2022 (6) TMI 1252 - NAPA - GST

Construction company must refund Rs. 6.46 crore to flat buyers for not passing GST input tax credit benefits under Section 171

NAPA found that a construction company failed to pass on input tax credit benefits to flat buyers, violating Section 171 of CGST Act. The company's ITC ... Profiteering - construction service supplied by the Respondent - it is alleged that the Respondent had not passed on the benefit of input tax credit (ITC) to him by way of commensurate reduction in the price of the flat purchased from the Respondent - contravention of section 171 of CGST Act - Interest - Penalty - time limitation - HELD THAT:- It is clear from the plain reading of Section 171 (1) that it deals with two situations one relating to the passing on the benefit of reduction in the rate of tax and the second pertaining to the passing on the benefit of the ITC, On the issue of reduction in the tax rate. it is apparent from the DGAP's Report that there has been no reduction in the rate of tax in the post GST period: hence the only issue to be examined is as to whether there was any net benefit of ITC with the introduction of GST On this issue it has been revealed from the DGAP's Report that the ITC as a percentage of the turnover that was available to the Respondent during the pre-GST period (April-2016 to June-2017) was 3.56% and during the post-GST period {July-2017 to March-2019), it was 11.74% for the project “Sierra-Vizag”. This confirms that, post-GST, the Respondent has been benefited from additional ITC to the tune of 8.18% [11.74% (-) 3.56%] of his turnover for the said project and the same was required to be passed on to the customers/flat buyers/recipients. The DGAP has calculated the amount of ITC benefit to be passed on to all the flat buyers as Rs. 6.46,06,227/- for the project “Sierra-Vizag”, the details of which are mentioned in Table-D. The Authority finds that the Respondent has profiteered by an amount of Rs. 6,46,06,227/- for the Project “Sierra-Virag” during the period of investigation i.e. 01.07.2017 to 31.03.2019, The above amount that has been profiteered by the Respondent from his home buyers in the above said Project shall be refunded by him, along with interest @18% thereon, from the date when the above amount was profiteered by him did the date of such payment, in accordance with the provisions of Rule 133 (3) (b) of the CGST Rules, 2017. Interest - HELD THAT:- The Respondent is also liable to pay interest as applicable on the entire amount profiteered. i.e. Rs. 6,46.06,227/- for the project “Sierra-Vizag”. Hence the Respondent is directed to also pass on interest @18% to the customers/ flat buyers/recipients on the entire amount profiteered, starting from the date from which the above amount was profiteered till the date of passing on/ payment, as per the provisions of Rule 133 (3) (b) of the CGST Rules, 2017. Penalty - HELD THAT:- Vide Section 112 of the Finance Act, 2019 specific penalty provisions have been enacted for violation of the provisions of Section 171 (1). Such provisions have come in to force w.e.f. 01.01.2020, by inserting Section 171 (3A). Since, no penalty provisions were in existence between the period from 01.07.2017 to 31.03.2019 when the Respondent had violated the provisions of Section 171 (1). the Authority holds that the penalty prescribed under Section 171 (3A) cannot be imposed on the Respondent retrospectively. This Order having been passed today falls within the limitation prescribed under Rule 133(1) of the CGST Rules, 2017. Issues Involved:1. Violation of provisions of Section 171 (1) of the CGST Act, 2017.2. Determination of the additional benefit to be passed on to the recipients.3. Constitutionality of Section 171 and Rule 126 of the CGST Rules.4. Methodology for computation of profiteering.5. Premature nature of investigation.6. Validity of proceedings post withdrawal of complaint.7. Computation of profiteered amount.Issue-Wise Detailed Analysis:1. Violation of Provisions of Section 171 (1) of the CGST Act, 2017:The primary issue was whether the Respondent violated Section 171 (1) of the CGST Act, 2017, which mandates the passing on of benefits from a reduction in tax rates or input tax credit (ITC) to recipients. The DGAP's investigation revealed that the Respondent had benefited from an additional ITC of 8.18% post-GST implementation and had not passed this benefit to the flat buyers. The Respondent's failure to reduce the prices accordingly constituted a violation of Section 171 (1).2. Determination of the Additional Benefit to be Passed on to the Recipients:The DGAP calculated that the Respondent had profiteered an amount of Rs. 6,46,06,227/- during the period from 01.07.2017 to 31.03.2019. This amount included the additional ITC benefit and GST on the profiteered amount. The Respondent was directed to refund this amount to the homebuyers along with interest @18% from the date of profiteering till the date of payment.3. Constitutionality of Section 171 and Rule 126 of the CGST Rules:The Respondent argued that Section 171 and Rule 126 violated Articles 14 and 19 of the Constitution. However, the Authority held that these provisions were constitutional as they aimed to protect consumer interests by ensuring that tax benefits were passed on to consumers. The Authority emphasized that it did not regulate prices but ensured the passing on of benefits from tax reductions and ITC to consumers.4. Methodology for Computation of Profiteering:The Respondent challenged the methodology used by the DGAP, arguing it did not reflect the true picture. The DGAP's methodology involved comparing ITC to turnover ratios pre- and post-GST. The Authority upheld this methodology, stating it was reasonable and logical. The Authority found that the increase in ITC due to higher service tax rates post-GST was an additional benefit that needed to be passed on to consumers.5. Premature Nature of Investigation:The Respondent claimed the investigation was premature as the project was ongoing. However, the Authority found that the DGAP had correctly limited the investigation period to 31.03.2019, after which the Respondent opted for a new scheme without ITC benefits. The Authority dismissed the Respondent's argument, stating the investigation was timely and appropriate.6. Validity of Proceedings Post Withdrawal of Complaint:The Respondent argued that the investigation should be dropped as the original complaint was withdrawn. The Authority clarified that Section 171 did not require a complaint for action and that the DGAP's investigation was valid even after the complaint's withdrawal. The Authority emphasized that the investigation aimed to uphold the spirit of Section 171, ensuring benefits were passed on to consumers.7. Computation of Profiteered Amount:The DGAP calculated the profiteered amount based on the additional ITC benefit. The Respondent was found to have profiteered Rs. 6,46,06,227/-, which needed to be refunded to the homebuyers. The Authority directed the Respondent to reduce prices commensurate with the ITC benefit and to pay interest @18% on the profiteered amount from the date of profiteering to the date of payment.Conclusion:The Authority concluded that the Respondent had violated Section 171 (1) of the CGST Act, 2017, by not passing on the benefit of additional ITC to the homebuyers. The Respondent was ordered to refund the profiteered amount of Rs. 6,46,06,227/- along with interest @18% to the homebuyers. The Authority upheld the constitutionality of Section 171 and Rule 126, the methodology used by the DGAP, and the validity of the investigation despite the withdrawal of the initial complaint. The Respondent was directed to comply with the order within three months, failing which recovery proceedings would be initiated.