Franchisor collecting royalty and advertisement charges from franchisees cleared of anti-profiteering violations under Section 171 CGST Act

CCI ruled that a franchisor collecting royalty and advertisement charges from franchisees did not violate anti-profiteering provisions under Section 171 of CGST Act, 2017. The franchisor had no control over product pricing or input tax credit utilization by franchisees, who operated independently and retained sales proceeds. Since no tax rate reduction occurred for royalty and advertisement services provided by the franchisor, anti-profiteering provisions were inapplicable. The proceedings against the respondent were dropped as the case fell outside Section 171's scope.

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Issues Involved:
1. Possible violation of Section 171 of the CGST Act, 2017 by M/s Subway Systems India Pvt. Ltd.
2. Determination of whether the Respondent profiteered by prescribing sales prices disproportionate to the loss of ITC and charging Royalty and Advertisement charges on increased net taxable sales value.
3. Examination of whether the Respondent passed on the benefit to recipients in terms of Section 171 of the CGST Act, 2017.

Issue 1: The National Anti-Profiteering Authority directed the DGAP to examine M/s Subway Systems India Pvt. Ltd. for possible violation of Section 171 of the CGST Act, 2017. The DGAP found that M/s SSIPL may have profiteered by charging royalty and advertisement charges on the increased net taxable sales, leading to further investigation.

Issue 2: The Respondent argued that they did not control the base price offered by franchisees, did not receive consideration for product sales, and only collected royalty and advertisement charges based on net sales. The DGAP found that the Respondent did not fix prices or retain ITC, and franchisees were free to decide prices, concluding that the Respondent did not profiteer.

Issue 3: The DGAP determined that the Respondent was not involved in determining prices for franchisee products and did not restrict franchisees from offering discounts. As there was no reduction in tax rates for royalty and advertisement services, Section 171 of the Act did not apply. Consequently, the proceedings against the Respondent were dropped.

In conclusion, the Commission found that the Respondent did not fall under the Anti-Profiteering provisions of Section 171 of the CGST Act, 2017 due to no reduction in tax rates for services provided, leading to the proceedings against the Respondent being dropped.

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