Provisions of Anti-Profiteering are constitutionally valid

Introduction

When GST was introduced in the Country, the Government ensures either a reduction in GST rates and/ or allowed GST credit, which was not available in the pre-GST regime on various Goods or Services and wanted corresponding benefits as allowed to the Companies by forgone revenues on above account should be passed to the consumers.

In order to ensure the consumers to be benefitted, the concept of 'Anti-Profiteering' was introduced under Section 171 of the Central Goods and Services Tax Act, 2017 ("the CGST Act") read with Rules122 to 137 of the Central Goods and Services Tax Rules, 2017 ("the CGST Rules").

Companies running diverse businesses ranging from hospitality, Fast-Moving Consumer Goods ("FMCG") to real estate, were directed to pass on the commensurate benefit of on reduction in tax rates or allowing the Input Tax Credit ("ITC"), which was made available in GST regime and check & balances were provided vide Anti-Profiteering provisions to its consumers/recipients along with interest.

Suppliers, while not opposed to passing on benefits to consumers, encounter substantial obstacles in adhering to the Anti-profiteering provisions. These challenges include the absence of a standardized methodology adopted by the National Anti-profiteering Authority ("NAA") and the Director General of Anti-Profiteering ("DGAP") for determining profiteering amounts, potential inconsistencies in determinations of profiteering across various levels, and a lack of clarity for assesses regarding compliance with Section 171(1) of the CGST Act. Additionally, the absence of defined time periods within which reduced prices must be maintained further compounds the predicament. Consequently, aggrieved by the provisions of Section 171 of the CGST Act, numerous companies spanning diverse industries have united to pursue relief through a writ petition.

In this regard, a writ petition was filed before the Hon'ble Delhi High Court in the matter of Reckitt Benckiser India (P.) Ltd v. Union of India [Writ Petition (Civil) No. 7743 of 2019and Others dated January 29, 2024] by more than 170 companies like Reckitt, Abbott, HUL, Johnson and Johnson, etc. ("the Petitioners") fiercely challenging the constitutional validity of Section 171 of the CGST Act read with Rules 122, 124, 126, 127, 129, 133 and 134 of the Central Good and Services Tax Rules, 2017 ("the CGST Rules"). Also, the Petitioners have challenged the legality of the notices and orders imposing penalties issued by the NAAunder Section 122 of the CGST Act read with Rule 133(3)(d) of the CGST Rules.

Contentions of the Petitioners

• That Section 171 of the CGST Act is beyond the legislative competence of Parliament.
• That failure to provide clear statutory guidance for the exercise of powers by NAA in the formulation of methodology amounts under "delegation of essential legislative function" as these formulations were essential and therefore, the same should have been stipulated by the Legislature. Thus, it is settled law that the legislative authority cannot be delegated under a statute without appropriate guidelines or safeguards. Further, Rule 126 of the CGST Rules is contrary to the legislative mandate contained in Section 171 of the CGST Act.
• That the term 'commensurate' is not defined in the CGST Act and the definition of profiteering inserted by way of amendment (that came into force only on January 1, 2020) is vague.
• That the methodology adopted by NAA and the DGAP to arrive at the profiteering amount varies from industry to industry or even different methodology is used in the same industry. Hence, without stipulating the specifics of the methodology to be adopted to determine the profiteering amount, the Petitioners could not have been asked to reduce prices.
• That determination of profiteering can be made at different levels such as entity level, Stock Keeping Unit ("SKU") level, product level, customer level, etc. Hence, an assessee intending to comply with the law has no way of ensuring whether its methodology complies with Section 171(1) of the CGST Act or not.
• That reference to Anti-Profiteering provisions of Australia and Malaysia was provided by the Petitioner, mentioning that the provisions so introduced prescribed clear policy guidelines before imposing the restrictive conditions.
• Section 171 of the CGST Act does not fix a time period, during which the reduced prices of the goods and services had to be maintained and left undefined and open-ended.
• That Rule 133 of the CGST Rules, uses the word "shall" and thus mandates that NAA must determine and pass an order within a period of three months (prior to amendment dated June 28, 2019) from date of receipt of the report from DGAP.
• That NAA does not have any power or authority in law to pass an order in relation to any product, other than the product against which complaint has been received by the authorities.
• Section 171 (3A) of the CGST Act, which came into force only from January 01, 2020 and so penalty under the said section read with Rule 133(3)(d) of the CGST Rules could not have been imposed on the Petitioners retrospectively.

Arguments of Respondents

• That anti-profiteering provisions have been brought into force in the interest of consumer welfare and so any interpretation of the same must be in favour of the consumer.
• That Section 171 of the CGST Act, has been enacted in achievement of the goals of redistributive justice contained in the Directive Principles of State policy in Articles 38, 39(b) and 39(c) of the Constitution of India.
• That Article 246A of the Constitution of India empowers the Legislature to make laws 'with respect to' GST. Hence, the said section does not violate Article, because it is not a taxing provision but is only meant to ensure that the sacrifice of tax revenue by the Central and State Governments for the welfare of the consumer is passed on to them by the supplier.
• The word 'commensurate' definition can be referred to from Cambridge Dictionary. Thus, Section 171 of the CGST Act lays down a clear legislative policy and hence, no essential legislative function has been delegated.
• That the power of NAA to determine procedure and methodology flows from Section 171 of the CGST Act itself. The rule-making powers of the Central Government as prescribed in Section 171(2) of the CGST Act as well as Section 164 of the CGST Act empower the Central Government to prescribe the powers and functions of the authority as well as to prescribe a Rule conferring the Authority with the power to determine the methodology for determining whether the benefits have been passed on. Hence, the principle delegatus non potestdelegare is not applicable to the present batch of matters.
• That NAA must necessarily determine the methodology and procedure to compute profiteering as it merely stipulates that the authority 'may' determine the methodology and procedure for such computation. Thus, provisions of Section 171 of the CGST Act provide sufficient guidance to NAA to determine the methodology on a case to case basis depending on the peculiar facts of each case and the nature of the industry and its peculiarities.
• That reference to the Anti-Profiteering provisions of Australia and Malaysia is provided by the Petitioner. In this regard, the Respondent stated that the Australian Act prohibits 'price exploitation' and the Malaysia Act prohibits suppliers from 'making unreasonably high profit' which aligns with Section 171 of the CGST Act.
• That Section 171 of the CGST Act is presumed to be a price-fixing legislation, it would not render the Section violative of Article 19(1)(g) of the Constitution of India.
• That Rule 129 of the CGST Rules which provides for the scope of powers of the DGAP, uses the words 'any supply of goods or services' and so the scope of powers of DGAP is very wide.
• That Section 171(3) of the CGST Act, which empowers NAA to order a supplier to return to the recipient, an amount equivalent to the amount not passed on by way of commensurate reduction in prices along with interest at the rate of eighteen per cent [18%] from the date of collection of the higher amount till the date of the return of such amount or recovery of the amount not returned including interest, as the case may be.
• That NAA was already vested with the powers to impose penalties as per Rule 133(3)(d) of the CGST Rules even before Section 171(3A) came into force. Thus, the said sub-section is therefore merely clarificatory in nature.

Observation of the Court

• The Hon'ble Delhi High Court observed that Section 171 of the CGST Act has a taste of unjust enrichment. Moreover, despite the reduction in rate or benefit of ITC, the Supplier can raise the price based on commercial factors. Hence, there is no price-fixing mechanism.
• Section 171 of the CGST Act clearly states the legislative policy does not delegate any essential legislative function to NAA. It has stated the pre-conditions for applicability of the provision are either the event of a reduction in the rate of tax or the availability of benefit of ITC. Once the said conditions are fulfilled, the price must be reduced. However, if before such reduction of the rate of taxes or benefit of ITC, the price paid by the consumer is inclusive of the GST, then there has to be a reduction in the subject price. Hence, the said section neither delegates any essential legislative function nor violates Article 14 of the Constitution.
• The Court also cleared the definition of the word 'commensurate' in Section 171 of the CGST Act that as per the dictionary meaning, whatever actual saving arises due to the reduction in rates of GST or the benefit of the ITC, must be reflected as equal or near about reduction in price. There is no fixed mathematical formula that can be laid down for determining the price as the facts of each case may be different. It has authorised NAA to determine the appropriate methodology.
• The Court opined that expansion of investigation is beyond the scope of the complaint. It is not ultra vires the statute as Section 171 of the CGST Act is wide and does not limit the scope of examination to only goods and services. Further, there is no requirement for a judicial member in NAA as it is primarily a fact-finding body and performs functions that are to be discharged by domain experts.
• The CGST Act rightly does not fix a time period during which a price reduction has to be offered. It is not proper or feasible to contemplate any specific period of time for the application of the reduced price, as the same has to take effect so long as the direct relation between the reduction of the tax rate or the benefit of ITC exists. There is no other factor effecting the same. If, conceptually, the reduction of tax rate has taken place on a specified date and there are no justified variations in the cost price or other factors for offsetting such reduction in the prices for a particular period of time, clearly for that period a reduced price must govern the transaction.
• This Court was of the view that providing for a particular period of time for operation of the provisions would not be in conformity with the scheme and intent of the CGST Act itself. It was clarified that there may be cases of arbitrary exercise of power under such cases. However, the remedy for the same is to set aside such orders on merits. If there is a possibility of abuse of Section 171 of the CGST Act, it cannot be struck down or declared unconstitutional as per the settled law.
• This Court is of the view that Rule 124 of the CGST Rules, is in consonance with Article 50 of the Constitution, since selection to NAA is made on the recommendation by a Selection Committee constituted by the GST Council which is a constitutional body. Further, Rule 133(3)(b)&(d) of the CGST Rules empowers the authority to levy interest @ 18% from the date of collection of the higher amount till the date of the return of such amount as well as the imposition of penalty are intra vires and within the Rule making power of the Central Government.
• This Court opined that the anti-profiteering provisions and rules are beneficial legislation as they promote consumer welfare, therefore, the time limit provided for furnishing of report by DGAP is directory in nature and not mandatory.

Conclusion

The High Court upheld the constitutional validity of Section 171 of the CGST Act and the CGST Rules, however, did not curb the ambiguities. They highlighted the reasons for the introduction of Section 171 of the CGST Act read with Rules 122, 124, 126, 127, 129, 133, and 134 of the CGST Rules, which are clearly in alignment with the public welfare objectives. The Court also acknowledged that the challenges should be addressed on the merits of each case. However, the Court failed to understand that the law is equal for all and should not be changed as per the facts and circumstances of each case. The issue involved in this petition requires consideration and is pending final disposal. Hence, the notice for final disposal is returnable on February 21, 2024.

Our Comments

"Anti-profiteering" measures were introduced in the GST regime in order to provide for a mechanism to ensure that the full benefits of ITC and reduced GST rates flow to the consumers who bear the burden of tax,thereby alleviating their tax burden and forestalling suppliers from unjustly appropriating such benefits. It stands as a touchstone for adjudicating the matter at hand.

NAA is urged to delineate a methodological framework or formulation for the computation of profiteering amounts across various industries, facilitating compliance with Section 171 of the CGST Act. While acknowledging the imperative of addressing potential misuse of legislation, it is advocated that clarifications should be provided by the concerned authorities in this context, to rectify any lacunae prone to exploitation, precluding a lacuna in regulatory oversight. Moreover, given the burgeoning caseload before the judiciary, the wholesale annulment of individual orders incongruent with extant jurisprudence is deemed impracticable, potentially exacerbating the burden of litigation upon the courts.