Do anti-profiteering provisions apply to B2B transactions or only to B2C transactions?
Section 171 doesn’t create any exception for B2B transactions — however, practically, the emphasis of enforcement and investigation, so far, has been apropos B2C transactions.
Nonetheless, the law is equally applicable to B2B transactions and has been relied upon heavily by companies to ensure that their vendors/suppliers across the chain are forced to pass on the benefits through price reduction. Even for the ongoing EPC/construction contracts, anti-profiteering provisions have been relied upon in conjunction with contractual clauses on ‘change in law’ to renegotiate contract price.
What does ‘commensurate reduction’ mean?
Unfortunately, no guidance has emerged from the government in this regard. Rule 126 of the CGST Rules provide that the NAA may determine the methodology and procedure for the determination as to whether benefits have been passed on by way of commensurate reduction in prices. As per Rule 126, the NAA under the Goods and Services Tax Methodology and Procedure, 2018, was notified on March 27, 2018. However, this provided no guidance whatsoever in regards to calculation of ‘commensurate reduction’ and dealt with internal procedures of the NAA only.
Logically, the mischief sought to be tackled under Section 171 is not profit per se but ‘profiteering’, i.e, making unjustifiable, excessive and exorbitant profits. Hence, ‘commensurate reduction’ ought to be interpreted only in a manner that tackles unreasonable exploitative profit.
What lessons can be learned from the eight NAA orders?
(i) If price of inputs (like paddy) has increased significantly or input credit has been blocked, non-reduction of price or even increase in price will not amount to profiteering (refer to the NAA decisions apropos “India Gate Basmati Rice” and franchisee of Subway India)
(ii) The NAA decision in Flipkart’s case: The complainant ordered an almirah on Flipkart on November 4, 2017. An invoice was raised on November 7, 2017, for Rs 14,852 (base price: Rs 11,994; GST: Rs 3,358 @ 28%; discount: Rs 500). Subsequently, the GST rate was decreased to 18%. Accordingly, new invoice was raised for Rs 14,152 (base price: Rs 11,994; GST: Rs 2159 @ 18%; discount: NIL).
Implications: Retaining the base price and withdrawing the discount is not profiteering, as the ad-hoc discount was offered from supplier’s profit margin
(iii) If the base price has been increased exactly by the same amount by which the GST rate had been reduced, it is profiteering (refer to the NAA decision in Sharma Trading Company, a distributor and stockist of a renowned FMCG brand)
Anti-profiteering applies even if products supplied to complainant were returned against a credit note
Even if the increase in base price was made by the FMCG brand itself, stockist would be liable for anti-profiteering
Narrow interpretation placed on ‘commensurate reduction’; it was held that the amount by which GST component has reduced should be deducted from the existing MRP
(iv) In the real estate sector, commensurate reduction on account of additional input credit can be calculated by comparing the ratio of input credit to taxable turnover pre-GST and post-GST and reduce the per sq ft rate proportionately (refer to the NAA decision in the Pyramid Infratech case)
(v) Benefit has to be passed on to each and every buyer and for each and every product and not only to those categories chosen by the assessee (refer to the NAA decision in the case of Lifestyle International and Kunj Lub Marketing selling ‘Maggi noodles’)
What is the way forward against adverse NAA orders?
There is no statutory appeal against such orders; the only remedy appears to be to file a writ before the appropriate high court(s). One such writ has just been filed in Delhi.
In any case, anti-profiteering provisions prima facie seem unconstitutional — assessees may explore contesting anti-profiteering investigations at the very inception, if not later, by challenging the powers given to the NAA under a vaguely worded Section 171 vide appropriate writ petitions.