• Notification Date: 02-02-2024
• Notification No: N/A

Setback for HUL, Nestle, Patanjali and others as HC upholds GST Anti-profiteering Provisions

The Delhi High Court on Monday upheld the constitutional validity of the anti-profiteering provisions under the Goods and Services Tax (GST) Act, dealing a blow to more than 100 companies, including Hindustan Unilever, Nestle, Johnson & Johnson, Abbott, Patanjali and DLF, which had challenged the provisions as well penalty imposed by the National Anti-profiteering Authority (NAA). 

A bench of acting chief justice Manmohan and Justice Dinesh Kumar held that the GST law is a “consumer-centric” beneficial legislation that eliminates the levy of multiple taxes, removes cascading tax effect and streamlines the credit mechanism by weeding out distortions in the supply chains while ensuring a smooth pass-through and transparent mechanism for levying tax. 

Companies from diverse sectors such as hospitality, fast-moving consumer goods and real estate had challenged the NAA’s order imposing penalty for failing to pass on the commensurate benefit of reduction in the rate of tax or input tax credit to their consumers with interest and the validity of various provisions under the GST law. 

“There cannot be any room for allowing unjust retention of benefit of reduction in rate of tax or benefit of input tax credit with the manufacturer/supplier/distributor,” the court ruled, adding that the provision mandates that a tax foregone has to be passed on as a commensurate reduction in price and has been enacted “in public interest”. 

It said, in a 142-page judgement, that the amounts foregone by the public exchequer in favour of the consumers cannot be appropriated by manufacturers, traders and distributors and to allow them to do so would amount to unjust enrichment. 

The court said the anti-profiteering provisions don't amount to a “price-fixing mechanism” and that no fixed or mathematical formula can be set to determine profiteering. 

The judges observed that there may be cases of arbitrary exercise of power under the anti-profiteering mechanism, “but 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,” they said. 

Tax experts termed the judgement a setback for businesses but said the court upholding factual analysis held out hope. 

“While the high court has held that anti-profiteering provisions are not unconstitutional, it has also observed that computation of the alleged profiteered amount by the authorities may have been incorrect (in the real estate sector, for instance),” said Pratik Jain, partner, PriceWaterhouse & Co LLP, adding that the quantum of the amount to be deposited would be contested in most cases. “Further, the appeal against the order lies in the Supreme Court now,” he said. 

The judgement implies that the quantum of profiteering for the real estate sector will be decided to address the issue of cost escalation and skewed input tax credit situation, said experts. 

"This will ensure that the amount of benefit, if at all available to the homebuyers, will be available only after addressing the issue on merits and removing the possibility of arbitrary exercise of power, thereby ensuring that each homebuyer having an equal square feet area gets an equal benefit,” said Abhishek A Rastogi, founder, Rastogi Chambers. 

Taxation lawyer V Lakshmikumaran said the challenge before the court was also on “various other infirmities in the various orders passed by the NAA” and that it has listed the matter for February 8. “In any case the stay granted has not been vacated. Meanwhile, the issue of validity of the provisions will have to be tested before the Supreme Court,” he said.