2018 (11) TMI 1073 - NAPA - GST

Respondent violated GST Act by not passing rate reduction benefits to consumers. Price reduction, penalty, consumer welfare emphasized.

Shri Ravi Charaya, Shri Chandranath Sarkar, Shri Shreepad Shende, Shri Jayasankar Venkatramani Versus M/s Hardcastle Restaurants Pvt. Ltd.

The respondent was found to have profiteered by not passing on the benefits of GST rate reduction to consumers, violating Section 171 of the CGST Act, ... Profiteering - reduction of rate of tax - Restaurant Services - rate of tax reduced from 18% to 5% w.e.f. 15.11.2017 - it is alleged that though the rate of GST on Restaurant Services had been reduced from 18% to 5% w.e.f. 15.11.2017, the Respondent had increased the prices of the products which were being sold by him and had maintained the same price which he was charging before the above reduction - contravention of the provisions of Section 171 of the CGST Act, 2017. Held that:- It is established beyond any doubt that the Respondent had increased the base prices on the intervening night of 14/15th November, 2017 by an average of 10.45% in respect of 1,730 products out of the 1,844 products which comes to about 93.82% which clearly shows that he had deliberately in conscious disregard of the provisions of Section 171 of the above Act had resorted to profiteering as he had no ground whatsoever to increase his prices on the eve of tax reduction. The quantum of denial of benefit due to the reduction in the rate of tax and the benefit of ITC availed by the Respondent which was required to be passed on to the customers or the amount of profiteering done by the Respondent is determined as ₹ 7,49,27,786/- under the provisions of Rule 133 (1) of the CGST Rules, 2017 as the Respondent has failed to pass on both the above benefits to his customers - The above amount is inclusive of the extra GST which the Respondent had forced the customers to pay due to wrong increase in his basic prices otherwise the prices to be paid by them should have further got reduced by the amount of the GST illegally charged from them. 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 which has been availed by him as per Rule 133 (3) (a). Since the complainants are not identifiable in this case the Respondent is further directed to deposit the above amount as per the provisions of Rule 133 (3) (c) in the ratio of 50:50 in the Central or the State CWFs of all the 10 States mentioned in para 12 above, along with the interest @ 18% till the same is deposited, within a period of 3 months. Penalty - Held that:- The Respondent has resorted to profiteering by charging more price than that he could have charged by issuing incorrect 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 exactly equal to the amount of reduced tax and benefit of ITC and thus he had denied the benefit of ITC and 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 - a SCN may 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. Issues Involved:1. Allegation of profiteering by the respondent.2. Examination of the respondent's defense.3. Calculation and methodology of profiteering.4. Legal interpretation of Section 171 of the CGST Act, 2017.5. Determination of the quantum of profiteering.6. Directions for the respondent and authorities.Issue-wise Detailed Analysis:1. Allegation of Profiteering by the Respondent:The applicants alleged that despite the reduction in GST on restaurant services from 18% to 5% effective from 15.11.2017, the respondent increased the base prices of products, thereby not passing the tax benefit to consumers. The respondent was accused of profiteering in violation of Section 171 of the CGST Act, 2017.2. Examination of the Respondent's Defense:The respondent argued that the benefit of the tax reduction was neutralized due to the withdrawal of Input Tax Credit (ITC). He also contended that the price revision did not fall within the purview of Section 171 as it applied only to pre-existing contracts. The respondent claimed that the increase in base prices was due to increased costs, including the abrupt denial of ITC, and that he had not profiteered.3. Calculation and Methodology of Profiteering:The DGAP reported that the respondent increased the base prices of 96.20% of products post-GST rate reduction, thus denying consumers the benefit of the tax reduction. The DGAP calculated the ratio of denial of ITC to the total taxable turnover as 9.11% and found that the respondent increased the base prices by 10.45%, resulting in a profiteered amount of Rs. 7.49 Crores.4. Legal Interpretation of Section 171 of the CGST Act, 2017:The authority clarified that Section 171 mandates the passing of benefits from tax rate reduction or ITC to consumers by way of commensurate reduction in prices. The respondent's claim that Section 171 did not apply to his case was rejected. The authority emphasized that Section 171 does not interfere with price fixing but ensures that tax benefits are passed on to consumers.5. Determination of the Quantum of Profiteering:The authority determined that the respondent had profiteered by Rs. 7.49 Crores by not reducing prices commensurately with the tax rate reduction. The profiteering amount includes the extra GST charged due to the increased base prices. The respondent's claim of increased costs and other factors was not considered relevant to the calculation of profiteering under Section 171.6. Directions for the Respondent and Authorities:The respondent was directed to reduce prices commensurately with the reduced tax rate and deposit the profiteered amount in the Consumer Welfare Funds of the respective states. The Central and State GST Commissioners were instructed to ensure compliance and recover the amount along with interest if not deposited. The DGAP was directed to investigate further for the period beyond 31.01.2018.Conclusion:The authority concluded that the respondent had resorted to profiteering by not passing on the benefits of GST rate reduction to consumers, thereby violating Section 171 of the CGST Act, 2017. The respondent was ordered to deposit the profiteered amount and a show-cause notice for penalty under Section 122(1)(i) of the CGST Act was to be issued.