2020 (8) TMI 601 - NAPA - GST

Respondent Guilty of Profiteering, Ordered to Deposit Profits, Reduce Prices

The Authority found the Respondent guilty of profiteering by not passing on the benefit of the GST rate reduction to customers, violating Section 171 of ... Commensurate reduction in prices - profiteering under Section 171 - denial of input tax credit (ITC) - computation of profiteered amount per supply/SKU - authority's power to determine procedure under Rule 126 - deposit in Consumer Welfare FundCommensurate reduction in prices - profiteering under Section 171 - denial of input tax credit (ITC) - computation of profiteered amount per supply/SKU - Whether the respondent passed on the commensurate benefit of reduction in the rate of GST and denial of ITC to recipients in respect of supplies from the two Subway outlets - HELD THAT: - The Authority examined pre- and post-rate-reduction transaction values for affected SKUs and applied Section 171(1) which mandates that any reduction in rate of tax or benefit of ITC must be passed on by way of commensurate reduction in prices. DGAP found ITC available during July-October 2017 equal to 11.16% of net taxable turnover and compared average pre-reduction base prices (representative period 01.11.2017-14.11.2017) with actual invoice-wise post-reduction base prices adjusted for denial of ITC. The Authority held that benefits must be passed on at each supply/SKU and that averaging pre-period prices against actual post-period invoice prices is the correct approach to ascertain whether each recipient received the commensurate monetary benefit. Applying that methodology, the Authority accepted DGAP's finding that the respondent increased base prices by more than the ITC impact and/or did not reduce prices commensurately after the rate cut w.e.f. 15.11.2017, thereby denying benefit to customers. [Paras 24, 25, 26, 27]The Authority held that the respondent did not pass on the commensurate benefit of rate reduction/denial of ITC for supplies from the two Subway outlets and thus contravened Section 171(1).Computation of profiteered amount per supply/SKU - profiteering under Section 171 - Quantum and computation of profiteered amount arising from denial of benefit for the investigation period - HELD THAT: - The DGAP computed the ITC ratio (11.16%) for July-October 2017 and compared representative pre-reduction base prices (01.11.2017-14.11.2017 averages) adjusted for denial of ITC with actual invoice-wise post-reduction cum-tax prices to identify per-SKU excess (profiteering per unit). Instances where base prices were raised beyond what was required to offset loss of ITC were treated as profiteering; negative instances were not netted off against positive instances because Section 171 requires benefit to be passed on to each recipient. On that basis the Authority accepted DGAP's calculations and determined the net profiteered amount for the period 15.11.2017 to 30.04.2019 as Rs. 61,67,097/- (inclusive of tax) as reflected in Annexure-15 of the DGAP report. [Paras 14, 15, 26, 27, 49]The Authority accepted the DGAP's methodology and computation and determined the profiteered amount as Rs. 61,67,097/- for the period 15.11.2017 to 30.04.2019.Authority's power to determine procedure under Rule 126 - computation of profiteered amount per supply/SKU - Whether the absence of a single fixed mathematical formula in rules renders DGAP's methodology invalid or the Authority without jurisdiction - HELD THAT: - The Authority observed that Section 171(1) itself prescribes the procedure in principle (benefit to be passed by commensurate reduction in prices and to be calculated per supply/SKU). Rule 126 empowers the Authority to determine Procedure and Methodology; however, facts and sectoral differences preclude a one-size-fits-all formula. The Authority held that a case-by-case mathematical approach based on relevant facts and representative pre-reduction prices is permissible and consistent with statutory intent. Consequently, DGAP's case-specific methodology, applied on the facts of this case and in conformity with prior approvals by the Authority, was held valid. [Paras 27, 28]The Authority held that DGAP's case-specific methodology is sustainable and that absence of a single fixed formula in rules does not invalidate the investigatory methodology or the Authority's jurisdiction.Deposit in Consumer Welfare Fund - penalty under Section 171(3A) - Remedies and consequential orders upon finding of profiteering - HELD THAT: - Having concluded that profiteering was established, the Authority directed the respondent to reduce prices commensurately per Rule 133(3)(a). Where recipients were not identifiable, it directed deposit of the determined amount into the Central Consumer Welfare Fund and the Maharashtra State Consumer Welfare Fund in equal parts along with interest at 18% from dates of realization. The Authority also held that the respondent is liable to be proceeded against under Section 171(3A) for imposition of penalty and issued a direction to issue notice to the respondent to show cause why penalty should not be imposed. Monitoring and recovery directions were given to the concerned SGST Commissioner. [Paras 49, 50, 51]Respondent directed to deposit Rs. 61,67,097/- into the consumer welfare funds with interest, to reduce prices commensurately, and to show cause for penalty under Section 171(3A).Profiteering under Section 171 - Whether further investigation of all other outlets of the respondent is required - HELD THAT: - DGAP's inquiry had been confined to two Subway franchise outlets while the respondent operated 35 outlets under a single GST registration and common ITC pool. The Authority found that profiteering was established in the two outlets and that supplies from other outlets were made under the same registration and ITC ledger. In view of Section 171(2) and amended Rule 133(5)(a), the Authority directed DGAP to further investigate all other outlets of the respondent for possible violation and to submit a fresh report under Rule 133(5)(b). This direction contemplates fresh investigation and report on outlets beyond the two already adjudicated. [Paras 17, 52]DGAP directed to investigate all other outlets of the respondent and submit a report; the issue of profiteering at those outlets is remanded for fresh investigation and report.Final Conclusion: The Authority found that the respondent did not pass on the commensurate benefit of GST rate reduction and denial of ITC in respect of the two Subway outlets for the period 15.11.2017 to 30.04.2019, accepted the DGAP's case-specific methodology, determined net profiteering at Rs. 61,67,097/-, directed deposit of that amount (with interest) into Central and State Consumer Welfare Funds and price reduction, issued a show-cause notice for penalty under Section 171(3A), and remanded the matter for further investigation of the respondent's other outlets. Issues Involved:1. Alleged profiteering by the Respondent due to non-passing of GST rate reduction benefit.2. Methodology and computation of profiteering.3. Respondent's defense on various grounds including commercial expediency, pricing control, and methodology.4. Compliance with Section 171 of the CGST Act, 2017.Detailed Analysis:1. Alleged Profiteering:The core issue was whether the Respondent had passed on the commensurate benefit of the GST rate reduction from 18% to 5% effective from 15.11.2017 to his customers. The DGAP's investigation revealed that the Respondent had increased the base prices of his products post-GST rate reduction, thereby not passing on the benefit to the consumers. The investigation covered the period from 15.11.2017 to 30.04.2019, and it was found that the Respondent had increased the base prices of 94 items, leading to a net higher cum-tax price incidence on consumers.2. Methodology and Computation of Profiteering:The DGAP used a methodology where the average base prices before the rate reduction were compared with the actual post-rate reduction base prices. The Respondent's claim that there was no prescribed methodology under the CGST Act or Rules was countered by the DGAP, stating that the computation was based on the data provided by the Respondent and the legal requirement of passing on the benefit of tax reduction as per Section 171 of the CGST Act, 2017. The DGAP's methodology was found to be reasonable, justifiable, and consistent with the provisions of Section 171.3. Respondent's Defense:The Respondent raised several defenses, including:- Lack of a prescribed methodology for computing profiteering.- Increase in costs due to various factors like raw materials, rent, and manpower.- The franchise agreement with Subway India controlling prices.- The principle of 'commercial expediency' and the right to determine prices.- The argument of 'netting off' where excess benefit passed to some customers should offset the shortfall to others.The Authority found these defenses untenable. It was clarified that the benefit of tax reduction must be passed on each SKU/unit to each customer, and netting off was not permissible as it would deny the benefit to individual customers. The Respondent's claim of increased costs coinciding exactly with the date of tax rate reduction was found implausible.4. Compliance with Section 171 of the CGST Act, 2017:Section 171 mandates that any reduction in the tax rate or benefit of ITC must be passed on to the recipient by way of commensurate reduction in prices. The Respondent's failure to do so was a violation of this provision. The Authority directed the Respondent to reduce his prices commensurately and deposit the profiteered amount of Rs. 61,67,097/- in the Consumer Welfare Funds of the Central and Maharashtra State Governments along with interest. The Respondent was also liable for penal action under Section 171(3A) of the CGST Act, 2017.Conclusion:The Authority concluded that the Respondent had indeed profiteered by not passing on the benefit of the GST rate reduction to his customers, thus violating Section 171 of the CGST Act, 2017. The order directed the Respondent to deposit the profiteered amount and reduce his prices, ensuring compliance with the anti-profiteering provisions.