Construction company profiteered Rs 74 lakh by not passing ITC benefits to homebuyers under Section 171 CGST Act

NAPA determined that a construction service provider profiteered Rs. 74,60,399 by failing to pass on ITC benefits to homebuyers as required under Section 171 of CGST Act, 2017. The respondent was ordered to reduce prices commensurately and return the profiteered amount with 18% interest within three months. However, penalty under Section 171(3A) could not be imposed retrospectively as the provision was inserted after the violation period ended.

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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 service by the Respondent after the implementation of GST.
2. Whether the Respondent passed on such benefit to the recipients by way of commensurate reduction in price, in terms of Section 171 of the CGST Act, 2017.

Issue-wise Detailed Analysis:

Issue 1: Benefit of Reduction in Rate of Tax or ITC
- Investigation and Findings: The DGAP conducted a detailed investigation covering the period from 01.07.2017 to 30.11.2019. The investigation revealed that post-GST, the Respondent could avail ITC of GST paid on all inputs and input services, unlike the pre-GST period where only Service Tax credit was available. The ratio of ITC to turnover increased from 3.28% in the pre-GST period to 4.44% in the post-GST period for the project "ESCALA". This indicated an additional benefit of 1.16% of the turnover due to ITC.

Issue 2: Passing on the Benefit to Recipients
- Respondent's Submissions: The Respondent argued that the benefit of ITC was dependent on various factors like stage of construction and negotiation with vendors. They claimed to have passed on the benefit based on the area to eligible customers.
- DGAP's Findings: The DGAP found that the Respondent had not passed on the benefit commensurately to all recipients. The benefit of additional ITC should have resulted in a reduction in the base price and cum-tax price. The profiteered amount was calculated to be Rs. 74,60,399/-.
- Verification and Confirmation: The Respondent claimed to have passed on Rs. 87,75,787/- to 110 homebuyers. Upon verification, it was found that the Respondent had passed on less than the required benefit to 31 flat owners and the Applicant No. 1 by an amount of Rs. 4,09,720/-. The excess benefit passed to some buyers could not offset the shortfall to others.

Additional Contentions and Clarifications:
- Comparison of ITC to Turnover: The Respondent contended that comparing ITC to turnover was not the correct mechanism. However, the DGAP clarified that this methodology was appropriate as it directly related to the output tax liability.
- Scope of Investigation: The Respondent argued that the investigation should be limited to the application submitted by Applicant No. 1. The DGAP and the Authority clarified that Section 171(2) of the CGST Act empowered the Authority to examine all supplies made by a registered person to ensure benefits were passed on to all recipients.

Authority's Decision:
- Profiteering Amount: The Authority determined that the Respondent had profiteered an amount of Rs. 74,60,399/-. The Respondent was ordered to reduce prices commensurate with the benefit of ITC received and return the profiteered amount to the recipients along with interest @18%.
- Penalty: Although the Respondent violated Section 171(1) of the CGST Act, 2017, no penalty under Section 171(3A) was imposed as it was not in operation during the period of violation.
- Compliance and Advertisement: The concerned jurisdictional CGST/SGST Commissioner was directed to ensure compliance, including publishing an advertisement to inform homebuyers about the order and the benefit due to them.

Conclusion:
The judgment emphasized the importance of passing on the benefits of ITC to recipients as mandated by Section 171 of the CGST Act, 2017. The Authority's decision ensured that the Respondent complied with the legal requirements and provided relief to the affected homebuyers.

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