HC upholds anti-profiteering clause in GST law; setback for HUL, ITC, Reckitt, Nestle and others

Delhi high court has upheld the constitutional validity of the anti-profiteering clause in the GST law, which mandates companies to pass on the benefit of lower taxes and input tax credit to consumers, as per reports.

The move is a setback for several companies as the National Anti-Profiteering Authority's (NAA) order could not be implemented all these years.

The list of petitioners included FMCG players ranging from Reckitt Benckiser to Hindustan Unilever, ITC, Nestle, P&G and Patanjali in along with Philips, Samsonite, Samsung, Starbucks, J&J and multiple builders and restaurants.

They argued that the provision in the law and the rules based on it were unconstitutional as they were beyond the legislative competence of Parliament. They also argued that they conferred excessive powers on NAA and questioned the absence of specifics of the methodology to determine "profiteering".

According to the government, the provisions were meant for consumer welfare and essentially created a substantive restriction on suppliers appropriating the gains from GST. Amicus curiae Amar Dave told the court that there was no question of any unbridled powers being conferred on NAA, which was entrusted with ensuring compliance. He further said that Section 171 was for consumer welfare and equity.

HC's acting chief justice Manmohan stated, "This court is of the view that the amounts foregone from the public exchequer in favour of consumers cannot be appropriated by the manufacturers, traders, distributors etc. To allow them to do so would amount to unjust enrichment... In the absence of such anti-profiteering provisions, there would be no legal obligation to pass on the benefit of GST regime and, consequently, the intended objective of reducing over-all tax rates and mitigating the cascading effect would not be achieved."

He also ruled that Section 171 was within Parliament's law-making powers and did not delegate any essential legislative function. The court also dismissed the claim by the petitioners that the provisions were in the nature of a price-fixing mechanism.

It, however, held that a "one size fits all approach" formula cannot be prescribed as the facts of each case or industry are not the same. It observed that the methodology adopted in case of real estate companies was flawed and there was no correlation between the turnover and input tax credit.

"It has been clarified by HC that in case parties can satisfy the cost escalation of inputs or other factors when GST rate becomes lower than the existing rate on date of transition, in such genuine cases, anti-profiteering orders passed against parties can be set aside," said tax lawyer RS Sharma.