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TMI Blog2020 (12) TMI 889X X X X Extracts X X X X X X X X Extracts X X X X ..... rom 18% to 5% w.e.f. 15.11.2017, on the restaurant service being supplied by the Respondent, vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017 without the benefit of ITC. Therefore, the Respondent is liable to pass on the benefit of tax reduction to his customers in terms of Section 171 (1) of the above Act. It is also apparent that the present investigation has been carried out w.e.f. 15.11.2017 to 31.03.2019. It is also evident that the Respondent has been dealing with a total of 280 items during the period from 15.11.2017 to 31.03.2019. Upon comparing the average selling prices as per the details submitted by the Respondent for the period from 01.07.2017 to 14.11.2017 and the actual selling prices post rate reduction, i.e. w.e.f. 15.11.2017 to 31.03.2019 the DGAP has reported that the GST rate of 5% has been charged w.e.f. 15.11.2017 however the base prices of 170 products have been increased more than their commensurate prices w.e.f. 15.11.2017 which established that because of the increase in the base prices the cum-tax prices paid by the consumers were not reduced commensurately, despite the reduction in the GST rate. As per the provisions of Sec 171 (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Anti-profiteering under Rule 128 (2) of the CGST Rules 2017. Vide the application, it has been alleged that the Respondent had increased the base prices of his products and had not passed on the benefit of reduction in the GST rate from 18% to 5% w.e.f. 15.11.2017 vide Notification No.46/2017-Central Tax (Rate) dated 14.11.2017 by way of commensurate reduction in prices, in terms of Section 171 of the Central Goods and Services Tax Act, 2017. 2. On receipt of the aforesaid reference from the Standing Committee on Anti-profiteering, a Notice under Rule 129 of the Rules was issued by the Director-General of Anti-profiteering on 10.05.2019, 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 to his 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 to furnish all documents in support of his reply. Further, the Respondent was allowed to inspect the non-confidential evidence/information which formed the basis of the said Notice, during the period 20.05.2019 to 22.05.2019. How ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices. Thus, the legal requirement was abundantly clear that in the event of a benefit of input tax credit or reduction in the rate of tax there must be a commensurate reduction in the prices of the goods or services. Such reduction could obviously be in money terms only so that the final price payable by a consumer got reduced. That was the legally prescribed mechanism for passing on the benefit of input tax credit or reduction in the rate of tax to the consumers under the GST regime. Moreover, it was also clear that the said Section 171 simply did not provide a supplier of goods or services, any other means of passing on the benefit of input tax credit or reduction in the rate of tax to the consumers. 9. The DGAP has reported that it was alleged that the Respondent did not pass on the benefit of the reduction in the GST rate to the recipients. It was seen that the Respondent was dealing with a total of 233 items while supplying restaurant services before 15.11.2017. It was also seen that the Respondent had been dealing with a total of 280 items during the period 15.11.2017 to 31.03. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable turnover had been taken for determining the impact of denial of input tax credit (which was available to the Respondent till 31.10.2017). On this basis, the DGAP has found that input tax credit amounting to ₹ 3,35,471/- was available to the Respondent during the period July 2017 to October 2017 which was 8.85% of the net taxable turnover of restaurant service amounting to 37,90,741/- supplied during the same period. With effect from 15.11.2017, when the GST rate on restaurant service was reduced from 18% to 5%, the said input tax credit was not available to the Respondent. A summary of the computation of the ratio of input tax credit to the taxable turnover of the Respondent in the pre-GST period was furnished by the DGAP as is given in Table-A below: TABLE-A (Amount in Rs.) Particulars Jul-17 Aug-17 Sept.- 2017 Oct.- 2017 Total ITC Availed as per GSTR-3B (A) 83,555 92,187 83,383 76,346 3,35,471 Total Outward Taxable Turnover as per GSTR-3B (B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.2017 (B) 14 Sum of taxable value from 01.11.2017 to 14.11.2017 (C) 3430 Average base price from 01.11.2017 to 14.11.2017 (D=C/B) 245 Base price with denial of input tax credit @8.85% (E=D*1.0885) 266.68 GST @ 5% (F= E*5%) 13.34 Commensurate price to be charged w.e.f. 15.11.2017 (G=E+F) 280.02 Selling price per unit as per Invoice No. 1/A-24756 dated 15.11.2017 (H) 295.00 Total profiteering (I=H-G) 14.98 14. The DGAP has further reported that on the basis of the scrutiny of the Respondent's records (item-wise supply invoices, turnover from supplies other than zero-rated, nil rated, and exempted supplies, ITC availability, and GST returns for the period 15.11.2017 to 31.03.2019), the impact of denial of the input tax credit was worked out. Thereafter the said impact of denial of ITC and the impact of the tax rate reduction were considered to comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as completely arbitrary and there was no uniformity in the mechanism adopted; that it was very common in the restaurant business to offer discretionary discounts to the customers and these discounts largely depended on market practices but all discounts were discretionary and depending upon the sales, inventory position, competitor's strategy, market penetration, customers' loyalty, or other similar factors; that giving a discount was the norm in this competitive world and depended on various business factors; that it was the right of the business to decide the quantum of discount and period that needed to be given to sustain in the competitive markets and attract more customers; that businesses also have the right to withdraw the discounts and other promotional offers any time and there was no rule governing that any deal or discount could not be withdrawn until the expiry of a specified period; that the DGAP has completely ignored the fact that discounts were given under special circumstances only and has instead calculated the average prices based on the total sales, including the discounted as well as normal sales, for the pre-tax rate reduction period from 01.11.2017 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 290.00 Oct'17 5 12 Veggie Delite Flat Bd 225.00 Oct'17 6 12 Western Egg Bkfst Sub 205.00 Oct'17 7 6 Chicken Slice Flat Bd 160.00 Oct'17 8 6 Chicken Tandoori Flat Bd 160.00 Oct'17 9 6 Chicken Slice Egg Bkfst S 110.00 Oct'17 10 6 Mexican Bean Patty Su 120.00 Oct'17 11 6 Turkey Chicken Slic 165.00 Oct'17 12 6 Veggie Delite Flat Bd 120.00 Oct'17 13 6 Veggie Patty Flat Bd 135.00 Oct'17 14 B.M.T. Extr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 12 Cookies 350.00 Sept'17 36 12 Chicken Slice Egg Bkfst S 205.00 Sept'17 37 12 Paneer Tikka Flat Bd 245.00 Sept'17 38 6 Aloo Patty Flat Bd 135.00 Sept'17 39 6 Chicken Slice Egg Bkfst F 110.00 Sept'17 40 6 ChknTikka Flat Bd 160.00 Sept'17 41 6 Corn Peas Flat Bd 135.00 Sept'17 42 6 Egg Cheese Bkfst Flat 110.00 Sept'17 43 6 Hara Bhara Kabab Flat Bd 120.00 Sept'17 44 6 Subway Club Flat Bd 165.00 Sept'17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hara Bhara Kabab Add 6 40.00 Aug'17 66 Mexican Bean Patty E 40.00 Aug'17 67 SOTD 6in Aloo Patty 105.00 Aug'17 68 SOTD 6in Aloo Patty or 105.00 Aug'17 69 SOTD 6in Chatpata or Ck 105.00 Aug'17 70 SOTD 6in Ckn Slice or M 105.00 Aug'17 71 SOTD 6in Ckn Tik or Cor 105.00 Aug'17 72 SOTD 6in Corn Peas 105.00 Aug'17 73 SOTD 6in Corn Peas or 105.00 Aug'17 74 SOTD 6in Hara Bhara or 105.00 Aug'17 75 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter he had increased his product prices in January 2019 after 15 months of the GST rate reduction, the profiteered amount has increased substantially in the months of February, 2019 and March, 2019 when compared with the monthly figures of the period from 01.07,2017 to 31.03.2019 because he had revised the prices of his products/ items in January 2019 to offset general inflation and higher expenses; that as per the DGAP's report, the quantum of profiteering was 3.19% of his turnover for the entire investigation period before February 2019, but for the period February- March 2019, it rose significantly to 6.53% of the turnover; that the same was reflected in the Chart below:- Month wise Comparison Chart Profiteered Amount Analysis month-wise Month Total Profiteered Amount Total Taxable Turnover Profiteering as a percentage of the Turnover Month Total profiteered Amount Total Taxable Turnover Profiteering as a percentage of the Turnover Nov'17 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge in tax for restaurant service. However, DGAP has calculated profiteered amount till June-2019 and compared the base price which were existing on 14.11.2017 with actual Invoice prices till June-2019 and he has completely ignored the fact that business was having fundamental right to increase the prices of its products and he had increased the prices of his products after substantial period approximately 15 months from the date of rate reduction to meet out general inflation and other business related expenditure, that the DGAP was working like a price controlling authority and that there was no stipulation in the statute prescribing the mechanism to be followed by businesses for revision of prices and up to what period prices of products could not be increased. d. That the amount of profiteering computed by the DGAP included the element of 5% GST which had been paid to the Governments as CGST and SGST; that according to the DGAP, not only the base price should have been reduced but the GST paid should also have been proportionately reduced but fact remained that the entire GST collected by him from the recipients/ customers has already been deposited with the Government of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Feb'19 78,793.55 3,752.07 75,041.47 Mar'19 77,011.38 3,667.21 73,344.18 666,700.25 31,747.63 634,952.62 e. That as per his franchisee agreement with his franchisor, he was under a legal obligation to pay 8% on net sales towards royalty and 4.5% towards advertisement charges to the franchisor, M/s Subway Systems India Private Limited; that accordingly he had paid GST @12% on royalty and GST @18% on advertisement expenses; that both, royalty and advertisement charge, had to be calculated based on his net taxable sales; that the DGAP has calculated the profiteering amount without considering the increase in royalty expenses (as also advertisement expenses) which were a percentage of the net sales and not a loss of ITC; that DGAP has ignored the fact that in the post-tax-rate reduction period, i.e. post 14.11.2017, his cost of royalty had increased by 1.769% as compared to the period before the tax rate reduction, as was shown in the Table below:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Impact after royalty expenses adjustment Difference due to Royalty Expenses adjustment Nov'17 19,904.99 10,528.76 9,376.23 Dec'17 35,480.87 18,183.02 17,297.85 Jan'18 36,690.29 19,177.16 17,513.13 Feb'18 31,073.44 16,098.99 14,974.45 Mar'18 33,966.52 17,668.40 16,298.12 Apr'18 33,364.22 17,398.22 15,966.00 May'18 34,092.86 17,733.27 16,359.59 Jun'18 31,800.00 16,838.93 14,961.07 Jul'18 34,727.90 18,232.47 16,495.43 Aug'18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proach of the European Commission and the matter was taken to the Dispute Settlement Body of the World Trade Organization (WTO) which held in favour of the Government of India. In the Appeal filed by the EU before the Appellate Body, the Appellate Body held that the practice of not netting off positive dumping margins and negative dumping margins was not correct. Thus, the Government of India succeeded before the WTO Appellate Body that positive and negative margins must be taken together and therefore got lower dumping margins for Indian exporters. European Commission accepted the decision and revised dumping margins not only for bed liens cases but also for other cases against India. Therefore, the position taken by the Government of India before the WTO should be considered by the DGAP while calculating the profiteered amount. h. That accordingly, in his case, the computation of profiteering ought to have taken into account all those cases where he had reduced the prices more than commensurately; that the DGAP had considered the impact of such cases as zero instead of incorporating the negative values during the computation of the profiteered amount; that based on Annexure 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (56,263.38) (60,926.51) June 18 (9,456.98) (9,456.98) Mar 19 - (56,440.96) (56,440.96) (65,897.93) July 18 (12,564.92) (12,564.92) - - - (12,564.92) Total - -45,595.47 -45,595.47 0.00 -275,902.58 -275,902.58 -321,498.05 i. That the DGAP should have completed the investigation within a period of six months of the receipt of the reference from the Standing Committee or within such extended period not exceeding a further period of three months for reasons to be recorded in writing as may be allowed by thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to understand the application of the same on their businesses in November 2017; that the tax regime for 'restaurant service' had been changed within a short period of time of 4-month i.e. with effect from 15.11.2017 after the introduction of GST; that for these reasons, the impact of changes should be considered only for a certain specific period and that the period for calculation of profiteering amount should be limited to around 04 months from the date of tax rate reduction i.e. up to the period March 2018; that thus the period of calculation of profiteered amount in this case should be considered up to 31.03.2018 since the investigation period of 17 months was an extraordinarily long period. I. That given the above submissions, he requested that a considerate approach be adopted in his case since he was operating in a market full of competition and since he had to maintain identical pricing as that of other Subway outlets in Mumbai. m. That several writ petitions were pending in various High Courts on the issue of profiteering and that all the petitioners have raised the important issues relating to the constitutional validity of anti-profiteering provisions as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the base prices of 83 items which was required to establish profiteering in respect of these 83 items as these items had substantial sales in post rate reduction period. b. That in the instant case, the Standing Committee on Anti-profiteering had examined the complaint and it was decided to refer the matter to the DGAP for detailed investigation, which was received in the office of DGAP on 02.05.2019. Accordingly, a Notice under Rule 129 of the CGST Rules, 2017 was issued to the Respondent on 10.05.2019. Based on the facts and circumstances of the case, the investigation was carried out covering the period from 15.11.2017 to 31.03.2019. Further, the legislative intent behind Section 171 of the CGST Act, 2017, was to pass on the benefit of tax-rate reduction by way of commensurate reduction in price. In other words, every recipient of goods or services had to get the due benefit from the supplier. Every supplier in the supply chain was legally required to pass on the benefit of the tax-rate reduction by maintaining the base price and charging GST at the reduced rate on such base price. Every supplier of goods and services was free to increase the price of his supply dependi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplier by issuing a credit note could be declared in the return filed by the supplier and his tax liability would stand adjusted to that extent in terms of Section 34 of the CGST Act, 2017. Therefore, the option was always open to the Petitioner to return the tax amount to the recipients by issuing credit notes and adjusting his tax liability for the subsequent period to that extent. d. That as per the franchise agreement in the case of the Respondent, the royalty expense and advertisement charges were fixed as a certain percentage of the net sales. These expenses were being paid by the Respondent not only before the tax-rate reduction but also in the period after the tax-rate reduction. Hence there appeared to be no increase/in the expenses since there was no increase in the percentage which was fixed in the franchise agreement. Moreover, in respect of GST paid by the Respondent on these expenses, the Respondent was availing Input Tax Credit of the same before rate reduction but after rate reduction, the Respondent could not avail the Input Tax Credit of the same in terms of Notification No. 46/2017 -Central Tax (Rate) dated 14.11.2017 Therefore, this impact of denial of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another recipient to that extent. In other words, the benefit of rate reduction passed on to one customer more than the commensurate benefit could not be appropriated against the benefit due to other customer. Therefore, the Respondent's contention was beyond the scope of Section of the CGST Act, 2017. f. That in this case, reference from the Standing Committee on Anti- profiteering was received in the office of DGAP on 02.05.2019 and the time limit to complete the investigation was extended upto 01.02.2020 by this Authority, in terms of Rule 129 (6) of the Rules, vide Order dated 31.10.2019. Accordingly, the investigation was completed within the stipulated time and the Investigation Report dated 29.01.2020 was submitted before this Authority on 30.01.2020 under Rule 129 (6) of the CGST Rules, 2017. Hence, the report was submitted within the prescribed time limit/period in this case. g. That the MRP was the maximum price at which goods could be sold in retail. The value of the transaction between the manufacturer and the wholesaler or the wholesaler and the retailer was invariably less than the MRP. Therefore, regardless of whether MRP was marked on the product or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction in the rate of tax from 18% to 5% w.e.f. 15.11.2017, on the restaurant service being supplied by the Respondent, vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017 without the benefit of ITC. Therefore, the Respondent is liable to pass on the benefit of tax reduction to his customers in terms of Section 171 (1) of the above Act. It is also apparent that the present investigation has been carried out w.e.f. 15.11.2017 to 31.03.2019. 22. It is also evident that the Respondent has been dealing with a total of 280 items during the period from 15.11.2017 to 31.03.2019. Upon comparing the average selling prices as per the details submitted by the Respondent for the period from 01.07.2017 to 14.11.2017 and the actual selling prices post rate reduction, i.e. w.e.f. 15.11.2017 to 31.03.2019 the DGAP has reported that the GST rate of 5% has been charged w.e.f. 15.11.2017 however the base prices of 170 products have been increased more than their commensurate prices w.e.f. 15.11.2017 which established that because of the increase in the base prices the cum-tax prices paid by the consumers were not reduced commensurately, despite the reduction in the GST rate. 23. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al to the denial of ITC or these were new products launched post-GST rate reduction. 25. Based on the aforesaid change in the tax rates, the impact of denial of ITC and the details of outward supplies (other than zero-rated, nil rated, and exempted supplies) during the period from 15.11.2017 31.03.2019, the amount of net higher sale realization due to increase in the base prices of the products, despite the reduction in the GST rate from 18% to 5% with denial of ITC or the profiteered amount has come to ₹ 6,66,700/- as per Annexure 12 of the Report of the DGAP including the GST on the base profiteered amount. The details of the computation have been given by the DGAP his Report. 26. The methodology adopted by the DGAP for computation of the profiteered amount by comparing the average base prices of the products in respect of which the rate of GST was reduced from 18% to 5% w.e.f. 15.11.2017 without the benefit of ITC with the actual post rate reduction base prices of these products appears to be correct, reasonable, justifiable, and in consonance with the provisions of Section 171 of the CGST Act, 2017, as it was not possible to compare the actual base prices prevalen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. Further, Section 15 (3) (a) of the above Act also provides that the value of the supply shall not include any discount which was given before or at the time of the supply if such discount had been duly recorded in the invoice issued in respect of such supply and thus, the GST was chargeable on the actual transaction value after excluding any discount (conditional as well as unconditional) and therefore, actual transaction value has been rightly considered by the DGAP for computation of profiteering. The Respondent had simply declared the reduced rate (discounted) as the total taxable value in the sales data maintained by him. The Respondent never claimed this fact in his written submissions made before the DGAP during the investigation. Furthermore, the Respondent had not submitted any documentary evidence to substantiate his claim. Therefore, the discounted prices, considered as normal prices by the DGAP for arriving at the base prices before rate reduction, were correct. The Respondent has himself submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d any evidence during the course of the investigation that the price rise affected by him was commensurate with the tax reduction. He has further claimed to have increased his prices in January 2019 on account of inflation and other expenses although at no stage between the period w.e.f. 01.11.2017 till 31.03.2019 he has produced any reliable evidence to show that he has passed on the benefit of tax reduction commensurately. Therefore, the DGAP has rightly computed the profiteered amount. Hence, the above contention of the Respondent is not tenable. 29. The Respondent has further contended that the right to trade was a fundamental right guaranteed under Article 19 (1) (g) of the Constitution of India and the right to trade incorporated the right to determine prices which could not be taken away without any explicit authority under the law. Therefore, this form of price control was a violation of Article 19 (1) (g) of the Constitution of India. In this connection, it would be relevant to mention that the Respondent has full right to fix his prices under Article 19 (1) (g) of the Constitution but he has no right to appropriate the benefit of tax reduction under the garb of the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered from the Government as it is required to be deposited in the CWFs of the Central and the State Government. Therefore, the above amount has been correctly included in the profiteered amount by the DGAP, therefore, the contention of the Respondent is untenable and hence it cannot be accepted. 30. The Respondent has further contended that the franchisor i.e. M/s Subway India Pvt. Ltd. was charging 8% and 4.5% totalling 12.5% Royalty and Advertisement Charges on his net sales (on which GST @ 12% and 18% was also being charged respectively) and after 01.07.2017 his royalty cost has directly increased by 1.769% which has not been considered by the DGAP. In this connection, it would be appropriate to mention that there has been no change in the rates of royalty and advertisement charges in the post-rate reduction period and hence, they have no impact on the base prices of the Respondent. These charges were already built in the base prices during the pre rate reduction period and hence, they cannot be added again to the base prices. The Respondent has already been given the benefit of denial of ITC on both the above expenses during the computation of the profiteered amount as no pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f tax rate reduction passed on to a particular recipient or customer cannot be adjusted against the benefit of tax rate reduction that ought to accrue to another recipient or customer. Therefore, the above contention of the Respondent is not tenable. 33. The Respondent has also alleged that the DGAP has ignored the negative values and resorted to 'zeroing' to compute higher profiteering which was used by the anti-dumping authorities in certain countries and which had been opposed by the Government of India before the WTO and vide Report No. WT/DS141/AB/R dated 1.3.2001 of the Appellate Body of WTO, regarding Anti-Dumping Duties on imports of Cotton-Type Bed Linen from India, the stand of the Indian Government was accepted and it was held that the practice of 'netting oft should be applied and hence the above methodology was binding on the DGAP while calculating profiteering. The above contention of the Respondent is not correct as no netting off can be applied in the cases of profiteering as the benefit has to be passed on to each customer which has to be computed on each product. The customers have to be considered as individual beneficiaries and they cannot be comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ITC denial which included the loss of ITC in respect of the MRP based items also. Therefore, MRP has no impact on the computation of the profiteered amount. Hence, the above plea of the Respondent is not maintainable. 36. The Respondent has further contended that the CGST Act, 2017, the CGST Rules, 2017 and the Methodology and Procedure notified by this Authority did not prescribe the period up to which the profiteered amount is to be calculated. Therefore, keeping in mind the perishable nature of the items and various other factors the profiteered amount should be restricted up to March 2018. In this context, we observe that while the rate of GST was reduced from 18% to 5% w.e.f. 15.11.2017, the Respondent had increased the base prices of his products immediately w.e.f. 15.11.2017 and had taken no steps to pass on the resultant benefit of tax reduction by way of a commensurate reduction in the prices of his supplies at any point of time till 30.06.2019. 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 not produced any evidence to prove from which date ..... X X X X Extracts X X X X X X X X Extracts X X X X
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