Bonne Sante 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, 2017), and Rules 122, 124, 126, 127, 129, 133, and 134 of the Central Goods and Services Tax Rules, 2017 (CGST Rules, 2017), which deal with anti-profiteering measures. The Court clarified that while the provisions are valid, instances of arbitrary exercise of power or erroneous application can be challenged on merits.

2. Core Issue

The core issue before the Delhi High Court was to determine the constitutional validity of the anti-profiteering provisions under Section 171 of the CGST Act, 2017, and the associated Rules (122, 124, 126, 127, 129, 133, 134 of the CGST Rules, 2017). The petitioners, comprising diverse businesses, argued these provisions were unconstitutional on various grounds.

3. Key Facts

• The CGST Act, 2017, was introduced to simplify and harmonize the indirect tax regime, eliminate cascading effects, and ensure that benefits of tax rate reductions and Input Tax Credit (ITC) flow to consumers.
• Section 171 and the impugned Rules establish an anti-profiteering mechanism, including the National Anti-Profiteering Authority (NAA) and the Director General of Anti-Profiteering (DGAP), to monitor and enforce the passing on of these benefits.
• Petitioners, companies from sectors like hospitality, FMCG, and real estate, challenged the constitutional validity of these provisions, alleging various infirmities.
• The Court decided to first address the constitutional validity before delving into the merits of individual cases.

4. Arguments

A. Taxpayer (Petitioners):

• Legislative Competence: Section 171 is beyond Parliament's power under Article 246A as it's a tax or financial exaction, which cannot be levied by subordinate legislation.
• Excessive Delegation: The provisions suffer from excessive delegation, as essential legislative functions (like defining "commensurate" reduction and methodology) are delegated without clear guidelines to the NAA, violating Article 14.
• Vagueness & Arbitrariness: The term "commensurate" is undefined, granting NAA unfettered discretion, leading to inconsistent interpretations (e.g., in real estate, varied ITC to turnover ratios).
• Price Fixing: The provisions amount to price-fixing, violating Articles 19(1)(g) (right to trade) and 300A (right to property), as they do not allow consideration of commercial factors (input costs, supply/demand).
• International Comparison: Anti-profiteering laws in Australia and Malaysia provided clear policy guidelines, unlike India's.
• Indefinite Obligation: No fixed time period for maintaining reduced prices, hindering trade.
• Mode of Benefit: Mandating price reduction as the sole method is arbitrary; other methods like increasing product volume/weight should be allowed. Legal impossibility for low-priced FMCG products due to Legal Metrology rounding-off rules.
• Lack of Appeal: Absence of a statutory appellate mechanism against NAA orders results in a lack of judicial oversight.
• NAA Constitution & Independence: Rule 124 (appointment terms) violates Article 50 due to potential governmental interference. NAA lacks a judicial member despite performing quasi-judicial functions, making its constitution illegal. Rule 134(2) (Chairman's casting vote) is illegal.
• Limitation: DGAP reports and NAA orders were often passed beyond the prescribed time limits, vitiating the proceedings.
• Scope of Investigation: DGAP expanded investigations beyond the scope of initial complaints without jurisdiction.
• Penalty & Interest: Cannot be imposed through Rules (133(3)(d)) without specific substantive provisions in the Act. The retrospective application of Section 171(3A) for penalty is illegal.
• Comparison of Taxes: Section 171 applies only to GST rate changes/ITC, not a comparison between post-GST and the pre-GST "basket" of distinct indirect taxes.
• Free Contractual Price: Section 64A of the Sale of Goods Act allows parties freedom to contract on price, which is contravened.
• NAA Constitution Notification: NAA was allegedly constituted by an administrative order, not a gazetted notification as required by Section 171(2) read with Section 2(80) and 166.

B. Revenue (Respondents):

• Consumer Welfare: Anti-profiteering measures are consumer-centric, aimed at ensuring tax benefits flow to them, aligning with Directive Principles of State Policy (Articles 38, 39(b), (c)).
• Legislative Competence: Section 171 falls within Parliament's power under Article 246A as an ancillary measure "with respect to goods and services tax," not a taxing provision itself.
• No Excessive Delegation: Section 171 clearly defines the legislative policy ("commensurate reduction"). "Commensurate" has a clear meaning (proportional, suitable). Minutiae can be delegated to rules or authorities. Rule 126 empowers NAA to determine methodology case-by-case due to varying facts. NAA has issued a methodology document.
• Not Price Fixing: Section 171 only deals with the tax component of price, not base price; suppliers retain freedom to fix base prices based on commercial factors. It prevents appropriation of tax benefits, not profit control.
• Foreign Laws Irrelevant: Constitutional validity is determined by Indian law.
• Indefinite Obligation: The benefit is ongoing as long as tax reduction/ITC availability exists and no other factors justify offsetting it.
• Mode of Benefit: "Commensurate reduction in prices" is the explicit mandate. Legal Metrology Rules (2011, 2017 amendments) on rounding off MRP make price reduction feasible even for low-priced products.
• No Vested Right of Appeal: Appeal is a statutory right; its absence does not render a statute unconstitutional. Judicial review under Article 226/227 is available.
• NAA Constitution & Independence: Rule 124 ensures independence through GST Council's role in selection/termination.
• No Judicial Member Required: NAA performs fact-finding functions by domain experts, not replacing functions traditionally exercised by courts. Many quasi-judicial bodies exist without judicial members.
• Casting Vote: A casting vote for the chairperson is a common and reasonable mechanism for tie-breaking.
• Limitation: Time limits for DGAP reports are directory, not mandatory, to avoid injustice to consumers.
• Scope of Investigation: Section 171 and Rule 129 ("any supply of goods or services") permit broad investigations beyond specific complaints, supported by Competition Act precedents.
• Penalty & Interest: Rule 133 (3)(b) & (d) for interest and penalty are within the rule-making power conferred by Section 164 of the Act to ensure deterrence. Retrospective penalty notices (pre-S.171(3A)) have been withdrawn.
• GST on Profiteered Amount: This additional GST was wrongly collected by suppliers and must be included in the profiteered amount.
• NAA Constitution Notification: NAA was duly constituted by a gazetted notification (No. 3/2017-Central Tax) which was laid before Parliament.

C. Amicus Curiae:

• Historical Context & Intent: Reports preceding GST highlighted the need for anti-profiteering (e.g., CAG on VAT showed non-passing of benefits) to ensure consumer benefit.
• Section 171 as a Complete Code: It contains all necessary parameters, prerequisites, consequences, and beneficiaries, reflecting legislative policy.
• Consumer Welfare & Equity: Section 171 prevents unjust enrichment. The direct price reduction is the intended benefit; indirect methods like discounts or cross-subsidization are not contemplated.
• Fact-Finding Mechanism: The Rules establish a multi-layered fact-finding process (Screening Committee, Standing Committee, DGAP, NAA), which is robust.
• No Unbridled Powers: Adequate guidance exists within the provisions for the Authority.

5. Court’s Reasoning

The Court systematically addressed each challenge:

• Principles for Constitutionality: Reaffirmed the presumption of constitutionality, requiring a clear transgression of constitutional principles, especially for economic laws which are granted greater latitude.
• Nature of GST and Section 171: Held that GST is a consumer-centric, "One Nation One Tax" system aimed at eliminating cascading effects. Section 171 is an integral consumer welfare regulatory measure, designed to prevent unjust enrichment by suppliers of the tax benefits foregone by the government.
• Legislative Competence (Article 246A): Found that "with respect to goods and services tax" in Article 246A includes all ancillary, incidental, and necessary matters. Section 171 is such an ancillary provision, acting as a social welfare measure to prevent collection of amounts unjustly. It is not a taxing provision itself.
• Excessive Delegation:
  • "Commensurate Reduction": The term "commensurate" means "corresponding in degree, amount, or size; proportionate." This provides a clear legislative policy, leaving the details of methodology to the subordinate authority.
  • Delegation to NAA (Rule 126): Section 171(2) and (3) explicitly allow the Central Government to prescribe NAA's powers, including determining methodology. Rule 126 is a valid delegation, not excessive sub-delegation. The NAA's eventual issuance of a methodology further confirms this.
  • Parliamentary Oversight: Section 166 ensures parliamentary review of rules, maintaining legislative control.
• Not a Price-Fixing Mechanism (Article 19(1)(g), 300A):
  • Section 171 deals only with the indirect tax component. Suppliers are free to fix base prices based on commercial factors. The provision ensures the tax foregone translates into reduced prices, not regulates overall profit.
  • The presumption of price reduction is rebuttable if the supplier can justify other cost increases.
  • There is no proprietary interest of suppliers in the tax benefits meant for consumers.
• International Comparison: Found the comparison to Australian and Malaysian laws misconceived, as those statutes explicitly regulated "price exploitation" or "unreasonably high profit," unlike Section 171, which focuses on passing on tax benefits.
• No Fixed Methodology: Acknowledged that no "one size fits all" formula can exist due to diverse facts and industries. NAA has the flexibility to determine methodology case-by-case, so long as it's fair and reasonable.
• Real Estate Specific Methodology: The Court agreed with petitioners that NAA's current methodology (ITC to turnover ratio) for real estate is flawed. It directed that total savings from GST for each project should be divided by the total area to determine a per square foot benefit, ensuring equal benefit to flat buyers.
• Mode of Benefit and Legal Metrology: Upheld that price reduction is the mandated method; indirect methods like increasing grammage or festival discounts are not contemplated. Ruled that Legal Metrology Rules regarding rounding off MRPs do not create a legal impossibility for price reduction.
• No Fixed Time Period: Concluded that fixing a time period for maintaining reduced prices would contradict the Act's intent. The obligation is ongoing as long as the tax benefit exists and is not offset by other justified factors.
• Section 64A of Sale of Goods Act: Held it inapplicable as Section 64A grants buyer's discretion, while Section 171 imposes a positive obligation on the supplier.
• Possibility of Abuse: Reaffirmed that a statutory provision cannot be struck down merely on the apprehension of misuse of power; remedies exist on the merits of individual orders.
• Comparison with Pre-GST Taxes: Held that Section 171 does contemplate comparing taxes levied post-GST with the pre-GST basket of indirect taxes, as GST subsumed these taxes to eliminate cascading effects and benefit consumers. Not doing so would defeat the Act's purpose.
• No Vested Right of Appeal: Reaffirmed that the right to appeal is a statutory creation, not an inherent right. The availability of judicial review under Article 226/227 ensures judicial oversight.
• No Judicial Member Required: Ruled that NAA is primarily a fact-finding body, requiring domain experts, not judicial members. It does not replace any judicial function previously exercised by courts. Cited precedents where other quasi-judicial bodies do not require judicial members.
• Casting Vote (Rule 134(2)): Noted the petitioner's argument against the Chairman's casting vote but did not delve into a detailed discussion as the respondents stated it had never been used.
• NAA Constitution Notification: This challenge (whether NAA was constituted by notification or administrative order) was deemed not to affect the constitutional validity of Section 171 itself, and therefore not addressed in this judgment.
• Penalty and Interest (Rule 133): Upheld the power to levy interest and penalty under Rule 133 as being within the rule-making power of the Central Government under Section 164, serving as a deterrent against profiteering. Noted that penalty notices issued prior to the introduction of Section 171(3A) have been withdrawn, rendering the retrospective application argument infructuous for those cases.
• GST on Profiteered Amount: Upheld its inclusion, as suppliers collected additional GST that the government intended for the consumer.
• Time Limit for DGAP Report: Held that these are directory, not mandatory, as no consequences are specified for non-adherence, and a liberal construction in favour of consumer welfare is appropriate.
• Expansion of Investigation Scope: Upheld DGAP's power to expand investigation beyond the initial complaint, citing the broad wording ("any supply") in Section 171 and Rule 129, and precedents from Competition Law.

6. Statutory References

• Central Goods and Services Tax Act, 2017 (Act, 2017): Sections 171, 171(1), 171(2), 171(3), 171(3A), 2(62), 2(63), 2(80), 2(108), 9, 57, 122, 164, 166.
• Central Goods and Services Tax Rules, 2017 (Rules, 2017): Rules 122, 124, 126, 127, 129, 133, 134.
• Constitution of India: Articles 14, 19(1)(g), 38, 38(1), 39(b), 39(c), 50, 226, 245, 246, 246A, 254, 279A, 300A, Seventh Schedule.
• 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).
• Finance Act, 2019: Section 112.
• Insolvency and Bankruptcy Code, 2016.
• Securities and Exchange Board of India Act, 1992: Section 4(1).
• Income Tax Act, 1961.
• All-India Services Act, 1951.
• Indian Contract Act, 1872.

7. Precedents Cited

The Court cited numerous precedents from the Supreme Court of India, including:

• Ahmedabad Urban Development Authority v. Sharakumar Jayantikumar Pasawala
• V.V.S. Sugars v. Govt. of A.P.
• Ramesh Birch vs. Union of India
• Barium Chemicals Ltd. & Ors. v Company Law Board & Ors.
• Pioneer Urban Land and Infrastructure Ltd. vs. Union of India
• State of M.P. v. Rakesh Kohli
• R. K. Garg v. Union of India
• Steelworth Ltd. vs. State of Assam
• Gopal Narain vs. State of U.P.
• Ganga Sugar Corp. Ltd. vs. State of U.P.
• Lohia Machines Ltd. vs. Union of India
• Pt. Banarsi Das Bhanot vs. State of Madhya Pradesh
• Sita Ram Bishambher Dayal vs. State of U.P.
• Bhatnagars & Co. Ltd. vs. Union of India
• Mohmedalli and Ors. vs. Union of India and Ors.
• M.K. Papiah vs. Excise Commr.
• In Re The Delhi Laws Act
• Welfare Association, A.R.P., Maharashtra Vs. Ranjit P. Gohil
• Chaturbhai M. Patel v. Union of India
• R.S. Joshi, Sales Tax Officer, Gujarat & Ors. vs. Ajit Mills Limited & Anr.
• P.K. Chinnasamy v. Govt. of T.N.
• Centre for PIL v. Housing & Urban Development Corpn. Ltd.
• Dinesh v. State of Rajasthan
• Vimala (K.) v. Veeraswamy (K.)
• CIT vs. B.C. Srinivasa Setty
• CCE vs. Larsen & Toubro Ltd.
• Dhanjibhai Ramjibhai vs. State of Gujarat
• Chairman & MD, BPL Ltd. vs. S.P. Gururaja and Ors.
• Dr.Ashwani Kumar vs. Union of India
• D.S. Grewal v. State of Punjab
• Maganlal Chhaganlal (P) Ltd. Vs. Municipal Corporation of Greater Bombay & Ors.
• Collector of Customs v. Nathella Sampathu Chetty
• Mafatlal Industries Ltd. v. Union of India
• State of Rajasthan v. Union of India
• Commr., H.R.E. v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt
• Kondiba Dagadu Kadam v. Savitribai Sopan Gujar
• Kashmir Singh v. Harnam Singh
• United Commercial Bank Ltd. v. Their Workmen
• Kondiba Dagdu Kodam v. Savitribai Sopan Gujar
• UP Power Corporation Ltd. v. Virenddra Lal
• Shiv Shakti Coop. Housing Society v. Swaraj Developers
• P.T. Rajan Vs. T.P.M. Sahir and Ors.
• Excel Crop Care Ltd. vs. Competition Commission of India
• Cadila Healthcare Ltd. & Anr. vs. CCI & Ors.
• Hinsa Virodhak Sangh v. Mirzapur Moti Kuresh Jamat
• Govt. of A.P. v. P. Laxmi Devi
• Morey v. Doud
• Secy. of Agriculture v. Central Roig Refining Co.
• Union of India vs. VKC Footsteps India (P) Ltd.
• Madras Bar Association v. Union of India (2010 & 2015 versions, and 2021 SCC OnLine SC 463 version)
• Union of India vs. R. Gandhi
• Rojer Mathews vs. South Indian Bank
• Clariant International Ltd. & Anr. vs. Securities and Exchange Board of India
• Namit Sharma vs. Union of India (2013, 1 SCC 745 and 2013, 10 SCC 359 review)
• McDowell & Co. Ltd. v. CTO
• Shree Bhagwati Steel Rolling Mills v. CCE
• Wing Commander Shyam Naithani vs. Union of India and Ors.