GST: BASE PRICE HIKE AMOUNTS TO PROFITEERING

[Dr. Sanjiv Agarwal]

The provisions of section 171 of the CGST Act, 2017 read with relevant rules are aimed at protecting the interests of the customers against unwarranted and unreasonable profiteering resorted to by suppliers of goods and services. The anti-profiteering law is being enforced by Director General of Anti-profiteering (DGAP) and the National Anti-profiteering Authority (NAA) with full force and it comes down heavily on the errant suppliers where action involves refund of amount of unjust enrichment and the levy of heavy penalties under section 122 of the CGST Act, 2017.

In one of the complaints recently disposed off by the NAA, the allegation of profiteering in contravention of the provisions of section 171 of the CGST Act, 2017 were proved and actions taken against the supplier of FMCG goods  vide NAA Order dated 27.12.2019.

DGAP, CBIC, New Delhi v. Raj & Company, New Delhi 2019 (1) TMI 22 - NATIONAL ANTI-PROFITEERING AUTHORITY ; 

Complaint & Facts

A complaint was filed with Secretary, NAA making an allegation that few major manufacturers of Fast Moving Goods Consumer Goods (FMCGs) including M/s. Garnier Laboratories Ltd., had not passed on the benefit of reduction in the rate of tax from 28% to 18% w.e.f. 15.11.2017 vide Notification No. 41/2017-CT (Rate) dated 14.11.2017. Infact, supplier had increased the base price to keep the MRP of its product ‘Garnier Nat Shade 3’ to maintain the same price which it was charging before the rate of tax was reduced on 15.11.2917 thus, indulging in profiteering in contravention of the provisions of Section 171 of the CGST Act, 2017. The complaint was based on following invoices for the pre and post 15.11.2017 periods which revealed the following :

Invoice No. / date	Description of products	MRP (in Rs.)	Discounted Base price (in Rs.)	Rate of GST	Price charged (inclusive of GST) (in RS.)
LCBL039761702884 /11.10.2017	Garnier Nat Shade 3	35	24.41	28%	31.25
LCBL039761704221 /30.11.2017	Garnier Nat Shade 3	40	26.48	18%	31.25

 

The DGAP sought various information’s from supplier including balance sheet, price list of products sold etc.

Supplier’s Contention

It was contended that supplier had passed on the benefit of tax reductions to the customers by way of discount scheme allowing a discount of 12.5% on products.

Further, the demand raised was incorrect as it was only a distributor of the products in question. The MRP was fixed by the manufacturer i.e. M/S L'oreal and the billing system was based on the web based software of the manufacturer in which it could upload the quantity of the products to be sold to its customers. Other figures such as MRP, basic rate, discount, if any and GST calculations etc. were loaded/ printed by the manufacturer's software itself. If it wanted to give any cash discount (on the basis of the Dealer's better payment terms etc.) out of its earnings, this discount entry could be uploaded by it in the end of the billing amount before arriving at the final payable figure.

Following defence grounds were also submitted :

1. Two invoices in question were not comparable as MRP’s were different
2. Factually, base price was kept constant even after increase in product’s MRP Sale invoices showed that the MRP of ₹ 35 was not increased to ₹ 40 but the MRP of ₹ 40 was decreased to ₹ 35 during the two months of September and October 2017, when the manufacturer had allowed a Special Promo Discount of ₹ 5 on the MRP for a short period of 2 months as a Consumer promotion benefit.
3. MRP was decided by manufacturer and as such, it had no role in determining MRP
4. It claimed that percentage reduction would be 7.8% only considering the base price of the product as 100, gross price inclusive of GST @ 28% would be 128 and the gross price inclusive of GST @ 18% would be 118 and hence due to reduction on ₹ 128 of ₹ 10 (128 - 118 = 10) the percentage reduction would be 10/128 = 7.8%.
5. That it had a closing stock of approximately 19.9 lakhs as on 15.11.2017, when the GST rate of 18% came into force and as such its manufacturers should have passed on 19.9 lakhs x 7.8% = 1.56 lakhs as GST profiteering benefit to it.
6. It had passed on this GST rate reduction benefit through schemes during the period between 15.11.2017 to 31.12.2017 and the quantum of benefit passed was as per the mandated requirement.
7. All the purchases and sales made after 15.11.2017 did not attract anti profiteering provisions under section 171 of the CGST Act,2017 as there was no benefit in tax rate that had accrued to it as it was buying and selling goods at the same GST rate of 18%.

DGAP Findings

DGAP investigations stated that supplier was registered under GST and it was his statutory responsibility and obligation to pass on the benefit of reduction in GST rate to customers. It revealed that following:

1. Supplier was required to sell the said goods at the pre 15.11.2017 base price and should have charged GST of 18% on such base price, to pass on the benefit of reduction in the rate of tax from 28% to 18%.
2. By increasing the base price of the said goods, the supplier had maintained the pre-GST rate reduction cum-tax price thus denying the benefit of GST rate reduction to the consumer.
3. Even after taking into account the discount of 12.5% (Rs. 3.78 per piece) offered under the Scheme, the base price of the product worked out to be ₹ 26.48 per piece, which was more than the pre rate reduction price of ₹ 24.41 per piece, charged by the supplier for the same product.
4. 388 products supplied by the supplier during the period between 15.11.2017 to 31.03.2018 were impacted by the reduction in the rate of GST from 28% to 18% w.e.f. 15.11.2017. Out of the above 388 products, 81 products were not sold during the period between 01.11.2017 to 14.11.2017 and hence, the reference prices for calculating the profiteering amount for these products were not available. Of out these 81 products, 41 products were newly introduced items post GST rate reduction w.e.f. 15.11.2017. For the remaining 40 items, the reference prices for calculation of the profiteered amount had been taken from the price list (for the period pre 15.11.2017) submitted by the supplier, which further revealed that out of these 40 items, the base prices of 34 products were increased by the supplier and the base prices of 6 products were reduced.
5. Out of the remaining 307 products (388-81=307) which were sold during the period 01.11.2017 to 14.11.2017, base prices of 259 products were increased and the base prices of 48 products were reduced post 15.11.2017.
6. Thus, in respect of total 388 items, it was found that the base prices of 293 (259+34) products were increased post 15.11.2017, for 54 products, the base prices were reduced post 15.11.2017 and 41 products were newly introduced post 15.11.2017. Thus, the total amount of profiteering in respect of these 293 products supplied by the supplier during the period w.e.f. 15.11.2017 to 31 03.2018, was arrived at ₹ 3,43, 109/-.

Manufacturer’s Comments

On enquiry, manufacturer, M/s L’oreal clarified on control over software and increase in base price. It was submitted by the manufacturer that:

1. It was that the benefits reach the ultimate consumer by instructing the distributors to reduce the prices.
2. M/S L'oreal and the supplier were two different legal entities undertaking transactions on principal to principal basis and neither section 171 of the CGST Act nor under any provisions of the CGST Rules could be invoked against it in the proceedings initiated against the supplier.
3. It was under a bona-fide belief that the price benefit on account of reduction in the GST rate had already been passed on to its customers.
4. Pricing of the products sold by the distributors was not controlled by the it and that the alleged statement made by the supplier that the software was controlled by it and sale price of the distributors was also fixed by it was not correct, as it did not exercise any control whatsoever on the prices through the software.
5. The distributor was entitled to give discounts and sell the goods at a price lower than the recommended price to his customers.

NAA Findings

Based on record, facts, submissions and DGAP report, NAA observed that since supplier was s distributor, the benefit of rate reduction was required to be passed on by it to the recipients as per the provisions of Section 171 of the CGAT Act, 2017.

It was established that out of the 388 products, the base prices of 293 (259+34) products were increased by it inspite of the rate reduction to maintain the pre rate reduction prices. As such, benefit of ₹ 343109 was denied to customers which was supposed to be passed to them, thus contravening section 171 by not providing commensurate reduction in prices of products supplied. Accordingly, amount profiteered was determined at ₹ 343109/-. It further observed as follows :

1. Invoices nowhere mentioned that discounts given by supplier were on account of reduction in GST rate from 28% to 18%.
2. Argument that prices were controlled by the manufacturer does not hold good in as much as he is registered supplier under the CGST/SGST Act, 2017 and is bound to follow the notification dated 14.11.2017 to pass on the benefit of GST rate reduction.
3. The legal obligation imposed upon it cannot be .ignored only because he is not the manufacturer who controls the prices, as he is accountable as a supplier to pass on the benefit of GST rate reduction.
4. M/s L’oreal (manufacturer) had also claimed that it was the obligation of the supplier to pass on the benefit of the trade discount/ price rebate schemes to the retailers or ultimate consumers.
5. Supplier had issued incorrect invoices while selling all the above products to his customers as he had not correctly shown the basic prices which he should have legally charged from them.
6. Supplier had also compelled them to pay additional GST on the increased prices though the incorrect tax invoices which would have otherwise resulted in further benefit to the customers which it had failed to pass on.
7. Supplier had deliberately and consciously acted in contravention of the provisions of the CGST Act, 2017 by issuing incorrect invoices which is an offence under Section 122 (1) (i)

NAA thus concluded / that directed :

1. Supplier directed to reduce the prices of all the above products as per the provisions of Rule 133 (3) (a) of the CGST Rules, 2017 by making commensurate reduction in their prices keeping in view the reduction in the rate of tax so that the benefit is passed on to the recipients.
2. Supplier directed to deposit the profiteered amount of ₹ 3,43,109/- along with the interest to be calculated @ 18% from the date when the amount was collected by it from his customers till the above amount is deposited as the same has been used by it in his business.
3. Since the recipients in this case were not identifiable the above amount of profiteering of ₹ 3,43,109/- along with interest shall be deposited by the supplier in the Consumer Welfare Fund of the Central Government and the State of Delhi respectively as per the provisions of Rule 133 (3) (c) of the CGST Rules, 2017 under the supervision of the DGAP within three months of order
4. DGAP directed to further investigate the quantum of profiteering which the supplier has made thereafter and submit his report.
5. Supplier is liable for imposition of penalty under the above Section read with Rule 133 (3) (d) of the CGST Rules, 2017. This would be subject to following principles of natural justice by issuing fresh show cause notice.