2021 (1) TMI 844 - NAPA - GST

Restaurant franchisee violated CGST Act by not passing on GST rate reduction benefits to customers.

The Respondent, a restaurant franchisee, was found to have violated Section 171 (1) of the CGST Act, 2017 by not passing on the benefit of the GST rate ... Passing on of benefit of tax rate reduction by commensurate reduction in prices - anti-profiteering under Section 171 of the CGST Act, 2017 - denial of input tax credit (ITC) and its impact on base price - methodology for computation of profiteering where invoice-level data is unavailable - liability of registered person/franchisee to comply with Section 171 - inclusion of tax component in computation of profiteered amount - period of investigation for computation of profiteered amount - non-retroactivity of penalty newly inserted after the period of alleged violationPassing on of benefit of tax rate reduction by commensurate reduction in prices - anti-profiteering under Section 171 of the CGST Act, 2017 - Respondent failed to pass on the commensurate benefit of reduction in GST rate to consumers and contravened Section 171(1) of the CGST Act, 2017. - HELD THAT: - The Authority found that the GST rate on restaurant services was reduced from 18% to 5% w.e.f. 15.11.2017 and that the respondent increased base prices of a large number of items on the intervening night. Comparison of pre- and post-rate reduction Menu Price Lists showed that for 115 of 137 items the base price increase exceeded the percentage impact of denial of ITC. Given Section 171(1) mandates passing on tax rate reduction/ITC benefit by way of commensurate reduction in prices (i.e., reduction in final price payable by each recipient), the respondent's conduct amounted to denial of benefit to consumers. The Authority therefore held profiteering established for the investigation period. [Paras 14, 17, 28, 32, 33]Profiteering established; respondent contravened Section 171(1) for the period 15.11.2017 to 30.06.2019.Denial of input tax credit (ITC) and its impact on base price - ratio of ITC to taxable turnover - The correct methodology was to determine the impact of denial of ITC by computing the ratio of ITC availed to net taxable turnover for the pre-rate reduction period and apply that percentage to assess commensurate price adjustment. - HELD THAT: - DGAP computed ITC availed (July-Oct 2017) of Rs.4,54,734 against outward taxable turnover of Rs.47,18,983 to arrive at an ITC/turnover ratio of 9.64%. The Authority accepted that ITC 'availed' (not 'utilized') is the appropriate metric because availment reflects inputs/input services attributable to outward supplies and utilization depends on a registrant's choice. The respondent's alternative calculation (9.86%) was rejected due to inclusion of ITC attributable to the whole of November 2017 and inclusion of compensation cess credit which was not lawfully usable for output tax discharge. [Paras 16, 31, 34, 36]ITC-to-turnover ratio of 9.64% for the pre-rate reduction period is correctly used to determine denial-of-ITC impact.Methodology for computation of profiteering where invoice-level data is unavailable - use of Menu Price Lists and quantities sold - Where invoice-wise pre- and post-change data are not furnished or are unusable, computation of profiteering on the basis of comparative Menu Price Lists and available sold quantities is appropriate. - HELD THAT: - Respondent failed to provide invoice-wise outward supply data in usable format (claimed system crash; invoices later submitted as non-editable PDFs and inconsistent product descriptions). The Authority held that deliberate withholding/mis submission of data justified DGAP's use of Menu Price Lists verified on sample invoices and sold quantity data to compute profiteering. Given these circumstances, the alternative average-price comparison method could not be applied. [Paras 6, 10, 18, 30, 31]DGAP's methodology of using Menu Price Lists together with available quantity data for computation of profiteered amount in these circumstances is appropriate and reasonable.Liability of registered person/franchisee to comply with Section 171 - A franchisee who is a separate GST registrant and avails ITC is individually liable to comply with Section 171 and cannot shift that responsibility to the franchisor. - HELD THAT: - The respondent claimed prices were fixed by franchisor. The Authority noted respondent held separate GST registration and availed ITC; no cogent evidence was produced to show lack of control over pricing. Section 171 responsibility rests on the registered supplier who availed the benefit and therefore cannot be displaced. [Paras 22, 37]Respondent (franchisee) is personally responsible for passing on the benefit and cannot shift liability to franchisor.Inclusion of tax component in computation of profiteered amount - price includes base price and tax for purposes of Section 171 - The element of GST collected from consumers on the excess base price is properly included in the profiteered amount. - HELD THAT: - Section 171 requires passing on benefit by way of commensurate reduction in price, which includes both base price and tax. If a supplier charged excess base price post-rate reduction, it also collected excess tax on that excess base price; inclusion of that tax in the profiteered amount is correct because the supplier could have refunded it or adjusted by credit notes notwithstanding subsequent payment to government. [Paras 13, 45]GST on the excess (profiteered) base amount is to be treated as part of the profiteered amount.Period of investigation for computation of profiteered amount - The investigation period from 15.11.2017 to 30.06.2019 is appropriate and profiteering is to be computed for that full period. - HELD THAT: - Respondent had increased base prices w.e.f. 15.11.2017 and did not demonstrate passing on of benefit at any date up to 30.06.2019. The Authority observed that profiteering continued throughout this period and that DGAP's consistent practice to take investigation up to the latest month of receipt of Standing Committee reference (June 2019) is not arbitrary. Exclusion of later months suggested by respondent was rejected. [Paras 4, 21, 44]Profiteering computed for and upheld across 15.11.2017 to 30.06.2019.Computation and deposit of profiteered amount - consumer welfare fund deposit and interest - The profiteered amount is Rs. 6,85,531 (inclusive of GST on the profiteered base) and, as recipients are not identifiable, the respondent is directed to deposit the amount in equal parts in the Central and State Consumer Welfare Funds with interest at 18% from dates of realization. - HELD THAT: - On the basis of DGAP's item-wise computations (Annexure-15) and accepted methodology, the Authority determined the net higher sale realization due to base price increases (including GST on that excess) to be Rs.6,85,531 for the investigation period. Recipients could not be identified; under Rule 133(3)(c) the amount is to be deposited in Consumer Welfare Funds in two equal parts, with interest at 18% computed from dates of realization until deposit, within three months, failing which recovery by Commissioners is directed. [Paras 21, 33, 47, 49]Respondent directed to deposit Rs. 6,85,531 in equal parts to Central and Maharashtra State Consumer Welfare Funds with interest @18% within three months.Non-retroactivity of penalty newly inserted after the period of alleged violation - Penalty under Section 171(3A) cannot be imposed because that penal provision was inserted w.e.f. 01.01.2020 and was not in force during the period 15.11.2017 to 30.06.2019. - HELD THAT: - Although profiteering offence under Section 171(3A) exists, the Authority observed the penal provision was introduced after the period of alleged contravention. Principle of non-retroactivity prevents imposing that penalty for past conduct; consequently no notice for penalty under Section 171(3A) is required. [Paras 48]No penalty under Section 171(3A) is imposed for the investigation period as that provision was not in force then.Final Conclusion: The Authority upheld DGAP's finding of profiteering for the period 15.11.2017 to 30.06.2019, confirmed the computation methodology adopted given the respondent's failure to furnish usable invoice-level data, fixed the profiteered amount at Rs. 6,85,531 (including GST on the excess) and directed deposit of the amount in equal parts to the Central and Maharashtra State Consumer Welfare Funds with interest @18% within three months; penal notice under Section 171(3A) was not issued because that provision was not in force during the relevant period. 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.Issue-wise Detailed Analysis:1. Whether the Respondent passed on the commensurate benefit of reduction in the rate of tax to his customers:The Respondent, a restaurant franchisee, was investigated for not reducing prices commensurately after the GST rate on restaurant services was reduced from 18% to 5% effective 15.11.2017. The Director General of Anti-Profiteering (DGAP) found that although the GST rate was reduced, the Respondent increased the base prices of 133 out of 137 items, effectively negating the benefit of the tax reduction. The DGAP concluded that the Respondent did not pass on the benefit of the tax reduction to customers as mandated by Section 171 of the CGST Act, 2017.2. Whether there was any violation of the provisions of Section 171 of the CGST Act, 2017 committed by the Respondent:The investigation revealed that the Respondent failed to provide complete and relevant documents and did not cooperate fully with the DGAP. The DGAP determined that the Respondent increased the base prices of items by more than the 9.64% required to offset the denial of Input Tax Credit (ITC). As a result, the DGAP computed the profiteered amount to be Rs. 6,85,531/-, including GST on the base profiteered amount. The DGAP's methodology involved comparing pre-rate reduction prices with post-rate reduction prices while considering the impact of the denial of ITC.Respondent's Contentions and DGAP's Clarifications:- The Respondent argued that the DGAP incorrectly computed the ITC to taxable turnover ratio and should have considered the period from 01.11.2017 to 14.11.2017. The DGAP clarified that the Respondent did not reverse the ITC on the closing stock as required and included ITC availed for the entire month of November 2017, which was incorrect.- The Respondent contended that the increased base prices were due to the withdrawal of ITC and other cost increases. The DGAP maintained that the Respondent was required to pass on the benefit of tax reduction to consumers and that the increase in prices was not justified.- The Respondent claimed that the DGAP's methodology was arbitrary and that no specific methodology for calculating profiteering was prescribed in the CGST Act or Rules. The DGAP responded that the methodology was based on the provisions of Section 171 and that the computation was a mathematical exercise to determine the commensurate reduction in prices.Authority's Findings:- The Authority found that the Respondent deliberately withheld data and did not cooperate with the investigation, which justified the DGAP's methodology.- The Authority agreed with the DGAP's computation of the profiteered amount and directed the Respondent to deposit Rs. 6,85,531/- in the Consumer Welfare Funds of the Central and Maharashtra State Governments.- The Authority noted that the Respondent violated Section 171 (1) of the CGST Act, 2017 by not passing on the benefit of the tax reduction to customers.- The Authority did not impose a penalty under Section 171 (3A) of the CGST Act, 2017, as it was not in operation during the period of violation.Conclusion:The Respondent was found to have violated the provisions of Section 171 (1) of the CGST Act, 2017 by not passing on the benefit of the GST rate reduction to customers. The Respondent was directed to deposit the profiteered amount in the Consumer Welfare Funds and reduce prices commensurately. The Authority also directed the Commissioners of CGST/SGST Maharashtra to monitor compliance with the order.