Aster Infrahome Pvt Ltd 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 (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). The Court clarified that while the provisions themselves are constitutional, specific orders passed under them might be challenged on merits if there is an arbitrary exercise of power or non-consideration of genuine factors.

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 associated anti-profiteering Rules (122, 124, 126, 127, 129, 133, and 134) under the CGST Rules, 2017. Petitioners, various companies, challenged these provisions on grounds including legislative competence, excessive delegation, violation of fundamental rights (Articles 14, 19(1)(g), 300A), lack of clear methodology, absence of appellate mechanism, and flawed composition of the National Anti-Profiteering Authority (NAA).

3. Key Facts

• Numerous writ petitions were filed by companies engaged in diverse businesses (hospitality, FMCG, real estate) challenging the anti-profiteering provisions.
• The petitioners had received notices or orders from the National Anti-Profiteering Authority (NAA) directing them to pass on the commensurate benefit of reduction in tax rates or Input Tax Credit (ITC) to consumers, sometimes with interest and penalties.
• The parties agreed to first argue and seek a decision on the constitutional validity of Section 171 and the related Rules, deferring the merits of individual cases.
• The anti-profiteering measures were introduced as part of the GST regime to ensure that the benefits of reduced tax burden and elimination of cascading effects of taxes were passed on to the consumers.

4. Arguments

Taxpayer (Petitioners):
* Legislative Competence: Section 171 and Rules are ultra vires Article 246A, as anti-profiteering measures are akin to a tax/financial exaction without specific parliamentary authorization in the parent Act.
* Excessive Delegation & Vagueness: The provisions suffer from excessive delegation as they delegate essential legislative functions (like determining methodology for "commensurate reduction") to the Executive/NAA without clear guidelines. The term "commensurate" is vague, leading to arbitrary decisions.
* Delegatus non potest delegare: The Legislature delegated power to the Central Government, which then further delegated methodology determination to NAA (Rule 126), violating this principle.
* Arbitrary Methodology: NAA/DGAP adopted flawed and inconsistent methodologies (e.g., for real estate, comparing ITC to turnover ratio, leading to disparate outcomes for similar projects).
* Price Fixing & Fundamental Rights: Section 171 amounts to price-fixing, violating Article 19(1)(g) (right to trade) and Article 300A (right to property), as it restricts price adjustments based on commercial factors like input costs, supply/demand.
* Indefinite Obligation: The absence of a fixed time period for maintaining reduced prices is arbitrary and unreasonable, hindering trade (Articles 14, 19(1)(g)).
* Mandatory Price Reduction: Mandating price reduction as the only way to pass on benefits (disallowing increased grammage or other consumer benefits) is arbitrary. Legal Metrology Rules make exact price reduction impossible for low-priced FMCG products.
* Lack of Appellate Mechanism: Absence of a judicial appeal against NAA orders leads to a lack of judicial oversight, rendering the Act unconstitutional.
* Composition of NAA: Rule 124 (appointment of members) is not in consonance with Article 50, allowing governmental interference. The absence of a judicial member in a quasi-judicial body like NAA (Rule 122) renders it illegal and void. Rule 134(2) granting the Chairman a casting vote is unconstitutional.
* Jurisdiction & Procedure: NAA was allegedly constituted by an administrative order, not a gazetted notification, violating Section 171(2) and 166. DGAP/NAA reports and orders are often barred by limitation (Rules 129(6), 133). DGAP suo motu expanded investigation beyond initial complaint, which is ultra vires.
* Penalty & Interest: Levy of penalty and interest under Rules 127 and 133 without explicit substantive provisions in the Act (prior to Section 171(3A) from Jan 2020) is illegal and retrospective.
* Comparison of Taxes: Section 171(1) only refers to GST reduction/ITC under CGST Act, not a comparison with a "basket" of pre-GST indirect taxes.
* Sale of Goods Act: Section 64A of the Sale of Goods Act, 1930, suggests freedom to contract on price after tax changes, conflicting with Section 171.

Revenue (Respondents & Amicus Curiae):
* Consumer Welfare: Anti-profiteering measures are for consumer welfare, ensuring benefits of GST reforms (ITC, reduced rates) flow to them, preventing unjust enrichment by suppliers.
* Legislative Competence: Article 246A empowers Parliament to make laws "with respect to" GST, which includes ancillary and incidental matters like anti-profiteering provisions, as they ensure the effectiveness of the GST regime. It is not a taxing provision.
* No Excessive Delegation: Section 171 clearly mandates "commensurate reduction in prices." "Commensurate" means a suitable, matching, or proportionate amount. This provides sufficient legislative policy. Minutiae can be delegated.
* Delegatus non potest delegare Inapplicable: Section 171(3) explicitly allows the Central Government to prescribe NAA's powers/functions, including determining methodology (Rule 126). Parliament maintains control via Section 166.
* Flexible Methodology: No single, rigid methodology for determining profiteering is possible due to diverse facts across industries and SKUs. NAA has flexibility, subject to fair and reasonable exercise. NAA has issued a "Methodology and Procedure, 2018".
* Not Price-Fixing: Section 171 only addresses the indirect-tax component of price, not the base price. Suppliers can vary base prices due to commercial factors, but cannot appropriate tax benefits. Any increase in base price must be justified and not a pretext to avoid passing on tax benefits.
* Indefinite Obligation is Justified: The nature of the GST Act does not allow for a fixed period for reduced prices. The obligation continues as long as the tax benefit exists.
* Legal Metrology Rules: These rules provide for rounding off MRP, which addresses the feasibility issue for low-priced products.
* No Absolute Right to Appeal: The right to appeal is statutory, not inherent. Absence of an appeal mechanism does not invalidate the Act, especially when NAA orders are subject to judicial review under Article 226 of the Constitution.
* Composition of NAA: NAA performs fact-finding functions by domain experts; it does not replace any judicial function previously exercised by courts. Therefore, a judicial member is not a constitutional requirement. The Chairman's casting vote is a common procedural device (and was stated not to have been used).
* Valid Constitution: NAA was constituted by a gazetted notification (Notification No. 3/2017-Central Tax) and laid before Parliament, fulfilling statutory requirements.
* Time Limits Directory: Time limits for DGAP/NAA reports are directory, not mandatory, as no consequences for delay are specified, and strict adherence would defeat the consumer welfare objective.
* Broad Scope of Investigation: Section 171 and Rule 129(2) (using "any supply") allow DGAP to expand investigation beyond the initial complaint to fulfill the anti-profiteering objective. This is consistent with powers of similar regulatory bodies.
* Penalty & Interest are Valid: Section 171 is broad enough to empower the government to prescribe interest and penalty (Rule 133(3)(b) & (d)) for non-compliance, ensuring deterrence. Section 164 also grants rule-making power for penalties. (Respondent conceded penalty notices issued prior to Section 171(3A) have been withdrawn).
* Comprehensive Comparison: The intent of GST was to replace a "basket" of indirect taxes; therefore, comparison with pre-GST taxes is essential to determine profiteering.
* Sale of Goods Act Irrelevant: Section 64A of the Sale of Goods Act is a discretionary provision for buyers, while Section 171 is a positive obligation on suppliers. No inconsistency.

5. Court’s Reasoning

The Court applied established principles for adjudicating constitutional validity, emphasizing the presumption of constitutionality and the greater latitude afforded to economic legislation.

• Nature of GST & Section 171: The Court recognized the GST Act, 2017, as a "paradigm shift" and a "consumer-centric Act" aimed at eliminating cascading taxes and ensuring benefits reach consumers. Section 171 is a "consumer welfare regulatory measure" designed to prevent "unjust enrichment" by suppliers who appropriate tax benefits intended for consumers.
• Legislative Competence: The Court held that "with respect to goods and services tax" in Article 246A of the Constitution encompasses all ancillary, incidental, and necessary matters. Section 171, by ensuring the benefits of tax reduction are passed to consumers, falls squarely within this legislative domain, acting as a social welfare measure and preventing illegal retention of foregone tax revenue.
• No Excessive Delegation: "Commensurate reduction in prices" in Section 171 was deemed a clear legislative policy. "Commensurate" implies an "equal or near about reduction" in price corresponding to the tax foregone. The power delegated to NAA to determine methodology (Rule 126) is for working out details within this policy framework and does not constitute essential legislative function. The principle of delegatus non potest delegare is inapplicable given the explicit statutory authorization. Parliament's oversight via Section 166 ensures control over delegated legislation. The Court noted that alleged arbitrary application of methodology might render specific orders bad, but not the legislative provision itself.
• No Price Fixing, No Violation of Fundamental Rights: Section 171 is not a price-fixing mechanism. It only addresses the indirect tax component of prices, not the base price which suppliers are free to set based on commercial factors. The obligation to pass on benefits is via "commensurate reduction" in price, not by other means like increased grammage. The presumption that price reduction must follow tax benefit is rebuttable if suppliers can provide cogent reasons for offsetting factors. Since the amounts foregone are public exchequer funds intended for consumers, suppliers have no proprietary interest, thus no violation of Articles 19(1)(g) or 300A.
• Methodology for Profiteering: The Court acknowledged that no single, uniform mathematical formula can apply to all cases or industries due to their diverse facts. NAA's flexibility to determine methodology case-by-case (under Rule 126) is therefore reasonable. However, specifically for the real estate sector, the Court found the NAA/DGAP's methodology (ITC to turnover ratio) flawed. It directed that for real estate, total GST savings for a project should be divided by total area to arrive at a per square foot benefit, ensuring equal benefit to similarly-sized units, and this interpretation will be considered during the merits hearing.
• Time Period for Price Reduction: An indefinite time period is appropriate, as the obligation to pass on benefits subsists as long as the tax reduction or ITC benefit exists and there are no justified countering factors. Prescribing a fixed period would contravene the Act's intent.
• Section 64A of Sale of Goods Act: This provision is irrelevant as it grants discretion to the buyer, whereas Section 171 imposes a positive obligation on the supplier. There is no conflict.
• Possibility of Abuse: The Court reiterated that a statutory provision cannot be struck down merely on the apprehension or possibility of abuse of power.
• Comparison of Pre/Post GST Taxes: To not compare with pre-GST indirect taxes would defeat the fundamental intent of the GST Act, which was to unify and simplify the tax regime by subsuming multiple taxes and eliminating cascading effects.
• No Vested Right of Appeal: Appeal is a statutory creation, not an inherent right. The absence of an appeal mechanism does not invalidate the anti-profiteering provisions, especially since NAA's orders are subject to judicial review under Article 226 of the Constitution, as evidenced by the numerous petitions before the High Court.
• No Judicial Member Required: NAA's functions are primarily fact-finding and require domain expertise. It does not replace any judicial function previously exercised by High Courts or other judicial bodies. Therefore, the principle requiring judicial members in tribunals that supplant High Courts does not apply to NAA.
• 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 within Rule-Making Power: Section 171 (read with Section 164) is broad enough to permit the Central Government to prescribe interest (Rule 133(3)(b)) and penalty (Rule 133(3)(d)) to deter profiteering. The Revenue's withdrawal of penalty notices issued prior to Section 171(3A) coming into force renders that specific issue infructuous.
• GST on Profiteered Amount: Inclusion of GST collected on the additional realization in the profiteered amount is justified, as the government intended to forgo that revenue for consumers.
• Time Limits for DGAP Report: The prescribed time limits for DGAP reports (Rule 129(6)) are directory, not mandatory, given the beneficial nature of the legislation and the absence of specified consequences for delay.
• Expansion of Investigation: The broad wording of Section 171 and Rule 129(2) ("any supply of goods or services") permits DGAP to expand investigations beyond the initial complaint, aligning with the consumer welfare objective and precedents in other regulatory laws like the Competition Act.

6. Statutory References

• Central Goods and Services Tax Act, 2017 (CGST Act, 2017):
  • Sections 171, 171(1), 171(2), 171(3), 171(3A)
  • Sections 122, 164, 166, 2(62), 2(63), 2(80), 2(108), 9
• Central Goods and Services Tax Rules, 2017 (CGST Rules, 2017):
  • Rules 122, 124, 126, 127, 129, 129(6), 133, 133(3)(b), 133(3)(d), 133(5), 134, 134(2)
• Constitution of India:
  • Articles 14, 19(1)(g), 300A, 38, 38(1), 39(b), 39(c), 50, 226, 246, 246A, 254, 279A
• Other Statutes/Rules:
  • Sale of Goods Act, 1930: Section 64A
  • Legal Metrology Act, 2009
  • Legal Metrology (Packaged Commodities) Rules, 2011: Rules 2(m), 6(1)(e)
  • Finance Act, 2019: Section 112
  • Trade Practices Act, 1974 (Australia): Sections 75AU, 75AV(1)
  • Price Control and Anti-Profiteering Act, 2011 (Malaysia): Sections 14, 15
  • Competition Act, 2002: Section 19(3)
  • Securities and Exchange Board of India Act, 1992: Section 4(1)

7. Precedents Cited

Supreme Court of India:
* 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
* 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
* Re The Delhi Laws Act, AIR (1951) SC 332
* P.K. Chinnasamy v. Govt. of T.N., (1987) 4 SCC 601
* Centre for PIL v. Housing & Urban Development Corpn. Ltd., (2017) 3 SCC 605
* Dinesh v. State of Rajasthan, (2006) 3 SCC 771
* Vimala (K.) v. Veeraswamy (K.), (1991) 2 SCC 375
* Welfare Association, A.R.P., Maharashtra Vs. Ranjit P. Gohil, (2003) 9 SCC 358
* 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
* 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
* Namit Sharma vs. Union of India, (2013) 1 SCC 745
* Union of India vs. Namit Sharma, (2013) 10 SCC 359 (Review)
* 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
* Namit Sharma vs. Union of India, (2013) 1 SCC 745
* Union of India vs. VKC Footsteps India (P) Ltd., 2021 SCC OnLine SC 706

Delhi High Court:
* Wing Commander Shyam Naithani vs. Union of India and Ors., W.P.(C) 6483/2021 & connected matters, 2022 SCC OnLine Del 769
* Cadila Healthcare Ltd. & Anr. vs. CCI & Ors., (2018) SCCOnline Del 11229