2019 (11) TMI 1084 - NAPA - GST

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

Sh. Sandeep Puri, Shri C.P. Rao, Director General of Anti-Profiteering, Indirect Taxes & Customs, Versus M/s. Johnson & Johnson M/s. Apollo Hospitals Enterprise Ltd.

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 ... Profiteering - Sanitary Napkin - reduction in the rate of GST - benefit of Input Tax Credit (ITC) to him by way of commensurate reduction in the price not passed on - contravention of section 171 of CGST Act - penalty - HELD THAT:- The respondent had not disputed the fact that the denial of ITC based on the turnover arrived at the DGAP was 9.4% - on perusal of the invoices on the basis of which complaint has been made clearly shows that the base price has increased even though the MRP remained the same. It is established beyond any doubt that the Respondent No. 1 (manufacturer) had increased the base price w.e.f. 27.07.2019 more than what he was entitled to increase, which clearly shows that he had deliberately in conscious disregard of the provisions of Section 171 of the above Act had resorted to profiteering. - the profiteered amount by the Respondent No.1 is determined as ₹ 42,70,18,5811- as per the provisions of Rule 133 (1) of the CGST Rules, 2017 as the said Respondent has failed to pass on the benefit of rate reduction to his customers. The respondent no. 2 who is the seller of the product has clearly increased the base price of the product. But as the benefit of ITC was not available to him post 27.07.2018, so the reversal of ITC on the closing stock was extra cost to him - as seen from the records reversal of ITC by him is more than excess realisation on closing stock after deniel of ITC benefit w.e.f. 27.07.2018, therefore no profiteering can be concluded on his part and hence, section 171(1) does not hold good in respect of the respondent. - This authority accepts the report of DGAP and holds that anti-profiteering provisions contained in section 171(1) of CGST Act is not attracted in case of Respondent no. 2 (who is seller) Penalty - HELD THAT:- It is also evident from the above narration of facts that the Respondent has denied benefit of rate reduction to the buyers of the product “Sanitary Napkin” in contravention of the provisions of Section 171 (1) of the CGST Act, 2017 and has thus resorted to profiteering, which is an offence under section 171 (3A) of the CGST Act, 2017 and therefore, he will be apparently liable for imposition of penalty under the provisions of the above Section - Accordingly, a Show Cause Notice be issued to him directing him to explain why the penalty prescribed under Section 171 (3A) of the above Act read with Rule 133 (3) (d) of the CGST Rules, 2017 should not be imposed on him. 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.