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TMI Blog2020 (3) TMI 611X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 1 has filed the application 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.). In the application, 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. Records showed that the worksheet indicating the extent of profiteering sent by the Screening Committee was also received by the DGAP along with the above recommendation of the Standing Committee on 27.03.2019. 2. The DGAP in his report has stated that on receipt of the said reference from the Standing Committee on Anti-profiteering on 27.03.2019, a notice under Rule 129 was issued on 09.04.2019 (Annex-1), calling upon the Respondent to reply as to whether he admitted that the benefit of reduction in GST rate w.e.f, 15.11.2017, had not been passed on to the recipients by way of commensurate reduction in prices and if so, to suo-moto determine the quantum thereof and indicate the same in his reply to the notice as well as furnish all the supporting documen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent and the documents/evidence on record had been carefully examined. 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. 7. The DGAP has further reported that the Central Government. On the recommendation of the GST Council, has 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. Since it was a case of reduction in the rate of tax, it was important to examine the provisions of Section 171 of the CGST Act, 2017 to ascertain whether the present case was a case of profiteering or not. Section 171 (1) reads as follows:- "Any reduction in 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." Thus, the legal requirem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration the period from 01.07.2017 to 31.10.2017 and not up to 14.11.2017. It was done due to the reason that certain invoices as furnished by the Respondent for the period 01.11.2017 to 14.11.2017 actually pertained to the entire month of November-2017 and that no reversal of ITC was done by the Respondent in respect of such invoices. Therefore, for the current investigation, the taxable turnover and ITC for the period 01.11.2017 to 14.11.2017 was excluded and not taken into account for the calculation of the percentage of ITC available to the Respondent. 10. The DGAP in his report has further 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 Rs. 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 Rs. 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 sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... input tax credit) or in other words, the profiteered amount came to Rs. 8,24,260/- (including GST on the base profiteered amount). The details of the computation have been furnished by the DGAP in the Annexure-16. The DGAP has also stated that the said services had been supplied by the Respondent in the State of Maharashtra only. 13. The DGAP has 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 Rs. 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 by the Respondent in the present case. 14. The above Report was considered by this Authority in its sitting held on 17.09.2019 and it was decided to hear the Respondent on 07.10.2019. Sh. Girish Gulsanlal Behel, Partner, Sh. Vishal Khandelwal & Sh. Amit Kuma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Amount in Rs.) Impact due to Vegetarian Seekh kebab Month Total Profiteering Amount (DGAP Working) Revised Profiteering Difference due to Vegetarian Seekh kebab 7.Jan'18 497.45 0 497.45 8.Feb'18 1,788.44 0 1,788.44 9.Mar'18 1,126.72 0 1,126.72 1.Apr'18 1,021.72 0 1,021.72 2.May'18 1,277.09 0 1,277.09 3.Jun'18 478.91 0 478.91 4.JuI'18 1,924.90 0 1,924.90 5.Aug'18 2,718.44 0 2,718.44 6.Sept'18 1,455.27 0 2,399.17 7.Oct 18 2,399.17 0 2,399.17 8.Nov'18 1,441.36 0 1,441.36 9.Dec'18 1,924.90 0 1,924.90 10.Jan'19 1,450.63 0 1,450.63 11.Feb'19 1,984.54 0 1,984.54 12.Mar'19 1,664.90 0 1,664.90 23,154.44 0 23,154.44 c. That the DGAP while calculating the profiteered amount, erroneously added a 5% notional amount without providing any rationale for such addition. This amount appeared to 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. Hence, the additional 5% amount of Rs. 39.250/- should be removed from the profiteered amount. d. That as per franchise agreement, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .Mar'19 95,243.86 71.333.16 23,910.70 801,327.35 433,342.87 367,984.48 f. That he has relied upon the case of Kumar Gandhrav vs. M/s KRBL Limited (Case Number 03/2018 dated 04-05-2018) = 2018 (5) TMI 760 - NATIONAL ANTI-PROFITEERING AUTHORITY passed by this Authority. g. That post 14.11.2017, he was not allowed to avail ITC as per Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017. Therefore, for calculating base prices after change in rate of tax, loss of ITC on capital goods was required to be considered separately as he was allowed to take credit only for short period i.e. July 2017 to 14.11.2017 and the percentage of ITC calculated by DGAP in his report did not reflect complete one-year trend of ITC of the business during which the capital goods expenditure would have taken place. He had incurred total capital expenditure of Rs. 2,01,490/- inclusive of GST and total GST paid on capital expenditure was Rs. 30,677/- which was 0.25% of total sales turnover during the year 2018-19 and if this 0.25% loss of ITC on account of capital goods was considered and added in the base prices for comparison then profiteered amount should reduce by Rs. 37,703/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54.01 50.00 (4.01) 1187.79 SUBWAY Item BtlDrk 91.81 85.00 (6.81) 1249.94 Turkey Chicken Slice 324.03 300.00 (24.03) 153.26 Veggie Delite Sub 129.61 120.00 (9.61) 5.20 100374.29 i. That the DGAP has not considered an amount of Rs. 1,18,000/- that had been incurred by him on account of items where the base prices were made zero under various kinds of sales promotion schemes such as free items to loyal customers, whole order discounts and BOGO offer. Therefore, the calculated profiteered amount should be reduced further by Rs. 1,18,000/-. Working in respect of the above claim has been furnished by the Respondent as has been mentioned below:- (Amount in Rs.) Summary of Free Items Month Total Amount of Free Items Month Total Amount of Free Items Nov'17 2,896.06 Aug'18 7,266.76 Dec'17 794.67 Sept'18 1,921.85 Jan'18 5,266.59 Oct'18 2,357.90 Feb'18 1,160.09 Nov'18 80,238.93 Mar'18 1,620.29 Dec'18 631.26 Apr'18 2,806.81 Jan'19 1,009.43 May'18 2,474.58 Feb'19 1,410.53 June'18 1,799.57 Mar'19 1,550.34 Jul'18 3,495.88 - Gross Total 22,314.54 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the items. One of his main raw materials was vegetables and the price of vegetables were changing on a day to day basis. Various factors like competition pricing, long term strategies for market penetration, profit margin for sustaining in the market, life cycle of the product, economic and social conditions, cost of the products and capital expenditure, inflation in manpower cost, general year on year inflation, etc. played an important role at the time of fixing the prices of the products. Therefore, the period considered for the calculation of profiteering amount should be around 4 months from the date of the rate change. Beyond that timeline, any price revisions should be purely considered as business decisions. Hence, the period of calculation of the profiteered amount in his case should be considered up to 31.03.2018. m. That as per the DGAP's report, the profiteered amount was 4.95% of the net sales turnover. This impact was considered only for the SKUs which had a positive impact on profiteering amount. The other benefits to the customers, reductions in SKU rates, discounts, increase in royalty expenses and the capital goods purchased were not accounted for (as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 90 200 Turkey 195 195 205 Chicken Teriyaki 195 195 205 Italian B.M.T. 195 195 205 Tuna 195 195 205 Turkey & Chicken Ham 195 195 205 Subway Club 195 195 205 Veggie Delite 201 205 210 Chatpata Chana Patty 201 205 210 Mexican Patty 201 205 210 Green Peas Patty 201 205 210 Hera Bhara Kebab 201 205 210 Veg Patty 218 220 220 Aloo Patty 218 220 220 Corn & Peas 218 220 220 Veg Shammi 218 220 220 Paneer Tikka 218 220 220 Chicken Tikka 242 240 240 Chicken Seekh 242 240 240 Roasted Chicken 242 240 240 Chicken Tandoori 242 240 240 Chicken Slice 242 240 240 Turkey 254 250 250 &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent. The details of sales for the above-said item were provided by the Respondent for the period before the rate reduction, therefore, the same was considered in the base price sheet and the base price of the product has been taken into consideration for determination of profiteering. c. That it was the customer who bore the burden of increased base prices along with the GST amount charged by the Respondent, due to the increase in the base prices by more than the denial of ITC. Therefore. The same has been considered in the calculation of profiteering. d. That the methodology adopted by the DGAP has been consistent over time and in all such cases. e. That it was also found that the increase in base prices was more than what was required to offset the impact of denial of ITC and such additional quantum along with applicable GST was recommended in his report as profiteering in the past and the same has been approved by this Authority in all such cases of profiteering in the case of 'Restaurant Services'. However, the submission of the Respondent gave insight into another fact which was hitherto not known and indicated that M/s Subway India Pvt. Ltd. (the franchiso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein he contended as follows:- a. That price of SOTD was increased to Rs. 110/- from Rs. 105/- with effect from August 2017. Hence, to compute the profiteering, the price of SOTD should have been taken as Rs. 110/-, i.e. the price on 14 Nov 2017, notwithstanding the actual invoice price. This was against the principles of natural justice and amounted to price control. which was contrary to the freedom of trade and business, granted under 19 (1) (g) of the Constitution of India. He has relied upon the judgment passed in the case of Basant Industries V. Asst Collector of Customs 1996 (81) ELT 195 (SC) = 1995 (1) TMI 89 - SUPREME COURT in this regard. b. That single sale entry in respect of sale of "Vegetarian Seekh Kebab shown in October 2017, was a result of a mistake by his staff and that too was as an add-on to the main item supplied under that invoice. The DGAP has failed to appreciate that the said product had been offered for sale regularly only in January 2018, i.e. in the post rate reduction period. He had furnished documentary evidence before the DGAP in support of his above claim and from the sales register furnished by him, it was verifiable that the said product had be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e price of the goods or services or both supplied by him." 20. In the context of deciding the present case, we observe that Section 171 of the CGST Act 2017 itself defines the term "profiteering" which means the amount determined on account of not passing on the benefit of reduction in the rate of tax on supply of goods and services or both or the benefit of Input Tax Credit to the recipient by way of commensurate reduction in the prices of the goods or services or both. We find it pertinent that Section 171 of the CGST Act 2017 provides that "profiteering" is to be computed in respect of each supply by a registered person. As per the above-said provisions, there is no connection between the term "profiteering" and "Profit". The scope of profiteering is confined to the question whether the benefit accruing on account of reduction in the tax rate or the benefit of ITC as the case may be, has been passed on to the recipient/consumer or not. In the context of the same, some of the submissions made by the recipient, i.e. those relating to increase in cost on account of royalty, advertising charges and inflation has increased the cost of raw materials (green vegetables and other perish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edure and Methodology' for passing on the benefits of reduction in the rate of tax and ITC has been mentioned in Section 171 (1) of the CGST Act, 2017 itself which states as follows:- "Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices." It is clear from the perusal of the above provision that it mentions "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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, the mathematical methodology employed in the case of one sector cannot be applied in the other sector otherwise it would result in denial of the benefit to the eligible recipients. Moreover, the provisions of Section 171 (1), which are abundantly clear, unambiguous and mandatory, truly reflect the intent of the Central and State legislatures. The Respondent cannot deny the benefit of tax reduction to his customers on the above untenable ground as Section 171 provides a clear cut methodology to compute both the above benefits. It would also be relevant to mention here that Section 171 (2) of the CGST Act, 2017 and Rule 122, 123, 129 and 136 of the CGST Rules, 2017 provide the machinery to enforce the provisions of law in the form of this Authority, the Standing and Screening Committees, the DGAP and a large number of field officers of the Central and the State Taxes to implement the anti-profiteering provisions. Hence, the above plea of the Respondent is not tenable. 22. 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;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. The details of the said transaction show that the Respondent has indeed supplied the product "Vegetarian Seekh kebab" on 4.10.2017 and the invoice shows the CGST and SGST amounts charged as Rs. 3.60/- each. Hence, 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. 24. 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 cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in the computation of profiteering. In this connection, it would be appropriate to refer to the definition of the profiteered amount given in the Explanation attached to Section 171 which states as under:- "Explanation : For the purposes of this section, the expression "profiteered" shall mean the amount determined on account of not passing the benefit of reduction in rate of tax on supply of goods or services or both or the benefit of ITC to the recipient by way of commensurate reduction in the price of the goods or services or both." 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 Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of such excess benefit which he has claimed to have passed, which will result in complete denial of benefit to the customers who were entitled to receive it. 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. 28. The Respondent has further claimed that he incurred a total cost of Rs. 1,18,000/- on account of items, where the base prices charged by him were 'zero' as per his various sales promotion schemes to improve customer loyalty, but the same has not been considered by DGAP, despite it being nothing but a benefit passed on by him to the customers and that the said amount should not be considered as profiteered amount. In this context, we find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et off the impact of denial of ITC, he increased the base prices of the items supplied by him, by more than 8.01% and hence he had indeed profiteered. 30. The Respondent has further contended that neither CGST Act nor the Methodology and Procedure notified by the Authority specify the period up to which a registered person has to keep the base prices same to ensure that the anti-profiteering provisions are not invoked. Also, the period of investigation for the computation of the profiteered amount has not been specified anywhere. As a result, the investigation period, in this case, was from November-2017 to March-2019, i.e. almost 16 months, which was an unduly long period, considering that factors influencing business and pricing decisions, such as competition, pricing, profit margin, perishability of items, etc. did not remain static. Therefore, the period of calculation for profiteering should be kept shorter and as such be considered only up to 31.03.2018. In this context, we observe that in this case, while the rate of GST was reduced from 18% to 5% w.e.f. 15.11.2017, the Respondent increased the base prices of his products immediately thereafter and did not pass on the resul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of price control was a violation of Article 19 (1) (g) of the Constitution of India. The contention of the Respondent is not correct as this Authority or the DGAP has not acted in any way as a price controller or regulator as they don't have the mandate to regulate the same. The Respondent is free to exercise his right to practice any profession or to carry on any occupation, trade or business, as per the provisions of Article 19 (1) (g) of the Constitution. He can also fix his prices and profit margins in respect of the supplies made by him. Under Section 171 this Authority has only been mandated to ensure that both the benefits of tax reduction and ITC which are the sacrifices of precious tax revenue made from the kitty of the Central and the State Governments are passed on to the end consumers who bear the burden of the tax. The intent of this provision is the welfare of the consumers who are voiceless, unorganized and vulnerable. This Authority is charged with the responsibility of ensuring that both the above benefits are passed on to the general public as per the provisions of Section 171 read with Rule 127 and 133 of the CGST Rules, 2017. This Authority has nowhere inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ients are not identifiable at this stage and since the supplies were affected in the state of Maharashtra. The above amounts shall be deposited along with 18% interest payable from the dates from which the above amount was realized by the Respondent from his recipients till the date of deposit in the Consumer Welfare Funds. The above amount of Rs. 8,24,260/-, along with applicable interest thereon, shall be deposited within 3 months of this order failing which it shall be recovered by the concerned SGST Commissioner. 37. 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. 38. The Authority as per Rule 136 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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