2020 (4) TMI 570 - NAPA - GST

GST Violation Judgment: Consumer Benefit Not Passed, Profiteering Penalty.

The judgment found the Respondent in violation of Section 171(1) of the CGST Act, 2017 for not passing on the benefit of the GST rate reduction to ... Profiteering under Section 171(1) of the CGST Act, 2017 - commensurate reduction in prices - denial of Input Tax Credit impact calculation as percentage of taxable turnover - inclusion of tax component in computation of profiteered amount - no netting off/zeroing of benefits across different recipients or supplies - continuing violation and period of investigation - penalty under Section 171(3A) of the CGST Act, 2017Profiteering under Section 171(1) of the CGST Act, 2017 - commensurate reduction in prices - no netting off/zeroing of benefits across different recipients or supplies - Whether the Respondent contravened Section 171(1) by not passing on the benefit of GST rate reduction/denial of ITC to recipients - HELD THAT: - The Authority found that Notification No. 46/2017 reduced the GST rate on restaurant services from 18% to 5% w.e.f. 15.11.2017 and concomitantly denied availability of input tax credit for such supplies. Section 171(1) mandates that any reduction in rate of tax or benefit of ITC must be passed to recipients by way of commensurate reduction in prices, measured in money terms for each supply. The DGAP's examination of product-wise invoices and returns established that the Respondent increased base prices of a number of items after 15.11.2017 and charged lower tax rates on those increased bases so that consumers did not receive a commensurate reduction in the total price payable. Contentions by the Respondent-relating to franchise royalty/advertising charges, inflation, business strategy, or Article 19(1)(g)-do not alter the statutory obligation under Section 171(1) to pass on the tax/ITC benefit on each supply; such commercial costs cannot be netted-off against the statutory benefit. Likewise, the Authority rejected the Respondent's plea for 'netting off' positive and negative price variations across SKUs, holding that every recipient is entitled to the benefit and no cross-appropriation is permissible. The Authority therefore concluded that the Respondent denied the benefit to recipients and committed profiteering as defined in Section 171(1). [Paras 18, 21, 22, 23, 27]The Respondent contravened Section 171(1) of the CGST Act, 2017 by not passing on the commensurate benefit of the reduction in GST rate/denial of ITC to his recipients; the allegation of profiteering is upheld.Denial of Input Tax Credit impact calculation as percentage of taxable turnover - inclusion of tax component in computation of profiteered amount - continuing violation and period of investigation - penalty under Section 171(3A) of the CGST Act, 2017 - Quantum of the additional benefit (profiteered amount) to be passed on and ancillary consequences - HELD THAT: - The DGAP computed the ratio of ITC to net taxable turnover for the pre-reduction period (July-October 2017) as 6.32% and used product-wise average pre-reduction base prices (derived from the Respondent's own invoices) to compare with actual post-reduction selling prices. Where base prices were increased by more than 6.32%, the excess constituted profiteering; the computation included the GST element on the excess base so that the final price payable by consumers is properly reflected. The DGAP's item-wise computation, exemplified in the report and reconciled with GSTR-1/GSTR-3B returns, produced a net higher sale realization (profiteered amount) for the investigation period. The Respondent's challenges to specific inputs in the computation-incorrect mapping of an alleged 'Sub of the Day' price, adjustment for increased royalty/advertisement payouts, exclusion of a notional 5% GST component, limitation of the period of computation, and alleged price reductions on some SKUs-were examined and rejected where inconsistent with Section 171, unsupported by invoices, or legally irrelevant (royalty/advertisement being internal contractual costs). The Authority also held that the offence continued until compliance was shown and therefore the investigation period (15.11.2017 to 31.03.2019) was appropriately adopted for computing profiteering. On this basis the DGAP's computed amount was accepted. [Paras 21, 24, 27, 28, 29]The net profiteered amount is determined as Rs. 1,49,896/-, to be addressed by commensurate price reduction and deposit in consumer welfare funds; a notice for imposition of penalty under Section 171(3A) is to be issued to the Respondent.Final Conclusion: The Authority upheld the DGAP's findings that the Respondent contravened Section 171(1) by not passing on the benefit of GST rate reduction/denial of ITC and accepted the DGAP's computation of the profiteered amount as Rs. 1,49,896/-. The Respondent is directed to reduce prices commensurately, deposit the determined amount in the Central and Maharashtra State Consumer Welfare Funds as ordered, pay interest as directed, and show cause why penalty under Section 171(3A) should not be imposed. Issues Involved:1. Violation of Section 171(1) of the CGST Act, 2017.2. Determination of the additional benefit of ITC to be passed on to recipients.3. Calculation of the profiteered amount.4. Consideration of increased costs due to royalty, advertisement charges, and inflation.5. Inclusion of GST in the profiteered amount.6. Period of investigation for profiteering.7. Right to trade under Article 19 (1)(g) of the Constitution of India.Detailed Analysis:1. Violation of Section 171(1) of the CGST Act, 2017:The judgment confirms that the Respondent violated Section 171(1) by not passing on the benefit of the GST rate reduction from 18% to 5% effective from 15.11.2017. The DGAP's report revealed that the Respondent increased the base prices of 129 items, negating the effect of the reduced GST rate, which led to the consumers paying higher prices than they should have.2. Determination of the Additional Benefit of ITC:The DGAP reported that the ITC available to the Respondent before the GST rate reduction was 6.32% of the net taxable turnover. Post-reduction, the Respondent should have reduced the base prices by this percentage to pass on the benefit to consumers. The Respondent failed to do so, leading to profiteering.3. Calculation of the Profiteered Amount:The DGAP calculated the profiteered amount as Rs. 1,49,896/-, which includes the excess base prices and the additional GST collected on these prices. The Respondent's contention that the DGAP incorrectly calculated the base price of the 'Sub of the Day' (SOTD) was dismissed as there was no evidence to support the claim. The DGAP's method of using average pre-rate reduction prices for comparison was upheld.4. Consideration of Increased Costs Due to Royalty, Advertisement Charges, and Inflation:The Respondent argued that increased costs due to royalty and advertisement charges post-rate reduction should be considered. However, the judgment clarified that Section 171 does not account for such internal cost increases. The focus is solely on whether the benefit of tax rate reduction has been passed on to consumers, irrespective of the supplier's costs.5. Inclusion of GST in the Profiteered Amount:The judgment upheld the inclusion of the additional GST collected on the profiteered amount. The Respondent was not required to collect this excess GST, and doing so violated the provisions of Section 171(1). The excess GST collected was rightly included in the profiteered amount as it represented the benefit denied to consumers.6. Period of Investigation for Profiteering:The Respondent's contention that the investigation period was too long was rejected. The judgment noted that the violation continued unabated until 31.03.2019, and the DGAP's investigation period from 15.11.2017 to 31.03.2019 was appropriate. The Respondent failed to provide evidence of passing on the benefit at any point during this period.7. Right to Trade Under Article 19 (1)(g) of the Constitution of India:The Respondent argued that the anti-profiteering provisions violated their right to trade. The judgment clarified that the Authority and DGAP do not act as price controllers or regulators. The Respondent is free to set prices and profit margins but must pass on the benefit of tax reductions to consumers. The anti-profiteering provisions ensure that the benefit of tax rate reductions is passed on to consumers, aligning with the welfare intent of the law.Conclusion:The judgment directed the Respondent to reduce prices commensurately and deposit the profiteered amount of Rs. 1,49,896/- in the Central and Maharashtra State Consumer Welfare Funds. The Respondent was also liable for a penalty under Section 171(3A) of the CGST Act, 2017. The SGST Commissioner, Maharashtra State, was tasked with ensuring compliance with the order and submitting a compliance report within four months.