Case Law Details
Ankit Kumar Bajoria Vs Hindustan Unilever Limited (National Anti-Profiteering Authority)
NAA held that Respondent Hindustan Unilever Limited (HUL) has resorted to profiteering being very well aware of the law and the rules which warranted him to pass on the benefit of GST rate reductions. Further he has also consciously and illegally recovered the excess realisation which was due to his RSs as ITC and thereby denied the benefit of tax reductions to the customers. He has further acted in conscious disregard of the obligation which was cast upon him to pass on the benefit of GST rate reductions. Instead he had deliberately increased the base prices by enhancing them equivalent to the amount of GST rate reductions in order to keep the old MRPs in place or not reduced them proportionately to the benefit of tax reductions, accordingly he has committed an offence under section 122 (1) (i) of the CGST Act, 2017 by issuing incorrect invoices to his customers and thus penal provisions under the above Act are required to be invoked against him. A notice dated 29.08.2018 was issued to the Respondent to explain why penalty should not be imposed under the above provisions. The Respondent vide his reply dated 14.09.2018 has submitted that in so far as the proposal to invoke penal provisions for imposition of penalty and cancellation of registration was concerned it can be done only after the Authority determines the allegation of profiteering against him. Since the Respondent has been held guilty of profiteering and has also been found to have violated the provisions of Section 122 (1) (i) of the CGST Act, 2017 a fresh notice be issued to him asking him to explain why penalty should not be imposed on him.
FULL TEXT OF ORDER OF NATIONAL ANTI-PROFITEERING AUTHORITY
1. The brief facts of the present case are that an application through e-mail dated 26.11.2017 (Annexure-1) was filed by the Applicant No. 1 before the Standing Committee on Anti-profiteering under Rule 128 of the Central Goods and Services Tax Rules (CGST), 2017 requesting that his identity should not be disclosed. The above Applicant through his application had complained that although the Goods & Service Tax (GST) had been reduced from 28% to 18% on a large number of products w.e.f. 15.11.2017, the Respondent had not reduced the Maximum Retail Prices (MRPs) of the products which were being sold by him. The Applicant No. 1 had also alleged that the Respondent had increased the base prices of his products, so that the MRPs continued to be the same even after reduction in the rates of GST. He had also enclosed a copy of the letter dated 21.11.2017 written by the Respondent to his Redistribution Stockists (RSs) stating that he will be recovering the excess Input Tax Credit (ITC) on the stocks of his brands lying with them as on 15.12.2017 and the benefit of tax reduction shall be passed on to the end consumers through reduction in the MRPs or through fill level increases. He had further informed vide his e-mail dated 25.01.2018 (Annexure-3) that the Respondent had started the process of recovery. Another application against the Respondent vide e-mail dated 17.11.2017 (Annexure-4) was filed before the Standing Committee by the Applicant No. 2 stating that the Respondent had increased the basic rates of his products after the rate of GST was reduced from 28% to 18% w.e.f. 15.11.2017. Both these applications were examined by the Standing Committee on Anti-profiteering in it’s meetings held on 29.11.2017 and 24.01.2018 respectively, wherein it was decided to refer the matter to the Applicant No. 4 (here-in-after referred to as the DGAP) to investigate both the above applications to determine whether the benefit of reduction in the GST rates had been passed on by the Respondent to the customers or not. Meanwhile another application dated 20.09.2018 was received from the Applicant No. 3 139 this Authority stating that the benefit of GST rate reduction had not been passed on by the Respondent and there was no evidence to show that the amount profiteered by him had been deposited in the Consumer Welfare Fund (CWF). Since the issue raised by the above Applicant had been investigated and a Report had already been filed by the DGAP on 15.06.2018 this application was not forwarded to the Standing Committee.
2. The DGAP after detailed investigation has submitted his Report on 15.06.2018 along with his subsequent reports dated 31.08.2018 and 25.09.2018. In his initial report dated 15.06.2018 the DGAP has stated that on the receipt of the minutes dated 29.11.2017 (Annexure-2) from the Standing Committee, notice under Rule 129 of the CGST Rules, 2017 was issued on 10.01.2018 calling upon the Respondent to submit his reply whether he admitted that the benefit of reduction in the rates of tax had not been passed on by way of commensurate reduction in the prices. The Respondent was also asked to suo moto determine the quantum of benefit not passed on and intimate the same. The Report further states that the Respondent had determined the amount of profiteering suo moto and come forward to deposit an amount of Rs. 59.94 Crores for the period w.e.f. 15.11.2017 to 30.11.2017 vide his letter dated 04.12.2017 addressed to the Chairman, Central Board of Excise and Customs now re-designated as Central Board of Indirect Taxes and Customs (CBIC). Vide his subsequent letter dated 08.01.2018 addressed to the Chairman, the Respondent had offered to deposit an amount of Rs. 59.04 Crores on account of profiteering for the month of December, 2017.
3. The DGAP’s Report also states that vide his letter dated 14.05.2018 (Annexure-10) both the Applicants No. 1 & 2 were provided an opportunity to inspect the non-confidential evidences/reply furnished by the Respondent, which was not availed by them. He has also intimated that since the analysis of data was complex and voluminous, he had requested for extension of time for completing the investigation which was given upto 17.06.2018 by the Standing Committee, vide minutes of it’s meeting dated 14.03.2018 in terms of Rule 129 (6) of the CGST Rules, 2017. He has further intimated that the investigation was conducted for the period w.e.f. 15.11.2017 to 28.02.2018 only.
4. The Report further submits that the Respondent vide his reply dated 25.01.2018 (Annexure-12) had intimated that he was India’s largest Fast Moving Consumer Goods (FMCG) Company and was engaged in the manufacture and supply of consumer goods comprising of four major categories, viz. Home Care, Personal Care, Foods and Refreshments. The DGAP has also submitted that the Respondent was manufacturing and supplying over 3200 Stock Keeping Units (SKUs) which were being sold through Redistribution Stockists (RSs), Modern Trade (MT) and the Canteen Stores Department (CSD). The DGAP has further submitted that the Respondent had also claimed that the profiteered amount was suo-moto determined by him after taking into account the various deductions Viz. (i) Pricing Deployment (PD), (ii) Trade Term Supply Deployment (TTSD), (iii) Fiscal Deployment (FD) and (iv) Writing off of the existing packaging material. The DGAP has also stated that the Respondent had also intimated that he and his RSs had large inventory of finished goods which was lying in his factories, distribution centers and was also in transit and hence he required nearly 60 days to pass on the benefit of tax rate reductions. The Respondent had also stated that about 900 SKUs were impacted by the GST rate reductions w.e.f. 15.11.2017 and wherever it was possible to print the Maximum Retail Prices (MRPs) online, he had changed them. The DGAP has also stated that the Respondent had informed that in respect of the 505 SKUs out of the 900 SKUs, he had implemented the change at the manufacturing stage itself by reducing the MRPs or by adjusting the grammage. The DGAP has further stated that the Respondent had also claimed that he had to write off packing material having old MRPs printed on it worth Rs. 10.50 Crores and replace it with new packing material which was claimed by him as deduction out of the profiteered amount. The Respondent had also claimed that his contract with the CSD did not include taxes and hence, he had not earned any amount due to reduction in the GST rates. The DGAP has also informed that the Respondent had admitted that the higher sales realization due to GST rate changes, for two channels comprising of (i) General Trade and (ii) MT was Rs. 185.40 Crores for the months of November and December, 2017, Rs. 151.19 Crores for the month of January 2018 and Rs. 135.87 Crores for the month of February 2018, however the Respondent had claimed deductions on account of the discounts, writing-off of the packing material, PD, TTSD and FD and deposited an amount of Rs. 118.80 Crores for the months of November and December 2017 in the CWF.
5. The DGAP has also intimated that the Respondent was asked to supply information/ documents/ record which he had supplied vide Annexures 12-22.
6. The DGAP has also informed that the Respondent had furnished reasons for the various deployments which he had claimed as deductions from the higher sales realization on account of GST rate reductions vide his letters dated 25.01.2018 and 05.03.2018 (Annexure-12 & 13). He has further informed that the Respondent had claimed deductiOn on PD due to the pricing initiatives w.e.f. 15.11.2017 which had resulted in reduction in the MRPs or increase in the grammage. The Respondent had also requested for deduction due to TTSD as he had floated various promotional schemes through the MT as an interim measure to give benefit of tax reductions. The DGAP has also stated that the Respondent had claimed deduction on account of FD because of proportionate reduction in the refund amount which he was getting due to area-based exemptions. The DGAP has further stated that the Respondent vide his letter dated 05.03.2018 (Annexure-13) had submitted that the amount of higher sales realization due to the rate changes for the month of January, 2018 for General Trade and MT was Rs. 151.19 Crores out of which a deduction of Rs. 136.58 Crores has been claimed on account of PD, TTSD and FD along with writing off of packing material with old MRPs worth Rs. 7.78 Crores and accordingly the net amount of higher sales realization of Rs. 6.83 Crores was calculated by him. The DGAP has also intimated that the Respondent vide his letter dated 05.03.2018 had revised the amount of profiteered amount which he was required to deposit in the CWF for the period w.e.f. 15.11.2017 to December, 2017 as Rs. 117.22 Crores instead of Rs. 118.98 Crores and hence he had claimed further deduction of Rs. 1.76 Crores from the amount payable in the CWF for the month of January, 2018 and accordingly he had volunteered to deposit an amount of Rs. 5.07 Crores in the CWF due to net higher sales realization for the month of January, 2018. The DGAP has further intimated that vide letter dated 10.04.2018 (Annexure-17), the Respondent had informed that the higher sales realization due to rate reductions for the month of February, 2018 for the General Trade and the MT was Rs. 135.87 Crores out of which an amount of Rs. 138.52 Crores had been claimed as deduction on account of the PD, TTSD and FD and therefore, the Respondent had informed that he was not depositing any further amount in the CWF. The DGAP has also intimated that the Respondent vide his letter dated 10.04.2018 had also informed that he had recovered an amount of Rs. 36.19 Crores from his RSs, as against the amount of Rs. 30.85 Crores deposited by him on 05.03.2018 in the CWF and hence he was willing to deposit the balance amount of Rs. 5.34 Crores in the above Fund. The DGAP has also stated that the Respondent had claimed that since there were no guidelines prescribed for determination of the profiteered amount he had calculated the impact on the sales realizations after deducting the various expenses and deployments due to the action taken by him after the rate reductions. The Respondent had also quoted the statement issued by the Indian Accounting Standards Board that ‘Profit was a general term for the excess of revenue over related cost’, and also cited the two judgements of the Hon’ble Supreme Court passed in the cases of Badridas Daga v. CIT 34 ITR 10 (SC) and CIT v. Meghalaya Steels Ltd. (2016) 67 taxmann.com 158 (SC] in his support. The DGAP has also claimed that the Respondent had interpreted the term “commensurate reduction” as ‘accounting for commensurate costs that were incurred as a result of GST rate reduction’. The DGAP has also stated that the Respondent had claimed that he could not have used the old MRPs printed packing material as the MRPs had been reduced and therefore, he was entitled to claim deduction of the value of the written off packaging material from the higher sales realization. The DGAP has further stated that the Respondent had claimed deductions due to the reduction in the area-based exemptions on the SKUs which were impacted by the rate reductions and which were being manufactured in his units based in Uttarakhand, Himachal Pradesh and Assam as they were entitled to budgetary support or the refund granted under the DIPP Notification No. 10(1)/2017-DBA-II/NER dated 05.10.2017, which was calculated with reference to the CGST/IGST paid after utilization of the ITC and the higher was the amount of CGST/IGST paid, the higher was the refund which reduced his cost of production. The DGAP has also informed that the Respondent had submitted that before 15.11.2017, his units were entitled to proportionate refund of 58% of the CGST paid @ 14% but now due to the reduction in the GST rate from 28% to 18%, the proportionate refund of 58% was to be computed for CGST paid @ 9% which had reduced his entitlement for refund and increased the cost of production. The DGAP has also supplied summary of the suo moto calculation of the profiteered amount made by the Respondent in the Table as under:-
TABLE
(Amount in Rs. Crores)
| Particulars | 15-30 Nov. 2017 |
Dec. 2017 | Jan. 2018 | Feb. 2018 | Total | |
| 1. Net Sale Value (Excluding GST): | ||||||
| -General Trade | 679 35 | 1,136.52 | 1,327.77 | 1,195.01 | 4,338.66 | |
| -Modern Trade | 201.60 | 340.06 | 424.71 | 352.29 | 1,318.66 | |
| 2.Total Net Sale Value (Excluding GST): | 880 95 | 1,476.57 | 1,752.49 | 1,547.30 | 5,657.31 | |
| 3. Total Gross Sale Value (GSV= Net Sale Value + Pricing deployment): | 880.95 | 1,512 58 | 1,867.52 | 1,676.31 | 5,937.36 | |
| 4. GST Benefit: | ||||||
| -General Trade | 55.57 | 95.90 | 115.93 | 105.97 | 373.38 | |
| -Modern Trade | 15.77 | 26.61 | 35.26 | 29.90 | 107.54 | |
| 5. Total GST Benefit (A): | 71.34 | 122.50 | 151.19 | 135.87 | 480.91 | |
| 6. Less: | ||||||
| -Pricing Deployment | 36.01 | 115.03 | 129.01 | 280.05 | ||
| -US Deployment | 1.59 | 19.08 | 8.60 | -2.90 | 26.37 | |
| -Fiscal Deployment | 6.99 | 12.97 | 12.95 | 12.41 | 45.31 | |
| -Packing Material written off | 7.80 | 7.80 | ||||
| 7. Total Deductions (B): | 8.58 | 68.06 | 144.38 | 138.52 | 359.53 | |
| 8.Suo moto declaration of profiteering (C)= (A)-(B): | 62.77 | 54.45 | 6.81 | 124.03 | ||
| 9. Add: Recovery from Redistribution Stockist (D): | 36.19 | |||||
| Total Amount (E)= (C )+(D) | 160.22 | |||||
7. The DGAP has also informed that the details of TRAN-2 statements in respect of the Union Territories (UTs) of Delhi, Puducherry, Goa, Dadra & Nagar Haveli, Daman & Diu for the period from July, 2017 to December, 2017, and copies of the sample invoices in which credit claimed in TRAN-2 statements had been passed on to the recipients by way of reduced prices had not been supplied by the Respondent.
8. The DGAP after examining the applications and the submissions made by the Respondent has recorded his findings on the three main issues viz.:-
(a) Whether the rates of GST were reduced in respect of the products supplied by the Respondent w.e.f. 15.11.2017,
(b) If the rats were reduced whether the benefit of such reduction in the rates of tax was passed on to the consumers in terms of Section 171 of the GST Act, 2017, and
(c) If not, what was the quantum of profiteering by the Respondent.
9. The DGAP’s report states that the Central Government, on the recommendation of the GST Council, had reduced the GST rates on several products from 28% to 18% and from 18% to 12% vide Notification No. 41/2017-Central Tax (Rate), dated 14.11.2017 with effect from 15.11.2017. The Report also states that the Respondent had suo moto, even before the issue of notice had admitted that he could not pass on the benefit of reduction in the tax rates to the consumers and therefore it was established that the Respondent had failed to pass on the benefit of the reduction in the rates of tax to his consumers in terms of the Section 171 of the CGST Act, 2017. In his report the DGAP has also acknowledged that the Respondent had himself determined the amount of profiteering and had deposited the amount determined by him in the CWF after claiming certain deductions on account of various deployments.
10. The Report of the DGAP highlighting the relevant provision of Section 171 (1) of the CGST Act, 2017 which reads that “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”, has emphasized that any benefit of ITC or reduction in the rates of tax must result in `commensurate reduction in the prices’ of the goods and the services. The Report further states that Section 171 does not provide the supplier of goods and services any other means of passing on the benefit of reduction in the rates of tax or benefit of ITC and therefore all suppliers of goods and services must pass on the benefits in terms of absolute reduction in the prices and flexibility to suo moto decide on any other mode of passing on the benefits was not available. Applying this principle the DGAP’s Report concludes that the Respondent in this case admittedly had not passed on the benefit that had accrued to him on account of the reduction in the GST rates.
11. After examining the various deductions claimed by the Respondent the DGAP’s Report states that the Respondent had claimed that he had passed on the benefit by supplying increased grammage of the products to the consumers i.e. more quantity was supplied for the existing price under the term PD. Similarly, the Respondent had also claimed deduction on expenditure incurred on some sales promotion schemes on the impacted goods sold through MT under the term TTSD. Both these deductions were denied by the DGAP on the ground that the legal provisions did not allow any other mode of passing on the benefit except by reduction in the prices as per the provisions of Section 171 of the CGST Act, 2017.
12. With regard to the Respondent’s claim for deduction on account of FD, the DGAP has noted that as per the Notification No. 10(1)12017- DBA-II/NER dated 05.10.2017, the Respondent was entitled to a refund of 58% of the CGST or 29% of the IGST to be paid through debit in the Cash Ledger Account (CLA) maintained by a unit in terms of Section 49 (1) the CGST Act, 2017 after utilization of the ITC of the Central Tax and the Integrated Tax. He has also argued that w.e.f. 15.11.2017, the Respondent was entitled to proportionate refund of the CGST paid @ 14% or 9% through CLA and hence the liability of the Respondent to make payment in cash had reduced due to reduction in the rates of tax which had resulted in reduced refund in the absolute terms. He had also contended that since the Respondent was still eligible to get the same proportionate refund of actual CGST/IGST paid in cash as was available to him prior to the reduction in the rates of GST, there was no loss in absolute terms to him. Therefore, he has concluded that the claim of the Respondent for deduction on account of FD was not maintainable. The claim of the Respondent to deduct the cost of written off packing material having old printed MRPs was also not admitted as the DGAP has held that vide letter No. WM-10(31)/2017, dated 16.11.2017 issued by the Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India it was clearly provided that there would be affixing of additional stickers or stamping or online printing for declaring the reduced MRPs. The Report also states that CGST Act, 2017 did not provide for allowance on account of the cost of packing material against the reduction in the price on account of lower GST rates. The Report concluded that the deductions claimed by the Respondent were not supported by any legal provisions and therefore they were inadmissible.
13. The Report after examining the Statements of Audited Financial Results for the Financial Years 2015-16, 2016-17, 2017-18 and the quarters ending December 2015, December 2016, December 2017, March 2016, March 2017 and March 2018 which were published by the Respondent, has mentioned that post 15.11.2017, there was a sharp increase in the profits made by the Respondent without a corresponding increase in the sale of the products inspite of his claim that the cost of production had risen after reduction in the rates of GST as per the Table given below:-
Table
| Period | Sale of products | Profit before exceptional items & tax | Change in Sale and Profits | ||
| Sale amount in Crores |
% increase over previous period |
Profit amount in Crores |
% increase over previous period |
||
| FY 2015-16 | 32,929.00 | 5,977 00 | |||
| FY 2016-17 | 33,895.00 | 2.93% | 6,155 00 | 2.98% | Sales increase by 3% and Profits increase by 3% |
| FY 2017-18 | 34,619,00 | 2.14% | 7,347 00 | 19.37% | Sales Increase by 2% but Profits increase by 19% |
| Quarter ending Dec. 2015 | 8,226 55 | 1,488.60 | |||
| Quarter ending Dec. 2016 | 8,124.00 | -1.25% | 1,333.00 | -10.45% | Sales decrease by 1% and Profits decrease by 10% |
| Quarter ending Dec. 2017 | 8,323.00 | 2.45% | 1,706.00 | 27.98% | Sales increase by 2% but Profit increase by 28% |
| Quarter ending March 2016 | 8,193.00 | 1,483.00 | |||
| Quarter ending March 2017 | 8,773.00 | 7.08% | 1,620.00 | 9.24% | Sales increase by 7% and Profit increase by 9% |
| Quarter ending March 2018 | 9,003.00 | 2.62% | 2,016.00 | 24.44% | Sales increase by 3% but Profit increase by 24% |
14. The Report also mentions that vide Note-11 & 12 attached to the Statement of Audited Financial Results for the quarter and year ending 03.2018 (Annexure-24) the Respondent had stated that an estimated amount of Rs. 124 Crores had been offered suo moto for deposit in the CWF for not passing on the benefit of reduction in the rates of tax and it was not accounted as revenue and was shown as liability. The DGAP has also informed that the Respondent had himself offered an amount of Rs. 36.19 Crores towards additional realization on account of the rate reductions which would have been earned by the Respondent’s RSs on their closing stock. Therefore, the DGAP has concluded that due to non-passing of the benefit of rate reductions by the Respondent there has been a sharp increase in his prices
15. While quantifying the extent of profiteering for the period w.e.f. 11.2017 to 28.02.2018, the Report states that the total number of items affected by the reduction in the rates of GST were 12,016 comprising of 1836 base packs. The DGAP has also stated that out of the above items, 11,820 items comprising of 1814 base packs constituting 99.71% of the sale value of the total impacted Items were affected by the rate reduction from 28% to 18% and the balance 196 items comprising of 22 base packs constituting 0.29% of the sale value of total impacted Items were affected by the GST rate reduction from 18% to 12%. Therefore he has concluded that the amount of net higher sales realization on account of increase in the base prices of the products after the reduction in the GST rates either from 28% to 18% or from 18% to 12%, or the total amount of profiteering was Rs. 419.67 Crores. The DGAP has also furnished detailed calculations of the profiteered amount vide Annexure-25 in which he has given the details of all the items which were impacted by the rate reductions. The Report further clarifies that the prices at which the Respondent sells his products to his RSs had been worked out as a fixed percentages of the MRPs of the corresponding products after allowing the profit margins of the RSs and the Retailers which were 90.96% for the supplies made to the General Trade and 92.59% for the MT. He has also submitted that the commensurate MRPs had been calculated on the basis of the reduced rates w.e.f. 15.11.2017 on the base prices computed by excluding the earlier GST and the MRP which was prevalent before 15.11.2017. He has further submitted that the commensurate revised MRPs had been calculated on the basis of the MRPs of the products intimated by the Respondent and in the case where he had not supplied them the prices had been obtained from the web portals. The DGAP has also submitted the details of the calculations made by him vide Annexure-25.
16. The Report also submits that the Respondent had recovered an amount of Rs. 36.19 Crores from his RSs on the stocks held by them on 14.11.2017 as had been alleged by the Applicant No. 1 also, by issuing debit notes to the RSs, while Rs. 6,47,131 could not be recovered from seven of the RSs. The Report further states that the amount earned by the RSs was beyond the scope of investigation and therefore its correctness had not been confirmed, however the Report claims that the Respondent had admitted it to be the profiteered amount and had suo-moto sought to deposit it in the
17. The DGAP has also informed that the Respondent had claimed and utilized as per TRAN-2 statements filed by him credit of Rs. 76.06 Crores except for the UTs of Delhi, Puducherry, Goa, Dadra & Nagar Haveli and Daman & Diu during the period w.e.f. July, 2017 to December, 2017, as per the proviso to Section 140 (3) of the CGST Act, 2017, which reads as under:-
“A registered person, who was not liable to be registered under the existing law, or who was engaged in the manufacture of exempted goods or provision of exempted services, or who was providing works contract service and was availing of the benefit of notification No. 26/2012-Service Tax, dated the 20th June, 2012 or a first stage dealer or a second stage dealer or a registered importer or a depot of a manufacturer. shall be entitled to take, in his electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions, namely:-
Provided that where a registered person, other than a manufacturer or a supplier of services, is not in possession of an invoice or any other documents evidencing payment of duty in respect of inputs, then, such registered person shall, subject to such conditions, limitations and safeguards as may be prescribed, including that the said taxable person shall pass on the benefit of such credit by way of reduced prices to the recipient, be allowed to take credit at such rate and in such manner as may be prescribed.” (emphasis supplied)
18. The DGAP has contended that as per the above provision, the Respondent was bound to pass on the credit availed through TRAN-2 statements by reducing the prices to be paid by the recipients. He has further contended that the Respondent was asked to furnish copies of the invoices to show that the benefit of credit had been passed on to the customers, but the Respondent had failed to do so. The DGAP has also averred that after examining the sale reports for the months of November and December, 2017 it was found that the Respondent had sold the items on which he had availed TRAN-2 credit at the same prices at which these items had been sold in the normal course of business. Accordingly the Report holds that the Respondent had not compiled with the proviso to Section 140 (3) resulting in profiteering of an amount of Rs. 76.06 Crores which was required to be recovered from the Respondent. He has also informed that this amount did not include the credit pertaining to the UTs of Delhi, Puducherry, Goa, Dadra & Nagar Haveliand Daman & Diu, 7–‘11 1– which could be ascertained only after the Respondent had filed the GST Returns. The Respondent was asked to furnish the details of the TRAN-2 credit availed by him for the above UTs and he has informed vide his letter dated 20.07.2018 that he has availed credit of Rs. 2.19 Crores in respect of UT of Delhi, however he had not claimed such credit for the rest of UTs.
19. In the concluding Para the DGAP’s Report states that the investigation had revealed that the allegation of profiteering made against the Respondent was duly established as he had increased the base prices of the products thus maintaining the same selling prices which were existing on 14.11.2017 or had not reduced the selling prices of the products commensurately, despite reduction in the GST rates from 28% to 18% or from 18% to 12% w.e.f. 11.2017. He has also stated that the Respondent had himself admitted profiteering and suo moto quantified the profiteered amount, hence, the provisions of Section 171 (1) of the CGST Act, 2017 had been contravened by the Respondent in the present case. The DGAP had further stated that the extent of profiteering was determined as Rs. 419.67 Crores plus the TRAN-2 credit amounting to Rs. 76.06 Crores which was entirely on account of Central Taxes and hence the total profiteering was held to be amounting to Rs. 495.73 Crores. He has further submitted that the Authority may direct the Respondent the deposit the amount of Rs. 36.19 Crores in the CWF which was recovered by him from his RSs as it amounted to the profiteered amount.
20. The DGAP’s Report dated 15.06.2018 was considered by the Authority in its sitting held on 05.07.2018 and it was decided to hear the interested parties i.e. the Applicants and the Respondent by granting personal hearing on 20.07.2018 at 11 AM, which was postponed to 27.07.2018 on the request of the Respondent. On 27.07.2018 the Applicants No. 1 & 2 did not appear but the Respondent was represented by Shri Srinivas Phatak, Chief Finance Officer, Ms. Shikha Gupta, Head Tax, Shri S. Moorthy, Manager, Shri C. S. Lodha, Advocate, Sh. Dev Bajpai, Head Legal, Sh. Radhakrishnan Menon, Associate, Sh. Gopalan Pasupati, Manager, Corporate Affairs and Smt. Gayatri, Deputy Commissioner and Sh. Bhupender Goyal, Assistant Director (Cost) represented the DGAP.
21. In his submissions dated 27.7.2018, the Respondent referring to the anti-profiteering provisions has stated that for the first time, anti-profiteering provisions were introduced by Section 171 of CGST Act, 2017 and the Government had constituted the National Anti-Profiteering Authority (NAA) and conferred it with specific powers under Chapter XV of the CGST Rules, 2017. According to the Respondent Rule 126 which states as under gives power to the Authority to determine the methodology and procedure:-
“Rule 126:. Power to determine the methodology and procedure: The Authority may determine the methodology and procedure for determination as to whether the reduction in the rate of tax on the supply of goods or services or the benefit of input tax credit has been passed on by the registered person to the recipient by way of commensurate reduction in prices”.
The Respondent has claimed that laying down of the methodology with sufficient clarity and lucidity and informing all stakeholders viz. manufacturers, dealers, retailers, service providers, customers etc.; was of critical importance because that alone could ensure equity, consistency, uniformity and clarity. The methodology and procedure referred to in the Rule should lay down the basic principles relevant to all the industries keeping in view the trade practices which should ensure that Section 171 of the above Act was interpreted in the case of all the registered persons uniformly, he has argued. He has also contended that such guidelines will have to necessarily spell out the concept of “profiteering”, “commensurate” “reduction in prices” and how various factual situations pertaining to different sectors, both, manufacturing and services would be dealt with. He has further contended that while Section 171 has laid down the broad principle, the methodology should define the scope of the above expressions. The Respondent in his submissions has also stated that the DGAP had taken a very literal and simpliciter meaning of these expressions and if the views as expressed in the report were accepted it would result in discriminatory and incongruous orders which were neither intended nor permissible by law.
22. The Respondent in his submissions has admitted that no one should be allowed to make extra profit while the Government had reduced the tax rate for the benefit of the consumers but at the same time extra quantities given to the consumers for the same price, curtailment of fiscal incentives, extra costs incurred which were clearly attributable to the rate change, price reduction effected through trade channels to reduce the prices for the end customers and reimbursement of such payments and the total taxes already deposited etc.; should be taken into consideration before alleging profiteering. The Respondent has acknowledged that this Authority in exercise of the powers conferred upon it under Rule 126 of the CGST Rules, 2017 has notified “Methodology and Procedure” for determination as to whether the reduction in the rate of tax on the supply of goods has been passed on by a registered person to the recipient by way of commensurate reduction in the prices or not, but he has claimed that the above “Methodology and Procedure” dealt only with the procedural aspects and did not deal with the issue of ‘Methodology of determination’ which was the crux of Rule 126. He has also stated that the Methodology alone was a guiding factor which could help to decide the question of profiteering as per Section 171 and Rule 126. Therefore, the Respondent has requested that in the interest of justice, equity and fairness, his case should be taken up for adjudication by the Authority only after formulating the methodology as contemplated by Rule 126 and the report submitted by the DGAP should be examined in the light of such methodology. He has also intimated that he had voluntarily deposited a sum of Rs. 124.04 Crores on 21.06.2018 in the CWF on the assumption that he was required to pay the said amount in addition to the amount of Rs. 36.19 Crores (Total Rs. 160.23) collected from his 3494 RSs, being excess amount earned by them on the stocks held by them as on 1511.2017 which should sufficiently demonstrate his bonafides. The Respondent has also tried to support his claims by giving various examples through which benefit of tax reductions could be passed on.
23. The Respondent on 09.08 2018 has further made detailed written submissions in which he had reiterated the various submissions made before the DGAP. In addition he has also raised certain legal issues by quoting the provisions of Section 171 and submitted that this Authority was the institutional mechanism under the GST law to check unfair profit-making activities by the trading community and the main function of the Authority was to ensure that the trader’s were not realizing unfair profit by charging higher prices from the consumers in the name of GST. He has also referred to the GST flier which was published by the Central Board of Excise & Customs (CBEC) to provide an overview of the anti-profiteering provisions which clarified that the intent of these provisions was to protect the end consumer from arbitrary price increase to ensure that the businesses did not pocket all the gains from the GST and did not profiteer at the expense of the common man. Claiming that the expression ‘profiteering’, which had not been defined in the CGST Act or the Rules, he has submitted that it should be understood in it’s natural and common parlance understanding. He has also referred to the various dictionary definitions of profiteering which are reproduced as follows:-
Merriam Webster’s Collegiate Dictionary [Tenth Edn.]:- The act or activity of making an unreasonable profit on the sale of essential goods especially during times of emergency.
Business Dictionary:- Disproportionately large or grossly unfair profit, generated often through manipulation of prices, abuse of dominant position, or by exploiting a bad or unusual situation such as temporary scarcity. There is usually no governmental control over profiteering unless it involves illegal means.
Cambridge Dictionary:- the activity of taking unfair advantage of a situation to make a large profit, often by selling goods that are difficult to get at a very high price:
Wikipedia: – Profiteering is a pejorative term for the act of making a profit by methods considered unethical.
Thus, ‘profiteering’ according to him was a pejorative term which connoted unethical, immoral, illegal and contumacious conduct on the part of a company whereby it earned disproportionately large and unfair profit. The Respondent has claimed that a company’s intent and conduct under the given circumstances keeping in view it’s complexity of the operations and feasibility of implementing various alternatives etc. were critical and important factors before judging it’s actions as honest and bonafide or as dishonest and contumacious resulting in undue gain to it. He has also contended that the spirit of the law was required to be considered before deciding as to whether the actions taken by the company were in the best interests of the economy and the consumers or were in any manner intended to benefit the company itself. He has further contended that considering the enormity of operations and the logistical difficulties, he did all that was possible to sub-serve the intent of the Government in passing on of the benefits to the consumers. He has also claimed that his bonafide intentions should be judged by the fact that he had kept the apex functionaries of the Government informed and that he had not gained even a rupee extra, leave aside profiteering and his actions could not be called unethical, immoral or contumacious.
24. The Respondent has also submitted that vide his letters dated 21.11.2017 and 04.12 2017, he had informed the Chairman CBIC that wherever it was not practically possible for him to pass on the benefits, the differential excess realization would be deposited with the Government ensuring that no benefit whatsoever was retained or kept by him and there was no gain of even one rupee to him nor there was any profiteering. He has further submitted that he had computed the amount on the assumption that the benefit of rate changes needed to be passed on immediately and that there was no lead time available for liquidating the pipeline stocks and therefore, he had suo-moto determined the amount of excess realization and volunteered to deposit it into the CWF vide his letters dated 04.12.2017 and 08.01.2018, even before investigation was launched. He has also intimated that he had deposited into the CWF a sum of Rs. 124 Crores although based on the actual calculations the cumulative excess realization did not exceed Rs. 121.5 Crores. He has also pleaded that he had regularly updated the authorities about his intentions of depositing the amounts profiteered into the CWF, but was surprised for being served with a notice dated 10.01.2018 by the DGAP for initiation of investigation. He has also stated that the above notice made it appear as if someone had complained that he had indulged in profiteering and that the DGAP had learnt about this for the first time from such complaint. He has also enclosed copies of the letters written by him to the Chairman CB1C and the advertisements issued by him to claim that he had made all efforts to pass on the benefit of tax reductions along with his submissions.
25. Referring to the DGAP’s Report dated 15.06.2018 the Respondent in his submissions dated 14.09.2018 has admitted that the rate of GST on the goods supplied by him was reduced w.e.f. 15.11. 2017 and the Maximum Retail Prices (MRPs) in respect of the goods already in sale pipeline could not be reduced during the transition period and therefore, he had volunteered to deposit the excess collection made on such sales. He has emphasized that the DGAP in his report had acknowledged that the Respondent had suo-moto, even before a notice was issued to him, had come forward to deposit the excess realization which could not be passed on. The Respondent has also submitted that the interpretation of Section 171 of CGST Act, 2017 made by the DGAP was too literal and completely ignored the intent, object and purpose of the above provision. Referring to the various judicial pronouncements of the Apex Court he has stated that the modern trend was to construe a statute purposively with the intent of ascertaining the object and intent of the law and to so harmoniously interpret the provision that it furthered the intent, object and purpose of the statute and hence a law intended to check profiteering must be purposively construed. He has also claimed that the emphasis of the Section was on non-retention of benefit of tax rate reduction by the manufacturer/dealer and passing it on to the recipient and not on the mode of such passing on whereas the Report had taken the literal meaning and prescribed only one mode of passing on the benefit by way of commensurate reduction in the prices. He has claimed that as long as it was clearly demonstrated by a manufacturer/dealer that the benefit had been effectively passed on, the mode was not the determinant factor and whether such a manufacturer/dealer had enriched himself illegally or has been honest enough in passing on the benefit in accordance with prevalent trade practice had to be looked into. He has also submitted that a correct interpretation of Section 171 was fundamental to this case so as to ascertain the Respondent’s genuinety and transparency in passing on the benefit either by reducing the prices or by giving more quantity of goods to the customers or by offering to deposit the excess realization in the CWF. According to the Respondent Rule 126 carried the mandate to provide methodology precisely with a view to avoid such disputes and to give broad guidelines within which manufacturers, dealers and retailers could function in a manner so as to sub-serve the intent of the anti-profiteering provisions and also to carry on their business in accordance with their long-established trade practices.
26. The Respondent has also claimed various deductions on account of PD, TTSM, and FD etc. and claimed that it has been a trade practice prevalent in the FMCG industry to effectively reduce the prices by offering more quantity of the goods supplied either by weight, volume or number for the same price and the schemes like buy one get one free, get three for the price of two, two liters for the price of one and seven grams for the price of five grams etc. were popular and prevalent in the trade where both the manufacturers and the consumers recognized them as a price reduction mechanism. He has therefore claimed that in the case of a 10% price reduction, either the price itself could be lowered by 10% or equivalent extra goods or quantity could be offered to the recipients and in either of the situations, both, the seller and the buyer regarded it as an effective price reduction. The consumers recognized the grammage increase as a definite benefit and that the advertisements issued by him following the rate change had explicitly mentioned the additional grammage on the packs given to the consumers and hence the supply of increased/higher quantity of the product at the same price was nothing but effective price reduction. He has accordingly pleaded that the interpretation of Section 171 adopted by the DGAP was incorrect, baseless and contrary to even the elementary perception of buyers and sellers and completely ignored the practices followed in the market for FMCG. He has also argued that in the case of value-based packages, giving of higher grammage was the most optimal and feasible solution from the perspective of the consumers. Referring to the provisions of the Legal Metrology (Packaged Commodities) Rules, 2011 (LM Rules) which provide for rounding off of the price to prevent coinage issues, he has submitted that such rounding off was prescribed in respect of the general packs and not in respect of the value-based packages and the application of the above mentioned Rules to such packages would lead to absurdity. He has also quoted Rule 2 (m) of the above Rules which states as under:-
“retail sale price”, means the maximum price at which the commodity in packaged form may be sold to the ultimate consumer and the price shall be printed on the package in the manner given below;
“Maximum or Max. retail price Rs inclusive of all taxes or in the form MRP Rs ………../ ……… incl.; of all taxes taking into account the fraction of less than fifty paisa to be rounded off to the preceding rupee and fraction of above 50 paise and up to 95 paise to the rounded off to fifty paise;”
Quoting an example of his product Clinic Plus Shampoo, the Respondent has submitted that the price of a sachet of the above Shampoo which was priced at Rs. 1/- would need to be reduced to 0.92 paise to give effect to the rate reduction and going by the Rule 2 (m), the price would have to be rounded off to 50 paise leading to halving of the realization per pack and if the Respondent was in the business of supplying only 1 Rupee price point packs, application of this Rule would mean reduction of sales by 50% and hence it could not be the intent of law nor a reasonable interpretation of the commensurate reduction as application of the above mentioned rule to the value-based packages would lead to absurdity. He has further submitted that it was for this reason that Rule 5 of the above Rules which dealt with “Specific commodities to be packed and sold in recommended standard packages,” was introduced which reads as under:-
“Notwithstanding anything contained in the Second Schedule, the Manufacturer or Importer may sell the value-based package in terms of Rupee 1, Rs. 2, Rs. 3, Rs. 4, Rs. 5, Rs. 6, Rs. 7, Rs. 8, Rs. 9 and Rs. 10 after making other declarations specified in Rule 6.”
Therefore, the Respondent has claimed that the law on packaged commodities, thus, specifically permitted sale of the value-based packages at the lower denominations. He has further claimed that Rule 5 (3) was a separate code in itself that dealt with the value-based packages and in view of the non-obstante clause, such packages could be sold at the above denominations and therefore his rationale for passing on the benefit of GST rate reductions by increasing the grammage for such packs should have been allowed by the DGAP as such grammage increase was a definite benefit to the consumers and hence reduction in the effective prices paid by them was to be allowed to the extent of Rs. 119.67 Crores to him on account of additional grammage from the profiteered amount. He has further submitted that if the Authority did not consider it as a price reduction, it should at least accept that these packs with higher grammage would be regarded as new packages with a quantity that was different than the packages which existed before the GST rate change as the provisions of Section 171 applied to a pack existing at the time of rate change and the packages with revised the grammage should be outside the ambit of these provisions.
27. With regard to the disallowance of deduction claimed on trade discounts reimbursed by the Respondent to his dealers of MT amounting to Rs. 26.37 Crores he has stated that the DGAP had not appreciated the issue in it’s proper perspective as when the goods were sold to the MT, the base prices were revised because the old packages which were lying in the pipeline on the date of announcement of the GST rate reduction carried the old MRPs and he had suggested to the MT dealers who were the “recipients” of his goods that since the packages carried the old MRPs, if they were to reduce the prices for the consumers, then they would be reimbursed. He has claimed that this was a suitable method to pass on the benefit to the consumers as MT dealers were large in number and were organized. He has claimed that the MT dealers had agreed and accordingly the excess amount in base prices recovered from them was reimbursed and therefore, while calculating the profiteered amount he had rightly deducted the amounts which were already passed on to the MT dealers however, The DGAP despite agreeing that the reimbursement was given to the MT had disallowed any such deduction. The Respondent has also submitted that he has passed on the benefit of the rate reductions by way of reimbursement through the debit or credit notes and the actual figures from the GST returns should be taken into account after considering them. The Respondent has also submitted that Section 171 dealt with passing on of benefit to the recipient by way of commensurate reduction in the price and the term recipient was defined in Section 2 (93) of the above Act, as under:-
“recipient of supply of goods or services or both means
(a) Where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;
(b) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
(c) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
On the basis of the above definition the Respondent has claimed that his recipient in the present case was the MT as it was liable to pay the sale consideration and since the fact of reimbursement to MT was not in dispute, amount of Rs. 26.37 Crores reimbursed to the MT, must be allowed as deduction.
28. With regard to the denial of deduction on account of reduction in the fiscal incentives of Rs. 45.31 Crores by the DGAP the Respondent has submitted that the area-based incentive was a direct benefit from the Central/State Governments for setting up a factory in a backward area and the Companies made the investment decisions based on an analysis of the value of this benefit vis-a-vis the higher costs of operating in a backward area and hence this incentive was a subsidy which impacted both the sale price and the net realization. He has also cited the details of benefit of this incentive as under:-
Cost of production (in Rupees)
| Raw Material cost | 45.00 |
| Production costs | 9.00 |
| Other costs | 9.00 |
| Profit | 11.00 |
| Less incentive from Government | -3.00 |
| Base Price | 71.00 |
From the above illustration the Respondent has claimed that the base price charged by the Respondent was influenced by the absolute amount of incentive and although the DGAP had admitted that the quantum of benefit had been reduced in the absolute terms but he had denied the deduction on this account. He has also stated that when the incentive value was reduced it would necessitate an offsetting increase in the base price and therefore the increase in the base price to the extent of reduction in the incentive value could not form part of the profiteering computation.
29. The Respondent has also claimed that in order to expedite the passing of the benefits to the consumers wherever possible by way of revised MRPs, the existing packing materials with old MRPs printed on it had to be written off and he had consciously decided not to comply with the fixing of new MRPs through stickers as they could easily be removed from poly packs and the benefits would not flow to the consumers which was in the best interest of the consumers. The Respondent has claimed that he had provided the list of the written off packing material location-wise along with the audited certificates issued by the Chartered Accountants and therefore he was rightly eligible to claim this deduction of Rs. 7.80 Crores on account of writing off of the packaging material.
30. The Respondent through the following illustration has claimed that if the base price would have remained unchanged; the GST deposited would have been Rs. 12.80 however, In view of the increase in the base price, an additional GST of Rs. 1.10 had already been paid by him to the Government. He has also stated that the DGAP had not appreciated that extra GST collection as a result of increase in the base price which had already been deposited with the Government and thus the Government had received more GST than what it would have received had there been no change in the base prices and accordingly an amount of Rs. 64 Crores should be allowed as deduction from the profiteered amount in as much as this amount had already been deposited with the Government as tax:-
| Particulars | Pre-15.11.2017 | Post 15.11.2017 |
Post 15.11.2017 (no change in base price) |
Differential amount due to higher base price |
| 1 | 2 | 3 | 4 | 5 |
| Base Price charged to Stockist | 71.00 | 77.30 | 71.00 | 6.30 |
| GST | 19.90 (28%) | 13.90 (18%) | 12.80 (18%) | 1.10 |
| Total invoice price to the stockist |
90.90 | 91.20 | 83.80 | 7.40 |
31. The Respondent has further stated that the sales to to Central Police Force (CPF) and to Central Railway Police Force (CRPF) were made at the base rates which excluded GST as was the case in respect of the CSD however, the DGAP had included these sales in the profiteered amount which should not have been done using the same principle as was applied in the case of the sales made to the CSD and therefore, he has claimed a deduction of Rs. 3.8 Crores. He has also provided a list of the CPF/CRPF dealers along with their GSTN numbers and co pies of sample invoices issued to them before and after the GST rate changes to demonstrate that the base prices excluding tax had remained unchanged.
32. The Respondent has also submitted that the Report has computed profiteering on the sale of the semi-finished goods which were sold by him to the third party manufacturers for further processing and since the sale was not for consumption as the finished goods were ultimately purchased by him, such sales of the semi-finished goods needed to be excluded. He has claimed that an amount of Rs. 2.6 Crores was erroneously included in the computation of the alleged profiteered amount which was required to be deducted. He has also submitted sample copies of the invoices to and from the contract manufacturers for the same product in support of his claim.
33. The Respondent has further submitted that despite inflationary pressures, he has passed on the full benefits of the GST rate reductions and has not increased his prices until February, 2018. He has taken objection to the DGAP’s Report which has alleged that the Respondent had made extra profit due to the rate reduction without corresponding increase in the sales and this was due to the GST benefits which had not been passed on by him to the The Respondent has also claimed that the DGAP had not appreciated that the introduction of GST had necessitated key accounting changes. He has also contended that increase/decrease in the profit of a Company was influenced by multiple factors such as volume, mix, cost of materials, inflation and overhead efficiencies etc. and not just sales growth
34. The Respondent has further submitted that the voluntary offer made by him on account of excess realization has been termed as “profiteering”. He has also claimed that his conduct of coming forward and voluntarily offering the differential tax amount for deposit has been misconstrued and it only implied that the DGAP had approached the matter with a preconceived mind to conclude that the Respondent had violated the anti-profiteering provisions. He has also submitted that the DGAP’s Report had alleged a profiteering of Rs. 419.67 Crores and the said amount was required to be recovered since the provisions of Section 171 had been contravened however, the computation of the above amount was based on the quantity and value of the outward taxable supplies across 12,016 items as per the GSTR-1 return data filed for the period from November 15, 2017 to February 28, 2018 and the rationale behind the computation had not been explained in a comprehensive manner. He has also stated that the computation has ignored the credit/debit notes reported in the GSTR 1 and the amounts refunded by him to the MT by way of such notes. He has also claimed that the Report did not explain why the differential amount reflected in the Report was grossed up for GST at the applicable rate of tax of 18% / 12%.
35. The Respondent has also submitted that the TRAN-2 credit of Rs. 76.06 Crores availed by him was not a subject matter of this investigation and hence the same could not be added to the alleged profiteered amount under Section 171. He has also stated that reliance has been placed on the sales report for the months of November and December 2017, for drawing an inference that he had not passed on the benefit of TRAN-2 credit that he had availed. He has claimed that he had filed for credit for the period between July to December 2017 only in February 2018 and hence he could not have said to have availed the above credit in the months of November and December 2017. Consequently, the question of passing the benefit of TRAN-2 did not arise and hence the allegation was factually incorrect. He has also contended that Rule 129 of the CGST Rules, 2017 warranted issue of notice to the interested parties containing, inter-alia, the description of the goods or services in respect of which the proceedings had been initiated as well as the summary of the statement of facts on which the allegations were based and since the notice did not allege anything on the TRAN-2 credit it could not form part of the investigation. He has further submitted that the TRAN-2 credit was available in respect of the inputs held in stock as on 30.06.2017 whereas the ITC under the GST was available upon the taxes that were charged on supply of goods/services after 01.07 2017. He has claimed that based on the reading of Section 140 (3) as well as the definitions of “Input tax” and the “Input tax credit” given under the CGST Act, 2017, it was clear that the TRAN-2 credit was on account of the stocks held prior to the GST implementation which could clearly not be regarded as a supply of goods on which CGST/SGST/UGST/IGST could have been charged. He has further claimed that the taxes or duties on such stocks were paid under the laws existing in the pre-GST regime and hence such taxes or duties did not qualify as input tax under the definition given in the Act and accordingly, the TRAN-2 credit could not be considered as ITC under the above Act. He has also contended that Section 171 dealt with passing of the benefit of the ITC but given that the Tran-2 credit did not qualify as ITC under the above Act, Section 171 could not be invoked and accordingly, TRAN-2 amount could not be added to the amount of alleged profiteering under Section 171. Quoting the relevant provisions of the transitional credit the Respondent has claimed that a depot of a manufacturer was not required to be registered under the previous tax regime because the Excise Duty (ED) was required to be paid only at the time of clearance from the factory and there was no requirement for registration of such depots, however, post GST, when goods were removed from such depots, the GST was required to be paid and hence they were required to be registered and therefore Section 140 (3) of the above Act allowed a registered depot to avail credit of the finished goods held in stock as on 30.06.2017 only if the conditions mentioned therein were satisfied. The Respondent has also stated that if the goods had moved from one depot to another and if the invoices were not in his possession credit was still available to the depot as per the transitional provisions specified under Rule 140 (3). The Respondent has also claimed that the goods in respect of which credit was claimed under TRAN-2 were the goods which had borne appropriate duty on which GST would have to be paid again which would amount to double taxation and therefore to avoid such double taxation provisions under Section 140 (3) read with Rule 117 had been made to permit either full credit when the documents were available or partial credit was allowed when the documents were not available, accordingly the Respondent has submitted that on all counts this demand on account of TRAN-2 credit was not legal, valid and proper.
36. Further the Respondent vide his written submissions dated 14.9.2018 and 27.9.2018 has reiterated his earlier submissions with few changes in the figures of various amounts. As per the latest submissions the amounts suo-moto determined and deposited into the CWF has been claimed to be Rs. 124.04 Crores as has been shown in Table 1 after claiming the deductions of Rs. 320.70 Crores as has been shown in Table 2 below:-
Table-1
| Date | Period | Amount deposited (Rs.Cr.) |
| 04.12.2017 | 15.11.2017 to 30.11.2017 | 59.94 |
| 08.01.2018 | 01.12.2017 to 31.12.2017 | 59.04 |
| 05.03.2018 & 10.04.2018 |
01.01.2018 to 28.02.2018 | 5.06 |
| Total | 124.04 | |
Table-2
(in Rs. Crores)
| 1 | Benefit passed on through extra grammage | 119.67 |
| 2 | Benefit given to Modern Trade | 26.37 |
| 3 | Packing material written off in view of rate change | 7.80 |
| 4 | Loss of fiscal incentive entitled for recoupment | 45.31 |
| 5 | Deposited with Consumer Welfare Fund | 124.04 |
| Total | 323.19 | |
| Extra collection by the Company (5774.80 — 5454.10) | 320.70 | |
| Excess Paid | 2.5 |
37. The Respondent has further submitted that if he had kept the unit base prices of all the packs unchanged as they prevailed on 14.11.2017, and had charged GST @ 18% instead of 28%, the base prices so recovered would have been Rs. 5454.10 Crores as against the actual higher realization of Rs. 5774.80 Crores as had been reflected in his GST Returns, therefore, he has claimed that an amount of Rs. 320.70 Crores was the extra realization if the difference between the base prices actually received was compared with the base prices that should have been charged. He has also submitted Auditor’s certificate of Rs. 119.67 Crores which has been claimed as grammage benefit along with the details of the same. He has also produced some advertisements and letters from the MT sector to prove that promotional schemes were passed on to the customers.
38. The Respondent was directed to show cause vide notice dated 29.08.2018 why penalty should not be imposed on him for violation of the provisions of the CGST Act, 2017 in reply to which vide his submission dated 14.09.2018 the Respondent has stated that the penalty could be imposed only after the determination of profiteering against him. He has further submitted that the penalty could be imposed only when his action was contumacious and actuated by desire to cheat the revenue however, in the present case it was evident that within six days of the GST rate changes, he had approached the Chairman, CBIC to ensure that he fulfilled the mandate of the law and then he had acted in accordance with the guidance received. He has also claimed that he had also ensured that the hundreds of his retailers did not profiteer and he had himself not kept or profited even by a rupee and also volunteered to deposit an amount of Rs. 124 Crores in the CWF. He has further claimed that his conduct also got appreciation from the authorities as had been mentioned in the Report and he had acted in the best interests of the consumer and thus he could not be called dishonest or contumacious warranting imposition of penalty.
39. Vide his submissions dated 27.09.2018 the Respondent has submitted clarifications on certain points which were raised by the Authority during the hearing held on 14.09.2018. The Respondent was asked to clarify whether Rs 320.70 Crores, were an admitted amount of profiteering? The Respondent has stated that the amount of Rs. 320 Crores was an extra realization, i.e. the difference between the base price actually received as compared to the base price that would have been received if there was no change whatsoever. He has also attached a certificate from the statutory auditors confirming the correctness of Rs. 320.70 Crores being the maximum amount on account of excess realization due to GST rate reductions w.e.f. 15.11.2017. The Respondent has further submitted that the computation of grammage deployment of Rs 119.67 Crores was provided by him to the DGAP on a monthly basis. Details of which were as below:-
(in Rs. Crores)
| Letter dated | Annexure No. | Grammage Delopment |
| 05th March 2018 | 3 | 11.35 |
| 09th March 2018 | 2 | 48.12 |
| 10th April 2018 | 2 | 60.19 |
| 119.67 |
40. The Authority had also asked him to resubmit the details of grammage deployment in the format of Annexure-25 prepared by the DGAP however, he had failed to do so. The Respondent has also claimed that the increase in the grammage was done in response to the GST rate reductions and not during the regular course of business. He has also submitted that the grammage changes were done to ensure that the benefit of rate reductions could be passed on to the consumer expeditiously by adjusting grammage wherever it was feasible and possible. He has also enclosed sample newspaper advertisements and copies of the letters from the Trade Association to further justify his claims. The Respondent has also maintained that the reimbursements given to the MT dealers were made in response to the GST rate reductions details of which were provided to the DGAP to substantiate that the schemes were run to pass on the GST benefit along with the credit note details. He has further submitted that his credit/debit notes demonstrated that the benefit was passed on and he was not legally obliged to confirm whether the benefit was further passed by the MT to its consumers however, his key MT dealers had confirmed that the benefit had been further passed on. The Responded has also argued that his offer of voluntarily deposit of the excess realization of base prices made to the Chairman was not an after-thought due to the complaint filed against him. He has further submitted that he had written to the Chairman within 6 days of the rate changes on 21.11.2017 stating the principle to be adopted in passing on the benefit to the consumers, based on which he had deposited an amount of Rs. 59.94 Crores and Rs. 59.04 Crores vide his letters dated 04.12.2017 and 08.01.2018 respectively in the CWF. The Respondent has also contended that he had come to know that a complaint had been filed by an anonymous applicant on 10.01.2018 when he has received notice for initiation of investigation under Rule 129 of the CGST Rules, 2017 by the DGAP. The Respondent has admitted that he had no legal authority to recover the amount on account of the benefit on the transition stock lying with his RSs. He has also submitted that he had done this as a matter of good governance and the proposal to recover the benefit earned by the RSs on transition stock was not due to any legal authority which he had. He has claimed that he had sought guidance from the DGAP on the modalities of passing on the benefits to the consumers vide his letter dated 25.01.2018 2018 and the DGAP vide his notice dated 21.02.2018 had enquired whether the process of recovery from the RSs had been completed. In response to this notice, he had clarified to the DGAP, vide his letter dated 22.02.2018, that he had still not made any recovery from the RSs as he was awaiting guidance from the DGAP on the modalities of passing on the benefits. He has also mentioned that based on the query from the DGAP, his inference was that the DGAP wanted him to recover this benefit from all the RSs. He has further claimed that he had kept the CBIC and the DGAP informed at every step and explained his approach with respect to the matter relating to the recovery from the RSs on account of the transition stocks. He has also contended that he had walked the extra mile to help recover the amount expeditiously and deposit it with the CWF although he had no legal right to do so.
41. Vide his submission dated 22.10.2018 the Respondent has submitted the details of the products impacted by the GST rate reductions and the date of grammage increase for each product and details of publicity of this grammage increase alongwith newspaper advertisements, screen shots of Company’s Website, electronic and digital advertisements, advertisements on the E-commerce website, and the advertisements on the packs. He has also submitted that he had issued a letter dated 21.11.2017 to his RSs stating that “as per GST regulation, we need to pass on the benefit to the end consumers through MRP reduction/ increased fill levels”. On the similar lines two more letters dated 12.2017 and 31.01.2018 were issued to the RSs mentioning that “the benefit of lower taxes across the portfolio are being passed on in the form of lower MRP or higher grammage”. He has also submitted that the RSs were using the distribution management software for placing orders with him on which the latest price or grammage was available at a product level and hence, all grammage changes were clearly known to the RSs via software. He has further submitted that due to clerical mistake he had provided wrong value of grammage deployment and it should be read as Rs. 118.68 Crores instead of Rs. 119.67 Crores.
42. Vide submissions dated 11.2018 earlier submissions made by the Respondent were reiterated and details relating to Rs. 118.68 Crores i.e. the benefit of GST rate reductions passed on by way of increased grammage in the format sought by the Authority were provided.
43. The Authority had sought certain clarifications from the DGAP who vide his Report dated 31stAugust 2018 has reiterated his findings made in the original Report dated 15.06.2018. He has also submitted that in the case of CSD the benefit of reduced rate of tax was extended since there was no price increase. The DGAP has also admitted that Rs. 3.80 Crores were erroneously included in the alleged profiteered amount on account of the sales made to the CPF and the CRPF. Further vide his Report dated 25.09.2018 the DGAP has clarified that a list of 99,281 products mapped with Consumer Buying Unit (CBU) codes was submitted by the Respondent out of which 44,690 products had more than one CBU code. He has further submitted that as far as Annexure-25 of his Report was concerned, the calculations were based on pre and post reductions in the GST rates and the details of the outward taxable supplies for the period between 15.11.2017 to 28.02.2018 as had been submitted by the Respondent.
44. We have carefully examined the DGAP’s Report, the written and the oral submissions made by the Respondent and all the documents that are placed on record. It is revealed from the record that there is no dispute that the Central Government, on the recommendation of the GST Council, had reduced the GST rates w.e.f. 15.11.2017 on several goods from 28% to 18% and from 18% to 12% vide Notification No. 41/2017-Central Tax (Rate) dated 14.11.2017. The main products being sold by the Respondent on which these rates were reduced have been shown in the table below:-
| SI. No. | Category | Major Brands | Tax Rate till 14.11.2017 | Tax Rate after 15.11.2017 |
| 1 | Personal Wash | Lux, Dove, Pears, Lifebuoy | 28% | 18% |
| 2 | Hair Care | Clinic Plus, Dove, Sunsilk | 28% | 18% |
| 3 | Skin Care & Cosmetics | Fair & Lovely, Ponds, Vaseline, Lakme |
28% | 18% |
| 4 | Deodorants | Axe, Rexona | 28% | 18% |
| 5 | Fabric Wash | Surf Excel, Rin, Wheel,Sunlight | 28% | 18% |
| 6 | Household Care | Vim, Domex, CIF | 28% | 18% |
| 7 | Coffee | Bru | 28% | 18% |
| 8 | Food Products | Knorr, | 18% | 12% |
45. It is also revealed from the record that 12,016 items comprising of 1836 packs which were being sold by the Respondent were impacted by the rate reductions out of which 11,820 items comprising of 1814 packs constituting 99.71% of the sale value of the total impacted items were affected by the rate reduction from 28% to 18% and the rest 196 items comprising of 22 base packs constituting 0.29% of the sale value of the total impacted items were affected by the GST rate reduction from 18% to 12%. It is also revealed from the perusal of Annexure-25 submitted by the DGAP, the contents of which have not been rebutted by the Respondent by producing any cogent evidence, in which item wise profiteering has been computed by the DGAP on the basis of the data provided by the Respondent himself that the Respondent had denied benefit of Rs. 419.67 Crores to his customers by increasing the base prices w.e.f. 15.11.2017 the day from which the rate reductions had come in to force. This increase was either exactly equal to the benefit of rate reductions or was more than such reductions. The Respondent had no ground to increase the base prices except that he wanted to appropriate the benefit of tax reductions. Had his intentions been bonafide he should not have increased his base prices and instructed his RSs to reduce their prices. The rates of tax were recommended to be reduced by the GST Council in it’s meeting held on 10.11.2017 and within a period of 4 days the Respondent had manipulated his software by increasing the base prices of as many as 12,016 items instead of only reducing the rates of tax which would have compelled his RSs to lower the prices commensurate with the reduction in the rates. Further the Respondent has himself admitted that had he not increased the base prices as were existing on 14.11.2017 and had charged GST © 18% instead of 28% the total sales realization would have been Rs. 5454.10 Crores as against the actual realization of Rs. 5774.80 Crores reflected in his Returns and hence he had made extra realisation of Rs. 320.70 Crores. By no stretch of imagination this amount of Rs. 320.70 Crores can be termed as extra realization as this in fact is the amount the benefit of which has been denied by the Respondent to his customers. The Respondent has also admitted that he had deposited an amount of Rs. 124.04 Crores in the CWF on 04.12.2017, 08.01.2018, 09.03.2018 and an amount of Rs. 36.19 Crores on 10.04.2018 which he had recovered from his RSs, therefore, the Respondent has himself admitted that he had resorted to profiteering as only the profiteered amount could be deposited in the CWF. Perusal of the Audited Financial Results published by the Respondent also shows that during the year 2017-18 after the rates of tax were reduced his sales had increased only by 2% but his profits had increased by 19%, during the quarter ending December, 2017 his sales had increased by 2% but his profits had increased by 28% and during the quarter ending March, 2018 his sales had increased by 3% whereas his profits had increased by 24% whereas during the year 2016-17 before the rates of tax were reduced his sales had increased by 3% and his profits had also increased by 3%. Therefore, it is established that the increase in his profits was entirely due to the increase in the base prices made by the Respondent through which he had denied the benefit of tax reduction to his customers and appropriated the tax benefits himself. Hence, it is established beyond any iota of doubt that the Respondent has committed breach of the provisions of Section 171 of the CGST Act, 2017 by resorting to profiteering.
46. The Respondent has laid great stress on formulation of the `Methodology of determination’ under Rule 126 of the CGST Rules, 2017 which should spell out the concepts of ‘profiteering’, `commensurate’ and ‘reduction in prices’. The Respondent has also claimed that this Authority had not notified such methodology under the above Rule. In this regard it would be appropriate to mention that this Authority under Rule 126 of the above Rules has already promulgated the “Methodology and Procedure” vide it’s Notification dated 28.03.2017 which has been exhibited on it’s website. It would also be relevant to point out here that the computation of the profiteered amount under Section 171 has to be done on the basis of the facts of each case and hence no general methodology can be prescribed for the same. The basic aim is to ensure that both the benefits of reduction in the rate of tax and ITC are passed on to the consumers by commensurate reduction in the prices. As per the provisions of the above Rule the Authority has power to ‘determine’ and not ‘prescribe’ the methodology. During the course of the present proceedings the Respondent was repeatedly asked to suggest alternate methodology if he was not satisfied with the computation of the profiteered amount made by the DGAP but the Respondent has failed to do so. The Respondent has also calculated the profiteered amount himself and deposited the same in the CWF which clearly shows that he was aware of the concepts of profiteering, commensurate and reduction in the prices. Therefore, all the objections raised by him in this behalf are frivolous and cannot be accepted.
47. The Respondent has also referred to the dictionary meaning of profiteering and claimed that he had not resorted to profiteering. However, it is quite clear from the record that he had illegally and wrongly increased the base prices of the products on which the rates of tax had been reduced w.e.f. 15.11.2017, the day from which this reduction had come in to force. Therefore, it is established that he had earned disproportionately large and grossly unfair profit by exploiting an unusual situation in which the rates of tax had been reduced and hence his act squarely falls within the definition of profiteering being unethical, immoral, illegal, malafide and contumacious.
48. The Respondent quoting 2 cases decided by the Hon’ble Supreme Court viz. Badridas Daga v. CIT 34 ITR 10 (SC) and CIT v. Meghalaya Steels Ltd. (2016) 67 com158 (SC) has submitted that profit has to be understood in a sense in which no commercial man would misunderstand it and the net profit could only be calculated by deducting from the sale price of an article, all elements of cost which go into manufacturing or selling it. It is respectfully submitted that the above cases are not relevant in the facts of the present case in as much as Section 171 of the CGST Act, 2017 does not deal with profit it only applies in the case of profiteering. Profiteering as laid down in the CGST law read with the CGST Rules only implies that whenever there is reduction in the rate of tax or benefit of ITC is available both of them should be passed on to the recipient in the form of commensurate reduction in the prices. There is no element of profit or costing involved in the present case. Therefore, the above judgements are of no help to the Respondent.
49. In this connection it would be relevant to apply the ratio of the judgement passed on the issue of profiteering in the case of Glaxo Smithkline Pharmaceuticals Limited, Civil Appeal No. 1939 of 2004 and Civil Appeal No. 1940 of 2004 by the Hon’ble Supreme Court vide which the Hon’ble Court had upheld the decision of the department to implement the price reduction from the date specified in the notification on all goods in the supply chain upto the last level so that the benefit of price reduction reached the consumer. The facts of the case were that the DPCO had issued a notification reducing the prices of certain products manufactured by the pharmaceutical companies and these reductions in prices were to come into effect within 15 days from the date of notification. A letter was issued by the Inspector of Drugs that the notification was applicable to all the products in the pipeline irrespective of the fact that they were manufactured on or before the issue of the notification. This letter was challenged by Glaxo Smithkline Pharmaceuticals Limited in the Hon’ble High court of Karnataka which had upheld the contention of the Inspector while a similar case was decided in favour of the manufacturer by the Hon’ble High Court of Delhi. Both these cases were appealed before the Hon’ble Supreme Court. The argument of the Id. Additional Solicitor General before the Hon’ble Supreme Court was that the scheme of the two DPCOs, 1987 and 1995 was very clear that once the price was notified for a formulation, the sale to the consumer could only be at the notified price and it was an absolute obligation on all persons not to sell any formulation to any consumer at a price exceeding the price which was the MRP price. The Id. Additional Solicitor General also argued that the words “carried into effect” read with “within 15 days” indicated the outer limit and there could not be two different prices in the distribution chain. The benefit of the price reduction would mandatorily have to be passed on to the consumer from the moment the reduction became operative and therefore there could not be one price that was operational at the end-point of the distribution chain and another price upstream in the distribution chain. It was also argued that it was possible that certain stock has been purchased at the higher and revised price and was lying with the distributor or wholesaler or retailer but once the revised price came into effect, this stock became unsellable at the higher price, and the losses or reductions needed to be absorbed somewhere in the distribution chain. How the manufacturers/distributors and dealers, inter-se, make arrangements for these losses to be absorbed, depends on the specific contractual and credit arrangements. It was emphasized that paramount consideration of the Central Government was that the revised price must be carried into effect in so far as the consumer was concerned and it was for the manufacturers and distributors to make appropriate arrangements how the unsold stock was dealt with. It was the submission of the Id. Additional Solicitor General that the relabeling was permitted under the law governed by the Legal Metrology Act, 2009. The Hon’ble Supreme Court in its order ruled that “We agree with learned Additional Solicitor General that the period of 15 days is simply a grace period or cooling period allowed to manufacturers to adjust their business in a manner where appropriate arrangements are made with regard to the unsold stocks in the distribution chain. The argument of the manufacturer or distributor, if accepted, that the stocks cleared by the manufacturer before the fifteenth day can be sold to the consumer at the higher unrevised price then, in our view, that may result in same formulation being offered for sale to a consumer at two different prices. We find ourselves in agreement with the submission of the learned Additional Solicitor General that the current price list is simply the price reflecting the currently operating notified price under the DPCO. Once a price is notified for a formulation, it takes effect immediately and sale of the formulation to the consumer has only to be at the notified price”. The Hon’ble Supreme Court referring to its judgement in the case of Cynamide India Limited, where in the Court had observed that “Profiteering, by itself, is evil. Profiteering in the scarce resources of the community, much needed life-sustaining foodstuffs and life-saving drugs is diabolic. It is a menace which has to be fettered and curbed. One of the principal objectives of the Essential Commodities Act, 1955 is precisely that. It must be remembered that Article 39 (b) enjoins a duty on the State towards securing that the ownership and control of the material resources of the community are so distributed as best to sub-serve the common good”. Thus the Hon’ble Supreme Court held that “the view of the Delhi High Court is fundamentally flawed and clearly wrong in light of our foregoing discussion. The Karnataka High Court has taken the correct view and the same is upheld. We, accordingly, dismiss the appeals preferred by the manufacturer/distributor and allow the appeals of the Union of India”.
As per the law settled in the above case the Respondent was bound to reduce the prices on the products being sold by him w.e.f. 15.11.2017 and in case he was not able to do so he should have immediately deposited the profiteered amount in the CWF which he had failed to do promptly as has been outlined in the paras supra. The Hon’ble Court had also taken strong exception to the profiteering and hence the Respondent has to bear the consequences of the profiteering as per the provisions of the CGST Act, 2017.
50. The Respondent has also claimed that he had informed the Chairman CBIC vide his letters dated 21.11.2017 and 04.12.2017 that he was sincere in passing on the benefit of tax reduction where ever it was possible and would suo-moto deposit the excess realization in case it was not possible to do so. However, it is apparent from the record that the Respondent had tried to mislead the authorities by making false claims as he had acted quite contrary to the claims which were made by him in his above letters. Instead of passing on the benefits he had increased the base prices, had compelled the customers to pay more price than what they were legally required to pay, had forced them to pay additional GST on the increased prices and also earned extra margins on the enhanced prices. He had even illegally compelled his RSs to deposit the ITC which they could have legally claimed due to reduction in the rates of tax which would have resulted in commensurate reduction in the prices and therefore, all the claims of having passed on the benefit of tax reduction sincerely and faithfully made by the Respondent are false and malafide.
51. It is also apparent from the record that the assertion made by the Respondent that he could not reduce the MRPs on the goods which were already in the pipeline and had decided to voluntarily deposit the excess realization in the CWF is not correct as he had infact increased the base prices of his products w.e.f. 15.11.2017 and had deposited the profiteered amount only after he had realized that a complaint dated 17.11.2017 had been lodged against him for profiteering. The Respondent had also not deposited the entire amount of profiteering by claiming a number of deductions. He has also claimed that passing of benefit of tax reductions through commensurate reduction in the prices was not the only way to pass on the benefit as the same could be done by supplying additional quantity of goods for the same price. However, this contention of the Respondent is without any basis as he had infact increased the base prices or maintained the same base prices which he was charging before the tax reduction whereas he should have reduced them keeping in view the reductions made in the rates of tax. The Respondent had given no choice to his customers and forced them to accept the additional quantity by paying more price, tax and profit margin whereas they should have got the benefit of tax reduction in the shape of commensurate reduction in the prices as per the provisions of Section 171 of the Act. The claim made by the Respondent that he could not have reduced the prices of the value-based packs as he was required to round off their prices as per the provisions of the LM Rules is also not correct as he could have deposited the excess price charged by him in the CWF till he was able to increase the quantity proportionate to the reduction in the tax rates which he had not done immediately after there was reduction in the rates of tax and had done so after a lapse of a considerable period of time.
52. It is also revealed that on 21.11.2017 the Respondent had written to the Chairman CBIC explaining the principles which were adopted by him while passing on the benefit of tax reduction to the consumers and after suo-moto estimating the quantum of higher realization on account of rate reduction the following amounts were deposited by him in the CVVF:-
| Date | Period | Amount in Crores |
| 04.12.2017 | 15.11.2017 to 30.11.2017 | 59.94 |
| 08.01.2018 | 01.12.2017 to 31.12.2017 | 59.04 |
| 05.03.2018 & 10.04.2018 |
01.01.2018 to 28.02.2018 | 5.06 |
| Total | 124.04 | |
53. It is further revealed that on 21.11.2017 the Respondent had written the following letter to his RSs:-
Hindustan Uniliver Limited,
Uniliver House,
B D Sawant Marg
Chakala, Andheri East
Mumbai 400099
Tel +91 (22) 39830000
Web: www.hul.co.in
CIN:115140MH1933PLC002030
Date: 21st November 2017
To: All the Redistribution Stockist (RS) of Hindustan Uniliver Limited
Dear Business Partner,
Sub:Revision in GST rates with effect from 15.11.2017 and passing o benefits to end consumers.
We thank you very much for your continued support during the GST implementation.
As you are aware, basis the recent Centre [CGST/IGST] and State Government [SGST] Notifications, the GST rates for some of our categories like Washing Powder, Dish Wash, Skin Care, Hair Care, Deodorants, Colour Cosmetics amongst others, have been reduced effective 15th November 2017 (Predominately from 28% to 18%).
When GST was implemented on 1st July 2017, we had reimbursed the differential tax due to GST incremental cost on account of the closing stock held by your concern as on 30th June 2017.
With the recent reduction of GST rates, GST input credit on our invoiced stocks at your end (as on 15th November 2017) would be at a higher rate, whereas you will be paying output tax at a lower rate. As per the GST Regulations, we need to pass on this benefit to the end consumers through MRP reductions/increased fill-levels. We will accordingly he recovering from you such excess input tax credit on your closing stock of HUL brands, as of 15th November 2017. We will account for this separately in our books and the same will be passed on to end consumers through MRP reduction (or fill level increase, where applicable).
It may be noted that the trade is required to pass on the benefit that they would he making during the transaction to the end consumers. You are required to communicate this unequivocally to the trade.
In the meantime, should you have any questions, feel free to get in touch with us through Lever care at Ievercare.customeruniliver.com or 1800-425-2901or directly reach out to your respective TSO/KAE/ASM.
We are hopeful that we shall continue to work with you in the spirit of extending the best value to the trade and the end consumers.
Your Truly,
Mohit Sud
General Manager, Customer Development, Central
54. Perusal of the above letter shows that the Respondent had admitted that the rate of GST had been reduced on the products which were being sold by him. He had also mentioned in this letter that when the GST was implemented w.e.f. 01.07.2017 he had reimbursed the differential tax due to incremental cost on account of the closing stock which was held by the RSs as on 30.06.2017. He had also intimated that due to reduction in the rate of tax the ITC available to the RSs on the stocks existing with them as on 15.11.2017 would be higher and they would be paying output tax at lower rate. He had also mentioned that the benefit of such rate reduction would have to be passed on to the consumers through the MRP reductions/increased fill levels and hence he would be recovering the excess ITC from them and account for it separately and the same would be passed on to the consumers.
55. In this connection it would be appropriate to refer to Section 22 of the CGST Act, 2017 which states that every supplier shall be liable to be registered under this Act in the State or the Union territory. other than special category States, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds Rs. 20,00,000/-. There is also no dispute that the RSs were registered suppliers and as per section 16 of the above Act they were entitled to take credit of the input tax charged on any supply of goods or services or both received by them from the Respondent. Since the tax was paid at 28% on the stocks which the RSs had as on 15.11.2017 they were required to sell it at the rate of 18% and claim ITC and hence they would have passed on the benefit of reduction in the GST tax rates to the customers. But by issuing the above letter the Respondent has not only denied ITC to his RSs but has also restrained them from passing on the benefit of reduction of tax rates to their customers. On specific query raised during the proceedings the Respondent was asked to intimate under what authority he had directed his RSs not to pass on the benefit and refund the amount of ITC which was legally due to them, however, he had admitted that he had no sanction of law to do so and his act was illegal. The Respondent could also not intimate the plan through which he proposed to pass on the benefit of tax reductions to the consumers as had been mentioned in his above letter. Therefore, it is clear that the claims made by the Respondent in this letter were false and misleading as he could never have passed the benefit of tax reductions to his customers who would have already purchased his goods at the higher prices by the time he had reduced the MRPs or benefit of tax reductions himself but has also made his RSs liable for action for violation of the provisions of section 171 supra as they were equally liable to pass on the benefit of tax reductions being registered dealers under the CGST/SGST Acts. The claims made by the Respondent have further been proved to be incorrect due to the reason that instead of reducing the MRPs or increasing the fill levels the ITC recovered from the RSs to the extent of Rs. 36.19 Crores was deposited into the CWF by him. It seems that the Respondent wanted to adjust the excess ITC recovered from his RSs against the reimbursement of the differential tax which he had paid on account of the incremental cost on account of the closing stocks existing with them as on 30.06.2017. It also appears that the Respondent had deposited the above amount in the CWF as an afterthought after he had come to realize that a complaint had been made against him for not reducing the prices and for recovering the excess ITC. The best course available to the Respondent in this case would have been to write to his RSs to pass on the benefit of tax reduction to the customers and claim ITC on the input tax paid by them @ 28% which the Respondent had failed to do and hence the claims made by the Respondent through the above letter and similar letters written to the CBIC and the DGAP cannot be believed and relied upon.
56. Initially vide Annexure 5 of his written submissions dated 10.08.2018, the Respondent had furnished the following statement as has been shown in the Table-3 given below, which showed that the amount actually collected in excess was Rs. 480.91 Crores and after deducting the fiscal incentives denied to him he had claimed that the net excess realization had been Rs. 435 Crores. But the DGAP has estimated an amount of Rs. 419.67 Crores as the profiteered amount other than Rs. 76.06 Crores of TRAN-2 credit. The Respondent later has filed the following details as shown in the Table-4 below claiming that if the deductions claimed by him were considered, the excess amount collected by him was only Rs. 121.11 Crores while he had deposited Rs. 124.04 Crores:-
Table-3
| Item | Amount in Rs. Crores | |
| Notional realization assuming base prices unchanged | 480.91 | |
| Loss of area based incentive arising from GST rate reduction | 45.31 | |
| Total Excess Realization | 435.60 | |
| Passed on the benefit by reducing the price | 130.37 | |
| Passed on the benefit by supplying increased grammage | 119.67 | |
| Reimbursed the excess collection to Modern Trade customers |
26.37 | |
| Reduced prices in some packs and passed benefit to customers even more than the rate cut |
29.88 | |
| Residual Excess Realization | 129.31 | |
| Packing Material written off in order to accelerate transition networks |
7.80 | |
| Amount to be deposited with Consumer Welfare Fund | 121.51 | |
| Less: Amount actually deposited with Consumer Welfare Fund |
124.04 | |
| Excess deposited | -2.53 | |
Statement submitted by the Respondent (Table-4)
| S.No. | Item | Amount in Crores | |
| 1. | Profiteering amount as per DGAP Report | 495.73 | |
| 2. | Transition Credit denied (DGAP Report) | 76.06 | |
| 3. | Profiteered amount other than T.C. | 419.67 | |
| 4. | Deductions claimed by Respondent | ||
| a. | Grammage | 119.67 | |
| b. | Prices reduced > than GST rate reduction | 29.88 | |
| c. | Fiscal Incentives denied | 45.31 | |
| d. | Reimbursement to Modern trade (TTS) | 26.37 | |
| e. | Packing material write off | 7.80 | |
| f. | Tax collected on profiteered amount | 63.99 | |
| g. | Sales to CRPF and CPC | 3.30 | |
| h. | Sales of semi-finished goods | 2.24 | |
| TOTAL Deductions | 298.56 | -298.56 | |
| Actual amount of Profiteering (Respondent) |
121.11 | ||
| Amount deposited in consumer welfare fund |
124.04 | +2.24 | |
57. According to the latest figures as given in the Table-5 below, the Respondent admits that he had collected in excess an amount of Rs. 320.70 Crores (5774.80 – 5454.10) as the price component and an amount of Rs. 57.80 Crores as tax component (1039-981.20). This amount of Rs. 320.70 Crores has been collected by increasing the base prices and selling at the original MRPs even after reduction of tax rates from 28% to 18% for all the products except coffee which was reduced from 18% to 12%:-
Table-5
| S.No. | Items | Amount in Crores |
| 1 | Total recovery of base price(without changing the base price) | 5454.10 |
| 2 | Total GST that would have been levied, recovered and paid to Government @ 18% | 981.20 |
| 3 | Total | 6435.30 |
| 4 | Total recovery of base price by increasing the base price | 5774.80 |
| 5 | GST levied, recovered and paid to Government @ 18% | 1039.00 |
| 6 | Total | 6813.80 |
58. The Respondent further states that the amount of Rs. 57.80 Crores was not liable for recovery since this amount had been paid to the Government as tax and accordingly he was accountable only for Rs. 320.70 Crores excess amount collected by him as follows:
| 1 | Benefit passed on through extra grammage | 119.67 |
| 2 | Benefit given to Modern Trade | 26.37 |
| 3 | Packing material written off in view of rate change | 7.80 |
| 4 | Loss of fiscal incentive entitled for recoupment | 45.31 |
| 5 | Deposited with Consumer Welfare Fund | 124.04 |
| 6 | Total | 323.19 |
| 7 | Extra collection by the Company (5774.80 — 5454.10 | 32.70 |
| 8 | Excess Paid | 2.5 |
59. From the above submissions of the Respondent it is clear that the Respondent is not denying the fact that he has profiteered an amount of Rs. 419.67 Crores as alleged by DGAP however, he has submitted different figures and claimed a number of deductions through his statements and therefore, the exact amount of profiteering has to be determined. This Authority in order to establish the exact quantum of profiteered amount has to evaluate and address each and every deduction claimed by the Respondent in his written and oral submissions. Hence every individual deduction claimed by the Respondent is being discussed in detail in the following paragraphs to arrive it at the right amount profiteered by the Respondent.
60. Admissibility of TRAN-2 Credit as deduction: The DGAP in his Report has included Rs. 76.06 Crores of the transitional credit, claimed by the Respondent through TRAN-2 statements in February 2018, in the profiteered amount. The DGAP is of the view that since this was the additional ITC, made available to the Respondent, he should have passed the benefit of it to the recipients according to Section 171 of the CGST Act, 2017. The DGAP has based his opinion on the proviso to Section 140 (3) of the CGST Act, 2017. The relevant excerpts of which are reproduced below:-
Section 140. (3) A registered person, who was not liable to be registered under the existing law, or who was engaged in the manufacture of exempted goods or provision of exempted services, or who was providing works contract service and was availing of the benefit of notification No. 26/2012-Service Tax, dated the 20th June, 2012 or a first stage dealer or a second stage dealer or a registered importer or a depot of a manufacturer, shall be entitled to take, in his electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions, namely:—
(i) such inputs or goods are used or intended to be used for making taxable supplies under this Act;
(ii) the said registered person is eligible for input tax credit on such inputs under this Act;
(iii) the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of such inputs;
(iv) such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day; and
(v) the supplier of services is not eligible for any abatement under this Act:
Provided that where a registered person, other than a manufacturer or a supplier of services, is not in possession of an invoice or any other documents evidencing payment of duty in respect of inputs, then, such registered person shall, subject to such conditions, limitations and safeguards as may be prescribed, including that the said taxable person shall pass on the benefit of such credit by way of reduced prices to the recipient, be allowed to take credit at such rate and in such manner as may be prescribed. (emphasis supplied)
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Explanation 1.—For the purposes of sub-sections (3), (4) and (6), the expression “eligible duties” means—
(i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957;
(ii) the additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975;
(iii) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975.
(iv) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978;
(v) the duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985;
(vi) the duty of excise specified in the Second Schedule to the Central Excise Tariff Act, 1985; and
(vii) the National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001, in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day.”
61. While rebutting the DGAP’s view on TRAN-2 credit as profiteered amount, the Respondent, in his written reply dated 14.09.2018, has contended that in the notice dated 10.01.2018 issued by the DGAP under Rule 129 of the CGST Rules, 2017, no allegation was levelled on account of TRAN-2 credit availed by the Respondent and therefore it was beyond the scope of this investigation. He has also claimed that as per Section 140 (3) and the definition of ITC given in the Act, TRAN-2 credit would fall outside the scope of the definition of ITC. The Respondent has also claimed that the TRAN-2 credit did not fall under the purview of Section 171 as it dealt with passing on the benefit of ITC whereas the TRAN-2 credit pertained to the credit in respect of the inputs held in stock as on 30.06.2017. On examining the DGAP’s notice dated 10.01.2018, it is found that in para 3 of the notice it has been categorically mentioned that you are hereby requested to reply to this notice on or before 25.01.2018 stating whether you admit that the benefit of reduction in tax rate or input tax credit has not been passed on to the consumers by way of commensurate reduction in price”. Therefore, the allegation that the Respondent was not put to notice would not hold good as the legal definition of ITC is inclusive of TRAN-2 credit as per Section 140 (3) read with Rules 117 (4) (a) (i) and 117 (4) (a) (ii), which make it very clear that the transitional credit availed through TRAN-2 statements was nothing but ITC for all intents and purposes of the above Act. The Respondent has also claimed that definition of ITC did not include the TRAN-2 credit. The CGST Act, 2017 gives the definition of ITC in Section 2 (63) read with Section 2 (62) and the definition of TRAN-2 credit flows from Section 140 (3) of the said Act read with Rule 117 of the CGST Rules, 2017 which state as under:-
“Section 2 (62). “input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes—
(a) the integrated goods and services tax charged on import of goods;
(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9;
(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;
(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or
(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy;”
‘Section 2 (63). “input tax credit” means the credit of input tax;”
The relevant provision under which the transitional credit was claimed as TRAN-2 credit in this particular case is Section 140 (3) of the Act. As reproduced above, Sub-Section (3) of Section 140 is the relevant provision which deals with persons who shall be entitled to take credit of eligible taxes and duties in respect of the inputs held in stock or the inputs contained in the shape of semi-finished or finished goods held in stock on the appointed day. Section 140 (3) specifically deals with TRAN-2 credit that is made available to all the registered persons other than the manufacturers with or without tax paid documents. There is no doubt that transitional credit is on eligible taxes and duties that are relevant to the pre-GST period, as claimed by the Respondent, however, one has to read the relevant provision along with the Rule 117 of CGST Rules 2017, which clearly states that this credit which is availed under Section 140 (3) is nothing but the ITC available under the GST. Rule 117 is reproduced below:-
117. (4) (a) (i) A registered person who was not registered under the existing law shall, in accordance with the proviso to sub-section (3) of section 140, be allowed to avail of input tax credit on goods (on which the duty of central excise or, as the case may be, additional duties of customs under sub-section (1) of section 3 of the Customs Tariff Act, 1975, is leviable) held in stock on the appointed day in respect of which he is not in possession of any document evidencing payment of central excise duty.
(ii) The input tax credit referred to in sub-clause (i) shall be allowed at the rate of sixty per cent on such goods which attract central tax at the rate of nine per cent or more and forty per cent. for other goods of the central tax applicable on supply of such goods after the appointed date and shall be credited after the central tax payable on such supply has been paid: Provided that where integrated tax is paid on such goods, the amount of credit shall be allowed at the rate of thirty per cent. and twenty per cent, respectively of the said tax; (emphasis supplied) .
62. Thus, from a plain reading of Section 140 (3) when read with Rule 117 (4) (a) (i) and 117 (4) (a) (ii), it becomes very clear that the credit availed by the Respondent under Section 140 (3) as TRAN-2 credit is nothing but ITC, under the GST regime. Therefore, the Respondent’s claim that TRAN-2 credit did not fall under the definition of ITC fails the test of law miserably and hence cannot be accepted. The respondent has also contended that the TRAN-2 credit, as availed under Section 140 (3) by him did not fall under the purview of Section 171 as it pertained to the credit in respect of the inputs held in stock as on 30.06.2017. It would be appropriate to note here that the TRAN-2 credit is available to any eligible taxable person under Section 140 (3) of the Act and it’s proviso very categorically states that “the said taxable person shall pass on the benefit of such credit by way of reduced prices to the recipient, be allowed to take credit at such rate and in such manner as may be prescribed”. This provision makes it mandatory for all those who avail TRAN-2 credit, to pass on the benefit so availed. Since, the TRAN-2 credit is ipso facto ITC and furthermore, the above proviso requires the registered persons to pass on the benefit of availment of TRAN-2 credit to the recipients, the provisions of Section 171 of the Act are very much applicable and can be invoked, as the legislative intent behind Section 171 is to prevent profiteering on account of denial of benefit of ITC. The claim made by the Respondent that he had availed the TRAN-2 credit in the month of February, 2018 and therefore, it could not be alleged that he had availed the benefit in the months of November and December, 2017 is factually incorrect as he has claimed benefit of credit in respect of the sales which he had made in these two months as is evident from the TRAN-2 statements filed by him with his returns, which have been placed on record by the DGAP. Therefore, the Authority finds that the DGAP has rightly included the entire amount of Rs. 76.06 Crores in the scope of his investigation.
63. In the instant case, the fact that the Respondent has availed the TRAN-2 credit of Rs. 76.06 Crores is not in dispute as he has failed to produce any evidence to prove, either before DGAP or before the Authority that this benefit of Tran-2 credit has been passed on by way of reduced prices. Moreover, the Respondent, on page 23, point (d) of his written submissions dated 14.09 2018 has mentioned that the law did not mandate passing of TRAN-2 credit, which is not correct and hence his contention cannot be accepted. In the light of the above facts, it can be concluded that the Respondent has not passed on the benefit of TRAN-2 credit to any of his recipients, which under Section 140 (3) read with Section 171 of the Act, he was required to pass on. Therefore, the plea of the Respondent to claim this amount of Rs. 76.06 Crores of Tran-2 credit as a deduction from the profiteered amount is rejected and the above amount is held to be the ITC the benefit of which was denied to his recipients by the Respondent.
64. Admissibility of grammage benefit as deduction: On the one hand, the Respondent has claimed that the benefit of extra quantity which has been passed on to the consumers at the original MRPs and hence the benefit of grammage should be given to him taking into consideration the unit cost of the item and on the other hand he has also claimed that these items should be considered as new products in as much as they did not exist at the time of rate changes. DGAP has dismissed his claim for deduction on account of grammage on the ground that Section 171 did not provide any other mode of passing on the benefit other than by reduction in the prices. In this connection it would be appropriate to underline that the true legislative intent behind the above Section is to safeguard the interests of the consumers. The legislature has mandated this Authority to ensure that no supplier is allowed to make undue profit by pocketing any benefit intended by the Government to be passed on to the recipients through the suppliers. Any GST rate reduction by the Government should always be seen as a sacrifice made by the Government from it’s own kitty of revenue, in the interest of the consumers in particular and society at large. Therefore, Section 171 requires a supplier to pass on any benefit of rate reduction or of ITC being made available to him, to his recipients. While ensuring this, the Authority is of the view that this Section needs to be purposively construed and due regard should also be given to the prevalent trade practices. The emphasis should be laid on non-retention of benefit of reduction of tax rates by a suppliers and its due passage to the recipient. What is important is to ascertain whether the supplier has enriched himself illegally or has passed on the benefit in accordance with the legal provisions as well as the prevalent practices of a particular trade or not. If the genuine interest of the trade is to pass on such benefits to the recipients, the Authority, without any prejudice to the law, has to also see that the practical options available to the suppliers of that particular trade are also taken into consideration. As claimed by the Respondent, extra quantity for the same price definitely is a benefit to the consumers and in the case of FMCG products quite often advertisements of more quantity for the original price either to attract the consumers or to clear the old stocks before the new stocks arrive are published. As submitted by the Respondent and provided in Rule (5) of the LM Rules, certain value-based products of lower denominations can be sold with different grammage thus allowing the supplier to adopt flexible quantities. Therefore, the Authority is of the view that passing on extra quantity could be one of the modes of passing on the benefit especially considering the fact that reducing the prices on low value products could be cumbersome and sometimes impractical. The Respondent in his submissions dated 27.09.2018 has claimed that he had passed total benefit of Rs. 119.67 Crores in the shape of additional grammage out of which an amount Rs. 67.03 Crores was directly proportional to the reduction in the tax rates while an amount of Rs. 39.94 Crores has been in excess of the rate reductions and an amount of Rs. 12.69 Crores was less than the GST rate reductions. The Respondent has produced a letter from his Auditors and sample advertisements to show that the benefit of rate reductions was passed on either by way of reduction in the MRPs or through the higher grammage. These advertisements dated 15.11.2017, 16.11.2017, 25.12.2017 and 29.12.2017 state that they were published with the following messages viz. `Ghata GST Badi Bachat’, ‘get the benefits of reduced GST rates on your wide range of Products’, `GST benefits are made available with reduced MRP or higher grammage’ and ‘bonanza GST benefits for you’, ‘much more value on your favorite brands, ‘get more value on your favorite brands’ etc.;. In some of the advertisements it is mentioned that the benefit was being given on entire range of detergent powder and liquids, entire range of shampoos and deodorants, entire range of skin creams lotions and face wash, entire range of chocolates, entire range of instant Coffee and the entire range of health drinks etc. The Respondent in his submissions dated 27.9.2018 has filed an Annexure comprising of 50 pages giving the details of grammage supplied to the customers on SKU wise basis for each CBU code for various months along with the letter issued by his Auditors but the documents supplied fell short of establishing a clear relationship between the GST rate-reduction and the increase in grammage.
65. Since due consideration was thought to be given to the prevalent trade practices the Respondent was granted another opportunity to legally establish his claim. The Authority had asked the Respondent to supply information in the following format so that the issue of passing of benefit through increased grammage could be settled. To establish the above mentioned fact, the Respondent was required to show for every product affected by the rate reductions, that the benefit of more grammage was given to the recipients as soon as there were rate changes; that the benefit was commensurate with the rate changes and that to prove the cause-effect relationship between the GST rate reductions and grammage increase it should not be a continuation of any ongoing business promotion activity and should be substantiated with documentary evidences. The Respondent, through an e-mail sent by the Secretary, NAA, dated 02.11.18, was asked to give the above information, in the prescribed format, so as to legally substantiate his claim. The Respondent vide his reply dated 14.11.2018 has submitted the details of 110 items SKU wise as called for in the format given below. He has also submitted copies of the advertisements published for passing on the benefit of grammage on account of GST rate reductions. Accordingly, the Respondent has claimed Rs. 118.67 Crores as deduction on account of the additional grammage supplied by him to his customers on the existing prices, out of which it has been claimed by him that grammage benefit worth Rs. 66.90 Crores had been passed commensurate to the GST rate reductions, the benefit of Rs. 12.69 Crores was less than the GST rate reductions and the benefit of Rs. 39.08 Crores was more than the GST rate reductions. As discussed above the Respondent was directed to supply the required information in the following format:-
Format to Corroborate the Grammage Benefit as a Non-Profiteering Measure
66. Grammage benefit given more than the GST rate reduction: The Respondent in his written submissions dated 22.10.2018 has claimed a deduction of Rs. 39.08 Crores on account of the prices reduced more than the GST rate reduction. The Respondent claims that on some products and SKUs, he has reduced the effective selling prices by more than he was actually mandated to, due to the GST rate reductions. Hence, a total amount of Rs. 39.08 Crores, he argues, should be deducted from the net profiteered amount as had been calculated by the DGAP. The DGAP in its report has rejected this claim of the Respondent.
67. The Authority is of the view that Section 171 of the CGST Act, 2017, puts the onus of passage of any benefit of the GST rate reductions or ITC to the recipient on the supplier. The keyword to be emphasised here is “commensurate reduction”. The law expects that commensurate reduction to the extent of the rate reductions should be given by the Respondent. Any greater reduction in prices is entirely a business call taken by the Respondent well within his right and hence there is no ground to compensate him on this ground. The Respondent, while claiming this deduction, has also claimed that the amount of profiteering was to be calculated entity-wise. However, this is not the correct interpretation of the law. The amount of profiteering has to be calculated by keeping the recipient at the centre. This implies that one particular recipient may have bought one product from the Respondent at a price which he was entitled to pay when the rates of tax were reduced but simultaneously there is another recipient who has paid more than what he was supposed to pay for some another product of the Respondent. The additional benefit given to one recipient cannot be offset with the denial of benefit to another recipient, as this is not the spirit of the law. Since; the Respondent’s interpretation of Section 171 of CGST Act, 2017, doesn’t have any legal merit, it cannot be accepted. Hence, the Respondent’s claim for deduction of Rs. 39.08 Crores on account of the more benefit given to the customers from the profiteered amount devoid of merit and cannot be accepted.
68. With regard to the balance amount claimed as grammage benefit in respect of the 110 CBU codes of his products when compared with Annexure-25 of the DGAP’s Report which is the basic document for computing the profiteered amount, it is found that there are variations in the claim made by the Respondent. On analysis it is found that:-
1. A total deduction of 118.68 Crores has been claimed by the Respondent on account of the additional grammage passed to the customers by him in respect of a total of 335 products.
2. Out of these 335 products, 14 products were already being sold prior to 15.11.2017, under the same CBU code, with same grammage and same MRPs. Therefore, no grammage benefit due to GST rate reductions can be given.
3. 7 products were not reflected in the Sales Register given to the DGAP therefore, they were not even the part of the calculation of the profiteered amount. Hence ho deduction can be allowed on them.
4. In respect of 6 products, the Respondent had passed on the benefit but more than the respective amount of profiteering computed by the DGAP for each of these products, hence, the deduction can be given but to the extent of DGAP’s calculated amount of profiteering only.
5. In respect of 73 products, the Respondent has passed the benefit but less than the respective amount of profiteering calculated by the DGAP for each of these products, hence, the deduction can be given but limited only to the amount of benefit actually passed on.
6. 28 products have been shown in the negative in the Sales Register which means that they were Sales Returned. Hence, no deduction can be given.
7. 191 products, having negative values, i. e. the Sales Returned were not shown in the Sales Register which means they are not even the part of the profiteered amount. Hence, no grammage benefit can be given.
8. 16 products were already being sold prior to 15.11.2017 but under different CBU codes, with same grammage benefit to be given due to GST reductions. Hence, no deduction can be allowed.
9. Hence, benefit can be given only in case of 79 products. The total amount of deduction that can be allowed, from the claimed amount of Rs. 118.68 Crores comes to Rs. 68,77,50,749 only. The summary of the grammage benefit is given in the following Table:-
Summary of Grammage Benefit
| Sr. No. | Row Labels | No. of Products |
Value of extra grammage supplied in Rs. |
Benefit to be given |
Sum of Value of extra grammage given (even more than GST rate reduction) |
| 1 | Already being sold pre 15.11.2017, under same CBU code | 14 | 12,76,46,825 | 0 | 72762206.64 |
| 2 | Disallowed due to Non-reflection in Sales Register | 7 | 1,58,91,857 | 0 | 1929945.301 |
| 3 | Increase in Grammage, benefit can be given as per DGAP Profiteering computation |
6 | 40389333.31 | 1,36,90,573 | 24260527.77 |
| 4 | Increase in Grammage, benefit can be given as HUL asked | 73 | 951793343.7 | 67,40,60,177 | 277733167 |
| 5 | Sales Return, reflected in Sales Register | 28 | (16,197) | 0 | 2536.368069 |
| 6 | Sales Return, not reflected in Sales Register | 191 | (81,699) | 0 | 34383.07019 |
| 7 | Was selling under another CBU code pre-15.11.2017 | 16 | 5,11,73,541 | 0 | 14118188.06 |
| Grand Total | 335 | 1186797003 | 687750749.7 | 390767115.3 |
Therefore, an amount of Rs. 68.77 Crores can be allowed to be deducted from the profiteered amount on account of the benefit which has been passed on by the Respondent in the shape of additional grammage as per the following table however the balance amount claimed by him cannot be allowed. Therefore, it is made clear that this deduction has been given to the Respondent due to the fact that the anti-profiteering measures have been incorporated in the tax laws for the first time and he had tried to pass on the benefit of tax reductions by increasing the quantity of his products. However, in future in case there is any reduction in the rate of tax or benefit of ITC is made available the same shall be passed on by him in the shape of commensurate reduction in the prices as per the provisions of Section 171 of the above Act and in case it is not possible to do so the amount so realised shall be deposited in the CWF:-
(Amount in Rupees)
| Reasons for grammage | Grammage disallowed |
Grammage allowed |
| Grammage benefit existed in pre GST era | 12,76,46,825 | |
| Not reflecting in the sales register | 1,58,91,857 | |
| Sales return not reflected in sales register | 81,699 | |
| Grammage benefit existed in pre GST era with different CBU code | 5,11,73,541 | |
| Grammage claimed and allowed as per DGAP report | 2,42,60,528 | 1,36,90,573 |
| Grammage claimed and allowed only for the period claimed by HUL | 27,77,33,167 | 67,40,60,177 |
| TOTAL | 49,67,87,617 | 68,77,50,750 |
69. Area based fiscal incentives denied: The Respondent has claimed an amount of Rs. 45.31 Crores as a deduction on account of the loss due to reduction in the area based incentives when calculated in absolute terms. He has reiterated that he was earlier entitled to a refund of 58% of CGST or 29% of IGST paid through debit in the CLA maintained by a unit in terms of Section 49 (I) the CGST Act, 2017 after utilization of the ITC of the Central Tax and the Integrated Tax. Accordingly, prior to 15.11.2017, the Respondent was entitled to proportionate refund for CGST paid @ 14% or 9% through CLA which now has been reduced to 9% or 6%. Hence, the liability of the Respondent to make payment in cash has got reduced due to reduction in the rates of tax which has resulted in reduced refund in absolute terms. The Authority, after due deliberation over this point, is of the view that there is absolutely no doubt that the area based exemption is a fiscal incentive given by the Government to any manufacturer. Though the benefit of refund is now limited only to CGST and IGST, as per Notification No. 10(1)/2017-DBA-II/NER, dated 05.10.2017, the fact remains that the incentive is limited to the extent of tax paid and it is a flawed picture being projected by the Respondent by claiming that he was in loss in the absolute terms. The DGAP is right in his assessment that there was no loss in absolute terms to the Respondent, since he was still eligible to get the same proportionate refund of actual CGST/IGST paid in cash as was available to him prior to the reduction in the rates of GST. Moreover, there exists no direct correlation between the MRP of the product (which is same over all-India) and the area based exemption benefit. The claim of the Respondent to the extent of Rs. 45.31 Crores is not justified in as much as there is no evidence to show that the products manufactured with these concessions were sold at a lower rate. Also, there is no evidence to show that these products are different from the products manufactured in other areas and were sold at the old MRPs. The products whether manufactured with concessions or without concessions are being sold at the same price. Admittedly, these prices were not reduced inspite of rate reductions. Therefore the claim of the Respondent is not legally sustainable and is thereby rejected.
70. Reimbursement to the Modern Trade:- The Respondent in his submission has submitted that he was manufacturing and selling over 3200 SKUs through (a) RSs (b) MT and (c) CSD He has explained that the MT was the large and organized customer of the Respondent in the form of big retail chains such as Big Bazaar and Reliance Fresh, etc. The Respondent has claimed that when the goods were sold to the MT, the base price was revised in the invoices because the old packs which were lying in the pipeline on the date of announcement of GST rate reductions carried the old MRPs and it was suggested to the MT dealers that since the packs carried the old MRPs, if they were to reduce the prices for their consumers, the same would be reimbursed. This according to the Respondent was a suitable method to pass on the benefit to the MT. He has claimed that the MT dealers had agreed and accordingly the excess amount in base prices recovered from them was reimbursed and therefore the trade discounts given to the MT should be allowed to him amounting to Rs. 26.37 Crores, as a deduction from the profiteered amount. He has also produced various communications exchanged between him and the MT to prove that the offers of tax benefit were extended to the end consumers. From the various documents produced it has not been substantiated that the consumers have benefitted with the reduction in the prices on account of reduction in the rates of tax. The Respondent, vide his submissions dated 27.9.2018, has filed various letters written to MT dealers which are all dated September 2018, which clearly shows that no action was taken to reduce the prices on the stocks lying with them at the time of rate reductions. It has been repeatedly observed by the Authority that the Respondent has not been able to appreciate the fact that the idea behind including the anti-profiteering mechanism in the GST laws, is solely to protect the interest of the consumers by preventing the supplier from unjustly enriching himself at the cost of the end-consumer. His claim that he had provided various discounts to the MT dealers to further pass on the benefit to the consumers is not established as it is not evidenced by any credible documentary evidence. Further the consumer would have never got the benefit of tax reductions unless the MRP was revised by the Respondent on the packs and the bar codes were changed, which does not seem to have happened. The Authority, thereby finds his claim short of any credence and hence the same cannot be accepted.
71. Packing material write off: The Respondent has also asserted that he should be given the benefit of the cost which he had to incur in writing off the packaging material which he had to dispose of, as it could no longer be used after the GST rate changes. He has also claimed that he had to write off the packaging material worth Rs. 7.80 Crores. The DGAP’s Report finds that the Govt. of India had allowed the manufactures to use the old packing material and to affix the revised MRP while the original MRP was visible. The Auditors report submitted by the Respondent through his written submission dated 27.09.2018 also mentions the grammage only and there is no mention of writing off of the existing packing material. The Respondent, on Page 14 of his reply, dated 14.09.2018, has also contended that “stickering though legally permissible was operationally nearly impossible.” (emphasis supplied). However, It is to note that operational difficulty in following a law can never be a ground for disobedience of law. The law was very clear when it gave the suppliers the relief to do re-stickering instead of incurring additional cost on new packaging material. It was a business call taken by the Respondent to not do re-stickering and rather go for fresh packing material. It is an admitted fact by the Respondent that vide office letter No. WM-10(31)/2017, dated 16.11.2017 issued by the Ministry of Consumer Affairs, Food and Public Distribution, it was clearly allowed by the Government to refix the stickers. Also, the CGST Act, 2017 nowhere provides allowance on account of cost of packing material against the reduction in the prices on account of lower GST rates. Hence, this Authority finds that the deduction claimed by the Respondent, on account of packing material write off, is not supported by any legal provisions and therefore for the reasons discussed above it is inadmissible.
72. Tax collected on profiteered amount: The Respondent has further claimed the benefit of tax on tax and submitted two different figures of Rs. 63.99 Crores and 57.80 Crores on this account. As shown in the table given in the preceding paragraphs, the Respondent has stated that if the base prices would have remained unchanged; the GST deposited would have been lesser than what he has already paid to the Government. He has also stated that the DGAP has not appreciated the extra GST collection as a result of increase in the base prices which has already been deposited with the Government and thus Government has already received more GST than what it would have received had there been change in the base prices. Accordingly, the above amount should be allowed as deduction. However, it is apparent from the record that the Respondent has not reduced his base prices due to reduction in the rates of tax and had thus forced his customers to pay more GST on the additional base prices which he could not have legally charged. Thus he had denied the benefit of the reduction to his customers to the extent of the additional GST charged by him. The provisions of Section 171 are clear which state that any extra amount collected unduly from the recipients has to be considered as profiteering. In this particular case, the recipients of the Respondent have been put to disadvantage. They have incurred an extra amount for the same supply, which they were not liable to pay. For example, if for a product with base price of Rs. 100/-, the GST rate was reduced from 28% to 18%, the selling price should have gone down from Rs. 128/- to Rs. 118/- and in case the supplier increases the base price to Rs. 108.47, and then charges Rs. 19.53 as GST at the rate of 18%, thereby making the selling price again equal to Rs. 128/- then this is a clear cut case of profiteering. Although, the supplier here might have paid the extra tax of Rs. 1.53 to the Government but he cannot claim this as a deduction from his profiteered amount as the recipient has paid Rs. 1.53 more than the amount he was supposed to pay. This entire sum of Rs. 1.53 amounts to profiteering done by the supplier. The Anti-profiteering provisions specified in the CGST Act and Rule 127 of the CGST Rules make it amply clear that the recipients get their rightful due in the form of reduction in the prices on account of reduction in the GST tax rates. Therefore, this Authority is of the view that since, the recipients of the Respondent have been compelled to pay extra GST which should be included in the profiteered amount. Hence, the Respondent’s claim to deduct this amount is dismissed.
73. Sales to CPF and CRPF: The Respondent, in his written and oral submissions, has stated that he had sold his goods through CSD and claimed that his contract terms with the CSD were exclusive of taxes and hence, he had not gained any amount on account of reductions in the GST rates. The Respondent has further stated that sales made to CPF and the CRPF were also made at the base rates excluding the GST as was the case in respect of the CSD. The DGAP had however included these sales made to the CPF and the CRPF in the profiteered amount which should not have been done on the same principles as were applied in the case of the sales made to the CSD. The Respondent has claimed a deduction of Rs. 3.80 Crores on this ground which has been included in the computation of the profiteered amount. He has also provided a list of the CPF/CRPF customers along with their GSTN numbers and copies of sample invoices issued to them before and after the GST rate changes to demonstrate that the base prices excluding tax had remained unchanged. The Authority had sought a clarification from the DGAP on this submission who vide his Report dated 31.08.2018 has submitted that in the case of CSD the benefit was extended since there was no price increase but in the case of the above two organizations the same was earlier denied by him. The DGAP has admitted that this amount of Rs. 3.80 Crores could be allowed to be deducted from the profiteered amount. The Authority is in absolute agreement with the DGAP’s revised opinion and allows the deduction of the above amount from the profiteered amount as no excess realization had taken place. This benefit of Rs. 3.80 Crores is being extended as there was no increase in the base prices of these supplies.
74. Sales of semi-finished goods: The Respondent has also submitted that the DGAP’s Report had computed profiteering on the sales of semi-finished goods also which were sold to the third party manufacturers for further processing. Since these sales were not made for consumption as the finished goods were ultimately purchased back by the Respondent, the amount of sales of such semi-finished goods needed to be excluded. The Respondent has calculated this amount as Rs. 2.63 Crores stating that it was erroneously included in the computation of the profiteered amount and has also submitted a sample copy of the invoice to and from the contract manufacturer for the same product in support of his claim. In his latest submissions dated 09.08.2018 & 27.09.2018 the Respondent has provided details of sales of semi-finished goods made to the third party manufacturers and from the details provided it appears that the prices have increased post 15.11.2017 inspite of rate reductions in taxes. His claim that these were not the final products but were further used in the manufacture of final product will not hold good in as much as the goods were final products from his end though it is an input to the third party manufacturers. As per Annexure-12 & 13 of his written submissions dated 09.08.2018 the Respondent has provided details of return of one product namely Coffee but for other products no evidence has been provided to prove that these goods were returned to him for further processing. In the case of Coffee also, the Respondent has not been able to provide any clear and conclusive proof to establish that the sent and the received back goods pertained to the same Batch or were exchanged during the same period of time. The Respondent has also not claimed that the prices had been reduced and his only claim is that it was a semi-finished product. Therefore the claim of the Respondent to the extent of Rs. 2.63 Crores made on this ground cannot be accepted.
75. Wrongly collected the ITC credit from RSs: The Respondent in his written submissions dated 21.06.2018 has intimated that he had collected Rs. 36.19 Crores from his RSs which was the excess realization made by them on the closing stocks as on 15.11.2017. He vide his letter dated 27.07.2018 addressed to the Authority had intimated that an amount of Rs. 36.19 Crores had been deposited in the CWF. Since this amount is the profiteered amount as has been admitted by the Respondent himself the same cannot be allowed to be deducted from the profiteered amount. However, an amount of Rs. 6,47,131/- has not been recovered from the seven RSs by the Respondent and deposited as has been admitted by him. Since these seven distributors who have enjoyed the benefit of ITC of 28% on the closing stocks and have not have passed on the benefit of reduced rates to their customers as has been discussed supra, the same needs to be recovered from the Respondent and hence the total amount of profiteering on this account is held to be Rs. 36.25 (36.19 + .06) Crores. The balance amount of Rs. 6,47,131/- shall be got recovered by the DGAP from the Respondent and deposited in the Central and the State CWFs as per their share. The DGAP as per para 41 of his Report has not included this amount of Rs. 36.25 Crores which has been recovered by the Respondent from his RSs or is required to be recovered from him as has been directed above, in the profiteered amount of Rs. 419.67 Crores. Since this amount has been held to be profiteered amount by this Authority the same shall be deposited in the Central and the CWF of the concerned States as per the calculation to be made by the DGAP and released by him accordingly as an amount of Rs. 36.19 Crores has already been deposited by the Respondent out of the above amount of Rs. 36.25 Crores.
76. The DGAP has also mentioned in his Report that the Respondent had not furnished the details of the TRAN-2 credit availed by him in respect of the Union Territories which have now been supplied by him vide his letter dated 27.07.2018 perusal of which shows that the Respondent had claimed an amount of Rs. 2.91 Crores as such credit in the UT of Delhi. Hence the total profiteered amount on account of denial of benefit of ITC is determined as Rs. 76.06 + Rs. 2.91 Crores i.e. Rs. 78.97 Crores. This amount of Rs. 78.97 Crores availed through TRAN-2 statements shall be deposited by him in the Central CWF as this amount pertains to the Central taxes and the duties.
77. Accordingly, the Authority determines that as per the data available on record the Respondent has profiteered an amount of Rs. 455.92 Crores (419.67 + 36.19 + .06) on account of denial of benefit to his customers due to the reduction in the rates of tax. He has also availed an amount of Rs. 78.97 Crores as TRAN-2 credit the benefit of which has also not been passed on by him. Therefore, the Respondent in all has profiteered an amount of Rs. 534.89 (419.67 + 36.19 + .06 + 78.97 ) Crores. Out of the amount of Rs. 455.92 Crores the deductions claimed by the Respondent are allowed only for an amount of Rs. 68.77 Crores on account of grammage benefit and Rs. 3.80 Crores for the supplies made to the CPF & the CRPF. Therefore, after allowing the above deductions of Rs. 72.57 (68.77 + 3.80) Crores, an amount of Rs. 383.35 (455.92-72.57) Crores is confirmed as the amount the benefit of which has been denied by the Respondent to his customers. Accordingly as per the provisions of Rule 133 (3) (c) of the CGST Rules, 2017 fifty percent of the amount of Rs. 383.35 Crores i.e. Rs. 191.68 Crores is required to be deposited in the Central CWF and the balance amount is to be deposited in the CWF of the concerned State. Since the Respondent has already deposited an amount of Rs. 160.23 (124.04 + 36.19) Crores in the Central CWF, he is hereby directed to deposit an amount of Rs. 31.45 (191.68 — 160.23) Crores in the Central CWF and the balance amount of Rs. 191.68 Crores shall be deposited by him in the CWFs of the States. As the amount of Rs. 36.25 Crores is to be separately calculated and apportioned by the DGAP to the Central and the State CWFs the balance amount of 173.50 Crores shall be deposit by the Respondent in the CWF of the concerned States as per the following details:-
| S. Nol. | State | Amount in Rs. |
| 1 | 01-JAMMU AND KASHMIR | 1,01,23,080 |
| 2 | 02-HIMACHAL PRADESH | 86,13,850 |
| 3 | 03-PUNJAB | 5,18,19,071 |
| 4 | 04-CHANDIGARH | 36,49,535 |
| 5 | 05-UTTARAKHAND | 1,52,58,041 |
| 6 | 06-HARYANA | 5,05,82,025 |
| 7 | 07-DELHI | 7,37,35,802 |
| 8 | 08-RAJASTHAN | 5,46,26,892 |
| 9 | 09-UTTAR PRADESH | 17,21,83,092 |
| 10 | 10-BIHAR | 7,49,45,964 |
| 11 | 11-SIKKIM | 10,63,096 |
| 12 | 12-ARUNACHAL PRADESH | 24,76,262 |
| 13 | 13-NAGALAND | 37,15,290 |
| 14 | 14-MANIPUR | 41,62,043 |
| 15 | 15-MIZORAM | 24,84,179 |
| 16 | 16-TRIPURA | 66,56,860 |
| 17 | 17-MEGHLAYA | 41,39,976 |
| 18 | 18-ASSAM | 4,99,55,571 |
| 19 | 19-WEST BENGAL | 15,45,37,257 |
| 20 | 20-JHARKHAND | 2,95,50,933 |
| 21 | 21-ODISHA | 5,06,02,064 |
| 22 | 22-CHATTISGARH | 2,53,89,961 |
| 23 | 23-MADHYA PRADESH | 5,58,67,770 |
| 24 | 24-GUJARAT | 7,97,81,776 |
| 25 | 25-DAMAN AND DIU | 3,20,668 |
| 26 | 26-DADRA AND NAGAR HAVELI | 7,43,630 |
| 27 | 27-MAHARASHTRA | 22 41,20,479 |
| 28 | 29-KARNATAKA | 14,69,40,113 |
| 29 | 30-GOA | 62,16,164 |
| 30 | 32-KERALA | 4,41,51,357 |
| 31 | 33-TAMIL NADU | 16,19,90,862 |
| 32 | 34-PUDUCHERRY | 35,73,541 |
| 33 | 35-ANDAMAN AND NICOBAR ISLANDS | 14,00,121 |
| 34 | 36-TELANGANA | 7,83,86,938 |
| 35 | 37-ANDHRA PRADESH (NEW) | 8,12,39,843 |
| Total | 1,73,50,04,097 |
78. In view of the above facts the Respondent is also directed to reduce the prices of his products by way of commensurate reduction keeping in view the reduced rates of tax and the benefit of ITC. Since the Applicants had complained in general that the Respondent had failed to pass on the benefit of rate reductions, there is no specific amount to be paid to them. Therefore as per Rule 133 (3) (c) of the CGST Rules, the Authority directs the Respondent to deposit the above amounts into the concerned CWFs along with the interest @ 18% till the same is deposited with in a period of three months from the date of receipt of this order as the profiteered amount has been used by the Respondent in his business. The concerned Central and the State GST Commissioners are directed to ensure that the amount due to them is got deposited along with the interest with in the specified period under the supervision of the DGAP failing which the same shall be recovered by them as per the provisions of the CGST/SGST Acts. The action taken by them in pursuance of this order shall be reported by them to this Authority within a period of 4 months from the date of this order through the DGAP. Since the present investigation has been conducted for the period between 15.11.2017 to 28.02.2018, the DGAP is directed to conduct further investigation to ascertain whether the Respondent has passed on the benefit of tax reductions in respect of all the products being sold by him and in case it is found that he has not done so further Report shall be submitted by him quantifying the amount of profiteering.
79. From the above discussion it is clear that the Respondent has resorted to profiteering being very well aware of the law and the rules which warranted him to pass on the benefit of GST rate reductions. Further he has also consciously and illegally recovered the excess realisation which was due to his RSs as ITC and thereby denied the benefit of tax reductions to the customers. He has further acted in conscious disregard of the obligation which was cast upon him to pass on the benefit of GST rate reductions. Instead he had deliberately increased the base prices by enhancing them equivalent to the amount of GST rate reductions in order to keep the old MRPs in place or not reduced them proportionately to the benefit of tax reductions, accordingly he has committed an offence under section 122 (1) (i) of the CGST Act, 2017 by issuing incorrect invoices to his customers and thus penal provisions under the above Act are required to be invoked against him. A notice dated 29.08.2018 was issued to the Respondent to explain why penalty should not be imposed under the above provisions. The Respondent vide his reply dated 14.09.2018 has submitted that in so far as the proposal to invoke penal provisions for imposition of penalty and cancellation of registration was concerned it can be done only after the Authority determines the allegation of profiteering against him. Since the Respondent has been held guilty of profiteering and has also been found to have violated the provisions of Section 122 (1) (i) of the CGST Act, 2017 a fresh notice be issued to him asking him to explain why penalty should not be imposed on him.
80.A copy of this order be supplied to all the Applicants, the Respondent and the concerned Central and State GST Commissioners free of cost and the file of the case be consigned after completion.
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