Anti-Profiteering: Powers of NAA?

[Jigar Doshi]

Background

There has been ample discussion on the rectitude of Anti-profiteering provisions in India. Borrowed from countries like Malaysia, Canada and Australia to check the inflation post introduction of GST; the concept has been around for almost three years now. However, there has been to and fro discussions on the obscurity and ambiguity that the provision has instilled. Notices and orders with absolutely no consistency in the methodology has exasperated the trade and industry to an unimaginable level. Just when the concept was heading towards its finale, in 2019, the GST council not only gave it a new lease of life, but it also gave the National Anti-Profiteering Authority (NAA) more powers. Further, in a capitalist economy like India, one sometimes wonder whether there is a place for a concept like Anti-profiteering? On one hand where we are laying red carpet for foreign investments and creating global optimism towards India, should we be extending the tenure of Anti-profiteering? Is it not going to deter the hymns of making India the most powerful economy in the world? In this article, we wish to discuss the recent developments on this front.

Section 171 of the CGST Act is the enabling provision which provides that the suppliers of goods and services should pass on the benefit of the following by way of commensurate reduction in prices:

1. Any reduction the rate of tax;
2. Seamless flow of input tax credit

Also, Rule 126 of the Central Goods and Services Tax Rules, 2017, (CGST Rules) mandates that the anti-profiteering body must evolve a methodology to deal with anti-profiteering issues. Further, Rule 133 of the CGST Rules lays down the procedure to issue orders by Anti-profiteering authorities.

In June 2019, Rule 133 was amended vide Notification no 31/2019 dated 28 June 2019 wherein sub-rule 5A was inserted. Vide the said sub-rule, the GST council extended the powers of the NAA to take up investigation suo-moto, i.e. even if certain goods or services does not form a part of the DGAP report, the NAA can investigate the same if they have reason to believe that the Anti-profiteering provisions have been violated.

This amendment was brought in due to the fact that before June 2019, the NAA had initiated investigation in respect of goods and/or services other than the reported ones, in respect of the same assesse. Let us understand this better by way of an example. In case Mr. X is engaged in manufacturing of three products A, B and C and NAA received a complaint regarding product B, then this amendment gave NAA the power to investigate product A and C also which was earlier not the case; not that the NAA did not do it earlier, but it was legally incorporated in the provisions only after June 2019. Probably, the council was trying to ratify the prior acts of the NAA with this amendment as this subject had flared up multiple times in writs and proceedings. However, if that was the case, then it certainly did not help the cause as the amendment was prospective and not retrospective. Further, one more amendment that was made in the Anti-profiteering provision was the separate penalty provision; prior to the said amendment, the penalty was imposed under the general penalty provision which also was a matter of debate at various courts and forums. Hence the council decided to end the dispute by providing for a specific penalty section. The Council also extended the time limit to complete the investigation from three months to six months, thus providing a long-drawn completion period to the authority.

Gujarat HC on Sapphire Foods

Sapphire Foods India Pvt. Ltd. (petitioner) filed a writ petition against the NAA order before the Gujarat High Court. The petitioner who is a franchisee of Yum, operates KFC and Pizza hut eateries. One of the customers had filed a complaint before the NAA that the reduction of GST rate from 18% to 5% has not been passed when he had ordered a pizza from the said petitioner. As reported in the media, the case is said to be dated back to December 2017, wherein the price of the specific pizza had increased even after the GST rates were slashed in November 2017.

The investigation in the case begun in October 2019 and the petitioner contended that though GST rates were slashed in November 2017, but the same was coupled with denial of ITC. This had led to increase in the overall cost of the company, resulting in price hike of the pizza. The company received several summons and it first moved to Bombay High Court in May 2020 where the petitioner submitted their stance. However, even after the said submission, the company received another summon which made them file a writ before the Gujarat High Court. In their writ, the company has alleged the following:

1. that the NAA has widened their scope of investigation by investigating products other than the pizza under question;
2. that the period of limitation as per the provisions has expired and the investigation is unwarranted;
3. that the methodology of the NAA seems to be equivocal.

The Gujarat High Court has granted an interim relief to the petitioner by directing the NAA and DGAP to limit their investigation to the product under question and not to widen the ambit of their scrutiny. The matter has been listed for hearing on 30 July 2020.

Our comments

The matter, as reported by the media, pertains to 2017. However, the investigation begun in 2019. For the purpose of discussion, the period under question needs to be divided into two segments: prior to June 2019 and post June 2019. Prior to June 2019, there was a continuing debate on whether the NAA has the authority to scrutinise goods and/or services which are beyond the complaints received. Considering that the matter relates to 2017, the amendment made in 2019 shall not be applicable in this case. Hence, strictly speaking, the NAA did not have the clear authority to encroach the goods and/or services beyond the scope of complaint. Therefore, the Gujarat High Court has correctly provided interim relief to petitioner. However, one cannot be too optimistic as the same is only an interim relief and the next hearing is scheduled for 30 July 2020. 

In the past also, the NAA has went beyond its scope of powers and demanded information or data pertaining to products other than the complained product. In the case of RECKITT BENCKISER INDIA PRIVATE LIMITED VERSUS UNION OF INDIA THROUGH: ITS SECRETARY & ORS. [2019 (7) TMI 1135 - DELHI HIGH COURT], the Delhi HC had provided interim relief to the company after NAA demanded data pertaining to the entire product range (approx. 3,500 in number!) ruling that the NAA cannot demand the petitioner to furnish data of products other than the product under question. While this ruling is only an illustration, there have been other instances where the NAA has overstepped its boundaries and asked for data of entire product range.

The NAA has been a subject of debate for the trade and industry since GST arrived. The methodology adopted, the penalties imposed, the scope of scrutiny and the constitution of the NAA are some debatable issues.

With Covid-19 slamming the economy left, right and centre, when the trade needs to worry about the revenue and income, can they really afford to also fret about the prices not being too high; is a question that the GST council needs to ponder deeply upon. The Hon’ble Prime Minister is piquantly advocating the ‘Make In India’ and ‘Atmanirbhar Bharat’ reforms. However, steps like not deferring or suspending the Anti-profiteering provisions seem to be contrary to these reforms as it ties the hands of the manufacturers to sell goods at a decent profitable price. No business runs or wants to run in a loss and if the cat doesn’t go back in the bag, we are afraid that it may bite many!

The author is Rebecca Pinto – Director at TMSL – a tax, technology firm and co-authored by Palak Goyal – Assistant Manager at TMSL and the views are personal.  Reach TMSL at jigar.doshi@tmsl.in