2020 (4) TMI 569 - NAPA - GST

Profiteering - restaurant service - allegation that reduction in the rate of GST from 18% to 5% w.e.f. 15.11.2017, the Respondent had not passed on the commensurate benefit since he has increased the base prices of his products - contravention of section 171 of CGST Act - Penalty - HELD THAT - It is clear from the plain reading of Section 171 (1) mentioned above 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 was 9.05% 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 9.05% i.e. by more than what was required to offset the impact of denial of ITC, supplied as a part of restaurant service to make up for the denial of ITC post-GST rate reduction. The profiteered amount is determined as ₹ 20,80,087/- as has been computed in Annexure-11 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. Further, since the recipients of the benefit, as determined, are not identifiable, the Respondent is directed to deposit an amount of ₹ 20,80,087/- in two equal parts of ₹ 10,40,043.50/- each in the Central Consumer Welfare Fund and the Maharashtra Consumer Welfare Fund as per the provisions of Rule 133 (3) (c) of the CGST Rules 2017, along with interest payable @ 18% to be calculated starting from the dates on which the above amount was realized by the Respondent from his recipients till the date of its deposit. Penalty - HELD THAT - The Respondent has denied the benefit of tax reduction to the customers in contravention of the provisions of Section 171 (1) of the CGST Act, 2017 and he has thus resorted to profiteering. Hence, he has committed an offence under section 171 (3A) of the CGST Act, 2017 and therefore, he is liable to penal action under the provisions of the above Section - Accordingly, a notice be issued to him directing him to explain why the penalty prescribed under Section 171 (3A) of the above Act read with Rule 133 (3) (d) of the CGST Rules, 2017 should not be imposed on him.

Summary

Issues Involved:
1. Whether the Respondent has passed on the commensurate benefit of reduction in the rate of tax to his customers?
2. Whether there was any violation of the provisions of Section 171 of the CGST Act, 2017 committed by the Respondent?

Detailed Analysis:

Issue 1: Passing on the Benefit of Tax Reduction

The case revolves around the reduction in GST rate from 18% to 5% on restaurant services effective from 15.11.2017, and whether the Respondent passed on this benefit to customers by reducing the prices of his products. The DGAP's investigation revealed that the Respondent increased the base prices of his products more than necessary to offset the impact of the denial of ITC, thus not passing on the commensurate benefit to the customers.

The Respondent argued that the methodology applied by the DGAP was incorrect as it used average base prices from two different periods (01.11.2017 to 14.11.2017 and 01.07.2017 to 31.10.2017) for comparison. The DGAP, however, clarified that the reference base prices were calculated by dividing the total quantity supplied by the total taxable value charged after discount during the specified periods.

The Respondent also contended that the CGST Act and Rules did not prescribe any specific procedure or methodology for calculating profiteering. The Authority, however, pointed out that Section 171(1) of the CGST Act, 2017 itself provides the methodology, stating that any reduction in the rate of tax or benefit of ITC must be passed on to the recipient by way of commensurate reduction in prices. The computation of profiteering is a mathematical exercise based on the reduction in tax rate and existing base prices before such reduction.

The Respondent's argument that the DGAP should have considered the actual base prices excluding discounts was also rejected. The effective price on which tax was levied was the discounted price, and hence, the discounted price was considered for determining the average base price.

Issue 2: Violation of Section 171 of the CGST Act, 2017

The DGAP's report confirmed that the Respondent had increased the base prices of his products by more than what was required to offset the impact of denial of ITC, thereby not passing on the benefit of the reduction in the rate of tax from 18% to 5% to his customers. The profiteered amount was calculated to be ?20,80,087/-, inclusive of GST.

The Respondent's contention that the length of the investigation period was arbitrary was also dismissed. The DGAP investigated the period from 15.11.2017 to 31.03.2019, during which the Respondent did not pass on the benefit of tax reduction, thus violating Section 171 of the CGST Act, 2017 continuously.

The Respondent's argument that the additional burden borne by him as GST was not considered was also rejected. The Authority clarified that the Respondent had not only collected excess base prices but also additional GST on these excess base prices, which was not required to be paid by the customers due to the reduction in the tax rate.

The Respondent's claim that the proceedings violated Article 19(1)(g) of the Constitution of India was also found to be without merit. The Authority and the DGAP do not act as price controllers or regulators but ensure that the benefit of tax reduction is passed on to consumers.

Conclusion:

The Authority directed the Respondent to deposit ?20,80,087/- in two equal parts in the Central Consumer Welfare Fund and the Maharashtra Consumer Welfare Fund, along with interest payable at 18% from the dates the amount was realized till the date of deposit. The Respondent was also directed to reduce his prices commensurately. A notice was issued to the Respondent to explain why the penalty prescribed under Section 171(3A) of the CGST Act, 2017 should not be imposed on him. The Commissioner of SGST Maharashtra was directed to monitor the compliance of this order under the supervision of the DGAP.