Hindustan Unilever Limited 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 (Act, 2017), and Rules 122, 124, 126, 127, 129, 133, and 134 of the Central Goods and Services Tax Rules, 2017 (Rules, 2017), which govern anti-profiteering measures.

2. Core Issue

The core issue was the constitutional validity of the anti-profiteering provisions under the CGST Act, 2017 and CGST Rules, 2017, specifically whether they were:
* Beyond Parliament's legislative competence under Article 246A of the Constitution of India.
* Suffering from excessive delegation of essential legislative functions.
* Violative of fundamental rights, including the right to trade (Article 19(1)(g)) and property rights (Article 300A), by operating as a price-fixing mechanism.
* Arbitrary, vague, or unreasonable due to lack of a defined methodology, absence of a time limit for price reduction, lack of an appellate mechanism, and issues with the National Anti-Profiteering Authority (NAA)'s composition and powers (e.g., absence of judicial members, power to levy interest and penalty).

3. Key Facts

• Numerous writ petitions were filed by companies operating in diverse sectors, including hospitality, Fast-Moving Consumer Goods (FMCG), and real estate.
• These petitions challenged the validity of Section 171 of the CGST Act, 2017, and the related anti-profiteering Rules (122, 124, 126, 127, 129, 133, 134) of the CGST Rules, 2017.
• Petitioners also challenged notices proposing penalties or final orders issued by the NAA, directing them to pass on the commensurate benefit of tax rate reduction or Input Tax Credit (ITC) to consumers along with interest.
• The court decided to first adjudicate on the constitutional validity of the provisions before addressing the merits of individual cases.

4. Arguments

• Taxpayer (Petitioners):

  • Legislative Competence & Excessive Delegation: Argued that the provisions are beyond Parliament's power under Article 246A, constituting a financial exaction without specific statutory backing. Claimed excessive delegation of essential legislative functions to the Executive and NAA (e.g., determining methodology for profiteering) due to vague terms like "commensurate" and lack of guidelines, leading to arbitrary outcomes and inconsistent application (e.g., in real estate cases).
  • Price Fixing & Violation of Rights: Contended that the provisions amount to price-fixing, violating Articles 19(1)(g) and 300A, as they disregard commercial factors (input costs, supply/demand) affecting pricing. Cited foreign anti-profiteering laws (Australia, Malaysia) which incorporate such factors.
  • Operational Difficulties: Highlighted challenges like legal impossibility of reducing MRP for low-priced FMCG products due to Legal Metrology rules and inconsistencies in accepting alternative methods like increasing grammage.
  • Procedural Flaws: Alleged lack of appellate mechanism against NAA orders, absence of a judicial member in NAA (a quasi-judicial body), illegality of the Chairman's casting vote, and retrospective application of penalty provisions (Section 171(3A)).
  • Scope of "Tax Reduction": Argued that Section 171 only refers to GST rate reductions, not a comparison with the basket of pre-GST indirect taxes.
  • Timelines: Stated that DGAP/NAA reports/orders were time-barred.
  • Investigation Scope: Challenged DGAP's expansion of investigation beyond the initial complaint.
  • Interest/Penalty: Argued that levy of interest and penalty by rules lacked substantive statutory authorization.

• Revenue (Respondents) & Amicus Curiae:

  • Consumer Welfare & Constitutional Mandate: Asserted that anti-profiteering measures are consumer welfare provisions, promoting redistributive justice (Articles 38, 39(b), 39(c)) and preventing unjust enrichment by suppliers who appropriate tax benefits meant for consumers.
  • Legislative Competence: Stated that "with respect to goods and services tax" in Article 246A covers ancillary matters like anti-profiteering, which ensures the efficacy of the GST regime. Not a taxing provision.
  • No Excessive Delegation: Argued "commensurate" has a clear meaning (proportionate reduction). Legislature set the policy; methodology details can be delegated to NAA, which has issued guidelines. Emphasized that uniform methodology is impossible due to varied case facts.
  • Not Price Fixing: Maintained that Section 171 only addresses the tax component of price, not the base price, allowing suppliers flexibility to adjust for other commercial factors (though such adjustments must be justified and not a mere device to avoid passing on benefits).
  • Justification for Measures: Referred to pre-GST reports (CAG, 13th Finance Commission) highlighting failure of earlier tax reforms (VAT) to pass benefits to consumers, thus justifying the need for anti-profiteering.
  • Procedural Soundness: Explained the multi-layered fact-finding mechanism (Screening Committee, Standing Committee, DGAP, NAA) as robust. Argued that the right to appeal is statutory, not inherent, and judicial review under Article 226 is available.
  • NAA Composition: Contended that NAA is a fact-finding body of domain experts and does not supplant judicial functions of High Courts, hence no requirement for a judicial member.
  • Timelines: Argued that time limits are directory, not mandatory, given the beneficial nature of the legislation and to avoid injustice to consumers.
  • Investigation Scope: Emphasized the wide wording ("any supply") in Section 171 and Rule 129, permitting DGAP to expand investigations.
  • Interest/Penalty: Argued that Section 164 (rule-making power) supports the levy of interest and penalty via rules as deterrents. Noted that SCNs for penalties prior to Section 171(3A) coming into force have been withdrawn.
  • GST on Profiteered Amount: Inclusion of GST on the profiteered amount is correct as it represents additional tax wrongfully collected from consumers.
  • Comparison of Taxes: Insisted that the comparison must involve pre-GST indirect taxes to fully reflect the cascading effect eliminated by GST.
  • Sale of Goods Act: Distinguished Section 64A of Sale of Goods Act as discretionary for the buyer from Section 171's positive obligation on the supplier.

5. Court’s Reasoning

• Presumption of Constitutionality: Started by reaffirming the principle that statutes are presumed constitutional, especially economic laws, requiring significant latitude for the legislature.
• Purpose of Section 171: Held that Section 171 is a consumer welfare regulatory measure, directly linked to the GST's objective of reducing the tax burden on final consumers by eliminating cascading effects. It prevents unjust enrichment by suppliers who might otherwise retain tax benefits.
• Legislative Competence (Article 246A): Interpreted "with respect to goods and services tax" broadly, including all ancillary, incidental, and necessary matters. Preventing unjust retention of tax benefits is ancillary to the power to tax. Thus, Section 171 falls squarely within Parliament's legislative competence.
• No Excessive Delegation:
  • Found Section 171 to be a "complete code" with "exactitude" in defining NAA's functions, duties, and powers.
  • Clarified that "commensurate reduction" means an "equal or near about reduction" in price corresponding to the tax foregone. The term is not vague.
  • The power delegated to the NAA via Rule 126 to determine methodology is permissible, as it involves working out details within the clear legislative policy of Section 171. The principle of delegatus non potest delegare does not apply. Parliament maintains control through Section 166.
• Not a Price-Fixing Mechanism:
  • Held that Section 171 does not regulate base prices or profits; it only mandates passing on the tax component reduction.
  • Suppliers are free to adjust base prices due to commercial factors, but must justify such variations and not use them as a pretext to circumvent the obligation. The presumption of price reduction is rebuttable upon valid justification.
  • No proprietary right exists for suppliers over tax amounts foregone by the government for consumer benefit.
  • Therefore, Section 171 does not violate Articles 19(1)(g), 14, or 300A.
• Foreign Laws: Distinguished Australian and Malaysian anti-profiteering laws as price-control mechanisms (prohibiting "price exploitation" or "unreasonably high profits"), unlike Section 171.
• Methodology for Profiteering:
  • Acknowledged that no single, uniform mathematical formula can apply across all cases/industries. NAA must determine appropriate methodology case-by-case, ensuring it is fair and reasonable.
  • Specifically for Real Estate: Noted flaws in NAA's "ITC to turnover ratio" methodology due to non-uniformity of construction expenses and advances. Suggested a methodology of calculating total savings per project and dividing by total area to ensure equal per square foot benefit for flat-buyers, to be considered during merits hearing.
  • Maintained that legislative prerogative dictates price reduction as the method to pass on benefits, disallowing indirect methods like increasing grammage or discounts, which are not "cash in hand."
  • Dismissed the "legal impossibility" argument for FMCG products, citing Legal Metrology Rules for rounding off MRPs.
• Time Period: Concluded that fixing a specific time period for price reduction is neither necessary nor feasible given the dynamic nature of GST and its intent. The obligation applies as long as the tax benefit exists and is not genuinely offset.
• Section 64A of Sale of Goods Act: Held that Section 64A (discretionary for buyer to adjust contract price) is not applicable or inconsistent with Section 171 (positive obligation on supplier). Contracts violating this public policy are void.
• Possibility of Abuse: Reaffirmed that statutory provisions cannot be struck down merely on the possibility of abuse of power; remedies lie in challenging specific arbitrary orders on their merits.
• Comparison of Taxes: Agreed that Section 171 must consider the entire "basket" of pre-GST indirect taxes subsumed by GST to fulfill the Act's intent of eliminating cascading effects and reducing overall tax burden.
• 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 of the Constitution provides sufficient oversight.
• No Judicial Member in NAA: Held that NAA's functions are primarily fact-finding and require domain expertise, not necessarily judicial members, as it does not replace existing courts.
• Rule 124 (NAA Appointment): Found Rule 124 to be in consonance with Article 50, ensuring independence of NAA members through selection by a GST Council-constituted committee and requiring Council approval for termination.
• Levy of Interest and Penalty (Rule 133): Concluded that Section 171, read with Section 164 (rule-making power for penalties), is broad enough to empower the Central Government to prescribe interest and penalty to deter profiteering. Noted that penalty notices for periods prior to Section 171(3A) coming into force have been withdrawn, rendering that specific point infructuous.
• GST on Profiteered Amount: Rightly included, as it represents revenue wrongfully collected from consumers despite the government's intent to forgo it.
• Timelines for DGAP Report: Declared the time limits for DGAP reports as directory, not mandatory, given the beneficial nature of the legislation and absence of specified consequences for non-compliance.
• Expansion of Investigation: Upheld DGAP's power to expand investigation beyond the initial complaint, citing wide wording of Section 171 and Rule 129 ("any supply") and precedents from Competition Law.

6. Statutory References

• Central Goods and Services Tax Act, 2017 (CGST Act, 2017):

  • Section 171 (Anti-profiteering measure, including sub-sections 1, 2, 3, 3A and Explanation)
  • Section 2(108) (Definition of "tax")
  • Section 2(62) & 2(63) (Definitions related to Input Tax Credit)
  • Section 9 (Levy and collection of CGST)
  • Section 112 (Amendment related to Section 171(3A) via Finance Act, 2019)
  • Section 164 (Power of Government to make rules)
  • Section 166 (Laying of rules before Parliament)

• Central Goods and Services Tax Rules, 2017 (CGST Rules, 2017):

  • 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, including sub-rule 2, 6)
  • Rule 133 (Order of the Authority, including sub-rules 1, 2, 2A, 3, 3(b), 3(d), 4, 5)
  • Rule 134 (Decision to be taken by the majority, including sub-rule 2)

• Constitution of India:

  • Article 14 (Equality before law)
  • Article 19(1)(g) (Freedom to practise any profession, or to carry on any occupation, trade or business)
  • Article 38, 38(1) (State to secure a social order for the promotion of welfare of the people)
  • Article 39(b), 39(c) (Certain principles of policy to be followed by the State - distribution of material resources, prevention of concentration of wealth)
  • Article 50 (Separation of judiciary from executive)
  • Article 245 (Extent of laws made by Parliament and by the Legislatures of States)
  • Article 246A (Special provision with respect to goods and services tax)
  • Article 279A (Goods and Services Tax Council)
  • Article 300A (Persons not to be deprived of property save by authority of law)
  • Article 226 (Power of High Courts to issue certain writs)

• Other Statutes/Rules:

  • Legal Metrology Act, 2009
  • Legal Metrology (Packaged Commodities) Rules, 2011 (Rules 2(m), 6(1)(e))
  • Sale of Goods Act, 1930 (Section 64A)
  • Customs Tariff Act, 1975 (Section 9A)
  • Competition Act, 2002 (Section 19(3))
  • Securities and Exchange Board of India Act, 1992 (Section 4(1))
  • Income Tax Act, 1961

7. Precedents Cited

• Ahmedabad Urban Development Authority v. Sharakumar Jayantikumar Pasawala, (1992) 3 SCC 285
• V.V.S. Sugars v. Govt. of A.P., (1999) 4 SCC 192
• Ramesh Birch vs. Union of India, 1989 Supp SCC 430
• Barium Chemicals Ltd. & Ors. v Company Law Board & Ors., [AIR 1967 SC 295]
• Ankit Kumar Bajoria vs. M/s Hindustan Unilever Ltd., Case No.20/2018 (NAA Order)
• Madras Bar Association v. Union of India, (2015) 8 SCC 583
• Madras Bar Association v. Union of India, (2010) 11 SCC 1
• L. Chandra Kumar v. Union of India, (1997) 3 SCC 261
• Indian Carbon Limited v. State of Assam (1997) 6 SCC 479
• Shree Bhagwati Steel Rolling Mills v. CCE (2016) 3 SCC 643
• Pioneer Urban Land and Infrastructure Ltd. vs. Union of India, (2019) 8 SCC 416
• State of M.P. v. Rakesh Kohli, (2012) 6 SCC 312
• R. K. Garg v. Union of India, 1981 (4) SCC 675
• Steelworth Ltd. vs. State of Assam [1962] Supp (2) SCR 589
• Gopal Narain vs. State of U.P. [AIR 1964 SC 370]
• Ganga Sugar Corp. Ltd. vs. State of U.P. [(1980) 1 SCC 223]
• Lohia Machines Ltd. vs. Union of India, (1985) 2 SCC 197
• Pt. Banarsi Das Bhanot vs. State of Madhya Pradesh, AIR 1958 SC 909
• Sita Ram Bishambher Dayal vs. State of U.P. (1972) 4 SCC 485
• Bhatnagars & Co. Ltd. vs. Union of India, AIR 1957 SC 478
• Mohmedalli and Ors. vs. Union of India and Ors., AIR 1964 SC 980
• M.K. Papiah vs. Excise Commr. (1975) 1 SCC 492
• McDowell & Co. Ltd. v. CTO, (1985) 3 SCC 230
• Madras Bar Association v. Union of India & Anr., (2021) SCC OnLine SC 463
• M. Ramnarain (P) Ltd. v. State Trading Corpn. of India Ltd. [(1983) 3 SCC 75]
• Gujarat Agro Industries Co. Ltd. v. Municipal Corpn. of the City of Ahmedabad (1999) 4 SCC 468
• CCI v. SAIL, (2010) 10 SCC 744
• Union of India vs. R. Gandhi, (2010) 11 SCC 1
• Rojer Mathews vs. South Indian Bank, (2019) SCC OnLine SC 1456
• Clariant International Ltd. & Anr. vs. Securities and Exchange Board of India (2004) 8 SCC 524
• Union of India vs. VKC Footsteps India (P) Ltd., 2021 SCC OnLine SC 706
• Namit Sharma vs. Union of India, (2013) 1 SCC 745
• Union of India vs. Namit Sharma (Review Petition) (2013) 10 SCC 359
• In Re The Delhi Laws Act AIR (1951) SC 332
• Welfare Association, A.R.P., Maharashtra Vs. Ranjit P. Gohil, (2003) 9 SCC 358
• Chaturbhai M. Patel v. Union of India [AIR 1960 SC 424 : (1960) 2 SCR 362]
• R.S. Joshi, Sales Tax Officer, Gujarat & Ors. vs. Ajit Mills Limited & Anr., (1977) 4 SCC 98
• Sahni Silk Mills (P) Ltd. v. ESI Corpn., (1994) 5 SCC 346
• D.S. Grewal v. State of Punjab 1958 SCC OnLine SC 9
• Dhanjibhai Ramjibhai vs. State of Gujarat (1985) 2 SCC 5
• Chairman & MD, BPL Ltd. vs. S.P. Gururaja and Ors., (2003) 8 SCC 567
• Dr.Ashwani Kumar vs. Union of India, (2020) 13 SCC 585
• Kondiba Dagadu Kadam v. Savitribai Sopan Gujar (1999) 3 SCC 722
• Kashmir Singh v. Harnam Singh (2008) 12 SCC 796
• Wing Commander Shyam Naithani vs. Union of India and Ors., W.P.(C) 6483/2021 & connected matters, 2022 SCC OnLine Del 769
• United Commercial Bank Ltd. v. Their Workmen, AIR 1951 SC 230
• UP Power Corporation Ltd. v. Virenddra Lal, (2013) 10 SCC 39
• Shiv Shakti Coop. Housing Society v. Swaraj Developers, (2003) 6 SCC 659
• P.T. Rajan Vs. T.P.M. Sahir and Ors. (2003) 8 SCC 498
• Excel Crop Care Ltd. vs. Competition Commission of India, (2017) 8 SCC 47
• Cadila Healthcare Ltd. & Anr. vs. CCI & Ors., (2018) SCCOnline Del 11229