2022 (10) TMI 312 - HC - GST

Section 171 CGST Act upheld as consumer welfare measure, not charging provision, requiring equal benefit pass-through to all customers

The Delhi HC upheld the constitutional validity of Section 171 of the CGST Act and related anti-profiteering provisions, rejecting challenges under ... Anti-profiteering under Section 171 - suo motu power of the National Anti-Profiteering Authority - obligation to pass on benefit of tax rate reduction on each supply - prohibition of netting off benefits across supplies (SKU-wise pass-on) - commensurate reduction in prices as the prescribed mode of passing benefit - post-sale discounts not substituting for commensurate price reduction - prima facie deposit of profiteered amount pending final adjudicationSuo motu power of the National Anti-Profiteering Authority - Validity of initiation of proceedings by the Secretary, NAA, and the existence of suo motu power in the NAA to examine alleged contraventions under Section 171 - HELD THAT: - The Court held prima facie that Section 171 and the Rules thereunder empower the NAA to examine 'any supply' and that the procedure in the Rules (including applications by Commissioners or other persons) does not curtail the original legislative power of the Authority. Rule 127 and the methodology provision permitting inquiry on the Authority's own motion indicate that NAA possesses suo motu powers to initiate proceedings in the public/consumer interest. The Court noted Rule 128 permits 'any other person' to make an application, so the Secretary, NAA, would prima facie qualify to institute proceedings. [Paras 7, 8, 14]Prima facie upheld NAA's suo motu power and validated initiation by the Secretary for the present proceedings.Obligation to pass on benefit of tax rate reduction on each supply - prohibition of netting off benefits across supplies (SKU-wise pass-on) - Whether a supplier may net off benefits across supplies or need pass on the benefit of tax reduction on each supply/SKU to each recipient - HELD THAT: - The Court expressed a prima facie view that Section 171 casts an obligation on every supplier to pass on the benefit of tax rate reduction or ITC on every supply. The statutory phrase 'any supply' indicates benefit must be reflected at the level of each taxable supply to each recipient, and a supplier cannot offset greater benefit given on some supplies against lesser or no benefit on others. The provision is a consumer-welfare measure and must be liberally construed to further consumer and public interest. [Paras 9, 13, 15]Prima facie held that netting off across SKUs is not permissible; benefit must be passed on supply-wise.Commensurate reduction in prices as the prescribed mode of passing benefit - post-sale discounts not substituting for commensurate price reduction - Whether post-sale discounts or increase in grammage can constitute the commensurate reduction in prices mandated by Section 171 - HELD THAT: - The Court observed prima facie that Section 171 contemplates passing the benefit by way of commensurate reduction in prices. Post-sale discounts given by the petitioner were held prima facie not to have been granted on account of GST rate reduction and therefore do not qualify as the required commensurate price reduction. Similarly, a supplier cannot choose to pass the benefit by increasing grammage instead of reducing the price when the statute prescribes price reduction as the mode of passing on the benefit. [Paras 3, 4, 16, 18]Prima facie held that post-sale discounts and increased grammage do not satisfy the statutory requirement of commensurate price reduction.Examination of alleged impact of increase in Customs Duty - Admissibility at this stage of the petitioner's plea that increase in Customs Duty justified the non-passage of benefit - HELD THAT: - The Court examined the materials produced regarding customs duty and found the spreadsheets lacking essential particulars (bills of entry, dates, values, description, or indication whether imports were raw materials or finished goods). The Court observed that assessing the impact of changed customs duty would require detailed examination of manufacturing composition and consumption of inputs; consequently, such a claim cannot be satisfactorily examined at the prima facie stage on the present record. [Paras 17]Prima facie the asserted effect of increased Customs Duty cannot be examined at this stage.Prima facie deposit of profiteered amount pending final adjudication - Interim treatment of the alleged profiteered amount and ancillary proceedings pending final hearing - HELD THAT: - Relying on its prima facie conclusions, and having regard to earlier orders in similar cases, the Court directed the petitioner to deposit the principal profiteered amount (after deducting GST already deposited with the Department) in six equal instalments starting 10 October 2022. The Court stayed the interest amount, penalty proceedings and further investigation by NAA in respect of other products until further orders. The Court emphasised these views were prima facie and without prejudice to final adjudication. [Paras 19]Directed interim deposit of the principal profiteered amount in six instalments; stayed interest, penalty and further investigation pending final hearing.Final Conclusion: The High Court, on prima facie consideration, upheld that NAA has suo motu power, that Section 171 requires pass-on of tax reduction on each supply by way of commensurate price reduction (disallowing netting across SKUs and excluding post-sale discounts or increased grammage as substitutes), held that alleged customs-duty-based adjustments cannot be assessed at this stage, and ordered interim deposit of the principal profiteered amount (with specified deductions and instalments) while staying interest, penalty and further investigation until final adjudication. Issues Involved:1. Constitutionality of Section 171 of the CGST Act and related rules.2. Validity of NAA's suo moto powers.3. Netting off benefits of rate reduction.4. Post-sale discounts as commensurate reduction.5. Impact of customs duty increase on profiteering.6. Calculation and deposition of profiteered amount.Issue-wise Detailed Analysis:1. Constitutionality of Section 171 of the CGST Act and Related Rules:The petitioner challenged the constitutionality of Section 171 of the CGST Act and specific rules under Chapter XV of the CGST Rules, alleging they are unconstitutional, ultra vires, and violative of Articles 14, 19(1)(g), 265, and 300A of the Constitution of India. The court, however, viewed Section 171 as an incidental provision aimed at ensuring the benefits of tax rate reduction or input tax credit are passed on to consumers, aligning with the consumer welfare objective of the CGST/SGST Acts.2. Validity of NAA's Suo Moto Powers:The petitioner argued that the National Anti-Profiteering Authority (NAA) lacks suo moto powers to initiate proceedings. In contrast, the respondent contended that Section 171 confers broad powers on the NAA to examine any supply of goods or services for profiteering. The court noted that Rule 128 permits 'a commissioner or any other person' to make a written application, and prima facie, the Secretary, NAA, qualifies to make such an application. The court referenced previous cases where the issue of suo moto powers was raised but upheld the NAA's actions.3. Netting Off Benefits of Rate Reduction:The petitioner contended that the NAA should consider the netting of benefits extended in some products against those not extended. The respondent argued that Section 171 mandates passing on the benefit of tax reduction on every supply, not selectively. The court agreed with the respondent, stating that a supplier cannot offset benefits passed to one customer against another and must pass on the benefit on each supply.4. Post-Sale Discounts as Commensurate Reduction:The petitioner claimed that post-sale discounts should be considered a commensurate reduction in prices. The respondent countered that the petitioner was required to pass on the benefit by not increasing base prices and that post-sale discounts were irrelevant. The court held that post-sale discounts do not qualify as commensurate reduction under Section 171.5. Impact of Customs Duty Increase on Profiteering:The petitioner argued that increases in customs duty should be excluded from the profiteered amount. The respondent pointed out that the actual selling price per unit remained unchanged despite customs duty increases and that Section 171 does not allow for adjustments against increased costs. The court found the petitioner's evidence inadequate and unreliable, noting that any purported increase in customs duty could not be examined at this stage.6. Calculation and Deposition of Profiteered Amount:The court directed the petitioner to deposit the principal profiteered amount, deducting the GST already deposited, in six equated installments. The interest amount and penalty proceedings were stayed until further orders. The court emphasized that these views were prima facie and would not prejudice the final hearing.The court also directed the parties to complete pleadings before the next hearing date and listed the matter for further hearing on 19th October 2022.