Affiniti Enterprises vs Union Of India Through Its Secretary & ... 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), which deal with anti-profiteering measures. The court clarified that while there might be instances of arbitrary exercise of power, this would lead to setting aside specific orders on merits, not invalidating the statutory provisions themselves.

2. Core Issue
The core issue was the constitutional validity of Section 171 of the CGST Act, 2017 and Rules 122, 124, 126, 127, 129, 133, and 134 of the CGST Rules, 2017, which mandate that any reduction in the rate of tax or the benefit of Input Tax Credit (ITC) must be passed on to the recipient through a "commensurate reduction in prices."

3. Key Facts
* A batch of over 100 writ petitions was filed by companies involved in diverse businesses (hospitality, FMCG, real estate) challenging the anti-profiteering provisions.
* The petitioners also challenged the legality of notices and final orders issued by the National Anti-Profiteering Authority (NAA) that directed them to pass on benefits along with interest.
* The CGST Act, 2017, aimed to simplify indirect taxes, eliminate multiplicity and cascading effects of taxes, and create a common national market ("One Nation One Tax").
* The anti-profiteering provisions were introduced to ensure that the benefits of reduced tax rates and increased ITC, which represent foregone government revenue, are passed on to the consumers.

4. Arguments (Taxpayer vs Revenue)

• Taxpayer (Petitioners):

  • Legislative Competence: Section 171 is beyond Parliament's power under Article 246A as it constitutes a tax or financial exaction without specific statutory authorization.
  • Excessive Delegation: Section 171 and Rules 126, 127, 133 suffer from excessive delegation by not providing clear guidelines or legislative policy for determining "commensurate reduction" or "profiteering," making them ambiguous and arbitrary, violating Article 14 and 19(1)(g).
  • Price Fixing: The provisions amount to price-fixing, infringing on the right to trade and business under Articles 19(1)(g) and 300A, as they disregard commercial factors like input costs, supply, and demand.
  • Lack of Uniform Methodology: No fixed methodology for calculating profiteering (e.g., real estate sector calculation varied significantly), leaving unfettered discretion to NAA.
  • Indefinite Period: No fixed time period for maintaining reduced prices, making the obligation open-ended and arbitrary.
  • Mode of Benefit: Mandating only price reduction as a means to pass on benefit is arbitrary; other methods like increasing grammage should be allowed (citing NAA inconsistencies).
  • Legal Impossibility: For low-priced FMCG products, rounding-off rules under Legal Metrology Act make exact price reduction legally impossible.
  • Absence of Appeal: No statutory appeal mechanism against NAA orders, leading to lack of judicial oversight and violating constitutional principles.
  • Composition of NAA: Rule 124, dealing with appointment and terms of service, leads to potential governmental interference, violating Article 50. Absence of a judicial member in NAA, a quasi-judicial body, renders it illegal. Rule 134(2) granting Chairman a casting vote is unconstitutional.
  • Timelines: Time limits for DGAP reports and NAA orders in Rules 129(6) and 133 are mandatory and were often violated, making proceedings barred by limitation.
  • Scope of Investigation: DGAP expanded investigations beyond the initial complaint, which was ultra vires the Act and Rules, especially prior to the amendment of Rule 133(5).
  • Penalty and Interest: Levy of penalty and interest under Rules 127 and 133 without explicit substantive provisions in the Act (before Section 171(3A) came into effect on Jan 1, 2020) is illegal and retrospective.
  • Tax Comparison: Section 171 only refers to tax reductions under the CGST Act, not a comparison between pre-GST "basket of taxes" and post-GST rates.
  • Section 64A of Sale of Goods Act: Parties are free to agree on prices post-tax reduction.
  • Constitution of NAA: NAA was constituted by an administrative order, not a gazetted notification as required by the Act.

• Revenue (Respondents) & Amicus Curiae:

  • Consumer Welfare & Unjust Enrichment: The provisions prevent suppliers from appropriating benefits meant for consumers, aligning with the Directive Principles of State Policy (Articles 38, 39(b), 39(c)).
  • Legislative Competence: Section 171 is not a taxing provision but an ancillary and incidental measure to the GST regime, falling within Parliament's broad legislative power under Article 246A.
  • No Excessive Delegation: "Commensurate" is a clear term. Section 171 lays down a clear legislative policy, leaving the procedural details and methodology to be determined by NAA via Rule 126, which is permissible delegation. Uniform methodology cannot be fixed due to case-specific variations.
  • Not Price Fixing: Section 171 only addresses the indirect-tax component of prices; it does not interfere with a supplier's right to set base prices based on commercial factors. The obligation is to pass on tax benefits, and any justification for not doing so must be cogent and not a pretext for avoidance.
  • No Time Limit: A fixed time limit for price reduction is not feasible given the nature of tax changes and the intent of the Act.
  • Mode of Benefit: "Commensurate reduction in prices" implies a direct reduction, not indirect benefits or discounts.
  • Legal Metrology Act: Existing rules allow rounding off of MRPs, thus negating the "legal impossibility" argument.
  • No Vested Right of Appeal: The right to appeal is statutory, not inherent. Absence of an appeal mechanism does not invalidate the Act, as NAA orders are subject to judicial review under Article 226/227.
  • Composition of NAA: NAA performs fact-finding and domain-specific functions. It does not replace the judicial functions of courts. Therefore, a judicial member is not a constitutional requirement (citing precedents for other quasi-judicial bodies). The casting vote is a common procedural device.
  • Timelines: Time limits in Rules 129(6) and 133 are directory, not mandatory, to avoid injustice to consumers and ensure the beneficial nature of the legislation is upheld.
  • Scope of Investigation: Section 171 and Rule 129(2) use broad language ("any supply") allowing DGAP to expand investigations beyond the initial complaint to fulfill the anti-profiteering objective (citing Competition Act precedents).
  • Penalty and Interest: Rule 133's provisions for interest and penalty are within the rule-making power conferred by Section 164 of the Act to ensure deterrence. The retrospective penalty issue is moot as pre-Section 171(3A) notices have been withdrawn. GST on the profiteered amount is rightly included.
  • Constitution of NAA: NAA was duly constituted by a gazetted notification (No. 3/2017-Central Tax) laid before Parliament.

5. Court’s Reasoning
* Constitutional Scrutiny: The Court emphasized the principle of judicial restraint in economic legislation, acknowledging a presumption of constitutionality and limiting intervention to clear transgressions of constitutional provisions. The possibility of abuse is not a ground for striking down legislation.
* Nature of GST and Anti-Profiteering: The CGST Act is a consumer-centric, social welfare legislation designed to eliminate cascading taxes and ensure benefits reach the end-consumer. Section 171 embodies the principle of unjust enrichment, preventing suppliers from appropriating tax benefits intended for the public.
* Legislative Competence: The Court held that Section 171 falls within Parliament's power under Article 246A to make laws "with respect to" GST, encompassing all ancillary and necessary matters to achieve its objectives. It is not a taxing provision.
* No Excessive Delegation: Section 171 provides a clear legislative policy—pass on benefits through commensurate price reduction. The term "commensurate" is understood to mean a proportionate reduction in price equivalent to the tax savings. Rule 126, which allows NAA to determine the methodology, is a permissible delegation of procedural details within this established policy. Parliament retains control through Section 166.
* Not Price Fixing: Section 171 regulates only the tax component of the price, not the base price. Suppliers are free to adjust base prices based on commercial factors, but they must demonstrably pass on the tax benefits. The presumption of price reduction is rebuttable with cogent justifications.
* Methodology for Profiteering: Acknowledging that no single formula fits all industries, the Court affirmed NAA's flexibility to determine methodologies on a case-by-case basis, provided they are fair and reasonable. For the real estate sector, the Court critically observed flaws in NAA's "ITC to turnover ratio" method and suggested a project-level calculation of total savings divided by area to ensure equitable benefit to flat buyers.
* Mode of Benefit Transfer: The legislative mandate requires "commensurate reduction in prices" (cash in hand), disallowing indirect methods like increased grammage or discounts as primary modes. The Legal Metrology Rules for rounding off MRP prevent "legal impossibility" arguments for low-value goods.
* No Fixed Time Period: The absence of a specific time period for applying reduced prices is appropriate; the obligation to pass on benefits exists as long as the tax reduction/ITC benefit persists, subject to other justified factors.
* Section 64A of Sale of Goods Act: This provision is a discretion for buyers, while Section 171 imposes a positive obligation on suppliers. The CGST Act is independent, and contracts must comply with Section 171.
* Absence of Appeal: The right to appeal is a creature of statute. Its absence does not invalidate the Act, especially since NAA orders are subject to judicial review under Article 226/227 of the Constitution.
* Composition of NAA: NAA's role is primarily fact-finding and expertise-driven. It does not supplant traditional judicial functions, hence the absence of a judicial member does not render it unconstitutional. The mechanism for appointing and terminating members ensures independence. While a casting vote for the Chairman (Rule 134(2)) was deemed impermissible, the court did not delve deeper as it was asserted not to have been used.
* Penalty and Interest: Rule 133's provisions for interest and penalty are valid, being within the rule-making power of the government under Section 164 to ensure deterrence against profiteering. The retrospective application of penalty was rendered infructuous as relevant notices were withdrawn.
* Timelines for DGAP: The time limits prescribed for DGAP reports are directory, not mandatory, as no consequences for non-compliance are specified, and a mandatory reading would defeat the consumer welfare objective.
* Expansion of Investigation: The broad language of Section 171 and Rule 129(2) empowers DGAP to expand investigations beyond the initial complaint, akin to powers exercised by the Director General under the Competition Act, to ensure thoroughness and prevent the purpose of investigation from being defeated.

6. Statutory References
* Constitution of India: Articles 14, 19(1)(g), 38, 39(b), 39(c), 50, 246A, 300A, 226, 227.
* Central Goods and Services Tax Act, 2017: Sections 2(62), 2(63), 2(80), 9, 57, 122, 164, 166, 171 (including sub-sections (1), (2), (3), (3A) and Explanation).
* Central Goods and Services Tax Rules, 2017: Rules 122, 124, 126, 127, 129 (including sub-rule (2), (6)), 133 (including sub-rules (1), (2A), (3), (3)(b), (3)(d), (4), (5) and Explanation), 134 (including sub-rule (2)).
* Finance Act, 2019: Section 112.
* Legal Metrology Act, 2009.
* Legal Metrology (Packaged Commodities) Rules, 2011: Rules 2(m), 6(1)(e).
* Sale of Goods Act, 1930: Section 64A.
* Competition Act, 2002.

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
* 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
* 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
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* Gujarat Agro Industries Co. Ltd. v. Municipal Corpn. of the City of Ahmedabad (1999) 4 SCC 468
* CCI v. SAIL, (2010) 10 SCC 744
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* Union of India vs. Namit Sharma (2013) 10 SCC 359
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* United Commercial Bank Ltd. v. Their Workmen, AIR 1951 SC 230
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* Diwan General and Sugar Mills Pvt. Ltd. & Ors. vs. Union of India, AIR (1959) SC 626
* Union of India vs. Cynamide India Ltd., (1987) 2 SCC 720