TMI Blog2019 (11) TMI 1084X X X X Extracts X X X X X X X X Extracts X X X X ..... Rules, 2017 as the said Respondent has failed to pass on the benefit of rate reduction to his customers. The respondent no. 2 who is the seller of the product has clearly increased the base price of the product. But as the benefit of ITC was not available to him post 27.07.2018, so the reversal of ITC on the closing stock was extra cost to him - as seen from the records reversal of ITC by him is more than excess realisation on closing stock after deniel of ITC benefit w.e.f. 27.07.2018, therefore no profiteering can be concluded on his part and hence, section 171(1) does not hold good in respect of the respondent. - This authority accepts the report of DGAP and holds that anti-profiteering provisions contained in section 171(1) of CGST Act is not attracted in case of Respondent no. 2 (who is seller) Penalty - HELD THAT:- It is also evident from the above narration of facts that the Respondent has denied benefit of rate reduction to the buyers of the product Sanitary Napkin in contravention of the provisions of Section 171 (1) of the CGST Act, 2017 and has thus resorted to profiteering, which is an offence under section 171 (3A) of the CGST Act, 2017 and therefore, he will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GST Rules, 2017 was issued on 24.10.2018, calling upon the Respondents to reply as to whether they admitted that the benefit of GST rate reduction had not been passed on to the recipients by way of commensurate reduction in prices and if so, to suo-moto determine the quantum thereof and indicate the same in their reply to the notice along with all supporting documents. The Respondents were also given an opportunity to inspect the non-confidential evidences/information furnished by the above Applicants. 5. The DGAP in his Report hasstated that the Respondent No. 1 made following statements before him:- a) He had immediately given effect to the reduction in GST rate from 12% to Nil on sanitary napkins and accordingly, had reduced the Maximum Retail Price (MRP) of the said goods, to pass on the net benefit of GST rate reduction to the end consumers. b) Post 26.07.2018, he was not eligible to claim/avail input tax credit (ITC) on inputs and input services related to sanitary napkins and therefore, input taxes had become part of the cost of such goods and hence he increased his base price for the distributors in respect of the supplies post 26 07 2018, but the price to the u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 075875 dated 19.07.2018 as ₹ 35/- which was reduced to ₹ 34/- by the Respondent No. 1. when the GST rate was reduced to Nil with effect from 27.07 2018. c) For the stocks purchased prior to 27.07.2018, a dealer could not alter the MRP but the fact of MRP being reduced from ₹ 35/- to ₹ 34/- was communicated to him by the Respondent No. 1 and he had sold the goods within the revised MRP of ₹ 34/-, in compliance the relevant rules and regulations. d) He was not eligible to retain the ITC in respect of the stock held as on 26.07.2018 and consequently, he realised that the loss of ITC would become cost to him and would increase the purchase or procurement price. But he did not increase his selling price to the customers after the reduction in GST rate and maintained the same selling price, despite the increase in cost on account of non-availability of ITC in respect of the stock procured prior to 27.07.2018, and thus passed on the benefit of the reduction in GST rate by way of adopting the revised MRP and not recovering the additional cost which arose on account of non-availability of ITC for the stock procured prior to 27.07.2018. e) The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nil GST Amount (Rs.) H = F*G 03.56 0.00 Selling Price after discount (Rs.) I = F + H 33.25 33.25 Difference in base price (Rs.) (33.25 - 29.69) = 03.56/- 8. The DGAP also mentioned that while determining the ratio of ITC in respect of sanitary napkins as a percentage of the taxable turnover from sanitary napkins supplied during the period July, 2017 to 26.07.2018, the ITC on closing stock as on 26.07.2018 had to be excluded and accordingly the ITC amounting to ₹ 180.73 crore (₹ 192.98 crore - ₹ 12.25 crore) was available to the Respondent No. 1 which was approximately 9.4% of the taxable turnover from sanitary napkins during the same period minus the value of closing stock as on 30.06.2017 (₹ 1994.28 crore - ₹ 75.81 crore = ₹ 1,918.47 crore), when the GST rate on sanitary napkins was reduced from 12% to Nil. Since ITC was not available with effect from 27.07.2018, the computation of ratio of ITC to the taxable turnover of the Responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surate selling price with the actual invoice-wise selling price during the period 27.07.2018 to 30.09.2018. Accordingly. the amount of net higher realisation due to increase in base price beyond 9.4% has been worked out. The DGAP also mentioned that from outward supplies as submitted by the Respondent No. 1 for the period 27.07.2018 to 30.09.2018, it was found that he had sold 81 items during the said period and out of the said 81 items,73 items were sold by him during the period 01.07.2018 to 26.07.2018. After scrutiny of the Respondent No.1 s outward supplies during the period April, 2018 to June, 2018, the DGAP noticed that the remaining 8 items (81-73) were sold during the period of April, 2018 to June, 2018 and accordingly the profiteered amount had been arrived at by comparing the commensurate prices of all the said 81 items with the actual selling prices or base prices of the said items sold during the period 27.07.2018 to 30.09.2018. The DGAP in his Report stated that the profiteered amount was estimated at ₹ 8,50,029/- for Canteen Stores Department (CSD) outlets and ₹ 42,61,68,552/ -for outlets other than CSD outlets. The place of supply (State or Union Terr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37) 79,59,779.41 Total 42,70,18,5811/- 11. The DGAP based on the outward supplies of sanitary napkins during the period 01.07.2018 to 30.09.2018 in respect of the Respondent No. 2 observed that he had increased the base price of the goods in question when the rate of GST was reduced from 12% to Nil. On account of the reduction in GST rate from 12% to Nil w.e.f. 27.07.2018, the ITC reversed on the closing stock held as on 26.07.2018 had become cost to the Respondent No. 2 and no ITC was available as sanitary napkins were exempted. Hence, the Respondent No. 2 was not required to pay any GST on supply of sanitary napkins after 27.07.2018 and therefore the profiteered amount was limited only to the closing stock on which credit was available in the pre-GST rate reduction period. The excess realisation from the closing stock (as on 26.07.2018) sold during the period 27.07.2018 to 30.09.2018, as compared with the ITC reversed on the said stock and the difference, if any. would be the amount of profiteering and such excess realisation came to ₹ 19,50,494/- as calculated by the DGAP. It has also been informed by the DG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J J DGAP Incorrect % age increase in base price Base price pre-exemption Base price post-exemption % age increase by J J Base price pre-exemption Base price post-exemption % age increase by DGAP A B C=(B-A)/A D E F=(E-D)/D G=F-C Stayfree Cotton Wings 27.90 30.36 8.82% 21.25 30.36 42.86% 34.04% 3302007327 3302008171 Basis not provided 3302008171 The above Respondent has also enclosed a copy of the invoice to show that the price charged by him during the pre-exemption period to Apollo Hospital was ₹ 27.90. (b) The Respondent has also stated that the percentage increase of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32.21 32.12% 22.93% 2704019601 2704024125 Basis not provided 2704024125 14. The Respondent vide his written submissions dated 24.04.2019 has stated that he supplies his products through various distribution channels namely: a. General : which includes wholesale distributors across all the states and 80% of the sales are in this category. b. Institutional : The supplies are to hospitals, medium and large institutions and Canteen Stores Department (CSD) owned by Government of India. c. Key Accounts : Large retailers such as D Mart, Big Bazar and Reliance retail and also includes e-commerce operators. d. Others : Sales other than a, b, c channels. e. Exports: Sales to countries outside India. 15. He further stated that he sells his products through various product channels as given above and while making sales in the trade chain, the price at which products are sold to a distributor depends on which product channel it is a part of. Moreover, prices to a distributor would also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (Appeals) (2007) 1 SCC 781 = 2006 (12) TMI 82 - SUPREME COURT Hero Cycles (Pvt.) Ltd. vs. CIT, (2015) 16 SCC 359 = 2015 (11) TMI 1314 - SUPREME COURT where the principle of commercial expediency was interpreted. 17. He further submitted that the complaints on the basis of which the DGAP investigation was initiated were not maintainable and the proceedings which have been initiated on the basis of such complaints were completely without jurisdiction and deserved to be dropped as the complaints had not been supported with any credible evidence and had made an unfounded and unsubstantiated allegation against him and in the absence of any admissible evidence, there could have been no basis to arrive at a prima facie determination that the Respondent No. 1 had indulged in profiteering. 18. He further submitted that once the DGAP had arrived at a finding that the Respondent No. 1 had reduced the MRP of the goods concerned, as evidenced in Para 21 of the DGAP s Report, the basis of the complaints that there was no reduction of prices is negated and therefore, having given such a finding, the DGAP should have concluded that no profiteering has been done by the Respondent N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 and 12.03.2019. 21. The Respondent No. 1 has relied upon the judgment of the Hon ble Delhi High Court in CCE v. SG Engineers 2015 (322) ELT 204 (Del.) = 2013 (7) TMI 905 - DELHI HIGH COURT wherein it was held that where the order does not notice the relevant facts, it was a cryptic order without any reasons and such an order was not sustainable for violation of principles of natural justice. He submitted that there were various flaws and inconsistencies in the methodology adopted by the DGAP to compute the alleged profiteering as he had sold only 52 SKUs between 27.07.2018 to 30.09.2018 and the Report mentions 81 SKUs, which was incorrect and erroneous. 22. He further claimed that if he had broadly passed on more than the commensurate benefits of reduction of tax, then it should be considered as good compliance with respect to each customer without looking at the price of each SKU microscopically as has been sought to be done in the Report. He mentioned that pricing of products is a complex exercise and products were usually not priced individually and in isolation at a unit level and that in a free market, several considerations such as those of demand and supply, fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y been increased/decreased prior to the GST rate reduction, there would be no rationale of creating an artificial price by resorting to an average (that is, the average base price computed by the DGAP). This is also reasonable as the price after the GST rate reduction must be compared to the last prevailing price prior to such rate reduction. The DGAP had then compared this base price to the actual selling prices of the said SKUs supplied to the same customer in each of the invoices after the GST rate reduction to compute profiteering and replicated this exercise for each of the SKUs and, accordingly, computed profiteering at an SKU level for each of the customers. He had consolidated the data, as explained above, for a particular customer for all SKUs cumulatively and calculated the profiteering across SKUs sold to a particular customer and concluded that the benefit of ₹ 18,92,31,610/- was to be passed on which was more than the commensurate benefit required to be passed on by him under Section 171 of the CGST Act. He further argued that even if he carried out the above calculations without consolidating the data for all SKUs sold to a customer and calculates in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that he had passed on ₹ 4,66,33,038/- in excess of the commensurate benefit required to be passed on under Section 171 of the CGST Act in the case of sales made to all channels other than CSD and in case of CSD sales, he had passed on ₹ 36,53,181/- in excess of the commensurate benefit required to be passed on under Section 171 of the CGST Act, 2017. 29. He further contended that the approach adopted by the DGAP in the Report restricted the right of the Respondent No. 1 to carry on trade freely and amounted to price fixation by the authorities, which was not the intent of the legislation, neither the Constitutional provisions nor the CGST Act empowers the DGAP to get into the realm of price fixation at an individual product / SKU level and that the aim of Section 171 of the CGST Act, 2017 was not to fix price but to prevent profiteering. He said that the term profiteering has been defined in Black s Law Dictionary, which was relied upon by the Hon ble Supreme Court in the case of Islamic Academy of Education v. State of Karnataka (2003) 6 SCC 697, 774 = 2003 (8) TMI 469 - SUPREME COURT as taking advantage of unusual or exceptional circumstances to make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not be imposed on him under Section 29, 122,123, 124, 125, 126 and 127 of the CGST Act read with Rule 21 and 133 of the CGST Rules. 2017. 32. With regard to the notice on penalty as to why his registration under the CGST Act should not be cancelled if the Authority accepted the findings of the Report, the Respondent submitted that Section 29 (2) (a) of the CGST Act, was only potentially applicable provision, which provided that a proper officer may cancel the registration of a person where a registered person has contravened the provisions of the CGST Act or the CGST Rules. Rule 21 (c) of the CGST Rules provided that the registration granted to a person was liable to be cancelled if the said person violated the provisions of Section 171 of the CGST Act or the Rules made thereunder. Rule 133(3)(e) of the CGST Rules also provided that where the Authority determined that a registered person has not passed on the benefit of the reduction in the rate of tax on the supply of goods to the recipient by way of commensurate reduction in prices. the Authority may order, inter alia, cancellation of registration under the CGST Act. Further, it is submitted that cancellation of registr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exempted and attracted NIL rate of GST vide Notification No. 19/2018-Central Tax (Rate) dated 26.07.2018, w.e.f 27.07.2018. However prior to 27.07.2018 this product attracted 12% GST with the benefit of ITC on the inputs and input services which was denied from 27.07.2018 as the product was exempted from levy of tax. The GST paid on the inputs and on input service post rate reduction was a cost to the supplier, hence the base prices of the products would increase to the extent of denial of ITC. Accordingly the DGAP based on the turnover and the ITC available to the Respondent had estimated the ratio of ITC to the taxable turnover as 9.4%. The DGAP vide Annexure 33 and 34 of his Report has arrived at the base prices after taking into account the average price of the product for the period w.e.f. 01.07.2018 to 26.07.2018 i.e. prior to GST rate reduction. These base prices have been loaded with 9.4% and accordingly recalibrated base prices per unit have been arrived at. These recalibrated base prices have been compared with the actual selling prices after the product was exempted and wherever the selling price of the product was more than the recalibrated base prices, it appeared th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2007) 1 SCC 781 = 2006 (12) TMI 82 - SUPREME COURT Hero Cycles (Pvt.) Ltd. vs. CIT, (2015) 16 SCC 359 = 2015 (11) TMI 1314 - SUPREME COURT the Hon ble Supreme Court was dealing with a case of income tax where in a given situation the petitioner was entitled to deduction of interest. In fact while dealing with commercial expediency the Supreme Court had categorically held that it all depended on the facts and circumstances of the respective case. Therefore the reliance placed on a judgement which was entirely different form the facts of the present case is of no use to the Respondent as far as this case is concerned. 39. The contention of the Respondent that the complaints are without jurisdiction is completely misplaced. As per Rule 128 of the CGST Rules the Standing Committee on receipt of an application either from an interested party or from a Commissioner or any other person can examine as to whether the provisions of Section 171 have been violated. In the present case the Application was received from the Commissioner and the Principle Chief Commissioner and on prima facie finding that the provisions of section 171 have been violated it was forwarded for detailed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstruction services. Therefore the question of prescribing any mathematical methodology does not arise but depending on facts of each case the Authority has been determining the mathematical methodology as per the provisions of the above Rule. 41. Further the Respondents claim that the profiteered amount should be entity based and not product based is absolutely irrelevant in as much as the reduction of the tax is on the product and not on the entity. The intention of the law is to benefit the consumer as and when the Government foregoes its revenue by reducing the taxes in the interest of the consumer. Therefore the question of setting off the extra benefit to one consumer as against the other does not arise at all. 42. The Respondent No. 1 has stated that the DGAP s Report does not lay down a proper methodology and has dealt with 81 SKUs when actually he has sold 51 SKUs. The DGAP in his Report dated 08.05.2019 has clearly stated that the difference in SKU has no relevance on the amount of profiteering and his entire calculations have been based on the data provided by the Respondent. The DGAP has in his Report explained how the base prices were recalibrated and how the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion v. State of Karnataka (2003) 6 SCC 697, 774 = 2003 (8) TMI 469 - SUPREME COURT is also not relevant because Section 171 of the CGST Act is a new law that has been introduced in the GST era to protect the interest of the Consumers. The law or the Authority has not questioned the Respondents right to conduct business or to fix the prices of his products but ensures that the benefits provided by the Government through the Respondent are necessarily passed on. The question of retaining these benefits by the Respondent would deemed to be doing injustice to the consumers and thus depriving the consumers of the benefits extended through the Public Exchequer. 45. On perusal of Annexure-33 and 34 of the DGAP Report, it is established beyond any doubt that the Respondent No. 1 had increased the base price w.e.f. 27.07.2019 more than what he was entitled to increase, which clearly shows that he had deliberately in conscious disregard of the provisions of Section 171 of the above Act had resorted to profiteering. Therefore upholding the findings of the DGAP, this Authority finds that the Respondent No. 1 has profiteered to the extent of ₹ 42,70,18,581/- which includes an amoun ..... 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