2020 (3) TMI 611 - NAPA - GST

Profiteering - restaurant service supplied by the Respondent (Franchisee of M/s Subway Systems India Pvt. Ltd.) - allegation that the benefit of reduction in the rate of GST not passed on - contravention of section 171 of CGST Act - penalty - HELD THAT - Section 171 (1) of the CGST Act, 2017 states that the reduction in the rate of tax or benefit of ITC which means that the benefit of tax reduction or ITC has to be passed on by a supplier since it is a sacrifice granted from the public exchequer, which cannot be misappropriated by him. It also means that the above benefit is to be passed on each product to each buyer and in case it is not passed on, the profiteered amount has to be calculated for which investigation has to be conducted on all such impacted supplies made to each recipient, thereby clearly implying that a supplier cannot claim that he has passed on more benefit to one customer, therefore he would pass less benefit to another customer than the benefit which is actually due to that customer. In other words, each customer is entitled to receive the benefit of tax rate reduction or ITC on each product purchased by him. The word commensurate mentioned in the above Section gives the extent of benefit to be passed on by way of reduction in the prices which has to be computed in respect of each product supplied based on the extent of tax reduction as also the existing base price of the product before such tax rate reduction. The computation of commensurate reduction in prices is purely a mathematical exercise which is based upon the above parameters and hence it would vary from product to product and hence no fixed methodology can be prescribed to determine the amount of benefit which a supplier is required to pass on to a recipient or for computation of the profiteered amount. The Respondent has contended that the computation of profiteering by the DGAP was flawed on various counts. One contention made before us was in respect of 'Sub of the Day' (SOTD) which was sold by him @ ₹ 110/- till 14.11.2017 but the base price of SOTD had been incorrectly mapped by the DGAP to ₹ 105/- while working out the base price for the pre rate reduction period. However, the record of the case reveals that the Respondent, at no point in time, has furnished any invoice/ supply document that shows SOTD as an item supplied/ sold by him. Since no invoices mention SOTD as an item supplied, there is no ground for accepting Respondent's contention regarding SOTD - The Respondent has himself stated that he had charged different base prices to his customers for the same product on different days of any particular week/ month during the pre rate reduction period and therefore. the only alternative available was to compute the average base prices for the above period so that comparison could be made with the post rate reduction actual base prices. Therefore are no merit in the claim of the Respondent regarding the same. The Respondent has further contended that one of the products, i.e. Vegetarian Seekh kebab was launched only in January 2018 and sold thereafter and hence there could be no profiteering in respect of the said product. In this regard, it is observed form the DGAP's supplementary report dated 06.12.2019, that the price of the said product has been culled out from Respondent's sales data for October 2017 (Transaction ID 1/A-18653 dated 4.10.2017) and mentioned in the Annexure-10 of DGAP Report - it is clear to us that the said product has been sold by the Respondent in the pre-rate reduction period and this contention of the Respondent is untrue and unacceptable. We do not find any reason to interfere in the computation of profiteering by the DGAP on this ground. The Respondent has also claimed that the DGAP, while calculating the profiteered amount, erroneously added a 5% notional amount without providing any rationale for such addition. This amount had been added due to GST. which had been collected from the customers and deposited with the Government of India with his monthly GST returns. Therefore, this addition of a further 5% amount should be removed and hence the profiteered amount be reduced appropriately. This contention of the Respondent is not correct because the provisions of Section 171 (1) and (2) of the CGST Act, 2017 mandate that the benefit of reduction in the tax rate is to be passed on to the recipients/ customers by way of commensurate reduction in price, which includes both, the base price and the tax paid. In this connection, it would be appropriate to mention that the Respondent has not only collected excess base prices from the customers which they were not required to pay due to the reduction in the rate of tax but he has also compelled them to pay additional GST on these excess base prices which they should not have paid. The Respondent has also contended that as per his franchisee-franchisor agreement with his franchisor M/s Subway Systems India Private Ltd., he was under an obligation to pay 8% of his net sales towards royalty and 4.5% of his net sales towards advertisement charges to the franchisor and that post 14.11.2017, when the tax rate was reduced, his cost towards royalty and advertising charges had increased significantly but the same was not considered by the DGAP while calculating profiteering - It is clear that an increase or decrease in costs of a supplier, which included costs such as royalty and advertisement charges or the costs towards the renovation of the store. has no ramification on the amount of profiteering which is computed in line with the provisions of Section 171 of the CGST Act. In case a supplier has not passed on the benefit of tax rate reduction by way of a commensurate reduction in prices in each of his supplies, anti-profiteering provisions will apply to him, irrespective of his costs or whether he makes profits or losses. In any case, the payments made by the Respondent on account of Royalty and Advertisement Charges are purely an internal agreement between the franchiser and the franchisee without any connection with the anti-profiteering provisions applicable to the franchisee, i.e. the Respondent. Hence, this contention of the Respondent is not accepted. The Respondent has further contended that w.e.f 15.11.2017, ITC on inputs and capital goods stood denied to him vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017. Hence, for calculating the base prices after the reduction in the rate of tax with simultaneous denial of ITC, the loss on account of denial of ITC on capital goods ought to have been factored in the computation of profiteering by the DGAP since before 14.11.2017. he was allowed to take ITC on his purchases of capital goods - It is pertinent that for the pre rate-reduction period. ITC on capital goods, if any, availed by the Respondent, has already been accounted for in the computation. Hence, the contention of the Respondent is without any merit. The Respondent has further claimed that in the case of certain products supplied by him after the tax rate reduction. he had reduced the prices more than commensurately, but this aspect has been ignored by the DGAP, in as much as the DGAP has not considered the negative values and instead taken them as zero, whereas the profiteering should have been netted off - It has to be kept in mind that every recipient/ customer is entitled to the benefit of the tax rate reduction by way of reduced prices and Section 171 does not offer the Respondent to suo moto decide on any other modality to pass on the benefit of reduction in the rate of tax to his recipients. Therefore, any benefit of tax rate reduction passed on to a particular recipient or customer cannot be appropriated or adjusted against the benefit of tax rate reduction that ought to accrue to another recipient or customer. Therefore. the contention of the Respondent is not accepted. The fact that the Respondent has not complied with the law till 31.03.2019 implies that profiteering has to be computed for the entire period and hence we do not see any reason to accept this contention of the Respondent. We further observe that had the Respondent passed on the benefit before 31.03.2019, he would have been investigated only till that date. Therefore, the period of investigation i.e. from 15.112017 to 31.03.2019 has been rightly taken by the DGAP. In the present case, we determine the profiteered amount as ₹ 8,24,260/-, details of the computation of which are given in in Annexure-16 of the DGAP Report dated 09,09.2019. Accordingly, the Respondent is directed to reduce his prices commensurately. As indicated in the above mentioned Annexure. in terms of Rule 133 (3) (a) of the above Rules. The Respondent is 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 above Rules, since the recipients are not identifiable at this stage and since the supplies were affected in the state of Maharashtra. Penalty - HELD THAT - Since it has been found that the Respondent 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 he has resorted to profiteering, he has been found to have committed an offence under section 171 (3A) of the CGST Act, 2017 and therefore, he is liable for the imposition of penalty under the provisions of the above Section - Accordingly; a notice be issued to him directing him to explain why the penalty prescribed under Section 171 (3A) of the above Act read with Rule 133 (3) (d) of the CGST Rules. 2017 should not be imposed on him.

Summary

Issues Involved:
1. Whether the Respondent passed on the commensurate benefit of reduction in the rate of tax to his customers.
2. Whether there was any violation of the provisions of Section 171 (1) of the CGST Act, 2017 in this case.

Detailed Analysis:

Issue 1: Passing on the Benefit of Tax Reduction
The DGAP’s investigation revealed that the Respondent had not passed on the benefit of the reduction in GST rate from 18% to 5% (effective from 15.11.2017) to his customers. Instead, the Respondent increased the base prices of his products, thereby negating the reduction in the GST rate. The DGAP compared the average selling prices before and after the rate reduction and found that the tax amount was computed at 18% before 15.11.2017 and at 5% thereafter. However, due to the increase in base prices, the cum-tax prices paid by consumers were not reduced commensurately.

The DGAP reported that the Respondent had increased the base prices by more than 8.01% to offset the impact of denial of ITC, which was not justified. The profiteered amount was calculated as ?8,24,260/-, including GST on the base profiteered amount.

Issue 2: Violation of Section 171 (1) of the CGST Act, 2017
Section 171 (1) of the CGST Act, 2017 mandates that 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. The Respondent’s failure to reduce prices commensurately with the reduction in GST rate constituted a violation of this provision.

The Respondent’s contentions regarding increased costs due to royalty, advertisement charges, and other business factors were found irrelevant to the computation of profiteering. The law requires that the benefit of tax reduction be passed on to each customer for each supply, and any excess benefit passed on to some customers cannot offset the denial of benefit to others.

Additional Findings:
1. Incorrect Base Prices: The Respondent argued that the DGAP incorrectly considered the base price of certain products. However, the DGAP based its calculations on the Respondent’s own invoices, and the Authority found no merit in the Respondent’s claims.

2. Vegetarian Seekh Kebab: The Respondent contended that this product was launched post-rate reduction. However, the DGAP found evidence of its sale in the pre-rate reduction period, and this contention was dismissed.

3. Royalty and Advertisement Charges: The Respondent’s argument that increased royalty and advertisement charges should be considered in the profiteering calculation was rejected. These costs are internal business decisions and do not affect the requirement to pass on the tax reduction benefit.

4. Capital Goods ITC: The Respondent’s claim for considering ITC on capital goods was rejected as the DGAP had already factored in the denial of ITC in its calculations.

5. Free Items and Discounts: The Respondent’s argument that free items and discounts should offset the profiteered amount was rejected. The law requires the benefit to be passed on for each supply, and netting off benefits is not permitted.

6. MRP Products: The Respondent’s claim regarding MRP-based products was also dismissed as the denial of ITC had already been factored into the DGAP's calculations.

Orders:
1. The Respondent was directed to deposit ?8,24,260/- in the Consumer Welfare Funds of the Central and Maharashtra State Governments, along with 18% interest from the dates the amounts were realized.
2. The Respondent was found liable for penalty under Section 171 (3A) of the CGST Act, 2017, and a notice was issued to explain why the penalty should not be imposed.
3. The DGAP was directed to investigate M/s Subway Systems India Pvt. Ltd. for possible profiteering by charging royalty and advertisement charges on increased net taxable sales.

Conclusion:
The Respondent violated Section 171 (1) of the CGST Act, 2017 by not passing on the benefit of GST rate reduction to consumers. The profiteered amount was determined to be ?8,24,260/-, and the Respondent was directed to deposit this amount in the Consumer Welfare Funds with applicable interest. The DGAP was also directed to investigate M/s Subway Systems India Pvt. Ltd. for potential profiteering.