NON – PASSING OF ITC BENEFIT IS PROFITEERING UNDER GST

[Dr. Sanjiv Agarwal]

In yet another complaint against M/s Theco India Pvt. Ltd. for contravention of section 171 of the CGST Act, 2017 on anti-profiteering measures, the National Anti-Profiteering Authority (NAA) vide its Order dated 28.11.2018 has ordered that the company had wrongly charged higher price without reducing the base price to the extent of Counter- Veiling Duty (CVD) @ 12.5 percent in pre-GST regime and ITC being allowed under GST regime on IGST paid on products. It also directed for imposition of penalty and directed further investigation by the DGAP to cover all products supplied by the company to unearth and quantify the benefit which it might have failed to pass on to the customers.

Brief Facts

In Crown Express Dental Lab, Ranchi & DGAP, Delhi v. Theco India Pvt. Ltd., Chennai 2018 (12) TMI 135 - NATIONAL ANTI-PROFITEERING AUTHORITY ;  a complaint was filed relating to purchase of Lava CNC 240 Milling Machine with accessories and Lava Materials Approved Sintering Furnace,  which were imported from Germany. As per the quotation submitted in pre-GST period, price quoted was with 2% Central Sales Tax (CST) and 2% freight but tax invoice raised in GST period mentioned GST @ 18% (IGST). The grievance was that under GST, taxes such as Counter Veiling Duty (CVD), CST and Special Additional Duty (SAD), were subsumed in IGST where as it was charged 18% IGST on pre-GST selling price as per quotation which included CVD, SAD etc and that the benefit of ITC was denied.

The DGAP took up the determination of benefit not passed as well as sought comments / alongwith documentary evidences from the company.

In the instant case, the quotation dated 28.11.2016 (pre-GST) revealed as under:

Description	Price (in Rs.)
Lava Mill CNC 240 and accessories (A)	44,66,000/-
Lava Materials approved Sintering Furnace D664 (B)	14,40,000/-
Total price (C=A+B)	59,06,000/-
Freight (D= 2% of 'C' above)	1,18,120/-
Price (including Freight = C+D)	60,24,120
Plus CST (2%)

 

Further, tax invoice dated 06.09.2015 (in GST regime) revealed as under:

Description	Price (in Rs.)
Lava Mill CNC 240 and accessories (A)	45,55,320/-
Lava Materials approved Sintering Furnace D664 (B)	14,68,800/-
Total price (C=A+B)	60,24,120/-
IGST (18%)	10,84,342/-
Price (including Tax)	71,08,462/-

Company Submissions

The company denied the allegations in complaint and submitted that:

• In GST regime, Custom Duty was reduced to 7.5% and its benefit was given to buyer.
• ITC can be claimed by buyer and it is wrong to claim that not price had increased.
• An additional discount was offered to offset any adverse GST impact, as such product was sold for the first time.
• It had imported goods under GST regime and had not claimed any transitional credit thereon.
• There had been an increase in taxable value of machine w.e.f. January, 2017, after quotation was submitted.
• Complainant had agreed to the terms and conditions of sale.
• Complainant was free to claim full refund of advance paid.

Before the Authority (NAA), the company, inter alia, contended that:

• The additional costs relating to the Accessories and Lava materials which were supplied as a combo offer to the complainant had not been considered while arriving at the purchase cost and the amount of profiteering.

• CST paid @ 2% which amounted to additional cost for which no credit was available under CST Act, 1956 has not been considered. DGAP has failed to consider the 2% component.

DGAP Investigation

DGAP’s examination reveals that had the import of the above items been made prior to the implementation of GST, the company was required to pay Counter Veiling Duty (CVD) @ 12.5% and Special Additional Duty (SAD) @ 4% and it would have got refund of the SAD upon the sale of these items but it could not have claimed credit of the CVD which would have formed part of the cost of the above items.

However, import was made on 31.08.2018 in GST period when CVD and SAD were subsumed in IGST and entire amount of IGST @ 18% paid on import was eligible for Input Tax Credit (ITC). DGAP opined that company should have reduced the base price to the extent of the CVD that was no longer to be paid as well as to the extent of the IGST, the credit of which was available to it.

Thus, it was proved that the base price of the above items had remained the same, i.e., ₹ 60,24,120/- as per the quotation dated 28.11.2016 and the base price was not reduced to the extent of CVD that was not to be paid after the implementation of the GST.

Further, since the import had taken place post GST, company was not required to pay CVD and therefore taxable value should have been reduced commensurately. The amount of profiteering done by the supplier company was ₹ 478085.

NAA Findings

NAA observed that though company had argued for supply of additional material, there is no mention of combo offer, both in quotation as well as tax invoice. Further, additional discount was from own sources and hence could not be considered as part of taxable value. Since the invoices were raised in GST period, there was no question of CST payment and hence such an argument was not maintainable. There was nothing on record to prove that price increase was communicated to buyer and agreed upon. According to NAA, supplier should have reduced the base price to the extent of CVD (at 12.5%) which was chargeable on the amount mentioned in the quotation dated 28.11.2016 since in the period prior to GST,  no Cenvat credit was available for the CVD paid on the import of the goods whereas in the post GST period, no CVD was charged. Instead IGST was charged on the import of goods which was available as ITC to the company while supplying goods to the complainant. Hence the price offered prior to implementation of GST had to be reduced by the amount of CVD paid in order to neutralise the impact of ITC which was available to the company. The NAA therefore, concluded that amount profiteered by the supplier for two machines was ₹ 4,78,085.

It profiteered at the expense of buyer and had violated provisions of section 171 of the CGST Act, 2017 and thus also rendered itself liable to penal action in line with the provisions of section 122 of the CGST Act, 2017 apart from its liability to refund the profiteered amount along with the applicable interest in terms of the provisions of the CGST Rules, 2017.

It is clear from the facts that the company was fully aware of the GST provisions and availability of ITC on account of IGST charged on import of goods. It was also fully aware of the provisions of section 171 of the CGST Act whereby it was bound to pass on the benefit arising due to ITC availability on import of the said product. However, it  had deliberately acted in defiance of the above law and hence he is guilty of the conduct which is contumacious and dishonest. It had further acted in conscious disregard of the obligation which was cast upon him by the law, by issuing incorrect invoice in which the base price was deliberately not reduced by the amount of CVD, SAD and CST chargeable under erstwhile scenario which is now chargeable as IGST in the GST regime and is available as ITC benefit and thus he had denied the benefit of reduction in the price granted vide IGST provisions to his customers. Accordingly it has committed an offence under Section 122 (1) (i) of the CGST Act, 2017. It also held that the possibility of the company having profiteered and thus unfairly benefited in the similar manner, in case of the other supplies affected by him to other customers, cannot be ruled out. Thus, in the interest of justice to the customers, we unequivocally opine that a fresh investigation by the DGAP covering all products supplied by the company, within the confines of Section 171 of the CGST Act, is merited to unearth and quantify the benefit that the company has failed to pass on to his customers.

The outcome of NAA order is thus,

1. Establishment of profiteering to the extent of ₹ 4,78,085 in terms of section 171 of the CGST Act, 2017
2. Liable to be penalized in term of section 122 of the CGST Act, 2017
3. Direction to reduce the sale price of the said items immediately, commensurate to the reduction in the price due to ITC of erstwhile chargeable CVD which is now available in the form of IGST and pass on this benefit to his customers.
4. Direction to refund an amount of ₹ 4,78,085/- along with interest @ 18% to the complainant from the date when this amount was realised by it till the date of refund within a period of 3 months from the date of receipt of the order failing which the same shall be recovered by the DGAP as per the provisions of the CGST Act, 2017 and shall be refunded as has been directed in  the order.
5. For levy of penalty u/s 122 of the CGST Act, 2017, keeping in view the principles of natural justice, opportunity of being heard has to be given to the company before the penalty is imposed by issue of fresh notice to explain why penalty should not be imposed on it.
6. Direction to DGAP to initiate investigation against company to determine profiteering, if any in respect of other products / customers.

Conclusion

This is one of the orders issued by NAA wherein it has come down heavily on the supplier of goods and on establishment of profiteering, it has ordered further investigation to ensure that there is no profiteering resorted to in case of other products or with other customers. The message is clear the culprits of profiteering done at the cost of buyers shall be dealt with sternly and taken to logical and desirable outcome.