M/S Friends Land Developers vs Union Of India & Ors. on 29 January, 2024

1. Outcome

The Delhi High Court upheld the constitutional validity of Section 171 of the Central Goods and Services Tax Act, 2017 (Act, 2017), and Rules 122, 124, 126, 127, 129, 133, and 134 of the Central Goods and Services Tax Rules, 2017 (Rules, 2017). The Court clarified that while there may be cases of arbitrary exercise of power or erroneous application of the anti-profiteering mechanism, such issues would lead to setting aside specific orders on their merits, not invalidating the statutory provisions themselves. The matters challenging individual orders will be listed for further directions on February 8, 2024.

2. Core Issue

The core issue before the Delhi High Court was to determine the constitutional validity of Section 171 of the CGST Act, 2017, and the related anti-profiteering Rules (Rules 122, 124, 126, 127, 129, 133, and 134) of the CGST Rules, 2017. The petitioners challenged these provisions on various grounds, including legislative competence, excessive delegation, vagueness, violation of fundamental rights, and procedural deficiencies.

3. Key Facts

• A batch of writ petitions was filed by companies operating in diverse sectors (hospitality, FMCG, real estate) challenging the anti-profiteering provisions of the GST regime.
• The petitioners were subject to notices or final orders by the National Anti-Profiteering Authority (NAA) directing them to pass on the commensurate benefit of tax rate reduction or Input Tax Credit (ITC) to consumers, along with interest, and proposing/imposing penalties.
• The parties agreed to first argue and seek a decision on the constitutional validity of the impugned Section and Rules, deferring the merits of individual orders.
• The Central Goods and Services Tax Act, 2017, was introduced to simplify and harmonize the indirect tax regime, eliminate multiplicity of taxes, avoid cascading effects, and streamline credit mechanisms, with a stated objective of consumer welfare.
• The anti-profiteering measures were introduced to ensure that the benefits arising from tax reductions and ITC accrue to consumers and are not retained by suppliers.

4. Arguments (Taxpayer vs Revenue)

• Taxpayer (Petitioners):

  • Legislative Competence & Nature of Exaction: Section 171 and associated Rules are beyond Parliament's legislative competence under Article 246A as they constitute a tax or financial exaction without clear statutory backing for subordinate legislation.
  • Excessive Delegation: The provisions suffer from excessive delegation as they delegate essential legislative functions (like determining methodology for profiteering) to the Executive/NAA without sufficient guidelines, violating Article 14. The term "commensurate" is vague, leading to arbitrary exercise of power by NAA.
  • Price Fixing: Section 171 amounts to price-fixing, violating Articles 19(1)(g) (freedom to trade) and 300A (right to property), as it mandates price adjustments solely based on tax factors, ignoring commercial realities like input costs, demand, and supply.
  • Flawed Methodology: The methodology adopted by NAA/DGAP, particularly for real estate (ITC to turnover ratio), is flawed, not notified, and leads to inconsistent results.
  • Uncertainty & Practical Impossibility: No fixed period for which reduced prices must be maintained, hindering trade. Price reduction as the sole method is arbitrary; other methods (e.g., increased grammage in FMCG) should be allowed, especially for low-priced items due to Legal Metrology rounding-off rules.
  • Lack of Due Process/Oversight: Absence of an appellate mechanism against NAA orders, lack of a judicial member in NAA (which performs quasi-judicial functions), and the Chairman's casting vote provision in Rule 134(2) are unconstitutional.
  • Procedural Ultra Vires: NAA was not properly constituted by a gazetted notification. Time limits for investigation/orders by DGAP/NAA are mandatory and were often violated. DGAP/NAA illegally expanded the scope of investigations beyond the initial complaint.
  • Penalty & Interest: Levy of penalty and interest under Rules 127 and 133 lacks specific substantive authority in the Act prior to the introduction of Section 171(3A) and cannot be applied retrospectively.

• Revenue (Respondents):

  • Legislative Competence: Section 171 is an "anti-profiteering measure," not a tax, and is well within Parliament's power under Article 246A to make laws "with respect to" GST, serving the objectives of redistributive justice (DPSP - Articles 38, 39).
  • No Excessive Delegation: The legislative policy is clear: benefits must be passed on as "commensurate reduction in prices." "Commensurate" is a clear term. Delegating the determination of methodology to NAA (Rule 126) is permissible as it involves working out details within the laid-down policy, with parliamentary oversight via Section 166.
  • Not Price Fixing: Section 171 only addresses the indirect tax component, allowing suppliers to set base prices based on commercial factors. It prevents appropriation of tax benefits, not general price control. Even if considered price-fixing, it would be permissible if based on relevant factors.
  • Flexible Methodology: No uniform methodology is feasible across diverse industries; NAA is empowered to determine it case-by-case. The "National Anti-Profiteering Authority: Methodology and Procedure, 2018" provides guidance.
  • Benefit Per SKU: Benefits must be passed on at each supply/SKU level, treating all buyers equally, not through netting off or indirect methods. Legal Metrology Rules allow for price adjustments, making reduction feasible for low-priced products.
  • No Fixed Time Period: The absence of a fixed time period for price reduction is appropriate given the nature of the Act; the obligation exists as long as the tax benefit does.
  • No Vested Right to Appeal & Judicial Member: Appeal is a statutory right, not inherent. Absence of statutory appeal is not unconstitutional, as judicial review under Article 226/227 is available. NAA's functions are primarily fact-finding and do not replace traditional judicial functions, hence a judicial member is not constitutionally mandated. Many quasi-judicial bodies operate without judicial members.
  • Procedural Validity: NAA was duly constituted by a gazetted notification (No. 3/2017) and laid before Parliament. Time limits for DGAP/NAA are directory, not mandatory, to avoid defeating the consumer welfare objective. Expansion of investigation beyond the complaint scope is permissible under the broad wording of Section 171 and Rule 129(2), supported by competition law precedents.
  • Penalty & Interest: Section 164 empowers the government to make rules for penalties. Rule 133(3)(b) & (d) are within this power. Penalty proceedings for periods prior to Section 171(3A) have been withdrawn. GST collected on profiteered amounts is rightly included as it constitutes unjust enrichment.

• Amicus Curiae:

  • Supported the Revenue's position, highlighting the legislative intent behind GST as a consumer-centric reform.
  • Referenced past experiences with VAT where tax benefits were not passed on, necessitating anti-profiteering measures in GST.
  • Emphasized that Section 171 is a stand-alone provision with embedded navigational tools and clear objectives of consumer welfare and equity, preventing unjust enrichment.
  • Stressed that the mechanism is a fact-finding exercise with multiple layers (Screening, Standing Committees, DGAP, NAA), ensuring due process.

5. Court’s Reasoning

• Constitutional Scrutiny: The Court emphasized the presumption of constitutionality, especially for economic laws, where the legislature is allowed latitude.
• Purpose of Section 171: Section 171 embodies the principle of unjust enrichment, a consumer welfare regulatory measure directly connected to the GST's objective of removing cascading taxes and reducing the final consumer's burden. It ensures tax foregone by the government benefits consumers, not intermediaries.
• Legislative Competence: Section 171 falls within Parliament's power under Article 246A to make laws "with respect to" Goods and Services Tax, covering ancillary and necessary aspects.
• No Excessive Delegation: Section 171 outlines a clear legislative policy (benefits shall be passed on by "commensurate reduction in prices"). "Commensurate" has a definite meaning (equal or near-about reduction in rupee/paisa terms). The power delegated to NAA to determine methodology (Rule 126) is within the framework of this policy and is subject to parliamentary oversight.
• Not Price Fixing: Section 171 regulates the tax component of prices, not the base price set by suppliers based on commercial factors. The presumption of price reduction is rebuttable if suppliers can justify offsetting costs. It does not violate Articles 19(1)(g), 14, or 300A.
• Foreign Comparisons Irrelevant: Foreign anti-profiteering laws (Australia, Malaysia) regulate overall prices/profits, which differs from Section 171's focus on passing on tax benefits.
• Methodology: No single formula can apply to all cases due to industry diversity. NAA's flexibility in determining methodology on a case-by-case basis is reasonable and legal. The Court, however, acknowledged the petitioners' concerns regarding the ITC-to-turnover ratio for real estate, suggesting a total savings-to-total area approach for future merit hearings.
• Benefit Transfer Mechanism: It is the legislature's prerogative to mandate price reduction as the method. Other forms like increased grammage or discounts are not contemplated by the Act. Legal Metrology Rules allow for rounding off, making price reduction feasible for FMCG products.
• Duration of Obligation: Not fixing a specific time period for price reduction is appropriate as the obligation exists as long as the tax benefit remains.
• Applicability of Sale of Goods Act: Section 64A of the Sale of Goods Act is not applicable as it concerns a discretionary reduction by the buyer in contract price, whereas Section 171 imposes a positive statutory obligation on the supplier.
• Possibility of Abuse: A statutory provision cannot be struck down merely on the hypothetical possibility of its abuse.
• Comparison of Pre-GST and Post-GST Taxes: Limiting comparison only to GST rates would contradict the fundamental objective of the GST regime, which subsumed a basket of distinct indirect taxes.
• Right to Appeal & Judicial Member: There is no vested right to appeal; it is a creature of statute. The absence of a statutory appeal does not invalidate the provisions, especially since judicial review under Article 226 is available. NAA's role is fact-finding, not replacing judicial power, hence a judicial member is not a constitutional requirement.
• Casting Vote (Rule 134(2)): The Court noted the petitioners' challenge but did not delve into a detailed discussion as the respondents stated the provision had never been used.
• Constitution of NAA: The issue of NAA's constitution via administrative order (rather than gazetted notification) was not addressed in this judgment as it does not affect the constitutional validity of Section 171.
• Rule 124 (Governmental Interference): Selection and termination mechanisms for NAA members, involving the GST Council, ensure independence in line with Article 50.
• Penalty and Interest: Section 171 and the rule-making power under Section 164 are broad enough to allow for the levy of interest and penalty (Rule 133(3)(b)&(d)) as a necessary deterrent. Penalties for periods prior to Section 171(3A) have been withdrawn, rendering this point infructuous.
• Inclusion of GST in Profiteered Amount: The GST collected on the additional, unreduced price is rightly included in the profiteered amount, as it represents an unjust gain from the consumer.
• Time Limit for DGAP Report: The time limits prescribed for DGAP reports are directory, not mandatory, to prevent consumers from being remediless, especially in beneficial legislation.
• Expansion of Investigation Scope: DGAP's power to expand investigation beyond the initial complaint is valid under the wide wording of Section 171 and Rule 129(2), consistent with precedents in competition law.

6. Statutory References

• Central Goods and Services Tax Act, 2017:
  • Section 171 (including Sub-sections (1), (2), (3), (3A), and Explanation)
  • Section 122
  • Section 2(62), 2(63), 2(80), 2(108)
  • Section 9
  • Section 57
  • Section 164 (including Sub-sections (1), (2), (3), (4))
  • Section 166
• Central Goods and Services Tax Rules, 2017:
  • Rules 122, 124, 126, 127, 129 (including Sub-rules (1), (2), (3), (4), (5), (6)), 133 (including Sub-rules (1), (2), (2A), (3), (4), (5)), 134 (including Sub-rules (1), (2))
• Constitution of India:
  • Article 14, 19(1)(g), 38, 38(1), 39(b), 39(c), 50, 226, 245, 246, 246A, 254, 279A, 300A
• Other Acts/Rules:
  • Finance Act, 2019 (Section 112)
  • 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))
  • Sale of Goods Act, 1930 (Section 64A)
  • Indian Contract Act, 1872
  • Securities and Exchange Board of India Act, 1992 (Section 4(1))
  • Income Tax Act, 1961
  • All-India Services Act, 1951
  • Trade Practices Act, 1974 (Australia) (Section 75AU, 75AV(1))
  • Price Control and Anti-Profiteering Act, 2011 (Malaysia) (Section 14, 15)

7. Precedents Cited

1. Ahmedabad Urban Development Authority v. Sharakumar Jayantikumar Pasawala, (1992) 3 SCC 285
2. V.V.S. Sugars v. Govt. of A.P., (1999) 4 SCC 192
3. Ramesh Birch vs. Union of India, 1989 Supp SCC 430
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6. State of M.P. v. Rakesh Kohli, (2012) 6 SCC 312
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13. Sita Ram Bishambher Dayal vs. State of U.P. (1972) 4 SCC 485
14. Bhatnagars & Co. Ltd. vs. Union of India, AIR 1957 SC 478
15. Mohmedalli and Ors. vs. Union of India and Ors., AIR 1964 SC 980
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49. Shiv Shakti Coop. Housing Society v. Swaraj Developers, (2003) 6 SCC 659
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51. Excel Crop Care Ltd. vs. Competition Commission of India, (2017) 8 SCC 47
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53. Indian Carbon Limited v. State of Assam (1997) 6 SCC 479
54. Shree Bhagwati Steel Rolling Mills v. CCE, 2015 (326) E.L.T. 209 (SC) / (2016) 3 SCC 643
55. CIT vs. B.C. Srinivasa Setty (1981) 2 SCC 460
56. CCE vs. Larsen & Toubro Ltd. (2016) 1 SCC 170
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63. Union of India & Anr. v. Madras Bar Association, (2021) SCC OnLine SC 463