JANUARY 03, 2020

By Rakesh Kumar, Member CESTAT (Retd.)

1. Statutory Provisions

1.1. SUB-SECTION (1) of Section 171 of the CGST Act, 2017 provides 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 of the goods/services by way of commensurate reduction in prices. Sub-section (2) of this Section empowers the Central Government to set up, on the recommendations of the GST Council, an Authority or empower an existing Authority for implementation of the provisions of Sub-section (1). Sub-section (3) provides that the Authority referred to in Sub-section (2) shall exercise the powers and shall discharge the functions as may be prescribed by the Central Government. Sub-section (3A) introduced w.e.f. 1st August, 2019 by Sec 112 of the Finance (No. 2) Act, 2019 provides that where the Authority comes to conclusion that a registered person has profiteered under Sub-section (1), such person shall be liable for penalty equivalent to 10% of the 'profiteered amount', as defined in Explanation to this Section, but this penalty shall stand waived if the profiteered amount determined by the Authority is paid within 30 days of the Authority's order. However, under Sec 1(2)(b) of this Act, Sec 92 to 112 and Sec 114 shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint. By Notification No. 01/2020 - Central Tax dated 1st January 2010 issued under Sec 1(2) of the Finance (No. 2) Act, 2019, Sec 112 has been brought into force w.e.f. 1st day of January 2020. Thus, the newly introduced penal provision of Sub-section (3A) of Sec 171, though inserted in Section 171 w.e.f. 1st August, 2019, has come into force w.e.f. 1st January 2020.

1.2. There are identical provisions in the SGST Acts. By virtue of Sec 21 of the UTGST Act and Sec 20 of the IGST Act, the provisions of Sec 171 of the CGST Act, 2017 are applicable to these Acts also.

1.3. The Rules 122 to 137 in Chapter XV of the CGST Rules, 2017 pertain to anti-profiteering. These Rules provide for-

(a) constitution of National Anti-profiteering Authority (NAA) consisting of a Chairman and four Technical Members for adjudication of the complaints of profiteering against the GST registered persons and other functions assigned to it;

(b) constitution of a Central Standing Committee on Anti-profiteering by the GST Council and State level Screening Committee in each State by the State Government for screening of the complaints of profiteering to determine as to whether there is prima facie evidence to show that the supplier has not passed on the benefit of reduction in the rate of tax or the benefit of input tax credit to the customers by way of commensurate reduction in prices and refer such cases to the Directorate General of Safeguards (now renamed as 'Directorate General of Anti-profiteering' vide office order no. 05/AD.IV/2018 dated 12.06.2017) for detailed investigation;

(c) detailed investigation of the complaints by the Directorate General of Anti-profiteering (DGAP); and

(d) adjudication of the complaints by NAA after hearing the concerned suppliers, the recipients and other interested parties.

As per the anti-profiteering Rules, as the same exist at present, while the Standing Committee on Anti-profiteering shall,within a period of two months of receipt of a complaint, which can be extended by the Authority by a period not exceeding one month, determine as to whether it is a fit case for being forwarded to the DGAP for detailed investigation, the DGAP, on receipt of the reference from the Standing Committee, shall complete the investigation within a period of six months which can be further extended by three months by the Authority. Under Sub-rules (1) and (2) of the Rule 133, the Authority, on receipt of the report from the DGAP, has to decide within a period of six months from the date of receipt of the report whether the registered person (supplier of goods or services) investigated by the DGAP has passed on the benefit of reduction in the rate of tax on supply of goods or services or the benefit of the ITC to the recipients by way of commensurate reduction in prices and before deciding this issue, an opportunity of hearing has to be granted to the interested parties. The term 'interested parties' as per the Explanation (c) below the Rule 137 includes the 'supplier of goods or services under the proceedings', the 'recipient of goods or services under the proceedings' and any other person making the allegation of profiteering against the supplier. Under Rule 133(2A), the Authority may also seek clarification from the DGAP on its report during the process of determination under Rule 133(1).Under Rule 133(3), where the Authority determines that a registered person has not passed on the benefit of reduction in rate of tax on supply of goods or services or the benefit of ITC to the recipient by way of commensurate reduction in prices, the Authority may order -

(a) reduction in prices;

(b) 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 percent (presumably, per annum ) from the date of collection of the higher amount till the date of return of such amount or recovery of the amount including interest not returned, as the case may be, in case the eligible person does not claim return of the amount or is not identifiable, and depositing the same in the Fund referred to in Sec 57;

(c) imposition of penalty under the Act; and

(d) cancellation of registration under the Act.

1.4. Rule 126 empowers the Authority to determine the methodology and procedure for determination as to whether the reduction in the rate of tax on supply of goods or services or the benefit of ITC has been passed on by the registered person to the recipient by way of commensurate reduction in prices. However, the "National Anti-profiteering Authority under the Goods & Services Tax Methodology and Procedure" notified by the Authority under Rule 126 contains only the provisions regarding the working procedure of the Authority, like, principal seat of the Authority, quoram, office hours and holidays, adjournment, re-institution of the proceedings earlier dismissed or disposed ex-parte, production of additional oral or documentary evidence etc. The "Methodology and Procedure" notified by the Authority is totally silent about the computational aspect i.e. how it will determine that the benefit of reduction in rate of tax or the benefit of ITC availment has not been passed on by way of commensurate reduction in prices and once it is determined that a supplier has not passed on the benefit of reduction in rate of tax or the benefit of ITC by way of commensurate reduction in prices, how the profiteered amount is to be calculated and for what period.

1.5. Under Rule 137, as amended by notification no. 33/2019-CT dated 28.07.1019 the Authority shall cease to exist after expiry of four years from the date on which the Chairman of the Authority enters upon his office unless the GST Council recommends otherwise. Thus, the tenure of the Authority is till November 2021, unless it is further increased.

2. Scope Of The Anti-profiteering Provisions

2.1. The provisions of Sec 171(1) are applicable to every case where- (a) there is reduction in the rate of tax, or (b) there is availment of ITC benefit. It will be seen that in case of ITC availment, because of the way this Sub-section is worded,the application of these provisions is not confined only to those cases where on account of changes in law higher quantum of ITC has become available. These provisions are applicable to every case where the benefit of ITC has been availed and the Authority can take up the case for ascertaining whether the price of the product has been fixed after taking into account the ITC benefit availed which has the effect of reducing the cost of inputs. In every case where these provisions are applicable, the benefit of reduction in rate of tax or the benefit of ITC is required to be passed on to the customers by way of commensurate reduction in prices. The price of a product has two components- base price i.e. the price excluding GST and the element of GST. Though the term 'commensurate reduction' has not been defined,from the orders of the Authority it is seen that compliance with the provisions of Sec 171(1) would require that-

(a) in case of reduction in the rate of GST without withdrawal of ITC benefit, there is no increase in the base price during post rate reduction period so that there is reduction in the sale price of the product to the extent of reduction in the quantum of the tax;

(b) in case of reduction in the rate of GST accompanied by withdrawal of ITC benefit, increase in the base price during post rate reduction period is only to the extent which is necessary to offset the effect of withdrawal of ITC benefit so that there is net reduction in sale price to the extent of net reduction in tax after adjusting for increase in base price to offset the effect of withdrawal of ITC benefit; and

(c) in case of availment of ITC benefit, there is reduction in the base price of the product to the extent of the quantum of ITC benefit, as availment of ITC benefit has the effect of reducing the cost of inputs.

2.2. A question now arises as to whether in case of reduction in the rate of tax, with ITC benefit or accompanied by withdrawal of ITC benefit, any case of increase in base price or increase in base price in excess of that required to offset the effect of withdrawal of ITC benefit during post rate reduction period, would amount to contravention of the provisions of Sec 171(1) and similarly whether in case of availment of ITC benefit, any case of non-reduction of the base price to the extent of availment of ITC benefit would amount to contravention of the provisions of Sec 171(1) of the CGST Act. In this regard, it is seen that while the word 'profiteering' has not been used in sub-section (1) of Sec 171, the heading of this section - 'Anti-profiteering measure' throws light on its objectives and, therefore, clarifies the scope of the provisions of this Section.The Apex Court in the case of Commissioner of Income Tax Vs Vadilal Lalubhai reported as AIR 1973 SC-1016 a used the marginal notes of Section 44F of the Income Tax Act to ascertain the intention of the Legislature observing that the marginal notes give an indication of exactly what was the mischief that was intended to be remedied.

2.3. Since the term 'profiteering' has not been defines in the GST Acts, its meaning can be ascertained from the dictionaries. As per the Cambridge Dictionary, 'profiteering' means the act of taking unfair advantage of a situation to make a large profit, usually by charging high prices for things people need.As per Black's Law Dictionary, 'profiteering' means taking advantage of unusual or exceptional circumstances to make excessive profit. As per Oxford Dictionary, 'profiteering' means making excessive or unfair profit especially illegally or in black market. Thus, 'profiteering' means making excessive profits through the means which are unfair or illegal. Therefore, in the context of 'Anti-profiteering measures' of the GST Law, 'profiteering' would mean pocketing by a supplier of a tax concession which is meant for the recipients, or in other words, making profit out of some tax concession to the detriment of the consumers. Thus, in case of reduction in the rate of tax or availment of ITC benefit, only that increase in base price or non-reduction of base price can be treated as contravention of the provisions of Sec 171(1) which is with the intention of pocketing the benefit of reduction in rate of tax or availment of ITC and if the increase in base price or non-reduction of base price is attributable to other business or commercial reasons like increase in the fixed cost, variable cost or the cost of inputs, withdrawal of ITC benefit which has the effect of increase in the cost of inputs, increase in demand etc, the same cannot be attributed to pocketing of tax concession and cannot be treated as profiteering. This interpretation would be in accordance with the provisions of Art 19(1) (g) of the Constitution of India which guarantees every citizen the "right to practice any profession, or to carry on any occupation, trade or business", as the word 'business' has been interpreted by the courts as an activity with profit motive, subject to reasonable restrictions imposed in public interest. Prohibition on pocketing by a supplier of goods or services of some tax concession meant for the customers is a reasonable restriction on the right to carry on any occupation, trade or business. Therefore, in case of reduction in rate of tax, every increase in base price during post rate reduction period or in case of availment of ITC benefit, every non-reduction of base price cannot be treated as a case of profiteering unless there is evidence to show that the same is attributable to illegal pocketing of tax concession meant for the recipient of the goods/ services and for this, the investigating agency- DGAP has to collect evidence, as there is no presumption of profiteering in the GST Acts. In other words, the Anti-profiteering provisions are subject to the right to carry on any occupation, trade or business guaranteed under Article 19(1)(g) of the Constitution of India and the mischief sought to be remedied by these provisions is not of earning profit per se but of earning unjustifiable profit by pocketing the tax concession meant for the consumers.

3. Lack of machinery provisions for- (i)determining whether a registered person has profiteered i.e. has not passed on the benefit of the reduction in the rate of tax on the Supply of goods or services or the benefit of ITC to the recipient by way of commensurate reduction in price sand (ii) determining the period of price reduction and the quantum of profiteered amount once a finding of profiteering has been arrived at.

3.1.As discussed above, for arriving at the finding of profiteering, merely the fact of increase in the base price or non- reduction of base price is not enough, there must also be a finding backed by evidence that increase in base price or non-reduction of base price is with intention of pocketing the tax concession meant for the consumers, not due to some genuine commercial reasons like increase in the cost of inputs and other costs, high demand for the goods or services etc.To give an example, in case of air transportation and hotel industry, the prices of air tickets charged by the airlines and the room rents charged by hotels are highly susceptible to supply and demand and while applying anti-profiteering provisions to these industries, it would be absolutely necessary to ascertain that increase in base price during post GST rate reduction period or nor-reduction of base price during period following some change in law resulting in higher quantum of ITC having become available for availment is not due to purely commercial reasons. Thus, for arriving at the finding of profiteering, it is necessary to distinguish the increase in base price /non reduction of base price on account of profiteering by pocketing of tax concession meant for consumers from that due to purely commercial reasons.

3.2. Once the finding of profiteering has been arrived at, the next step is to determine the 'period of price reduction' and on this basis, the quantum of profiteered amount which the supplier is required to return to the customers or as the case may be, deposit in the Central and State Consumer Welfare Fund. For this, it will have to be determined as to when the effect of reduction in rate of tax or the effect of availment of ITC benefit on the price of the product has got neutralized on account of increase in the cost of inputs, or change in other factors influencing the price.

3.3.Since the determination of the fact of profiteering attracting the provisions of Sec 171 of the CGST Act and having arrived at the finding of profiteering, determining the period of price reduction and the profiteered amount is a complex exercise involving economic and accounting issues which requires going into the various aspects of pricing including costing and distinguishing the increase in base price/ non-reduction of base price with the intention of profiteering by pocketing of tax concession from that due to purely commercial reasons, there should have been machinery/ computational provisions either in the Act or in the Rules for this exercise. But neither the GST Acts nor the Rules made thereunder have any computational or machinery provisions in this regard. Though Rule 126 of the CGST Rules authorizes the NAA to "determine the methodology and procedure for determination as to whether the reduction in rate of Tax on 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", no procedure regarding the computational aspects of determining the fact of profiteering and the period of price reduction has been prescribed by the Authority. There is no procedure prescribed as to how the impact of availment of ITC or availment of higher quantum of ITC on account of changes in the law on the prices of the goods/services would be calculated. In a number of exemption notifications, the reduction in rate of GST is subject to withdrawal of ITC benefit, which increases the cost of inputs and would require increase in the base prices. But there is no standard procedure prescribed as to how the impact of withdrawal of ITC benefit on the prices would be computed. These are serious lapses in the GST law as the same exists at present, as while the contravention is defined, its determination and quantification requires calculations and the computational provisions are missing. The NAA has the powers under Rule 126 to fill in this gap, but it has chosen not to do so. On this point, the NAA in its order dated 21.11.2019 in case of DGAP and others Vs M/s Johnson & Johnson Pvt Ltd, Mumbai and M/s Apollo Hospitals Enterprise Ltd (case No. 59/2019)reported as 2019-TIOL-59-NAA-GST has observed as under.

"Moreover in exercise of the powers under Rule 126 of the CGST Rules, 2017 the Authority has to determine 'Procedure and Methodology' which is evident from all our orders. There cannot be a fixed methodology for determination of the profiteered amount as each case is different and determination of the profiteered amount depends on the facts of that case. The mathematical methodology applied in the case where the rate has been reduced and ITC disallowed cannot be applied in the case where the rate has been reduced and ITC allowed. Similarly, the mathematical methodology applied in the case of Fast Moving Consumer Goods (FMGC) cannot be applied in case of construction services. Therefore the question of prescribing any mathematical methodology does not arise but depending on the facts of each case the Authority has been determining the mathematical methodology as per the provisions of the above Rule."

But if the Authority decides the computational methodology in each case depending upon its facts, how a supplier of goods/services is to know whether he has breached the anti-profiteering provisions even if he had revised the sale prices of his products as per his understanding of the law following reduction in the rate of tax or availment of ITC? In such circumstances, is it fair to impose penalty on the Supplier besides recovery of the profiteered amount from him along with 18% interest?

4. Practice being actually followed for determination as to whether the reduction in the rate of tax on 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 and the quantification of profiteered amount, if the benefit has not been passed on.

4.1. In case of reduction in the rate of tax or change in the law resulting in higher quantum of ITC becoming available, the determination as to whether the provisions of Section 171(1) have been complied with or not, requires comparison of the base price of the product immediately before date of reduction in rate of tax or date of change in law resulting in higher quantum of ITC becoming available with the base price immediately after the reduction in rate of tax/change in law. In case of reduction in rate of tax without withdrawal of ITC benefit, increase in the base price immediately after reduction in rate of tax would warrant an investigation for ascertaining as to whether the same is on account of profiteering. In case of reduction in rate of tax accompanied by the withdrawal of ITC benefit, increase in the base price immediately after the reduction in rate of tax, which is more than that required to offset the effect of withdrawal of ITC benefit,would warrant an investigation for ascertaining as to whether such increase is on account of profiteering. Similarly, in case of change in law resulting in a higher quantum of ITC becoming available, non- reduction of the base price in proportion to the increase in availability of ITC benefit would warrant an investigation. The first issue in this regard is as to whether mere increase in base price/increase in base price beyond that required to offset the effect of withdrawal of ITC benefit or non-reduction of base price in proportion to increase in availability of ITC benefit by itself can be presumed to be on account of profiteering with the intent to pocket the tax concession which is meant for the customers of the supplier of the goods/services. The obvious answer to this question is that since there is no such presumption in the law and since the price of a product in addition to the element of tax, also depends upon a number of other factors like cost of inputs, fixed cost, supply and demand position, degree of competition, etc., in case of reduction in rate of tax without or with withdrawal of ITC benefit, it cannot be presumed that any increase in base price/increase in base price beyond that required to offset the effect of withdrawal of ITC benefit, is due to profiteering and similarly, in case of change in law resulting in higher quantum of ITC becoming available, non-reduction of base price in proportion to increase in ITC benefit cannot be presumed to be with intention of profiteering. The Authority in its order dated 04.05.2018 in the case of Shri Kumar Gandharv Vs KRBL Ltd (Case No 3/2018) reported as - 2018-TIOL-2-NAA-GST, has held that 8.33% increase in the base price of branded packaged rice after introduction of GST when 5% GST was imposed with ITC benefit to the tune of 2.73% to 3% of the taxable turnover, which had become available, did not amount to profiteering, as the purchase price of the bulk rice had increased. However, in all other cases, it is seen that while determining the question of profiteering, neither the DGAP investigates as to whether the increase in the base price or non-reduction of the base price is due to profiteering and not due to any genuine reason like increase in the cost of inputs, supply and demand position etc., nor the NAA gives any finding on this issue and as such in the cases of reduction in rate of tax, it is presumed that the increase in base price/ increase in base price beyond that required to offset withdrawal of ITC benefit during post rate reduction period is due to profiteering and similarly, in case of change in law resulting in higher quantum of ITC benefit becoming available, non-reduction of base price or reduction of base price which is less than the increase in ITC availability is presumed to be due to profiteering, without any finding supported by evidence on this point.

4.2. The second issue is regarding computation of increase in the base price and quantification of profiteered amount, if the increase in the base price following the reduction in rate of tax has been held to be due to profiteering. In this regard, the first point of dispute is as to which base price of the pre-rate reduction period should be adopted and it should be compared with which base price of post rate reduction period. If a supplier makes all the supplies of his product to all his customers at the same price without any quantity discount or promotional discounts, there would be no issue. But in most of the cases, suppliers have different prices for different classes of buyers and also give quantity discounts which depend upon the volume of sales and promotional discounts. In such cases, the correct method for determining as to whether the supplier has increased his base price following reduction in rate of duty, would be to compare the base price without discount during period immediately preceding the reduction in rate of tax with the base price without discount during period immediately after the reduction in rate of tax and for this purpose,the comparison should be made separately for each class of buyer.

For comparison of pre and post rate reduction base prices, discounts are to be excluded as the Authority in its order dated 18.07.2018 incase of Rishi Gupta Vs M/s Flipcart Internet Pvt Ltd reported as - 2018-TIOL-04-NAA-GST has held that withdrawal of discount does not amount to profiteering as the same is offered by the supplier from his profit margin and does not form part of the base price. If instead of doing this, average price of sales at discounted prices to all the classes of buyers during pre-rate reduction period and post rate reduction period is compared, the picture will get distorted. Though the Authority in its order dated 21.11.2019 in the case of Commissioner CGST Mumbai West & DGAP New Delhi Vs Johnson & Johnson Pvt Ltd, Mumbai (Case No 59/2019)(Supra) has accepted the principle that when a supplier makes the supply of his goods through different channels to different category of buyers at different prices, separate base prices for each category of buyers for pre-rate reduction period must be adopted, this principle has not been followed and in this very case, in spite of the respondent's contention that there are a large number of categories of buyers to which the goods are supplied at different rates, the Authority classified the supplies only in two categories - supplies to CSD which constitute a very small proportion of total sales and 'other than CSD supplies' and it adopted separate base prices only for supplies to CSD outlets and 'other than CSD supplies', while the latter category included supplies to a large number of categories of buyers at widely different prices. Very often, on account of higher proportion of sales at large discounts during pre-rate reduction period, the average base price for pre-rate reduction period is much less than the normal transaction value of individual transactions,as a result of which not only the percentage increase in the base price gets inflated, the quantum of profiteered amount also gets inflated. In some cases of multi-product companies, different period was adopted for different items for calculation of average base price for pre-rate reduction period.

In the case of Johnson & Johnson Ltd (case No. 59/2019)(Supra) the rate of GST on sanitary napkins was reduced from 12% ad valorem to nil by Notfn No 19/2018-CT(R) dated 26.07.2018. In this case, while for certain SKUs, the average base price for pre-rate reduction period was calculated for the period from 01.07.2018 to 26.07.2018, in case of other SKUs, the same was calculated for the period from April 2018 to June 2018 and thereafter, this average base price has been compared with the actual selling price of the same SKUs for the period from 27.7.2018 to 30.09.2018.

4.3. The other issue regarding the computational aspect is in respect of cases where reduction in rate of duty is accompanied by withdrawal of ITC benefit. Since withdrawal of ITC benefit increases the cost of inputs, the same would justify increase in the base price of the products. Therefore,when reduction in rate of tax is accompanied by withdrawal of ITC benefit, first of all what has to be seen is as to whether increase in base price during the post rate reduction period is more than that warranted to offset the effect of ITC benefit and only if the increase is more than that required to neutralize the effect of withdrawal of ITC benefit, further investigation would be required. Thus, in such cases, first of all, the effect of withdrawal of ITC benefit on the base prices has to be calculated. But no standard method has been prescribed for this either in the Rules or by the NAA. The practice adopted by DGAP and the NAA in this regard is to calculate the ratio of ITC availment to the taxable turnover for pre-rate reduction period and apply the same for post rate reduction period. For example if during pre-rate reduction period, the ITC availment is 10% of the taxable turnover as per GSTR-3B returns, during post rate reduction period, any increase in base price beyond 10% would be treated as profiteering. But this practice is based on the assumptions that-

(a) the ITC to taxable turnover ratio for pre-rate reduction period would be the same as that for post rate reduction period, and

(b) in case of multiple products, the ratio would be uniform for each product.

Both of these assumptions would not be correct in all the cases.The first assumption would not be correct in cases where there is acquisition of high value capital goods or increase in the price of tax paid inputs during post rate reduction period because of which the Input Tax,whose credit is no longer available for availment and which increases the cost, and its ratio to taxable turnover would increase. Similarly, there is no basis for assuming that in case of multi-product companies, ITC availment to Taxable turnover ratio would be uniform for all the products and since the profiteering is determined and quantified product-wise (NAA's orders in the cases of M/s Lifestyle International(order dated 25.09.2018 in case no. 8/2018) and M/s Kunj Lub Marketing reported as - 2018-TIOL-09-NAA-GST, the finding of profiteering and the computation of profiteered amount would get distorted if overall ITC availment to Taxable turnover ratio is applied for each individual product.

4.4. The third issue is regarding the practice of including GST in the profiteered amount. GST gets included because of the questionable practice adopted by Authority of quantifying the profiteered amount by taking the difference between the post rate reduction base price as per the Department plus GST and the actual selling price including GST. The rationale of the Authority for including GST in the profiteered amount is that since higher amount of GST along with higher base price has been recovered by the supplier from the customers, the excess amount to be returned to the customer/to be deposited in the Consumer Welfare Fund should also include GST. This is absolutely wrong as the amount representing as GST recovered by the supplier from the customers has not been retained by him but has been paid by him to the government and, therefore, the supplier cannot be said to have profited in any manner by recovering higher amount of GST from his customers.Even in terms of the Explanation to Sec 171 brought into force w.e.f. 1st January, 2020 defining the term 'profiteered amount', this term would not include the GST,as any amount collected by a supplier as representing GST is governed by Sec 76 and in terms of the provisions of this Section, this amount is required to be paid forthwith to the Government and once the provisions of Sec 76(1) have been complied with in respect of an amount collected by the supplier from his customers as representing GST, that amount cannot be collected from him once again as profiteered amount. Moreover,since the entire amount collected by a supplier as representing GST has been paid by him to the Government, in the event of the supplier being held to be guilty of indulging in profiteering by increasing the base price/ non-reduction of base price, the differential amount of GST, which is with the Government, can be paid directly by the Government to the customers or deposited in the Consumer Welfare Fund. In fact, in most of the cases, since it is not feasible to refund the profiteered amount to the customers and for this reason the same is ordered to be deposited in the Consumer Welfare Fund, the GST collected on the profiteered amount can be easily transferred by the Government to the Consumer Welfare Fund. In any case, there is no justification for charging GST from a supplier as part of the profiteered amount when the same has already been paid by him to the Government. The inclusion of GST in the profiteered amount not only inflates the quantum of the profiteered amount but also inflates the quantum of interest which is charged at 18%and also inflates the penalty for post 01.01.2020 cases of contravention, which is 10% of the profiteered amount.

4.5. The fourth and most important issue regarding computational aspect is determination of the period of price reduction and the quantum of profiteered amount. Once the Authority has arrived at the finding that following reduction in rate of tax or change in law resulting in availability of higher quantum of ITC benefit, a supplier has not passed on the benefit of reduction in rate of tax or availability of higher quantum of ITC by way of commensurate reduction in price, the Authority has to order the price reduction. But the price reduction cannot be for indefinite period and has to be for certain definite period and if the products have already been supplied at higher price,the Authority has to quantify the excess amount charged during the period of price reduction and order its return to the customer or its deposit to the Consumer Welfare Fund along with interest @ 18%. The quantum of profiteered amount would depend upon the length of the period of price reduction starting from the date of reduction in rate of tax/date of change in the law, resulting in availing of higher quantum of ITC. The price of a product, goods or service, doesn't depend on tax element only but also depends on other equally important factors - fixed cost,cost of inputs, supply and demand position, degree of competition, etc., which change from time to time. Therefore, the benefit of a tax concession given from a particular date, will, with the passage of time, get neutralized by other factors. Therefore, the period of price reduction and on this basis the calculation of profiteered amount, has to be only for the time period during which the other factors as mentioned above have not changed.

However, it is seen that in most of the cases, there is neither any investigation by DGAP on this point, nor any finding by NAA on this point and the period of profiteering is arbitrarily adopted. As per the practice, the DGAP arbitrarily decides the "period of investigation" which is informed to the supplier being investigated and for which the information is obtained and in the event of finding of profiteering, the profiteered amount is calculated for this period, without any inquiry whatsoever as to on what basis this period of price reduction/period of profiteering has been adopted and the Authority also accepts the period of profiteering adopted by the DGAP without any finding as to on what basis this period has been adopted. Only in the cases where the supplier under investigation has specifically informed the DGAP during investigation about upward revision of the prices of his product son account of increase in the input cost, for calculation of profiteered amount, the period w.e.f. the date of price revision is excluded.But in all other cases, the profiteered amount is calculated for the period of investigation arbitrarily decided by the DGAP, even though in a large number of cases, the suppliers, in spite of increase in the cost of inputs, may not have increased the prices of their products on account of competition. In a recent order dated 23.12.2019 in the case of Johnson & Johnson Pvt Ltd, Mumbai (case No 77/2019 ) - 2019-TIOL-77-NAA-GST, the Authority, in para 80 of the order, with regard to the supplier's plea that the profiteered amount has been calculated for too long a period from 15.11.2017 to 31.12.2018, has observed that since the investigation was initiated by DGAP by issuing the notice on 15.01.2019, the period of profiteering has been taken up to 31.12.2018. By this logic, if the inquiry had been started by DGAP in July, 2019, the profiteered amount would have been determined for period from 15.11.2017 to 30.06.2019. This practice of the Authority is, obviously, based on the assumption that the price of a product is dependent only on the element of tax and on no other factor, which is an absurd assumption.

5. Penalty

5.1 Another issue regarding implementation of anti-profiteering provisions is the imposition of penalty. During the period prior to 01.08.2019, there was no provision in Section 171 or in any other section of CGST Act prescribing a specific penalty for contravention of the provisions of Section 171(1). Though, as mentioned above, by Sec 112 of the Finance (No. 2) Act, 2019, Sub-section (3A) was added to Sec 171 providing for penalty equal to 10% of the profiteered amount for contravention of the provisions of Sub-section (1), this newly inserted Sub-section has been brought into force w.e.f. 1st January, 2020 by Notification No. 01/2020- Central Tax dated 1st January, 2020.Therefore, during the period prior to 1st January, 2020, penalty for contravention of the provisions of Section 171(1) could be imposed only u/s 125 which prescribes a penalty not exceeding Rs 25000/- for contravention of the provisions of the Act or of the Rules made there under for which no separate penalty is provided for in this Act, as the Rule 133(3)(c) of the CGST Rules prescribes imposition of penalty by the Authority as specified under the Act. Thus, during period prior to 1st January, 2020, penalty for the contravention of Section 171(1) could be imposed only under Section 125.However, in most of the orders passed during the period prior to 1st January, 2020, notices have been issued for imposition of penalty under Sec 122(1)(i) of the CGAT Act for supply of goods/services under 'incorrect' invoices. Sec 122(1)(i) provides for penalty on a person who either supplies any goods or services without issue of invoice or issues incorrect or false invoice with regard to any such supply. This Section is meant for imposition of penalty in the cases of supplies of goods or services either without invoice or under parallel invoices or under invoices containing false particulars regarding description or value of the goods. When some goods or services have been supplied by a supplier under an invoice mentioning the correct description of the goods and the price actually charged and on payment of full GST on that price, the invoice cannot be treated as 'incorrect or false invoice' just because the invoice price is higher than what it should be according to NAA. This may be a case of contravention of the provisions of Sec 171(1), but not of making supply under 'false or incorrect invoice'. Even if it is assumed that the supplier is guilty of issuing incorrect invoice, a question arises whether NAA can exercise the powers of a GST officer and impose penalty under Sec 122(1)(i) for issue of incorrect invoice on a supplier held to be guilty of contravention of the provisions of Sec 171(1)?The answer is obviously NO, as NAA is empowered to impose penalty only for contravention of the provisions of Sec 171(1). But this has been done in a number of cases, probably because the quantum of penalty under Sec 122 is not restricted to Rs 25000/-.

5.2. Sub-section (2)(b) of Section 1 of Finance (No 2) Act of 2019 clearly states that Sections 92 to 112 and Section 114 shall come into force on such date as the Central Government, may, by notification in the official gazette, appoint. It is by section 112 of this Act that sub-section (3A) had been added to section 171 of the CGST Act, 2017. Though the Finance (No 2) Act, 2019 received the President's assent on 01.08.2019 and w.e.f. 01.08.2019, sub-section (3A) providing for higher penalty for the offences of profiteering became part of Section 171,because of Section 1(2)(b)of Finance (No 2) Act of 2019, the newly inserted sub-section (3A) was to come into force only from such date as notified by the Central Government. The newly inserted penal provision was brought into force only w.e.f. 01.01.2020 vide Notification No. 01/2020-Central Tax dated 01.01.2020. However, surprisingly, the Authority,probably under the impression that sub-section (3A)has come into force w.e.f. 01.08.2019, has, in about 30 orders passed during August, 2019- December, 2019 period, ordered issue of notice for imposition of penalty equal to 10% of the profiteered amount on the suppliers by invoking the new Sub-section (3A) which was not even in force till 31st December, 2019 and which came into force only w.e.f. 1st January, 2020.These notices for penalty issued under a provision which had not been brought into force till 31stDecember, 2019 are non est.

5.3. Since there is nothing in the newly inserted Sub-section (3A) from which it can be inferred that the same can be applied retrospectively, this new penal provision cannot be invoked in the cases of contravention of the provisions of Sec 171(1) during the period prior to 1st January, 2020. However, it is seen that in an order passed on 1nd January, 2020 - 2020-TIOL-02-NAA-GST where the period of contravention of the provisions of Section 171(1) is prior to 1st January, 2020, the Authority has ordered the issue of notice for imposition of penalty equal to 10% of the profiteered amount by invoking Section 171(3A), which is wrong. Apex Court in the case of Commissioner of Central Excise, Mumbai Vs Lal Mining Engg Works reported as - 2007-TIOL-157-SC-CX has held that Sec 11AC of the Central Excise Act, 1944 providing for mandatory penalty equal to the duty evaded cannot be applied retrospectively. In case of Commissioner Central Excise, Ahmedabad Vs Orient Fabrics Ltd reported as - 2003-TIOL-32-SC-CX the Apex Court has held that amendment to Additional Duties of Excise Act providing for penal provisions cannot be given retrospective effect.

6. Inquiry procedure

6.1. Under Rule 129 of the CGST Rules the concerned supplier/registered person gets a notice from DGAP asking him to furnish certain information for the period of investigation as mentioned in the notice, on the basis of which calculations are made by the DGAP.But during the course of investigation, neither any inquiry is made with the supplier seeking his explanation for increase in base price during post rate reduction period or non-reduction of base price following change in law resulting inavailment of higher quantum of ITC nor any opportunity of hearing is granted to him to inform him about the methodology adopted for arriving at the conclusion of profiteering and calculation of profiteered amount and considering his objections before arriving at the final conclusion. The Authority in para 72 of its above-mentioned order dated 23.12.2019 in the case of Johnson & Johnson Pvt. Ltd has held that DGAP is not required to give personal hearing during its investigation. Since no hearing is granted by the DGAP to the supplier being investigated other than asking for certain information for the period of investigation and since the supplier has absolutely no idea as to which method would be adopted by the Authority for determining whether he has contravened the provisions of Sec 171(1) and how the profiteered amount would be calculated, the inquiry conducted by DGAP is largely a unilateral inquiry. As a result of this practice, the supplier very often has no opportunity to submit certain vital information which would affect the outcome of inquiry and when this information is submitted to the Authority at the time of personal hearing, the same is not accepted on the ground that it was not presented to the DGAP during investigation. In the above-mentioned order dated 23.12.2019 in case of Johnson & Johnson Pvt Ltd (supra), the Supplier's contention recorded in para 23 to 26 of the order that out of total profiteered amount of about Rs 230.40 crores calculated by the DGAP, an amount of about Rs 96 crores is in respect of stock transfers and if the stock transfers are separately included while computing profiteered amount, it would lead to double counting of profiteering with respect to the same goods, was rejected by the Authority (para 83 of the order) on the ground that the Supplier under the proceedings did not supply the details of the stock transfers and the amount involved therein to DGAP. It is difficult to understand as to why the Authority could not correct this factual mistake even if the supplier under proceeding belatedly mentioned the fact of stock transfers before the Authority for the first time.

7. What is the "additional oral or documentary evidence" mentioned in the 'Procedure and Methodology' notified by the Authority under Rule 126?

7.1. In the 'Procedure and Methodology' notified by the Authority under Rule 126 of the CGST Rules, there is Rule (24) which states that "the interested parties shall not be allowed to produce additional oral or documentary evidence before the Authority". The term "interested parties", as defined in Explanation below the Rule 137 includes 'supplier of goods or services under proceedings' and the 'recipient of goods and services under proceedings'. Thus a supplier of goods/services against whom anti-profiteering proceedings have been initiated under Sec 171 is barred from producing additional oral or documentary evidence in course of proceedings before the Authority.The term 'additional evidence' in the context of appellate proceedings means the evidence which had not been produced before the original adjudicating authority. Which evidence - oral or documentary, will be treated as additional evidence in course of proceedings before NAA which is the original adjudicating authority? In this regard, it will be wrong to treat some document not produced before DGAP or some fact not mentioned to DGAP during investigation as 'additional evidence' and refuse to accept the same in course of proceedings before the Authority invoking Rule (24), as during investigation, the DGAP, other than asking for certain information, neither makes any inquiry with the supplier nor grants them any opportunity of personal hearing and the supplier under investigation does not know anything about the methodology adopted by the DGAP for arriving at the finding of profiteering or quantification of profiteering.

8. Conclusion

Thus, the functioning of the Authority not only suffers from lack of transparency, but as discussed above, many of its practices are, either of doubtful legal validity or are outright contrary to the provisions of law. Huge amounts are demanded from the suppliers of goods/services as 'profiteered amount' either on the basis of some computational methodology/formula adopted by DGAP which is based on certain assumptions,and which is applied in an inflexible manner as if the same were statutory provision or on the basis of certain practices adopted which are contrary to the provisions of law. Because of the manner in which the anti-profiteering provisions are being implemented, the same are doing more harm than good, as instead of attacking profiteering, it is the profit making which is being attacked.What is worse, there is no provision for appeal against the Authority's orders and the only remedy for a supplier faced with an adverse order of the Authority is to file a writ petition against it before the High Court. When the GST was introduced along with its anti-profiteering provisions, no appellate authority for appeal against the orders of the NAA was prescribed, possibly for the reasons that the enforcement of the anti-profiteering provisions would be only for two years and these provisions would be used sparingly. But the period of NAA has been extended by another two years and the cases being taken up by DGAP for investigation and by the Authority for adjudication are increasing. It will not be surprising if the Authority's period is further extended. The Government should, therefore, consider providing an appellate forum for appeals against the NAA's orders. In view of temporary nature of the Authority,instead of a separate appellate authority, some existing tribunal like National Bench of the GST Tribunal or CESTAT can be empowered to hear and decide the appeals against the NAA's orders. Another step which must be taken by the Government to mitigate the hardship being faced by the trade and industry is to specify the computation procedure for arriving at the finding of profiteering and quantification of profiteered amount in the CGST Rules themselves.

[The views expressed are strictly personal.]