Franchisee found guilty of not passing GST rate reduction benefits to customers.

The Respondent, a franchisee of M/s Subway Systems India Pvt. Ltd., was found to have violated Section 171 of the CGST Act by not passing on the benefit of the GST rate reduction to customers. The Director-General of Anti-Profiteering (DGAP) determined that the Respondent increased base prices of items post-GST rate reduction, resulting in a profiteered amount of Rs. 6,66,700/-. The Respondent's arguments regarding methodology and completion of the investigation were dismissed. The Authority ordered the Respondent to deposit the profiteered amount in Consumer Welfare Funds within three months, with monitoring by the Commissioners of CGST/SGST Maharashtra.

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Issues Involved:
1. Whether the Respondent has passed on the commensurate benefit of reduction in the rate of tax to his customersRs.
2. Whether there was any violation of the provisions of Section 171 of the CGST Act, 2017 committed by the RespondentRs.

Detailed Analysis:

Issue 1: Whether the Respondent has passed on the commensurate benefit of reduction in the rate of tax to his customersRs.

The case revolves around the allegation that the Respondent, a franchisee of M/s Subway Systems India Pvt. Ltd., did not pass on the benefit of the GST rate reduction from 18% to 5% effective from 15.11.2017, as mandated by Section 171 of the Central Goods and Services Tax Act, 2017. The Director-General of Anti-Profiteering (DGAP) initiated an investigation based on a reference from the Standing Committee on Anti-Profiteering. The investigation covered the period from 15.11.2017 to 31.03.2019.

The DGAP reported that the Respondent increased the base prices of 170 items post-GST rate reduction, thereby not reducing the cum-tax prices paid by consumers despite the reduction in the GST rate. The DGAP compared the average selling prices before the rate reduction (01.07.2017 to 14.11.2017) with the actual selling prices post-rate reduction (15.11.2017 to 31.03.2019) and found that the Respondent had increased the base prices more than the permissible limit, which should have been adjusted only to the extent of the denial of Input Tax Credit (ITC).

The Respondent contended that the DGAP's methodology was arbitrary and did not consider the discretionary discounts offered to customers. However, the DGAP clarified that the average base prices were computed based on the actual transaction value as per Section 15 of the CGST Act, 2017, which includes discounts. The DGAP also considered sales data from previous months (July to October 2017) where sales were not found during the period 01.11.2017 to 14.11.2017.

Issue 2: Whether there was any violation of the provisions of Section 171 of the CGST Act, 2017 committed by the RespondentRs.

Section 171 of the CGST Act mandates that any reduction in the rate of tax or benefit of ITC must be passed on to the recipient by way of commensurate reduction in prices. The DGAP found that the Respondent had increased the base prices of 168 items more than the permissible limit of 8.85% (the impact of denial of ITC), thereby not passing on the benefit of the tax reduction to the customers. The profiteered amount was calculated to be Rs. 6,66,700/-.

The Respondent argued that the DGAP's methodology was akin to the "zeroing methodology" used in anti-dumping cases, which the Government of India had opposed at the WTO. However, the Authority clarified that netting off cannot be applied in profiteering cases as the benefit has to be passed on to each customer for each product.

The Respondent also contended that the DGAP included 5% GST in the profiteered amount, which was already deposited with the Government. The Authority held that the excess GST collected due to increased base prices must be refunded to the customers or deposited in the Consumer Welfare Fund, as it was not supposed to be collected.

The Respondent's claim that the DGAP failed to complete the investigation within the prescribed time was also dismissed, as the investigation was completed within the extended period allowed by the Authority.

Conclusion:

The Authority concluded that the Respondent had indeed violated the provisions of Section 171 of the CGST Act by not passing on the benefit of the GST rate reduction to the customers. The Respondent was directed to deposit the profiteered amount of Rs. 6,66,700/- in the Central and Maharashtra State Consumer Welfare Funds, along with interest, within three months. The Commissioners of CGST/SGST Maharashtra were directed to monitor the compliance of this order.

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