NON-COMMENSURATE BENEFIT OF TAX RATE REDUCTION – A FIT CASE FOR PROFITEERING

[Dr. Sanjiv Agarwal]

When the tax rates are reduced by the Government, it is incumbent on the suppliers to reduce the price of goods and/or services and such reduction shall be commensurate with the said reduction. If it is not so, it becomes a case for contravention of provisions of section 171 of the CGST Act, 2017.

In one of the cases, the instant one, while the Government reduced the taxes from 28% to 18% w.e.f. 14.11.2017 on products ‘deodorant’, the supplier did not reduced the prices. Once upheld, NAA also imposed penalty on the respondent supplier u/s 171 (3A) of the CGST Act, 2017.

SHRI RAHUL SHARMA, M/S. LOCAL CIRCLE INDIA PVT. LTD., DIRECTOR GENERAL OF ANTI-PROFITEERING, INDIRECT TAXES AND CUSTOMS, VERSUS M/S. MCNROE CONSUMER PRODUCTS PVT. LTD. [2020 (3) TMI 558 - NATIONAL ANTI-PROFITEERING AUTHORITY]  dated 06.03.2020, complainant filed a complaint  against the Respondent in respect of supply of Deodorant ‘Wild Stone Deo Chrome BX 120 ml. and stated that the said product had been shipped by the Respondent to M/s. Big Bazar, Inderlok on 28.09.2017 under Purchase Order No. 8114615731 with the MRP of ₹ 250/-, was again supplied on 04.12.2017 under purchase Order No. 81.15262327 with the MRP of ₹ 250/- and on 16.06.2018 it was again sold under Purchase Order No. 4518224285 with the same MRP of ₹ 250/-. It was alleged that the Respondent had not pass on the benefit of reduction in the GST rate from 28% to 18% w.e.f. 15.11.2017 which was reduced vide Notification No.  41/2017-Central Tax (Rate) dated 14.11.2017 in terms of Section 171 of the CGST Act ,2017 and instead, he had increased the base price of ‘Wild Stone Deo Chrome BX 120 ml. Deodorant to maintain the same MRP of ₹ 250/-.

The matter was referred to DGAP for investigation who submitted its report dated 04.09.2019 and 27.02.2020 covering the period 15.11.2017 to 31.03.2019.

The respondent submitted that it  had reduced the prices of its products post rate reduction in GST vide Notification No. 41/2017-Central Tax (Rate) dated 14.11.2017 and the same had been duly communicated to all the channel partners. The said reduction was done w.e.f. 28.11.201’7 due to the reason that till that date, supplier respondent was analysing the impact of the above said Notification on its products and was computing the revised MRPs and thereafter it had communicated the revised MRPs to its channel partners. It had also distributed stickers of the revised MRPs for putting them on the stocks available with the channel partners and all the fresh sales made by him had been done on the reduced MRPs.

The DGAP observed that  the Central Government had reduced the GST rate on the goods supplied by the Respondent from 28% to 18% w.e.f. 15.11.2017, vide S. No. 57A, and 60A of the Schedule III appended to the Notification No. 41/2017-Central Tax (Rate) dated 14.11.2017. This was a matter of fact which had also not been contested by the Respondent. The DGAP had claimed that the legal requirement was abundantly clear that in the event of benefit of ITC or reduction in the rate of tax, there must be a commensurate reduction in the prices of the goods or services supplied. Such reduction in price could only be in terms of money, so that the final price payable by a recipient got reduced commensurate with the reduction in the tax rate or benefit of ITC. This was the only legally prescribed mechanism to pass on the benefit of ITC or reduction in the rate of tax under the GST regime and there was no other method which a supplier could adopt to pass on such benefits.

According to DGAP findings,  the Respondent had increased the base price of the above product after GST rate reduction (post 14.11.2017) and then reduced the same but still kept the increased base price (i.e. ₹ 120.91 as against ₹ 115.72) as compared to the pre-GST rate reduction price. The DGAP therefore, concluded that the claim of the Respondent was incorrect.

As per the invoices submitted by the Respondent, the DGAP observed that the Respondent had increased the base prices of the goods when the rate of GST was reduced from 28% to 18% w.e.f. 15.11.2017 and the commensurate benefit of GST rate reduction was not passed on to the recipients. On the basis of aforesaid pre and post-reduction GST rates and the details of the outward taxable supplies (other than zero rated, nil rated and exempted supplies) of all the products supplied during the period from 15.11.2017 to 31.03.2019, as furnished by the Respondent, the amount of net higher sales realization due to increase in the base prices of the impacted goods, despite the reduction in the GST rate from 28% to 18% or in other words, the profiteered amount was computed as ₹ 21,94,96,828/-.

This amount had been arrived at by comparing the average of the base prices of all the products sold by the Respondent during the period from 01.10.2017 to 14.11.2017, with the actual invoice-wise base prices of all the products sold during the period from 15.11.2017 to 31.03.2019 after the GST rate reduction from 28% to 18%. The excess GST so collected from the recipients by the Respondent, has also been included in the aforesaid profiteered amount as the excess prices collected from the recipients also included the GST charged on the increased base prices. He also furnished the details of place (State or Union Territory) of supply-wise break-up of the total profiteered amount of Rs.  21,94,96,828/-.

DGAP concluded that  the base prices of the goods under investigation had been increased post GST rate reduction w.e.f. 15.11.2017 and thus, by increasing the base prices of the goods consequent to the reduction in the GST rate, the commensurate benefit of reduction in the GST rate from 28% to 18%, was not passed on to the recipients by the Respondent. The total amount of profiteering covering the period from 15.11.2017 to 31.03.2019 has been worked out to be ₹ 21,94,96,828/-. Hence, provisions of Section 171 (1) of the CGST Act, 2017 were contravened by the Respondent.

The NAA considered the DGAP report, submissions and records. The issues to be addressed by NAA were:

1. Whether the Respondent is liable to pass on the benefit of tax reduction w.e.f. 15.11.2017 to its buyers?
2. Whether there has been any violation of the provisions of Section 171 of the CGST Act, 2017 by the ‘Respondent?
3. If yes, then what is the quantum of profiteered amount?   

The NAA concluded that  the profiteered amount is determined as ₹ 21,84,79,790/- in terms of Rule 133 (1) of the CGST Rules, 2017, during the period from 15.11.2017 to 31,03.2019, as has been computed by the DGAP. The Authority under Rule 133 (3) (a) of the CGST Rules, 2017 ordered that the Respondent shall reduce its prices commensurately in terms of the Rule. The respondent was also directed to deposit an amount of ₹ 21,84,79,790/- in the CWF of the Central and the concerned State. Government, as the recipients were not identifiable, as per the provisions of Rule 133 (3) (c) of the Rules alongwith 18% interest payable from the dates from which the above amount was realised by him from its recipients till the date of its deposit. The said amount shall be deposited within a period of 3 months from the date of passing of this order failing which it shall be recovered by the concerned Commissioners CGST/SGST. The State/Union Territory wise amount of benefit to be deposited by the Respondent in the concerned CWF was also identified.

Further, the Respondent had denied the benefit of tax reduction to the customers in contravention of the provisions of Section 171 (1) of the CGST Act, 2017 and had thus profiteered as per the explanation attached to Section 171 of the above Act. Therefore, the Respondent was apparently liable for the imposition of penalty under Section 171 (3A) of the. CGST Act, 2017.

The Authority as per Rule 136 of the CGST Rules 2017 directed the Commissioners of CGST/SGST to monitor this order under the supervision of the DGAP by ensuring that the amount profiteered by the Respondent as ordered by this Authority is deposited in the CWFs of the Central and the State Governments.