2019 (2) TMI 295 - NAPA - GST

Profiteering - restaurant services - SGB Stuffed GB (Garlic Bread) - 1 Med NHT Veg Extrava (Medium Veg Pizza) - benefit of reduction in rate of tax not passed - increase in base price of the products - denial of ITC - period between 15.11.2017 to 31.05.2018 - Section 171 of the CGST Act, 2017. Held that - The Respondent is engaged in the business of operating quick service restaurants under the name and style of Domino s Pizza and has a pan India presence with 1,128 outlets across 31 States and Union Territories in which the Respondent is duly registered under the GST and all his outlets were maintaining consistency from taste to overall experience and the prices of all his products as shown in the menu were similar throughout his restaurants exclusive of the GST. It has also been admitted by the Respondent that the Central Govt. vide its Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017 had reduced the rate of GST from 18% to 5% on restaurant services with the stipulation that no ITC would be available on the goods and service supplied under the above services, accordingly, 398 items which were being supplied by the Respondent were impacted with the reduction in the rate of tax, the benefit of which was required to be passed on by the Respondent to his customers by commensurate reduction in his prices as per the provisions of Section 171 of the CGST Act, 2017. It is revealed from the record that the Respondent had himself admitted before the DGAP, as has been mentioned in Para 4 (e) supra that the price of Type A Pizza was ₹ 440/- per unit and that of Type B was ₹ 470/- per unit respectively up to 14.11.2017, before the rate of tax was reduced and was ₹ 450/- and ₹ 485/- per unit respectively post 14.11.2017 after the rate of tax was reduced. Hence there was increase in the base price by ₹ 10/- in respect of Type A Pizza and ₹ 15/- in respect of the Type B Pizza. Perusal of Annexure23 attached by the DGAP with his Report also shows that the base prices of both these products were in fact increased by the amount shown above by the Respondent. Therefore, even if it is admitted that both the items of Pizza ordered by the above Applicant were distinct there is hardly any doubt that the Respondent had increased the base prices of both of them as per his own admission which he should not have done arbitrarily - However, the Respondent has duly admitted that he had increased the base prices in respect of the second item viz. Garlic Bread purchased by the above Applicant from him after the tax reduction. Therefore, there was sufficient ground for the Screening Committee as well as the DGAP to investigate the allegation of profiteering made against the Respondent and the objection raised by the Respondent on this ground is completely wrong and frivolous and hence the same cannot be accepted. The provisions of Section 171 are further very explicit which state that the recipient has to be given the benefits of tax reduction and the ITC on every supply commensurate with such reduction or the ITC. Hence, it was duty of the Respondent to ascertain on which of his products the rate of tax had been reduced and after taking in to account the impact of denial of ITC to what extent the prices should have been increased. The whole exercise needed no directions from this Authority as it involves simple mathematical calculation which the Respondent has been carrying on repeatedly at the time of fixing his prices. Hence, the contention of the Respondent made on this ground is unreasonable and hence it cannot be considered. The Respondent has not passed on the benefit of reduction in the rate of tax to his recipients, commensurate to the denial of ITC, during the period between 15.11.2017 to 31.05.2018 and accordingly, the quantum of denial of such benefit or the profiteered amount illegally earned by the Respondent is determined as ₹ 41,42,97,635/- as per the provisions of Rule 133 (1) of the CGST Rules, 2017 - Accordingly, the Respondent is directed to reduce his prices by way of commensurate reduction keeping in view the reduced rate of tax and the benefit of ITC denied - Respondent is also directed to refund to the Applicant No. 1 an amount of ₹ 5.65 along with interest @18% from the date of charging of the above amount from him till its refund. Penalty - Held that - The Respondent has resorted to profiteering by charging more price than what he could have charged by issuing wrong tax invoices. He has further acted in conscious disregard of the obligation which was cast upon him by the law, by issuing incorrect invoices in which the base prices were deliberately enhanced more than what he was entitled to increase due to denial of ITC and thus he had denied the benefit of reduction in the rate of tax granted vide Notification dated 14.11.2017 to his customers. Accordingly he has committed an offence under Section 122 (1) (i) of the CGST Act, 2017. Therefore, a show cause notice be issued to the Respondent to explain why penalty under the provisions of the above Section should not be imposed on him. Application disposed off.

Summary

Issues Involved:
1. Allegation of profiteering by not passing on the benefit of GST rate reduction.
2. Examination of the increase in base prices of products post-GST rate reduction.
3. Calculation and determination of the profiteered amount.
4. Methodology for determining and calculating profiteering.
5. Compliance with principles of natural justice.

Detailed Analysis:

1. Allegation of Profiteering:
The Applicant No. 1 alleged that the Respondent did not pass on the benefit of GST rate reduction from 18% to 5% effective from 15.11.2017, instead increased the base prices of products, thereby nullifying the benefit of tax reduction. The Respondent was accused of profiteering by maintaining the same consumer prices post-tax reduction.

2. Examination of Price Increase:
The DGAP's investigation revealed that the Respondent had increased the base prices of 314 out of 393 items after the GST rate reduction, thus not passing on the benefit to consumers. The Respondent admitted to increasing the base prices of Medium Veg Pizza and Garlic Bread post-tax reduction. The DGAP found that the Respondent had increased the base prices more than the permissible limit to offset the denial of ITC.

3. Calculation of Profiteered Amount:
The DGAP calculated the profiteered amount to be ?41,42,97,635/- by comparing the base prices before and after the GST rate reduction and considering the denial of ITC. The profiteered amount included ?5.65/- specifically from the Applicant No. 1. The DGAP's detailed analysis showed that the Respondent had increased prices by more than the permissible 5.59% in respect of 170 items, leading to profiteering.

4. Methodology for Determining Profiteering:
The Respondent argued that no specific methodology was prescribed for calculating profiteering, leading to arbitrary results. However, the Authority clarified that the methodology varies across industries and products, and the calculation should ensure that the benefit of tax reduction and ITC is passed on to each recipient. The DGAP used average sales realization for computation, which was justified under Section 15 of the CGST Act, 2017.

5. Compliance with Principles of Natural Justice:
The Respondent claimed violation of natural justice as no show cause notice was issued. However, the Authority noted that the Respondent was duly notified and given opportunities to present submissions and defend against the allegations. The Respondent's detailed submissions and hearings demonstrated that the principles of natural justice were upheld.

Conclusion:
The Authority concluded that the Respondent did not pass on the benefit of GST rate reduction to consumers and engaged in profiteering. The Respondent was directed to refund the profiteered amount to the Applicant No. 1 and deposit the balance in the Consumer Welfare Funds. The Authority also directed further investigation to ensure compliance post-31.05.2018 and issued a show cause notice for imposing penalties under Section 122 (1) (i) of the CGST Act, 2017.