Joydeep Sarkar Vs Himalaya Drug Company (NAA)
Fact of the Case:
The brief facts of the case are that under Rule 128 (1) of the Central Goods and Services Tax (CGST) Rules, 2017 an application dated 27.11.2017 was filed before the Standing Committee on Anti-profiteering by the Applicant No. 1 alleging that the Respondent had not passed on the benefit of reduction in the GST rate w.e.f. 15.11.2017 to his customers but had instead increased the base prices of his products by keeping the Maximum Retail Prices (MRP) unchanged. The above Applicant had also submitted Price Lists of a large number of the products supplied by the Respondent showing both the pre and post GST rate reduction prices claiming that the Respondent had not reduced the MRPs.
Held by NAA:
It is clear from the above narration of the facts that the profiteered amount has been computed by comparing the average pre rate reduction base prices of the impacted products with the average post rate reduction base prices in respect of both the tax reductions. The above mathematical methodology adopted by the DGAP to compute the profiteered amount is not in consonance with the methodology approved by this Authority in the cases of tax reductions decided by it as the profiteered amount has been determined by comparing the average pre rate reduction base prices with the actual post rate reduction prices. It would also be pertinent to mention here that the DGAP has also been comparing the average pre rate reduction base prices with the actual post rate reduction prices in the cases where rate of tax has been reduced to compute the profiteered amount. In case the mathematical methodology of comparing the average to average base prices employed by the DGAP is approved it would not be possible to compute the benefit of tax reduction which is due to each customer on each supply. The profiteered amount computed by the DGAP would also not be correct. Hence, the above mathematical methodology adopted by the DGAP is not correct, logical, appropriate and in consonance with the provisions of Section 171 of the CGST Act, 2017. Therefore, the Report dated 22.10.2019 furnished by the DGAP cannot be accepted. Accordingly, the DGAP is directed to reinvestigate the above case under Rule 133 (4) of the CGST Rules, 2017.
FULL TEXT OF ORDER OF NATIONAL ANTI-PROFITEERING AUTHORITY
1. The brief facts of the case are that under Rule 128 (1) of the Central Goods and Services Tax (CGST) Rules, 2017 an application dated 27.11.2017 was filed before the Standing Committee on Anti-profiteering by the Applicant No. 1 alleging that the Respondent had not passed on the benefit of reduction in the GST rate w.e.f. 15.11.2017 to his customers but had instead increased the base prices of his products by keeping the Maximum Retail Prices (MRP) unchanged. The above Applicant had also submitted Price Lists of a large number of the products supplied by the Respondent showing both the pre and post GST rate reduction prices claiming that the Respondent had not reduced the MRPs.
2. The application was examined by the Standing Committee on Anti-profiteering in its meeting held on 09.02.2018 wherein it was decided to forward it to the Director General of Anti-profiteering (DGAP) for detailed investigation under Rule 129 (1) of the above Rules. Another application dated 11.04.2018 was filed by the Applicant No. 1 against the Respondent, when the rate of GST was reduced from 12% to 5% w.e.f. 14.10.2017. The Standing Committee on Anti-profiteering vide the minutes of its meeting held on 02.05.2018 had clubbed it with the earlier application for the purpose of investigation and forwarded it to the DGAP.
3. The DGAP after completing the investigation had submitted his Report under Rule 129 (6) of CGST Rules, 2017 on 27.08.2018. In his Report the DGAP had submitted that the provisions of Section 171 of the CGST Act, 2017 have been infringed and the Respondent had profiteered by not passing on the benefit of reduction in the tax rates by lowering the prices of his products commensurately. The DGAP had quantified the profiteering amount on the basis of pre and post-reduction GST rates and the details of the outward supplies (other than zero rated, nil rated and exempted supplies) for the period from 14.10.2017 to 31.03.2018, furnished by the Respondent.
4. The DGAP had also stated that a total of 425 items supplied by the Respondent were impacted by both the GST rate reductions. Out of these 425 items, 52 items were impacted by the GST rate reduction from 12% to 5% w.e.f. 14.10.2017 and 373 items were impacted by the GST rate reduction from 28% to 18% w,e.f.15.11.2017. The amount of net higher sales realization due to increase in the base prices of the products consequent to the reduction in the GST rates, either from 12% to 5% or from 28% to 18% or the amount of profiteering was arrived at as Rs. 32,48,33,436/- (Rs. 1,18,49,171/-for the items impacted by the GST rate reduction from 12% to 5% w.e.f. 14.10.2017 and Rs. 31,29,84,264/- for the items impacted by the GST rate reduction from 28% to 18% w.e.f. 15.11.2017). However, taking into account the credit notes issued by the Respondent to his stockists, amounting to Rs. 13,20,40,302/-, the net benefit that had not been passed i.e. the net amount of profiteering was worked out to be Rs. 19,27,93,133/- (Rs. 32,48,33,436/- – Rs. 13,20,40,302/-) by the DGAP.
5. The Respondent in his initial written submissions dated 10.10.2018 had submitted that with the implementation of the GST from 01.07.2017 some of his products were levied higher rates of GST of 28%/12% as against the indirect tax rates of 26%/7% (approx.) which were applicable prior to the implementation of the GST and the Respondent had not undertaken any revision of the prices then which had resulted in financial loss of Rs. 8,30,66,0561- to him. Subsequently, the Government had reduced the rates of GST in respect of some of his products from 14.10.2017 onwards and for some more products from 15.11.2017 and he had passed on the GST rate reduction benefit by reducing the prices from 01.12.2017 onwards. While there was reduction in the MRPs, there was no reduction in the margin which was being paid to the stockists or dealers on the sale of the products and he had issued credit notes to all his stockists/distributors to compensate the difference due to reduced MRPs with the instructions to pass on the benefit of reduced MRPs to the end consumers. The Respondent has also stated that the DGAP had erred while calculating the profiteered amount to the extent of Rs. 21,71,18,388/- as the DGAP for the purpose of computation had also considered branch transfers. He had also claimed that the computation of profiteered amount included promo supplies also which did not represent the supplies made in the usual course of business, for the reason that such promo supplies included physician’s samples given for free, products used for marketing given for free and the combo packs supplied for a very short period on which GST was being paid instead of reversing the ITC as per the provisions of Section 17 of the CGST Act, 2017. He has also claimed that majority of such promo supplies included removal as samples, gifts and for other marketing purposes and the GST paid on the output value was expensed off in the books of accounts and no amount was recovered (in respect of supplies) from the customers, hence it would not be right to allege that the Respondent had profiteered in respect of the supply of promo products. He had further claimed that the Report was inconsistent to the extent of considering promo supplies in certain months and not considering the same in respect of the other months. He had also filed Annexure-B which provided the details of branch transfers and promo supplies and stated that if his aforesaid details were taken into account for re-verification the alleged profiteered amount would get reduced. He had also claim that the difference in average selling prices arrived by the DGAP would also come down, if the quantity and the value of sales in respect of the above two supplies was removed from the computation.
6. The DGAP in his subsequent Reports dated 26.11.2018, 20.12.2018 and 21.01.2019 had admitted that inadvertently certain branch transfers were included in the calculations and hence he had revised the profiteered amount as per the revised Annexure-14. The Report further stated that 500 credit notes submitted by the Respondent had been verified and it was observed that they were issued with the remark ‘on account of difference in MRP on closing stock for November 2017’. It was also submitted that on verification it was found that Rs. 13,20,40,902/- were passed on by way of credit notes. Accordingly, the amount of profiteering was computed as Rs. 14,22,54,443/- by the DGAP after considering the branch transfers and the credit notes.
7. During the course of the hearing it was observed that the Respondent had vehemently argued that the promo supplies which included physician’s samples, marketing samples and gifts etc. and which were supplied free of cost were also taken into consideration for computing the profiteered amount. Hence, he had contended that an amount of Rs. 3,52,02,969/- which had been computed as profiteered amount by the DGAP should be excluded from the profiteered amount. He had also stated that since no price including GST was collected for these supplies, the question of profiteering did not arise. He had also argued that the GST Policy Wing of the Central Board of Indirect Taxes (CBIC) vide its circular No. 92/11/20/2019-GST dated 07.03.2019 had clarified that the goods or services which were supplied free of cost (without any consideration) should not be treated as ‘supply’ under the GST except in the case of activities mentioned in schedule I of the CGST Act. The Respondent had also claimed to have paid the GST in order to avoid reversal of ITC as per sub-section (5) of Section 17 of the CGST Act, 2017 which provided that the ITC would not be available in respect of the goods disposed by way of gifts or free samples. He had further claimed that in spite of repeated submissions made on this ground, this aspect had not been examined by the DGAP in any of his Reports. The DGAP has claimed that the promo supplies had been rightly taken into account for calculating the profiteered amount, however no grounds had been given to justify their inclusion.
9. The DGAP in his Report had also stated that a total of 425 items were impacted by the GST rate reductions. Out of these total 425 items, 52 items were impacted by the GST rate reduction from 12% to 5% w.e.f. 14.10.2017 and 373 items were impacted by the GST rate reduction from 28% to 18% w.e.f. 15.11.2017. However, it was noticed that the Annexure-14 of the Report prepared by the DGAP did not provide any breakup of these items and the details of calculation of the base prices for these two categories of rate reductions. Therefore this Authority vide its I.O. No. 05/2019 dated 30.04.2019 passed under Rule 133 (4) of the CGST Rules, 2017 had directed the DGAP:-
i. To examine and submit his clear cut findings whether the promo sales should be included while calculating the profiteered amount keeping in view the Circular No. 92/11/20/2019-GST dated 07.03.2019 issued by the CBIC.
ii. To submit separate Annexures for the products in the case of which the rate of tax was reduced from 28% to 18% and from 18% to 12% respectively and how the base prices in respect of these products were computed.
The DGAP’s Report after reinvestigation under Rule 133 (4) was received on 23.10.2019 in which he has stated that he has examined the matter in the light of Circular No. 92.11.20/2019-GST dated 07.03.2019 and Para 2A of the above Circular dealt with the issue relating to the free samples and gifts supplied by the suppliers to their stockists and dealers etc. without charging any consideration. As per the Circular, the goods or services or both which were supplied free of cost should not be treated as `supply’ under the GST. However, the ITC would not be available to the supplier on the inputs, input services and capital goods to the extent they were used in relation to the gifts or free samples. The DGAP has also stated that in the present case, the Respondent has admittedly not reversed the ITC availed in respect of these supplies and has also treated them as a taxable supplies by showing a taxable value for these goods in his retur and has paid GST on the same and thus being taxable supplies they were covered within the ambit of Section 171 of the CGST Act, 2017.
10. The DGAP has further stated that Para 2B of the Circular dealt with the offers like ‘Buy one, Get one free’ announced by the companies, where a single price was being charged for the supply of two or more goods. The DGAP has stated that the Respondent has claimed that profiteering should not be computed on such combo packs, however the above Circular clearly mentioned that they were taxable supplies and the rate of tax would depend upon whether the supply was a mixed or a composite supply. Thus, the DGAP has claimed that being taxable supplies, these supplies were also covered within the ambit of Section 171 of the CGST Act, 2017.
11. The DGAP has further claimed that profiteering for each combo pack/offer pack has been determined individually by comparing the price of the same combo pack/offer pack during the pre-rate reduction and the post-rate reduction periods. The DGAP has illustrated calculation of profiteering with the help of the Table as has been shown below:-
