Opinion | Inconsistency in anti-profiteering orders is cause for concern

Mekhla Anand and Shiladitya Dash

On December 7, 2018, Hardcastle Restaurants challenged an order of the National Anti-profiteering Authority (NAA) before the Bombay High Court — this once again brings forth the minefield of issues surrounding anti-profiteering provisions.

On November 16, 2018, the NAA had held Hardcastle, a franchisee of the fast food chain McDonald’s, guilty of profiteering Rs7.50 crore (excluding penalty) as it maintained its product prices despite GST rate reduction from 18% to 5%. While the period under challenge was till January 31, 2018, the NAA order directed further investigations for the period thereafter.

At the core of the challenge to anti-profiteering provisions are the following concerns:

Lack of Methodology: The NAA for the first time admitted the lack of a broad framework/guideline for determining commensurate price reduction. While claiming that it was open to considering the approach followed by individual suppliers, it rejected Hardcastle’s approach which was based on the principles laid down in NAA’s previous orders. Therefore, while there are no statutory guidelines governing the determination of profiteering, one cannot rely on the principles enunciated by NAA in its earlier orders to ensure compliance with anti-profiteering provisions.

Input Tax Credit (ITC): Hardcastle had claimed that it was unable to avail ITC pertaining to period prior to the GST rate-cuts as it had not received invoices for the corresponding supplies. This cost had to be taken into consideration while computing profiteering. The NAA observed that the increased cost was due to Hardcastle’s lack of prudence in making necessary provisions to avoid such loss. It held that costs on such account cannot be factored into the base pricing of Hardcastle’s products on the ground that it was not entitled to such ITC.

It must be noted that under GST legislations the receipt of invoices pertaining to supplies is a pre-requisite for availing ITC of such supplies. The NAA failed to grasp that there was no way for Hardcastle to foresee the rate-cut to take preemptive steps towards safeguarding its ITC entitlement. In addition, the substantive rights of Hardcastle to avail the ITC accrued prior to the rate revision. Such entitlement ought to have been allowed to Hardcastle even after the rate-cut.

Alternatively, Hardcastle ought to have been allowed to mitigate such costs arising pursuant to an abrupt change in law. Additional factors such as market conditions, rising of input costs, increase in expenditure on electricity, fuel, rent, royalty, commissions, etc., were also factored into such increase. Hardcastle relied on a previous NAA order in the case of KRBL Limited wherein the NAA held that fluctuations in production costs influenced by market conditions were to be considered while determining profiteering.

However, the NAA dismissed Hardcastle’s contention as untenable, and noted that the anti-profiteering provisions only mandate a reduction in the value of products pursuant to a rate-cut or increase in the availability of ITC to the supplier.

Also, contrary to its previous orders, the NAA noted that issues relating to market conditions are not required to be taken into consideration while determining the profiteered amount. Accordingly, a price reduction is mandatory pursuant to rate-cuts, irrespective of any extraneous factors influencing pricing of products at the said point of time. Therefore, even where market factors might be inflating the cost of production, businesses would be forced to reduce their product prices and incur losses to comply with anti-profiteering provisions. This may amount to the curtailment of the right to free trade.

Timeline for Price Increase: The NAA also observed that the price increase on the eve of GST rate reduction reflects Hardcastle’s disregard towards the intent of the anti-profiteering provisions. Consequently, one may deduce that while an increase in base pricing of products is not taboo under the anti-profiteering regulations, the timing of such an upward revision is crucial in determining the intent of profiteering. Therefore, any inflation in pricing ought to be undertaken only prior to or after the elapse of a reasonable time, from the date of such change in law. However, an indication as to what such reasonable timeline might be is missing.

To conclude, the NAA order suggests that it is attempting to shift the burden of its duty of notifying a methodology for computation of commensurate reduction in prices to the taxpayers. While donning a façade for collaborative approach by welcoming the supplier’s point of view, the NAA dismissed Hardcastle’s pricing methodology which was based on guidelines and observations emanating from its prior orders. The lack of homogeneity in the NAA orders and reliance on logical and legal principles infringe the basic fundamental rights of taxpayers and is disruptive for businesses.

Hardcastle’s challenge has a counterpart in the Delhi High Court where interim relief was granted to Pyramid Infratech by staying operation of the NAA order. Clearly, this is the beginning of a storm of litigation waiting to make its way to the higher judiciary.

Mekhla Anand, a partner, heads the indirect tax practice and Shiladitya Dash is senior associate at Cyril Amarchand Mangaldas. Views are personal.

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