McDonald’s: Fast Food, Fast Profits (Part-1)

[Dr. Sanjiv Agarwal]

In over a dozen of complaints disposed off  by the National Anti-profiteering Authority (NAA) so far, we have witnessed that of late, NAA has started confirming allegations against the business entities in relation to more than normal profiteering where tax related benefit was not passed to the customers.

In yet another case, McDonalds’ has fallen prey to NAA clutches for profiteering at the cost of customers and not passing the benefit of Input Tax Credit (ITC) and tax rate reduction or its products. The NAA vide its 42 page long order dated 16^th November, 2018 came to the conclusion that M/s Hardcastle Restaurants Pvt. Ltd. Mumbai, who were operating quick service restaurants under the brand of ‘McDonalds’ had indulged in profiteering, contravening the provisions of section 171 of the CGST Act, 2017. [ SHRI RAVI CHARAYA, SHRI CHANDRANATH SARKAR, SHRI SHREEPAD SHENDE, SHRI JAYASANKAR VENKATRAMANI VERSUS M/S HARDCASTLE RESTAURANTS PVT. LTD. (2018) 11 TMI 1073 (NAA)].

The NAA determined the amount of profiteering done to the tune of over ₹ 7 crore (Rs. 7,49,27,786/-)  which is the quantum of denial of benefit due to the reduction in the rate of tax and the benefit of ITC availed by the company which was required to be passed on to the customers or the amount of profiteering done by the company as it had failed to pass on both the benefits, viz, ITC and rate reduction to its customers. This amount is inclusive of the extra GST which the company had forced the customers to pay due to wrong increase in its basic prices, otherwise the prices to be paid by them should have further got reduced by the amount of the GST illegally charged from them. It was further held that depositing of the extra GST in the Government account can not absolve the company of the allegation that it had compelled them to pay more price than what they should have paid and hence it amounts to denial of benefit under Section 171 of the CGST Act.

Brief Facts

In the instant case, there were two complaints lodged via e-mails alleging that though the rate of Goods and Services Tax (GST) on Restaurant services had been reduced from 18% to 5% w.e.f. 15.11.2017, the company had increased the prices of the products which were being sold by him and had maintained the same price which he was charging before the above reduction. It also claimed that the company had indulged in profiteering in contravention of the provisions of Section 171 of the CGST Act, 2017 and hence appropriate action should be taken against it. The entity against whom complaint was made is chain of restaurants run under the name of ‘McDonalds’ in western and southern parts and registered in ten states in India.

It is a fact that based on GST Council’s recommendations, the rate of GST on the Restaurant services was reduced to 5% w.e.f. 15.11.2017 with the condition that the ITC on the goods or services used in supplying the restaurant services would not be available.

Investigation by DGAP

However, the DGAP investigating the matter observed that such contentions were not correct as provisions of section 171  would be attracted as soon as there was reduction in the rate of tax or the benefit of ITC was available and they would not be dependent on whether the contract for supply was entered in to before such reduction or availability of ITC had come in to force and hence provisions of Section 64 A of the Sale of Goods Act, 1930 were not applicable. Further, the argument of the company that the provisions of Section 171 amounted to controlling the prices and thus infringed its right to trade under Article 19 (1) (g) of the Constitution was also not correct as this section nowhere provided for control on the prices and its mandate was limited to the extent of ensuring that the benefits of tax reduction and ITC were passed on to the consumers by way of commensurate reduction in the prices. Also, the Central Government on the recommendations of the GST Council vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017 had reduced the rate of tax on restaurant services from 18% to 5% w.e.f. 15.11.2017 with the condition that the benefit of ITC would not be available on this service.

It was observed in the instant case that the company was selling over 1840 products out of which it increased the prices of over 1770 products (i.e. over 95% of the products), as revealed from pre and post 15^th November, 2017 price list.

Though the GST was charged @ 5% any but it was on the increased price which customers were forced to pay. Infact, it should have charged the lower price after commensurate reduction due to reduction in the rate of tax and hence they were denied the benefit which had become due to them.

DGAP also computed the ITC claimed and found that ITC claimed was also in excess of the entitlement. DGAP observed that on the basis of the pre and post reduction in the 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 January, 2018, as per the GSTR-I or GSTR-3B returns of the company, the amount of net higher sale realization due to increase in the base prices of the services, despite the reduction in the GST rate from 18% to 5%, with denial of ITC, the profiteered amount came to ₹ 7.49 Crores. It may be noted that this amount is the highest ever amount profiteered in cases adjudicated.

Submissions by Company

The company (restaurant) submitted that :

• Price revision does not fall within purview of section 171 as it applied in only those cases where the contract of supply/sale had been entered in to prior to the change in the rate of tax or ITC. Any such change did not amount to automatic change in the price unless it was agreed to by both the parties as per Section 64 A of the Sale of Goods Act, 1930.
• Any attempt to regulate the sale price of the products being sold by it would violate its right to carry on trade as per Article 19 (1) (g) of the Constitution and the provisions of Section 171 were not similar to the laws framed for controlling prices as per List III of Schedule-VII of the Constitution.
• The cost of food and beverages had gone up due to the abrupt denial of ITC which had constrained it to increase the base prices to negate this impact and such increase was also not commensurate with the increase in the costs.
• The cost of the restaurant services had gone up by at least 15%.
• Prices of some premium products had been reduced from 11% to 22%.
• The restaurants in the shopping malls was charged on fixed or variable or semi-variable basis which was approximately 3.5% of the incremental turnover and was payable at the end of the year and since the bills for the same would be raised only at the year-end, it would not be eligible to claim ITC on such variable rent and it would suffer an estimated loss of ₹ 22.78 Lakhs.
• The transitional credit mentioned in TRAN-I statement filed by it was not the correct indicator of the tax incurred as:

(i) credit of CENVAT was not available on the Central Excise Duty,

(ii) his restaurants were operating under the Composition Scheme under which ITC on VAT was not allowed

(iii) expenses on Petroleum were outside the GST and

(iv) most of the inputs were taxable at higher rates.1

 

(To be continued ……)