2020 (12) TMI 487 - NAPA - GST

Profiteering - Restaurant Services - benefit of reduction in the rate of tax not passed on - contravention of the provisions of Section 171 of the CGST Act, 2017 - penalty - HELD THAT - The Respondent is a company registered under the Companies Act, 1956 and is engaged in the business of operating quick service restaurants under the brand name of Mcdonalds under a franchisee agreement with the multi-national company Mcdonalds India Private Limited. The Respondent is operating about 300 restaurants in the 10 States of Andhra Pradesh, Chhattisgarh, Goa, Gujarat, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Tamilnadu and Telangana. He was selling 1844 products as on 15.11.2017 when the rate of GST on the restaurant services being provided by him was reduced from 18% to 5% by the Central and the State Governments vide Notification No. 26/2017-Central Tax (Rate) dated 14.11.2017 with the stipulation that the Respondent would not be entitled to the benefit of ITC on the above service w.e.f. 15.11.2017. Accordingly, the Respondent was required to pass on the benefit of tax reduction to his recipients as per the provisions of Section 171 of the CGST Act, 2017 and its consequences if he did not pass on the benefit. On the basis of the analysis of the details of the product-wise outward taxable supplies made during the period between 15.11.2017 to31.01.2018, the DGAP had found that the Respondent had increased the base prices of the items supplied by him to neutralise the effect of ITC of 9.11% which was not available to him after the rate reduction w.e.f. 15.11.2017. The DGAP had compared the pre and post GST rate reduction average prices of the items sold during the period between 15.11.2017 to 31.01.2018 and after taking into account the entire quantity of the products sold during the above period, he had found that the Respondent had increased the average output taxable value i.e. the base price by 10.45% to offset the denial of input tax credit of 9.11% as was evident from Annexure-36 of the Report. Therefore, the DGAP had concluded that the Respondent had not passed on the benefit of reduction in the rate of tax from 18% to 5% as he had increased the base prices by more than 9.11% to 100.09% in respect of 1,730 items out of total 1,844 items i.e. 93.82% of the total items supplied by him after 15.11.2017. The DGAP had also stated that on the basis of the pre and post reduction GST rates, the impact of the denial of ITC and the details of the outward supplies made during the period between 15.11.2017 to 31.01.2018, as per the GSTR-I or GSTR-3B Returns of the Respondent, the amount of net higher sale realization due to increase in the base prices of the products, despite the reduction in the GST rate from 18% to 5%, with denial of ITC, the profiteered amount came to Rs. in respect of the above 10 States as per Annexures-37 of the Report. Accordingly, after careful consideration of the Report of the DGAP and the submissions of the Respondent, this Authority had held the Respondent liable for profiteering under Section 171 (1) of the above Act and directed him to deposit the profiteered amount vide order dated 16.11.2018. The time limit prescribed under Rule 133 (1) is not mandatory and it is only directory. Therefore, the contention of the Respondent that Notification No. 31/2019-Central Tax dated 28 June 2019 which extended time from 3 months to 6 months by amending the Rule 133 (1) would become redundant is untenable. Also, no elaborate mathematical calculations are required to be prescribed separately for passing on the benefit of tax reduction and computation of the profiteered amount. This Authority was under no obligation to provide the same to the Respondent. The Respondent cannot deny the benefit of tax reduction to his customers on the above ground and enrich himself at the expense of his buyers as Section 171 provides clear cut methodology and procedure to compute the benefit of tax reduction and the profiteered amount. The Respondent cannot claim violation of Article 14 on the ground that he has not been allowed to include his costs in the prices on the date of reduction in the rate of tax as such a claim would be against the provisions of Section 171 (1). The Respondent had enough time from 01.07.2017 to 14.11.2017 to increase his prices due to increase in his cost however, sudden increase in his cost on 15.11.2017 is a deliberate attempt not to pass on the benefit of tax reduction and appropriate the amount of benefit. Therefore, the above contention of the Respondent is not maintainable. There are several statutory bodies which exercise quasi-judicial functions but they are not required to be composed of Judicial Members. There is no Judicial Member in the SEBI which has been constituted under the Securities and Exchange Board of India Act, 1992. Neither the statute nor any decision of the Court requires the SEBI to be composed of a Judicial Member simply because it also performs quasi-judicial functions under the Act apart from its other roles - the TRAI which also performs quasi-judicial functions has been constituted under the Telecom Regulatory Authority Act, 1997 but does not have a Judicial Member. Section 3 of the said Act provides for the composition of the Authority. Again, the Medical Council of India has been constituted under the Indian Medical Council Act, 1956. The various disciplinary powers which it exercises under the Act can be said to be quasi-judicial in nature but it does not require a Judicial Member in its Council. The constitution and composition of the Council is provided in Section 3 of the said Act. The Institute of Chartered Accountants of India has been constituted under the Chartered Accountants Act, 1949. The ICAI also exercises quasi-judicial functions over its registered members and can pass orders which have far reaching consequences affecting the rights of Chartered Accountants but even its composition does not require a Judicial Member s presence. Its composition is provided in Section 9(2) of the above Act and the same does not include a mandatory Judicial Member. Similarly, the Assessing Officers, Commissioners of Appeal under the Income Tax Act, 1961 and the CGST Act, 2017, the Authorities on Advance Rulings under both the above Acts and the Dispute Resolution Panel under the Income Tax Act, 1961 all perform quasi- judicial functions but there is no requirement that such persons who must be possessing either a law degree or have had judicial experience. Such a requirement is not only impractical but would also render several statutory authorities unworkable - it can be concluded that this Authority has not having replaced any Courts, cannot be equated to a Court or a Tribunal and hence the mandate of having a Judicial Member cannot be said to apply to this Authority. The benefits of tax reduction and ITC are to be passed on by each registered person by commensurate reduction in prices on each supply to every recipient and this Authority is empowered to examine whether these benefits have been passed on or not. To assist this Authority while making such examination an investigating agency designated as the DGAP has been created under Rule 129 of the CGST Rules, 2017 to conduct detailed investigation and submit Report to this Authority under Rule 129 (6) to determine whether the above benefits have been passed or not in terms of Section 171 (1) and Rule 133 (1) of the above Rules. The Respondent has further stated that the DGAP has wrongly computed the amount of profiteering. The Respondent has computed the net incremental revenue as 9.43% on the Restaurant service by comparing the revenue at the pre rate change prices and the post rate change prices after reducing the incremental costs from it. In this regard it can be noted that in case the incremental revenue is taken to be 9.43% then it is more than the denial of ITC of 9.11% and hence the Respondent has profit margin of 0.32% as per his own admission which proves that he has profiteered to the extent of 0.32%. Therefore, the Respondent cannot claim that he was not required to pass on the benefit of tax reduction. Power to frame methodology and procedure is generally and widely available to all the judicial, quasi-judicial and other statutory bodies and no favour has been shown to this Authority by granting it power to frame its own methodology and procedure under Rule 126. Such a power has been conferred on the GST Tribunal under Section 111 (1) of the CGST Act, 2017 and the Competition Commission under Section 36 of the Competition Act, 2002. This Authority has similarly framed its methodology and procedure under Rule 126 vide Notification dated 28.03.2018. The Respondent does not have the power of legislature to frame the methodology and procedure and hence any such methodology and procedure suggested by him cannot be accepted being illogical, arbitrary, inequitable and being ultra vires of Section 171 and Article 14 of the Constitution. The Respondent had wrongly claimed that he had passed on the benefit at the entity level whereas the evidence on record shows otherwise. The Respondent is liable to pass on the benefit of GST rate reduction from 18% to 5% with denial of benefit of ITC, as was notified by the Central and the State Governments vide Notification No. 41/2017-Central tax (Rate) dated 14.11.2017 w.e.f. 15.11.2017. It is also established that the Respondent has not passed on the benefit of above tax reduction to his customers in terms of Section 171 (1) w.e.f. 15.11.2017 to 31.01.2018. On the basis of the pre rate reduction GST rate of 18% and the post rate reduction GST rate of 5% with denial of ITC of 9.11% of the turnover and the details of the product wise supplies made during the period from 15.11.2017 to 31.01.2018, as have been supplied by the Respondent himself, the amount of net higher sales realization due to increase in the base prices of the impacted products after comparing the average pre and post rate reduction prices of the products, despite the reduction in the GST rate from 18% to 5% or the profiteered amount is determined as ₹ 7,49.27,786/- as per the provisions of Section 171(1) (2) of the CGST Act, 2017 read with Rule 133 (1) of the CGST Rules, 2017. Penalty - HELD THAT - The Respondent has denied benefit of rate reduction to the buyers of his products 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 for violation of the provisions of Section 171 (1) during the period from 15.11.2017 to 31.01.2018 and therefore, he is apparently liable for imposition of penalty under the provisions of Section 171 (3A) of the above Act. However, perusal of the provisions of Section 171 (3A) under which penalty has been prescribed for the above violation shows that it has been inserted in the CGST Act, 2017 w.e.f. 01.01 2020 vide Section 112 of the Finance Act, 2019 and it was not in operation during the period from 15.11 2017 to 31.01.2018 when the Respondent had committed the above violation and hence, the penalty prescribed under Section 171 (3A) cannot be imposed on the Respondent retrospectively - notice for imposition of penalty is not required to be issued to the Respondents.

Summary

Issues Involved:
1. Whether the Respondent has passed on the benefit of tax reduction to his customers w.e.f. 15.11.2017 as per the provisions of Section 171 (1) of the CGST Act, 2017.
2. The quantum of the profiteered amount as per the provisions of Section 171 (1) read with the Explanation attached to Section 171.
3. Whether the Respondent is liable to the penalty prescribed under Section 171 (3A).

Detailed Analysis:

Issue 1: Passing on the Benefit of Tax Reduction
The Applicants alleged that the Respondent did not reduce prices after the GST rate on restaurant services was reduced from 18% to 5% w.e.f. 15.11.2017. The Respondent increased the base prices of products, thus maintaining or increasing the final price paid by customers. The DGAP's investigation confirmed that the Respondent increased the base prices of 1,774 out of 1,844 products (96.20%), thereby denying the benefit of tax reduction to customers. The Respondent argued that the increase in prices was due to the denial of Input Tax Credit (ITC) and other increased costs. However, the DGAP found that the average base price increase of 10.45% was more than the denial of ITC (9.11%), indicating profiteering.

Issue 2: Quantum of Profiteered Amount
The DGAP calculated the profiteered amount by comparing the pre and post GST rate reduction prices of products sold during the period from 15.11.2017 to 31.01.2018. The total profiteered amount was determined to be ?7,49,27,786. The Respondent's argument that the profiteered amount should be reduced by the GST already deposited was rejected, as the excess GST collected was part of the profiteered amount. The Respondent's claim of increased costs was also not accepted, as the methodology for passing on the benefit of tax reduction does not consider such costs.

Issue 3: Liability for Penalty
The Respondent committed an offence by violating Section 171 (1) during the period from 15.11.2017 to 31.01.2018. However, the penalty provisions under Section 171 (3A) were inserted w.e.f. 01.01.2020 and cannot be applied retrospectively. Therefore, no penalty was imposed on the Respondent.

Conclusion:
The Respondent was found to have denied the benefit of GST rate reduction to customers by increasing base prices and maintaining or increasing the final price paid by customers. The total profiteered amount was determined to be ?7,49,27,786, which the Respondent was directed to deposit in the Consumer Welfare Funds of the Central and State Governments along with 18% interest. The Respondent was also directed to reduce prices commensurately. No penalty was imposed due to the retrospective application of the penalty provisions.