Even after 25 orders have been passed by the National Anti-Profiteering Authority (NAA) there continues to be inconsistency in its approach in dealing with the cases of alleged profiteering from GST rate cuts.
Businesses still await the formulation of standard guidelines for compliance with anti-profiteering provisions under the GST regime. Even after 25 orders have been passed by the National Anti-Profiteering Authority (NAA) there continues to be inconsistency in its approach in dealing with the cases of alleged profiteering from GST rate cuts.
Treatment of commercial discounts
Recently, a distributor of L’oreal was held to have profiteered by maintaining the base prices of certain products despite GST rate-cuts from 28% to 18% with effect from November 15, 2017. The distributor claimed that there was no revision in the base pricing of the products post rate-cuts. During the period immediately prior to the rate revision (i.e. September and October 2017) the base price appeared lower on account of an ongoing special promotional discount from L’oreal.
The NAA rejected the argument on a vague observation that pre-rate revision discounts had no bearing on determination of profiteering and held that such discontinuation of discounts amounted to an increase in the base price and consequently profiteering. In other words, withdrawal of a commercial discount pursuant to a GST rate-cut amounts to profiteering as per the NAA.
One may note that in some of its earlier orders, the NAA held that withdrawal of discounts pursuant to rate-cuts did not amount to profiteering. While the findings of the NAA in the case of L’oreal’s distributor are in stark contrast to its earlier decisions, the NAA does not provide any rationale behind such inconsistency.
Supply chain dynamics
L’oreal’s distributor claimed that it was not benefiting from the rate-cuts as the product prices were controlled by the manufacturer. It also placed on record the fact that its margins remained constant and it was buying goods at higher prices. The NAA observed that the distributor was registered under the GST legislations and was accountable for passing on the benefit of GST rate-cuts to its customers. NAA further opined that these legal obligations could not be ignored on the ground that it was not the manufacturer of the product and did not control its pricing.
The NAA order interprets the anti-profiteering laws to compel the supplier to act in an impossible manner. The Distributor procured the products at the price charged from it by L’oreal and charged the revised tax rate on the supplies post rate reduction. Therefore, there was no window for any additional benefit arising that could be pocketed by the Distributor. In such circumstances, the only way of passing any further benefits to the recipient was to supply the products at a loss. Such an interpretation means that a supplier would have to reduce its existing profit or operate at a loss. This does not appear to be in line with the intention of the legislature in relation to the anti-profiteering provisions. In addition, as there have been multiple cases before the NAA which involve a similar factual matrix of a resultant non-compliance by a distributor/ retailer on account of default on the part of the manufacturer, it is only ordinate that the NAA should also consider the unique supply chain dynamics of a business while addressing the question of its profiteering.
The NAA went on to hold the distributor in prejudice on the grounds of lack of correspondence with L’oreal for decrease in base price of products. This suggests that distributors/ retailers should suo-moto request their supplier manufacturers for downward revision in prices of subject products pursuant to rate-cuts even while not legally mandated to do so.
In most of its recent cases the NAA has concluded the existence of profiteering solely on the basis of a comparative arithmetic analysis of base pricing of products. It appears to consider fundamental legal principles to be subservient to arithmetic calculations. While the NAA has been vehemently insisting in its orders that its mandate does not entail price regulation, it continues to do exactly the opposite.
- By Mekhla Anand, Partner, and Shiladitya Dash, Senior Associate, Cyril Amarchand Mangaldas. All the views expressed are personal.