Developer must refund Rs 1.56 crore to homebuyers for not passing ITC benefits under section 171 CGST Act

NAPA determined that the respondent developer realized an additional amount of Rs. 1,56,77,149/- by not passing on ITC benefits to 71 home/shop buyers during July 2017 to September 2019, violating section 171 of CGST Act. The respondent was directed to refund the profiteered amount with 18% interest within three months and reduce future prices commensurate with ITC benefits. While penalty under section 171(3A) was applicable, it could not be imposed retrospectively as the provision was inserted effective January 2020. NAPA also directed DGAP to investigate the respondent's other projects for similar contraventions.

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Issues Involved:

1. Whether there was a benefit of reduction in the rate of tax or input tax credit (ITC) on the supply of construction service by the Respondent upon implementation of GST w.e.f. 01.07.2017.
2. Whether such benefit was passed on by the Respondent to the recipients in terms of Section 171 of the Central Goods and Services Tax Act, 2017.
3. Whether the Respondent's claim of passing on 3% GST benefit to the Applicant was valid.
4. Whether the denial of CENVAT Credit of Rs. 3,58,20,322/- towards service tax paid to CIDCO was correct.
5. Whether the investigation methodology and period covered by DGAP were appropriate.
6. Whether the Respondent had under-reported the agreement value to lower GST, Stamp Duty, and other tax commitments.

Issue-wise Detailed Analysis:

1. Benefit of Reduction in Rate of Tax or ITC:
The DGAP's investigation revealed that the Respondent benefited from additional ITC to the tune of 2.44% (2.51% post-GST - 0.07% pre-GST) of the turnover from 01.07.2017 to 30.09.2019. The Respondent was required to pass on this benefit to the flat/shop buyers but failed to reduce the basic prices of his flats/shops by 2.44%. This failure contravened Section 171 of the CGST Act, 2017, which mandates passing on the benefit of ITC to the recipients.

2. Passing on the Benefit to Recipients:
The DGAP concluded that the Respondent did not pass on the benefit of ITC to the buyers, resulting in profiteering of Rs. 1,56,77,149/- (including GST @ 12%). The Respondent's claim of passing on Rs. 61,83,525/- to 21 home buyers was unsubstantiated due to lack of documentary evidence.

3. Respondent's Claim of Passing on 3% GST Benefit:
The Respondent argued that he passed on a 3% GST benefit by charging 9% instead of 12% GST. However, it was found that the Respondent collected 9% GST from the Applicant but discharged only 8% GST to the Government on the Applicant's flat. The DGAP's investigation showed that the Respondent collected higher amounts of GST from buyers than he paid to the Government, debunking the Respondent's claim.

4. Denial of CENVAT Credit of Rs. 3,58,20,322/-:
The DGAP denied the CENVAT credit claimed by the Respondent for the service tax paid to CIDCO on the grounds that leasing of vacant land was covered under the Negative list of services and thus exempt from service tax. The Respondent's claim that the DGAP had no jurisdiction to deny this credit was rejected, and the denial was upheld based on the Finance Act, 1994, and CENVAT Credit Rules, 2004.

5. Investigation Methodology and Period:
The DGAP's methodology of comparing the ratio of CENVAT credit to turnover for pre-GST and post-GST periods was approved. The investigation covered the period from 01.07.2017 to 30.09.2019, and any transactions post-September 2019 were outside the scope of the investigation. The Respondent's contention that the investigation should cover the entire project tenure was rejected.

6. Under-reporting of Agreement Value:
The allegation of under-reporting the agreement value to lower GST, Stamp Duty, and other tax commitments was outside the scope of Section 171 of the CGST Act, 2017. The DGAP stated that this issue could be examined by the jurisdictional GST authorities.

Conclusion:
The Authority determined that the Respondent realized an additional amount of Rs. 1,56,77,149/- from 71 home buyers/shop buyers due to non-passing of the ITC benefit. The Respondent was directed to pass on this amount along with 18% interest per annum to the eligible buyers within three months. The Commissioners of CGST/SGST Mumbai, Maharashtra were tasked with ensuring compliance and publicizing the order. The DGAP was also directed to investigate other projects executed by the Respondent for similar contraventions. The penalty under Section 171 (3A) could not be imposed retrospectively for the period under investigation.

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