2019 (3) TMI 371 - NAPA - GST

Cosmetic cream manufacturer violated Section 171 CGST Act by not passing tax reduction benefits to consumers

NAPA held that a cosmetic cream manufacturer contravened Section 171 of CGST Act, 2017 by not passing on tax reduction benefits to consumers. The ... Reduction in the rate of tax and passing on benefit under Section 171 of the CGST Act, 2017 - Comparison of effective tax incidence pre GST and post GST - Profiteering by increasing base price / failure to pass on tax reduction - Obligation to deposit profiteered amount with interest and refund mechanism / Consumer Welfare Fund - Offence of issuing incorrect tax invoices and penalty under Section 122(1)(i) of the CGST Act, 2017 - Remand for further investigation of quantum of profiteering on all products suppliedReduction in the rate of tax and passing on benefit under Section 171 of the CGST Act, 2017 - Comparison of effective tax incidence pre GST and post GST - Scope of Section 171 includes comparison of pre GST tax incidence with post GST rates to determine whether benefit of reduction in the rate of tax has been passed on. - HELD THAT: - The Authority held that Section 171(1) is not confined to a reduction in the rate of GST alone; where the net tax incidence applicable prior to implementation of GST is higher than the tax incidence after introduction of GST, that net reduction falls within Section 171(1) and must be passed on by way of commensurate price reduction. The CGST/SGST charging and supply provisions do not prevent comparison of pre GST taxes (such as CED, CST, VAT) with post GST rates because those pre GST levies were subsumed by GST and formed part of the price on which VAT was leviable; the legislative scheme and repeal provisions demonstrate that rates fixed on introduction of GST were set having regard to prior tax incidence. The Authority therefore rejected the Respondent's contention that Section 171 applies only to a change in a GST rate and not to a reduction in overall tax incidence occasioned by GST's introduction or subsequent rate changes, and concluded that comparing pre and post GST tax incidence is permissible for invoking Section 171(1). [Paras 36, 37, 38]Section 171(1) applies to a reduction in overall tax incidence arising on or after 01.07.2017 and the pre GST and post GST rates/incidences can be compared to determine applicability of anti profiteering obligations.Comparison of effective tax incidence pre GST and post GST - Profiteering by increasing base price / failure to pass on tax reduction - The DGAP's computation that the effective tax incidence on the product reduced from 30.06% (pre GST) to 28% (post GST) and that the Respondent increased the base price, thereby denying the benefit to consumers, is correct and can be relied upon. - HELD THAT: - After examining submissions and materials, the Authority found the methodology and computations in the DGAP report reliable. The DGAP compared the relevant tax incidence applicable up to the stage when the Respondent fixed his selling price in the pre GST period with the post GST incidence and concluded a reduction from 30.06% to 28%. The Authority rejected the Respondent's alternate method of including VAT collected in subsequent distribution stages for the pre GST effective rate calculation on the ground that only the taxes up to the stage of the Respondent's supply were relevant for comparing pre and post GST incidence for the purpose of Section 171. Evidence showed the Respondent's average base price rose from Rs. 202.06 to Rs. 230.90 w.e.f. 01.07.2017, which, combined with the reduced tax incidence, meant the benefit of tax reduction was not passed on. The DGAP's annexed computation of the profiteered amount was accepted as correct. [Paras 13, 14, 42, 43, 47]DGAP's computation of reduction in tax incidence and resultant profiteering is upheld; the increase in base price by the Respondent resulted in denial of benefit and the DGAP's profiteering amount calculation is accepted.Profiteering by increasing base price / failure to pass on tax reduction - Respondent No. 1 increased the base price and thereby committed profiteering by contravening Section 171(1). - HELD THAT: - The Authority found from the sales data and supporting documents that Respondent No. 1 alone increased the base price of the product after 01.07.2017 and thus was primarily responsible for not passing the tax reduction benefit to recipients. The Respondent's explanations (withdrawal of discounts, prior non pass through of CED, competitors' pricing, payments to trade partners) were not supported by evidence sufficient to rebut the inference that the base price rise coinciding with tax reduction was intended to appropriate the benefit. The Respondent subsequently admitted profiteering and offered to deposit the computed amount. [Paras 13, 14, 43, 45, 46]Respondent No. 1 is held to have profiteered by increasing base price post GST and thereby contravened Section 171(1).Obligation to deposit profiteered amount with interest and refund mechanism / Consumer Welfare Fund - Directive for deposit of the computed profiteered amount with interest and mechanism for disbursal where recipients are not identifiable. - HELD THAT: - The Authority directed Respondent No. 1 to deposit the profiteered amount as computed by the DGAP for the period 01.07.2017 to 31.07.2018. Interest is to be calculated at 18% from the date of collection till deposit. As many recipients are not identifiable, the Authority ordered the amount (with interest) to be deposited in the Central and concerned State Consumer Welfare Funds in a 50:50 ratio and specified timelines for deposit and recovery if not complied with, with supervision by the DGAP and reporting by Commissioners. [Paras 47, 48, 49]Respondent No. 1 to deposit the profiteered amount of Rs. 96,59,716.26 with interest @18% and, where recipients are not identifiable, to deposit the amount into Central and State Consumer Welfare Funds in the prescribed ratio within three months; recovery provision and reporting directions issued.Offence of issuing incorrect tax invoices and penalty under Section 122(1)(i) of the CGST Act, 2017 - Respondent No. 1 issued incorrect invoices and is liable to be proceeded against for penalty under Section 122(1)(i); hearing on penalty to be afforded. - HELD THAT: - The Authority found that Respondent No. 1 did not correctly show the basic price in his tax invoices and thereby caused customers to pay additional GST on inflated prices; such conduct falls within the offence described under Section 122(1)(i). In the interest of natural justice, the Authority directed issuance of a show cause notice to the Respondent to explain why penalty should not be imposed under the provision read with Rule 133(3)(d) of the CGST Rules, 2017. [Paras 51]Notice to be issued to Respondent No. 1 to show cause why penalty under Section 122(1)(i) should not be imposed; material establishes incorrect invoicing.Remand for further investigation of quantum of profiteering on all products supplied - DGAP directed to further investigate and quantify profiteering on all products supplied by Respondent No. 1 where required. - HELD THAT: - Because the Respondent did not provide details of MRP changes at every stage in the value chain for all products as requested, the Authority directed the DGAP to continue investigation into the quantum of profiteering on all products supplied by Respondent No. 1 and submit a further report. This is a directed remand for additional fact finding and quantification rather than a final adjudication on those additional products. [Paras 50]DGAP to further investigate and report the quantum of profiteering on all products supplied by Respondent No.1 and submit revised report.Final Conclusion: The Authority held that Section 171(1) permits comparison of pre GST and post GST tax incidence to determine whether the benefit of reduction in the rate of tax has been passed on; accepted the DGAP's computation that tax incidence on the product fell from 30.06% to 28% and that Respondent No.1 increased his base price thereby profiteering. Respondent No.1 is directed to deposit the computed profiteered amount with interest into the Central and State Consumer Welfare Funds (where recipients are not identifiable), to reduce prices as mandated, and to face a show cause notice for penalty under Section 122(1)(i); DGAP is remanded to further investigate profiteering on all products supplied by Respondent No.1 and submit report. Issues Involved:1. Allegation of profiteering by not passing on the benefit of tax rate reduction.2. Examination of the tax rate structure before and after GST implementation.3. Determination of the quantum of profiteering.4. Compliance with Section 171 of the CGST Act, 2017.5. Issuance of incorrect invoices and imposition of penalty.Detailed Analysis:1. Allegation of Profiteering:The core issue revolves around the allegation that the Respondent No. 1 increased the MRP of 'Melaglow Rich (Niacinamide) Depigmentation & Glow Restoration Cream' from Rs. 365 to Rs. 415 per unit post-GST implementation, despite a reduction in the tax rate. The applicant claimed that this was a contravention of Section 171 of the CGST Act, 2017, which mandates passing on the benefit of tax rate reductions to consumers.2. Examination of Tax Rate Structure:The Director General of Anti-Profiteering (DGAP) investigated the tax rate structure and MRP of the product across different periods:- Pre-GST: Central Excise Duty (CED) exemption until 06.05.2016, followed by an effective CED rate of 8.13% of MRP.- Post-GST (01.07.2017 to 14.11.2017): GST at 28%.- Post-GST (15.11.2017 onwards): GST reduced to 18%.The DGAP found that the base price of the product increased from Rs. 202.06 (pre-GST) to Rs. 230.90 (post-GST), indicating that the benefit of tax reduction was not passed on to consumers.3. Determination of Quantum of Profiteering:The DGAP calculated the amount of profiteering by comparing the base prices and tax rates before and after GST implementation. The investigation concluded that the Respondent No. 1 profiteered an amount of Rs. 96,59,716.26 by increasing the base price of the product and not passing on the benefit of reduced GST rates to consumers.4. Compliance with Section 171 of the CGST Act, 2017:The Respondent No. 1 argued that Section 171 was not applicable as it only referred to reductions in GST rates, not pre-GST tax rates. However, the Authority clarified that the intention of Section 171 was to ensure that any reduction in tax rates (including those resulting from the transition to GST) should lead to a commensurate reduction in prices. The Authority rejected the Respondent's interpretation, stating that the term 'rate of tax' in Section 171 has a broader scope and includes comparisons between pre-GST and post-GST rates.5. Issuance of Incorrect Invoices and Imposition of Penalty:The Authority noted that the Respondent No. 1 issued incorrect invoices by not reflecting the correct base price and charging additional GST on the inflated price. This was deemed a deliberate contravention of the CGST Act, 2017, making the Respondent liable for penalties under Section 122(1)(i) and Rule 133(3)(d) of the CGST Rules, 2017. The Respondent was given an opportunity to explain why a penalty should not be imposed.Conclusion:The Authority directed the Respondent No. 1 to reduce the price of the product as per Rule 133(3)(a) of the CGST Rules, 2017, and deposit the profiteered amount of Rs. 96,59,716.26 along with 18% interest in the Consumer Welfare Fund of the Central and State Governments. The DGAP was also instructed to further investigate the quantum of profiteering on all products supplied by the Respondent No. 1.