Respondent ordered to refund unpassed GST benefits to buyers, directed to adjust prices

The Authority found that the Respondent had benefited from additional input tax credit post-GST implementation but had not passed on this benefit to buyers, contravening Section 171 of the CGST Act, 2017. The profiteered amount of Rs. 2,44,80,835 inclusive of GST @ 12% was to be returned to buyers with interest. The Respondent was directed to reduce prices accordingly, and further investigation into another project was ordered. While the Respondent's actions constituted an offence, retrospective penalty imposition was not possible due to the timing of the violation.

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Issues Involved:
1. Whether there was a benefit of reduction in the rate of tax or input tax credit on the supply of construction service by the Respondent after the implementation of GST.
2. Whether such benefit was passed on by the Respondent to the recipients in terms of Section 171 of the Central Goods and Services Tax Act, 2017.

Detailed Analysis:

Issue 1: Benefit of Reduction in Tax Rate or Input Tax Credit Post-GST Implementation

The DGAP's investigation revealed that the Respondent had indeed benefited from an additional input tax credit (ITC) post-GST implementation. The ITC available to the Respondent during the pre-GST period was 2.66% of the turnover, whereas, during the post-GST period, it was 8.57%. This indicated an additional benefit of 5.91% of the turnover post-GST. The DGAP compared the applicable tax rates and ITC available in the pre-GST and post-GST periods, concluding that the Respondent had benefited from the additional ITC to the tune of 5.91%.

Issue 2: Passing on the Benefit to Recipients

The DGAP's report found that the Respondent had not passed on the benefit of the additional ITC to the recipients. The Respondent continued to charge GST at the increased rate of 12% on the pre-GST basic prices without reducing the base prices by 5.91%. This contravened Section 171 of the CGST Act, 2017. The total profiteered amount was determined to be Rs. 2,44,80,835, which included 12% GST. This amount also included Rs. 66,463 (including 12% GST) in respect of Applicant No. 1 and Rs. 2,44,14,372 (including 12% GST) in respect of 228 other shop buyers.

Respondent's Contentions and DGAP's Clarifications:

1. Incremental Tax on Services:
- Respondent's Argument: The incremental tax paid on services should not form part of profiteering since the rate of Service Tax increased from 15% to 18% post-GST.
- DGAP's Clarification: The benefit of ITC must be passed on to the recipients by way of commensurate reduction in prices, as per Section 171 of the CGST Act, 2017. The incremental ITC of 3% on services cannot be excluded from the total amount of profiteering as it has not been paid by the Respondent from his own account.

2. Profiteering Amount Restriction:
- Respondent's Argument: The profiteered amount should be restricted to the ITC availed in respect of goods only.
- DGAP's Clarification: The entire amount of ITC, including that from services, must be considered. The ITC of Rs. 77,93,422 on VAT during the pre-GST period was duly considered by the DGAP. The contention that only the ITC on goods should be considered is incorrect.

3. Increased Project Costs:
- Respondent's Argument: Increased costs due to marketing and commissions should be considered while calculating the profiteered amount.
- DGAP's Clarification: Marketing and commission costs are part of the normal business expenses and are already built into the project cost. There is no provision under Section 171 (1) to consider these costs while calculating the profiteered amount.

Authority's Decision:

The Authority concluded that the Respondent had indeed benefited from the additional ITC to the extent of 5.91% of the turnover and had not passed on this benefit to the buyers, thus contravening Section 171 of the CGST Act, 2017. The profiteered amount was determined to be Rs. 2,44,80,835, inclusive of GST @ 12%. The Respondent was ordered to pass on this amount to the buyers along with interest @ 18% per annum from the date of collection till the payment is made.

Additional Directions:

The Respondent was directed to reduce the prices commensurate with the benefit of ITC received. The Commissioner CGST/SGST Haryana was instructed to ensure compliance and submit a report within four months. Furthermore, the DGAP was directed to investigate another project by the Respondent, "Epic," to determine if similar profiteering had occurred.

Penalty:

Although the Respondent's actions constituted an offence under Section 171 (3A) of the CGST Act, 2017, the penalty could not be imposed retrospectively as the relevant provisions were not in force during the period of violation (01.07.2017 to 30.06.2019).

Conclusion:

The Respondent was found to have contravened Section 171 of the CGST Act, 2017, by not passing on the benefit of additional ITC to the buyers. The total profiteered amount of Rs. 2,44,80,835 was to be returned to the buyers with interest. The DGAP was also directed to investigate the Respondent's other project, "Epic," for potential profiteering.

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