CONTRAVENTION OF SECTION 171 IN PROFITEERING ON SUPPLY OF HOUSES (FLATS)

[Dr. Sanjiv Agarwal]

Where the developer has denied benefit of ITC to the buyers of the flats being constructed by it in contravention of the provisions of section 171 (1) of the CGST Act, 2017 and had thus realized more price from them than it was entitled to collect and has also compelled them to pay more GST than that they were required to pay,  the National Anti-profiteering Authority upheld the contravention of section 171 of CGST Act.  It further directed the developer to reduce the price to be realized from the buyers of the flats commensurate with the benefit of ITC received by it.

In Ashok Khatri v. S3 Infra Reality (P.) Ltd. 2019 (3) TMI 369 - NATIONAL ANTI-PROFITEERING AUTHORITY;  profiteering was alleged in respect of purchase of a flat in project “Auric City Homes” situated in Faridabad. It was alleged that developer had not passed on the benefit of Input Tax Credit (ITC) by way of commensurate reduction in the price after implementation of the GST w.e.f. 01.07.2017 and charged GST on full amount of instalments.

On reference to DGAP, investigation was undertaken and responses from the developer and complainant examined. It was submitted that deveoloper had suo moto admitted that there has been benefit of ITC post-GST and it had passed on such benefit to the complainant by reducing the demand raised in the month of February, 2018 by Rs. 12,492/- which was 1.23% of the amount collected post-GST. It had also assured that the final input tax credit benefit would be provided at the time of possession.

According to report of DGAP, prior to 01.07.2017, i.e., in the pre-GST era, the service of construction of affordable housing, provided by the respondent, was exempted from the Service Tax vide Notification No. 25/2012-ST, dated 20.06.2012, as amended by Notification No. 9/2016-ST, dated 01.03.2016 and hence the supplier was not eligible to avail credit of Central Excise Duty paid on the inputs or Service Tax paid on the input services, however, the supplier was eligible to avail CENVAT credit of Service Tax paid on input services for the commercial shops sold by him. It had also claimed that the supplier was eligible to ITC on VAT paid on inputs but the CENVAT credit of Central Excise Duty paid on inputs was not available and post-GST, the supplier was eligible to avail ITC of GST paid on inputs and input services including the tax paid by his sub-contractors.

The Central Government had levied 18% GST, effective rate of which was 12% in view of 1/3rd abatement on the value of land on construction service vide Notification No. 11/2017-Central Tax (Rate), dated 28.06.2017. The actual GST rate on construction service in respect of affordable and low-cost housing was further reduced from 12% to 8%, vide Notification No. 1/2018-Central Tax (Rate), dated 25.01.2018.

It observed that additional ITC of 2.84% of the taxable turnover should have resulted in commensurate reduction in the base price and therefore, in terms of section 171 of the CGST Act, 2017, the benefit of the additional ITC that had accrued to the developer was required to be passed on to the flat buyers. Developer admitted that the amount of profiteering as calculated by the DGAP would be passed on to all the buyers for both the residential and the commercial units. He also reiterated that the major amount as calculated by the DGAP had already been passed on and the balance amount will be paid in due course.

The NAA observed that the issues to be settled were :

(a)     Whether there was reduction in the rate of tax on the service in question w.e.f. 01.07.2017 and w.e.f. 25.01.2019?

(b)    Whether there was any net additional benefit of ITC?

(c)     Whether there was any violation of the provisions of section 171 of the CGST Act, 2017, by not passing on the benefits by the Respondent?

Based on report and records, the developer has sold 780 units out of 816 residential units, out of which for 29 units there was no consideration paid after introduction of GST, hence the profiteered amount has to be calculated only for 751 units which have been sold and consideration received. Out of these 751 homebuyers the DGAP has admitted that for 100 buyers the entire profiteered amount has already been paid. Hence in respect of 651 units, the profiteered amount comes to Rs. 1,45,59,184 which includes an amount of Rs. 23,772 for the Applicant.

It directed the developer to reduce the price to be realized from the buyers of the flats commensurate with the benefit of ITC received by it. Since the present investigation was only up to 31.08.2018, any benefit of ITC which accrues subsequently shall also be passed on to the buyers by the developer as and when the remaining residential/commercial units are sold.

The developer has denied benefit of ITC to the buyers of the flats being constructed by him under the above Policy in contravention of the provisions of section 171 (1) of the CGST Act, 2017 and has thus realized more price from them than he was entitled to collect and has also compelled them to pay more GST than that they were required to pay by issuing incorrect tax invoices and hence he has committed an offence under section 122 (1) (i) of the CGST Act, 2017 and therefore, he is liable for imposition of penalty. The Authority as per rule 136 of the CGST Rules, 2017 directed the Commissioners of CGST/SGST Haryana to monitor this order under the supervision of the DGAP by ensuring that the amount profiteered by the developer as ordered by the Authority is passed on to all the buyers .