2018 (12) TMI 1599 - NAPA - GST

Respondent breached GST rate rules, profiteered Rs. 383.35 Crores, ordered to deposit in Consumer Welfare Fund.

The Respondent failed to pass on the benefit of reduced GST rates to consumers as mandated by Section 171 of the CGST Act, 2017. The investigation ... Commensurate reduction in prices - passing on benefit of reduction in rate of tax - profiteering under Section 171 of the CGST Act, 2017 - TRAN-2 transitional credit as input tax credit (ITC) and obligation to pass on benefit - Methodology and Procedure under Rule 126 of the CGST Rules, 2017 - deposit in Consumer Welfare Fund (CWF) - penalty for issuance of incorrect invoices under Section 122(1)(i) of the CGST Act, 2017 - admissibility of deductions claimed (grammage, trade reimbursements, fiscal incentives, packing material write-off, tax-on-tax)Passing on benefit of reduction in rate of tax - commensurate reduction in prices - profiteering under Section 171 of the CGST Act, 2017 - Whether the respondent passed on the benefit of GST rate reductions w.e.f. 15.11.2017 to consumers in terms of Section 171 - HELD THAT: - The Authority found as a matter of fact and law that the Central Government reduced GST rates w.e.f. 15.11.2017 and that the respondent increased base prices across impacted SKUs instead of reducing selling prices commensurately. Applying Section 171, read purposively to secure that benefits of tax reduction and ITC are not retained by suppliers, the Authority held that the only mode mandated for passage of benefit is commensurate reduction in prices unless demonstrated otherwise under prevalent trade practices. The respondent's conduct - raising base prices, instructing redistribution stockists (RSs) not to pass on ITC, and delayed/partial deposit into the CWF - established denial of benefit and profiteering. The Authority rejected submissions that alternate modes (grammage increases, trade reimbursements, deposit offers) absolved the respondent unless legally substantiated and contemporaneous with rate change. The DGAP's finding that the respondent contravened Section 171 was thus upheld and profiteering established. [Paras 9, 10, 44, 45, 51]The respondent is held to have contravened Section 171 by failing to pass on the benefit of GST rate reductions and thereby resorting to profiteering.TRAN-2 transitional credit as input tax credit (ITC) and obligation to pass on benefit - passing on benefit of reduction in rate of tax - Whether TRAN-2 transitional credit availed by the respondent qualifies as ITC and was required to be passed on to recipients; and whether it was includible in profiteered amount - HELD THAT: - The Authority examined Section 140(3) and Rule 117 and concluded that transitional credit availed under TRAN-2 is, for purposes of the Act, input tax credit. The proviso to Section 140(3) expressly requires that such benefit be passed on by way of reduced prices. The respondent's contention that TRAN-2 credit fell outside ITC or outside the scope of the investigation was rejected. The respondent failed to demonstrate that the TRAN-2 benefit was passed on. Consequently the DGAP rightly included TRAN-2 amounts in the scope of profiteering. [Paras 17, 62, 63]TRAN-2 credit is ITC for the purposes of Section 171 and the TRAN-2 amount not passed on by the respondent is includible in the profiteered amount.Admissibility of grammage as a mode of passing on benefit - commensurate reduction in prices - admissibility of deductions claimed - Whether benefit passed by increasing grammage (extra quantity) could be allowed as deduction from profiteered amount and, if so, quantum - HELD THAT: - Recognising prevailing trade practices and practical difficulties in reducing MRPs for low value/value-based packs, the Authority held that increased grammage can constitute a mode of passing on benefit provided there is clear, contemporaneous, product wise evidence of causation and that the increase is commensurate with the tax reduction. The respondent was given opportunity to substantiate claims in prescribed format. On scrutiny, many claimed items were ineligible (e.g. not in sales register, pre-existing packs, sales returns, different CBU codes). The Authority permitted deduction only to the extent supported by documentary evidence and nexus, allowing Rs. 68.77 crores as grammage-related deduction from the profiteered amount and rejecting the balance of the claimed grammage benefit. [Paras 11, 64, 65, 68]Grammage increase is an admissible mode of passing benefit in appropriate cases; Rs. 68.77 crores is allowed as deduction for grammage benefit, balance disallowed.Admissibility of deductions claimed - fiscal incentives (area-based) and their effect - Whether the respondent's claimed deduction for loss of area-based fiscal incentives (fiscal deployment) is admissible - HELD THAT: - The Authority examined the respondent's claim that reduction in notified tax rates reduced absolute refunds under area-based incentives and increased base costs. It held that area-based incentives are fiscal benefits linked to tax paid and that there was no evidence of an absolute loss that would justify excluding the claimed amount. There was no direct correlation shown between MRP and such incentives, nor evidence that products manufactured under concessions were sold at lower prices. The DGAP's rejection of the deduction was affirmed. [Paras 12, 28, 69]The claim for deduction on account of loss of fiscal (area-based) incentives is rejected.Admissibility of deductions claimed - trade reimbursements to Modern Trade - Whether reimbursements/trade discounts paid to Modern Trade (MT) could be deducted from profiteered amount - HELD THAT: - The respondent alleged reimbursements to MT dealers to pass on benefit; however, documentary evidence did not establish that end consumers received price reduction contemporaneously with rate change. Letters produced were dated much later and did not demonstrate that MRPs/barcodes were revised or that consumers benefitted. The Authority concluded that the respondent failed to substantiate that MT reimbursements effected passing of benefit to customers and therefore denied the deduction claimed. [Paras 26, 70]Deduction for reimbursements to Modern Trade (Rs. 26.37 crores claimed) is not allowed.Packing material write-off - admissibility of deductions claimed - Whether cost of writing off existing packaging material bearing old MRPs is admissible as deduction from profiteered amount - HELD THAT: - The Authority noted government guidance permitted stickering or online printing to declare reduced MRPs and that the CGST Act does not allow deduction for cost of packing material in computation of passing on tax benefit. Operational difficulty does not justify non-compliance. The respondent's choice to write off rather than sticker was a business decision and unsupported by legal provision; the deduction was therefore rejected. [Paras 12, 71]Claim for deduction on account of packing material write-off is rejected.Tax collected on profiteered amount - profiteering under Section 171 of the CGST Act, 2017 - Whether the additional tax collected (tax-on-tax) on increased base prices can be deducted from profiteered amount - HELD THAT: - The Authority held that extra GST charged on unlawfully increased base prices was part of the additional amount paid by recipients and thus forms part of profiteering; even if the respondent remitted that extra tax to Government, the recipients had paid more and the extra tax cannot be deducted from the profiteered amount. The respondent's claim to deduct such tax was dismissed. [Paras 30, 72]Extra tax collected on account of increased base prices is includible in profiteered amount and not deductible.Sales to CPF/CRPF and CSD - admissibility of deductions claimed - Whether sales to CPF/CRPF (and similar supplies) should be excluded from profiteering computation - HELD THAT: - DGAP initially included such supplies; on review he accepted that supplies where no excess realization occurred should be excluded. The Authority concurred and allowed deduction of Rs. 3.80 crores in respect of CPF/CRPF supplies where base prices excluding tax remained unchanged and no excess realization arose. [Paras 31, 73]Deduction of Rs. 3.80 crores for supplies to CPF/CRPF is allowed.Sales of semi-finished goods - admissibility of deductions claimed - Whether sales of semi-finished goods to third party manufacturers should be excluded from profiteering computation - HELD THAT: - Respondent claimed certain sales were of semi-finished goods not for consumption. Authority reviewed invoices and transactional details and found insufficient evidence that supplies were not final or that prices were reduced; prices had increased post 15.11.2017. The claim to exclude Rs. 2.63 crores was not proved and therefore rejected. [Paras 32, 74]Claim to exclude sales of semi-finished goods (Rs. 2.63 crores) is rejected.Recovery from Redistribution Stockists (RSS) - deposit in Consumer Welfare Fund (CWF) - Treatment of amounts recovered from RSS and deposited by respondent and recovery of unrecovered amounts from RSS - HELD THAT: - The respondent recovered Rs. 36.19 crores from RSS and deposited it in the CWF; seven RSS amounts totalling Rs. 6,47,131 remained unrecovered. The Authority held that amounts recovered from RSS were part of profiteered amount and could not be deducted; the unrecovered sum must be recovered from respondent and deposited. DGAP had not included these in earlier computation; Authority directs DGAP to apportion and deposit accordingly. [Paras 16, 75, 76]Recovered amount of Rs. 36.19 crores is part of profiteering; Rs. 6,47,131 not recovered must be recovered from respondent and deposited in CWF.Computation and quantification of profiteered amount - deposit in Consumer Welfare Fund (CWF) - Final quantification of profiteering for period 15.11.2017 to 28.02.2018 and directions for deposit and distribution - HELD THAT: - After applying admissible deductions (grammage Rs.68.77 crores and CPF/CRPF Rs.3.80 crores) and adding identified components (DGAP's computed Rs.419.67 crores; RSS recovery and unrecovered amounts; TRAN-2/UT credits), the Authority determined net profiteering and apportioned fifty percent to Central CWF and balance to State CWFs per Rule 133(3)(c). The Authority noted amounts already deposited by respondent (Rs.160.23 crores) and directed deposit of balance central share (Rs.31.45 crores) within three months with interest @18% and DGAP/Central/State Commissioners to effect and report compliance. The Authority set out precise aggregation and apportionment to be carried out by DGAP. [Paras 77, 78]Net profiteering for the period is quantified and respondent directed to deposit specified balances into Central and State CWFs with interest; DGAP to compute apportionment and monitor compliance.Methodology and Procedure under Rule 126 of the CGST Rules, 2017 - Whether absence of a general, prescriptive 'methodology of determination' under Rule 126 invalidates the DGAP computations or respondent's liability - HELD THAT: - The Authority recorded that it had already issued 'Methodology and Procedure' under Rule 126 and emphasised that computation of profiteering depends on facts of each case; Rule 126 empowers the Authority to determine methodology rather than prescribe inflexible rules. The respondent was repeatedly invited to propose alternate methodology but failed to do so. The Authority therefore rejected the contention that DGAP's approach was invalid for want of a general methodology. [Paras 21, 46]Lack of a single prescriptive methodology under Rule 126 does not vitiate the DGAP's computations; Authority's methodology/approach for the case is upheld.Penalty for issuance of incorrect invoices under Section 122(1)(i) of the CGST Act, 2017 - Whether penal proceedings should be initiated for issuance of incorrect invoices and related contraventions - HELD THAT: - Having found contravention of Section 171 and specific facts indicating issuance of incorrect invoices and conscious denial of benefit, the Authority held that penal provisions under Section 122(1)(i) are attracted. It directed that a fresh show-cause notice be issued to the respondent to explain why penalty should not be imposed, leaving adjudication to the appropriate authority after giving respondent opportunity. [Paras 79]A fresh notice is to be issued to the respondent asking why penalty under Section 122(1)(i) should not be imposed.Further investigation by DGAP - Whether further investigation is required and remanded matters for the DGAP - HELD THAT: - The Authority confined its investigation to the period 15.11.2017 to 28.02.2018 and directed the DGAP to conduct further investigation to ascertain whether the respondent has passed on the benefit of tax reductions in respect of all products being sold by it; if not, DGAP is to quantify additional profiteering and submit further report. This constitutes remand for fresh consideration/verification by the DGAP limited to post investigation scope described. [Paras 3, 78]The DGAP is directed to carry out further investigation beyond the present computations and submit additional quantified report where non-passage of benefit is found (remanded for fresh consideration).Final Conclusion: The Authority holds that the respondent failed to pass on the benefit of GST rate reductions w.e.f. 15.11.2017 and thereby contravened Section 171 of the CGST Act, 2017; after allowing limited, evidenced deductions (notably partial grammage benefit and certain supplies excluded), the Authority quantified net profiteering for the investigated period, directed deposit and apportionment into Central and State Consumer Welfare Funds with interest, ordered recovery of unrecovered sums from redistribution stockists, directed further investigation by the DGAP where required, and directed issuance of a fresh show-cause notice to the respondent proposing penalty under Section 122(1)(i). Issues Involved:1. Whether the rates of GST were reduced in respect of the products supplied by the Respondent w.e.f. 15.11.2017.2. If the rates were reduced, whether the benefit of such reduction in the rates of tax was passed on to the consumers in terms of Section 171 of the GST Act, 2017.3. If not, what was the quantum of profiteering by the Respondent.Issue-wise Detailed Analysis:1. Reduction in GST Rates:The Central Government, on the recommendation of the GST Council, reduced the GST rates on several products from 28% to 18% and from 18% to 12% effective from 15.11.2017. The Respondent admitted that the GST rates on the goods supplied by him were reduced w.e.f. 15.11.2017.2. Passing on the Benefit of GST Rate Reduction:The Respondent failed to pass on the benefit of the reduction in the rates of tax to his consumers. Instead of reducing the prices commensurately, the Respondent increased the base prices of his products, thus maintaining the same selling prices even after the reduction in GST rates. This was evident from the fact that the Respondent manipulated his software to increase the base prices of 12,016 items from 15.11.2017. The DGAP's investigation revealed that the Respondent had not reduced the MRPs or increased the fill levels as claimed. The DGAP's report emphasized that Section 171 of the CGST Act, 2017 mandated that any reduction in the rate of tax or benefit of input tax credit must result in a commensurate reduction in prices, which the Respondent failed to comply with.3. Quantum of Profiteering:The DGAP's investigation determined that the Respondent had profiteered an amount of Rs. 419.67 Crores by increasing the base prices of products after the reduction in GST rates. Additionally, the Respondent availed an amount of Rs. 76.06 Crores as TRAN-2 credit, which was not passed on to the consumers, resulting in a total profiteering amount of Rs. 495.73 Crores. The Respondent had deposited Rs. 124.04 Crores in the Consumer Welfare Fund (CWF), but this was not sufficient to cover the entire profiteered amount.Admissibility of Deductions Claimed by the Respondent:1. Grammage Benefit:The Respondent claimed that he passed on the benefit of GST rate reduction by supplying additional quantity (grammage) of products for the same price. The Authority allowed a deduction of Rs. 68.77 Crores on account of grammage benefit, considering it as a legitimate mode of passing on the benefit in the FMCG sector.2. Area-based Fiscal Incentives:The Respondent claimed a deduction of Rs. 45.31 Crores due to the reduction in area-based incentives. However, the Authority rejected this claim, stating that the Respondent was still eligible for the same proportionate refund of actual CGST/IGST paid in cash, and there was no loss in absolute terms.3. Reimbursement to Modern Trade:The Respondent claimed a deduction of Rs. 26.37 Crores for trade discounts reimbursed to Modern Trade dealers. The Authority rejected this claim as the Respondent failed to provide credible evidence that the benefit was passed on to the end consumers.4. Packing Material Write-off:The Respondent claimed a deduction of Rs. 7.80 Crores for the cost of writing off old packaging material. The Authority rejected this claim, stating that the law allowed re-stickering of old MRPs, and the Respondent's decision to write off the packaging material was a business call, not a legal requirement.5. Tax Collected on Profiteered Amount:The Respondent claimed a deduction of Rs. 57.80 Crores for the extra GST collected on the increased base prices. The Authority rejected this claim, stating that the extra amount collected from the recipients was part of the profiteering and could not be deducted.6. Sales to CPF and CRPF:The Respondent claimed a deduction of Rs. 3.80 Crores for sales made to CPF and CRPF at base rates excluding GST. The Authority allowed this deduction as there was no increase in the base prices for these supplies.7. Sales of Semi-finished Goods:The Respondent claimed a deduction of Rs. 2.63 Crores for sales of semi-finished goods to third-party manufacturers. The Authority rejected this claim as the Respondent failed to provide conclusive proof that the goods were returned for further processing.8. ITC Credit Collected from RSs:The Respondent collected Rs. 36.19 Crores from his Redistribution Stockists (RSs) as excess realization on closing stocks. The Authority held this amount as profiteered and directed it to be deposited in the CWF.Final Determination:The Authority determined that the Respondent had profiteered an amount of Rs. 455.92 Crores on account of denial of benefit to customers due to the reduction in GST rates. Additionally, the Respondent availed Rs. 78.97 Crores as TRAN-2 credit, which was not passed on to consumers, resulting in a total profiteering amount of Rs. 534.89 Crores. After allowing deductions of Rs. 68.77 Crores for grammage benefit and Rs. 3.80 Crores for supplies to CPF and CRPF, the net profiteering amount was Rs. 383.35 Crores. The Respondent was directed to deposit this amount along with interest in the Central and State Consumer Welfare Funds (CWFs) within three months. The DGAP was also directed to conduct further investigation to ascertain if the Respondent had passed on the benefit of tax reductions for all products sold.