Rate Reduction Benefit By Reduction In Prices: Delhi High Court Directs Loreal To Deposit Principal Profiteered Amount

The Delhi High Court has directed Loreal to deposit the principal profiteered amount after deducting the GST imposed on the net profiteered amount in six equal instalments.

The division bench of Justice Manmohan and Justice Dinesh Kumar Sharma has observed that the interest amount directed to be paid by the department as well as the penalty proceedings and investigation by the National Anti-Profiteering Authority (NAA) in respect of other products sold by Loreal has stayed till further orders.

The court has noted that under Section 171, any benefit of a reduction in the rate of taxes or benefit of an input tax credit on any supply of goods or services can only be by way of a commensurate reduction in prices.

"When a statute clearly provides for a manner in which something is to be done and a duty is cast upon the supplier to extend the benefit of rate reduction by way of a commensurate reduction in prices, the supplier cannot insist that instead of reducing prices, he will give extra grammage of the product," the court said.

The petitioner, Loreal, challenged Section 171 of the CGST Act, Chapter XV of the CGST Rules, more particularly, Rules 126, 127, and 133 of the CGST Rules as unconstitutional, ultra vires, and violative of Articles 14, 19(1)(g), 265 & 300A of the Constitution of India.

The petitioner submitted that the application filed by the Secretary, NAA, to the Standing Committee seeking initiation of proceedings under Section 171 was not a valid initiation of proceedings against the petitioner for the purpose of examining whether there was any profiteering or not.

The petitioner contended that NAA was not netting the benefit of the rate reduction because it had extended the benefit of the rate reduction to some products as against those where the petitioner had not extended the benefit of the rate reduction to the subject products by way of a commensurate reduction in prices. Therefore, while it is being punished for being a "bad boy", it is not being rewarded for being a "good boy".

The petitioner submitted that even though in some products they have not been able to grant a commensurate reduction in prices, they have tried to pass on the benefit by way of an increase in the weight of the product.

The petitioner urged that an increase in customs duty on certain products should be excluded. In support of the argument, the petitioner gave certain illustrations from which it could be seen that when comparing the invoices issued during the period from November 15th, 2017 to November 30th, 2017 with the invoice raised in the month of March 2018, the actual sale price per unit, including GST, had remained the same during both periods. The profiteering on account of GST collected by him should be excluded.

The NAA contended that Section 171 of GST confers powers of wide amplitude upon the NAA to examine "any supply of goods or services" by any registered person and to examine whether the reduction in the tax rate or benefit of input tax credits has been passed on to the recipient by way of a commensurate reduction in prices or not.

The NAA stated that even assuming that the rules provide for a mechanism by which a recipient or any other interested party or a commissioner can make a written application in a prescribed form, it is required to be examined by the Standing Committee and the Screening Committee. However, this procedure in no way fetters the original power conferred upon the NAA by Section 171, to examine whether input tax credits availed by any registered person or the reduction in the rate of tax on any supply of goods or services, have been passed on to the recipient by way of a commensurate reduction in prices or not. NAA has no suo moto powers to make an application or to initiate an investigation which would be in the larger consumer and public interest and thus deserves to be rejected.

The NAA contended that the petitioner had collected excess base prices from his customers, which they were not required to pay due to the reduction in the rate of tax. The petitioner has also compelled them to pay additional GST on these excess base prices, which they should not have paid.

The court observed that Section 171 is not a charging or taxing provision. On the contrary, it is an incidental provision in the CGST/SGST Acts for the purpose of ensuring that eliminating the cascading effect of taxation on the consumer is achieved. It further ensures that any benefit of a rate reduction of taxes or ITC benefit is passed on to the recipient without the middleman taking advantage of the government forgoing their taxes for the end consumer.

The court was of the prima facie view that the post-sale discount had not been granted on account of the GST rate reduction and, therefore, did not qualify as a commensurate reduction in prices as required under Section 171.

Case Title: Loreal India Private Limited Versus Union Of India

Citation: W.P.(C) 12557/2022

Citation: 2022 LiveLaw (Del) 941

Counsel For Petitioner: Sr.Advocate Mukul Rohatgi with Advocates V.Lakshmikumaran, Karan Sachdev and Agrim Arora

Counsel For Respondent: Advocate Uma Prasuna Bachu

Click Here To Read the Order