices to the end consumers by way of display at stores. Sample photographs evidencing display of various products at reduced prices in retail stores as advised by the Respondent. Jan 2018 onwards The process of MRP change as well as increase in grammage on packs started in November 2017 itself, and as the old MRP printed inventory was phased out and the fresh stock with reduced MRP on artwork became ready it started to hit shelves from January 2018 onwards. The Respondent reduced the prices on invoices issued to its recipients commencing January 2018 onwards for majority of products, and also increased grammage for some. The Respondent offered discounts in the form of post supply price reductions till the time MRP reduction or higher grammage was given. 21. The Respondent has also claimed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by comparing pre-GST MRP less taxes with MRP less taxes @ 18% GST. b. Tax cost considered in GST regime was GST @ 18% embedded in MRP (less budgetary support, if any, for products manufactured in Baddi). Tax costs considered in pre-GST regime were VAT Excise Duty/CVD on finished/imported products, Excise Duty/Service Tax on inputs/input services in case of products manufactured in Baddi plant (as no credit was available due to area-based exemption, no credit was available). Octroi and Service Tax credit reversal on account of traded products etc. Calculations were made at product level after factoring in the factual position on bifurcation of products into those manufactured in area-based exemption plant (Baddi), those manufactured in Excise Duty paying plant (i.e. Pune) and the imported products. c. Comparison was made between the pre-GST and the GST @ 18% instead of GST @28% and GST @18%, as there was increase in effective rate of tax during the implementation of GST as on July 1, 2017 compared to that under the pre-GST regime, which was not fully factored in by way of increased prices when the GST rate became 28%. Accordingly, in most cases, the reduction in MRP required, wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as under: Sl. No. Particulars Amount (Rs. in Crores) (considering weighted average price of latest MRP) Base price discrepancies resulting in inflated alleged profiteering calculation by DGAP 1 Non-averaging of base price where description is used for comparison (1-10-2017 to 14-11-2017 (Goods Desc.) and 1-9-2017 to 30-9-2017 (Goods Desc.) 30.52 2 Rectification of inconsistency in sequence followed for some line items 5.28 3 Adoption of average price of description wherever comparable product code is used 5.72 4 Above figures are based on adoption of weighted average of prices of products with latest MRP instead of weighted average of all products (Annexure I & Annexure 2 in CD submitted on 25-10-2019): 5 Calculation of profiteering in respect of line items for which credit notes issued (based on DGAP computation) 0.65 6 Computation of profiteering for sales not impacted by rate reduction (based on DGAP computation) 0.14 7 Incorrect quantity in 1 line item of sale (Annexure 1 & Annexure 4 in CD submitted on 25-10-2019) has been rectified 0.02 Total 42.33 He has further pointed out that while the DGAP has stated in Para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1-10-2017 to 14-11-2017, the DGAP went to Step 2, which was by comparing the sale price post 14-11-2017 with the average pre-reduction sale price of product having same description during the period from 1-10-2017 to 14-11-2017. Prices of products sold during the period from 1-10-2017 to 14-11-2017 with the same description GAR COL NAT SHADE 1 as per the DGAP's file "Pre-rate reduction pivot" were as follows:- S. No Goods code Good description HSN MRP General Trade Quantity Taxable Amount Average price 425 CNCFR100-9B GAR COL NAT SHADE 1 33059040 175 1,116 127,199 113,98 426 CNCFR100-A0 GAR COL NAT SHADE 1 33059040 180 2,267 265,770 117,23 427 CNCFR100-B0 GAR COL NAT SHADE 1 33059040 190 68,763 8,478,331 123,30 428 CNCFR100-D0 GAR COL NAT SHADE 1 33059040 190 448,600 55,435,512 123,57 429 CNCFR100-DA GAR COL NAT SHADE 1 33059040 190 70,444 8,670,157 123,08 From the above, the Respondent has claimed that the product GAR COL NAT SHADE 1 was sold under 5 different product codes and the average sale price of each of those products was Rs. 113.98, Rs. 117.23, Rs. 123.30, Rs. 123.57 and Rs. 123.08. The average price at description ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent intended to recover from his customers going forward, and accordingly, instead of adopting a weighted average of all the products with same description, the weighted average price of products with latest MRP prevailing in the pre-rate reduction period should be adopted as the comparable price. In the above example, the weighted average price of product with latest MRP was Rs. 123.48 p. u., which was calculated by adding the sales value and dividing the same by quantity sold of Serial Nos. 427 to 429. 27. The Respondent has requested that the highest of the prices with latest MRP (Rs. 123.57 p. u.), should be considered since the said price was actually charged to customers in the pre-rate reduction period. Alternatively, the latest price of Rs. 123.08 p. u. of the latest product code introduced immediately prior to rate reduction might be considered as the pre-rate reduction price. He has further submitted that these prices should be considered instead of the weighted average price of all the products in the pre-rate reduction period, since the investigation was into a serious allegation of profiteering and not a mere mathematical calculation/comparison between the pre- a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price of product code SYMAF050-00 having product description AcnoFight Facewash 50 ml as also details of other products having same product description in DGAP's pre-rate reduction pivot sheet are as follows: S. No Goods Code Goods Description HSN MRP General Trade Quantity Taxable Amount Average price 3626 SYMAF050-00 Acnofight Facewash 50ml 33049990 85 3,096 166,926 53.92 3627 SYMAF050-30 Acnofight Facewash 50ml 33049990 95 210 12,655 60.26 3628 SYMAF050-40 Acnofight Facewash 50ml 33049990 99 194.034 12,184,724 62.80 On the basis of the above he has submitted that if the said product code SYMAF050-00 having product description AcnoFight Facewash 50 ml was a correct comparable, then all the other products viz. SYMAF050-30 and SYMAF050-40 having the same description AcnoFight Facewash 50 ml should also be considered as correct comparables and accordingly, the average prices of all the codes having same comparable description must be considered, instead of considering the price of 1 product code alone. Therefore, the Respondent has argued that while the price of comparable code taken by DGAP was Rs. 53.92 p.u., the average price of the products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this Notification are as follows:- A1. Schedule.III - 18% A.2 S. No. A.3. Chapter/Heading/Sub-heading/Tariff item A.4. Description of goods A.5. 59. A.6. 3305 9011, 3305 9019 A.7. Hair Oil A.8 443. A.9. 9606[other than A.10. 9603 10 00] A.11. Brushes (including brushes constituting parts of machines, appliances or vehicles), hand operated mechanical floor sweepers, not motorised, mops and feather dusters; prepared knots and tufts for broom or brush making; paint pads and rollers; squeegees (other than roller squeegees) [other than brooms and brushes, consisting of twigs or other vegetable materials bound together, with or without handles] Accordingly, he has submitted that there was no reduction in the rate of GST from 28 % to 18 % in respect of these products. However, the DGAP had still gone on to compute profiteering in respect of such product amounting to Rs. 14, 45, 267/-. 33. He has also contended that in respect of 1 line item of sale from Maharashtra to J & K, the quantity was incorrectly mapped as 0.07 instead of 432, which has led to alleged profiteering computation of Rs. 1,69,308/- whereas the actual sale amount including GST itself was only Rs. 1,69,335/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eligible to claim the said GST discount from Respondent by way of claims. The Respondent has further submitted that the reduced prices to be charged by the distributors/MT customers were also communicated to them. As reduced MRP was not reflected on packages for some time, he chose to adopt a system of GST claim discount so that benefit reached beyond direct customers of the Respondent and was not retained within the supply chain. He has further submitted that direct reduction in the prices of the products impacted by the GST rate reduction was made once the revised MRP was reflected on packages. Since the exercise of determining revised MRP was time-consuming and the discounts based on such revised MRP could be made effective only from January 2018. till such time that the revised MRP based GST discount claim system was in place (i.e. till December 2017), an ad-hoc discount in the range of 5% to 12.5% of the sale price of distributor/MT customers was given as GST claim discount to them. 36. The Respondent has also stated that the customers were aware of the post supply GST price reductions and accordingly claims were raised by them which were settled through issuance of Credit N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (running in to more than 500 pages) as to how GST rate reduction benefit has been passed on by way of post-supply discounts to distributors and modern retail customers but the above submissions were not considered by the DGAP and in his Report. The DGAP had rejected an amount of Rs. 73.59 Crore passed by way of such discounts on the ground that there was no one-to-one correlation between the supplies made and the discounts given which was not correct. He has also explained with an example that in the claim file submitted to the DGAP for one of his customers (Delhi Trading Co.), it could be clearly seen that the discount was based on the actual sale made by distributor to the retailer for a given product. He has further stated that the discount offered in respect of one invoice by the customer to the retailer for product DGAPL Eye Liner Studio Gel and the related claim made by the customer on the Respondent was as follows:- Customer to retailor invoice Invoice, as given by the Respondent in his submissions showed the MRP, Reduced MRP and the Scheme Discount (Sch Disc) which was calculated based on the rate per unit of product, as applicable based on the difference between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice reduction on credit notes was captured once the system design for Credit Notes was changed. Even till such time that the system design was changed, the discount was on account of GST reduction only and the same was issued by way of Credit Notes. 39. The Respondent has further submitted that in respect of modern trade/ modern retail customers, discounts were extended by way of settlement of invoices raised by such MT customers on him and his recipients had treated these price reductions/discounts as service in view of the fact that there were disputes under the erstwhile Service Tax legislation between the department and the dealers of the automobile companies who were receiving the incentives from the manufacturers post sale. The incentive received by the dealers was considered by the department as consideration for the service provided by the dealers to the manufacturers and Service Tax was demanded on such incentives. In order to avoid dispute regarding future tax liability and interest thereon, if any, he had taken position to accept the claims for price reductions from the recipients with tax as it was revenue neutral, being creditable in the hands of the Respondent. The R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act that the benefit of such price reduction was passed on further to the trade partners below in the supply chain, after carrying out appropriate verification. He has also submitted that allegation of profiteering (if any) should have been made after taking into account the amount passed on by way of post supply discount claims which alone reflected the net realization of the Respondent. He has further submitted that once discount was allowed as per established practice, the same should be allowed to be deducted from the sale price of the goods. 42. The Respondent has also claimed that the GST charged to the customers was available as credit to them which could be utilized against their output tax liability and accordingly, there was no need to separately refund the GST portion as well. Further, as and when the customers sold the goods, they had reduced the discount amount passed on (and claimed from the Respondent) while arriving at the taxable value under section 15 of CGST Act and charged GST only on the net price after discount, recovered from their customer. Accordingly, the computation of alleged profiteering ought to had been made after taking into account the benefit pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of increase in the quantity of products and based on weighted average prices of the products with latest MRP which amounted to Rs. 82,97,36,596/- (Rs. 26,96,31,164/- if restricted to profiteering at line item level). He has also submitted that this Authority during the course of the hearing on 30-10-2019 had handed over a template in excel format to the Respondent to corroborate the grammage benefit as a non-profiteering measure and directed the Respondent to provide the data and supporting information in the said format. Accordingly, the Respondent has once again mapped the data relating to the benefit of GST rate 'reduction passed on through higher grammage/extra quantity on various SKUs during the period of investigation viz. (November 15, 2017 to December 31, 2018) in the abovesaid template by introducing additional columns in the 35 excel sheets shared by DGAP with his Report dated 5-7-2019 (as Annexure 15 to the DGAP Report). From the above, he has submitted that he has passed on benefit of GST rate reduction by way of increase in the quantity of the products which should be reduced from the alleged profiteering computation. 46. The Respondent has also pleaded that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and the demand in the market, new prices were determined. 47. The Respondent has also averred that section 171(1) of the CGST Act mandated that any reduction in the rate of tax has to be passed on to the recipients by way of commensurate reduction in prices and according to the provisions of the above section this Authority was mandated to investigate through the DGAP and determine the quantum of commensurate benefit arising out of reduction in the tax rate which had not been passed on by a supplier. Therefore, allegation of profiteering (if any) could only be to the extent of reduction in the GST rate. In the instant case there had been reduction in the tax rate by 10% which as per the DGAP's computation methodology could be given effect by keeping the pre-tax price (base price) constant, which would have resulted in a reduction of 7.8% in the cum tax price charged to the customers. 48. He has further averred that the allegation of profiteering (if at all) could only be to the extent of the said 7.8%, which reflected the reduction in the tax rate. In other words, there could be no allegation of profiteering in excess of the said 7.8% reduction as any amount charged in exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' which was neither intended nor mandated by section 171 of the CGST Act. The Respondent has further submitted that the computation of aggregate reduction in the amount alleged as profiteered due to the above error committed by the DGAP based on the weighted average price of products with latest MRP came to Rs. 14,39,46,529/- and the above difference in the pre-rate reduction price and actual sale price was mainly occurring due to the usage of description as one of the basis for comparison of prices. He has also stated that there were SKUs where due to the price of promotional SKU with same description where price was low, due to which excess profiteering has been computed. Price of promotional SKU was always lower than the regular price of a product. The price of said promotional SKUs could not be considered as comparable to prices of normal SKUs charged post GST rate reduction. After the consumer promotion time period had expired the price of the product returned back to the regular price as a usual business practice. The Respondent has also submitted a list of SKUs on which he was running promotions in the months of October-November 2017 in the Price List submitted vide Anne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g authorities in certain countries like European Union. According to the said methodology, while calculating the dumping margin only those SKUs were considered which were being dumped and those SKUs which were not being dumped were not considered. The Respondent has further contended that he has passed on more than required amounts by following means:- a. Higher reduction in per unit price of the goods sold: There was a flat reduction in the prices of the goods by more than 78% which was reflected on the invoice itself. For instance, if the Respondent was selling the goods at Rs. 100 + 28% GST = Rs. 128/- and as per the DGAP's methodology, the commensurate price should have been Rs. 100 + 18% GST = Rs. 118/-, the Respondent has sold these goods at a price of say Rs. 95 + 18% GST = Rs. 112.1, thereby reducing the price by Rs. 5.9 (118-112.1) more than that the commensurate reduction computed by the DGAP. The amount passed on by this measure alone was Rs. 68,59,12,188/-, considering weighted average price of the products with latest MRPs. b. Increase in grammage in excess of 8.5%: The Respondent has also passed on higher price reduction in some goods by way of higher grammage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asure aggregated to Rs. 139,98,01,877/- which should be reduced from the alleged profiteering computation. 53. The Respondent has further submitted that he was having a unit in Baddi, Himachal Pradesh where he was availing the benefit of area based exemption under the erstwhile Central Excise regime. The Respondent was also getting goods manufactured through his sub-contractors located in Baddi. Under the above exemption, the Respondent was not required to pay Central Excise Duty on the goods manufactured in such units and was also not entitled to avail any CENVAT credit. With the introduction of GST, upfront exemption to such units was withdrawn and instead they were required to pay GST on goods supplied and thereafter claim refund to the extent of 58% of the central tax component paid out in cash. The Respondent has also stated that the implementation of the GST w.e.f. 1-7-2017 has resulted in taking away a substantial portion of the tax benefit which was available to the Respondent under the excise regime and a loss of Rs. 74,41,87,041/- in respect of his own manufacturing plant in Baddi had been suffered by him which was computed by comparing the reduced refund available to hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act of ITC. In fact, in the case of the Respondent, there was only a reduction in the rate of tax on the raw materials and the ITC has been reduced. A reduced ITC in the post-rate reduction period would result in increased cash outflow and consequently increased refund, which ultimately resulted in reduction in the loss when compared to pre-rate period. The Respondent has therefore adjusted the increased benefit on account of reduced ITC and was only claiming the net loss on account of reduced GST rate. The Respondent has also reworked the quantum of reduced refund solely on account of reduction in the rate of tax from 28% to 18% without considering loss on account of refund restricted to 58% of CGST/29% of IGST instead of his expectation of 100% refund of CGST/50% refund of IGST. The refund reduced solely on account of reduction in rate of tax from 28% to 18% worked out to Rs. 16,75.98.492/-, which should be adjusted while arriving at profiteering, if any. 56. The Respondent has also claimed that with the reduction in GST rates w.e.f. 15-11-2017, the tax payout has been directly reduced, resulting in reduced refund in absolute terms. Hence, the absolute reduction in refund allowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fective from the midnight of 15-11-2017. Therefore, the amount of GST collected by the Respondent from his customers stood paid to the Government exchequer. He has further stated that assuming, without admitting, that the Respondent has profiteered and GST has been collected thereon and said GST was to be deposited in the CWF then instead of the Respondent, the Government could transfer the amount equivalent to the GST on the profiteered amount to the CWF. He has also submitted that the term 'Profiteering' always had reference to a registered person. It implied that the profiteered amount was retained by the registered person. Therefore, with respect to the alleged excess GST paid by the recipient not retained by the Respondent but promptly paid to the Government as tax (on which there is no dispute), the Respondent could not be alleged to have profiteered. He has further submitted that addition of 18% GST would have been correct if the case of the DGAP had been that the amount has been collected and retained by the Respondent and not deposited with the Government. He has also contended that the amount charged from the recipients as GST which was available as input tax cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tentative and final prices had been recognized and consequently, all post-supply price reductions passed on should be factored in while examining whether commensurate reduction in prices has taken place or not. 60. He has also stated that commensurate reduction was not restricted to passing of benefit of tax rate reduction in monetary terms which was normally the price. Section 171 did not used the words 'pass on the benefit by reduction in price'. The effect of commensurate reduction in price was increased benefit to the recipient due to tax rate reduction. It should be seen whether the objective of section 171 was being achieved or not. If the recipient got the benefit in monetary or non-monetary form proportionate to tax rate reduction, section 171 was complied with. Price in this regard was the consideration paid or payable for the supply and as per Indian Contract Act. 1872, consideration included any act or abstinence. While consideration for supply was generally measured in monetary terms, the same could also include non-monetary elements. Thus, price was not only what was reflected in the invoice. The monetary component might already be factored in the invoice pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the 'marginal notes' to section 171 and heading of Chapter XV of CGST Rules, was untenable and not correct. He has also maintained that the text of section 171 did not use the term 'profiteering'. In order to understand the scope of section 171, it was pertinent to understand the meaning of the term 'profiteering' which had been used in the marginal notes. 63. He has also submitted that he has not violated section 171 and the rules made thereunder and the allegation of profiteering consequent to GST rate reduction was not sustainable and in the unlikely event of this Authority holding that some amount had been profiteered by him, then the same would be refunded by the Respondent to his recipients. This was without prejudice to the right of the Respondent to challenge the proceedings before higher forums. He has also claimed that rule 133 of CGST Rules provided that where this Authority determined that a registered person has not passed on the benefit of the reduction in the rate of tax, it may order return to the recipient of an amount equivalent to the amount not passed on. It further provided for deposit of such amount in the CWF constituted under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the existing MRP for a period of three months w.e.f. from 1st July, 2017 to 30th September, 2017. The Respondent has also submitted that Rule 6(3) dealt with the affixation of sticker with revised lower MRP without reference to a person who was empowered in this regard. The only condition was that such sticker should not cover the MRP declaration already made by the manufacturer or packer. Therefore, it could be said that such sticker could be affixed also by persons like distributors, dealers or retailers. The law recognized that the product might be anywhere in the distribution channel and all such persons like dealers and retailers may affix sticker to show reduced MRP. In the case of increase in MRP, relaxation was granted to manufacturers, importers and packers by the abovesaid circular dated 4-7-2017 to affix sticker to declare changed MRP on unsold stock as existing on 1st July, 2017. In case of reduction of MRP, all persons including dealers and retailers had been provided the discretion to affix stickers as per rule 6(3). In respect of reduction of MRP on the goods lying with the dealers and others, law had taken into account practical considerations. It was not possible f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d have been prescribed, then the Respondent would have passed on the benefit to his customers according to such methodology or guidelines and the present proceedings would have been avoided. 66. The Respondent has also pleaded that the present proceedings had been initiated in violation of the principles of natural justice as show cause notice has not been issued to the Respondent proposing the action to be taken by this Authority. Moreover, the investigation was initiated on the basis of the reference of the Secretary of this Authority to the Standing Committee, which has unilaterally misinterpreted the submissions made by the Respondent in his communications to erroneously conclude admission of profiteering by the Respondent. The Respondent was not given any chance to clarify or explain his communication. He has also submitted that the Report consequent to the investigation by DGAP was neither a show cause notice nor could it be treated as substitute to a show cause notice. However, from the hearing notice received by the Respondent, it appeared that this Authority has considered the above Report of the DGAP as a show cause notice, which was not correct. He has submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some line items, the DGAP has adopted price as per Step 5 - Comparable Base Code Price (1-10-2017 to 14-11-2017) whereas the price as per Step 2 itself was available. These line items with inconsistencies could be identified in each of the 35 excel sheets by filtering following line items which showed difference of Rs. 4,80,88.937/- in the profiteered amount. The DGAP has in his Step 5 and 6 identified certain products as comparable for computing profiteering without taking any inputs from the Respondent. For instance, in row number 131216 of 12. Gujarat GT file, it could be seen that the Respondent has sold product GN MEN Acnofight FW 50 ml with product code SYMAF050-70 at a per unit price of Rs. 61.93 (excluding GST). Since the said product code or sale of that description was not available in the pre-rate reduction period, the DGAP has mapped product code SYMAF050-00 (having product description AcnoFight Facewash 50 ml) as comparable whose pre-reduction price was Rs. 53.92 p. u. (excluding GST) and accordingly computed a profiteering of Rs. 8.01 p. u. (excluding GST) or Rs. 9.45 p. u. including GST. He has also claimed that without getting into any dispute as to the correctness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the post-rate reduction price. In the alternative, weighted average of latest prices, should have been taken into account. He has also claimed that the practice adopted by the DGAP was not fair as hunting for the least price and using the same as base price so that the difference was maximum and the alleged profiteering amounts got inflated, was neither provided in the law nor was in consonance with the anti-profiteering principles. In all the transactions subjected to scrutiny by the DGAP involving thousands of SKUs with supplies made over 18 months, such error in reckoning base prices has crept in and the same was required to be corrected which would result in substantial reduction of alleged profiteering amounting of Rs. 40.82 Crore and Rs. 41.67 Crore respectively. 69. The Respondent has also argued that during the normal course of his business he has issued Credit Notes on account of return of goods from his recipients or on account of incorrect invoicing. In respect of supplies made after 14-11-2017 there had been cases of Credit Notes being issued by the Respondent. On perusal of computation made by the DGAP in the 35 files, he has observed that for some line items of invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on 7-1-2019 to investigate the matter and hence the period from 15-11-2017 up to the latest month of receipt of reference was taken up for investigation i.e. from 15-11-2017 to 31-12-2018 which has already been stated in para-6 of his Report dated 5-7-2019. 73. With regard to incorrect quantity in 1 line item of Sale (Annexures 1 & 4 in the CD submitted on 25-10-2019) he has stated that the error has been rectified The DGAP has also claimed that his Report dated 5-7-2019 had been prepared on the basis of data and information submitted by the Respondent during the course of investigation. Vide letter dated 21-6-2019, the Respondent had submitted the details of outward taxable supplies containing Inter-alia details of invoice No. MH1814006635 dated 22-6-2018 consisting 0.07 quantity and having base price of Rs. 1,43,504.08/- which was duly considered by him during the Investigation. As the quantity has been rectified to 432 instead of 0.07, the profiteering for that transaction has been reduced to Rs. 5,426/-. 74. On the issue of benefits passed on to recipients by way of price reduction post-supply (discounts/other benefits) the DGAP has submitted that provisions contained in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear that in the event of a benefit of ITC or reduction in the rate of tax, there must be a commensurate reduction in prices of the goods or services. Such reduction could obviously only be in absolute terms such that the final price payable by a consumer must get reduced. This was the legally prescribed mechanism for passing on the benefit of ITC or reduction in the rate of tax under the GST regime to the consumers. Moreover, it was clear that the said section 171 simply did not provide a supplier of the goods or services any other means of passing on the benefit of ITC or reduction in the rate of tax to the consumers. 78. The issue of loss due to reduced fiscal incentives under the budgetary support scheme has been addressed by the DGAP by stating that the concern raised by the Respondent has duly been addressed in Para 19 of his Report dated 5-7-2019. 79. The Respondent has also claimed that profiteering should not be computed for luxury products. In this regard the DGAP has submitted that section 171 of the Central Goods and Services Tax Act did not make any differentiation between the necessity and the luxury products and his investigation Report has covered all the product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o refer to the prices of various goods/services but for each individual product or service, there would be only one selling price and one commensurate price, the difference of which would be the profiteered amount. The word "any" is used before the word "supply" to indicate that the benefit of reduction in rate of tax has to be passed on for each and every supply. The word "registered person" has been used as section 171 of the CGST Act, 2017 which could not be applied on suppliers who were not registered under the GST Act, and it was clear from the word "recipient" (in singular) that the benefit has to be passed to each and every recipient, who may buy a single SKU also. Thus, the profiteering has to be determined at the SKU level. The text of the law was very clear according to which the benefit of reduction in the rate of tax has to be passed on to each recipient on every supply. Thus, there was no scope for interpretation of the marginal notes. 82. On the contention of the Respondent that the profiteered amount could be refunded to his distributors, the DGAP has submitted that the benefit must be passed on to the recipients who had borne the incidence of such amount i.e. the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price should be taken as one out of the following three approaches:- (a) Weighted Average Base Price of the product having same description with all the MRPs. (b) Average Base Price of the product with latest MRP of the latest product code introduced immediately prior to rate-reduction. (c) Weighted Average Base Price of the products with latest MRP prevailing in pre-rate reduction period. Accordingly, the Respondent has re-computed the profiteering amount and submitted that the profiteering should be reduced by Rs. 19,75,12,265/- in case approach (a) above is adopted or by Rs. 30,39,43,079/- in case approach (b) above was adopted or by Rs. 30,51,84,398/- in case approach (c) was adopted. 87. In this regard, the DGAP has submitted that the Respondent had sold some products with same description in multiple product codes with different MRPs. However, these MRPs were prevailing in the pre-rate reduction period and were not obsolete. For this the DGAP has taken an example of the product with description "MAJIREL (NEW) SHADE. NO. 4", for General Trade Channel, the details of which are furnished in the table given below:- S. No. Product Code Product Description HSN MRP Qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 MRCIP300-80 MAJIREL (NEW) SHADE NO. 3 33059040 335 23,106 55,14,061 238.64 Total 1,24,960 2,80,06,771 224.12 91. He has stated that in the post rate reduction period, he had adopted the pre-rate reduction base price as Rs. 220.83/- (available at first place) and determined the profiteering for product sold in the post-rate reduction period as Rs. 28,81,815/- (for the state Delhi- General Trade). However, the Respondent has submitted that as per approach (c) Weighted average price of latest MRP of Rs. 238.64/- should be adopted and profiteering reduced by Rs. 26,17,512/- and profiteering should be only Rs. 2,64,303/- [Rs. 28,81,815/- (-) Rs. 26,17,512/-]. The DGAP has claimed that the above submission of the Respondent did not seem to be appropriate as the Respondent had sold 1,01,851 units @ Rs. 310/- MRP and only 23,106 units @ Rs. 335/- MRP during the pre-rate reduction period which showed that both the MRPs were in the market and neither was obsolete. However, the DGAP has submitted that if this Authority decided, it might consider approach (a) where Weighted Average Base Price of the product having same description with all the MRPs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as claimed by the Respondent, for approach (c). 94. On the claim of the Respondent regarding calculation of the profiteering respect of the line items for which credit notes have been issued, the DGAP has stated that he had excluded all the transactions for which Credit Notes were issued for sales return by mapping the Credit Notes with the original sale invoices. However, for certain transactions as highlighted by the Respondent, the DGAP has accepted that he had inadvertently computed the profiteering amounting of Rs. 65,20,961/- for the transactions for which Credit Notes were issued later on due to non-availability of linkage between them. However, the same has been verified and this Authority might like to consider the same. 95. The Respondent has also alleged computation of profiteering on the sales not impacted by rate reduction. In this regard, the DGAP has submitted that in principle, he had not determined and computed profiteering for the items not impacted by Notification No. 41/2017-Central Tax (Rate) dated 14-11-2017 (Kajal & Hair Oil). However, he had inadvertently included certain transactions not impacted by the rate reduction notification and computed profiteerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... base price from Respondent's Price List (H) 46,02,070/- Para- 3 above Net Revised Profiteering (I)= [A-(B+C+D+E+F+G)+H] 1,86,39,57,058/- 98. We have carefully considered all the Reports filed by the DGAP, the submissions of the Respondent and the other material placed on record and it is revealed that the DGAP vide his Report dated 5-7-2019 has computed the profiteered amount as Rs. 2,16,49,61,535/- which has been shown at Sr. No. 1 of the above Table given in his Report dated 23-12-2019. However, vide Sr. No. 2 of the above Table, the DGAP has submitted that an amount of Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in terms of the Order dated 20/2018 passed by this Authority on 24-12-2018 in the case of Ankit Kumar Bajaria v. Hindustan Unilever Ltd. [2019] 72 GST 266. 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. 104. 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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