DGAP finds profiteering on sanitary napkins, orders reduction in prices and penalty under CGST Act

The Authority upheld the DGAP's findings that Respondent No. 1 had profiteered by not passing on the benefit of the GST rate reduction on sanitary napkins to consumers. The profiteered amount was determined to be Rs. 42,70,18,581/-. Respondent No. 1 was directed to reduce prices, deposit the profiteered amount with interest in Consumer Welfare Funds, and face a Show Cause Notice for penalties under Section 171(3A) of the CGST Act. No profiteering was found on the part of Respondent No. 2, leading to the dismissal of the application against them.

---

---

Issues Involved:
1. Whether the benefit of reduction in the GST rate on sanitary napkins from 12% to Nil was passed on by the Respondents to the recipients.
2. Methodology used by the DGAP to determine profiteering.
3. The jurisdiction and validity of the complaints filed.
4. Whether the Respondent No. 1's pricing methodology was appropriate.
5. The applicability of penalties and cancellation of registration under the CGST Act.

Detailed Analysis:

1. Whether the Benefit of GST Rate Reduction was Passed On:
The core issue was whether the Respondents passed on the benefit of the GST rate reduction from 12% to Nil on sanitary napkins to the consumers as mandated by Section 171 of the CGST Act, 2017. The DGAP found that the Respondent No. 1 had increased the base prices of the products post-GST rate reduction, thereby not passing on the benefit to the consumers. The DGAP's investigation revealed that the base price of the product had increased even though the MRP remained the same, indicating that the benefit was not passed on.

2. Methodology Used by DGAP:
The DGAP used a methodology where the average base price of the product for the period before the GST rate reduction (01.07.2018 to 26.07.2018) was recalibrated by adding 9.4% (the ratio of ITC to taxable turnover). This recalibrated base price was then compared with the actual selling prices post-GST rate reduction. The DGAP found that the benefit of the tax exemption had not been extended to the recipients, resulting in a profiteering amount of Rs. 42,70,18,581/-. The Respondent No. 1's objections to this methodology were dismissed, as the DGAP's approach was deemed appropriate for the case.

3. Jurisdiction and Validity of the Complaints:
The Respondent No. 1 argued that the complaints were without jurisdiction and lacked credible evidence. However, the Authority noted that the complaints were examined by the Standing Committee on Anti-profiteering, which referred the matter to the DGAP for detailed investigation. The process followed was in accordance with Rule 128 of the CGST Rules, and the complaints were found to be valid.

4. Respondent No. 1's Pricing Methodology:
The Respondent No. 1 contended that the DGAP's methodology was flawed and that they had, in fact, passed on the benefit of the rate reduction by reducing the MRP. They also argued that the pricing of products was a complex exercise influenced by various factors. However, the Authority found that the Respondent No. 1 had increased the base price more than the allowed 9.4%, amounting to profiteering. The Authority also dismissed the Respondent's argument that the benefit should be considered at an entity level rather than a product level, stating that the law intended to benefit the consumer directly.

5. Applicability of Penalties and Cancellation of Registration:
The Respondent No. 1 argued that the Authority was not empowered to impose penalties under the CGST Act, as Section 171 did not provide for it. However, the Authority noted that Section 171(3A) of the CGST Act provided for the imposition of penalties for profiteering. Consequently, the Authority directed the issuance of a Show Cause Notice to the Respondent No. 1 to explain why a penalty should not be imposed. The previous notice on penalty dated 25.03.2019 was withdrawn.

Conclusion:
The Authority upheld the DGAP's findings that the Respondent No. 1 had profiteered by not passing on the benefit of the GST rate reduction to the consumers. The total profiteered amount was determined to be Rs. 42,70,18,581/-. The Respondent No. 1 was directed to reduce prices commensurately and deposit the profiteered amount along with interest in the Consumer Welfare Funds (CWFs) of the respective states. The Authority also directed the issuance of a Show Cause Notice for the imposition of penalties under Section 171(3A) of the CGST Act. The application against Respondent No. 2 was dismissed as no profiteering was found on their part.

---