2022 (7) TMI 34 - NAPA - GST

Respondent violated Section 171 CGST Act by failing to pass GST rate reduction benefits to customers

The NAPA determined that a respondent violated Section 171 of the CGST Act by failing to pass on GST rate reduction benefits to customers during November ... Commensurate reduction in prices - methodology of comparison of pre rate average price with post rate transaction price - treatment of base price discrepancies (averaging and comparables) - mode of passing benefit - post supply discounts and increase in grammage - zeroing versus netting off of benefits - time limit/directory nature of procedural timelines under Rule 129/133 - deposit of profiteered amount in Consumer Welfare Fund - further investigation/remand for post cut off periodTime limit/directory nature of procedural timelines under Rule 129/133 - Whether the proceedings and the Authority's directions were time barred for failure to complete investigation or pass order within six months. - HELD THAT: - The Authority held that the statutory time limits under Rule 129(6) and Rule 133(1) are directory, not mandatory, because the statute and rules do not prescribe nullifying consequences for non compliance. The Authority noted the Respondent had been given opportunities to make submissions and that an interim direction for further investigation under Rule 133(4) was within the Authority's powers; para 10 of the Authority's Guidelines treating a Rule 133(4) report as a fresh report for the purposes of Rule 133(1) was a permissible clarification under Rule 126. The Respondent's plea that the proceedings were time barred was rejected.Proceedings are not time barred; the Respondent's limitation objection is rejected.Methodology of comparison of pre rate average price with post rate transaction price - Whether the DGAP's methodology (average pre rate base price compared with transaction wise post rate prices) for quantifying profiteering is unsound and arbitrary. - HELD THAT: - After examining alternative approaches urged by the Respondent (actual v. actual, average v. average, entity/HSN level comparisons) the Authority endorsed DGAP's six step approach of using pre rate average base price (by product and channel) compared with transaction wise post rate taxable values. The Authority found DGAP's methodology suited the factual matrix (multiple SKUs, variable transactional prices, different channels) and that the average to actual method better ensured coverage of transactions and that recipients who actually paid higher prices would be identified. The Authority therefore rejected the Respondent's challenge to the adopted methodology.DGAP's adopted methodology is reasonable and is affirmed; Respondent's alternate methodologies are rejected.Treatment of base price discrepancies (averaging and comparables) - Whether DGAP should rectify base price computation where pre rate averaging erroneously took the first matching line item or where comparables/sequencing produced distortions. - HELD THAT: - DGAP accepted and the Authority recorded that certain computational/lookup errors and sequence issues existed. The Authority agreed with DGAP that the correct corrective approach is to adopt a weighted average base price for products having the same description across MRPs (the 'weighted average of all MRPs' approach) to address non averaging and comparable mapping issues; consequential rectifications were made in DGAP's revised computation. DGAP's rectifications (as reflected in its 28.08.2020 report) were found to be appropriate.DGAP's rectifications to pre rate base price computations are accepted and applied.Mode of passing benefit - post supply discounts and increase in grammage - Whether passing the benefit of a tax rate reduction by (a) post supply discounts/claims and (b) increasing grammage/volume constitutes lawful 'commensurate reduction in prices' under Section 171(1). - HELD THAT: - The Authority examined submissions and evidence on post supply discounts (credit notes, distributor/modern trade claims) and on increased grammage (minutes, artwork, packaging). It held that Section 171(1) requires passing the benefit by way of a commensurate reduction in prices in monetary terms; promotional or service payments described in documentation, or trade/advertising reimbursements, could not be treated as passing of the tax reduction unless clearly shown to be monetary reductions of the taxable transaction value. On increase in grammage the Authority found no reliable, consistent evidence linking grammage changes to a commensurate price reduction per SKU; minutes and supporting material did not establish required correlations and showed inconsistencies in the percentage increases. Consequently, the Authority rejected the contention that increased grammage per se satisfies Section 171(1).Post supply discounts and incentives must be demonstrated as reductions in taxable transaction value to be accepted; increase in grammage is not an acceptable substitute for commensurate price reduction on the facts and evidence in this case.Zeroing versus netting off of benefits - Whether DGAP erred by not 'netting off' (allowing negative variances to offset positive ones) and instead applying zeroing in computing profiteering. - HELD THAT: - The Authority held that Section 171(1) requires benefit to be passed on 'on any supply' to each recipient; netting across different SKUs or recipients would defeat individual recipients' entitlement and could leave some recipients worse off. Accordingly, the Authority upheld the approach of computing denial on each supply/recipient without netting positive and negative variances across different supplies.Netting off is not permissible; DGAP's transaction/recipient wise approach (zeroing for non denials) is maintained.Treatment of GST collected in profiteering calculation - Whether GST collected on the alleged excess price must be excluded from the profiteered amount because it was deposited with the government. - HELD THAT: - The Authority found that where excess taxable value was charged to recipients as a result of failure to pass on the tax reduction, the GST collected on that excess forms part of the benefit denied to the consumer and falls within the statutory object of Section 171. Even if GST was deposited to government accounts, the supplier's obligation under Section 171 requires refund/return of the amount equivalent to the benefit; therefore GST collected on the excess cannot be excluded from the quantum determined for restitution / deposit into the Consumer Welfare Fund.GST collected on the excess taxable value is included in the profiteered amount for removal/relief purposes.Period of investigation and scope of further inquiry - Whether the period (15.11.2017 to 31.12.2018) for which profiteering was investigated was arbitrary and whether further investigation should be ordered beyond that period. - HELD THAT: - The Authority explained that the investigation period corresponds to the date of rate reduction and the cut off required to examine returns up to the previous month when the complaint/reference was received; the period chosen is not arbitrary. The Authority directed, under Rule 133(5), that DGAP carry out further investigation to ascertain whether the Respondent passed on the benefit in respect of impacted products sold after 31.12.2018, and to report further if denial is found.Investigation period 15.11.2017 to 31.12.2018 is appropriate; DGAP is directed to investigate post 31.12.2018 transactions and submit a further report.Constitutional and procedural challenges to Section 171 and NAA rules - Whether Section 171, the Rules (126,127,133) or the Authority's composition/processes are unconstitutional, violative of Article 14 or 19(1)(g), or suffer from excessive delegation; and whether absence of a judicial member invalidates the Authority. - HELD THAT: - The Authority rejected constitutional challenges. It observed Section 171/Rules were enacted through the statutory process with GST Council and legislatures; the Authority's functions are specialised and quasi judicial, and absence of a judicial member does not render constitution or decisions invalid. Challenges alleging excessive delegation and breach of natural justice were dismissed because DGAP's reports, notices, and multiple opportunities to be heard were provided and procedures under the Act/Rules were followed.Constitutional and procedural challenges are rejected; the Authority's constitution, rules and procedures are valid and complied with in these proceedings.Quantification of profiteering and deposit directions - Final quantified amount of profiteering and the relief to be ordered. - HELD THAT: - After considering DGAP's investigation, the Respondent's submissions and DGAP's subsequent rectifications, the Authority determined the profiteered amount for the period 15.11.2017 to 31.12.2018. The Authority directed commensurate reduction in prices and ordered deposit of fifty percent of the determined amount into the Central Consumer Welfare Fund and the remainder into the respective State Funds in specified state wise proportions; interest at 18% from date of collection until deposit was directed. The Authority declined to issue a penalty under Section 171(3A) because that provision came into force after the relevant period.Profiteering determined at Rs. 1,86,39,57,508 for 15.11.2017-31.12.2018; directions issued for price reduction and deposit of amounts with interest into Central and State CWFs; penalty under Section 171(3A) not imposed for the historical period.Final Conclusion: The Authority found that the Respondent failed to pass on the benefit of the GST rate reduction for the period 15.11.2017 to 31.12.2018 and, after upholding DGAP's methodology and specified rectifications, quantified profiteering at Rs. 1,86,39,57,508/-. The Respondent was directed to effect commensurate price reductions and to deposit the prescribed shares of the determined amount (with 18% interest) into the Central and State Consumer Welfare Funds within three months; DGAP was directed to investigate supplies made after 31.12.2018 and submit a further report. Issues Involved:1. Limitation under Rule 133.2. Methodology for calculating profiteering.3. Period of investigation.4. Base price discrepancies.5. Discounts and post-supply price reductions.6. Increased quantity/grammage as commensurate reduction.7. Impact of increased Customs Duty.8. Inclusion of GST in profiteered amount.9. Zeroing and higher benefits passed on certain SKUs.10. Impact of reduced fiscal incentives under budgetary support.11. Calculation of profiteering for luxury products.12. Refund of profiteered amount to recipients.13. Violation of principles of natural justice.14. Constitutionality of the Authority without a Judicial Member.15. Constitutionality of Section 171 and related Rules.16. Excessive delegation under Rules 122, 127, and 133.Detailed Analysis:1. Limitation under Rule 133:The Respondent contended that the proceedings were time-barred under Rule 133. The Authority clarified that the time limits under Rule 133(1) and Rule 129(6) are directory, not mandatory, as no consequences for non-adherence are prescribed. The Supreme Court's judgment in Mahadev Govind Gharge v. Special Land Acquisition Officer (2011) and P.T. Rajan v. T. P. M. Sahir and Ors. (2003) were cited to support this position. The Authority also noted that the Respondent had ample opportunities to defend himself and that the proceedings were not in violation of natural justice.2. Methodology for calculating profiteering:The Respondent argued that the absence of a prescribed methodology led to arbitrariness. The Authority held that Section 171(1) of the CGST Act provides a clear methodology for passing on the benefit of tax reduction, which is by commensurate reduction in prices. The Authority emphasized that no elaborate mathematical calculations are required, and the benefit should be passed on by maintaining the pre-rate reduction prices and charging the reduced GST rate.3. Period of investigation:The Respondent claimed that the period of investigation was arbitrarily chosen. The Authority clarified that the period of investigation is from the date of rate reduction until the benefit is passed on. The period of investigation in this case was from 15.11.2017 to 31.12.2018, which was deemed appropriate.4. Base price discrepancies:The Respondent contended that discrepancies in the base price calculation led to inflated profiteering amounts. The Authority found that the DGAP had adopted a suitable methodology by comparing the average pre-rate reduction price with the actual post-rate reduction price. The methodology was deemed appropriate given the voluminous transactions and varying prices.5. Discounts and post-supply price reductions:The Respondent argued that post-supply discounts should be considered in calculating profiteering. The Authority rejected this claim, stating that the benefit of tax reduction must be passed on by commensurate reduction in prices, not through discounts or promotional schemes. The credit notes and invoices provided by the Respondent were found to be related to advertising and promotional services, not GST rate reduction.6. Increased quantity/grammage as commensurate reduction:The Respondent claimed that the benefit of tax reduction was passed on by increasing the quantity of products. The Authority held that the statutory provisions under Section 171 mandate only commensurate reduction in price as the method of passing on the benefit. The increase in grammage was not considered equivalent to price reduction.7. Impact of increased Customs Duty:The Respondent argued that increased Customs Duty should be considered in calculating profiteering. The Authority found that the Respondent had not provided adequate supportive documents to substantiate this claim. The selling prices of the products remained the same despite the alleged increase in Customs Duty.8. Inclusion of GST in profiteered amount:The Respondent contended that GST collected and deposited with the Government should not be included in the profiteered amount. The Authority held that the excess GST collected due to inflated base prices must be refunded to the recipients or deposited in the Consumer Welfare Fund.9. Zeroing and higher benefits passed on certain SKUs:The Respondent argued that higher benefits passed on certain SKUs should be considered, and the DGAP's methodology of zeroing was incorrect. The Authority rejected this claim, stating that the benefit must be passed on to each recipient for each supply individually, and netting off benefits is not permissible.10. Impact of reduced fiscal incentives under budgetary support:The Respondent claimed that reduced fiscal incentives under the budgetary support scheme impacted pricing. The Authority found that the refund of CGST or IGST was proportionate to the tax paid in cash, and there was no adverse impact on margins due to the reduction in tax rates.11. Calculation of profiteering for luxury products:The Respondent argued that luxury products should be excluded from profiteering calculations. The Authority rejected this claim, stating that all products impacted by the GST rate reduction are subject to the provisions of Section 171.12. Refund of profiteered amount to recipients:The Respondent contended that the profiteered amount should be refunded to identifiable recipients. The Authority held that the benefit must be passed on to the end consumers, not intermediaries like distributors or retailers.13. Violation of principles of natural justice:The Respondent claimed that the proceedings violated principles of natural justice due to the absence of a show cause notice. The Authority found that the Respondent was given adequate opportunity to defend himself, and the proceedings were conducted fairly.14. Constitutionality of the Authority without a Judicial Member:The Respondent argued that the absence of a Judicial Member rendered the Authority's constitution improper. The Authority held that its functions are quasi-judicial and do not require a Judicial Member. The composition of the Authority is in accordance with the CGST Act and Rules.15. Constitutionality of Section 171 and related Rules:The Respondent contended that Section 171 and related Rules are unconstitutional and violate Articles 14 and 19(1)(g) of the Constitution. The Authority rejected this claim, stating that the provisions aim to benefit consumers by ensuring that tax reductions are passed on to them.16. Excessive delegation under Rules 122, 127, and 133:The Respondent argued that these Rules suffer from excessive delegation. The Authority held that the Rules have the approval of the Parliament, State Legislatures, Central and State Governments, and the GST Council, and do not constitute excessive delegation.Conclusion:The Authority determined that the Respondent had profiteered an amount of Rs. 1,86,39,57,508/- by not passing on the benefit of GST rate reduction to his customers. The Respondent was directed to reduce prices commensurately and deposit the profiteered amount along with interest in the Consumer Welfare Funds of the Central and State Governments. The Authority also directed further investigation to ascertain whether the benefit was passed on after 31.12.2018.