2020 (4) TMI 568 - NAPA - GST

Profiteering - restaurant service - allegation that reduction in the rate of GST not passed on - contravention of section 171 of GST Act - HELD THAT - It is clear from the plain reading of Section 171(1) that it deals with two situations one relating to the passing on the benefit of reduction in the rate of tax and the second about the passing on the benefit of the ITC - On the issue of reduction in the tax rate, it is apparent from the DGAP's Report that there has been a reduction in the rate of tax from 18% to 5% w.e.f. 15.11.2017, vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017 in the post GST period. It has been revealed from the DGAP's Report that the ITC which was available to the Respondent during the period July 2017 to October 2017 is 7.39% of the net taxable turnover of restaurant services supplied during the same period. With effect from 15.11.2017, when the GST rate on restaurant service was reduced from 18% to 5%, the ITC was not available to the Respondent. The DGAP in his Report has stated that the Respondent had increased the base prices of different items by more than 7.39% i.e. by more than what was required to offset the impact of denial of ITC, supplied as a part of restaurant services to make up for the denial of ITC post-GST rate reduction and on comparison of pre and post GST rate reduction prices of the items sold in respect of items sold - Accordingly, the quantum of profiteering has been computed to ₹ 7,33,043/- as per Annexure-10 of the DGAP's Report dated 13.09.2019, which is correct and can be relied upon. The profiteered amount is determined as ₹ 7,33,043/- as has been computed in Annexure-10 of the DGAP Report dated 13.09.2019. Accordingly, the Respondent is directed to reduce his prices commensurately in terms of Rule 133 (3) (a) of the above Rules. The Respondent is also directed profiteered by the Respondent as ordered by this Authority is deposited in the CWFs of the Central and the State Government of Maharashtra - File be consigned after completion.

Summary

Issues Involved:
1. Whether the Respondent passed on the commensurate benefit of the GST rate reduction to his customers.
2. Whether there was any violation of Section 171 (1) of the CGST Act, 2017.

Detailed Analysis:

Issue 1: Passing on the Benefit of GST Rate Reduction
The DGAP report indicated that the GST rate on restaurant services was reduced from 18% to 5% effective from 15.11.2017, as per Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017. The Respondent allegedly increased the base prices of his products, thus not passing on the benefit of the GST rate reduction to the customers. The DGAP's investigation covered the period from 15.11.2017 to 31.03.2019 and found that the Respondent had indeed increased base prices by more than the required 7.39% to offset the impact of the denial of ITC. The DGAP calculated the profiteered amount to be ?7,33,043/-, including GST on the profiteered amount.

Issue 2: Violation of Section 171 (1) of the CGST Act, 2017
Section 171(1) mandates that any reduction in the rate of tax or the benefit of ITC must be passed on to the recipient by way of commensurate reduction in prices. The DGAP's report confirmed that the Respondent had not passed on the benefit of the reduced GST rate to his customers. The Respondent's various submissions, including increased costs due to royalty and advertisement charges, inflation, and non-availability of ITC on capital goods, were found irrelevant to the computation of profiteering. The DGAP also clarified that discounts offered by the Respondent were part of his general business practice and not specifically due to the GST rate reduction.

Respondent's Submissions and DGAP's Clarifications:
1. Methodology of Calculation: The Respondent argued that the DGAP's methodology was incorrect, but the DGAP clarified that the computation was based on the discounted price, which was the effective price on which tax was levied.
2. Sub of the Day (SOTD) Pricing: The Respondent claimed that the base price of SOTD was incorrectly mapped, but the DGAP found no invoice or supply document supporting this claim.
3. Royalty and Advertisement Charges: The Respondent contended that his costs increased due to these charges, but the DGAP stated that these were internal agreements and not relevant to the anti-profiteering provisions.
4. Non-Availability of ITC on Capital Goods: The DGAP had already factored in the denial of ITC in the computation, making the Respondent's contention irrelevant.
5. Buy One Get One Offer: The Respondent claimed that the DGAP included profiteering on free items, but the DGAP clarified that the computation was based on transaction value, and discounts were part of the general business practice.
6. Inflation: The Respondent argued that inflation should be considered, but the DGAP maintained that profiteering is calculated based on the benefit of rate reduction, not inflation.
7. Period of Calculation: The Respondent suggested a shorter period for calculating profiteering, but the DGAP found that the violation continued till 31.03.2019, justifying the period of investigation.
8. Right to Trade: The Respondent claimed a violation of Article 19 (1) (g) of the Constitution, but the DGAP and the Authority clarified that the anti-profiteering provisions do not interfere with business decisions but ensure the passing on of tax benefits to consumers.

Conclusion:
The Authority concluded that the Respondent had indeed violated Section 171 (1) of the CGST Act, 2017, by not passing on the benefit of the GST rate reduction to his customers. The profiteered amount was determined to be ?7,33,043/-, and the Respondent was directed to reduce his prices commensurately and deposit the profiteered amount in the Consumer Welfare Funds (CWFs) of the Central and State Government of Maharashtra. The concerned SGST Commissioner was instructed to submit a compliance report within four months.