TaxTMI 
TaxTMI 
TaxTMI 
2019 (10) TMI 863
X X X X Extracts X X X X
X X X X Extracts X X X X
....1 to the Standing Committee on Anti-profiteering under Rule 128 of the CGST Rules, 2017. The Applicant No. 1 had alleged in his application that the Respondent had increased the price of the flat after the introduction of GST w.e.f. 01.07.2017 and had not passed on the benefit of Input Tax Credit (ITC) by way of commensurate reduction in the price in respect of supply of construction service to him related to the purchase of Flat No. C1308, Tower-C, in the Respondent's project "Nikoo Homes II", situated in Bhartiya City, Chokkanahalli, Yelahanka, Bengaluru Karnataka. 2. The Standing Committee on Anti-profiteering vide the minutes of its meetings held on 07.08.2018 & 08.08.2018 had referred the above application to the DGAP for investigation under Rule 129 (1) of the CGST Rules, 2017 to determine whether the benefits of reduction in the rate of tax or ITC had been passed on by the Respondent to his recipients or not. The application was sent to the DGAP along with the details submitted by the Applicant No. 1 viz the duly filled in Form APAF-1, copies of intimation letters & receipts, copies of Agreement to Sell and Agreement for Construction, cop....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e has also submitted that taking in to account the size of the project which was spread over 4 to 5 years, in case there was accrual of benefit of ITC, it could only be computed at the end of the project and accordingly, he would pass on the ITC benefit, if any, to the buyers on completion of the project. 8. The Respondent has further submitted that the sale prices of the flats would be dependent on various parameters including surrounding developments, standard of life in that area, facilities like hospitals, schools, public transport, accessibility to various offices, airport, railway station, competition in the market and the demand and supply of homes, irrespective of the costs. He has also claimed that the flats would be sold over a period of 4 to 5 years and the customers who had purchased them in the beginning would enjoy price advantage over the other customers who had purchased them later. The Respondent has further claimed that the cost of constructing a flat was irrelevant in the context of pricing of the flat and therefore, the provisions relating to anti-profiteering, specifically with regard to the availability of ITC, should not be applied to the developers. The Res....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... value), as has been shown in Table- 'C' below:- Table- 'C' S.No. Type of Levy Rate of Tax Abatement Effective rate of tax 1 Service Tax 14% 5.60% 2 Central Surcharges & Cesses 1% 60% 0.40% 3 State VAT 14.5% 30% 10.15% The Respondent has also stated that he had collected 5% VAT from his customers which was lower by 5.15% as compared to his actual tax liability. The collection of VAT at a rate lower than the actual tax rate amounted to passing on the benefit to the customers though not directly related to the GST credits or the anti-profiteering provisions. He has further stated that under the GST the abatement allowed for the value of land was 33.33%, whereas he had taken the value of land as 35% to 40% of the total agreement value which had resulted in lower tax liability for the Applicant No. 1, as has been shown in Table- 'D' below:- Table- 'D' (Amount in Rs.) Particulars Adopted by the Respondent as per agreement If the value is limited to 1/3 Total value of the contract 94,32,260 94,32,260 Less: Value of land 32,68,000 30,36,733* Taxable value 60,90,730 54,08,267 Non-Taxable Value (Sinking Fund) 7....
X X X X Extracts X X X X
X X X X Extracts X X X X
....copies of all demand letters, Sale Agreement, Contract issued to the Applicant No. 1, all other details/ information were to be treated as confidential, in terms of Rule 130 of the CGST Rules, 2017. 13. The DGAP in his Report has stated that the Respondent had vide his letter dated 09.10.2018 submitted a copy of the agreement to sell dated 16.03.2016, agreement to build/construct and demand letters for the sale of Flat No. C1308 to the Applicant No. 1, measuring 1,634 sq. ft., at the basic sale price of Rs. 5,168/- per sq. ft. The details of amounts and taxes paid by the Applicant No. 1 to the Respondent has been furnished in Table-'F' below:- Table-'F' (Amount in Rs.) S.No. Payment Stages Due Date BSP Other Charges Service Tax VAT GST Total Land Other than Land 1 At the time of Booking 01.05.2017 16,89,000 - - - - - 16,89,000 2 On Commencement of Excavation 15.04.2016 4,22,250 - - - - - 3 On Completion of Foundation 04.02.2017 4,22,250 - - - - - 4 On Completion of Basement Floor Slab 26.05.2017 4,22,250 - - - - - 5 On Completion of 3rd Floor Slab 10.10.2017 3,12,250 1,10,000 &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2017 reads as "(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier". Based on these provisions the DGAP has stated that the ITC pertaining to the residential units which were under construction but had not been sold was provisional which would be required to be reversed by the Respondent if such units remained unsold at the time of issue of the completion certificate, in terms of Section 17 (2) & Section 17 (3) of the CGST Act, 2017, which read as under: Section 17 (2) "Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies". Section 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the Respondent that the collection of VAT and Service Tax at lower rate than their actual liability, was a benefit already passed on to the customers, was incorrect and could not be considered as compliance of Section 171 of the CGST Act, 2017. He has also contended that the claim of the Respondent that he had given the deemed benefit of Rs. 41,628/- to the Applicant No. 1, by way of tax on the differential value of land by not applying the deduction of 1/3rd value as the value of land, was also not correct. Therefore, the contention of the Respondent that the allegation of the Applicant No. 1 that no benefit had been passed on was incorrect was also not acceptable. The DGAP has also submitted that the argument of the Respondent that the sale prices of the flats were market-driven and would be dependent on various parameters and that the cost of construction of the flats was irrelevant in the context of fixing their prices was not examined or questioned by him as Section 171 did not give the mandate to regulate the price of the flats, as they were to be determined by the Respondent himself and the above Section only required that any reduction in the rate of tax or the benefit ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... - 3. Rebate of VAT(WCT) for the payment made to registered Contractors or Sub-contractors (C) 1,53,18,163 40,68,155 1,93,86,318 - - - 4. Input Tax Credit of GST Availed (D) - - - 13,07,42,364 13,09,35,260 26,16,77,624 5. Total CENVAT/VAT/Input Tax Credit Available (E)=(A)+(B)+(C) or (D) 7,83,67,207 2,67,63,088 10,51,30,295 13,07,42,364 13,07,42,364 26,16,77,624 6. Total Turnover including land value as per Homes Buyers List (Flats sold upto 31.08.2018(F) 1,24,76,16,628 27,28,76,988 1,52,04,93266 1,70,02,48,800 75,79,97,814 3,30,38,55,442 7. Total Saleable Area (in sq. ft.) (G) 27,00,020 27,00,020 8. Area Sold relevant to Turnover as per Home buyers List (Flats sold upto 31.08.2018) (H) 16,86,966 22,33,585 9. Relevant CENVAT/INPUT TAX CREDIT (I)=[(E)*(H)/(G)] 6,56,85,155 21,64,72,180 10. Ratio of CENVAT/ Input Tax Credit to Turnover [(J) = (I)/(F)] 4.32% 6.55% The DGAP has further claimed that as per the Table-'G' above, the ITC as a percentage of the total turnover that was available to the Respondent during the pre-GST period from ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ulted in the commensurate reduction in the base prices as well as cum-tax prices. Therefore, in terms of Section 171 of the CGST Act, 2017, the benefit of the additional ITC was required to be passed on to the recipients. He has further claimed that the Respondent had not contested that any such benefit would have to be passed on to the recipients at the time of giving possession of the flats, however, the fact was that this had not been done so far by him. The payments received from the Applicant No. 1 and the other recipients did not show that the benefit had been passed on by the Respondent, which meant that the Respondent had retained the benefits on account of additional ITC and by not reducing the pre-GST base prices by 2.23% on account of the additional benefit of ITC and charging GST at the increased rate of 18% on the pre-GST base prices, the Respondent had contravened the provisions of Section 171 of the of the CGST Act, 2017. 23. The DGAP has also quantified the profiteered amount on the basis of the aforesaid CENVAT/ITC availability pre and post-GST and the details of the amounts collected by the Respondent from the Applicant No. 1 and the other home buyers towards the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s further claimed that out of the remaining 1304 flats [(1713) - (409)], 243 customers had booked the flats in pre-GST period and also paid instalments in the pre-GST period but they had not paid any consideration towards construction during the post-GST period from 01.07.2017 to 31.08.2018 (period covered by investigation) and in case ITC in respect of these 243 units was taken into account to calculate the profiteering in respect of 1061 units where payments towards construction value had been received post-GST, the ITC as a percentage of turnover would be distorted and erroneous. Therefore, he has contended that the benefit of ITC in respect of these 243 units should be calculated when the consideration towards construction would be received from the concerned home buyers, by taking into account the proportionate ITC in respect of such units. 25. The DGAP has concluded that the benefit of additional ITC of 2.23% of the turnover has accrued to the Respondent which was required to be passed on to the Applicant No. 1 and other flat buyers who had entered into the agreements with the Respondent upto 30.06.2017. He has also argued that the Respondent had contravened the provisions o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lisations. He has also stated that the provisions relating to profiteering clearly mandated that any benefit of additional ITC which had become available due to GST should be passed on to the customers by way of commensurate reduction in the price of the goods or services supplied. He has further stated that the prices of the flats would be lower at the beginning of the project when compared to the prices when the project execution had begun and approached completion. He has also submitted that the 'cost incurred' or the 'cost to be incurred' on the project should be considered as the basis for computing the profiteered amount instead of the realisations from the customers. He has further submitted that the prices of the residential units per sq. ft. varied from time to time and were influenced by various external factors and variation in the selling prices would not have any impact on the input credits and therefore, input credit of taxes which was the basis for anti-profiteering calculations was based on purchases/inward supplies and was not linked to the outward supplies/sales. 28. The Respondent has also claimed that the tax paid on services was not a real benefit when c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....taxes with input credit for a part of a period or for the company as a whole would lead to incorrect understanding and analysis. He has also contended that in the construction and sale of residential flats, the total turnover, taxable turnover and the output tax liability was a function of sale of new units out of the total inventory and on the contrary, the inward supplies and the input taxes was a function of work completion and speed of project execution which did not have any correlation. 32. The Respondent has further contended that the comparison of the output tax and the input tax as a ratio to the turnover and within themselves would be an acceptable analysis for businesses which were season agnostic or where the sale and purchase commenced and was concluded within a very short duration e.g. consumer durables and food items etc., which could not be applied where the business was seasonal and hence, in all such cases, the ratios would be heavily skewed when applied for the season or off-season only. He has also argued that it was for this reason that under the Value Added Tax law and the CENVAT Credit Rules, 2004 a provision for true-up and true-down was introduced. He has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble customers at the end of the project. 35. The Respondent vide his submissions dated 09.05.2019 and 11.06.2019 has reiterated his earlier stand and stated that he would compute and determine the ITC benefit that would accrue to him and would pass on the same to the eligible customers at the end of the project. 36. Supplementary Report was sought from the DGAP on the issues raised by the Respondent through his above submissions. The DGAP vide his Report dated 16.04.2019 has claimed that the Respondent has submitted that the 'cost incurred' or the 'cost to be incurred' on the project should be considered as the basis for computing the alleged profiteered amount instead of the realisations from the customers, however, it was clear that the Respondent was not eligible to avail the CENVAT/ITC of many taxes like the Central Excise Duty, Central Sales Tax, Karnataka Entry Tax, Countervailing Duty and Special Additional Duty of Customs etc. during the pre-GST regime and after introduction of the GST, the Respondent was eligible to avail the ITC paid on all the inputs and input services including the sub-contracts. He has further claimed that the additional ITC availed by the Respondent....
X X X X Extracts X X X X
X X X X Extracts X X X X
....T period from April, 2016 to June, 2017 as Rs. 6,56,85,155/- and relevant ITC for the post-GST period as Rs. 21,64,72,180/- from July, 2017 to August, 2018 and reported that the pre-GST ratio of CENVAT to turnover came to 4.32% and the same ratio for the post-GST period was 6.55% and hence the Respondent has availed additional benefit of ITC after coming in to force of the GST w.e.f. 01.07.2017 of 2.23% (6.55%-4.32%) which he was required to pass on to his buyers as per the provisions of Section 171 (1) of the above Act. The DGAP as per Table H has further reported that the Respondent has not passed on the benefit of additional ITC of 2.23% and has in excess collected/profiteered an amount of Rs. 5,06,78,069/- from the house buyers which he was required to pass on to them. The DGAP has also intimated that the Respondent has profiteered an amount of Rs. 58,450/- from the Applicant No. 1 including the GST and an amount of Rs. 5,06,19,619/- (Total 5,06,78,069/-) from the rest of the house buyers which was required to be paid to both of them. The DGAP has further intimated that the Respondent has supplied the construction service in the State of Karnataka only. 40. The Respondent duri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t himself cost has no bearing on the prices of the flats hence the same cannot be considered for calculation of the profiteered amount and only the benefit of additional ITC which has accrued to the Respondent post-GST is required to be considered, therefore, the credit of ITC is very much relevant while computing the profiteered amount and hence the arguments of the Respondent made in this behalf are irrelevant. 43. The Respondent has also contended that the comparison of the input credits with output taxes should be done covering the entire life span of the project and comparing of the output taxes with input credit for a part of a period would lead to incorrect assessment of profiteering. The contention of the Respondent made in this behalf may be correct as Section 175 (1) of the above Act mandates passing on of the benefit of additional ITC which has accrued to the Respondent during the entire life of the project before occupancy certificate is issued however, it has to be taken in to consideration that the housing projects have long gestation period whereas the ITC is being availed by the Respondent every month. The Respondent cannot enrich himself at the expense of the flat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g the amount of ITC in his business. Therefore, the flat buyers cannot be forced to wait till the completion of the project over a period of 4 to 5 years to claim the benefit of ITC and pay more price than what they should pay after commensurate reduction in the prices of the flats. In case the Respondent insists on passing on the benefit of ITC to the buyers after the completion of the project he should also claim the benefit of ITC after completion of the same. He cannot apply different yardsticks for availing and passing on of the benefit of the ITC. Therefore, the arguments of the Respondent made on this account are frivolous and hence they cannot be accepted. 47. The Respondent has further contended that the rate of GST on sale of residential units has been reduced from 12% to 5% without ITC which would increase the cost of the project. Perusal of the Notification No. 03/2019-Central Tax (Rate) dated 29.03.2019 issued by the Central and the State Govts. shows that the rate of GST on construction service has been reduced from 12% to 5% without benefit of ITC w.e.f. 01.04.2019. However, the same has no effect on the present investigation as the same has been carried....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ually agreed upon as per Clause 6.4 of the Agreement to Sell executed between the buyers and the Respondent which specifically provides that the buyers shall not claim ITC benefit. The DGAP has stated in his Report that the above contention of the Respondent had merit and therefore, the ITC pertaining to the above 409 units was not considered by him during the investigation. Since the above agreements have been executed by mutual consent of both the parties they are binding on both of them, however, it is clarified that the above claim of the Respondent shall be subject to well settled principles that no flat buyer can be forced to forfeit his right of claiming benefit of ITC and any agreement executed in violation of the provisions of Section 171 (1) of the above Act shall be void. 50. It is also revealed from the Report that out of the remaining 1304 flats [(1713) - (409)], 243 customers have booked the flats and also paid part consideration during the pre-GST period but they have not paid any instalment during the post-GST period and in case the ITC in respect of these 243 units was taken into consideration to calculate the profiteered amount, the ITC as a percentage of turnove....