TMI Blog2020 (1) TMI 1370X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons on the basis of which such an approach can be approved by this Authority. He has also not explained why the above approach was not applied by him at the time of preparing of his Report dated 5-7-2019. Vide Sr. No. 3 of the Table the DGAP has also submitted that an amount of ₹ 4,80,88,937/- can be excluded from the original profiteered amount due to rectification of inconsistency in the sequence followed by him in respect of certain line items in case it is so decided by this Authority. However, no explanation has been given why the above inconsistency cannot be rectified by him in case such an error has taken place. This Authority cannot pass any order on the above issue unless all the facts are placed before it by the DGAP along with the reasons why this inconsistency has taken place. The DGAP has also stated vide Sr. No. 4 of the Table produced, that an amount of ₹ 5,18,75,235/- could be subtracted from the profiteered amount on the ground of rectification of the adopted average price on description wherever comparable product code was used subject to the approval of this Authority. However, no reasons have been given why the above approach was more app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rease/reduction made by the Respondent in respect of such SKU. Documents to be supplied, after which the decision will be made. - I.O. No. 5 of 2019 - - - Dated:- 3-1-2020 - B.N. Sharma, Chairman, J.C. Chauhan And Amand Shah, Technical Member For the Applicant : Bhupinder Goyal, Assistant Director For the Respondent : Anand Nagda, General Manager V. Lakshmikumaran, K. Srikanth, G. Gokul Kishore, D. Macchar and Tushar Mittal, Advs. ORDER 1. This Report dated 5-7-2019 and the supplementary Reports dated 11-12-2019 and 23-12-2019 have been received from the above Applicant (hereinafter referred to as the DGAP) after detailed investigation under rule 129(6) of the Central Goods Service Tax (CGST) Rules, 2017. The brief facts of the case are that it was alleged that the Respondent had not passed on the benefit of reduction in the rate of GST on the Fast Moving Consumer Goods (FMCGs) being supplied by him, when the rate of GST was reduced from 28% to 18% w.e.f. 15-11-2017. The issue of not passing on the benefit of tax reduction was examined by the Standing Committee on Anti-Profiteering under rule 128(1) of the above Rules and it was decided to refer the matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respondent was selling the above products to about 1.300 customers which included (a) General Trade (GT) or Distributors, (b) Modern Trade (MT), (c) E-commerce Platforms, (d) Canteen Stores Department (CSD) and the said products were manufactured either by him (at factories situated in Baddi and Chakan) or by his contract manufacturers. He was also importing goods from outside India. The manufactured as well as the imported products were stock-transferred to various locations from where they were sold to various distributors, modern retailers and Canteen Stores etc. b. That the Respondent has 20 GSTINs as supplier and 4 GSTINs as Input Service Distributor (ISD). Out of the said 20 GSTINs, he had stopped supplies to 7 GSTINs but these GSTINs were still registered for which he was filing NIL Returns. c. That neither section 171 of the Central Goods and Services Tax Act, 2017 nor the Rules framed thereunder provided any guidelines as to how the benefit of reduction in the tax rate was to be passed on to the recipients. Accordingly, he had passed on the benefit of GST rate reduction to his recipients by adopting the following methods:- (i) By reducing the prices of the impacte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 7.8% of MRP. (iii) Higher Grammage / Quantity Increase: The Respondent had passed on the benefit of GST rate reduction on certain SKUs by increasing the quantity of the products while retaining the earlier MRPs. The increase in grammage required to compensate for reduction in the GST rate from 28% to 18% was 8.5%. However, he had increased the grammage by 10% or more in case of all the products. Hence, the benefit passed on by way of higher grammage/quantity in excess of 8.5%, might be adjusted against the benefit required to be passed on in respect of other products. (iv) New Stock Keeping Units (SKUs) including supply of goods not impacted by GST rate reduction (Kajal, Hair oil): The Respondent continuously introduced new innovative products by changing formulation and by improving/changing/adding/modifying the ingredients. Such products would normally have different packing and suitable indication on the packing himself to inform and educate the consumers about such new and improved products. For such products with new product codes, there were no pre-rate reduction identical products, the prices of which could be compared with the prices of the new products introduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es so agreed. Given that taxes did not form part of the price negotiated which the CSD, the supplies made to the CSD should be excluded from the ambit of the ongoing investigation into alleged profiteering. (viii) Sales made to sub-contractor and scrap sales: The Respondent submitted that prices negotiated for these sales were exclusive of GST and the GST applicable on the date of supply was charged on the negotiated prices. Therefore, the sales made to sub-contractors and scrap sales should be excluded from the scope of the present investigation. (ix) Company transfer: The stock transfer of goods or supply of service by the Respondent's one GSTIN to another, should be excluded from the ambit of the present investigation. e. The Respondent also submitted that his prices for different channels of customers, viz., General Trade, Modern Trade, Matrix Business Partners, Direct Salons, Institutional Sales and CSD etc. were different and hence, the pricing for one channel should not be adopted for the pricing for another. f. The Respondent also claimed that in the FMCGs industry, periodic price revisions were usually undertaken every 5-6 months, considering the impact of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ST Council had reduced the GST rate on the goods supplied by the Respondent from 28% to 18% w.e.f. 15-11-2017, vide Sr. No. 57A, 58, 59 and 60A of the Schedule III attached to the Notification No. 41/2017-Central Tax (Rate) dated 14-11-2017, a matter of fact which had also not been contested by the Respondent. Regarding the Respondent's claim that he had passed on the benefit of GST rate reduction to the extent of ₹ 73.59 Crore by way of issuing Credit Notes to his customers viz. distributors/modern retailers etc., a perusal of the claim documents (constituting 50% of total claim value) submitted by the Respondent revealed that these were invoices raised by the Respondent's trade partners for provision of services like advertising, sales promotion, sponsorship and brand promotion etc. to the Respondent, which the Respondent had reimbursed by issuing Credit Notes. Some of the descriptions contained in these credit notes/invoices were mentioned by the DGAP in the Table given below: S. No. Credit Note No. Date Trade Partner's Name Nature/Description of transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and promotion services supplied by his trade partners, could not be considered as the benefit of GST rate reduction w.e.f. 15-11-2017. The DGAP has also claimed that there was no proximity between the date of GST rate reduction and the date of the supply of the service and/or the Credit Notes. The method adopted by the Respondent for calculating the reduction in price and MRP by comparing the pre-GST MRP less pre-GST taxes with the post-GST MRP less GST @18%, for the reason that there was no increase in the price at the time of implementation of GST, was also not consistent with the provisions of section 171 of the Central Goods and Services Tax Act, 2017 read with Chapter XV of the above Rules. 9. The DGAP has also claimed that the Respondent's decision not to increase the MRPs when the tax rates had increased at the time of implementation of the GST, was his voluntary and conscious business decision which could not form the basis for not passing on the benefit of subsequent GST rate reduction w.e.f. 15-11-2017, as the provisions contained in section 171 of the Central Goods and Services Tax Act, 2017 did not provide for any means of passing on the benefit of reduction in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms. However, there was no loss to the Respondent in relative terms as he was still eligible to get the same proportionate refund of the CGST/IGST paid in cash as was available prior to the reduction in the rate of GST. Moreover, such refund of CGST or IGST paid in cash was also a function of and dependent on the amount of input tax credit utilized by the Respondent for discharge of output GST liability and could not always be attributed to the output GST rate. In other words, even after the GST rate reduction, if the input tax credit utilization by the Respondent was reduced, the refund amount might remain the same or it may even increase. The DGAP has also submitted that if one goes by the logic adopted by the Respondent, the prices of goods had to be reduced in case there was an increase in the tax rate (because of availability of more refund). Therefore, the claim of the Respondent to set off the profiteered amount on account of reduction in the absolute amount of refund/incentive/subsidy, was also not acceptable. The Respondent had also sought to exclude the outward sale of the following from the scope of the present investigation: (a) New SKUs introduced after 15-11-2017 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rates and the details of outward taxable supplies (other than zero rated, nil rated and exempted supplies) of the impacted products during the period from 15-11-2017 to 31-12-2018, 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 the profiteering amount came to ₹ 2,16,49,61,535. This said profiteered amount had been arrived at by the DGAP by comparing the customer type-wise average of the base prices of the impugned products sold during the period from 1-10-2017 to 14-11-2017, with the actual invoice-wise base prices of such products sold during the period from 15-11-2017 to 31-12-2018. The excess GST so collected from the recipients, was also included in the aforesaid profiteered amount as the excess price collected from the recipients also included the GST charged on the increased base price. The place (State or Union Territory) of supply wise break-up of the total profiteered amount of ₹ 2,16,49,61,535/-as computed by the DGAP is furnished in the Table given below:- Sl. No. Name of State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16 Jharkhand 20 2,28,81,405 55,51,323 2,84,32,728 17 Karnataka 29 11,06,96,404 6,44,22,022 17,51,18,426 18 Kerala 32 2,55,67,497 67,41,449 3,23,08,946 19 Madhya Pradesh 23 3,48,69,472 1,69,49,615 5,18,19,087 20 Maharashtra 27 29,56,33,071 14,34,19,734 43,90,52,805 21 Manipur 14 24,26,847 39,69,400 63,96,248 22 Meghalaya 17 51,02,941 7,93,658 58,96,599 23 Mizoram 15 25,87,030 19,46,324 45,33,353 24 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Respondent was represented by Sh. Anand Nagda. General Manager-Tax, Sh. V. Lakshmikumaran, Sh. K. Srikanth, Sh. G. Gokul Kishore, Sh. D. Macchar and Sh. Tushar Mittal. Advocates. Further hearings were held on 30-8-2019, 1-10-2019, 30-10-2019 and 27-12-2019 and 1-1-2020. 16. The Respondent has filed written submissions on 30-7-2019, 13-9-2019, 24-10-2019, 5-11-2019 and 27-12-2019 and stated that he was a leading cosmetics group worldwide and has been present in India as a wholly owned subsidiary of M/s L'Oreal S. A., since 1994. He was engaged in the manufacture and supply of various cosmetic products which were broadly grouped under the product categories viz. hair care, hair colour, make up, skin care and luxury products like perfumes and deodorants falling under various HSN codes, mainly HSN codes 3303, 3304 and 3305. He occupied the second position in the beauty industry with a strong portfolio of 14 powerful international brands across all distribution channels, which could be grouped as under: Divisions Channels Products CPD Consumer products Division Mass market channe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Respondent has further stated that he was supplying the above products to more than 1,300 customers grouped under the following categories: (i) General Trade (GT) (Distributors) (ii) Modern Trade (MT) (iii) E-Commerce Platforms (iv) Canteen Stores Department (CSD) it CPC, etc. 19. The above products were either being manufactured by him in his factories located at Baddi and Chakan (Pune) or by his contract manufacturers. The Respondent also imported goods from outside India and the customers of the Respondent either directly sold his products to the consumers or further sold them to other wholesalers and distributors in the market and products eventually reached the consumers through a chain of such distributors, wholesalers and retailers. 20. The Respondent has further stated that with hundreds of SKUs being impacted by the GST rate change, execution of any price change due to such tax rate reduction needed to be carried out after taking into account the requirements of the Legal Metrology law and also the business considerations to avoid massive business disruption and confusion among customers and consumers. Effective from 15-11-2017, the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, the Respondent made all efforts to communicate to its recipients through its huge and robust marketing and sales department to ensure that reduced MRP is effectively implemented in the market L'Oreal also ensured that retailers communicate reduced prices to the end consumers by way of display at stores. Sample photographs evidencing display of various products at reduced prices in retail stores as advised by the Respondent. Jan 2018 onwards The process of MRP change as well as increase in grammage on packs started in November 2017 itself, and as the old MRP printed inventory was phased out and the fresh stock with reduced MRP on artwork became ready it started to hit shelves from January 2018 onwards. The Respondent reduced the prices on invoices issued to its recipients commencing January 2018 onwards for majority of products, and also increased grammage for some. The Respondent offered discounts in the form of post supply price reductions till the time MRP reduction or higher grammage was given. 21. The Respondent has also claimed that he did not agree with the conclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es with MRP less taxes @ 18% GST. b. Tax cost considered in GST regime was GST @ 18% embedded in MRP (less budgetary support, if any, for products manufactured in Baddi). Tax costs considered in pre-GST regime were VAT Excise Duty/CVD on finished/imported products, Excise Duty/Service Tax on inputs/input services in case of products manufactured in Baddi plant (as no credit was available due to area-based exemption, no credit was available). Octroi and Service Tax credit reversal on account of traded products etc. Calculations were made at product level after factoring in the factual position on bifurcation of products into those manufactured in area-based exemption plant (Baddi), those manufactured in Excise Duty paying plant (i.e. Pune) and the imported products. c. Comparison was made between the pre-GST and the GST @ 18% instead of GST @28% and GST @18%, as there was increase in effective rate of tax during the implementation of GST as on July 1, 2017 compared to that under the pre-GST regime, which was not fully factored in by way of increased prices when the GST rate became 28%. Accordingly, in most cases, the reduction in MRP required, worked out to be less than 7.8%, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5months Health Bakers confectioners 17/2018 dated 7-2-2018 15-11-2017 to 31-3-2018 5 months Accordingly, he has submitted that the period of investigation should be restricted to a shorter period. 24. The Respondent has also pointed out discrepancies resulting in reduction of alleged profiteering amount which are tabulated as under: Sl. No. Particulars Amount (Rs. in Crores) (considering weighted average price of latest MRP) Base price discrepancies resulting in inflated alleged profiteering calculation by DGAP 1 Non-averaging of base price where description is used for comparison (1-10-2017 to 14-11-2017 (Goods Desc.) and 1-9-2017 to 30-9-2017 (Goods Desc.) 30.52 2 Rectification of inconsistency in sequence followed for some line items 5.28 3 Adoption of average price of description whereve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... standing that the DGAP first performed Step 1, and where it could not find pre-rate reduction price based on Step 1, it performed Step 2. Similarly, where the pre-rate reduction price was not available even after performing Step 2, the DGAP went ahead with Step 3, and so on. 25. The Respondent has also submitted that while the DGAP has in his Report stated that he has adopted the average prices, the same was not true when it came to comparison on the basis of description. Instead of comparing the weighted average of all line items with same description, the DGAP has adopted the prices as per the first line item with the same description, for instance, the Respondent had supplied product GAR COL NAT SHADE 1 (having product code CNCFR100-DC) from his Gujarat registration to his customer in Gujarat (being a General Trade customer) at a per unit price of ₹ 127.17 excluding GST. Since the product code CNCFR100-DC was not sold in pre-rate reduction period of 1-10-2017 to 14-11-2017, the DGAP went to Step 2, which was by comparing the sale price post 14-11-2017 with the average pre-reduction sale price of product having same description during the period from 1-10-2017 to 14-11-2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opting an average price. He has also submitted that the price actually adopted by the DGAP was not even the average at that description level and hence, rectification was required in the computation made by the DGAP. 26. The Respondent has also mapped the date of product code creation against each of the line items in the pre-rate reduction pivot provided by the DGAP and took an example of the product with description GAR COL NAT SHADE 1 discussed earlier, which is as follows:- General Trade S. No. Goods Code Goods Description HSN MRP Date of Creation Quantity Taxable Amount Average price 425 CNCFR100-9B GAR COL NAT SHADE 1 33059040 175 29-Nov-16 1,116 127,199 113,98 426 CNCFR100-A0 GAR COL NAT SHADE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iately prior to rate reduction might be considered as the pre-rate reduction price. He has further submitted that these prices should be considered instead of the weighted average price of all the products in the pre-rate reduction period, since the investigation was into a serious allegation of profiteering and not a mere mathematical calculation/comparison between the pre- and post-rate reduction prices. 28. He has also contended that adoption of weighted average price of products with latest MRP along with rectification of above discrepancy of non-averaging of base prices alone would result in a substantial reduction in the alleged profiteering by ₹ 30.52 Crore. The Respondent has also computed the latest and the weighted average prices of the products with the latest MRPs and mapped the same against each line items in 35 excel sheets and also mapped the difference between the profiteering as per DGAP's formula (recalculated for weighted average price) and profiteering as per his revised formula applied for latest and average of latest prices. He has first calculated the weighted average prices of the products with latest MRPs at description level and stated that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33049990 95 210 12,655 60.26 3628 SYMAF050-40 Acnofight Facewash 50ml 33049990 99 194.034 12,184,724 62.80 On the basis of the above he has submitted that if the said product code SYMAF050-00 having product description AcnoFight Facewash 50 ml was a correct comparable, then all the other products viz. SYMAF050-30 and SYMAF050-40 having the same description AcnoFight Facewash 50 ml should also be considered as correct comparables and accordingly, the average prices of all the codes having same comparable description must be considered, instead of considering the price of 1 product code alone. Therefore, the Respondent has argued that while the price of comparable code taken by DGAP was ₹ 53.92 p.u., the average price of the products with latest MRP with comparable description must be considered, which in this case was ₹ 62.80 p. u. (for product with MRP of ₹ 99 sold at the price of ₹ 62.80). If the said price of ₹ 62.80 was used as comparable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.5. 59. A.6. 3305 9011, 3305 9019 A.7. Hair Oil A.8 443. A.9. 9606[other than A.10. 9603 10 00] A.11. Brushes (including brushes constituting parts of machines, appliances or vehicles), hand operated mechanical floor sweepers, not motorised, mops and feather dusters; prepared knots and tufts for broom or brush making; paint pads and rollers; squeegees (other than roller squeegees) [other than brooms and brushes, consisting of twigs or other vegetable materials bound together, with or without handles] Accordingly, he has submitted that there was no reduction in the rate of GST from 28 % to 18 % in respect of these products. However, the DGAP had still gone on to compute profiteering in respect of such product amounting to ₹ 14, 45, 267/-. 33. He has also contended that in respect of 1 line item of sale from Maharashtra to J K, the quantity was incorrectly mapped as 0.07 instead of 432, which has led to alleged profiteering computation of ₹ 1,69,308/- whereas the actual sale amount including GST itself was only ₹ 1,69,335/-, which would result i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to claim the said GST discount from Respondent by way of claims. The Respondent has further submitted that the reduced prices to be charged by the distributors/MT customers were also communicated to them. As reduced MRP was not reflected on packages for some time, he chose to adopt a system of GST claim discount so that benefit reached beyond direct customers of the Respondent and was not retained within the supply chain. He has further submitted that direct reduction in the prices of the products impacted by the GST rate reduction was made once the revised MRP was reflected on packages. Since the exercise of determining revised MRP was time-consuming and the discounts based on such revised MRP could be made effective only from January 2018. till such time that the revised MRP based GST discount claim system was in place (i.e. till December 2017), an ad-hoc discount in the range of 5% to 12.5% of the sale price of distributor/MT customers was given as GST claim discount to them. 36. The Respondent has also stated that the customers were aware of the post supply GST price reductions and accordingly claims were raised by them which were settled through issuance of Credit Notes b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts for one transaction (running in to more than 500 pages) as to how GST rate reduction benefit has been passed on by way of post-supply discounts to distributors and modern retail customers but the above submissions were not considered by the DGAP and in his Report. The DGAP had rejected an amount of ₹ 73.59 Crore passed by way of such discounts on the ground that there was no one-to-one correlation between the supplies made and the discounts given which was not correct. He has also explained with an example that in the claim file submitted to the DGAP for one of his customers (Delhi Trading Co.), it could be clearly seen that the discount was based on the actual sale made by distributor to the retailer for a given product. He has further stated that the discount offered in respect of one invoice by the customer to the retailer for product DGAPL Eye Liner Studio Gel and the related claim made by the customer on the Respondent was as follows:- Customer to retailor invoice Invoice, as given by the Respondent in his submissions showed the MRP, Reduced MRP and the Scheme Discount (Sch Disc) which was calculated based on the rate per unit of product, as applicable based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the Credit Note copies. However, the DGAP in his report has not given any finding on the passing of the benefit through the Credit Notes. This exercise has been clubbed by the DGAP with the invoices raised by the MT customers for claiming post-supply discounts extended on account of GST rate reduction. The said description of GST price reduction on credit notes was captured once the system design for Credit Notes was changed. Even till such time that the system design was changed, the discount was on account of GST reduction only and the same was issued by way of Credit Notes. 39. The Respondent has further submitted that in respect of modern trade/ modern retail customers, discounts were extended by way of settlement of invoices raised by such MT customers on him and his recipients had treated these price reductions/discounts as service in view of the fact that there were disputes under the erstwhile Service Tax legislation between the department and the dealers of the automobile companies who were receiving the incentives from the manufacturers post sale. The incentive received by the dealers was considered by the department as consideration for the service provided by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the value, irrespective of their form or nomenclature and any benefit passed on by him in whatever form to the recipients must be taken into consideration. It was the policy of the Respondent that while price reduction scheme was made known in advance to the recipients, the claims were allowed only when the Respondent was assured of the fact that the benefit of such price reduction was passed on further to the trade partners below in the supply chain, after carrying out appropriate verification. He has also submitted that allegation of profiteering (if any) should have been made after taking into account the amount passed on by way of post supply discount claims which alone reflected the net realization of the Respondent. He has further submitted that once discount was allowed as per established practice, the same should be allowed to be deducted from the sale price of the goods. 42. The Respondent has also claimed that the GST charged to the customers was available as credit to them which could be utilized against their output tax liability and accordingly, there was no need to separately refund the GST portion as well. Further, as and when the customers sold the goods, they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HEX ExtraOrd Clay SH 704 ml 371.68 341.09 30.59 704 ml 640 ml Per ml price: Period Selling price incl. tax Grammage Per ml price Post rate reduction 371.68 704 ml 0.528 Pre rate reduction 341.09 640 ml 0.533 From the above illustration, he has stated that if the price comparison was made on per ml basis, the price of ₹ 0.528 charged after 15th November, 2017 was lower than the price of ₹ 0.533 charged before 15th November, 2017. 45. The Respondent has computed the actual benefit passed on by way of increase in the quantity of products and based on weighted average prices of the products with latest MRP which amounted to ₹ 82,97,36,596/- (₹ 26,96,31,164/- if restricted to profiteering at line item level). He has also submitted that this Authority during the course of the hearing on 30-10-2019 had handed over a template in excel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons but the same had not been considered by the DGAP. He has further submitted that an amount of ₹ 19,18,68,113/- representing the amount of profiteering (recalculated based on the average prices of products with latest MRPs) computed on these line items was required to be reduced from the total alleged profiteering computed by the DGAP. The difference in the Customs Duty rate had resulted in additional cost of ₹ 14,10,48,577/- which was a significant change in the business environment in respect of such imported products and hence, such SKUs must be removed from the computation of profiteering at least from the date of increase in the Customs Duty rate. He has also submitted that in the previous 5 years, there was no increase in the Customs Duty and when it was reduced, the market forces would come into picture and based on the competition and the demand in the market, new prices were determined. 47. The Respondent has also averred that section 171(1) of the CGST Act mandated that any reduction in the rate of tax has to be passed on to the recipients by way of commensurate reduction in prices and according to the provisions of the above section this Authority was ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... calculated profiteering to the extent of full difference between ₹ 109.61 and ₹ 81.59 i.e. ₹ 28.02. The Respondent however has submitted that allegation of profiteering (if any) on this SKU could be only to the extent of ₹ 6.91 and thereafter, the balance amount of ₹ 21.11 (if any, subject to revision in methodology of not including consumer promotion SKUs as comparable) was attributable to the business profits of the Respondent which was not within the scope of section 171. In other words, this differential amount of ₹ 21.11 could not be alleged as profiteered as per section 171 of the CGST Act, as the scope of section 171 was limited to commensurate reduction in prices to the extent of reduction in the rate of tax or benefit of input tax credit. 49. The Respondent has also submitted that if the business profits were also treated as profiteered amount, the same might amount to 'price control' which was neither intended nor mandated by section 171 of the CGST Act. The Respondent has further submitted that the computation of aggregate reduction in the amount alleged as profiteered due to the above error committed by the DGAP based on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imes slightly less. However, while determining alleged profiteering on the other impacted SKUs, the DGAP has ignored such excess benefit passed on by the Respondent. 51. The Respondent has also contended that the DGAP has selectively applied the Anti-Profiteering provisions in the present case, where the Respondent had passed on benefit to the customers in excess of the required amount. The DGAP has ignored such measures (treating these as zero (0) for profiteering calculations). On the other hand, the DGAP had insisted that where the benefit to the customer was less than what was required amount, regardless of other measures, the differential amount was alleged as profiteered amount. The Government of India itself had objected to the concept of 'zeroing' at the World Trade Organization (WTO). The Respondent has also argued that the DGAP had incorrectly applied a methodology similar to 'zeroing' which was used by anti-dumping authorities in certain countries like European Union. According to the said methodology, while calculating the dumping margin only those SKUs were considered which were being dumped and those SKUs which were not being dumped were not conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ₹ 1.5 - reduction in the fiscal incentives (for instance, say price was increased to ₹ 101/- and no increase was taken to the extent of ₹ 0.5). The amount passed on by this measure alone was ₹ 15,37,84,257/-, considering weighted average price of the products with latest MRPs. 52. The Respondent has also submitted that if a customer was charged ₹ 2/- extra for 1 SKU and was provided a higher than required price reduction of ₹ 3/- for another SKU, as long as the amount on a totality basis had been returned to the customer and had not been charged extra, it should not matter that an extra amount of ₹ 2/- was charged. As long as the customer received the benefit (whether on 1 SKU or another), it could not be construed that the Respondent had profiteered to the extent of ₹ 1/-. Accordingly, the Respondent has submitted that negative price variations as discussed above should also be considered for determining alleged profiteering (if any). The value of excess benefit passed on other SKUs by this measure aggregated to ₹ 139,98,01,877/- which should be reduced from the alleged profiteering computation. 53. The Respondent has f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsiderable reduction in the output GST paid by the Respondent. Further, the raw materials had also undergone a reduction in rate of GST from 28% to 18%. The Respondent has also given illustration showing the reduced refunds in absolute terms by comparing the refund available in the pre-reduction period with the refund available in the post-reduction period and claimed that the refund available under the new scheme in the GST regime was restricted to specified percentage of tax paid by cash after utilizing input tax credit. Accordingly, if the tax payout in cash was reduced, the amount of refund allowable also got reduced. He has also submitted that the loss could not be considered in relative terms as there was a clear reduction in refund when compared on a per unit basis. 55. The Respondent has also submitted that in order to negate any impact due to fluctuation in the ITC, he has calculated the refund on a per unit basis by taking the data for a period of 4-5 months each pre- and post GST rate reduction, which was a sufficiently long period to negate any impact of ITC. In fact, in the case of the Respondent, there was only a reduction in the rate of tax on the raw materials a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incorrectly inflated the pre-rate reduction price by adding 18% GST to it and compared it with the actual sale price including 18% GST, without adducing grounds as to why this amount has been added. The Respondent has further stated that such computation was incorrect. Whatever amount was charged as GST by the Respondent, the same has been duly deposited in the Government account. There has been no allegation that the amount termed as excess GST in the Report was not GST per se and that such excess tax has not been paid to the Government. Once it was accepted that such amount was also tax and the public exchequer was not deprived of such sum, the same tax amount could not be demanded again from the Respondent or deposit of such tax amount in Consumer Welfare Fund (CWF) could be ordered. He has also claimed that it was an undisputed fact that the Respondent has charged GST from his customers, over and above the value of goods supplied by him i.e. on ex-tax basis. It was also undisputed that the Respondent has reduced the rate of GST charged from his customers from 28% to 18%, effective from the midnight of 15-11-2017. Therefore, the amount of GST collected by the Respondent from his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roportionality and adequacy. The law did not prescribe as to how to determine whether a particular amount was commensurate as the legislature was conscious of the fact that pricing of goods was a complex exercise involving numerous factors and the price was based on contract and terms as agreed between the seller and the buyer. The price might be tentative and may get finalized at a later date which might be post supply. The price was not determinable i.e. at the time of supply the price might not be final and it might vary based on a future event. He has also added that there might be multiple prices for the same supply at different points of time viz. one before the supply and one after the supply when the price was finalized based on terms of sale like discounts or price reductions based on schemes and turnover, etc. and to cover such situations, the word 'prices' was used in section 171. The law has also used the word 'any' before supply of goods and the same has been used to denote singular as against the plural for price. Therefore, for the same supply, existence of tentative and final prices had been recognized and consequently, all post-supply price reductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e words 'registered person' and when the same were read along with 'supply', it denoted that section 171 was applicable to the persons registered under CGST Act. The Respondent has not obtained registration SKU wise and the form GST REG-01 which was specified under the CGST Rules for obtaining registration sought details of the goods supplied and the words used were 'Please specify top 5 goods' and the table thereunder sought description of goods along with HSN code. He has claimed that when the registration was obtained based on the goods supplied which were classifiable under particular tariff headings, applying section 171, SKU wise was neither legally sanctioned nor correct and that in place of SKU wise calculation of profiteering, HSN code could be considered in the light of above submissions for the purpose of calculating alleged profiteering. 62. The Respondent has also submitted that he has not undertaken any activity which tantamounted to 'profiteering'. The interpretation given to section 171 and rules made thereunder, by the DGAP without considering the 'marginal notes' to section 171 and heading of Chapter XV of CGST Rules, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixation of stickers with revised MRP and allied compliances were provided under the Legal Metrology Act, 2009 and the Legal Metrology (Packaged Commodities) Rules 2011. As per the provisions of rule 6(3) of the above Rules in respect of reduction in the MRP, it was permissible to affix sticker with revised lower MRP and ensure that the revised MRP did not cover the MRP declared earlier. The said rule provided discretion to the supplier regarding affixation of sticker as the words used were 'may be affixed'. Therefore, he has stated that in case of reduction in MRP, there was no compulsion to affix sticker with revised MRP. In terms of rule 33(1) of the aforesaid Rules, the Central Government could relax any of the conditions in the rules. In exercise of the said powers, the Legal Metrology Division of the Department of Consumer Affairs had issued a circular dated 4-7-2017 permitting the manufacturers or packers or importers to change the MRP on unsold stock manufactured/packed/imported prior to 1st July 2017 after inclusion of the increased amount of tax due to GST if any, in addition to the existing MRP for a period of three months w.e.f. from 1st July, 2017 to 30th Septe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pact of difference in the rate of tax or credit availability. The said impact could be ascertained product wise, service wise and entity wise etc. However, the said section or rules made thereunder or procedure laid down by this Authority were completely silent on this aspect of calculation/computation. In the absence of any framework or guidelines laid down by section 171 or the Rules made thereunder, different approaches might be followed by this Authority and the DGAP. Such unfettered discretion would lead to uncertainty, arbitrariness and whimsical approach on case to case basis. He has also stated that in the absence of any methodology or guidelines for computing profiteering, the registered persons were following different methods for passing on the benefit of reduction in the tax rate or benefit of input tax credit to the recipients as per their own understanding. The Respondent has also considered that the profiteering would be computed on the legal entity basis and accordingly he has passed on the benefit to his customers. He has further stated that if the methodology or the guidelines would have been prescribed, then the Respondent would have passed on the benefit to his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, leading to inconsistency in the steps actually specified by the DGAP in his Report vis-a-vis the steps actually followed. For instance, the DGAP has specified that in Step 2, he has used the average price from 1-10-2017 to 14-11-2017 based on the description and in Step 3, he has used the average price from 1-9-2017 to 30-9-2017 based on product code. However, the Respondent has noticed that for few line items, while the price as per Step 2 (i.e. average at description level from 1-10-2017 to 14-11-2017) was available, the DGAP has gone to Step 3 and adopted the price as per 1-9-2017 to 30-9-2017 product code. He has also submitted that in order to align the approach as specified by the DGAP in his Report with the actual calculations made in Annexure-15 rectification of these line items was required, which could lead to reduction in the alleged profiteering computation. Similarly, there were other inconsistencies wherein while the price was available in Step 2 (1-10-2017 to 14-11-2017 product description), the DGAP has adopted price as per Step 4 (1-9-2017 to 30-9-2017 product description). Further, in some line items, the DGAP has adopted price as per Step 5 - Comparable Base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the Respondent and not the prices of ₹ 113.98 or ₹ 117.23 which were prevailing for earlier SKUs which had become remnant and were being sold only till the time stocks lasted. He has further submitted that this price of ₹ 123.08 was the price which the Respondent intended to recover from his customers and accordingly, instead of adopting a weighted average of all the products with same description, the latest price prevailing in the pre-rate reduction period should be adopted as the comparable price. In fact, in the above example, while the weighted average was ₹ 123.44 p. u., the latest price was ₹ 123.08 p. u. and accordingly, the latest price and not the weighted average should be adopted when comparison was made based on the description of the product, including comparable product code, instead of adopting the weighted average price. Alternatively, he has suggested that instead of adopting the weighted average or the latest price, the weighted average price of all products with latest MRPs should be considered as comparable price. The price prevalent just before the tax rate reduction was required to be compared with the post-rate reduction p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same continued thereafter and accordingly, there was no reduction in the rate of GST from 28% to 18% for these products. However, the DGAP has gone on to compute profiteering in respect of such products amounting to ₹ 14,45,267/- which should be reduced from the profiteered amount. He has also submitted that in respect of one line item of sale from Maharashtra to J K, the quantity was incorrectly mapped as 0.07 instead of 432, which has led to alleged profiteering computation of ₹ 1,69,308/- whereas the actual sale amount including GST itself was ₹ 1.69,335/-, which would result into reduction of the amount of profiteering by ₹ 1,63,884/-. 71. The above submissions of the Respondent were sent to the DGAP for clarifications and the DGAP vide his Reports dated 11-12-2019 and 23-12-2019 has replied to the above submissions of the Respondent which has been mentioned in the subsequent paras. 72. In respect of the period of Investigation having not been prescribed either in the Central Goods and Services Tax Act, 2017 nor in the corresponding Rules/Notifications the DGAP has stated that he had received the reference from the Standing Committee on Anti- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent that the above Credit Note was issued on account of passing of benefit of reduction in the rate of tax which was absolutely incorrect and therefore denied. 75. On the issue of impact of Customs Duty Increase on the pricing the DGAP has submitted that the concern of the Respondent has been addressed in Para 18 of his Report dated 5-7-2019. 76. The DGAP has also submitted that the Respondent's claim that the business profits had also been treated as profiteered amount was not correct as the profiteered amount of each product had been calculated with reference to a base price which included the profit margin, if any on any product on the basis of the data provided by the Respondent. 77. On the issue of not considering the higher benefit passed on in respect of certain SKUs and applying 'zeroing methodology' the DGAP has submitted that in terms of section 171 of the Central Goods and Services Tax Act, 2017 which governed the Anti-Profiteering provisions under the GST reads as Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices. Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pients or alternatively deposited in the CWF, regardless of whether such extra tax collected from the recipient had been deposited in the Government account or not. Besides, any extra tax returned to the recipients by the Respondent by issuing Credit Notes could be declared in the return filed by him and his tax liability shall stand adjusted to that extent in terms of section 34 of the CGST Act, 2017. Therefore, the option was always open to the Respondent to return the tax amount to the recipients by issuing Credit Notes and adjusting his tax liability for the subsequent period to that extent. 81. The Respondent has also stated that the interpretation of section 171 of CGST Act made by the DGAP was not correct. The DGAP in reply has stated that section 171 of the CGST Act, 2017 was very clear according to which benefit commensurate to the amount of reduction in the rate of tax has to be passed on to the recipient by way of reduction in price. As per the website Lexico powered by Oxford, the word equivalent was also a synonym of the word commensurate and the intention of the law was clear that the price of the goods/services has to be reduced by the amount of reduction in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must be a commensurate reduction in prices of the any supply of goods or services. Therefore, the Respondent was under legal obligation to pass on the benefit. Anti-profiteering provisions were for the benefit of the recipients and each recipient must get benefit of reduction in the rate of tax or increase in the ITC on each and every supply of goods or services or both. Therefore, he was justified in applying the provisions of anti-profiteering at Product/SKUs level. 85. The Respondent has also stated that the DGAP has not applied averaging of base prices where description was used for comparison [1-10-2017 to 14-11-2017 (Goods Desc.) and 1-9-2017 to 30-9-2017 (Goods Desc.)]: In this regard, the DGAP has submitted that he has adopted the average base price (arrived by dividing the total taxable value by total quantity sold) in pre-rate reduction period and compared it with the actual transaction value in the post-rate reduction period. However, in case one product having same description was sold in multiple product code, then he had adopted the average base price available at first place in the same product. 86. The Respondent has also contended that instead of taking aver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, Respondent has submitted that as per approach (c) Weighted average price of latest MRP of ₹ 238.64/- should be adopted and profiteering reduced by ₹ 26,38,779/- and profiteering should be only ₹ 1,34,191/- [₹ 27,72,970/- (-) ₹ 26,38,779/-]. 89. The DGAP has claimed that the above submission of the Respondent did not seem to be appropriate as the Respondent had sold 73,906 units @ ₹ 310/- MRP and only 30,465 units @ ₹ 335/- MRP during the pre-rate reduction period, which showed that both the MRPs were in market and neither was obsolete. The DGAP has submitted that if this Authority decided, it might consider approach (a) where Weighted Average Base Price of the product having same description with all the MRPs was to be adopted for pre-rate reduction base price to address the issue or adopting old MRP/first line item. Following the approach as per (a) above, and adopting weighted average base price of ₹ 226.03/-, the profiteering amount will reduce by ₹ 7,70,237/- and the revised profiteering will be ₹ 20,02,733/- [₹ 27,72,970/- (-) ₹ 7,70,237] for the State- Delhi General Trade, the DGAP has claime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of adopting old MRP/first line item. Following the approach as per (a) above, and adopting weighted average base price of ₹ 224.12/-, the profiteering amount would reduce by ₹ 4,83,997/- and the revised profiteering would be ₹ 23,97,818/- [₹ 28,18,815/- (-) ₹ 4,83,997/-] for the State- Delhi General Trade. He has further submitted that in case, approach (a) was to be considered, the total profiteering amount might get reduced by ₹ 19,75,12,265/- as against the amount of ₹ 30,51,84,398/- as claimed by the Respondent, for approach (c). 92. The Respondent has also suggested rectification of inconsistency in the sequence followed for some line items. The DGAP has stated in this regard that the methodology adopted by him had been explained in para 22 of his Report dated 5-7-2019 read with Summary Sheet of Annexure-15 of the said Report and he has diligently followed the same without any inconsistency. However, due to adoption of the average base price available at the first place in the same product (having multiple product codes), if the price was not obtained at Step-2 then, he had gone for Step-3 and so on. The DGAP has further su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to ₹ 14,45,267/- as the Respondent had not classified them as Non-Impacted transactions in his submission made during the investigation. However, the same had been verified and this Authority might like to consider the same. 96. The DGAP has further stated that on re-examination of all the 35 sheets as enclosed in the Respondent's submissions, he has observed that, inadvertently, he had adopted pre-rate reduction MRP instead of pre-rate reduction base price from the Price List for a few transactions in the State of Delhi for Modern Trade Channel and compared it with the actual selling price and reported nil profiteering for such transactions. However, on correcting the error, profiteering to the tune of ₹ 46,02,070/- (after adjusting correct price adopted from Respondent's Price List for some line items) would be added to earlier reported profiteering amount. Although, the Respondent has identified such inadvertent mistake he had not pointed it out in his submission before this Authority. 97. The DGAP has further stated that on the basis of the above clarifications, if this Authority decided any or all the above submissions, the profiteering reported i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 535/- which has been shown at Sr. No. 1 of the above Table given in his Report dated 23-12-2019. However, vide Sr. No. 2 of the above Table, the DGAP has submitted that an amount of ₹ 19,75,12,265/- can be reduced from the above profiteered amount on account of rectification of the non-averaging of the base prices where description was used for comparison ((1-10-2017 to 14-11-2017 (Goods Desc.) and 1-9-2017 to 30-9-2017 (Goods Desc.)). However, the DGAP has also stated that the above rectification could be made if it was decided to do so by this Authority. The DGAP has not mentioned the reasons on the basis of which such an approach can be approved by this Authority. He has also not explained why the above approach was not applied by him at the time of preparing of his Report dated 5-7-2019. 99. Vide Sr. No. 3 of the above Table the DGAP has also submitted that an amount of ₹ 4,80,88,937/- can be excluded from the original profiteered amount due to rectification of inconsistency in the sequence followed by him in respect of certain line items in case it is so decided by this Authority. However, no explanation has been given why the above inconsistency cannot be recti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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