Ats Homes Pvt Ltd vs Union Of India & Ors. on 29 January, 2024

Outcome**

The Delhi High Court upheld the constitutional validity of Section 171 of the Central Goods and Services Tax Act, 2017 (CGST Act) and Rules 122, 124, 126, 127, 129, 133, and 134 of the Central Goods and Services Tax Rules, 2017 (CGST Rules). The Court clarified that while the provisions are valid, individual orders passed by the National Anti-Profiteering Authority (NAA) may be challenged on their merits for arbitrary exercise of power or erroneous application.

2. Core Issue

The core issue before the Delhi High Court was the constitutional validity of the anti-profiteering provisions under Section 171 of the CGST Act, 2017, and the associated Rules (Rules 122, 124, 126, 127, 129, 133, and 134 of the CGST Rules, 2017). Petitioners, diverse businesses, argued that these provisions were beyond legislative competence, suffered from excessive delegation, were arbitrary, amounted to price-fixing, and lacked proper procedural safeguards.

3. Key Facts

• A large number of writ petitions were filed by companies operating in diverse sectors (e.g., hospitality, Fast-Moving Consumer Goods (FMCG), real estate).
• These petitioners challenged the notices proposing penalties and final orders issued by the National Anti-Profiteering Authority (NAA) directing them to pass on commensurate benefits of tax rate reduction or Input Tax Credit (ITC) to consumers, along with interest.
• The petitioners argued that the anti-profiteering mechanism itself was unconstitutional.
• The Court decided to first address the constitutional validity of the provisions, reserving the merits of individual orders for later.

4. Arguments (Taxpayer vs Revenue)

Taxpayer (Petitioners)
* Legislative Competence & Excessive Delegation: Section 171 and associated rules are beyond Parliament's power under Article 246A as they are in the nature of a tax/financial exaction and delegate essential legislative functions (e.g., determining methodology to NAA via Rule 126) without clear guidelines.
* Vagueness & Arbitrariness: The terms "commensurate reduction" and "profiteering" are undefined, leading to unfettered discretion for NAA, violating Articles 14 and 19(1)(g). Methodologies applied by NAA, especially for real estate (ITC to turnover ratio), are inconsistent and flawed.
* Price-Fixing: Section 171 amounts to price-fixing, infringing on the right to trade (Article 19(1)(g)) and property (Article 300A) by ignoring commercial factors like input costs, supply/demand.
* Comparison to Foreign Laws: Anti-profiteering laws in Australia and Malaysia provide clear policy guidelines and consider various factors, unlike India's law.
* Absence of Time Limit: The indefinite and open-ended obligation to reduce prices is arbitrary and unreasonable, violating Articles 14 and 19(1)(g).
* Mode of Benefit Transfer: Mandating price reduction as the only way to pass on benefits is arbitrary; other methods like increasing product volume/weight should be allowed. Legal Metrology Act rules make price reduction for low-priced FMCG products legally impossible.
* Lack of Appellate Mechanism: Absence of a statutory appeal against NAA orders leads to a lack of judicial oversight, rendering the mechanism unconstitutional.
* Composition of NAA: Rule 124, read with Article 50, is problematic as the NAA performs quasi-judicial functions but lacks a judicial member, and the Chairman has a casting vote (Rule 134(2)), suggesting governmental interference.
* Retrospective Penalty & Interest: Levy of penalty under Section 171(3A) and interest under Rule 133(3)(b) retrospectively (as 171(3A) came into force from Jan 1, 2020) and without explicit substantive statutory authority is illegal.
* Scope of Investigation & Timelines: DGAP's expansion of investigation beyond the initial complaint is ultra vires. Mandatory time limits for DGAP reports (Rule 129(6)) and NAA orders (Rule 133) have been violated, vitiating proceedings.
* GST Scope: Section 171(1) refers only to GST rate reduction/ITC, not a comparison between post-GST taxes and a basket of pre-GST indirect taxes.
* Sale of Goods Act: Section 64A of the Sale of Goods Act, 1930, indicates that parties are free to agree on price adjustments after tax changes.
* Constitution of NAA: NAA not constituted by a duly gazetted notification as per Section 171(2) read with Section 2(80) and 166.

Revenue (Respondents & Amicus Curiae)
* Purpose of GST & Anti-Profiteering: GST aims to simplify indirect taxes, eliminate cascading effects, and ensure consumer benefits. Anti-profiteering measures are crucial for this, preventing unjust enrichment by suppliers and promoting consumer welfare, aligning with Directive Principles of State Policy (Articles 38, 39(b), 39(c)).
* Legislative Competence: Article 246A empowers Parliament to make laws "with respect to" GST, which includes ancillary, incidental, and necessary matters like anti-profiteering. It is not a taxing provision itself.
* No Excessive Delegation: Section 171 provides a clear legislative policy for "commensurate reduction." The term "commensurate" is clear. Delegating the determination of methodology to NAA (Rule 126) is permissible as it's a matter of working out details on a case-by-case basis; no single formula fits all. Rules are framed under Section 164 and subject to parliamentary oversight (Section 166).
* Not Price-Fixing: Section 171 only addresses the indirect tax component of prices; businesses remain free to determine base prices based on commercial factors. It prevents appropriation of tax benefits, not general price control.
* Foreign Law Irrelevance: Australian and Malaysian laws are distinct price control mechanisms, not directly comparable to Section 171.
* No Fixed Time Period Required: Given the nature of tax changes, an open-ended obligation to pass on benefits is necessary as long as the tax reduction persists.
* Mode of Benefit Transfer: "Commensurate reduction in prices" implies direct price reduction. Legal Metrology Rules (for rounding off MRP) facilitate price reduction even for low-value items.
* Appellate Mechanism: Appeal is a statutory right, not inherent. Judicial review under Article 226/227 is available and exercised, providing sufficient oversight.
* Composition of NAA: NAA primarily performs fact-finding functions by domain experts, not judicial functions that replace High Courts. Therefore, a judicial member is not a constitutional requirement. A casting vote for the Chairman is a common and fair mechanism.
* Retrospective Penalty & Interest: Rule 133 (interest and penalty) is within the rule-making power under Section 164. Retrospective application of penalties under Section 171(3A) is not being pressed by NAA, making this issue infructuous.
* GST on Profiteered Amount: GST collected on the additional (profiteered) amount is rightly included in the profiteered amount as it defies the government's intent to pass on benefits.
* Timelines as Directory: Time limits for DGAP and NAA are directory, not mandatory, as they are part of a beneficial legislation and their lapse would cause injustice to consumers.
* Expansion of Investigation: Section 171 and Rule 129(2) ("any supply of goods or services") have a wide scope, allowing DGAP to investigate beyond the initial complaint to ensure the overall objective is met, as supported by precedents in competition law.
* Constitution of NAA: NAA was constituted by notification (Rule 122, Notification No. 3/2017-CT) and laid before Parliament, fulfilling statutory requirements.

5. Court’s Reasoning

• Principles of Constitutionality: The Court affirmed the presumption of constitutionality of statutes, requiring clear transgression of constitutional principles to strike down legislation. Economic laws are viewed with greater latitude.
• GST as a Paradigm Shift: The CGST Act is consumer-centric, aimed at eliminating cascading taxes and reducing the final consumer burden. Section 171 is crucial for achieving this.
• Section 171's Mandate & Unjust Enrichment: Section 171 prevents unjust enrichment by ensuring that tax savings (reduction in rate or ITC benefit) foregone by the government are passed on to consumers as a "commensurate reduction in prices." "Commensurate" means an equal or near-equal reduction in rupee and paisa terms. This aligns with Directive Principles of State Policy (Articles 38, 39(b), (c)).
• Legislative Competence (Article 246A): The power to legislate "with respect to goods and services tax" under Article 246A includes ancillary and necessary measures. Anti-profiteering is an ancillary aspect and a social welfare measure connected to GST.
• No Excessive Delegation: Section 171 establishes a clear legislative policy. The delegation to NAA to determine methodology (Rule 126) is valid, as it concerns the working out of details within the policy framework. Parliament retains control through Section 166. The principle of delegatus non potest delegare is not violated as the delegation was intended.
• Not a Price-Fixing Mechanism: Section 171 solely addresses the tax component of prices, not the base price. Suppliers are free to adjust base prices based on commercial factors, but any claim of offsetting the tax benefit with other costs must be cogently justified (rebuttable presumption). The intent is to ensure tax benefits reach consumers, not to control overall pricing or profits.
• Rejection of Foreign Comparisons: Australian and Malaysian anti-profiteering laws are aimed at price control/exploitation or unreasonably high profits, which differs from Section 171's specific focus on passing on tax benefits.
• Flexible Methodology: No single, uniform mathematical formula can apply across all cases/industries. NAA is empowered to determine appropriate methodology on a case-by-case basis (Rule 126).
  • Real Estate Specific: The Court deemed NAA's methodology (ITC to turnover ratio) for real estate flawed, suggesting total GST savings per project should be divided by total area to arrive at a per-square-foot benefit.
• Legislature's Prerogative on Benefit Transfer: The legislative mandate is a "cash in hand" benefit through price reduction, not alternative forms like increased grammage or discounts, which would dilute the direct benefit. Legal Metrology Rules allow for rounding off MRPs, making price reduction feasible for low-priced items.
• No Fixed Time Period: The indefinite application of anti-profiteering provisions is justified given the nature of the Act, as benefits should apply as long as the underlying tax reduction exists and is not genuinely offset by other factors.
• Section 64A Sale of Goods Act Inapplicable: This Section confers discretion on buyers, while Section 171 imposes a positive obligation on suppliers. They are not inconsistent; contracts violating the public policy of Section 171 are void.
• Possibility of Abuse: The mere possibility of abuse of a statutory provision is not a ground to declare it unconstitutional.
• Comparison of Tax Regimes: Rejecting comparison of pre-GST basket of taxes with post-GST tax rates would go against the core intent of the GST regime.
• No Vested Right of Appeal: Appeal is a statutory right. Its absence does not invalidate the law, especially when judicial review under Article 226/227 is available and effectively exercised.
• No Judicial Member Requirement for NAA: NAA is primarily a fact-finding body focusing on technical/domain expertise. It does not supplant High Courts, thus not requiring judicial members.
• Rule 124 in Consonance with Article 50: The selection process via the GST Council's Selection Committee and termination requiring Council Chairman's approval ensures insulation from direct governmental interference.
• Rule 133 for Interest and Penalty Valid: Section 164 of the CGST Act empowers the Government to make rules providing for penalties. Interest and penalty provisions serve as necessary deterrents against profiteering. The issue of retrospective penalty under Section 171(3A) is infructuous as NAA has withdrawn such show cause notices.
• GST on Profiteered Amount: GST collected on the additional (profiteered) amount is rightly included in the profiteered amount as its collection goes against the government's intent to benefit consumers.
• DGAP Time Limit is Directory: Time limits for DGAP reports (Rule 129(6)) are directory, not mandatory, as no consequences are specified for their lapse, and strict adherence would harm consumer welfare.
• Expansion of Investigation Valid: Section 171 and Rule 129(2) (using "any supply") are broadly worded, allowing DGAP to expand investigations beyond the initial complaint. This is consistent with precedents in competition law.

6. Statutory References

• Constitution of India:
  • Article 14 (Equality before law)
  • Article 19(1)(g) (Freedom to practice any profession, or to carry on any occupation, trade or business)
  • Article 38 (State to secure a social order for the promotion of welfare of the people)
  • Article 39(b) and 39(c) (Certain principles of policy to be followed by the State)
  • Article 50 (Separation of judiciary from executive)
  • Article 77052 (Article 246) (Subject-matter of laws made by Parliament and by the Legislatures of States)
  • Article 181693519 (Article 246A) (Special provision with respect to goods and services tax)
  • Article 1930681 (Article 254) (Inconsistency between laws made by Parliament and laws made by the Legislatures of States)
  • Article 82361382 (Article 279A) (Goods and Services Tax Council)
  • Article 300A (Persons not to be deprived of property save by authority of law)
  • Article 1712542 (Article 226) (Power of High Courts to issue certain writs)
• Central Goods and Services Tax Act, 2017 (CGST Act):
  • Section 2(80) (Definition of "notification")
  • Section 2(62) (Definition of "Input Tax")
  • Section 2(63) (Definition of "Input Tax Credit")
  • Section 2(108) (Definition of "supply")
  • Section 9 (Levy and collection of CGST)
  • Section 57 (Goods and Services Tax Welfare Fund)
  • Section 112 (Finance Act, 2019)
  • Section 122 (Punishment for certain offences)
  • Section 164 (Power of Government to make rules)
  • Section 166 (Laying of rules and notifications before Parliament)
  • Section 171 (Anti-profiteering measure)
  • Section 171(1), 171(2), 171(3), 171(3A)
• Central Goods and Services Tax Rules, 2017 (CGST Rules):
  • Rule 122 (Constitution of the Authority)
  • Rule 124 (Appointment, salary, allowances and other terms and conditions of service of the Chairman and Members of the Authority)
  • Rule 126 (Power to determine the methodology and procedure)
  • Rule 127 (Duties of the Authority)
  • Rule 129 (Initiation and conduct of proceedings)
  • Rule 133 (Order of the Authority)
  • Rule 134 (Decision to be taken by the majority)
• Other Acts:
  • Sale of Goods Act, 1930 (Section 64A)
  • Legal Metrology Act, 2009
  • Legal Metrology (Packaged Commodities) Rules, 2011 (Rules 2(m), 6(1)(e))
  • Customs Tariff Act, 1975 (Section 9A)
  • Competition Act, 2002 (Section 19(3))
  • Insolvency and Bankruptcy Code, 2016
  • Trade Practices Act, 1974 (Australia) (Section 75AU, 75AV(1))
  • Price Control and Anti-Profiteering Act, 2011 (Malaysia) (Section 14, 15)
  • Central Excise Act
  • Service-Tax statute
  • Sales-tax Acts
  • Securities and Exchange Board of India Act, 1992 (Section 4(1))
  • Income Tax Act, 1961
  • All-India Services Act, 1951

7. Precedents Cited

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9. Madras Bar Association v. Union of India, (2010) 11 SCC 1
10. L. Chandra Kumar v. Union of India, (1997) 3 SCC 261
11. Indian Carbon Limited v. State of Assam (1997) 6 SCC 479
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21. Sita Ram Bishambher Dayal vs. State of U.P. (1972) 4 SCC 485
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32. Namit Sharma vs. Union of India, (2013) 1 SCC 745
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49. Dr.Ashwani Kumar vs. Union of India, (2020) 13 SCC 585
50. Maganlal Chhaganlal (P) Ltd. Vs. Municipal Corporation of Greater Bombay & Ors., (1974) 2 SCC 402
51. Collector of Customs v. Nathella Sampathu Chetty, 1962 SCC OnLine SC 30
52. Mafatlal Industries Ltd. v. Union of India, (1997) 5 SCC 536
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55. Cadila Healthcare Ltd. & Anr. vs. CCI & Ors., (2018) SCCOnline Del 11229
56. Kondiba Dagadu Kadam v. Savitribai Sopan Gujar (1999) 3 SCC 722
57. Kashmir Singh v. Harnam Singh (2008) 12 SCC 796
58. United Commercial Bank Ltd. v. Their Workmen, AIR 1951 SC 230
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60. Shiv Shakti Coop. Housing Society v. Swaraj Developers, (2003) 6 SCC 659
61. Diwan General and Sugar Mills Pvt. Ltd. & Ors. vs. Union of India, AIR (1959) SC 626
62. Union of India vs. Cynamide India Ltd., (1987) 2 SCC 720
63. Diwan General and Sugar Mills Pvt. Ltd. & Ors. vs. Union of India, AIR (1959) SC 626
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65. Wing Commander Shyam Naithani vs. Union of India and Ors., W.P.(C) 6483/2021 & connected matters, 2022 SCC OnLine Del 769