2025 (10) TMI 57 - HC - GST

Anti-profiteering order upheld: manufacturers cannot evade passing GST rate cuts by increasing quantity while keeping MRP unchanged

Sharma Trading Company Versus Union Of India & Ors.

HC upheld the impugned anti-profiteering order, finding that manufacturers/retailers cannot avoid passing on GST rate reductions by increasing quantity ... Profiteering - Constitutional validity of Section 171 of the Central Goods and Service Tax Act, 2017 and the corresponding Rule 126 of the Central Goods and Service Tax Rules, 2017 - benefit of GST rate reduction not passed on to consumers, by increasing the base price and keeping the MRP unchanged - HELD THAT:- In Reckitt Benckiser [2024 (1) TMI 1248 - DELHI HIGH COURT] is concerned, it has been categorically observed that increase in volume or weight or supply of additional free material by any schemes would not be sufficient to satisfy the requirement of passing on the benefit availed to the consumers. This Court is of the opinion that all schemes which may have been in operation, ought to have been recalibrated with the reduction in GST rates. There may be some transitional problems, however, the purpose of the reduction in GST rates cannot be defeated. Such problems are nothing but those for which the manufacturers and retailers ought to be prepared for. For eg., upon immediate reduction of GST rates, the product MRP may be the same, but the GST component has to be reduced, even if it means that the product is being sold for less than the MRP. The term MRP means `Maximum Retail Price’ and thus sale below the said price is permissible. It is only sale above the said price which is impermissible. But to ensure that the GST benefit is not passed on, increasing the quantity of the product unknowingly and charging the same MRP is nothing but deception. The consumer’s choice is being curtailed. The non-reduction of price cannot be sought to be justified on the ground that the quantity has been increased or that there was some scheme which justifies the increase in price. In the opinion of this Court, such an approach would defeat the entire purpose of reduction of GST rates and the same cannot be permitted. It is clear that the purpose of the ‘anti-profiteering mechanism’ is to safeguard consumers' interests and guarantee that businesses would transfer the benefits of lower tax rates and input tax credits to the final consumers. This Court is of the opinion that the impugned order deserves to be upheld. Accordingly the amount of Rs. 5,55,126/- shall be transferred to the Consumer Welfare Fund. Petition disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether Section 171 of the Central Goods and Services Tax Act, 2017 and Rule 126 of the Central Goods and Service Tax Rules, 2017 (and allied Rules) are unconstitutional or ultra vires Articles 14 and 19 of the Constitution. 2. Whether the impugned order of the Anti-Profiteering Authority (as reflected in the Investigation Report of the Director General of Anti-Profiteering) correctly found profiteering where a supplier/stockist did not reduce sale prices after a statutory reduction in GST rate but increased the base price. 3. Whether increase in product grammage/quantity or the existence of commercial promotional schemes (free gifts, bundled offers) can lawfully substitute for a commensurate reduction in price required to pass on GST rate reduction or input tax credit benefit to the consumer. 4. Whether penalty proceedings under the CGST/Rules could be sustained in the factual matrix where anti-profiteering determination had been made, having regard to Rule-making power and subsequent administrative practice. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Constitutionality of Section 171 and allied Rules Legal framework: Section 171 and Chapter XV of the Rules create an anti-profiteering mechanism to ensure benefits of reduced tax rates or input tax credits are passed to consumers; Rules specify composition, functions and remedial powers of the Authority, DGAP and related procedures. Precedent treatment: A coordinate bench upheld constitutional validity of Section 171 and multiple Rules in Reckitt Benckiser (referenced), concluding the provisions are a complete code and not arbitrary. Interpretation and reasoning: The Court relied upon the prior holding that the legislative scheme is within legislative competence and that consumer welfare objectives justify the regulatory mechanism; concerns regarding arbitrary or erroneous exercise of power are remediable by setting aside erroneous orders, not by striking down the statutory provisions. Ratio vs. Obiter: Ratio - provisions are constitutionally valid; Obiter - acknowledgment that arbitrary exercise may occur and such instances attract judicial review on merits. Conclusion: Challenge to the constitutional validity of Section 171 and the relevant Rules does not survive; statutory scheme stands upheld. Issue 2 - Validity of anti-profiteering finding where base price increased post GST reduction Legal framework: Section 171 mandates that reduction in tax rate or availability of input tax credit must result in commensurate reduction in price to the recipient; Rules empower investigation by DGAP and remedial orders by the Authority (including refund, deposit to Consumer Welfare Fund, interest). Precedent treatment: Reckitt Benckiser elaborated that the benefit must reach the recipient as cash in hand via commensurate reduction in price and that the anti-profiteering authority may examine each SKU and each supply; comparative reliance on Supreme Court precedent (Excel Crop Care) supports broad investigatory powers. Interpretation and reasoning: The impugned order relied on admitted invoice data showing identical MRP/sale price pre- and post-GST reduction while the base price had been raised by an amount nearly equivalent to the GST rate reduction. The Court accepted the factual matrix that the supplier had 1288 units of pre-notification stock and nevertheless charged higher base price after the tax cut, thereby negating the benefit. The legislative intent and consumer welfare purpose require that such actions cannot be permitted to defeat the rate reduction. Transitional or administrative difficulties do not justify negation of the statutory mandate. Ratio vs. Obiter: Ratio - where tax rate reduction occurs, a supplier cannot offset the benefit by increasing base price such that the consumer does not receive a commensurate reduction; factual findings based on invoices and admissions support determination of profiteering. Obiter - recognition that commercial realities/transitional problems exist but do not absolve legal obligation to pass on benefit. Conclusion: The impugned anti-profiteering determination that the supplier profiteered by increasing base price instead of reducing sale price is upheld; the profiteered amount is to be transferred to the Consumer Welfare Fund with interest as directed. Issue 3 - Whether increase in grammage/quantity or promotional schemes can substitute for price reduction Legal framework: Section 171 requires commensurate reduction in price to the recipient; Legal Metrology and packaging rules govern MRP disclosure and rounding; anti-profiteering analysis focuses on benefit reaching final consumer. Precedent treatment: Reckitt Benckiser was followed and cited for the proposition that increases in volume/weight, free extra material, festival discounts or cross-subsidisation are not adequate substitutes for passing on the tax benefit as a price reduction to the consumer. Interpretation and reasoning: The Court reasoned that permitting suppliers to meet the statutory obligation by covertly increasing quantity or providing bundled offers without consumer consent would defeat the legislative purpose. The consumer's right to the benefit is individuated and must be reflected in price reduction to the recipient; promotional schemes must be recalibrated to ensure the benefit is passed on. The fact the supplier relied on a promotional scheme or earlier free-gift offers did not validate non-reduction of price for pre-existing stock. Ratio vs. Obiter: Ratio - increase in volume/quantity or promotional free goods cannot be substituted for commensurate price reduction required by Section 171; Obiter - transitional recalibration of schemes may pose practical difficulties but are not a legal defence to non-passage of benefit. Conclusion: Commercial arrangements increasing grammage or offering promotional items do not absolve the obligation to reduce price commensurately upon GST reduction; the supplier's reliance on such schemes was insufficient to avoid the anti-profiteering finding. Issue 4 - Penalty proceedings and consequences post determination Legal framework: Rule-making power under Section 164 permits rules including prospective retrospective effect and penalties up to prescribed limits; Rules empower imposition of interest and penalties and prescribe deposit to Consumer Welfare Fund. Precedent treatment: Reckitt Benckiser considered Rule 133 and related provisions and held them intra vires; it also observed administrative practice concerning withdrawal or non-pressing of penalty proceedings in light of Section 171(3A) and subsequent developments. Interpretation and reasoning: While the authority may propose penalties, the Court noted that penalty proceedings in many cases concerning violation of Section 171(1) prior to the coming into force of Section 171(3A) have been rendered infructuous or withdrawn by the Authority. In the present factual matrix the Court declined to press penalty proceedings in view of the precedent and administrative position noted in Reckitt Benckiser. Ratio vs. Obiter: Ratio - Rule 133(3)(b)&(d) and related penal provisions are intra vires; Obiter - where administrative practice or subsequent legal changes have resulted in withdrawal/non-pressing of penalty notices, penalty proceedings may be treated as not applicable. Conclusion: Penalty proceedings are not to be imposed in the present matter in view of the referenced judicial and administrative practice; however, the power to impose penalties is constitutionally valid and remains available where applicable. Cross-References and Operational Directions 1. The Court applied the coordinate bench authority upholding Section 171 and the Rules and expressly confirmed that merits of specific anti-profiteering orders are to be adjudicated independently. 2. The Court directed transfer of the determined amount (including interest) into the Consumer Welfare Fund and accepted proof of prior deposit and conversion into FDR for operational compliance with the order. 3. The Court emphasized that remedies for arbitrary or erroneous application of anti-profiteering powers lie in setting aside orders on merits rather than invalidating the statutory provisions themselves.