Property developer must refund Rs. 1.78 crore Input Tax Credit benefits under section 171 CGST Act to flat purchasers with 18% interest

NAPA held that the property developer contravened section 171 of CGST Act by not passing on Input Tax Credit benefits to flat purchasers. The Authority determined the developer received additional ITC of 5.40% of turnover post-GST implementation, totaling Rs. 1,78,32,984 in profiteering. The developer was directed to refund this amount with 18% interest from the date of profiteering until payment to all homebuyers and shop buyers. While penalty provisions under section 171(3A) existed, they could not be imposed retrospectively as the violations occurred before the penalty provisions became effective from January 1, 2020.

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Issues Involved:

1. Whether there was a benefit of reduction in the rate of tax or ITC on the supply of construction services by the Respondent post-GST implementation.
2. Whether such benefit was passed on by the Respondent to the recipients in terms of Section 171 of the CGST Act, 2017.

Issue-wise Analysis:

1. Benefit of Reduction in Rate of Tax or ITC:

The DGAP investigated whether the Respondent benefited from a reduction in the tax rate or ITC on the supply of construction services after the implementation of GST. The investigation covered the period from 01.07.2017 to 30.09.2019. It was found that the ITC as a percentage of the turnover available to the Respondent during the pre-GST period (April 2016 to June 2017) was 1.27%, while during the post-GST period (July 2017 to September 2019), it was 6.67%. This indicated that the Respondent benefited from an additional ITC of 5.40% of the turnover post-GST.

2. Passing on the Benefit to Recipients:

The DGAP reported that the Respondent did not pass on the benefit of the additional ITC to the recipients by way of commensurate reduction in prices, as required under Section 171 of the CGST Act, 2017. The total amount of profiteering was calculated to be Rs. 1,78,32,984/-, which included Rs. 34,137/- related to the specific flat of Applicant No. 1. The Respondent claimed to have passed on the benefit to some customers through credit notes and invoices, but discrepancies were found in the verification process, and many claims could not be substantiated.

Respondent's Contentions and Authority's Findings:

- Constitutionality and Natural Justice: The Respondent argued that Section 171 of the CGST Act was ultra vires the Constitution and that the absence of a judicial member in the Authority compromised its independence. The Authority rejected these contentions, stating that the Authority was constituted under Section 171(2) of the CGST Act, 2017, and that ample opportunities were provided to the Respondent to present their case, thus adhering to the principles of natural justice.

- Methodology for Determination: The Respondent contended that no specific methodology was prescribed for determining whether the benefit of ITC was passed on. The Authority clarified that the methodology was enshrined in Section 171(1) of the CGST Act, which required passing on the benefit of ITC by way of commensurate reduction in prices. The DGAP's approach of comparing the ITC to turnover ratios in pre- and post-GST periods was found to be rational and appropriate.

- Increase in Cost of Inputs: The Respondent argued that the increase in the cost of inputs should be considered while determining profiteering. The Authority found this contention misplaced, as the increase in input costs was independent of the output GST rate and was a business risk factored in at the time of entering into agreements.

- Passing on the Benefit: The Respondent claimed to have passed on the benefit of ITC to customers, but the DGAP found discrepancies and unverifiable claims. The Authority directed the Respondent to refund the profiteered amount of Rs. 1,78,32,984/- along with interest at 18% to the homebuyers/shop buyers/customers, including Applicant No. 1.

Conclusion:

The Authority upheld the DGAP's findings and ordered the Respondent to refund the profiteered amount along with interest. The Respondent was also directed to reduce the prices commensurate with the benefit of ITC and ensure compliance with the order. The jurisdictional CGST/SGST Commissioner was directed to monitor the compliance and submit a report to the Authority. The DGAP was also directed to investigate profiteering in other projects undertaken by the Respondent. The order was passed within the extended period of limitation due to the COVID-19 pandemic.

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