2018 (9) TMI 625 - NAPA - GST

Manufacturer penalized for not passing GST rate reduction benefit to consumers, violated Section 171 CGST Act 2017

NAPA held that respondent engaged in profiteering by failing to pass on GST reduction benefit from 28% to 18% on Vaseline product effective 15.11.2017. ... Profiteering / passing on benefit of tax reduction - commensurate reduction in prices - Section 171 of the CGST Act, 2017 - input tax credit (ITC) benefit - return of goods and credit note not negating supply - deposit in Consumer Welfare Fund - penalty under Section 122(1) of the CGST Act, 2017 - Methodology and Procedure under Rule 126 of the CGST Rules, 2017Profiteering / passing on benefit of tax reduction - commensurate reduction in prices - Section 171 of the CGST Act, 2017 - Whether the respondent contravened Section 171 by not passing on the benefit of GST rate reduction and thereby indulged in profiteering - HELD THAT: - The Authority found on the admitted material that GST on the product was reduced from 28% to 18% w.e.f. 15.11.2017 but the respondent continued to charge the same gross selling price. The respondent's admitted purchase and sale prices show an increase in base price after 15.11.2017 which exactly offset the tax reduction, resulting in higher base realisation per unit. The respondent's status as a registered dealer aware of the Notification and of Section 171 imposed on him the obligation to pass on the benefit; reliance on instructions or pricing by the manufacturer did not absolve him. The Authority applied the mathematical adjustment implicit in Section 171 and the Legal Metrology guidance for refixing MRP, and noted that the Authority has prescribed the methodology under Rule 126. On these findings profiteering was established for supplies made during the stated period. [Paras 16, 18]Profiteering under Section 171 is established against the respondent for the period stated; he is directed to reduce sale price and pass on the benefit.Return of goods and credit note not negating supply - profiteering / passing on benefit of tax reduction - Whether the subsequent return of goods and issuance of credit note by the purchaser nullified the original supply so as to defeat a finding of profiteering - HELD THAT: - The Authority held that the supply was completed on 15.11.2017 when tax invoice was issued, delivery made and consideration received; the transaction was reflected in the respondent's November return. A later return of goods and issuance of credit note in December did not render the earlier supply infructuous for the purpose of Section 171. Consequently, the respondent's contention that the returned transaction negated profiteering was rejected as contrary to the facts and statutory scheme. [Paras 17]Return of goods and issuance of credit note did not negate the original supply for the purposes of Section 171; the contention is rejected.Input tax credit (ITC) benefit - deposit in Consumer Welfare Fund - profiteering / passing on benefit of tax reduction - Whether recovery by the manufacturer of excess ITC from stockists or subsequent deposit in the Consumer Welfare Fund absolves the respondent of liability for profiteering - HELD THAT: - The Authority noted that even if the manufacturer (HUL) recovered excess ITC from its stockists or deposited amounts in the Consumer Welfare Fund, such subsequent transactions do not absolve a registered supplier who issued incorrect invoices and realised excess amounts equal to the tax reduction. The obligation to pass on the benefit arises at the point of supply; later adjustments between manufacturer and stockists do not cure the respondent's failure to pass on benefit to consumers. The DGAP was directed to verify any deposits made by HUL and ensure balance amounts and interest are recovered from the respondent if not covered. [Paras 20, 23]Recovery or deposit by the manufacturer does not absolve the respondent; he remains liable for the determined profiteered amounts or interest as directed.Penalty under Section 122(1) of the CGST Act, 2017 - profiteering / passing on benefit of tax reduction - Whether penalty proceedings should be initiated against the respondent for issuing incorrect invoices and denying the benefit of tax reduction - HELD THAT: - Having found that the respondent knowingly issued invoices with an enhanced base price equal to the tax reduction and thereby deprived customers of the statutory benefit, the Authority concluded that his conduct was contumacious and dishonest and attracted the penal provision in Section 122(1) for issuing incorrect or false invoices. The Authority proposed imposition of penalty under Section 122 read with Rule 133(d) but afforded the respondent a show-cause opportunity before imposing penalty. [Paras 24, 25]Penalty is proposed under Section 122(1) read with Rule 133(d); respondent is given notice to show cause why penalty should not be imposed.Profiteering / passing on benefit of tax reduction - interest on amounts not passed on - deposit in Consumer Welfare Fund - Quantification and remedial directions in respect of the profiteered amount - HELD THAT: - The Authority quantified profiteering based on DGAP's computation and admissions: profiteering of Rs. 184 determined for a specific invoice to the applicant which is to be returned with interest at 18% from the date noted; and an amount of Rs. 5,50,186 (excluding the Rs. 184) determined for supplies to other, non-identifiable recipients which is to be deposited with interest at 18% from the first of the subsequent month in which profiteering occurred. The DGAP is directed to verify any corresponding deposits by HUL and recover any shortfall or outstanding interest from the respondent; amounts for non-identifiable recipients are to be deposited in the Consumer Welfare Fund as per Rule 133(c). The respondent must pay or deposit ordered amounts within three months or face recovery measures. [Paras 23, 26]Profiteered amounts are determined and directed to be returned or deposited with interest; DGAP to ensure recovery/verification and the respondent must comply within three months.Final Conclusion: The Authority held that the respondent contravened Section 171 by failing to pass on the benefit of GST rate reduction w.e.f. 15.11.2017, quantified the profiteered amounts for identified and non identifiable recipients, directed reduction of sale price and refund/deposit with interest, required DGAP verification of any deposits made by the manufacturer, and proposed penalty proceedings under Section 122(1) while granting the respondent an opportunity to show cause. Issues Involved:1. Allegation of profiteering by not passing on the benefit of GST rate reduction.2. Examination of the transaction's validity due to the return of goods.3. Determination of the methodology for commensurate reduction in prices.4. Consideration of increased product quantity as a benefit.5. Examination of excess Input Tax Credit (ITC) recovery by HUL.6. Imposition of penalty for violating Section 171 of the CGST Act, 2017.Issue-wise Analysis:1. Allegation of Profiteering:The Applicant No. 1 alleged that the Respondent did not pass on the benefit of GST rate reduction from 28% to 18% on Vaseline VTM 400 ml. The DGAP's investigation revealed that the Respondent increased the base price of the product to maintain the same selling price, thus contravening Section 171 of the CGST Act, 2017. The Respondent's defense that the benefit was passed on through increased quantity was deemed untenable, as the Respondent was not competent to alter the product's quantity or MRP.2. Transaction Validity Due to Return of Goods:The Respondent argued that the transaction was nullified as the goods were returned. However, the DGAP clarified that Section 171 required the benefit to be passed on at the time of supply, and future events like returns did not negate the original transaction. The Authority upheld this view, stating that the supply was completed upon issuance of the tax invoice and receipt of payment.3. Methodology for Commensurate Reduction in Prices:The Respondent contended that the CGST Act did not specify a methodology for determining commensurate price reduction. The Authority dismissed this argument, stating that it involved simple mathematical calculations to adjust the MRP by the reduced tax amount. The Respondent's failure to declare the reduced MRP as per Legal Metrology Rules further violated Section 171.4. Consideration of Increased Product Quantity:The Respondent claimed that the increased quantity of Vaseline from 300 ml to 400 ml at the same MRP passed on the tax reduction benefit. The Authority found this claim untenable as the Respondent, being an intermediary, could not alter the product's quantity. The Respondent was required to pass on the tax reduction benefit by reducing the base price.5. Excess ITC Recovery by HUL:The Respondent argued that the excess ITC credited to HUL was deposited in the Consumer Welfare Fund (CWF), absolving him of profiteering. The Authority rejected this, stating that the Respondent issued incorrect tax invoices and increased the base price to negate the tax reduction benefit. Any subsequent deposit in the CWF did not absolve the Respondent of profiteering.6. Imposition of Penalty:The Authority determined that the Respondent deliberately violated Section 171 by issuing incorrect invoices and increasing the base price equal to the reduced tax amount. This conduct was deemed contumacious and dishonest, justifying the imposition of a penalty under Section 122 of the CGST Act, 2017. The Respondent was given notice to show cause why such a penalty should not be imposed.Conclusion:The Respondent was directed to reduce the sale price of the product commensurate with the GST rate reduction and return the profiteered amount of Rs. 184 to Applicant No. 1 with 18% interest. The Respondent was also ordered to deposit Rs. 5,50,186 (excluding the amount returned to Applicant No. 1) along with 18% interest into the respective Consumer Welfare Funds. The DGAP was tasked with ensuring compliance and recovering any shortfall. The Respondent was given three months to comply with the order, failing which the amount would be recovered by the DGAP as per the CGST Act, 2017.