Manufacturer violated Section 171(1) CGST Act by not passing GST reduction benefit on sanitary napkins to consumers

NAPA held that respondent violated Section 171(1) of CGST Act, 2017 by failing to pass on benefit of tax rate reduction from 12% to nil on sanitary napkins effective 27.07.2018. Authority determined profiteered amount of Rs. 9,84,354 for period 27.07.2018 to 31.03.2019 based on DGAP investigation showing respondent increased base prices instead of reducing them. Respondent directed to deposit profiteered amount with 18% interest in Consumer Welfare Fund within three months as recipients unidentifiable. No penalty imposed as Section 171(3A) provisions came into force after the violation period.

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Issues Involved:
1. Violation of Section 171 of the CGST Act, 2017.
2. Quantum of profiteering.

Issue-wise Detailed Analysis:

1. Violation of Section 171 of the CGST Act, 2017:

The case revolves around the allegation that the Respondent did not pass on the benefit of a tax rate reduction from 12% to Nil on Stayfree Sanitary Napkins, effective from 27.07.2018, as per Notification No. 19/2018-CTR dated 26.07.2018. The DGAP's investigation confirmed that the Respondent increased the base price of the product when the tax rate was reduced, thereby benefiting by Rs. 19,61,033/- during the period from 27.07.2018 to 31.03.2019. This was deemed a violation of Section 171 of the CGST Act, 2017, which mandates passing on the benefit of tax rate reduction to consumers.

2. Quantum of Profiteering:

The DGAP was directed to investigate specific issues and submit a detailed report. The investigation revealed that the Respondent had increased the base price of the sanitary napkins post the tax rate reduction, leading to profiteering. The DGAP's report dated 31.12.2020 recalculated the profiteered amount, considering common input tax credit (ITC) reversals and discounts.

Detailed Findings:

a. Common Input Tax Credit:
The DGAP verified the Respondent's claim of reversing common credit of Rs. 13,07,118/-. The ITC reversal was found to be correct and proportionately distributed to the turnover of sanitary napkins, impacting the base price calculation for profiteering.

b. Discounts:
The Respondent, being a retailer, provided discounts at the point of sale, reflected in the invoices. The DGAP concluded that profiteering should be calculated on the taxable value (transaction value) as per Section 15 (3) of the CGST Act, 2017.

c. Profiteering Amount Calculation:
The DGAP computed the profiteered amount separately for closing and fresh stocks. For the closing stock, the profiteered amount was Rs. 5,37,208/-, and for the fresh stock, it was Rs. 4,47,146/-. The total profiteered amount was Rs. 9,84,354/-.

Respondent's Contentions:

The Respondent argued that the total common credit reversal should be adjusted against the alleged profiteering. They also contended that the benefit of common credit reversal should be given for both closing and fresh stocks. However, the DGAP clarified that the common credit reversal was correctly apportioned and accounted for in the profiteering calculation.

Authority's Decision:

The Authority determined that the Respondent violated Section 171 (1) of the CGST Act, 2017, by not passing on the benefit of the tax rate reduction. The profiteered amount was confirmed as Rs. 9,84,354/-, which the Respondent was directed to deposit along with 18% interest in the Consumer Welfare Funds of the Central and State Governments. The Respondent's liability for penalty under Section 171 (3A) could not be imposed retrospectively as the provision came into force after the period in question.

Conclusion:

The Authority concluded that the Respondent must deposit the profiteered amount with interest in the Consumer Welfare Funds within three months. The jurisdictional Commissioners of CGST/SGST were directed to ensure compliance and report back within four months. The order was passed within the limitation period as per the Supreme Court's directions on the exclusion of the limitation period due to the COVID-19 pandemic.

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