2020 (5) TMI 442 - NAPA - GST

Ruling: Liability for Not Passing on GST Reduction Benefit Upheld

The authority found both respondents liable for profiteering by not passing on the benefit of GST rate reduction from 28% to 18% on a specific product. ... Profiteering as denial of commensurate reduction in prices under Section 171 - DGAP investigation under Rule 129 - pass-on benefit at SKU level - comparison of pre-rate average base price with post-rate invoice-wise base price - exclusion/netting off ('zeroing') not permissible in anti-profiteering - discounts and Section 15(3) invoice-recording requirement - inclusion of excess GST collected in the profiteered amount - deposit in Consumer Welfare Fund and interest under Rule 133 - power to investigate beyond the product/party named in complaintDGAP investigation under Rule 129 - power to investigate beyond the product/party named in complaint - Validity of DGAP's expansion of investigation to include Respondent No.1 and Respondent No.2 despite original complaint naming another entity - HELD THAT: - The Authority held that Section 171(2) and Rule 129 empower the DGAP to investigate and collect evidence in all cases where a reduction in rate of tax or benefit of ITC ought to be passed on; this mandate is not restricted to products or suppliers expressly named in an initial complaint. Where, during investigation, DGAP came to know that other registered persons (here Respondent No.1 and Respondent No.2) were the actual manufacturers/suppliers and had not passed on benefit, he was obliged to include them in the investigation and to report the infringement to the Authority. Consequently, the DGAP's decision to withdraw the notice to the initially named entity and issue notices to the actual suppliers/distributors was in consonance with Section 171 and Rule 129 and therefore valid. [Paras 66, 67, 68, 69]DGAP lawfully expanded investigation and included Respondent No.1 and Respondent No.2; objection on this ground is rejected.Pass-on benefit at SKU level - comparison of pre-rate average base price with post-rate invoice-wise base price - exclusion/netting off ('zeroing') not permissible in anti-profiteering - Appropriate methodology for computation of profiteering (average pre-rate vs invoice-wise post-rate; SKU-level treatment; netting off) - HELD THAT: - The Authority accepted DGAP's methodology of computing channel/customer-wise average base price for a short pre-rate period (01.11.2017-14.11.2017 or latest month) and comparing that pre-rate average with each actual invoice-wise base price in the post-rate period, on an SKU-by-SKU and recipient-by-recipient basis. The reasons given: (a) suppliers charged different base prices to different customers and many customers did not buy the same SKU in both periods, making direct invoice-to-invoice comparison impracticable; (b) Section 171 requires that benefit must be passed on each supply/each SKU so averaging pre-rate prices for a short representative period is reasonable for comparison while post-rate calculation must be invoice-specific; and (c) netting off positive and negative variances across SKUs (the 'zeroing' or netting methodology) is impermissible because it would deny relief to individual purchasers who were not given the benefit. On these bases the Authority found DGAP's method just, reasonable and in consonance with Section 171 and Article 14. [Paras 62, 63, 65, 77, 85]DGAP's computation methodology (pre-rate short-period average v. post-rate invoice-wise prices at SKU level; no netting off) is upheld as lawful and appropriate.Discounts and Section 15(3) invoice-recording requirement - profiteering as denial of commensurate reduction in prices under Section 171 - Whether discounts (including the additional 7.81% claimed) amounted to lawful passing of benefit under Section 171 and could be excluded from profiteering computation - HELD THAT: - The Authority examined the invoices and evidence relied upon by Respondent No.1 and found that: (a) the Respondent had increased base prices post 15.11.2017 and then shown discounts (claimed to be 7.81%), (b) the discounts were not recorded on invoices in a manner satisfying Section 15(3) of the CGST Act (i.e., discounts given before/at time of supply must be duly recorded), and (c) even where a 7.81% discount appeared, it did not equate to the full commensurate reduction legally required (a 10% rate reduction) and Respondent's own tables showed a shortfall. The Authority therefore held that the purported discounts did not discharge the statutory obligation to pass on the full commensurate benefit by reduction in prices and could not be excluded from computation of profiteering. [Paras 24, 25, 71, 78, 88]The claimed discounts (including 7.81%) do not qualify as lawful passing of the commensurate benefit and cannot be excluded from profiteering; Respondent's contention is rejected.Inclusion of excess GST collected in the profiteered amount - profiteering as denial of commensurate reduction in prices under Section 171 - Whether the excess GST collected on increased base prices should be included in the quantified profiteered amount - HELD THAT: - The Authority held that the excess GST collected on account of higher base prices constituted part of the benefit wrongfully denied to consumers. Price for the purposes of Section 171 includes GST; where a supplier charged a higher base price after rate reduction and thereby collected excess GST, that excess tax constituted an element of the denial of benefit and properly forms part of the profiteered amount. The DGAP's inclusion of the GST component in the computed profiteered sums was therefore sustained. [Paras 16, 87]Excess GST collected is to be included in the profiteered amount; DGAP's inclusion of GST is upheld.DGAP investigation under Rule 129 - period from 15.11.2017 to 31.03.2019 - Validity of the period of investigation (15.11.2017 to 31.03.2019) and whether the lengthy investigation period was arbitrary - HELD THAT: - The Authority noted there is no prescribed fixed investigation period in the Act or Rules; obligation to pass on benefit arose from 15.11.2017. DGAP chose 15.11.2017 up to the date of last month of receipt of reference (31.03.2019) as the investigation cut off. Because Respondents failed to produce evidence that they had passed on benefit prior to 31.03.2019, DGAP was entitled to investigate until that date. Cases cited by Respondents where shorter periods were used were distinguished on facts (those complaints were received immediately after reduction). The Authority found the period adopted was not arbitrary given the lack of evidence of earlier compliance. [Paras 3, 73, 76]Investigation period 15.11.2017 to 31.03.2019 is valid; objection to length of period is rejected.Deposit in Consumer Welfare Fund and interest under Rule 133 - profiteering as denial of commensurate reduction in prices under Section 171 - Determination of profiteered amounts, directions for deposit with Consumer Welfare Funds, interest, and initiation of penalty proceedings - HELD THAT: - On the basis of DGAP's computations and the upheld methodology, the Authority determined the profiteered amounts for Respondent No.1 as Rs. 18,48,34,084/- (inclusive of GST) and for Respondent No.2 as Rs. 38,64,891/- (inclusive of GST) for the period 15.11.2017 to 31.03.2019. An amount of Rs. 8,97,253/- found to have been profiteered by Respondent No.1 from Respondent No.2 shall not be passed to the distributor but deposited in the Consumer Welfare Funds of the Centre and States in terms of Rule 133(3)(c). Both Respondents were directed to reduce prices, deposit the profiteered amounts with interest at 18% from the date of collection until deposit, within three months, failing which recovery mechanisms under CGST/SGST were to be used. Further, Show Cause Notices were ordered to be issued under Section 171(3A) for imposition of penalty. [Paras 114, 115, 116, 117, 118]Profiteered amounts quantified and confirmed; Respondents directed to deposit amounts with interest into CWFs within three months and Show Cause Notices for penalty to be issued.Final Conclusion: The Authority upheld DGAP's jurisdiction and methodology, rejected the Respondents' objections (including claimed discounts, period, and netting-off), determined profiteering for 15.11.2017 to 31.03.2019 as Rs. 18,48,34,084/- (Respondent No.1) and Rs. 38,64,891/- (Respondent No.2) inclusive of GST, directed reduction of prices, deposit of these amounts with 18% interest into the Consumer Welfare Funds within three months, and ordered issuance of Show Cause Notices for penalty under Section 171(3A). Issues Involved:1. Allegation of non-passing of GST rate reduction benefit by M/s Raymond Ltd.2. Jurisdiction and procedure followed by DGAP.3. Calculation methodology for profiteering.4. Period of investigation.5. Discounts and credit notes in profiteering computation.6. Impact of GST on pre and post-rate reduction prices.7. Constitutionality of Anti-Profiteering provisions.8. Penalty imposition under Section 171 (3A).Detailed Analysis:1. Allegation of Non-Passing of GST Rate Reduction Benefit:The complaint alleged that M/s Raymond Ltd. did not pass on the benefit of GST rate reduction from 28% to 18% on 'After-Shave Lotion Park Avenue Good Morning 50 ml,' maintaining the MRP at Rs. 115 per unit. The DGAP's investigation revealed that the product was supplied by Respondent No. 2 after purchasing it from Respondent No. 1. Both respondents failed to pass on the benefit of tax reduction as required under Section 171 of the CGST Act, 2017.2. Jurisdiction and Procedure Followed by DGAP:The Respondent No. 1 contended that the DGAP lacked jurisdiction to expand the investigation beyond the initial complaint against M/s Raymond Ltd. However, the authority clarified that the DGAP is mandated to investigate all cases where tax reduction benefits are not passed on, as per Section 171 (2) and Rule 129 of the CGST Rules, 2017. The DGAP acted within its jurisdiction by investigating both respondents.3. Calculation Methodology for Profiteering:The DGAP used average base prices of products pre-rate reduction and compared them with actual post-rate reduction base prices. The Respondent No. 1's claim of passing on a 7.81% discount was found insufficient as the required reduction was 10%. The methodology of comparing average pre-rate reduction prices with actual post-rate reduction prices was deemed correct and in line with Section 171 of the CGST Act, 2017.4. Period of Investigation:The Respondent No. 1 argued that the investigation period of 16 months and 16 days was arbitrary. The authority justified the period from 15.11.2017 to 31.03.2019, as the respondent failed to provide evidence of passing on the benefit within this period. The DGAP's investigation period was found reasonable and necessary to ensure compliance.5. Discounts and Credit Notes in Profiteering Computation:The Respondent No. 1's claim of passing on the benefit through discounts was rejected as discounts did not meet the conditions under Section 15 (3) of the CGST Act, 2017. The authority emphasized that the benefit must be passed on through commensurate price reduction. Credit notes issued for reasons other than tax reduction were not considered in profiteering calculations.6. Impact of GST on Pre and Post-Rate Reduction Prices:The Respondent No. 1's argument that the profiteered amount included GST was dismissed. The authority clarified that the excess GST collected from customers due to increased base prices must be included in the profiteered amount as it represents the benefit denied to customers.7. Constitutionality of Anti-Profiteering Provisions:The Respondent No. 1 challenged the constitutionality of Section 171 and related rules, claiming they violated Articles 14 and 19 (1) (g) of the Constitution. The authority refuted this, stating that the provisions ensure the benefit of tax reduction reaches consumers and do not impose price control, thus not infringing on the respondent's right to trade.8. Penalty Imposition Under Section 171 (3A):The authority found both respondents liable for profiteering and directed them to deposit the profiteered amounts along with interest in the Consumer Welfare Funds (CWFs) of the Central and State Governments. Show Cause Notices were issued to both respondents for the imposition of penalties under Section 171 (3A) of the CGST Act, 2017.Conclusion:The authority confirmed that both respondents failed to pass on the benefit of GST rate reduction and engaged in profiteering. They were directed to reduce prices, deposit the profiteered amounts with interest in the CWFs, and were issued Show Cause Notices for penalties. The methodology and period of investigation were upheld, and the respondents' constitutional challenges were dismissed.