2023 (8) TMI 102 - CCI - GST

Profiteering - sales prices of the products to all franchises disproportionate to the loss of ITC or not - charging Royalty and Advertisement charges on such increased net taxable sales value from his franchisees - reduction in the rate of GST not passed on - contravention of provisions of Section 171 of the CGST Act 2017 - HELD THAT - On examination of submissions made by the Respondent and as seen from the copy of Agreement between the Franchisee and Franchisor it had been observed that there was no clause that indicated that the Franchisor was fixing prices or that the Franchisor had been supplying the material and had been retaining the ITC. The Franchisee was only supposed to pay the Royalty Charges at 8% and Advertisement Charges at 4.5% as the case might be on the net sales. Upon perusal of the Report of the DGAP we observe that the Respondent was working on a Franchisee-Franchisor agreement and was providing its business model to various operators and he was only collecting Royalty and Advertisement Charges from his Franchisees for selling proprietary products of Subway on the net sales declared by individual Franchisees. The rate of Royalty and Advertisement Charges were mutually agreed with the Franchisee and the Respondent had nothing to do with the individual products sold to the customers. The Franchisee was only supposed to pay the Royalty Charges @ 8% and Advertisement Charges @ 4.5% as the case might be on the net sales. The Respondent did not have any control on the base price offered by his Franchisees to their customers and the amount of Input Tax Credit availed by his Franchisees - Further the consideration for sale of products was not received by the Respondent from his Franchisee and it was retained by the individual Franchisees and accounted for as revenue in their individual books of accounts. It is clear that the Franchisees were free to operate their business and were also liable to pay the taxes and obtain necessary permissions. Since there had been no reduction in the rate of tax in respect of the services i.e. Royalty Service and Advertisement Services provided by the Respondent the provisions of Section 171 of the Act were not applicable with respect to these services - the instant case does not fall under the ambit of Anti-Profiteering provisions of Section 171 of the CGST Act 2017 as there had been no reduction in the rate of tax in respect of the services provided by the Respondent nor he was supplying the various products to the customers. The present proceedings being conducted against the Respondent are dropped.

Summary

Issues Involved:
1. Possible violation of Section 171 of the CGST Act, 2017 by M/s Subway Systems India Pvt. Ltd.
2. Determination of whether the Respondent profiteered by prescribing sales prices disproportionate to the loss of ITC and charging Royalty and Advertisement charges on increased net taxable sales value.
3. Examination of whether the Respondent passed on the benefit to recipients in terms of Section 171 of the CGST Act, 2017.

Issue 1: The National Anti-Profiteering Authority directed the DGAP to examine M/s Subway Systems India Pvt. Ltd. for possible violation of Section 171 of the CGST Act, 2017. The DGAP found that M/s SSIPL may have profiteered by charging royalty and advertisement charges on the increased net taxable sales, leading to further investigation.

Issue 2: The Respondent argued that they did not control the base price offered by franchisees, did not receive consideration for product sales, and only collected royalty and advertisement charges based on net sales. The DGAP found that the Respondent did not fix prices or retain ITC, and franchisees were free to decide prices, concluding that the Respondent did not profiteer.

Issue 3: The DGAP determined that the Respondent was not involved in determining prices for franchisee products and did not restrict franchisees from offering discounts. As there was no reduction in tax rates for royalty and advertisement services, Section 171 of the Act did not apply. Consequently, the proceedings against the Respondent were dropped.

In conclusion, the Commission found that the Respondent did not fall under the Anti-Profiteering provisions of Section 171 of the CGST Act, 2017 due to no reduction in tax rates for services provided, leading to the proceedings against the Respondent being dropped.