2021 (1) TMI 1009 - NAPA - GST

Profiteering - supply of restaurant service - Applicant had alleged that the Respondent had increased the base prices of his items and did not pass on the benefit of reduction in the GST rate by way of commensurate reduction in prices - contravention of Section 171 of the CGST Act, 2017 - Penalty - HELD THAT - It is revealed from the record that the Respondent has been operating a total of 133 multiplexes in 18 states and dealing with 1650 items while supplying restaurant services after 15.11.2017. It is also revealed from the plain reading of Section 171 (1) of the CGST Act, 2017 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 case record that there has been a reduction in the rate of tax from 18% to 5% w.e.f. 15.11.2017, on the restaurant service being supplied by the Respondent, vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017 without the benefit of ITC. Therefore, the Respondent is liable to pass on the benefit of tax reduction to his customers in terms of Section 171 (1) of the above Act. It is also apparent that the present investigation has been carried out w.e.f. 15.11.2017 to 30.04.2019. It is also evident that the Respondent has been dealing with a total of 1650 items during the period from 15.11.2017 to 30.06.2019. Upon comparing the average selling prices as per the details submitted by the Respondent for the period from 01.08.2017 to 14.11.2017 and the actual selling prices post rate reduction w.e.f. 15.11.2017 to 30.06.2017 the DGAP has reported that the GST rate of 5% has been charged w.e.f. 15.11.2017. however, the base prices of 1434 products have been increased more than their commensurate prices w.e.f. 15.11.2017 which established that because of the increase in the base prices the cum-tax prices paid by the consumers were not reduced commensurately, inspite of the reduction in the GST rate - While comparing the average pre rate reduction base prices with the post rate reduction actual base prices the DGAP has duly taken in to account the impact of denial of ITC in respect of the restaurant service being supplied by the Respondent as a percentage of the taxable turnover from the outward supply of the products made during the pre-GST rate reduction period by taking into consideration the period from 01.07.2017 to 31.10.2017 and not up to 14.11.2017. It is further revealed from the analysis of the details of item-wise outward taxable supplies made during the period from 15.11.2017 to 31.03.2018 that the Respondent had increased the base prices of the items supplied as a part of restaurant service to make up for the denial of ITC post GST rate reduction. The pre and post GST rate reduction prices of the items sold during the period from 01.08.2017 to 14.11.2017 (Pre-GST rate reduction) and 15.11.2017 to 31.03.2019 (Post-GST rate reduction) have been compared and it has been found that the Respondent has increased the base prices by more than what was required to offset the impact of denial of ITC in respect of 1434 items (out of a total of 1650 items) sold during the above period. Thus, it is apparent that the Respondent has resorted to profiteering as the commensurate benefit of reduction in the rate of tax from 18% to 5% has not been passed on by him. However, there was no profiteering in respect of the remaining items on which there was either no increase in the base prices or the increase in base prices was less or equal to the denial of ITC or these were new products launched post-GST rate reduction. Based on the pre and post-reduction GST rates, the impact of denial of ITC and the details of outward supplies (other than zero-rated, nil rated, and exempted supplies) during the period from 15.11.2017 to 30.04.2019, 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 or the profiteered amount has come to 3,85,30,314/- including the GST on the base profiteered amount. The details of the computation have been given by the DGAP in Annexure-22 of his Report. However, the DGAP vide his Supplementary Report dated 08.10.2020 has partially accepted the objection of the Respondent regarding under-reporting of the eligible ITC allowance - The DGAP has computed the input tax credit as a percentage of the total taxable turnover of the Respondent for the period July 2017 to October 2017 for the reasons cited in paras 26 27 of the DGAP report dated 31.01.2020. Further, with effect from 15.11.2017, Respondent was not allowed to avail ITC in terms of Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017, Therefore, in terms of provisions of Section 16 (2) (a) Respondent was not eligible to take ITC w.e.f. 15.11.2017 on the strength of invoices received post 15.11.2017 when the aforesaid notification debarred the Respondent from ITC availment. As Respondent has received the taxable invoices post 15.11.2017 when he was ineligible to avail ITC in terms of Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017, therefore the same cannot be considered for computation of denial of Input Tax Credit to net turnover ratio. The office of the DGAP has been charged with the responsibility of conducting a detailed investigation to collect the evidence necessary to determine whether both the above benefits have been passed on or not in terms of the provisions of Section 171 of the CGST Act, 2017 and the Rule 129. The above Rule has been framed by the Central Government under Section 164 of the CGST Act, 2017 read with Section 171 (3) which has the approval of the Parliament and all the State Legislatures and of the GST Council which is a constitutional body established under 101st Amendment of the Constitution and also has the approval of the Central Government and the State Governments. There is no provision in the above Act or the Rules which provides that the investigation shall be limited to the products against which complaint has been received. On the contrary, every product on which the rate of tax has been reduced is required to be investigated by the DGAP and report submitted to this Authority to determine whether the above benefits have been passed on as per the provisions of Section 171 of the above Act - The Respondent cannot get away by appropriating the benefit which he is legally bound to pass, on the ground that no complaint has been made in respect of the other products. Moreover, the benefit is not to be paid by him out of his own pocket, since it has been granted from the public exchequer to benefit the common consumers. Therefore, the above claim of the Respondent is not correct and hence the same cannot be accepted. The Respondent is trying to deliberately mislead by claiming that he was required to carry out highly complex and exhaustive mathematical computations for passing on the benefit of tax reduction which he could not do in the absence of the procedure framed under the above Act. However, no such elaborate computation was required to be carried out as the Respondent was to maintain the base price of the product which he was charging as of 14.11.2017 and then add 10.22% of the base price on account of denial of ITC and charge GST @5% w.e.f. 15.11.2017. Instead of doing that he has raised his prices by adding more than 10.22% of the base prices as is evident from the above discussion. It is clear from the above narration of facts and the law that no procedure or elaborate mathematical calculations are required to be prescribed separately for passing on the benefit of tax reduction. 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 a clear cut methodology and procedure to compute the benefit of tax reduction and the profiteered amount. Therefore, the above plea of the Respondent is wrong, and hence, it cannot be accepted. The profiteered amount is determined as ₹ 3,10,56,9391- as has been revised vide the DGAP s Supplementary Report dated 08.10.2020. 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 above are not identifiable, the Respondent is directed to deposit an amount of ₹ 3,10,56,939/- in two equal parts of ₹ 1,55,28,470/- each in the Central Consumer Welfare Fund and the State Consumer Welfare Funds as mentioned in the Table F Revised, as per the provisions of Rule 133 (3) (c) of the CGST Rules 2017, along with interest payable @ 18% to be calculated from the dates on which the above amount was realized by the Respondent from his recipients till the date of its deposit. The above amount of ₹ 3,10,56,939/- shall be deposited, as specified above, within a period of 3 months from the date of passing of this order failing which it shall be recovered by the concerned CGST/SGST Commissioner. 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 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. However, a 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 30.04.2019 when the Respondent had committed the above violation and hence, the penalty prescribed under Section 171 (3A) cannot be imposed on the Respondent retrospectively. Accordingly, notice for the imposition of penalty is not required to be issued to the Respondent.

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: Whether the Respondent has passed on the commensurate benefit of reduction in the rate of tax to his customers.

The Respondent, operating 133 multiplexes in 18 states and dealing with 1650 items, was subject to a reduction in the GST rate from 18% to 5% w.e.f. 15.11.2017, as per Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017. The DGAP's investigation revealed that the Respondent had increased the base prices of 1434 items more than the commensurate amount required to offset the denial of ITC, thus not passing the benefit of tax reduction to the customers. The DGAP computed the ratio of ITC to the net taxable turnover for the period from July 2017 to October 2017, determining it to be 10.22%, which was used to assess the impact of denial of ITC. The profiteered amount was revised to ?3,10,56,939/- based on this computation.

Issue 2: Whether there was any violation of the provisions of Section 171 of the CGST Act, 2017 committed by the Respondent.

The Respondent contended that the DGAP exceeded its jurisdiction by investigating products beyond the complaint's contours and that the investigation was time-barred. However, the DGAP's mandate under Rule 129 of the CGST Rules, 2017, and the Ministry of Finance's Office Order No. 05/Ad.IV/2018, allowed for a detailed investigation of all products affected by the tax rate reduction. The DGAP's investigation was extended as per Notification No. 31/2019-Central Tax dated 28.06.2019, which was applied prospectively to ongoing investigations. The Respondent's arguments regarding the lack of prescribed methodology for computing profiteering and violation of Article 19(1)(g) of the Constitution were found to be without merit, as Section 171(1) of the CGST Act, 2017, provided a clear framework for passing on the benefit of tax reduction and ITC.

Conclusion:

The Respondent was found to have violated the provisions of Section 171(1) of the CGST Act, 2017, by not passing on the commensurate benefit of tax reduction to his customers. The profiteered amount was determined to be ?3,10,56,939/-. The Respondent is directed to deposit this amount in the Central and State Consumer Welfare Funds within three months, along with interest payable at 18% from the date of realization until the date of deposit. The Commissioners of CGST/SGST are directed to monitor compliance and submit a report within four months. No penalty was imposed as the provisions of Section 171(3A) were not in effect during the period of violation.