2020 (12) TMI 889 - NAPA - GST

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 ... Commensurate reduction in prices - passing on the benefit of input tax credit - anti-profiteering under Section 171 of the CGST Act, 2017 - denial of input tax credit impact ratio - no netting off / zeroing of benefits - deposit in Consumer Welfare Fund - interest at 18% on profiteered amountCommensurate reduction in prices - passing on the benefit of input tax credit - The Respondent did not pass on the commensurate benefit of the reduction in GST rate to his customers in respect of certain items supplied. - HELD THAT: - The Authority accepted the DGAP's comparison of average pre-rate-reduction base prices with post-rate-reduction actual base prices (pre-period averages taken from 01.07.2017-31.10.2017 / 01.11.2017-14.11.2017 as applicable). It held that the statutory obligation under Section 171(1) required any reduction in rate or benefit of ITC to be passed by way of a commensurate monetary reduction in price. The DGAP computed the ratio of ITC to net taxable turnover (8.85%) to determine the permissible increase in base prices to offset denial of ITC; for 168 items the post-reduction base prices exceeded that permissible impact and thus the cum-tax price paid by consumers was not reduced commensurately. The Authority found the DGAP's methodology of item wise invoice comparison and use of representative pre reduction averages to be correct, rejecting the respondent's contentions on discounts, timing of price revisions, and MRP-based exclusions. [Paras 23, 24, 26, 27, 28]Profiteering established: the Respondent failed to pass on the commensurate benefit on specified items for the investigation period.Anti-profiteering under Section 171 of the CGST Act, 2017 - denial of input tax credit impact ratio - no netting off / zeroing of benefits - deposit in Consumer Welfare Fund - interest at 18% on profiteered amount - Quantification of profiteering and remedial directions under Section 171 and the Rules. - HELD THAT: - Relying on the DGAP's computations (Annexure-12), the Authority accepted the net higher sale realization due to increased base prices (after accounting for the impact of denial of ITC) as Rs. 6,66,700 (inclusive of GST) for the period 15.11.2017 to 31.03.2019. The Authority rejected the respondent's arguments for netting off negative entries, treating them as inapplicable because Section 171 requires benefit to be passed on each supply to each recipient and does not permit cross-subsidisation or netting across supplies. It also rejected contentions on time-bar and MRP exclusions, and held that the GST element on excess base price is part of the benefit denied and cannot be recovered from the Government but must be deposited per Rule 133. Consequential directions were issued for reduction of prices, deposit of the profiteered amount in equal parts into the Central and State Consumer Welfare Funds, and payment of interest at 18% from dates of realization until deposit, with monitoring by the concerned Commissioners. [Paras 33, 34, 36, 38, 39]Profiteered amount fixed at Rs. 6,66,700 (inclusive of GST); Respondent directed to reduce prices commensurately, deposit Rs. 6,66,700 in equal parts into Central and Maharashtra State Consumer Welfare Funds with 18% interest, and compliance to be monitored by CGST/SGST Commissioners.Final Conclusion: The Authority upholds the DGAP report: the Respondent contravened Section 171 by not passing the commensurate benefit of GST rate reduction, profiteering quantified at Rs. 6,66,700 (inclusive of GST) for 15.11.2017-31.03.2019, with directions to reduce prices, deposit the amount (with interest) into the Consumer Welfare Funds, and for statutory monitoring and recovery if necessary. 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.