By TIOL News Service

NEW DELHI, SEPT 19, 2018: MORE than a hundred applicants who had booked flats under the Haryana Affordable Housing Policy 2013 have alleged profiteering by the developer.

It is their case that before coming in to force of the  CGST Act, 2017  w.e.f. 01.07.2017, Excise Duty and Value Added Tax (VAT) were being collected from them as Service Tax was exempted, however, after the implementation of the above Act, 12% Goods & Services Tax (GST) was levied on the construction service in place of Excise Duty and VAT w.e.f. 01.07.2017, which was further reduced to 8% w.e.f. 25.01.2018 but the benefit of Input Tax Credit (ITC) which was available to the Respondent and which was much more than the output tax liability of the Respondent had not been passed on to them and, therefore, the Applicants should not have been burdened with the entire GST of 12% or 8%.

The Director General of Anti-profiteering(DGAP) in his report concluded that the ITC available to the Respondent during the pre-GST period from April 2016 to June 2017 was 1.10% of the taxable turnover and during the post-GST period from July 2017 to February 2018, the ITC available to the Respondent was 7.20% of the taxable turnover and thus there was additional benefit of ITC to the tune of 6.10% (7.20%-1.10%) in the post-GST era, covering the period from July 2017 to February 2018 to the Respondent.

The DGAP has also stated that for the period w.e.f. 01.07.2017 to 24.01.2018 while the additional ITC available was 6.10% of the taxable turnover, the tax rate had increased by 6.75 % (12%-5.25%), leaving no benefit of ITC to be passed on to the Applicants.

On the other hand, during the period between 25.01.2018 to February, 2018, the additional ITC of 6.10% of the taxable turnover was more than the increase in the tax rate by 2.75% (8%- 5.25%), requiring the Respondent to pass on the benefit of additional ITC of 3.35% (6.10%-2.75%) of the taxable turnover to the Applicants by way of commensurate reduction in the price of the flats.

The DGAP further reported that there was no violation of the provisions of Section 171 of the above Act during the period between 01.07.2017 to 24.01.2018 when the GST was leviable @ 12% but there was violation when the GST was reduced to 8% w.e.f. 25.01.2018 to February, 2018 as the Respondent had not passed on the net benefit of ITC to the Applicants which had accrued to him.

He also reported that the profiteered amount came to Rs. 7,20,398/- which included the profiteered amount @ 3.35% and GST @ 8% on the profiteered amount; that the Respondent had profiteered an amount of Rs. 1,67,25,103/- from the other allottees who had not filed complaints and this amount was required to be deposited in the Consumer Welfare Fund as they were not identifiable.

The respondent while disagreeing with the report submitted that the expenditure on land, license approvals and External Development Charges (EDC) was required to be incurred before start of the construction and hence the initial payments on application, allotment and few periodical installments were meant for funding the above mentioned costs which on an average amounted to 40-45% of the total revenue from the Applicants; that the percentage of expenditure on construction was far more than the percentage of collections made from the Applicants; that besides construction cost there were other expenses which needed to be considered before arriving at the profit margin; that though the benefit of ITC was made available, the basic cost of the raw material (steel) had increased abnormally which had resulted in setting off of the benefit of ITC; that their sub-contractors were also exempt from Service Tax earlier, but after the implementation of the GST, the sub-contractors had been registered and they had to discharge their tax liabilities; that during the period from 1st July, 2017 to 28th February, 2018, sub-contractors were liable to pay Rs. 1,19,14,407/- as GST which was passed on to the Respondent and this extra amount charged by subcontractors had not been considered as the part of the cost in the post-GST period; that, therefore, percentage of ITC should be accordingly recalculated.

The Applicants inter alia did not agree with the DGAP's report which stated that the profiteering was only to the extent of 3.35% but claimed that the amount of profiteering was 6.10%; that increase or decrease in cost on account of the factors other than tax rate and ITC was not to be considered for the purpose of profiteering; that maximum rate of Rs. 4,000/- per sq. ft. carpet area was fixed and any escalation in the cost had already been taken into account at the time of fixing of the above rate; that increase or decrease in the raw material prices was a market phenomenon which was not related to the GST and, therefore, the cost escalation factor was not required to be considered by the Authority; that huge amount of ITC (of Rs.8.70 crores) was available to the Respondent which had been availed by him from September, 2017 to February, 2018; that the Respondent was fully aware that the ITC should have been passed on to the buyers after re-calibrating the price, which had not been done deliberately by him which attracted penal provisions under the anti-profiteering law.

The Authority noted that the following issues required to be decided -

(a) Whether there was any violation of the provisions of Section 171 of the  CGST Act, 2017  in this case?

(b) If yes then what was the quantum of profiteering?

In respect of the first issue, the Anti-Profiteering authority observed thus - It is very clear from the reading of Section 171 that it deals with two situations one relating to the passing on the benefit of reduction in the rate of tax and the second pertaining to the passing on the benefit of the ITC. In the instant case though rationalization of tax had not resulted in the reduction in the tax rate, the benefit of ITC had been extended to all the goods and services which were utilized by any builder which was not available in the pre-GST era. This fact has not been denied by the Respondent. Since Section 171 not only deals with passing on the benefit of reduction in the rate of tax but also deals with passing on the benefit of ITC therefore the contention made by the Respondent is legally not correct to the extent that there had been increase in the rate of tax from 5.25% to 12% and then 8% and no benefit could be passed on by him to the Applicants as the Respondent had become entitled to claim ITC the benefit of which was required to be passed on by him to the Applicants as per the provisions of Section 171. The Respondent has also admitted that he had become eligible to claim ITC after coming in to force of the GST and hence he was liable to pass on the benefit to the Applicants.

As regards the second issue, the Authority further observed -

+ Haryana Affordable Housing Policy 2013 makes it mandatory on him (respondent) that he could not charge more than Rs. 4000/- per sq. ft., the price which he had himself offered and there is no provision of price escalation in the above price either in the above Policy or in the Buyer's Agreement.

+ It is also apparent from the returns that when compared to the pre-GST period where 86% of the tax liability was paid in cash after availing ITC, in the post GST period the entire amount of tax liability had been paid through ITC, which shows that the entire 12% GST liability was paid through ITC while 12% GST was being collected by him from the Applicants. Therefore, this Authority is of the view that the ratio of the ITC to the taxable turnover calculated by the DGAP is correct and the Respondent has not placed any concrete facts or reasons on record to dispute the same.

+ Contention of the Respondent that the cost factor (of raw materials) should be taken into account is not valid and justifiable as there is no escalation clause in the Agreement and the Respondent has also availed benefit of interest on the amount paid by the Applicants.

+ Arguments advanced by the Respondent that in the pre-GST regime there was no tax liability on the sub-contractors and in the post-GST era the tax levied on the sub-contractors was to be borne by the Respondent is also not tenable because the entire amount is eligible for ITC to the Respondent which has been admitted by him in his written submissions. Moreover the sub-contractors are also eligible for ITC which was not available to them earlier and on account of rationalization of tax rates many of the inputs were now available at the reduced rates.

+ It is absolutely clear that the excess ITC was available to the Respondent the benefit of which he was required to pass on to the Applicants. The Respondent cannot appropriate this benefit as this is a concession given by the Government from it's own tax revenue to reduce the prices being charged by the builders from the vulnerable section of society which cannot afford high value apartments. The Respondent is not being asked to extend this benefit out of his own account and he is only liable to pass on the benefit of ITC to which he has become entitled by virtue of the grant of ITC on the Construction Service by the Government.

+ The Authority has taken the basic principle followed by the DGAP i.e. 6.1% of profiteering and accordingly the amount of profiteering has been calculated for each type of flat to arrive at the profiteering amount for each and every buyer depending upon the type of flat he has purchased. In view of the above the Authority determines the amount of profiteering as Rs. 8,22,80,998/- for all the 2476 flats.

Order:

++ The Authority under Rule 133 (3) (a) of the  CGST Rules, 2017  orders that the Respondent shall reduce the price to be realized from the buyers of the flats commensurate with the benefit of ITC received by him ... Since the present investigation is only up to 28.02.2018, any benefit of ITC which shall accrue subsequently shall also be passed on to the buyers by the Respondent. He shall not only pass on the benefit as has been mentioned above to the 109 Applicants who are before us but to all the 2476 buyers as they are identifiable.

++ Respondent is further directed to refund or reduce the amount, to the extent calculated above to each and every buyer at the time of collecting the last installment along with the interest @ 18% per annum to be calculated from the date of the receipt of the excess amount from each buyer, within a period of 3 months from the date of receipt of this order.

++ Accordingly, a Show Cause Notice be issued to respondent directing him to explain why the penalty prescribed under Section 122 of the above Act read with rule 133 (3) (d) of the  CGST Rules, 2017  should not be imposed on him.

The Commissioner of State Tax, Haryana was directed to monitor this order under the supervision of the DGAP by ensuring that the amount profiteered by the Respondent, as ordered by the Authority, is passed on to all the buyers.

In passing: A battle royale begins…

(See 2018-TIOL-06-NAA-GST)