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PROFITEERING ON SUPPLY OF RESTAURANT SERVICES: SUBWAY CASE |
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PROFITEERING ON SUPPLY OF RESTAURANT SERVICES: SUBWAY CASE |
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The NAA has been receiving various complaints against profiteering in contravention of section 171 of the CGST Act, 2017 against supplier of goods and services. Most of such complaints have been in relation to residential flats and restaurant services. A popular brand ‘subway’ operates in India on the ‘franchise’ model for its retail outlets. Many complaints pertain to subway franchisees with the allegation that such eateries have not reduced their prices even after reduction of GST rates from 18% to 5% and instead, base prices were escalated. DEPUTY COMMISSIONER OF STATE TAX, DIRECTOR-GENERAL OF ANTI-PROFITEERING. CENTRAL BOARD OF INDIRECT TAXES & CUSTOMS, VERSUS M/S. LE REVE PVT. LTD [2020 (3) TMI 611 - NATIONAL ANTI-PROFITEERING AUTHORITY] the complainant filed a complaint under Rule 128 of the CGST Rules, 2017 alleging profiteering in respect of restaurant service supplied by the Respondent (Franchisee of M/s Subway Systems India Pvt. Ltd.). It was alleged that despite the reduction in the rate of GST from 18% to 5% w.e.f. 15.11.2017, the Respondent had not passed on the commensurate benefit since he had increased the base prices of his products. The matter was referred to DGAP for investigation who covered the period from 15.11.2017 to 31.03.2019 and submitted its report dated 09.09.2019. The main issues for determination were whether the rate of GST on the service supplied by the Respondent was reduced from 18% to 5% w.e.f. 15.11.2017 and if so, whether the commensurate benefit of such reduction in the rate of GST had been passed on by the Respondent to his recipients, in terms of Section 171 of the CGST Act, 2017. It was a fact that the Central Government had reduced the GST rate on the restaurant service from 18% to 5% w.e.f. 15.11.2017 with the condition that the ITC on the goods and services used in supplying the service was not taken vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017. The legal requirement of the Section 171 was abundantly clear that in the event of benefit of ITC or reduction in rate of tax. there must follow a commensurate reduction in the prices of the goods or services being supplied by a registered person and that the final price being changed for each supply had to be reduced commensurately with the extent of benefit and that there was no other legally tenable mode of passing on such benefit of rate reduction or ITC to the recipients/consumers. Further, the Respondent supplier had been dealing with a total of 337 items while supplying restaurant services before and after 15.11.2017. On comparing the average selling prices as per details submitted by the Respondent for the period 01.07.2017 to 14.11.2017, and the prices post 15.11.2017 it was evident that 68 items supplied by him were launched in the post-rate reduction regime. He has been charging the lower GST rate of 5% on the increased base price of the other items, which confirmed that the tax amount was computed g 18% before 15.11.2017 and @ 5% w.e.f. 15.11.2017. However, because of this increase in base prices, the cum-tax prices paid by the consumers were not reduced commensurately for all the items, despite the reduction in the GST rate. Therefore, the only point for determination was whether the increase in base prices was solely on account of the denial of ITC. The DGAP stated that the ratio of ITC to the net taxable turnover had been taken for determining the impact of denial of ITC (which was available to the Respondent till 14.11.2017). As per the monthly GST Returns submitted by the Respondent, it was found that the ITC amounting to ₹ 2,99,442/- was available to him during the period July 2017 to October 2017 which was 8.01% of the net taxable turnover of restaurant service amounting to ₹ 37,34,976/- supplied during the same period. Further, with effect from 15.11.2017, the GST rate on restaurant service was reduced from 18% to 5% and hence, the said ITC was not available to the Respondent. It was established that the Respondent supplier had increased the base prices by more than 8.01% i.e.. by more than what was required to offset the impact of denial of ITC in respect of 248 items (out of total 316 items) sold during the same period and hence, the commensurate benefit of reduction in rate of tax from 18% to 5% had not been passed on to the customers. However, no profiteering was established regarding 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 they were new products launched by the Respondent. Based on the reduction in the pre and post-GST rates, the impact of denial of ITC was examined and the details of outward supplies (other than zero-rated, nil rated and exempted supplies) during the period 15.11.2017 to 31 03.2019, as per the product-wise sales registers reconciled with the GSTR-1 and GSTR-3B returns to ascertain the amount of net higher sale realization due to increase in the base prices of the service. Despite the reduction in GST rate from 18% to 5% (with denial of input tax credit) or in other words, the profiteered amount came to ₹ 8,24,260/- (including GST on the base profiteered amount). The DGAP therefore, concluded that the allegation of profiteering by way of either increasing the base prices of the products while maintaining the same selling price or by way of not reducing the selling prices of the products commensurately. despite the reduction in GST rate from 18% to 5% w.e.f. 15.11.2017 stood confirmed against the Respondent. The additional amount to the tune of ₹ 8,24.260/- had been realized from the recipients which included both the profiteered amount and GST on the said profiteered amount and hence, the provisions of Section 171 (1) of the CGST Act, 2017 had been contravened. The NAA considered the DGAP report and other submissions, and determined the profiteered amount as ₹ 8,24,260/-. The NAA directed to reduce prices commensurately in terms of Rule 133 (3) (a) of the CGST Rules, 2017. It was also directed to deposit an amount of ₹ 8 24 260/- in two equal parts of ₹ 4,12.1301- each in the Central Consumer Welfare Fund and the and the Maharashtra State Government as per provisions of Rule 133 (3) (c) of the Rules, since the recipients were not identifiable and the supplies were affected in the state of Maharashtra. The said amounts were ordered to be deposited along with 18% interest payable from the dates from which the above amount was realized by the Respondent from its recipients till the date of deposit in the Consumer Welfare Funds. This amount of ₹ 8,24,260/-, along with applicable interest thereon, shall be deposited within 3 months of the order failing which it shall be recovered by the concerned SGST Commissioner. Since it had been found that the Respondent supplier has denied the benefit of tax reduction to his customers/ recipients in contravention of the provisions of Section 171 (1) of the CGST Act, 2017 and since it had resorted to profiteering, respondent had committed an offence under section 171 (3A) of the CGST Act, 2017 and therefore, it was also liable for the imposition of penalty. The Authority as per Rule 136 of the CGST Rules, 2017 directed the jurisdictional Commissioners of CGST/SGST to monitor this order under the supervision of the DGAP by ensuring that the amount profiteered by the Respondent as ordered by the Authority is deposited in the CWFs of the Central and the State Government of Maharashtra. Further, the Authority, as per provisions of Section 171 (2) of the CGST Act, 2017 and as per the amended Rule 133 (5) (a) of the CGST Rules 2017 directed the DGAP to further examine M/s Subway Systems India Pvt. Ltd. for possible violations of the provisions of Section 171 of the CGST Act 2017 and to submit his report as per the provisions of Rule 133 (5) (b) of the CGST Rules, 2017 since there are adequate reasons to believe that M/s Subway Systems India Pvt. Ltd. may have profiteered by charging the royalty and advertisement charges on the increased net taxable sales. Other Similar Cases A large number of complaints in relation to subway franchisee’s have been adjudicated by the NAA in recent past and in all such cases, profiteering has been upheld. Following cases can be referred.
By: Dr. Sanjiv Agarwal - March 22, 2021
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