2020 (7) TMI 546 - NAPA - GST

Restaurant failed to pass on tax benefits to customers post-GST reduction, ordered to refund & reduce prices.

The Respondent failed to pass on the benefit of tax reduction to customers after the GST rate on restaurant services was reduced. The investigation ... Passage of benefit of tax reduction by commensurate reduction in prices - denial of input tax credit and its impact on base price - computation of profiteering on each supply/SKU - obligation to deposit unidentifiable profiteered amount in Consumer Welfare Fund - penal liability for contravention of Section 171Passage of benefit of tax reduction by commensurate reduction in prices - denial of input tax credit and its impact on base price - computation of profiteering on each supply/SKU - Whether the Respondent passed on the commensurate benefit of reduction in GST rate to his customers and whether he contravened Section 171 of the CGST Act, 2017. - HELD THAT: - The Authority found that GST on restaurant services was reduced from 18% to 5% w.e.f. 15.11.2017 with denial of ITC. The DGAP computed the ratio of ITC to net taxable turnover for the pre-rate reduction period (01.07.2017 to 31.10.2017) as 8.72% and compared average pre-rate base prices with actual invoice-wise post-rate base prices. The Authority accepted the DGAP's methodology of adding denial of ITC to the pre-rate average base price and comparing it with actual post-rate invoice prices because Section 171 requires passing the benefit on each supply/SKU to each recipient; averaging post-period prices would deprive individual purchasers of entitled benefit. On the material before it (sales data, returns and price lists submitted by the Respondent), the Authority concluded that for several items the Respondent increased base prices by more than the permissible impact of denial of ITC and therefore failed to pass the commensurate benefit. Contentions about commercial reasons for price increases, royalty/advertising adjustments, delivery fees, MRP treatment, alleged zeroing/netting methodology, promotional reductions and temporal limitation of calculation were examined and rejected: (a) Section 171 does not restrict suppliers from fixing prices but forbids appropriation of tax benefit; (b) the DGAP had considered ITC denial (including on franchisor charges) in the ITC:turnover ratio; (c) delivery fees and hypothetical ITC thereon were not part of pre-rate comparables; (d) netting off positive and negative variances across different recipients/SKUs is not permissible because benefit must be passed on per supply; and (e) the investigation period (15.11.2017-30.06.2019) was appropriate because the Respondent did not establish that the benefit had been passed on earlier. [Paras 32, 33, 34, 35, 36]The Respondent did not pass on the commensurate benefit of the GST rate reduction and thereby violated Section 171 of the CGST Act, 2017.Computation of profiteering on each supply/SKU - obligation to deposit unidentifiable profiteered amount in Consumer Welfare Fund - penal liability for contravention of Section 171 - Quantification of the profiteered amount and consequential directions including deposit, interest and initiation of penalty proceedings. - HELD THAT: - Applying the accepted methodology, the DGAP computed the net higher sale realization (profiteered amount) after netting off the permitted impact of denial of ITC on relevant SKUs for the investigation period. The Authority approved the DGAP's computation as detailed in Annexure-13 and determined the profiteered amount to be Rs. 7,53,854/-, inclusive of GST on the base profiteered amount. As the affected recipients were not identifiable, the Authority directed deposit of the entire amount in equal halves into the Central and Rajasthan State Consumer Welfare Funds, with interest at 18% from the dates the amounts were realized till deposit. Further, having found contravention of Section 171, the Authority directed issuance of notice to the Respondent to explain why penalty under Section 171(3A) read with Rule 133(3)(d) should not be imposed. Monitoring and compliance reporting were directed to the concerned CGST/SGST Commissioners under supervision of the DGAP. [Paras 23, 24, 40, 41, 42]Profiteered amount fixed at Rs. 7,53,854/-, to be deposited in equal parts into Central and Rajasthan State Consumer Welfare Funds with 18% interest; notice for penalty under Section 171(3A) to be issued and compliance to be monitored by the Commissioners.Final Conclusion: The Authority held that the Respondent, a restaurant franchisee, failed to pass on the commensurate benefit of GST rate reduction (18% to 5% w.e.f. 15.11.2017) after accounting for denial of ITC and thus contravened Section 171; the profiteered amount was quantified at Rs. 7,53,854/- (inclusive of GST), directed to be deposited equally into the Central and Rajasthan State Consumer Welfare Funds with interest @18%, and a notice for penalty proceedings under Section 171(3A) was ordered. Issues Involved:1. Whether the Respondent passed on the commensurate benefit of reduction in the rate of tax to his customers.2. Whether there was any violation of the provisions of Section 171 of the CGST Act, 2017 committed by the Respondent.Detailed Analysis:Issue 1: Whether the Respondent passed on the commensurate benefit of reduction in the rate of tax to his customers.The investigation by the Director General of Anti-Profiteering (DGAP) revealed that the GST rate on restaurant services was reduced from 18% to 5% effective from 15.11.2017, without the benefit of Input Tax Credit (ITC). The Respondent increased the base prices of his products by more than the required percentage to offset the denial of ITC, thus not passing the benefit of the tax reduction to his customers. The DGAP calculated that the ITC available during the period from July 2017 to October 2017 was 8.72% of the net taxable turnover. However, the Respondent increased the base prices of his products by more than 8.72%, leading to a net higher sale realization due to the increase in base prices despite the reduction in the GST rate. This resulted in a profiteered amount of Rs. 7,53,854/-, including GST on the base profiteered amount.Issue 2: Whether there was any violation of the provisions of Section 171 of the CGST Act, 2017 committed by the Respondent.The Respondent argued that the DGAP considered all price revisions made after 15.11.2017 as part of the profiteered amount and ignored the right to increase prices due to business reasons. However, the investigation found that the Respondent failed to pass on the benefit of tax reduction commensurately. The DGAP's methodology for computing the profiteered amount, which involved comparing pre and post rate reduction base prices and accounting for the denial of ITC, was deemed correct and reasonable. The Respondent's argument that the DGAP acted as a price-controlling authority was dismissed, as the DGAP's mandate was to investigate whether the benefits of tax reduction and ITC were passed on to consumers.The Respondent's claim that the base price of certain items was incorrectly mapped was also rejected, as the DGAP used the sales data provided by the Respondent. The argument that the increase in royalty and advertisement charges should be considered was dismissed, as these charges were already included in the base prices during the pre-rate reduction period. The Respondent's reliance on the case of Kumar Gandhrav v. M/s KRBL Limited was found inapplicable, as the facts of that case were different.The Respondent's contention that the DGAP should have considered the delivery fee paid to online e-commerce platforms was also rejected, as there was no evidence that the delivery fee was not recovered from buyers. The DGAP's inclusion of the 5% GST amount in the profiteered amount was upheld, as the excess GST collected from customers was required to be refunded or deposited in the Consumer Welfare Fund.The Respondent's argument that the DGAP incorrectly applied a methodology similar to the 'zeroing methodology' was dismissed, as the benefit of tax reduction must be passed on to each customer on each product. The claim that the DGAP ignored the negative values and resorted to 'zeroing' was also rejected, as the benefit of tax reduction must be computed on each SKU.The Respondent's plea to restrict the calculation of the profiteered amount to a reasonable length of time was dismissed, as the violation of Section 171 continued unabated till 30.06.2019. The argument that the CGST Act did not prescribe a method for computing the profiteered amount was also dismissed, as the methodology for passing on the benefits of tax reduction and ITC was outlined in Section 171 (1) of the CGST Act, 2017.Conclusion:The Respondent was found to have denied the benefit of tax reduction to customers in contravention of Section 171 (1) of the CGST Act, 2017, resulting in a profiteered amount of Rs. 7,53,854/-. The Respondent was directed to reduce prices commensurately and deposit the profiteered amount in the Central and Rajasthan State Consumer Welfare Funds along with interest. The Respondent was also liable for penal action under Section 171 (3A) of the CGST Act, 2017. The Commissioners of CGST/SGST Rajasthan were directed to ensure compliance with the order.