GST: PROFITEERING CHARGES FREEZED ON SUPPLY OF REFRIGERATORS

[Dr. Sanjiv Agarwal]

National Anti-profiteering Authority (NAA) in one of the recent Orders dated 16.06.2020 confirmed the allegation of profiteering in contravention of section 171 of the CGST Act, 2017 read with Rules 128 to 136 of CGST Rules, 2017 as the supplier had not reduced the price of refrigerator on reduction of GST rates.

In the instant case, Kerala State Screening Committee on Anti-profiteering filed a complaint alleging profiteering on the supply of “Refrigerator Whirlpool FP313D PROTTON ROY MIRROR” (HSN code 84182100) by not passing on the benefit of reduction in the rate of tax w.e.f. 01 07.2017, by way of commensurate reduction in price, in terms of Section 171 of the Central Goods and Services Tax (CGST) Act, 2017 read with Rules 128 to 136 of CGST Rules, 2017 .  It relied on two invoices dated 11.09.2016 and 03.08.2017. [KERALA STATE SCREENING COMMITTEE ON ANT-PROFITEERING, DIRECTOR GENERAL OF ANTI-PROFITEERING, INDIRECT TAXES & CUSTOMS. VERSUS M/S. WHIRLPOOL OF INDIA LTD. 2020 (6) TMI 573 - NATIONAL ANTI-PROFITEERING AUTHORITY ].

The matter was referred to DGAP who investigated for the period 1.7.2017 to 31.08.2018 and submitted its report dated 06.12.2018 to the NAA.

The respondent submitted that it was operating on an All India constant Price List i.e. same Maximum Retail Price (MRP) and Dealer Price (DP) across all States. The DP was defined as the total Basic Price plus Value Added Tax (VAT)/ Goods & Services Tax (GST)- In the pre-CST period, the VAT rates used to vary from State to State, Since the DP was constant on All India basis, the Basic Price also varied from State to State However, in the post GST period, since the GST rate was constant, the Basic Price was also constant across the States, The Respondent had also used the term ‘Net Basic Price (NBP) which was the Basic Price less Excise Duty in the pre-GST period and it was the same as the Basic Price in the post GST period, The Respondent had used the term ‘Sales Realization’ to reflect Net Basic Price less Discount.

The DP effective on 11.09.2016 (pre-GST) for the impugned product was ₹ 37,300/- per unit and on 03.08.2017 (post-GST), it was Rs, 38,175 per unit, The increase In DP of ₹ 875/- per unit in the two invoices was due to:-

1. Increase in material cost impact of ₹ 365 per unit [on comparing effective Bill of Manufacture (BOM) cost as per the Systems Applications and Products (SAP) software].
2. Increase in freight cost: Impact of ₹ 29 per unit (on account of various market factors like availability driven by demand supply gaps, loading regulations and overall inflation etc.).
3. Reduction in sales realization due to GST impact of ₹ 441 per unit.

Further,  the allegation made in the notice that the benefit of reduction in the rate of tax has not been passed by commensurate reduction of price was not correct as there was no reduction in the total tax incidence (in %) and infact the total tax incidence as % of Net Basic Price has gone up from 26.1% to 28.0% .

The Central Government had levied 28% GST on the “Refrigerators, freezers and other refrigerating or freezing equipment, electric or other; heat pumps other than air conditioning machines of heading 8415” vide S. No. 120 of Schedule- IV attached to Notification No. 01/2017-Central Tax (Rate) dated 28.06.2017.

In pre-GST, impugned product was manufactured at Pune (Maharashtra) only while it was sold in Maharashtra and in other States. Therefore, it liable to Central Sales Tax @ 2% apart from the VAT (ranging between 12.50% to 15 95%) and the Central Excise Duty @12.50% on the abated MRP. In some States, Entry Tax (1% to 2%) was also levied on the impugned product. Therefore, the average tax incidence in pre-GST period was about 31.5% which had got reduced to 28% on the introduction of GST w.e.f. 01.07.2017. Thus, the contention of the Respondent that the total tax incidence on the impugned product has increased in the post-GST period was not correct.

In terms of section 15 of the CGST Act, 2017, GST was chargeable on the actual transaction value after excluding any discount and therefore, for the purpose of establishing profiteering, if any, Basic Price before discount could not be considered and the basic price after discount (excluding duties) was the correct amount which should be taken into consideration.

Also as per Section 171 of the CGST Act, 2017 which governs the anti-profiteering provisions, in the event of a benefit of Input Tax Credit (ITC) or reduction in the rate of tax, there must be a commensurate reduction in prices of the goods or services. Such reduction could obviously only be in absolute terms and the final price payable by a consumer must get reduced commensurate with the reduction in the tax rate.

The actual discount had increased by ₹ 105/- per unit. However, the Respondent has admitted that this increase in discount was on account of various market factors and not on account of reduction in the rate of tax. Therefore, the DGAP contended that the Respondent has not passed on the benefit of reduction in the rate of tax to his recipients in the form of discount.

As per DGAP report, from the details of the outward supplies made during the period from 01.07.2017 to 31.08.2018 furnished by the Respondent the amount of net higher sale realization due to increase in the basic price of the impugned product, despite the reduction in the GST rate or in other words, the profiteered amount came to Rs. 5,06,921/-. 

The profiteered amount was arrived at by comparing the State- wise average basic price (after discount) of the impugned product during the period from 01.042017 to 30.06.2017, with the transaction-wise basic price (after discount) during the period from 01 07.2017 to 31,08.2018.

The basic price (excluding tax) of the impugned product was increased by the Respondent although there was a reduction in the rate of tax after the introduction of GST w.e.f. 01.07.2017 and thus, the commensurate benefit of reduction in the GST rate was not passed on to the recipients, Accordingly, the DGAP submitted that the provision of Section 171 (1) of the CGST Act, 2017 requiring that “a reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices”, has been contravened by the Respondent.

Based on the report and submissions, the NAA further directed the DGAP to re-examine the following issues under Rule 133 (4) of the CGST Rules, 2017 as the Respondent had vehemently contested the issues of reversal of ITC and the incidence of tax during the pre and the post GST regimes, which were required to be resolved before liability of the  Respondent could be fixed for violation of the provisions of Section 171 of the CGST Act, 2017:

1. Whether the credit reversals was ₹ 497/- or 185/-?
2. If ₹ 185/- were to be taken as ITC reversal, would there be reduction in the rate of tax after the introduction of GST?
3. If yes, to re-determine the profiteered amount after taking Into account all the submissions made by the Respondent during the hearings before this Authority

The DGAP after considering the revised details of the VAT reversal in lieu of the CST, Entry Tax and the CST sales in Assam and Gujarat has stated that the average tax incidence in pre-GST period was about 30% which got reduced to 28% on introduction of GST. However, the tax incidence on introduction of GST has marginally increased in Delhi from 27.86% to 28% and in Haryana, from to 28%.

Further, the amount of profiteering made by the Respondent for failing to pass on the benefit of the reduction in the rate of tax to the recipients, in terms of Section 171 of the CGST Act, 2017, came to ₹ 4,07,451/- including the GST after considering the details of outward supplies during the period from 01 07.2017 to 31.08.2018. The said profiteered amount was arrived at by comparing the State-wise average basic price (after discount) of the impugned goods during the period from 01.04.2017 to 30.06.2017 with the transaction-wise basic price (after discount) during the period from 01.07.2017 to 31 08.2018 for ail the States (except Delhi and Haryana where the tax incidence has increased on introduction of GST).

The NAA observed that it was evident from the perusal of Sub-Section 171 (1), 171 (3A) and the Explanation attached to this Section that profiteering pertains to the amount of benefit which has been denied to the recipients by a registered person by not reducing the prices of his products commensurately on which the rate of tax has been reduced.

The NAA determined the amount profiteered as  ₹ 4,07,451/- including the GST as per the provisions of Rule 133 (1) of the CGST Rules, 2017.

The respondent was directed to reduce the price of the above product as per the provisions of Rule 133 (3) (a) of the CGST Rules, 2017, keeping in view the reduction in the rate of tax so that the benefit of tax reduction is passed on to the recipients. It was also directed to deposit the profiteered amount along with the interest to be calculated @ 18% from the date from which the amount was collected by him from the recipients till the above amount is deposited, in terms of the Rule 133 (3) (b) of the CGST Rules, 2017. Since, the recipients in this case were not identifiable, the Respondent is directed to deposit the above amount of profiteering along with interest in the CWFs of the Central and the concerned State Governments as per the provisions of Rule 133 (3) (c) of the CGST Rules, 2017 in the ratio of 50:50 along With interest @ 18%, till the same is deposited.

Further, the said amount shall be deposited within a period of 3 months by the Respondent, from the date of receipt of the order, failing which the same shall be recovered by the concerned Commissioners of the Central and the State GST, as per the provisions of the CGST/SGST Acts, 2017 under the supervision of the DGAP.

Since the Respondent had denied the benefit of rate reduction of the GST to the consumers in contravention of the provisions of Section 171 (1) of the CGST Act, 2017 and he had thus resorted to profiteering, it had committed an offence under Section 171 (3A) of the CGST Act, 2017 and therefore, it was apparently liable for imposition of penalty under the provisions.

The DGAP was directed to further investigate whether the Respondent has passed on the benefit of tax reduction to his recipients in terms of Section 171 of the CGST Act or not in respect of the products on which the rate of tax was reduced and submit Report as per the provisions of Rule 129 (6) of the above Rules.

The NAA order also mentioned that as per the provisions of Rule 133 (1) of the CGST Rules, 2017 this order was to be passed on or before 06 04.2020 as the investigation Report was received from the DGAP on 07.10.2019, However, due to the COVID-19 pandemic prevailing in the country, the order could not be passed on or before the said date.