In a setback to companies including Hindustan Unilever, Nestle and Reckitt Benckiser and others, Delhi High Court on Monday upheld anti-profiteering provisions of GST Laws. With this, orders pronounced by erstwhile National Anti-Profiteering Authority (NAA) will continue to have validity.

Section 171 of the CGST Act deals with anti-profiteering measures and prescribes that any reduction in the rate of tax on supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of a commensurate reduction in prices. Earlier, complaints were to be filed with the NAA. Now, the task is with Competition Commission of India (CCI).

A total of 107 petitions were filed to challenge the constitutional validity of said section and related rules as well as legality of the notices proposing imposition or orders imposing penalty issued by NAA. Petitioner companies are from diverse businesses ranging from hospitality, fast-moving consumer goods (FMCG) to real estate. In its judgment, a division bench comprising acting Chief Justice Manmohan, and Justice Dinesh Kumar Sharma said: “The constitutional validity of Section 171 of Act, 2017 as well as Rules122, 124, 126, 127, 129, 133 and 134 of the Rules, 2017 is upheld.”

The court said it is possible that there may be cases of arbitrary exercise of power under the anti-profiteering mechanism by enlarging the scope of the proceedings beyond the jurisdiction or on account of not considering the genuine basis of variations in other factors such as cost escalations on account of which the reduction stands offset, skewed input credit situations etc. However, the remedy for the same is to set aside such orders on merits. “What will be struck down in such cases will not be the provision itself which invests such power on the concerned authority but the erroneous application of the power,” the bench said.

Constitutional validity

According to Gunjan Prabhakaran, Partner with BDO India, while the High Court has upheld the constitutional validity of the anti-profiteering provisions, it would also be important to see the observations of the High Court on various other legal issues such as period for which the profiteering would need to be determined, requirement of judicial members in the national antiprofiteering authority or the appellate mechanism etc., in addition to the comments on the very method to calculate profiteering itself.

“The High Court judgment would also need to be analysed regarding their finding on various other legal issues, including the method of calculation of profiteering itself,” she said.

Abhishek A Rastogi, Founder of Rastogi Chambers, said that companies have an option of filing an SLP before the Supreme Court against the constitutional validity order in case the quantum of profiteering computation will be detrimental to them.

“While the Delhi High Court has held anti-profiteering provisions as constitutional, the quantum of profiteering has to be decided on merits by the Delhi High Court, on the basis of factors such as cost escalation and skewed input tax credit,” he said.


Court’s Reasonings on Section 171 of CGST Act

-         Mandates tax forgone has to be passed on as a commensurate reduction in prices

-         Falls within law making power of Parliament

-         Lays out a clear legislative policy does not delegate any essential legislative function

-         Not a price fixing mechanism

-         No fixed/uniform method or mathematical formula can be laid down for determining profiteering

-         A statutory provision cannot be struck down on the possibility of abuse