Johnson & Johnson Pvt Ltd, vs Union Of India & Ors. on 29 January, 2024

udgment Summary: Johnson & Johnson Pvt Ltd, vs Union Of India & Ors. (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 there might be instances of arbitrary exercise of power by the National Anti-Profiteering Authority (NAA) in specific cases, such instances would lead to setting aside those individual orders on their merits, rather than invalidating the underlying statutory provisions themselves.

2. Core Issue
The central issue was the constitutional validity of the anti-profiteering provisions (Section 171 of the CGST Act and its related Rules) on grounds including:
* Lack of legislative competence of Parliament.
* Excessive delegation of essential legislative functions.
* Violation of fundamental rights (Article 14, 19(1)(g), 300A) due to being a price-fixing mechanism, lack of clear methodology, and indefinite timeframes.
* Procedural infirmities in the constitution and functioning of the NAA (e.g., absence of judicial members, lack of appeal, mandatory vs. directory timelines, scope of investigation, retrospective application of penalties).

3. Key Facts
* Numerous writ petitions were filed by companies across diverse sectors (hospitality, Fast-Moving Consumer Goods (FMCG), real estate) challenging the anti-profiteering notices, orders, and penalties issued by the National Anti-Profiteering Authority (NAA) and Director General of Anti-Profiteering (DGAP).
* The petitioners were directed by NAA to pass on the commensurate benefit of reduction in tax rate or Input Tax Credit (ITC) to consumers, along with interest and sometimes penalties.
* The CGST Act, 2017 aimed to simplify indirect taxation, eliminate cascading tax effects, and ensure that tax benefits flow to consumers.
* The anti-profiteering provisions (Section 171 and related Rules) were introduced to prevent suppliers from appropriating these benefits themselves.

4. Arguments

a) Taxpayer (Petitioners)
* Legislative Competence: Section 171 and Rules exceed Parliament's power under Article 246A; they are a tax/financial exaction without specific statutory authorization, which cannot be done via subordinate legislation.
* Excessive Delegation: The provisions suffer from excessive delegation as essential legislative functions (determining methodology for profiteering) are delegated to the Government/NAA without sufficient guidelines. The term "commensurate" is vague and undefined.
* Price Fixing: Section 171 operates as a price-fixing mechanism, violating Articles 19(1)(g) and 300A, as it mandates price adjustments solely based on tax/ITC changes, ignoring other commercial factors (e.g., input costs, demand-supply dynamics).
* Indefinite Period: The absence of a fixed time period for which reduced prices must be maintained makes the provision arbitrary and unreasonable.
* Flawed/Inconsistent Methodology: NAA/DGAP apply inconsistent methodologies (e.g., for real estate, varying ITC to turnover ratios; for FMCG, difficulty in reducing MRP due to rounding off rules in Legal Metrology Act, leading to grammage changes not being consistently accepted).
* Lack of Appeal: Absence of a statutory appellate mechanism against NAA orders signifies lack of judicial oversight.
* Composition of NAA: Rule 122 is illegal and void due to the absence of a judicial member in NAA, given its quasi-judicial functions, violating Article 50.
* Casting Vote: Rule 134(2) granting the Chairman a casting vote is unconstitutional.
* Limitation: DGAP/NAA reports and orders were allegedly barred by limitation as specified in Rules 129(6) and 133.
* Scope of Investigation: DGAP expanded investigations beyond the scope of initial complaints without specific statutory authority, particularly before the introduction of Rule 133(5).
* Penalty/Interest: Levy of penalty and interest under Rules 127 and 133 was ultra vires, as there was no substantive provision in the Act authorizing them prior to Section 171(3A)'s insertion (which is prospective).
* Pre-GST Comparison: Section 171 refers only to GST rate reductions/ITC and does not permit comparison with a "basket of distinct indirect taxes" from the pre-GST regime, which is impossible due to varied state-level taxes.
* Sale of Goods Act: Section 64A of the Sale of Goods Act allows parties to freely agree on price in contracts made after tax reduction, implying Section 171 overrides contractual freedom.
* NAA Constitution: NAA was constituted by an administrative order, not a gazetted notification, violating Section 171(2) read with Section 166.

b) Revenue (Respondents) & Amicus Curiae
* Legislative Competence: Section 171 is not a taxing provision but a consumer welfare measure to ensure that benefits of tax reduction/ITC reach consumers, aligning with Articles 38, 39(b), and 39(c) of the Constitution. It falls within Parliament's power to make laws "with respect to" GST under Article 246A, covering ancillary and incidental matters.
* No Excessive Delegation: Section 171 clearly outlines the legislative policy: "commensurate reduction in prices." The term "commensurate" has a definite meaning. The minutiae of methodology can be delegated to rules/authority, and Rule 126 validly empowers NAA to determine it case-by-case.
* Not Price Fixing: Section 171 only addresses the indirect-tax component of price, not overall price fixation. Suppliers retain freedom to set base prices based on commercial factors, as long as tax benefits are passed on. The provision applies irrespective of the base price and does not regulate profits.
* No Indefinite Period: It is inherent to the nature of the Act that the reduced price should apply as long as the tax reduction or ITC benefit persists, making a fixed timeframe impractical and undesirable.
* Methodology: No uniform mathematical formula is feasible due to diverse industry and product specifics. NAA's "Methodology and Procedure, 2018" and case-by-case approach are appropriate. Legal Metrology Rules provide for rounding off MRPs, addressing the FMCG industry's concerns.
* Appellate Mechanism: Right to appeal is statutory, not inherent. Absence of a statutory appeal does not invalidate the provisions. NAA orders are subject to judicial review under Article 226 of the Constitution.
* Composition of NAA: NAA performs fact-finding, quasi-judicial functions that do not replace or supplant the High Court's judicial power. Thus, a judicial member is not a constitutional requirement.
* Casting Vote: A casting vote for the Chairperson in case of a tie is a common and reasonable practice in statutory bodies.
* NAA Constitution: NAA was duly constituted by a gazetted notification (Rule 122 via Notification No. 3/2017-Central Tax) and laid before Parliament as required.
* Timelines Directory: Timelines for DGAP/NAA reports are directory, not mandatory, to avoid prejudicing consumers if delays occur due to no fault of theirs.
* Scope of Investigation: Section 171 ("any supply") and Rule 129(2) are broadly worded, allowing DGAP to expand the investigation beyond the initial complaint to fulfill the consumer welfare objective.
* Penalty/Interest: Section 171 (implicitly) and Section 164 (explicitly) empower the government to prescribe penalties and interest through rules for deterrence and to prevent unjust enrichment. Penalty notices issued prior to Section 171(3A) coming into force have been withdrawn, making that specific issue infructuous.
* GST on Profiteered Amount: GST collected on the additional realization (due to non-reduction of prices) is rightly included in the profiteered amount, as it represents an unjustified collection from the consumer.
* Pre-GST Comparison Valid: The very objective of GST was to subsume multiple taxes. Comparing pre-GST tax burden (basket of indirect taxes) with post-GST rates is essential to measure the benefit passed on.
* Section 64A Sale of Goods Act irrelevant: Section 171 imposes a positive statutory obligation to reduce price, which cannot be circumvented by contractual terms or the discretionary nature of Section 64A.
* Possibility of Abuse: Legislation cannot be struck down merely on the hypothetical possibility of abuse of power; the presumption is that power will be exercised fairly.

5. Court’s Reasoning
* Presumption of Constitutionality: The Court reiterated that there's a strong presumption in favor of the constitutionality of enactments, especially economic/tax laws, which are viewed with greater latitude.
* Purpose of GST & Section 171: GST is a consumer-centric law designed to eliminate cascading taxes and reduce tax burdens. Section 171 is crucial for this, ensuring that benefits of tax reduction/ITC are genuinely passed to consumers, preventing unjust enrichment. It serves a social welfare objective aligned with Directive Principles (Articles 38, 39(b), (c)).
* Legislative Competence: Article 246A grants Parliament broad power to legislate "with respect to" GST, which includes ancillary and incidental matters like anti-profiteering. Section 171 is not a taxing provision but a regulatory measure, hence arguments based on taxing powers are inapplicable.
* No Excessive Delegation: Section 171 clearly lays down the legislative policy: "commensurate reduction in prices" to pass on tax/ITC benefits. "Commensurate" is a clear and understood term. The power granted to NAA (Rule 126) to determine methodology is for working out details within this policy and is not an essential legislative function. Parliament retains control over rules (Section 166).
* Not Price Fixing: Section 171 is not a price-fixing mechanism. It only pertains to the tax component of the price. Suppliers are free to adjust base prices due to commercial factors, but any reduction in tax/ITC must be commensurately passed on. This "commensurate reduction" is a rebuttable presumption, meaning suppliers must provide cogent justification for not reducing prices by that amount.
* Foreign Laws: Comparisons to Australian and Malaysian anti-profiteering laws were dismissed as those laws are primarily price control mechanisms, unlike Section 171 which focuses on ensuring tax benefits are passed on.
* Methodology: A fixed/uniform methodology is impractical due to varied industry specifics. NAA has the flexibility (Rule 126) to determine appropriate methods on a case-by-case basis. For real estate, the Court criticized the "ITC to turnover ratio" method as flawed, directing that total savings for a project should be divided by total area to ensure equitable benefit distribution per square foot.
* Mode of Benefit Transfer: The Legislature has the prerogative to mandate how benefits are passed. Section 171 explicitly requires "commensurate reduction in prices," disallowing indirect methods like increased grammage, discounts, or cross-subsidization as the sole means. The "legal impossibility" argument for FMCG due to MRP rounding off was rejected, citing Legal Metrology Rules.
* No Fixed Time Period: Not fixing a time period for price reduction is appropriate given the dynamic nature of tax benefits; the obligation persists as long as the tax reduction or ITC benefit exists.
* Section 64A of Sale of Goods Act: This provision is irrelevant as Section 171 imposes a positive statutory obligation on suppliers, distinct from a contractual discretion.
* Possibility of Abuse: The mere possibility of abuse of statutory power is not a ground to strike down a provision as unconstitutional.
* Pre-GST Comparison: To fulfill the GST objective of subsuming multiple indirect taxes and reducing the overall tax burden, comparing the pre-GST "basket of taxes" with post-GST rates is necessary and valid.
* No Vested Right of Appeal: The right to appeal is a creature of statute. Its absence does not render the law unconstitutional, especially when orders are subject to judicial review under Article 226.
* Composition of NAA: NAA's functions are primarily fact-finding and technical, not those traditionally exercised by courts. Therefore, the absence of a judicial member does not violate constitutional principles.
* Independence of NAA: Rule 124 ensures independence by requiring selection committee recommendations from the GST Council and termination approvals from the Council's Chairman.
* Interest and Penalty: Sections 171 (implicitly) and 164 (explicitly) provide sufficient power to frame rules for imposing interest and penalties, which act as deterrents against profiteering. The issue of retrospective penalty prior to Section 171(3A) was deemed infructuous as NAA had withdrawn such proceedings.
* GST on Profiteered Amount: Including GST collected on the additional realized amount in the profiteered amount is correct, as it represents an unlawful collection contrary to the government's intent.
* Timelines Directory: Time limits for DGAP reports (Rule 129(6)) are directory, not mandatory, as no consequences are specified for non-compliance, and strict adherence would undermine the consumer welfare objective.
* Expanded Scope of Investigation: The broad wording of Section 171 and Rule 129(2) ("any supply") permits DGAP to expand investigations beyond the initial complaint to fully achieve the anti-profiteering objective.

6. Statutory References
* Central Goods and Services Tax Act, 2017: Section 171, 171(1), 171(2), 171(3), 171(3A), 2(80), 2(108), 2(62), 2(63), 9, 112, 122, 164, 166.
* Central Goods and Services Tax Rules, 2017: Rules 122, 124, 126, 127, 129, 129(6), 133, 133(1), 133(3), 133(3)(b), 133(3)(d), 133(4), 133(5), 134, 134(2).
* Constitution of India: Articles 14, 19(1)(g), 38, 38(1), 39(b), 39(c), 50, 77, 226, 245, 246, 246A, 254, 279A, 300A, Seventh Schedule.
* Sale of Goods Act, 1930: Section 64A.
* Legal Metrology Act, 2009: (General reference).
* Legal Metrology (Packaged Commodities) Rules, 2011: Rules 2(m), 6(1)(e).
* Customs Tariff Act, 1975: Section 9A.
* Competition Act, 2002: Section 19(3).
* Finance Act, 2019: Section 112.
* Finance Act, 2017: Sections 184, 186(2).
* Securities and Exchange Board of India Act, 1992: Section 4(1).

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
* 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, 2015 (326) E.L.T. 209 (SC) (also (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]
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* 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
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