McDonald’s: Fast Food, Fast Profits (Part-2)

[Dr. Sanjiv Agarwal]

Company’s Stand

The company challenged the complaint on facts as well as legal grounds that the provisions of section 171 itself were illegal and unconstitutional which inter alia include,

• DGAP has conceded in his Report that the company had charged GST @ 5% to his consumers and therefore, commensurate benefit had been passed on to them.
• The DGAP had admitted that there was no incremental ITC available and therefore, no benefit was to be passed on by the company.
• Despite admission that section 171 nowhere aimed at price regulation and its purpose was only to ensure that benefit of reduction in the rate of tax or ITC was passed on to the recipients by way commensurate reduction in the prices, the DGAP had gone in to the computation of base price by invoking the marginal note, i.e. ‘Anti-Profiteering Measure’ which was illegal.
• As per the settled law pronounced on the interpretation of the statutes, marginal notes were considered as internal aid to construction and while construing such provisions, the first and the foremost rule was of literal construction and in case the provision was unambiguous and the legislative intent was clear, the other rules of construction were not be called into aid since they were to be called for aid only when the legislative intention was not clear.
• Marginal note could be used in the interpretation of statue only if literal construction of the statue was ambiguous or absurd and since the provisions of Section 171 were unambiguous and explicit hence the marginal note was irrelevant and therefore, any attempt to examine and assess the base price was beyond the scope of Section 171.
• DGAP had only considered the impact of ITC denial and had failed to consider other factors such as increase in the electricity bills, fuel costs, variable rent, royalty and commissions etc.
• As per WPI, prices of food articles had risen by 6.32% and that of fuel & power by 4.69% during the same period, however, only the impact of ITC was considered.
• Increased input prices were to be considered as a mitigating factor (as also considered by NAA in KRBL case).
• While determining cost of a product, tax was just one component and the other factors had been ignored.
• DGAP had concluded that the turnover had increased by 24,81 ,33,857/- solely due to the increase in the base prices by 10.45%, which could not be taken as profit accruing to the company as there was increase in:

(a) Royalty, as the company was paying royalty to McDonald's India Pvt. Ltd. which was 3.99% of the restaurant turnover and amounted to incremental royalty of 99,00,540/- on the incremental turnover attributed solely to the price increase during the year 2017-18

(b) Variable rent, which was 3.29% of the restaurant turnover, whereby he had paid an incremental rent of 81,63,604/- on the incremental turnover attributed solely to price increase during the above year, and

(c) Other variable expenses like payments made to various service providers and during the year 2017-18, such expenses were 0.96% of the restaurant turnover and he had paid incremental expenses of 23,82,085/- on the incremental turnover attributable solely to the price increase. It further pleaded that on the incremental revenue of 24,81,33,857/-, it had incurred incremental cost of 2,21hence the profit worked out to be 9.43% as against 10.45% computed by the DGAP.

• In determining the price, the historical data as is available at the time of decision making is used to estimate the likely cost of sales. There was an abrupt change in the tax regime on 14 November, 2017 whereby the Government had denied the benefit of ITC to the restaurant services which had resulted in significant increase in the cost which needed immediate price revision.
• The methodology adopted by the DGAP has left significant amount of tax unaccounted for therefore the correct tax cost analysis due to ITC denial could be made only on the basis of the audited financials which have been taken in to account by the Respondent for the year 2016-17 to forecast incremental  tax cost.
• The calculation of the profiteered amount of ₹ 7.49 crores was not correct as the DGAP has ignored the reduction in the price made by him which had led to reduction in the profiteered amount and also due to the reason that the DGAP had calculated the profiteered amount @ 105%, i.e. base price + 5% GST when the 5% GST had already been deposited in the Government account and not retained by it and hence, no profiteering could be alleged.
• The relevant provisions of the CGST Act, 2017 or the CGST Rules, 2017 did not prescribe the methodology to be followed by the registered suppliers in order to comply with the anti-profiteering requirements.
• Rule 126 of the CGST Rules authorised NAA to determine the methodology and procedure to decide whether the reduction in the rate of tax or the benefit of input tax credit had been passed on by the registered person to the recipient by way of commensurate reduction in prices. However, no such methodology had been notified by it till date.
• Section 171 and Rule 122-137 being part of a taxing statute, could not be enforced in the absence of machinery provisions for computation of the profiteered amount.
• It was not clear whether the price alteration was required to be done at the entity level, State level, locational level, product level, category level or SKU level, each of which would bring about a different result in the pricing.
• There was also no indication whether a ‘commensurate’ change in pricing would be assessed as a trend or in percentage terms.
• There was no recognition of various non-GST factors like market conditions, demand and supply, rising/ falling input costs, each of which might independently warrant a reduction or increase in prices and how in respect of common goods or services which would be procured and used across the business e.g. fuel, security and audit services, such costs would be apportioned to the various segments of the business.

Inferences from the Order

Based on the order, the following assertion / inferences can be drawn :

• Complaints before NAA can be filed jointly by two or more complainants on mail or otherwise.
• Section 171 is attracted as soon as there is reduction in the rate of tax or the benefit of ITC is available and it is not dependent on whether the contract for supply is entered in to before tax reduction or availability of input tax credit had come into force and therefore, section 64A of Sale of Goods Act, 1930 is not applicable.
• Section 171 of CGST Act, 2017, nowhere provides for control on prices and its mandate is limited to ensuring that benefit of tax reduction and input tax credit is passed on to consumers by way of commensurate reduction in the prices.
• It is clear even from a cursory perusal of the provisions of Section 171 that they are completely unambiguous and clear and hence there is hardly any scope for misinterpretation of the marginal note mentioned as 'Anti-Profiteering Measures'.
• Any reduction in the rate of tax on any supply of goods or services or the benefit of ITC shall be passed on to the recipient by way of commensurate reduction in prices.
• Mere charging of GST @ 5% w.e.f. 15.11.2017 does not amount to passing on the benefit of the reduction.
• The intent of legislature shows that it proposes to hold the suppliers accountable for passing on both the above benefits as they have been given out of the public exchequer and any breach of the same will fall foul of the section 171.
• There is no question of violation of the right of the company granted under Article 19 (1) (g) nor of the laws framed for regulation of prices as per List Ill of Schedule V-II of the Constitution. Both the claims made by the Respondent in this regard are farfetched and untenable in view of the specific provisions of section 171.
• Profit is the advantage or gain derived in a legal business transaction but the same cannot be considered as profit if it is illegally derived by appropriating the benefits which are granted by the Government from the public funds to the consumers.
• The benefit of reduction in the rate of tax as well as the benefit of ITC have been given by the Central as well as the State Government by sacrificing their own revenue in favour of the general public and the business entity has no right to appropriate them.
• The provisions of section 171 and the above Rules are very clear and unambiguous under which a comprehensive machinery comprising of the State specific Screening Committees, Standing Committee, Directorate General of Anti-Profiteering and Commissioners of Central GST and State Tax have been constituted/established under the above provisions to take cognizance of the complaints made on profiteering, their investigation and for enforcement of the orders passed by the Authority.
• The computation of the profiteered amount under Section 171 has to be done on the basis of the facts of each case and hence no general methodology and procedure can be prescribed for the same. Moreover, the word used in Rule 126 is to 'determine' and not to 'prescribe' the methodology and procedure. The basic aim is to ensure that both the benefits of reduction in the rate of tax and the ITC are passed on to the consumers by commensurate reduction in the prices.
• The benefit is required to be passed on at   the product level as the recipient would be different in each supply of the product. Every consumer is entitled to receive the above benefits and no one can be denied these benefits on the ground that they shall be passed on at the entity level, State level, locational level or the SKU level. The Respondent has no discretion to deny these benefits on any ground or to grant them on the basis of his own convenience.
• Anti-profiteering amount would also include the extra GST which the entity force the customers to pay due to wrong increase in its base price, otherwise the price to be paid by them should have been further reduced by the amount of GST illegally charged from them.
• Depositing of such extra GST in the Government account can not absolve the company of the allegation that it had compelled the customers to pay more price than what they should have paid had the entity charged correctly and as such, it amounts to denial of benefit u/s 171 and not as per law.
• NAA can direct Central and State GST authorities to ensure that amount due is deposited with interest and in case it is not so deposited, they should take appropriate steps for recovery under the supervision of DGAP.
• DGAP may be asked to submit a  report of compliance within time as stipulated.
• NAA can direct the authorities to issue a show cause notice for levy of penalty.
• NAA order may impose cost of litigation on the party(ies).

Final Verdict

The NAA while dealing with this complaint thus concluded that the company has resorted to profiteering by charging more price than that it could have charged by issuing incorrect tax invoices. It observed that the company further acted in conscious disregard of the obligation which was cast upon it by the law by issuing incorrect invoices in which the base prices were deliberately enhanced exactly equal to the amount of reduced tax and benefit of ITC and thus it had denied the benefit of ITC and reduction in the rate of tax granted vide Notification dated 14.11.2017 to its customers. Accordingly, it committed an offence under Section 122 (1) (i) of the CGST Act, 2017.

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