ANTI-PROFITEERING IN GST: ASSERTIONS FROM HINDUSTAN UNILEVER CASE

[Dr. Sanjiv Agarwal]

The National Anti-profiteering Authority (NAA) has been dealing with profiteering complaints with all seriousness and more particularly where in consumers at large are affected, i.e., complaints against FMCG companies.

One such complaint is against the well known FMCG company, Hindustan Unilever Ltd. (HUL) where in the main complainant is also ‘ Anonymous’, perhaps first of its kind, as he did not wanted his identity to be disclosed.

In Anonymous, Ankit Kumar Bajoria, S.M. Ramanathan and DGAP, CBIC, New Delhi v. Hindustan Unilever Ltd., Mumbai 2018 (12) TMI 1599 - NATIONAL ANTI-PROFITEERING AUTHORITY ; vide Order dated 24.12.2018, the NAA has upheld the chargers of profiteering against the company for contravention of provisions of section 171 of the CGST Act, 2017. The complaint was that although the Goods & Service Tax (GST) had been reduced from 28% to 18% on a large number of products w.e.f. 15.11.2017, HUL had not reduced the Maximum Retail Prices (MRPs) of the products which were being sold by it. It was also alleged that the HUL had increased the base prices of his products, so that the MRPs continued to be the same even after reduction in the rates of GST. Similar complaints were received from other complainants.

DGAP Findings

Detailed investigation by DGAP revealed that HUL had determined the amount of profiteering suo moto and came forward to deposit an amount of ₹ 59.94 Crores for the period w.e.f. 15.11.2017 to 30.11.2017. The profiteered amount was suo-moto determined after taking into account the various deductions viz. (i) pricing deployment (PD), (ii) trade term supply deployment (TTSD), (iii) fiscal deployment (FD) and (iv) writing off of the existing packaging material.

According to DGAP report, section 171 does not provide the supplier of goods and services any other means of passing on the benefit of reduction in the rates of tax or benefit of ITC and therefore, all suppliers of goods and services must pass on the benefits in terms of absolute reduction in the prices and flexibility to suo moto decide on any other mode of passing on the benefits was not available. Applying this principle, it stated that HUL admittedly had not passed on the benefit that had accrued to it on account of the reduction in the GST rates. The legal provisions did not allow any other mode of passing on the benefit except by reduction in the prices as per the provisions of Section 171 of the CGST Act, 2017.

DGAP report concluded that the allegation of profiteering made against HUL was duly established as it had increased the base prices of the products thus maintaining the same selling prices which were existing on 14.11.2017 or had not reduced the selling prices of the products commensurately, despite reduction in the GST rates from 28% to 18% or from 18% to 12% w.e.f. 15.11.2017. The extent of profiteering was determined as ₹ 419.67 crores plus the TRAN-2 credit amounting to ₹ 76.06 crores which was entirely on account of Central Taxes and hence the total profiteering was held to be amounting to ₹ 495.73 crores.

NAA Findings

The NAA after examining the DGAP report, records, documents and submissions made by HUL, came to conclusion that contravention of provision of section 171 are clearly established and that HUL was guilty also invoking penal provisions. It observed that there is no dispute that the Central Government, on the recommendation of the GST Council, had reduced the GST rates w.e.f. 15.11.2017 on several goods from 28% to 18% and from 18% to 12% vide Notification No. 41/2017-Central Tax (Rate) dated 14.11.2017.

The HUL has also calculated the profiteered amount itself and deposited the same in the CWF which clearly shows that it was aware of the concepts of profiteering, commensurate and reduction in the prices.

Major Assertions

• As per the law settled, HUL was bound to reduce the prices on the products being sold by it w.e.f. 15.11.2017 and in case it was not able to do so, it should have immediately deposited the profiteered amount in the Consumer Welfare Fund (CWF) which it had failed to do promptly.
• The assertion made by the HUL that it could not reduce the MRPs on the goods which were already in the pipeline and had decided to voluntarily deposit the excess realization in the CWF is not correct as it had infact increased the base prices of its products w.e.f. 15.11.2017 and had deposited the profiteered amount only after he had realized that a complaint dated 17.11.2017 had been lodged against it for profiteering.
• The claim made by the HUL that he could not have reduced the prices of the value- based packs as it was required to round off their prices as per the provisions of the LM Rules is also not correct as it could have deposited the excess price charged by it in the CWF till it was able to increase the quantity proportionate to the reduction in the tax rates which it had not done immediately after there was reduction in the rates of tax and had done so after a lapse of a considerable period of time.
• The HUL has not only denied the benefit of tax reductions itself but has also made its regional stockist liable for action for violation of the provisions of section 171 supra as they were equally liable to pass on the benefit of tax reductions being registered dealers under the CGST/SGST Acts.
• The true legislative intent behind the Section 171 is to safeguard the interests of the consumers. The legislature has mandated this Authority to ensure that no supplier is allowed to make undue profit by pocketing any benefit intended by the Government to be passed on to the recipients through the suppliers.
• Any GST rate reduction by the Government should always be seen as a sacrifice made by the Government from it's own kitty of revenue, in the interest of the consumers in particular and society at large. Therefore, Section 171 requires a supplier to pass on any benefit of rate reduction or of ITC being made available to it, to its recipients. While ensuring this, the Authority was of the view that this Section needs to be purposively construed and due regard should also be given to the prevalent trade practices. The emphasis should be laid on non-retention of benefit of reduction of tax rates by a suppliers and its due passage to the recipient. What is important is to ascertain whether the supplier has enriched itself illegally or has passed on the benefit in accordance with the legal provisions as well as the prevalent practices of a particular trade or not. If the genuine interest of the trade is to pass on such benefits to the recipients, the Authority, without any prejudice to the law, has to also see that the practical options available to the suppliers of that particular trade are also taken into consideration.
• The HUL was required to show for every product affected by the rate reductions, that the benefit of more grammage was given to the recipients as soon as there were rate changes; that the benefit was commensurate with the rate changes and that to prove the cause-effect relationship between the CST rate reductions and grammage increase it should not be a continuation of any ongoing business promotion activity and should be substantiated with documentary evidences.
• Section 171 of the CGST Act, 2017, puts the onus of passage of any benefit of the GST rate reductions or ITC to the recipient on the supplier. The keyword to be emphasised is "commensurate reduction". The law expects that commensurate reduction to the extent of the rate reductions should be given by HUL. Any greater reduction in prices is entirely a business call taken by the HUL well within his right and hence there is no ground to compensate.
• The amount of profiteering has to be calculated by keeping the recipient at the centre. This implies that one particular recipient may have bought one product from the HUL at a price which he was entitled to pay when the rates of tax were reduced but simultaneously there is another recipient who has paid more than what he was supposed to pay for some another product of the HUL. The additional benefit given to one recipient cannot be offset with the denial of benefit to another recipient, as this is not the spirit of the law.
• In future in case there is any reduction in the rate of tax or benefit of ITC is made available the same shall be passed on by it in the shape of commensurate reduction in the prices as per the provisions of Section 171 of the above Act and in case it is not possible to do so the amount so realised shall be deposited in the CWF.
• There exists no direct correlation between the MRP of the product (which is same over all-India) and the area based exemption benefit.
• Operational difficulty in following a law can never be a ground for disobedience of law. The law was very clear when it gave the suppliers the relief to do re-stickering instead of incurring additional cost on new packaging material. It was a business call taken by the HUL to not do re-stickering and rather go for fresh packing material. The CGST Act, 2017 nowhere provides allowance on account of cost of packing material against the reduction in the prices on account of lower GST rates.
• The Anti-profiteering provisions specified in the CGST Act and Rule 127 of the CGST Rules make it amply clear that the recipients get their rightful due in the form of reduction in the prices on account of reduction in the GST tax rates. Therefore, the Authority was of the view that since, the recipients of the HUL have been compelled to pay extra GST which should be included in the profiteered amount. Hence, the HUL's claim to deduct this amount was dismissed.
• Anti-profiteering would not apply to products sold through CSD and to CRPF as these were sold exclusive of taxes and HUL did not gain any amount by way of reduction in tax rates. There can not be excess realization in such sales and hence section 171 is not attracted.

Gist of NAA Order

In conclusion, the NAA passed the following Order with directions –

• HUL profiteered a total amount of ₹ 534.89 crore on account of denial of benefit to customers due to reduction in tax rates (Rs. 455.92 crore) and on account of TRAN-2 ITC benefit which was not passed on to customers (Rs. 78.97 crore).
• Benefit of increased grammage allowed.
• Supplies to CPF and CRPF did not amount to profiteering
• 50% of the amount profiteered to be deposited in Central Consumer Welfare Fund (CCWF) and balance to be deposited in CWF of concerned states.
• Directed to reduce the prices of its products by way of commensurate reduction keeping in view the reduced rates of tax and the benefit of ITC.
• As per Rule 133 (3) (c) of the CGST Rules, the Authority directs HUL to deposit the above amounts into the concerned CWFs along with the interest @ 18% till the same is deposited with in a period of three months from the date of receipt of this order as the profiteered amount has been used by HUL in his business.
• Concerned Central and the State GST Commissioners directed to ensure that the amount due to them is got deposited along with the interest with in the specified period under the supervision of the DGAP failing which the same shall be recovered by them as per the provisions of the CGST/SGST Acts.
• The payment of amount shall be reported by HUL to the Authority within a period of 4 months from the date of this order through the DGAP.
• Since the present investigation had been conducted for the period between 15.11.2017 to 28.02.2018, the DGAP was directed to conduct further investigation to ascertain whether HUL has passed on the benefit of tax reductions in respect of all the products being sold by it and in case it is found that it has not done so, further Report shall be submitted quantifying the amount of profiteering.
• Since HUL has been held guilty of profiteering and has also been found to have violated the provisions of Section 122 (1) (i) of the CGST Act, 2017 a fresh notice be issued to it asking to explain why penalty should not be imposed on it.

Final Verdict

HUL has resorted to profiteering being very well aware of the law and the rules which warranted it to pass on the benefit of GST rate reductions.

HUL has also consciously and illegally recovered the excess realisation which was due to his RSS as ITC and thereby denied the benefit of tax reductions to the customers.

HUL has acted in conscious disregard of the obligation which was cast upon it to pass on the benefit of GST rate reductions.

HUL has deliberately increased the base prices by enhancing them equivalent to the amount of GST rate reductions in order to keep the old MRPs in place or not reduced them proportionately to the benefit of tax reductions and accordingly, it has committed an offence under section 122 (1) (i) of the CGST Act, 2017 by issuing incorrect invoices to its customers.