Jubilant Foodworks Ltd. & Anr. 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 and Rules 122, 124, 126, 127, 129, 133, and 134 of the Central Goods and Services Tax Rules, 2017. The Court clarified that while the provisions themselves are valid, individual orders passed under the anti-profiteering mechanism may be challenged on their merits if there is an arbitrary exercise of power.

2. Core Issue

The core issue before the Delhi High Court was the constitutional validity of the anti-profiteering provisions enshrined in Section 171 of the CGST Act, 2017, and the related Rules (122, 124, 126, 127, 129, 133, 134) of the CGST Rules, 2017. Petitioners, from diverse business sectors, contended that these provisions were ultra vires the Constitution on various grounds.

3. Key Facts

• Multiple writ petitions were filed by various companies across sectors like hospitality, Fast-Moving Consumer Goods (FMCG), and real estate.
• These petitioners challenged orders issued by the National Anti-Profiteering Authority (NAA) or notices proposing penalties under the anti-profiteering framework, which directed them to pass on the commensurate benefit of tax rate reduction or Input Tax Credit (ITC) to consumers along with interest.
• The petitioners argued that the anti-profiteering provisions were unconstitutional, leading the Court to first address this preliminary question before delving into the merits of individual orders.
• The essence of the anti-profiteering measure is to ensure that the benefits of GST implementation (reduction in tax rates or increased ITC availability) are passed on to the end consumer by way of a commensurate reduction in prices, preventing unjust enrichment by suppliers.

4. Arguments

Taxpayer (Petitioners):

• Legislative Competence & Excessive Delegation: Section 171 and the Rules are beyond Parliament's legislative competence under Article 246A and suffer from excessive delegation as they delegate essential legislative functions (e.g., methodology for determining profiteering) without clear guidelines, violating Articles 14 and 19(1)(g). The term "commensurate" is vague, giving NAA unfettered discretion.
• Price Fixing: The provisions amount to price-fixing, infringing on the right to trade and commerce under Article 19(1)(g) and Article 300A, as they disregard commercial and economic factors influencing pricing.
• Arbitrariness & Unreasonableness:
  • No fixed time period for which reduced prices must be maintained, creating an indefinite and unreasonable obligation.
  • Mandating price reduction as the only method to pass on benefits is arbitrary; other methods like increasing grammage should be permitted.
  • Legal impossibility to reduce prices for low-priced FMCG products due to Legal Metrology rules on rounding off.
  • Inconsistent application of methodology by NAA across similar industries/products.
• Procedural & Structural Flaws:
  • Absence of an appellate mechanism against NAA orders, leading to lack of judicial oversight.
  • Rule 124 (appointment and service conditions of NAA members) violates Article 50 due to potential governmental interference.
  • Absence of a judicial member in NAA, despite its quasi-judicial functions, renders it unconstitutional.
  • The Chairman's casting vote in Rule 134(2) is unconstitutional.
  • NAA was not constituted by a proper gazetted notification as required by the Act.
  • Time limits for DGAP reports/NAA orders were often violated, vitiating proceedings.
  • DGAP/NAA expanded investigations beyond the scope of initial complaints, which is ultra vires.
• Penalty & Interest: Levy of penalty and interest is illegal in the absence of specific substantive provisions in the Act, as Rules cannot impose such liabilities retrospectively (Section 171(3A) was inserted later).
• Scope of Comparison: Section 171 only applies to GST rate reduction or ITC under the GST regime itself, not a comparison with a basket of distinct indirect taxes applicable before GST. Section 64A of the Sale of Goods Act implies freedom to contract on prices.

Revenue (Union of India & Ors.) & Amicus Curiae:

• Consumer Welfare & Legislative Intent: Anti-profiteering measures are a consumer welfare regulatory measure, consistent with Directive Principles of State Policy (Articles 38, 39(b), (c)), ensuring that tax benefits are passed to consumers and preventing unjust enrichment.
• Legislative Competence: Article 246A ("with respect to goods and services tax") grants wide legislative power, encompassing ancillary and necessary matters like anti-profiteering, especially given the history of tax benefits not being passed on (e.g., post-VAT implementation).
• No Excessive Delegation: Section 171 lays down a clear legislative policy; "commensurate" has a definite meaning. The minutiae of methodology can be delegated to an expert body like NAA, which retains the flexibility to adopt suitable methods based on case-specific facts. NAA has also notified its methodology in 2018.
• Not Price Fixing: Section 171 is not a price-fixing mechanism; it only concerns the indirect-tax component of prices, allowing suppliers to adjust base prices based on commercial factors, provided they commensurately pass on tax benefits. The presumption of price reduction is rebuttable.
• Feasibility: Legal Metrology (Packaged Commodities) Rules provide for rounding off MRPs, making it feasible to pass on small benefits.
• Procedural Validity:
  • Appeal is a creature of statute, not an inherent right. NAA orders are subject to judicial review under Article 226 of the Constitution.
  • NAA performs fact-finding functions by domain experts, not judicial functions that replace courts; thus, a judicial member is not constitutionally mandated.
  • NAA was duly constituted by a gazetted rule (Rule 122) and laid before Parliament.
  • Time limits for investigation/order are directory, not mandatory, to avoid injustice to consumers.
  • Expansion of investigation is permissible under the wide language of Section 171 and Rule 129 (using "any supply of goods or services").
• Penalty & Interest: Levy of interest and penalty is within the rule-making power of the Central Government under Section 164 and is essential for deterrence. Penalty proceedings for periods prior to Section 171(3A) becoming effective have been withdrawn.
• Scope of Comparison: Comparing GST with the basket of pre-GST indirect taxes is necessary to achieve the core objective of the GST regime. Section 64A of the Sale of Goods Act is distinct as it refers to a buyer's discretion, while Section 171 imposes a positive obligation on the supplier for public policy reasons.

5. Court’s Reasoning

• Presumption of Constitutionality: The Court emphasized the principle of judicial restraint in economic legislation and the presumption of constitutionality of statutes.
• GST as a Paradigm Shift: The Court noted that GST is a consumer-centric law aimed at eliminating cascading taxes and reducing the tax burden, and Section 171 is crucial to achieve this objective.
• Section 171's Purpose: It embodies the principle of unjust enrichment, ensuring that tax benefits foregone by the government are passed to consumers. The term "commensurate" means an equivalent or nearly equivalent reduction in price in rupee and paisa terms. It is a consumer welfare regulatory measure, not a tax-levying provision.
• Legislative Competence: Section 171 falls under Article 246A, as "laws with respect to goods and services tax" include all ancillary, incidental, and necessary matters, such as preventing unjust enrichment arising from tax changes.
• No Excessive Delegation: Section 171 provides a clear legislative policy. The power given to NAA under Rule 126 to determine methodology is not excessive delegation, as the core policy is set, and parliamentary oversight exists through Section 166.
• Not Price Fixing: Section 171 is not a general price-fixing mechanism; it only addresses the tax component of the price. Suppliers can adjust base prices due to commercial factors, but any claim that these factors offset tax reductions must be cogently justified, as the presumption of price reduction is rebuttable.
• Foreign Laws Irrelevant: References to Australian and Malaysian anti-profiteering laws are inapposite because those laws are broader "price exploitation" or "unreasonably high profit" controls, unlike Section 171, which targets tax benefit pass-through.
• Methodology Flexibility: No single formula for determining profiteering can be prescribed due to varying facts across cases and industries. NAA must determine appropriate methodology case-by-case, and so long as it is fair and reasonable, it is valid.
  • Real Estate Specifics: The Court noted that the methodology adopted by NAA/DGAP for real estate (difference in ITC to turnover ratio) was flawed. It opined that total savings from GST should be divided by total area to arrive at a per square foot benefit for flat buyers, ensuring equal benefit for equal area.
• Legislative Prerogative: It is the legislature's prerogative to mandate how benefits are passed on. Requiring a direct "cash in hand" reduction in prices is not arbitrary. Legal Metrology Rules (rounding off MRP) ensure feasibility even for low-priced items.
• No Fixed Time Period: An indefinite obligation for price reduction is necessary as long as the direct relation between tax reduction/ITC benefit exists, to align with the Act's objective.
• Section 64A of Sale of Goods Act Inapplicable: Section 64A is discretionary for buyers, while Section 171 imposes a positive statutory obligation on sellers. GST laws are independent, and contracts violating the public policy of passing on benefits would be void.
• Possibility of Abuse: A statutory provision cannot be struck down merely on the apprehension of misuse or abuse of power.
• Pre-GST Comparison: Not comparing taxes levied post-GST with the basket of distinct pre-GST indirect taxes would defeat the "One Nation, One Tax" intent of the 2017 Act.
• No Right to Appeal: An appeal is a creature of statute, not a vested right. Orders of NAA are subject to judicial review under Article 226.
• No Judicial Member Required: NAA primarily performs a fact-finding role by domain experts, not judicial functions previously exercised by High Courts. Therefore, the absence of a judicial member does not render it unconstitutional.
• Rule 124 in Consonance with Article 50: The selection and termination process for NAA members, involving the GST Council, ensures independence and prevents governmental interference.
• Interest and Penalty Valid: Section 171, coupled with Section 164 (rule-making power for penalties), is broad enough to empower the Central Government to prescribe interest and penalty (Rule 133) as a deterrent to profiteering. The issue of retrospective penalty imposition for periods prior to Section 171(3A) becoming effective was deemed infructuous as such proceedings have been withdrawn.
• GST on Profiteered Amount: The GST collected on the additional realization (due to non-reduction of prices) is rightly included in the profiteered amount, as it defeats the government's intent and harms consumers.
• Time Limits for DGAP Report: These are directory, not mandatory, given the beneficial nature of the legislation and lack of specified consequences for non-compliance.
• Expansion of Investigation: The broad wording ("any supply of goods or services") in Section 171 and Rule 129 allows for expansion of investigation beyond initial complaints, which is necessary to achieve the consumer welfare objective.

6. Statutory References

• Central Goods and Services Tax Act, 2017 (Act, 2017):
  • Section 171 (Anti-profiteering measure, sub-sections 1, 2, 3, 3A, Explanation)
  • Section 2(108) (Definition of "taxable supply")
  • Section 2(62), 2(63) (Definitions of Input Tax Credit components)
  • Section 2(80) (Definition of "notification")
  • Section 9 (Levy and collection of CGST)
  • Section 57 (Goods and Services Tax Consumer Welfare Fund)
  • Section 164 (Power to make rules)
  • Section 166 (Laying of rules before Parliament)
• Central Goods and Services Tax Rules, 2017 (Rules, 2017):
  • Rule 122 (Constitution of the Authority)
  • Rule 124 (Appointment, salary, allowances, and other terms and conditions of service of Chairman and Members of Authority)
  • Rule 126 (Power to determine 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 majority)
• 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) & 39(c) (Certain principles of policy to be followed by the State)
  • Article 50 (Separation of judiciary from executive)
  • Article 226 (Power of High Courts to issue certain writs)
  • Article 245 (Extent of laws made by Parliament and by the Legislatures of States)
  • Article 246 (Subject-matter of laws made by Parliament and by the Legislatures of States)
  • Article 246A (Special provision with respect to goods and services tax)
  • Article 254 (Inconsistency between laws made by Parliament and laws made by the Legislatures of States)
  • Article 279A (Goods and Services Tax Council)
  • Article 300A (Persons not to be deprived of property save by authority of law)
• Other Statutes/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

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