Delhi High Court: The petitions were filed challenging the constitutional validity of Section 171 of Central Good and Services Tax Act, 2017 (CGST Act) and Rules 122, 124, 126, 127, 129, 133 and 134 of the Central Good and Services Tax Rules, 2017 (CGST Rules) as well as the legality of the notices proposing imposition or orders imposing penalty issued by the National Anti-Profiteering Authority (‘NAA’) under Section 122 of CGST Act read with Rule 133(3)(d) of CGST Rules and the final orders passed by NAA, whereby the petitioners, who are companies running diverse businesses ranging from hospitality, Fast-Moving Consumer Goods (‘FMCG’) to real estate, have been directed in accordance with Section 171 of Act, 2017, to pass on the commensurate benefit of reduction in the rate of tax or the Input Tax Credit to its consumers / recipients along with interest. A division bench of Manmohan, CJ., and Dinesh Kumar Sharma, J., held that Section 171, as enacted, is not manifestly arbitrary, and no fundamental or other rights of the petitioners are affected by requiring the benefit to be passed on through a commensurate reduction in prices.
The Court noted that the Goods and Services Tax (GST) Act, 2017 in India represents a transformative shift in the country’s indirect tax regime by levying a single tax on the value addition at each stage of the supply chain, from raw material acquisition to the hands of the consumer, GST operates as a destination-based tax. This mechanism, coupled with the implementation of Input Tax Credit, eradicates the cascading effect, fostering a transparent and efficient taxation system. The introduction of the GST system was preceded by a thorough examination by different committees. The concern raised was whether the reduction in taxes would result in lower prices for goods and services and whether this benefit would be passed on to consumers. Section 171 of the Act, 2017 was introduced to address the concern of unjust enrichment by mandating that suppliers pass on the benefits of reduced GST rates or Input Tax Credits through a commensurate reduction in prices to consumers.
The Court further noted that Section 171 is viewed as a measure to ensure that the benefits of reduced tax rates and Input Tax Credits are passed on to consumers, aligning with the GST regime’s objectives. It is not seen as a price control measure but rather to prevent unjust enrichment. Section 171 is in line with the Directive Principles of State Policy in the Constitution, particularly Article 38(1), Article 39(b), and Article 39(c). The section establishes an authority to determine whether suppliers have passed on the benefits of Input Tax Credits and reduced tax rates, and to exercise other prescribed powers and functions. Section 171 of the Act, 2017 falls within the law-making power of the Parliament under Article 246-A of the Constitution dealing with the ancillary and necessary aspects of Goods and Services Tax and is not beyond the legislative competence of the Parliament.
The court asserted that Section 171 is a comprehensive and unambiguous code, outlining the duties and powers of the National Anti-Profiteering Authority (NAA). It emphasized that the section ensures a commensurate reduction in prices when there is a reduction in tax rates or availability of input tax credit, thereby preventing unjust enrichment. The court rejected claims of excessive delegation, stating that the legislative policy is clear, and rules framed under the Act, particularly Rule 126, are well within the intended powers of the NAA. Furthermore, the court dismissed the applicability of the maxim “delegatus non potest delegare,” arguing that Section 171 and related rules do not violate constitutional principles. It highlighted parliamentary oversight, where rules must be laid before the Parliament, subject to modification or rejection. The Court acknowledged potential variations in NAA’s approaches but clarifies that such variations may question specific orders without invalidating the legislative framework, emphasizing the sound guiding principle provided by Section 171(1).
The Court emphasized that suppliers maintain the freedom to set their own prices based on commercial and economic factors. The court rejected the contention that every tax reduction must result in a ‘price reduction,’ explaining that the use of the term ‘shall’ in Section 171 mandates suppliers to pass on the benefit through a commensurate reduction in prices, while costing and market-related factors are irrelevant for the National Anti-Profiteering Authority (NAA). Furthermore, the court acknowledged that manufacturers or suppliers, despite tax rate reductions or Input Tax Credits, may raise prices based on legitimate commercial factors, as long as it is not a pretense. The court emphasizes that the presumption of a reduction in prices is rebuttable, and suppliers must justify any variations on cogent grounds without using them as a device to circumvent statutory obligations. The Court concluded that the impugned provisions do not function as a price-fixing mechanism and do not violate constitutional provisions, including Article 19(1)(g) or Article 14.
The Court said the view that no fixed or uniform method or mathematical formula can be universally prescribed for determining profiteering under Section 171 of the Act, 2017. The court emphasized that the determination of the profiteered amount must consider the relevant and unique facts of each case, stating that there is no one-size-fits-all approach. It affirmed that the National Anti-Profiteering Authority (NAA) has the flexibility to determine the appropriate methodology on a case-by-case basis, ensuring fairness and reasonableness. The Court discussed the legality of Rule 126 of the Rules, 2017, highlighting that its provision granting flexibility to the NAA to determine the methodology and procedure is reasonable. It also noted that the substantive provision, Section 171 of the Act, 2017, provides sufficient guidance to the NAA, and objections regarding the absence of specific methodologies are untenable. The Court agreed with the petitioners’ argument that the methodology lacks a direct correlation between turnover and Input Tax Credit in the real estate sector and suggested an alternative approach.
The Court also addressed concerns about the possibility of abuse of Section 171, stating that statutes should not be declared unconstitutional based on hypothetical situations or the potential for misuse. Regarding the composition of the NAA, the court rejected the contention that a judicial member is required stating that the NAA primarily performs a fact-finding exercise, and several quasi-judicial bodies in India, such as TRAI and the Medical Council of India, do not necessarily have judicial members.
Thus, the Court while upholding the constitutional validity of Section 171 and various rules related to anti-profiteering Rules 122, 124, 126, 127, 129, 133, and 134 of Rules, 2017, acknowledged the possibility of arbitrary exercise of power under the anti-profiteering mechanism. However, it clarified that in such cases, the remedy is to set aside specific orders on their merits, without challenging the provision itself, which grants such powers to the concerned authority.
[Reckitt Benckiser India Private Limited v. Union of India, 2024 SCC OnLine Del 588, decided on 29-01-2024]
Advocates who appeared in this case :
Mr. P. Chidambaram, Senior Advocate with Mr. R. Jawahar Lal, Mr. Siddharth Bawa Mr. Anuj Garg, Mr. Mohit Sharma and Ms. Harshita Advocates. Mr.Amar Dave, Amicus Curiae with Mr. Vikramaditya Bhaskar, Advocate.
Mr. Zoheb Hossain, Sanjeev Menon, Mr.Vivek Gurnani, Mr. Kavish Garach, Ms. Abhipriya, Mr.Vivek Gaurav, Ms.Sejal Aneja and Ms.Manisha, Advocates for NAA and DGAP. Mr.Asheesh Jain, CGSC with Mr. Gaurav Kumar Advocate for R-1 Mr.Farman Ali, Advocate with Ms.Usha and Mr.Krishan Kumar, Advocates for R-2 & 3