[Analysis] Anti-Profiteering under GST – Salient Features & Impact of Delhi HC Judgment

By Shankey Agrawal – Partner | BMR Legal Advocates

Table of Contents

1. Brief Overview of Anti-Profiteering Law
2. Batch Appeals before the Delhi High Court
3. Summary of Rival Arguments
4. Delhi High Court Decision in the case of Reckitt Benckiser India (P.) Ltd. v. Union of India [2024] 158 taxmann.com 675 (Delhi)
5. Aftermath
6. Global Scenario

1. Brief Overview of Anti-Profiteering Law

1.1 Anti-Profiteering Law – An Overview

Section 171 (Anti-profiteering measure) stipulates that any reduction in the “rate of tax” or the “benefit of input tax credit”, needs to be passed on to the final consumer by way of commensurate reduction in prices.

Intent behind the introduction of Anti-Profiteering:

• The implementation of GST brought about the unification of the tax system, eliminating the multiplicity of taxes and the cascading effect of taxes.
• The reforms led to a reduction in the overall tax burden post-introduction of GST on most goods and commodities.
• During the introduction of VAT in 2005, numerous instances of business profiteering were observed.
• Taking a cue from past experience and avoiding similar profiteering post-GST, legal provisions relating to Anti-Profiteering were included in the GST statute.
• Its purpose was to safeguard consumers’ interests and guarantee that businesses would transfer the benefits of lower tax rates and ITC to the consumers.

1.2 Anti-Profiteering – Investigation Methodology

• Applications are first examined by the State Screening Committee, which shall forward its recommendations to the Standing Committee within 2 months.
• The Standing Committee, within 2 months, examines the accuracy and adequacy of the evidence provided to determine whether there is a prima facie case for contravention of Anti-Profiteering provisions.
• Once satisfied, the Standing Committee refers the matter to the Director General of AntiProfiteering (DGAP) for a detailed investigation.
• The DGAP, within 6 months, conducts an investigation, collects evidence and drafts a report which is submitted before the National Anti-profiteering Authority (NAPA).
• The NAPA, within 6 months of receiving the DGAP’s report, determines whether or not the benefit has been passed on to the final consumer.

1.3 NAPA’s Powers and Appellate Remedy

Determination of liability: The NAPA has the power to –

• Determine the methodology and procedure for determining whether the reduction in the rate of tax or the benefit of input tax credit has been passed on to the consumer or not
• To identify the registered person who has not passed on the benefit
• Once identified, the NAPA has the power to order – a reduction in prices, pass on the benefit to the final consumer along with interest @ 18%, impose a penalty, or cancel the registration of the company

Appellate Remedy:

• There is no provision in the GST law for appeals against the NAPA’s orders. Thus, the only recourse is to approach the respective High Court by way of a writ petition

1.4 Overview of Law & Current Status

Development in law:

• The authority regulating and ensuring compliance with the anti-profiteering law in India was the National Anti-Profiteering Authority (NAPA) till December 1, 2022.
• The CBIC, through a notification dated 23.11.2022, shifted this authority from the NAPA to the Competition Commission of India (CCI).
• Before the CCI took over, the Rules prescribed a minimum of three members of the Authority (NAPA) to constitute a quorum at its meetings
• Currently, the CCI has only two members, of which one member serves as the chairperson. The absence of a quorum (3 members) was acting as an impediment in the CCI’s way of taking up anti-profiteering matters. * Notwithstanding, July 2023 onwards, CCI began adjudicating on anti-profiteering matters.

Note: Appeals against the CCI’s orders usually lie before the National Company Law Appellate Tribunal (NCLAT). However, there is no appeal provision in the GST Law against the Orders of the Authority**

1.5 Legal Challenges in Implementation of Anti-Profiteering

1.6 Status of Anti-Profiteering Provisions

Lacuna in law:

• Lack of clarity on the procedure to calculate the profiteered amount in case of GST rate reduction.
• Lack of clarity on methodology to pass on the benefits in case of reduction of tax rates/availability of ITC.
• At what profit indicator level should the anti-profiteering computation be made – at product/segment/business vertical/company (for some companies, there may be profits in 1 product line and losses in another product line).
• Lack of clarity as to the duration within which the benefit arising out of the reduction in GST rates or enhancement in credit pool is to be passed on to the customers.
• For businesses selling products through independent distributors, wholesalers, retailers, etc. till which leg shall the company be held responsible?

2. Batch Appeals before the Delhi High Court

2.1 Key Issues before the Delhi High Court

Key issues:
In the matters heard by the Delhi High Court (DHC), the major issues raised by the Petitioners were –

• The constitutionality of the anti-profiteering law
• The interpretation of the anti-profiteering provision (e.g. the meaning of the word ‘commensurate’)
• The application of the anti-profiteering provision (in the absence of a definite methodology of checking and computing the profiteered amount)

Specific issues raised against the NAPA orders during the batch appeals:

• NAPA’s actions lack constitutional conformity
• NAPA’s orders going against the economic principles for price revision mechanism
• Errors in computational methodology
• Lack of clarity on the interpretation of the word ‘commensurate’ and whether it means ‘proportionate’ or ‘equivalent’
• Whether commensurate accommodates other factors such as business cost, market factors, etc.
• Whether price reduction can be the sole way to pass on the benefit to the consumers

2.2 Key Industry Player’s Issues [Illustrations]

3. Summary of Rival Arguments

3.1 On Constitutionality

• Anti-profiteering provisions are unconstitutional, being beyond the legislative competence of Parliament under Article 246A.
• The impugned provisions suffer from the vice of excessive delegation as they delegate essential legislative functions to the Government.
• The impugned provisions are ambiguous, arbitrary, violative of Article 14
• ‘delegatus non potest delegare’ – a delegatee cannot further delegate unless expressly or impliedly authorized.
• Enacted as a temporary transitional provision
• Since NAA is discharging quasi-judicial function, the lack of a judicial member in the Authority is illegal and void; no provision of an appeal
• Violative of Articles 19(1)(g) and 300A of the Constitution as:

1. 1. Operation of S.171 amounted to price-fixing
   2. lack of prescription of a fixed time-period creates an indefinite obligation on taxpayers to show price reduction, hindering their right to trade and commerce

3.2 On Interpretation

• The term ‘commensurate’ is not defined in the Act
• The expression ‘profiteering’ in S.171 is dependent upon the scope and meaning of the phrase ‘commensurate reduction in the price’
• The test should be to ensure that the price difference is reasonable. An exact reduction of Rs 5 must not be expected to be passed on
• The government cannot direct market players on how to price their products, as the same would lead to price fixing
• Commensurate benefit may also be passed on by increasing grammage, i.e. an increase in the volume or weight of the product being sold for the same price
• For low-priced products in the FMCG industry, a minuscule reduction in price is not feasible owing to the restriction in the Legal Metrology Act, 2009 that requires prices of the goods to be rounded off to the nearest fifty paise

3.3 On Application

• DGAP cannot ask taxpayers to reduce prices without stipulating specifics of the methodology to be adopted to determine profiteering
• Variation in prices on the basis of occasions, days (weekends vs weekdays/festival days), locations etc. needs to be taken into account
• No clarity on adjustments allowed on account of a rise either in input costs or in customs duty on the import of inputs, supply and demand conditions and other factors that impact pricing.
• No clarity on whether the determination of profiteering must be made at different levels such as entity level, Stock Keeping Unit level, product level, customer level, etc.
• No prescribed methodology means taxpayers have no way of ensuring compliance.
• Certain instances of lapse in methodology:

1. 1. Profiteering of an organization is calculated based on invoices of 1 branch office, across 2 assessment years
   2. The methodology adopted for the real estate industry was based on the difference between the ratio of Input Tax Credit to turnover under the pre-GST and post-GST period

4. Delhi High Court Decision in the case of Reckitt Benckiser India (P.) Ltd. v. Union of India [2024] 158 taxmann.com 675 (Delhi)

4.1 Decision

• Principles for interpreting the constitutionality of an enactment – always a presumption in favour of the constitutionality of an enactment
• Court’s approach while dealing with tax laws vs. economic laws
• Purpose/aim of GST – a paradigm shift in the field of indirect taxes
• S.171 mandates that tax foregone has to be passed on as a commensurate reduction in price
• S.171 falls within the law-making power of the Parliament under Article 246A
• S.171 lays out a clear legislative policy and does not delegate any essential legislative function
• Impugned provisions are not a price-fixing mechanism. They do not violate either Article 19(1)(g) or Article 300A of the Constitution
• Reference to anti-profiteering provisions of Australia and Malaysia is misconceived
• No fixed/uniform method or mathematical formula can be laid down for determining profiteering
• Prerogative of the legislature to decide how the benefit is to be passed on to the consumers
• CGST Act rightly does not fix a time period during which price reduction has to be offered
• A statutory provision cannot be struck down on the grounds of the possibility of abuse
• To not compare taxes levied after the introduction of GST with a basket of distinct indirect taxes applicable before GST, would go against the intent and objective of the Act
• No vested right of appeal exists. The appeal is a creature of the statute
• No requirement of a judicial member in NAA
• Merely empowering NAA to ensure the prevention of profiteering would not have a sufficient deterrent effect on deviant behaviour unless an authority to levy interest and penalty also exists

5. Aftermath

5.1 Consequences

• A welfare mechanism disguised as a tax legislation
• The computational mechanism remains ad hoc
• DHC didn’t appreciate the technical nuances involved in the comparison of ITC to turnover ratio in the pre-GST era to that in the post-GST era
• Wide powers and excessive delegation leads to possibility of abuse
• Not prescribing a time limit for the operation of Anti-Profiteering provisions opens up the businesses for endless scrutiny
• Taxpayers have already preferred Special Leave Petitions against the judgment. Supreme Court to decide on these issues

6. Global Scenario