The Hindustan Unilever Limited ("HUL") saga, long perceived as an aberration in the anti-profiteering jurisprudence, now stands as an exposition of the enigma that comprise the anti-profiteering provisions. The National Anti-Profiteering Authority ("NAA") recently fastened a liability of INR 383.36 crore on HUL on account of profiteering.

This liability comes on the heels of HUL's decision to voluntarily deposit INR 160.23 crore in the Consumer Welfare Fund, even before any formal investigation was initiated against them. This decision by HUL had incidentally prompted an amendment in the law to accept such payments.

In addition to confirming the allegations of profiteering, the NAA has also directed further investigations into subsequent time periods (the current order is limited to the period between November 15, 2017 to February 28, 2018) and ordered initiation of penalty proceedings.

While the Delhi High Court has granted a stay on any coercive recovery proceedings against HUL, the debate on deployment of anti-profiteering as an anti-inflationary measure has itself escalated. The HUL order embodies the divergence between the NAA and the assessees on a number of issues such as:

1. Lack of clear guidelines - methodology for calculation of commensurate benefit

The NAA self admittedly is only mandated to 'determine' and not 'prescribe' the methodology for calculating the commensurate reduction in prices to be passed on to the recipients. At a conceptual level, this does sound rather rational, as a definite set of guidelines which work for one sector could spell disaster for another sector. However, in the absence of any specific methodology, there also needs to be an acknowledgement of the varied interpretations that could be adopted.

The order, like all its precedents, completely disregards the alternate computations proposed by HUL and continues to insist that the benefits are required to be passed at a Stock Keeping Unit ("SKU") level. Needless to state, the figures may present a different story when viewed at an entity or category or even supply chain level.

Similarly, the dispute on alternate approaches to pass the commensurate benefit instead of price reduction still lingers. The order holds that increase in grammage, though not an acceptable manner of passing the benefit, is being considered for once, since the law was at a formative stage. However, going forward HUL is mandated to necessarily adhere to price reduction in order to comply with anti-profiteering provisions.

Another remarkable point is that the NAA has failed to distinguish between the concept of business 'profit' and 'profiteering'. In the instant case, NAA has held that HUL by collecting the benefit accrued due to the reduction in tax rates from its distributors and modern retailers, prevented them from passing the benefit to the end customer. Notably, the NAA in a previous order1, disregarded this very argument raised by a HUL distributor and upheld the liability on account of profiteering, irrespective of HUL's actions. This could be a clear case of double taxation, wherein both the distributors as well as HUL have been targeted for the same set of transactions, thereby violating basic tenets of taxation law.

The lack of clarity on computation mechanism has also led to the NAA adopting inconsistent stands that run contrary to its own analysis. For example, on one hand the order maintains that the commensurate benefit is required to be passed on at SKU level, on the other hand entity level profits have been taken into account to establish profiteering allegations against HUL.

2. Timelines for passing the commensurate benefit

The NAA continues to maintain that the price reduction should be done with immediate effect. However, it has no recommendations on how to achieve this in the absence of enough preparation time or the complex supply chain models followed by most businesses. Typically businesses in the Fast Moving Consumer Goods (FMCG) space require lead time ranging from 60 to 120 days to effect the granular changes pertaining to input tax credit in particular. This order continues to disregard such business exigencies.

Another concern on the aspect of timeline is the extension of the investigation beyond February 2018. It suggests that the same prices have to be maintained for an indefinite period of time, which in itself is contrary to market dynamics.

3. Maximum Retail Price ("MRP") reduction mandatory to ensure compliance

The order has not considered the selling price and discounts offered by HUL to its recipients, i.e. distributors and retailers and concentrated on analysing whether there was reduction in MRP to ensure compliance with anti-profiteering provisions. While the legal provisions are clear that the benefit is required to be passed on to the 'recipient' of a supply, there is no rationale behind NAA's insistence of MRP reduction to guarantee conformity by an assessee.

4. Conflicting with Legal Metrology laws

For HUL as well as other industry players, it has been quite a task to strike a harmonious balance between the anti-profiteering provisions and the Legal Metrology laws. Going by NAA's interpretation till now, every tax reduction/increase in credit is to be reflected through a price decrease. By adopting this interpretation, many product prices would need to be altered by less than 50 paise. The Legal Metrology laws mandate rounding of amounts less than 50 paise to the lower rupee. In such a scenario, it is impossible to effectively comply with the anti-profiteering mandate and Legal Metrology laws simultaneously. However, the order discounts this concern being faced by businesses completely.

5. Impact of area based incentives not considered

The loss of refund to HUL in light of the withdrawal of area specific fiscal incentives have not been appropriately appreciated while computing the profiteering amount. It is evident from the order that the requisite calculations along with relevant figures and information in this regard was duly shared by HUL; yet, the NAA concluded that there was no real loss to HUL due to the withdrawal of area based Excise Duty benefit. As a closing remark to this issue, the order also subtly mentions that any loss attributable to withdrawal of area based incentives was a localized issue and should not impact product prices, which remain constant at a pan-India level. Therefore, even though the NAA acknowledged that the loss of area based incentive may have negatively impacted HUL to some extent, it refused to give due benefit to HUL for the same. Interestingly, this line of argument by the NAA, may potentially create a case for State level compliance of anti-profiteering provisions rather than consolidated approach at an entity level.

6. Total amount of transitional credit carried forward considered profiteered

The order also delves into a previously unexplored territory of the obligation of passing on the benefit accrued from transitional credit and whether the same was passed to its recipients, in compliance of anti-profiteering provisions. Ideally since this issue was being debated for the first time, emphasis should have been to factually verify and establish beyond any reasonable doubt, that the benefit of transitional credit was indeed availed by HUL and thereafter not passed to the recipients. On the contrary, the NAA without examining fundamental arguments raised by HUL such as the incorrect time-period being evaluated, without deep diving into the issue and without proper factual veracity, added the entire amount of INR 76.06 crore (balance of transitional credit carried forward) to HUL's profiteering liability.

It is alarming how the HUL order is a detailed arithmetical treatise, focussing solely on recovery of taxes without due regard to legislative intent or interpretation. Multiple representations before the Government and the NAA by the industry at large as well as individual players, have only received poised silence. It would now be interesting to observe whether the judiciary through its intervention will be able to fill in the legislative gaps left by the Government and bring some relief against the tyrannical dictum of the NAA.


1. Sh Pawan Sharma v. Sharma Trading Co, Case No. 6/2018 dated September 7, 2018 (TS-419-NAA-2018-NT)

All the views expressed are original.

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