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TMI Blog2020 (4) TMI 568X X X X Extracts X X X X X X X X Extracts X X X X ..... has alleged 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 increased the base prices of his products and had not passed on the commensurate benefit of reduction in the GST rate from 18% to 5% w.e.f. 15.11.2017, effected vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017. 2. The DGAP, in his report, has stated that on receipt of the said reference from the Standing Committee on Anti-profiteering, a notice under Rule 129 was issued on 09.04.2019, 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 by him 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 documents to evidence the same. The Respondent was also allowed to inspect the non-confidential evidence/information contained in the application from 15.04.2019 to 17.04.2019, which form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e) dated 14.11.2017, GST rate on restaurant services has been reduced from 18% to 5% w.e.f. 15.11.2017 by the Central Government, on the recommendation of the GST Council with the condition that the ITC on the goods and services used in supplying the service was not taken. 8. The DGAP has further stated that before inquiring into the allegation of profiteering, it was important to examine Section 171 of the CGST Act, 2017 which governed the anti-profiteering provisions under GST. Section 171(1) reads as "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 requirement as per the above provisions was abundantly clear that in the event of a benefit of ITC or reduction in the rate of tax, there must be a commensurate reduction in the prices of the goods or services being supplied by a registered person and the final price being charged for each supply had to be reduced commensurately with the extent of the benefit and there was no other legally tenable mode of passing on such benefit of rate reduction or ITC to the recipients/consumers. 9. The DGAP has al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed by the DGAP in Table-A below:- Table-A (Amount in Rs.) Particulars Jul-17 Aug-17 Sept.-2017 Oct.-2017 Total Total Outward Taxable Turnover as per GSTR-3B (A) 6,39,314 6,12,618 6,41,782 6,46,413 25,40,127 ITC Availed as per GSTR-3B (B) 42,104 48,405 51,075 46,024 1,87,608 The ratio of ITC to Net Outward Taxable Turnover (C)= (NB) 7.39 % 11. The DGAP has further reported that the analysis of the details of item-wise outward taxable supplies made during the period from 15.11.2017 to 31.03.2019 revealed that the Respondent had increased the base prices of different items supplied as a part of restaurant service to make up for the denial of ITC post-GST rate reduction. The pre and post GST rate reduction prices of the items sold as a part of restaurant service during the period 01.07.2017 to 14.11.2017 (Pre-GST rate reduction) and 15.11.2017 to 31.03.2019 (Post-GST rate reduction) were compared and it was established that the Respondent had increased the base prices by more than 7.39% i.e., by more than what was required to offset the impact of denial of ITC in respect of items sold during the same period and hence, the commensurate benefit of reduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the Respondent. This additional amount of Rs. 7,33,043/- had been realized by the Respondent from the recipients which included both the profiteered amount and GST on the said profiteered amount. Hence, the provisions of Section 171 (1) of the CGST Act, 2017 had been contravened by the Respondent in the present case. 15. The above Report was considered by this Authority in its sitting held on 17.09.2019 and it was decided to accord an opportunity of hearing to the Applicants and the Respondent on 03.10.2019. Notice was also issued to the Respondent directing him to explain why the Report dated 13.09.2019 furnished by the DGAP should not be accepted and his liability for violation of the provisions of Section 171 of the CGST Act, 2017 should not be fixed. Sh. Neeraj Rai, Partner appeared for the hearings. 16. The Respondent vide his written submissions dated 18.10.2019 has made the following submissions stating:- a. That the methodology applied in DGAP's report dated 13.09.2019 to arrive at profiteering was incorrect as the data used to arrive at profiteering was not a comparable data since average base prices in the pre-rate reduction regime were compared with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; 1.77 d. That after moving to the composition scheme w.e.f. 15.11.2017, he was not allowed to avail ITC on Capital Goods. Hence, to calculate the profiteered amount, he needed to factor in the loss of ITC from Capital Goods, which was 1.074% and the same was needed to be considered for arriving at profiteering. He has also illustrated his loss of ITC on Capital Goods in the Table below:- Non Availability of ITC of Capital Goods Party Name Date of purchase Basic Amount GST Paid Stellar Gastronom Pvt. Ltd. 27.04.2018 71045 12788.1 Nirmal Sales Agencies 23.04.2018 16299 2933.84 Stellar Gastronom Pvt. Ltd. 04.05.2018 41640 7495.2 Stellar Gastronom Pvt. Ltd. 11.05.2018 5280 950.2 Stellar Gastronom Pvt. Ltd. 11.05.2018 1750 210 Stellar Gastronom Pvt. Ltd. 22.05.2018 249409 44893.62 Stellar Gastronom Pvt. Ltd.. 14.06.2018 78200 14076 Rajseva Enterprises Pvt. Ltd 23.06.2018 12203.42 2196.62 Power Solutions 16.07.2018 70000 12600 Stellar Gastronom Pvt. Ltd. 14.08.2018 62139 11185.02 Total 607965.42 109328.8 Turnover of 2018-19 (Rs.) 10179424.60 % loss of GST on Capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent in respect of the non-availability of ITC on Capital Goods has already been addressed in para 13 to 15 of the DGAP's Report dated 13.09.2020 and it was revealed that the base prices of the products had been increased by the Respondent to factor the denial of credit. e. That in DGAP's Report dated 13.09.2019, the profiteered amount has been arrived at by comparing the average of the base prices of the products supplied during the period 01.11.2017 to 14.11.2017, with the actual invoice-wise base prices of such products supplied during the period from 15.11.2017 to 31.03.2019. The reference base prices of the products which were not sold during the period from 01.11.2017 to 14.11.2017 were taken from the sales made during the period from July-2017 to October-2017. Only those invoices, where the transaction prices of the products during the period from 15.11.2017 to 31.03.2019 were more than the commensurate base prices of the impugned products had been taken into account for computing profiteering and the invoices where the transaction prices were less than the commensurate base prices of the impugned products, they had not been considered. 18. The Respondent vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loss of denial of ITC in the rate reduction regime. vi. That in BOGO offer, there were 2 Subs, one free of cost and second was charged at the normal price. By doing this, he claimed to have passed on the benefit to the customers through the same Invoice; that all the sales made in respect of the BOGO offer on 02.11.2018 should be excluded from the scope of profiteering and hence, the profiteered amount would reduce by Rs. 4,970/-. He has also enclosed the following sample invoice of BOGO offer for Store No 58855:- (a) Inv No. 45425 dated 2/11/18 Amount Rs. 190/-. (b) Inv No. 45436 dated 2/11/18 Amount Rs. 215/-. (c) Inv No. 45449 dated 2/11/18 Amount Rs. 220/-. vii. That on point No. 6 of his previous submissions dated 18.10.2019 which related to inflation, the DGAP has not given any comment. In this regard, he has to submit that he was not holding inventory for more than one week due to the perishable nature of the items. One of his main raw materials was vegetables prices of which keep changing on day to day basis. Various factors like competition pricing, long term strategies for market penetration, the profit margin for sustaining in the market, life cycle of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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. (2). The Central Government may, on recommendations of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being in force, to examine whether ITCs availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him. (3). The Authority referred to in sub-section (2) shall exercise such powers and discharge such functions as may be prescribed. (3A) Where the Authority referred to in sub-section (2) after holding examination as required under the said sub-section comes to the conclusion that any registered person has profiteered under sub-section (1), such person shall be liable to pay penalty equivalent to ten per cent. of the amount so profiteered: PROVIDED that no penalty shall be leviable if the profiteered amount is deposited within thirty days of the date of passing of the order by the Authority. Explanation:- For the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at benefit of the reduction in the rate of tax and/ or benefit of ITC which is a sacrifice of revenue from the kitty of Central and State Governments in a welfare state is passed on to the recipients, and, if tracked down the entire value chain, to the end consumers. The welfare of the consumers who are voiceless, unorganized and scattered is the soul of the above provision. This Authority has been working in the interest of consumers as the trade is bound to pass on the benefit of tax reduction and ITC which becomes available to it due to revenue sacrificed by the Government. This Authority does not, in any manner, interfere in the business decisions of the Respondent and hence the functioning of the Authority and the anti-profiteering machinery is within the confines of the four walls of the provisions of Section 171 of the CGST Act 2017 and in no way violates the tenets of Article 19 (1) (g) of the Constitution. Keeping the above observations in mind, we proceed to address the specific issues raised by the Applicants and the Respondent in the present case. 22. The Respondent has claimed that the methodology applied to arrive at profiteering was incorrect as the data used to arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed on by way of reduction in the prices which has to be computed in respect of each product or unit based on the tax reduction as well as the existing base price of the product or unit or the additional ITC available. 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 or unit to unit 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 the profiteered amount. However, to give further clarifications and to elaborate upon this legislative intent behind the law, this Authority has been empowered to determine/expand the Procedure and Methodology in detail which has been notified by this Authority vide its Notification dated 28.03.2018 under Rule 126 of the CGST Rules, 2017. However, one formula which fits all cannot be set while determining such a "Methodology and Procedure" as the facts of each case are different. In one real estate project, date of start and completion of the project, price of the house/commercial unit, mode of payment of the price, stage of completion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discounts were given due to the GST rate reductions. These invoices revealed that the discounts offered (Sub of The Day-SOTD) were following the general discount pattern which was being followed by the Respondent in the course of his business. Therefore, the above discounts cannot be construed to have been given due to the GST rate reduction and hence, the above claim of the Respondent cannot be accepted. 25. The Respondent further contended that the base price in respect of Sub of the Day (SOTD) was Rs. 110/- which was incorrectly mapped to Rs. 105/- by the DGAP in many cases while working out the base rates for the period from July-2017 to October-2017. In this context, it has been revealed from the records that the Respondent, at no point in time, has furnished any invoice/supply document that showed SOTD as an item supplied/sold by him. Therefore, there is no ground for accepting Respondent's contention regarding SOTD. Further, it was found that for computing the extent of profiteering, the product-wise average base prices for the items supplied in the pre rate reduction period had been taken from the Respondent's invoices which were furnished by him and not from any s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 27. The Respondent has also contended that after moving to the composition scheme w.e.f. 15.11.2017, he was not allowed to avail ITC on Capital Goods. 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. In this regard, we find that the DGAP has already factored the fact of denial of ITC to the Respondent w.e.f. 15.11.2017 in the computation which is based on the comparison of ratios of the Total ITC available to the Net Taxable Turnover in the pre rate reduction regime with the post rate reduction regime. It is pertinent to mention that ITC on capital goods, if any, availed by the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, this contention of the Respondent is not maintainable. 30. The Respondent has further contended that no period has been prescribed under the Act to keep the base prices the same so the anti-profiteering provisions should not be invoked. The DGAP while calculating profiteered amount has arbitrarily considered sales from November-2017 to March-2019 i.e. almost 16 months after the change in GST rate, which was an unduly long period. 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 resultant benefit by way of commensurate reduction in the prices of his supplies at any point of time till 31.03.2019. In other words, the violation of the provisions of Section 171 of the CGST Act 2017 has continued unabated in this case and the offence continues. to date. The Respondent has nowhere produced any evidence to prove from which date the benefit was passed on by him. The fact that the Respondent h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. By doing so, the Respondent has defeated the very objective of both the Central as well as the State Governments which aimed to provide the benefit of rate reduction to the general public. The Respondent was legally not required to collect the excess GST and therefore, he has not only violated the provisions of the CGST Act, 2017 but has also acted in contravention of the provisions of Section 171 (1) of the above Act as he has denied the benefit of tax reduction to his customers by charging excess GST. Had he not charged the excess GST the customers would have paid less price while purchasing goods from the Respondent and hence the above amount has rightly been included in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by more than what was required to offset the impact of denial of ITC, supplied as a part of restaurant services to make up for the denial of ITC post-GST rate reduction and on comparison of pre and post GST rate reduction prices of the items sold in respect of items sold. Accordingly, the quantum of profiteering has been computed to Rs. 7,33,043/- as per Annexure-10 of the DGAP's Report dated 13.09.2019, which is correct and can be relied upon. 35. Based on the above facts the profiteered amount is determined as Rs. 7,33,043/- as has been computed in Annexure-10 of the DGAP Report dated 13.09.2019. Accordingly, the Respondent is directed to reduce his prices commensurately in terms of Rule 133 (3) (a) of the above Rules. The Respondent is also directed profiteered by the Respondent as ordered by this Authority is deposited in the CWFs of the Central and the State Government of Maharashtra as per the details given above. A report in compliance of this order shall be submitted to this Authority by the concerned SGST Commissioner within a period of 4 months from the date of receipt of this order. 38. A copy each of this order be supplied to the Applicants, the Respondent and th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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