2024 (1) TMI 1248 - DELHI HIGH COURT

Profiteering - Constitutional validity of Section 171 of the Central Good and Services Tax Act, 2017 and Rules 122, 124, 126, 127, 129, 133 and 134 of the Central Good and Services Tax Rules, 2017 - legality of the notices proposing imposition or orders imposing penalty issued by the National Anti-Profiteering Authority (NAA) under Section 122 of the Act, 2017 read with Rule 133(3)(d) of the Rules, 2017 - Direction to pass on the commensurate benefit of reduction in the rate of tax or the Input Tax Credit to its consumers / recipients along with interest.

Principles for adjudicating the constitutionality of an enactment - HELD THAT:- A Statute can be declared as unconstitutional only if the Petitioners make out a case that the Legislature did not have the legislative competence to pass such a Statute or that the provisions of the Statute violate the Fundamental Rights guaranteed under Part-III of the Constitution of India or that the Legislature concerned has abdicated its essential legislative function or that the impugned provision is arbitrary, unreasonable or vague in any manner. D.D. Basu in Shorter Constitution of India (16th Edn., 2021) has enumerated the grounds on which a law may be declared to be unconstitutional as follows:- (i) Contravention of any fundamental right, specified in Part III of the Constitution. (ii) Legislating on a subject which is not assigned to the relevant legislature by the distribution of powers made by the Seventh Schedule, read with the connected articles. (iii) Contravention of any of the mandatory provisions of the Constitution which impose limitations upon the powers of a legislature e.g. Article 301. (iv) In the case of a State law, it will be invalid insofar as it seeks to operate beyond the boundaries of the State. (v) That the legislature concerned has abdicated its essential legislative function as assigned to it by the Constitution or has made an excessive delegation of that power to some other body.

It must also be kept in mind that there is always a presumption in favour of constitutionality of an enactment and the burden to show that there has been a clear transgression of constitutional principles is upon the person who attacks such an enactment. Whenever constitutionality of a provision is challenged on the ground that it infringes a fundamental right, the direct and inevitable effect/consequence of the legislation has to be taken into account.

Court's Approach while dealing with tax or economic laws - HELD THAT:- The Courts have consistently held that the laws relating to economic activities have to be viewed with greater latitude than laws touching civil rights and that the Legislature has to be allowed some play in the joints because it has to deal with complex problems. The Supreme Court in its recent judgment in UNION OF INDIA & ORS. VERSUS VKC FOOTSTEPS INDIA PVT LTD. [2021 (9) TMI 626 - SUPREME COURT] has reiterated the approach that the Courts have to adopt while dealing with tax or economic regulations - It was held that The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of any of its provisions. If any crudities, inequities or possibilities of abuse come to light, the legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must guide and inspire the legislature in dealing with complex economic issues.

Act, 2017 marks a paradigm shift in the field of indirect taxes - HELD THAT:- The Act, 2017 levies a single tax on the supply of goods or services on the value addition at each stage of the supply chain from purchase of raw materials, manufacture of product or import, till the finished good reaches the hands of the consumer - The Goods and Service Tax is a destination-based tax and is levied at the point of consumption. Accordingly, the taxes get accumulated with the original price and due to the effect of Input Tax Credit, the cascading effect i.e. tax on tax is removed - Consequently, the intent of the Act, 2017 is to provide a common national market, boost productivity, increase competitiveness, broaden the tax base and make India a manufacturing hub.

Section 171 mandates that tax foregone has to be passed on as a commensurate reduction in price - HELD THAT:- Section 171 of the Act, 2017 mandates that whatever is saved in tax must be reduced in price. Section 171 of the Act, 2017 incorporates the principle of unjust enrichment. Accordingly, it has a flavor of consumer welfare regulatory measure, as it seeks to achieve the primary objective behind the Goods and Services Tax regime i.e. to overcome the cascading effect of indirect taxes and to reduce the tax burden on the final consumer. Consequently, the judgments of AHMEDABAD URBAN DEVELOPMENT AUTHORITY VERSUS SHARAD KUMAR JAYANTIKUMAR PASAWALLA AND OTHERS [1992 (5) TMI 175 - SUPREME COURT], M/S. SHREE BHAGWATI STEEL ROLLING MILLS VERSUS COMMISSIONER OF CENTRAL EXCISE & ANOTHER [2015 (11) TMI 1172 - SUPREME COURT], relied on by the Petitioners, are not applicable as they deal with the validity of delegated authority imposing tax/fee or charging interest on delayed payment of tax in the absence of empowering provision in the statute.

Section 171 falls within the law-making power of the Parliament under Article 246A - HELD THAT:- This Court is of the view that the anti- profiteering mechanism as incorporated in Section 171 of the Act, 2017 is in the exercise of the Parliament’s power to legislate on ancillary and necessary aspects/matters of Goods and Services Tax apart from being a social welfare measure as it amplifies and extends the earlier concept of barring persons to undertake exercise of collecting monies from the consumers by false representation - this Court is of the view that Section 171 of the Act, 2017 falls within the law-making power of the Parliament under Article 246A of the Constitution dealing with the ancillary and necessary aspects of Goods and Services Tax and is not beyond the legislative competence of the Parliament.

Section 171 lays out a clear legislative policy and does not delegate any essential legislative function - HELD THAT:- Section 171 of the Act, 2017 lays out a clear legislative policy. This Court is of the view that the necessary navigational tools, guidelines as well as checks and balances have been incorporated in the provision itself to guide any authority tasked with ensuring its workability. Consequently, Section 171 of the Act 2017 neither delegates any essential legislative function nor violates Article 14 of the Constitution of India - on a conjoint reading of Sections 171(2) and 171(3) of the Act, 2017, it is evident that the powers conferred on NAA by the Central Government under Rule 126 of the Rules, 2017 were intended by the Legislature to be exercised by the NAA itself. In fact, in exercise of its powers under Rule 126 of the Rules, 2017, NAA has issued the ‘National Anti-Profiteering Authority: Methodology and Procedure, 2018’ dated 28th March, 2018.

The Supreme Court in SAHNI SILK MILLS (P) LTD. VERSUS ESI. CORPN. [1994 (7) TMI 312 - SUPREME COURT] while discussing the maxim of delegatus non potest delegare has held that, “The basic principle behind the aforesaid maxim is that “a discretion conferred by statute is prima facie intended to be exercised by the authority on which the statute has conferred it and by no other authority, but this intention may be negatived by any contrary indications found in the language, scope or object of the statute”. Therefore, the principle of delegatus non potest delegare is not applicable to the present batch of matters.

Further, Section 166 of the Act, 2017 provides that every rule made by the Government in exercise of its powers under Section 164 of the Act, 2017 shall be laid before each house of the Parliament and that if both Houses agree to make any modification in the rule or both Houses agree that the rule should not be made, the rule shall thereafter have effect only in such modified form or be of no effect as the case maybe - the Executive by framing Rule 126 of the Rules, 2017 has in no manner encroached upon the jurisdiction of the Parliament. The Petitioners, throughout the hearing of the case, have repeatedly pointed out that the NAA has adopted varied approaches with regard to entities dealing with similar products in identical circumstances. If that is the case, then, it may make the orders passed by NAA bad, but would not invalidate either Section 171 or the Rules framed thereunder. Further, as the substantive mandate under Section 171(1) is itself a sound guiding principle for the framing of Rules and the functioning of NAA, the argument that Rule 126 suffers from excessive delegation is untenable in law.

Impugned provisions are not a price fixing mechanism - they do not violate either Article 19(1)(g) or Article 300A of the Constitution - HELD THAT:- Section 171 of the Act, 2017 has been incorporated with the intent of creating a framework that ensures that the benefit reaches the ultimate consumer. There cannot be any room for allowing unjust retention of benefit of reduction in rate of tax or benefit of input tax credit with the manufacturer/supplier/distributor. The reliance placed by the petitioners on the judgment of COMMISSIONER OF INCOME-TAX, BANGALORE VERSUS BC SRINIVASA SETTY (AND OTHER APPEALS) [1981 (2) TMI 1 - SUPREME COURT] is completely misconceived as both these judgments were passed specifically in the context of levy of taxes. As held hereinabove, Section 171 of the Act, 2017 does not levy any tax on supplies and hence these judgments do not apply to the present batch of matters. Consequently, the impugned provisions are not a price fixing mechanism and they do not violate either Article 19(1)(g) or Article 14 or Article 300A of the Constitution of India.

Reference to Anti-Profiteering provisions of Australia and Malaysia is misconceived - HELD THAT:- The ‘price’ aspect comes into play in the context of Section 171 of the Act, 2017 only when it comes to the manner in which the principal obligation of passing on benefits as aforesaid, is to be carried out i.e., by way of commensurate reduction of prices. Consequently, in the case of Section 171, there is no intent of any over- riding regulation on ‘price exploitation’ like in the case of the Australian Trade Practices Act referred to by the petitioners - the reference made by the petitioners to the Malaysian Price Control and Anti-Profiteering Act, 2011 is also misplaced as the said Act, according to the petitioner’s own submission, prohibits suppliers from ‘making unreasonably high profit’. By its very nature, the Malaysian Act controls pricing unlike Section 171 of the Act, 2017 which does not seek to regulate the pricing of the goods and services or the profits of the suppliers. Consequently, the reference to Anti-Profiteering provisions of Australia and Malaysia is misconceived.

No fixed/uniform method or mathematical formula can be laid down for determining profiteering - HELD THAT:- The expenses in a real estate project are not uniform throughout the life cycle of the project and the eligibility of credit depends on the nature of the construction activity undertaken during the particular period. As it is an admitted position that neither the advances received nor the construction activity is uniform throughout the life cycle of the project, the accrual of Input Tax Credit is not related to the amount collected from the buyers. This Court is in agreement with learned counsel of the petitioners that one needs to calculate the total savings on account of introduction of Goods and Services and Tax for each project and then divide the same by total area to arrive at the per square feet benefit to be passed on to each flat buyer. This would ensure that flat-buyers with equal square feet area received equal benefit. The Court, while hearing the present batch of matters on merits, shall take the aforesaid direction/interpretation into account.

It is the prerogative of the legislature to decide how the benefit is to be passed on the consumers - HELD THAT:- It is settled law that it is the prerogative of the Legislature to decide the manner as to how the reduction in rate of tax or the benefit of Input Tax Credit is to be passed on to the consumer - In cases for period prior to 31st December, 2017, the erstwhile Rule 2(m) of the Legal Metrology (Packaged Commodities) Rules, 2011 which provided detailed instructions for rounding off of the MRP would be applicable. Similarly, Rule 6(1)(e) of the above Rules as amended in 2017 with effect from 01st January, 2018 to 31st March, 2022 provides that the retail price of the package shall clearly indicate that it is the MRP inclusive of all taxes and the price in rupees and paise be rounded off to the nearest rupee or 50 paise would be applicable. Consequently, there would be no legal impossibility in reducing the MRP even in such cases. There is nothing inconsistent in Section 171 with such rounding off.

Act 2017 rightly does not fix a time period durng which price-reduction has to be offered - HELD THAT:- If, conceptually, the reduction of tax rate has taken place on a specified date and there are no justified variations in the cost price or other factors for offsetting such reduction in the prices for a particular period of time, clearly for that period a reduced price must govern the transaction. This Court is of the view that providing for a particular period of time for operation of the provisions would be not be in conformity with the scheme and intent of the Act, 2017 itself.

Section 64A of the Sale of Goods Act is not applicable to the obligation under section 171 - HELD THAT:- Tax reduction is given by sacrificing tax revenue and hence the Governments are legally competent to direct the suppliers to pass on the benefit of such tax reduction to the consumers after its notification. Any contract made in violation of public policy of passing on the benefit would be void. Consequently, all contracts (a) whether they are pending to be performed or (b) executed after tax reduction and/or (c) have already been concluded before tax reduction, have to implemented keeping in view the mandate enshrined in Section 171 of the Act, 2017.

A statutory provision cannot be struck down on the ground of possibility of abuse - HELD THAT:- During the course of hearing, learned counsel for the petitioners advanced a number of hypothetical situations to suggest that there is a possibility of abuse of Section 171 of the Act, 2017. However, it is settled law that Acts and their provisions are not to be declared unconstitutional on the fanciful theory that power would be exercised in an unrealistic fashion or in a vacuum or on the ground that there is an apprehension of misuse of statutory provision or possibility of abuse of power. It must be presumed, unless the contrary is proved, that administration and application of a particular law would be done “not with an evil eye and unequal hand”.

To not compare taxes levied after the introduction of the Act, 2017 with a basket of distinct indirect taxes applicable before the operation of the Act would go against the intent and objective of Act, 2017 - HELD THAT:- There was multiplicity of taxes as they were levied on the same supply system. This had a cascading effect as there was no provision for set off. The Hon’ble Prime Minister at the launch of Goods and Services Tax stated “If we take into consideration the 29 states, the 7 Union Territories, the 7 taxes of the Centre and the 8 taxes of the States, and several different taxes for different commodities, the number of taxes sum up to a figure of 500! Today all those taxes will be shred off to have ONE NATION, ONE TAX right from Ganganagar to Itanagar and from Leh to Lakshdweep”.

Additionally, a plethora of non-tariff barriers like octroi, entry tax, check posts etc. hindered free flow of trade throughout the country and this entailed a high compliance cost for taxpayers. The Act, 2017 has subsumed the earlier catena of indirect taxes (Central as well as State indirect taxes), inasmuch as, it levies a single tax on the supply of goods and services. Consequently, the submission of learned senior counsel for the Petitioner in W.P.(C) 1171/2020 that Section 171(1) of the Act, 2017 does not contemplate a comparison of the taxes levied after the introduction of the Act, 2017 with a basket of distinct indirect taxes applicable on goods and services before the operation of the Act goes against the grain, intent and object of the Act, 2017.

There is no vested right of appeal and an appeal is a creature of the statute - HELD THAT:- It is well settled that there is no vested right of appeal and an appeal is a creature of the Statute. Right of appeal is neither a natural nor an inherent right vested in a party. It is a substantive statutory right regulated by the Statute creating it. To provide for an appeal or not under a Statute is a pure question of legislative policy - a robust mechanism in conformity with the constitutional requirements is in place for dealing with grievances of breach of Section 171(1) of the Act, 2017 and hence, it cannot be said that there is no judicial oversight over the decisions of NAA.

There is no requirement of Judicial member in NAA - HELD THAT:- While this Court is in agreement with the submission of the Petitioners that the provision of a second or casting vote to the Chairman in the event of a tie/equality of votes as was given in Rule 134(2) of the Rules, 2017 is impermissible, yet as the Respondents have stated that the said provision has never been used, this Court does not deem it necessary to delve into a detailed discussion of the same - the Petitioners have challenged the validity of the constitution of the NAA on account of absence of a gazette notification as allegedly required under Section 171(2) of the Act, 2017. This Court is of the opinion that this issue does not affect the constitutional validity of the impugned section which is presently under consideration and so this issue is not being dealt with in the present judgment.

Rule 124 is in consonance with Article 50 - there is no scope for Governmental interference in functions exercised by NAA - HELD THAT:- This Court is of the view that Rule 124 of the Rules, 2017 is in consonance with Article 50 of the Constitution, inasmuch as, selection to NAA is made on the recommendation by a Selection Committee constituted by the Goods and Services Tax Council which is a constitutional body. Similarly the services of the Chairperson and members of NAA can be terminated only with the approval of the Chairman of the Goods and Services Tax Council. Consequently, the members of NAA are free to carry out their function as they deem fit and there is no scope whatsoever for any Governmental interference in the functions exercised by NAA.

Rule 133 to the extent it provides for levy of interest and penalty is within the rule making power of the Central Government - HELD THAT:- This Court is of the view that Section 171 of the Act, 2017 is broad enough to empower the Central Government to prescribe penalty and interest to ensure that the suppliers are deterred from pocketing the benefits meant for the consumers when taxes are foregone by the Government. Merely empowering NAA to direct returning of the amounts so pocketed by the supplier/registered person would not have a sufficient deterrent effect on deviant behavior unless interest and penalty are levied to prevent such actions from taking place in the first place. The width and amplitude of Section 171 by which the authority is empowered to ensure that reduction in tax rate or the Input Tax Credit availed results in commensurate reduction in the price of goods or services clearly encompasses within it the power to ensure that such conduct which leads to profiteering does not take place.

Rule 133(3)(b)&(d) of the Rules, 2017 which empower the authority to levy interest @ 18% from the date of collection of the higher amount till the date of the return of such amount as well as imposition of penalty are intra vires and within the Rule making power of the Central Government.

GST collected on the additional realization has a rightly been included in the profiteered amount - HELD THAT:- Both the Central as well as the State Government had no intent of collecting additional Goods and Services Tax on the higher price as they had sacrificed their revenue in favour of the buyer. By compelling the buyers to pay the additional Goods and Services Tax on a higher price, the supplier has not only defeated the intent of the Governments but has also acted against the interest of the consumer and therefore, the Goods and Services Tax collected by him on the additional realization has rightly been included in the profiteered amount.

Time limit for furnishing of report by DGAP is directory and not mandatory - HELD THAT:- The anti-profiteering provisions in the Act, 2017 and the Rules, 2017 are in the nature of a beneficial legislation as they promote consumer welfare. The Courts have consistently held that beneficial legislation must receive liberal construction that favors the consumer and promotes the intent and objective of the Act. That being the scenario, it cannot be said that the proceedings as a whole abate on lapse of time limit of furnishing of report by DGAP. The Supreme Court in P.T. RAJAN VERSUS T.P.M. SAHIR & ORS. [2003 (9) TMI 765 - SUPREME COURT] has held that “It is well-settled principle of law that where a statutory functionary is asked to perform a statutory duty within the time prescribed therefore, the same would be directory and not mandatory.” and that “a provision in a statute which is procedural in nature although employs the word “shall” may not be held to be mandatory if thereby no prejudice is caused.” Consequently, the time limit provided for furnishing of report by DGAP is directory in nature and not mandatory.

Expansion of investigation beyond the scope of the complaint is not ultra vires the statute - HELD THAT:- Section 171 of the Act, 2017 is widely worded and does not limit the scope of examination to only goods and services in respect of which a complaint is received. The scope of powers of the DGAP is provided for in Rule 129 of the Rules, 2017. From a reading of the said Rule especially the expression ‘any supply of goods or services’ used in sub-rule (2) of Rule 129, it is apparent that the scope of the DGAP’s powers is very wide and is not limited to the goods or services in relation to which a Complaint is received. The word ‘any’ includes within its scope ‘some’ as well as ‘all’ - In any event, the ignorance of the consumer or lack of information or surrounding complexity in the supply chain cannot be permitted to defeat the objective of a consumer welfare regulatory measure and it is in this light that the subject provision is required to be construed.

Conclusion - The constitutional validity of Section 171 of Act, 2017 as well as Rules 122, 124, 126, 127, 129, 133 and 134 of the Rules, 2017 is upheld. This Court clarifies that it is possible that there may be cases of arbitrary exercise of power under the anti-profiteering mechanism by enlarging the scope of the proceedings beyond the jurisdiction or on account of not considering the genuine basis of variations in other factors such as cost escalations on account of which the reduction stands offset, skewed input credit situations etc. However, the remedy for the same is to set aside such orders on merits. What will be struck down in such cases will not be the provision itself which invests such power on the concerned authority but the erroneous application of the power.

List the matters before the Division Bench-I for appropriate directions on 8th February, 2024.