2018 (11) TMI 1073 - NAPA - GST

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

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, ... Anti profiteering under Section 171 of the CGST Act, 2017 - commensurate reduction in prices - denial of input tax credit (ITC) and its impact on pricing - methodology for determination of profiteering - deposit in Consumer Welfare Fund (Rule 133) - offence under Section 122(1)(i) of the CGST Act, 2017Anti profiteering under Section 171 of the CGST Act, 2017 - commensurate reduction in prices - Whether the Respondent contravened Section 171 by failing to pass on the benefit of reduction in GST rate and/or ITC by way of commensurate reduction in prices for the period 15.11.2017 to 31.01.2018. - HELD THAT: - The Authority found that Notification No.26/2017 Central Tax (Rate) reduced GST on restaurant services to 5% w.e.f. 15.11.2017 with denial of ITC. Section 171 mandates that any reduction in rate of tax or benefit of ITC shall be passed on to the recipient by way of commensurate reduction in prices. Mere charging of the lower GST rate does not fulfil this mandate if the base price is increased so that the final price to consumer remains the same. On the material, including comparisons of pre and post 15.11.2017 price lists (Annexure 32) and SKU wise supply data, the DGAP established that the Respondent increased base prices on the intervening night of 14/15.11.2017 on average by 10.45% for 1,730 of 1,844 items (93.82%), thereby neutralising the benefit of rate reduction and denial of ITC to consumers. The Authority rejected the Respondent's contentions that Section 171 applies only to pre existing contracts or that price fixing rights under Article 19(1)(g) preclude enforcement; the provision is unambiguous and requires passing on benefits regardless of contract. The Authority therefore held that the Respondent contravened Section 171 for the specified period. [Paras 31, 32, 33, 41, 43]The Respondent failed to pass on the benefit of GST rate reduction and ITC and thereby contravened Section 171 for the period 15.11.2017 to 31.01.2018.Denial of input tax credit (ITC) and its impact on pricing - methodology for determination of profiteering - Whether the DGAP's methodology and computations for determining the ratio of ITC denial and the amount of profiteering were legally permissible and correctly applied in this case. - HELD THAT: - The DGAP computed ITC available for July-October 2017 from GSTR 3B and related records and derived a denial of ITC ratio of approximately 9.11% of taxable turnover; thereafter SKU level price comparisons for 15.11.2017-31.01.2018 showed average base price increase of 10.45%, leading to net higher realization. The Authority held that Section 171 does not prescribe a single rigid computational formula and Rule 126 empowers the Authority to determine methodology; the Authority had promulgated its methodology and applied it after excluding inter unit transfers and inadmissible credits and after considering transitional credit and other adjustments. The Authority rejected the Respondent's selective month picking, challenges to exclusion/inclusion of certain ITC items, and the plea that only audited financials or entity level analysis could be used. The Authority found the DGAP's computations and item/SKU level approach to be justified on the record and adequate for quantification. [Paras 28, 30, 37, 38, 45]The DGAP's methodology and computations for determining denial of ITC and the consequent profiteered amount are legally permissible and have been correctly applied in this case.Deposit in Consumer Welfare Fund (Rule 133) - commensurate reduction in prices - Relief and directions once profiteering is established where consumers are not identifiable. - HELD THAT: - Having determined that benefit was not passed to identifiable consumers, the Authority directed the Respondent to effect commensurate reduction in prices as required by Rule 133(3)(a). Where complainants/consumers cannot be identified, the excess collected must be deposited in the Consumer Welfare Funds; accordingly the Authority quantified the profiteered amount and directed deposit 50:50 between Central and State CWFs of the concerned States, with interest at 18% till deposit, and directed the GST Commissioners to ensure recovery and report compliance. The Authority also noted that depositing GST already paid to government does not absolve the supplier of liability under Section 171, since consumers were deprived of the commensurate reduction. [Paras 46, 47]Respondent directed to reduce prices commensurately and to deposit the quantified profiteered amount in the Central/State Consumer Welfare Funds with interest; enforcement to be ensured by GST Commissioners.Offence under Section 122(1)(i) of the CGST Act, 2017 - Whether the Respondent's conduct amounted to an offence under Section 122(1)(i) and whether showcause for penalty should be issued. - HELD THAT: - The Authority concluded that by issuing tax invoices with base prices deliberately enhanced equal to the tax reduction and by appropriating benefits granted for consumers, the Respondent acted in conscious disregard of statutory obligation and thereby committed an offence under Section 122(1)(i). The Authority therefore directed issuance of show cause notice to the Respondent proposing penalty under the cited provision. [Paras 48]A showcause notice for imposing penalty under Section 122(1)(i) is to be issued to the Respondent.Remand for further quantification - Whether any aspect was remanded for further investigation. - HELD THAT: - The Authority's investigation and quantification was limited up to 31.01.2018. The Authority directed the DGAP to continue investigation to determine the quantum of denial of benefits for the period after 31.01.2018 until such time as the Respondent reduces or has reduced prices commensurately and to submit a further report on that additional period. That aspect-quantification beyond 31.01.2018-was not finally adjudicated on merits and is left to DGAP for fresh examination and reporting. [Paras 3, 47]Quantification of denial of benefits beyond 31.01.2018 remanded to the DGAP for fresh investigation and report.Final Conclusion: The Authority held that M/s Hardcastle Restaurants Pvt. Ltd. contravened Section 171 by not passing on the benefit of GST rate reduction and denial of ITC for 15.11.2017-31.01.2018, quantified profiteering at Rs. 7,49,27,786/ , directed commensurate price reduction and deposit of the amount with interest into Consumer Welfare Funds of the concerned States, ordered GST Commissioners to effect recovery and compliance, directed issuance of a showcause for penalty under Section 122(1)(i), and remanded quantification beyond 31.01.2018 to the DGAP for further investigation. 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.