AI Drafter 
TaxTMI 
TaxTMI 
2020 (3) TMI 611
X X X X Extracts X X X X
X X X X Extracts X X X X
....mmittee on Anti-profiteering. The Applicant No. 1 has filed the application under Rule 128 of the CGST Rules 2017, alleging profiteering in respect of restaurant service supplied by the Respondent (Franchisee of M/s Subway Systems India Pvt. Ltd.). In the application, it was alleged that despite the reduction in the rate of GST from 18% to 5% w.e.f. 15.11.2017, the Respondent had not passed on the commensurate benefit since he had increased the base prices of his products. Records showed that the worksheet indicating the extent of profiteering sent by the Screening Committee was also received by the DGAP along with the above recommendation of the Standing Committee on 27.03.2019. 2. The DGAP in his report has stated that on receipt of the said reference from the Standing Committee on Anti-profiteering on 27.03.2019, a notice under Rule 129 was issued on 09.04.2019 (Annex-1), calling upon the Respondent to reply as to whether he admitted that the benefit of reduction in GST rate w.e.f, 15.11.2017, had not been passed on to the recipients by way of commensurate reduction in prices and if so, to suo-moto determine the quantum thereof and indicate the same in his reply to the notice....
X X X X Extracts X X X X
X X X X Extracts X X X X
....also stated that the reference from the Standing Committee on Anti-Profiteering, the various replies of the Respondent and the documents/evidence on record had been carefully examined. The main issues for determination were whether the rate of GST on the service supplied by the Respondent was reduced from 18% to 5% w.e.f. 15.11.2017 and if so, whether the commensurate benefit of such reduction in the rate of GST had been passed on by the Respondent to his recipients, in terms of Section 171 of the CGST Act, 2017. 7. The DGAP has further reported that the Central Government. On the recommendation of the GST Council, has reduced the GST rate on the restaurant service from 18% to 5% w.e.f. 15.11.2017 with the condition that the ITC on the goods and services used in supplying the service was not taken vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017. Since it was a case of reduction in the rate of tax, it was important to examine the provisions of Section 171 of the CGST Act, 2017 to ascertain whether the present case was a case of profiteering or not. Section 171 (1) reads as follows:- "Any reduction in rate of tax on any supply of goods or services or the benefit ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nover of the products supplied during the pre-GST rate reduction period has to be carried out by taking into consideration the period from 01.07.2017 to 31.10.2017 and not up to 14.11.2017. It was done due to the reason that certain invoices as furnished by the Respondent for the period 01.11.2017 to 14.11.2017 actually pertained to the entire month of November-2017 and that no reversal of ITC was done by the Respondent in respect of such invoices. Therefore, for the current investigation, the taxable turnover and ITC for the period 01.11.2017 to 14.11.2017 was excluded and not taken into account for the calculation of the percentage of ITC available to the Respondent. 10. The DGAP in his report has further stated that the ratio of ITC to the net taxable turnover had been taken for determining the impact of denial of ITC (which was available to the Respondent till 14.11.2017). As per the monthly GST Returns submitted by the Respondent, it was found that the ITC amounting to Rs. 2,99,442/- was available to him during the period July 2017 to October 2017 which was 8.01% of the net taxable turnover of restaurant service amounting to Rs. 37,34,976/- supplied during the same period. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the amount of net higher sale realization due to increase in the base prices of the service. despite the reduction in GST rate from 18% to 5% (with denial of input tax credit) or in other words, the profiteered amount came to Rs. 8,24,260/- (including GST on the base profiteered amount). The details of the computation have been furnished by the DGAP in the Annexure-16. The DGAP has also stated that the said services had been supplied by the Respondent in the State of Maharashtra only. 13. The DGAP has concluded that the allegation of profiteering by way of either increasing the base prices of the products while maintaining the same selling price or by way of not reducing the selling prices of the products commensurately. despite the reduction in GST rate from 18% to 5% w.e.f. 15.11.2017 stood confirmed against the Respondent. The additional amount to the tune of Rs. 8,24.260/- had been realized from the recipients which included both the profiteered amount and GST on the said profiteered amount and hence, the provisions of Section 171 (1) of the CGST Act, 2017 had been contravened by the Respondent in the present case. 14. The above Report was considered by this Authority i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....after. The DGAP, while calculating the profiteered amount, had inadvertently taken the base price of this product as Rs. 40/-, which was based on the sales of a different product in the month of October-2017. Hence, this item needed to be removed from the calculation of profiteering. The summary of the products and impact has been reproduced by the Respondent as mentioned below:- (Amount in Rs.) Impact due to Vegetarian Seekh kebab Month Total Profiteering Amount (DGAP Working) Revised Profiteering Difference due to Vegetarian Seekh kebab 7.Jan'18 497.45 0 497.45 8.Feb'18 1,788.44 0 1,788.44 9.Mar'18 1,126.72 0 1,126.72 1.Apr'18 1,021.72 0 1,021.72 2.May'18 1,277.09 0 1,277.09 3.Jun'18 478.91 0 478.91 4.JuI'18 1,924.90 0 1,924.90 5.Aug'18 2,718.44 0 2,718.44 6.Sept'18 1,455.27 0 2,399.17 7.Oct 18 2,399.17 0 2,399.17 8.Nov'18 1,441.36 0 1,441.36 9.Dec'18 1,924.90 0 1,924.90 10.Jan'19 1,450.63 0 1,450.63 11.Feb'19 1,984.54 0 1,984.54 12.Mar'19....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9;18 44,270.71 15,342.42 28,928.30 8.Feb'18 33,388.20 15,372.49 18,015.72 9.Mar'18 35,602.99 17,931.85 17,671.14 1.Apr'18 37,959.19 18,746.68 19,212.51 2.May'18 38,737.72 20,102.45 18,635.28 3.Jun'18 33,720.18 18,367.57 15,352.61 4.Jul'18 33,986.62 17,470.24 16,516.38 5.Aug'18 50,327.83 23,680.34 26,647.50 6.Sept'18 45,557.01 21,179.65 24,377.36 7.Oct'18 51,408.12 24,651.04 26,757.08 8.Nov'18 54,646.60 31,738.76 22.907.85 9.Dec'18 47,012.68 27,535.59 19,477.09 10.Jan'19 46,738.34 27,985.25 18,753.09 11.Feb'19 81,290.32 58,906.58 22,383.74 12.Mar'19 95,243.86 71.333.16 23,910.70 801,327.35 433,342.87 367,984.48 f. That he has relied upon the case of Kumar Gandhrav vs. M/s KRBL Limited (Case Number 03/2018 dated 04-05-2018) = 2018 (5) TMI 760 - NATIONAL ANTI-PROFITEERING AUTHORITY passed by this Authority. g. That post 14.11.2017, he was not allowed to avail ITC as per Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (13.22) 7.51 Bag Fee 5.40 5.00 (0.40) 7567.99 Bottled Juice 137.17 127.00 (10.17) 89.55 Can CanDrk 91.81 85.00 (6.81) 42742.74 Chatpata Chana Patty Sub 129.61 120.00 (9.61) 2.08 Cheese Add6in 20.35 18.84 (1.51) 4235.09 Cheese AddFt 37.80 35.00 (2.80) 3676.15 Chicken Tandoori Sub 172.82 160.00 (12.82) 4.16 ChknTikka Sub 172.82 160.00 (12.82) 1.39 Fresh Value Meal (IN) 77.34 71.61 (5.74) 25864.53 Lg Fountain Drink 64.81 60.00 (4.81) 137.94 Liquid Egg Add6in 32.40 30.00 (2.40) 15.33 Med Fountain Drink 59.41 55.00 (4.41) 632.21 Mexican Bean Patty Sub 129.61 120.00 (9.61) 192.24 Mexican Bean Patty Sub 129.61 120.00 (9.61) 1.04 PaneerTikka Add6in 43.20 40.00 (3.20) 536.42 RO Delivery Fee 10.80 10.00 (0.80) 12069.45 Rst Chicken Sub 172.82 160.00 (12.82) 2.77 Small Fountain Drink 54.01 50.00 (4.01) 1187.79 SUBWAY Item BtlDrk 91.81 85.00 (6.81) 1249.94 Turkey Chicken Slice 324.03 300.00 (24.03....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sp; 15,143.20 k. That as part of the franchise agreement, he needed to replace the store fixtures, machinery, equipment, etc. every 7 years. The renovation of the store was due in the month of November-2019 and for a similar size store for renovation, he had got a quotation of Rs. 19 25,196/- exclusive of GST. If this GST amount paid to the vendor had been allocated over the 7 years it would come around .041% of the turnover. He has further stated that apart from the loss of ITC, depreciation cost would go up substantially in initial years of capital expenditure. Therefore, the profiteered amount should be reduced by Rs. 60,797/- based on the loss of ITC on capital goods. I. That the DGAP while calculating the quantum of profiteering has considered sales up to the period from 15.11.2017 to 31.03.2019 i.e. almost 16 months. However, in the CGST Act, no period has been prescribed up to which registered person has to keep the base prices same so that anti-profiteering provision was not invoked. Also. as per the 'General Methodology and Procedure' notified through notification, the period of calculation of profiteered amount was not prescribed. While provid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ers. The final impact on the customers was very minimal and, in some cases, even negative. He has also furnished below Table indicating the trend of past price revisions till the period of June-19:- (Amount in Rs.) Menu Product Name Jul 17 to Sep 17 Aug 17to 14^th Nov 17 (SOTD Increase) Price After 14^th Nov 17 Aug-18 (SOTD Increase) Mar-19 Jun-19 SOTD 124 130 125 130 135 140 Western Egg & Cheese 130 130 Chicken Ham, Egg & Cheese 130 130 Veggie Delite 142 140 150 Chatpata Chana Patty 142 140 150 Mexican Patty 142 140 150 Green Peas Patty 142 140 150 Nara Bhara Kebab 142 140 150 Veg Patty 159 160 170 Aloo Patty 159 160 170 Corn & Peas 159 160 170 Veg Shammi 159 160 170 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....266 270 280 Green Peas Patty 266 270 280 Hera Bhara Kebab 266 270 280 Veg Patty 289 295 305 Aloo Patty 289 295 305 Corn & Peas 289 295 305 Veg Shammi 289 295 305 Paneer Tikka 289 295 305 Chicken Tikka 342 340 350 Chicken Seekh 342 340 350 Roasted Chicken 342 340 350 Chicken Tandoori 342 340 350 Chicken Slice 342 340 350 Turkey 354 360 370 Chicken Teriyaki 354 360 370 Italian B.M.T. 354 360 370 Tuna 354 360 370 Turkey & Chicken Ham 354 360 370 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... allowed only to the franchise operators to offset impact of denial of ITC. Further, the sales prices were recommended by the franchisor, however, it was not involved in the purchase of goods/material or services for the supply of restaurant services and there was effectively no denial of ITC to it and collection of royalty and other charges on the increased base prices appeared to be resorting to profiteering. Investigation on this issue may be undertaken based on further directions either from the Standing Committee under Rule 129 (1) of the CGST Rules or by this Authority under Rule 133 (5) of the Rules. f. That the additional cost of GST paid under Reverse Charge by the Respondent to M/s Subway India Private Limited on the increased amount of Royalty and Advertisement Expenses, was a point of law, which this Authority only was statutorily empowered to look into. g. That the ITC accrued on account of purchase of capital goods for the period when the same was allowed to the Respondent, had already been accounted for calculating the ratio of denial of ITC. The Respondent was allowed to increase the base prices to offset the impact of denial of ITC. However, no be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of "Vegetarian Seekh Kebab" was an anomaly and should have been ignored while calculating the profiteered amount. c. That Rule 126 of CGST rules empowered this Authority to determine the methodology and procedure for computation pr profiteering: however, neither the GST Act nor the Rules or any related delegated legislation. prescribed the method of computation by which profiteering needed to be calculated: although this Authority has prescribed the general methodology and the procedure and notified it in terms of Rule 126 of the CGST Rules, it did not prescribe any specific methodology to be adopted in the computation of profiteering amount. d. That he proposed to rely on the case of Commissioner of Income Tax Bangalore v. B. C. Srinivasa Setty 1981 2 SCC 460 = 1981 (2) TMI 1 - SUPREME COURT, wherein the Hon'ble Supreme Court has held that a charging section has to prescribe the method therefor, without which it became inapplicable and following the ratio thereof, in the absence of a statutorily prescribed methodology for calculation of profiteering, any such calculation became arbitrary and untenable. e. That he wanted to rely on the dictionary mean....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any ramification on the computation of the amount of profiteering. Further, it is pertinent to mention that Section 171 of the Act, ibid, mandates that profiteering has to be calculated on each supply/transaction and therefore it has to be calculated on each actual invoice/actual supply in the relevant period, comparing the prices mentioned therein with the prevailing base prices before the reduction in the tax rate/change in the availability of ITC. It is also pertinent that for the computation of profiteering, the actual transaction values of a product in the pre and post-tax rate reduction periods are compared. Hence, the actual pricing and the amount of profit/loss at the end of the supplier becomes irrelevant for the computation of profiteering. We also find it pertinent to mention that this Authority has no legislative mandate to fix the prices or the profit margins in respect of any supply (which are the rights of the supplier) and it is obligated by Section 171 of the CGST Act, 2017 to ensure that the benefit of the reduction in the rate of tax and/ or benefit of ITC (which is a sacrifice of revenue from the kitty of Central and State Governments in a welfare state) is pass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....efit of tax rate reduction or ITC on each product purchased by him. The word commensurate" mentioned in the above Section gives the extent of benefit to be passed on by way of reduction in the prices which has to be computed in respect of each product supplied based on the extent of tax reduction as also the existing base price of the product before such tax rate reduction. The computation of commensurate reduction in prices is purely a mathematical exercise which is based upon the above parameters and hence it would vary from product to product and hence no fixed methodology can be prescribed to determine the amount of benefit which a supplier is required to pass on to a recipient or for computation of the profiteered amount. However, to further elaborate upon this legislative intent behind the law, this Authority has notified the 'Procedure and Methodology' vide its Notification dated 28.03.2018 under Rule 126 of the CGST Rules, 2017. However, no fixed formula which fits all the cases of profiteering can be set while determining such a "Methodology and Procedure" as the facts of each case are different. In one real estate project, date of start and completion of the proje....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0/- till 14.11.2017 but the base price of SOTD had been incorrectly mapped by the DGAP to Rs. 105/- while working out the base price for the pre rate reduction period. However, the record of the case reveals that the Respondent, at no point in time, has furnished any invoice/ supply document that shows SOTD as an item supplied/ sold by him. Since no invoices mention SOTD as an item supplied, there is no ground for accepting Respondent's contention regarding SOTD. Further, we find that for computing the extent of profiteering, the DGAP has taken, as the basis, the product-wise average prices for the items supplied in the pre rate reduction period from the Respondent's invoices which the Respondent had himself submitted and not from any secondary data/ source. We also take note of the fact that the DGAP has compared the average pre rate reduction base prices with the actual post rate reduction prices of all the products supplied by the Respondent, including SOTD, due to the reasons that it was not possible to compare the average base prices pre and post rate reduction as the post rate reduction the benefit has to be legally passed to each buyer on the actual transaction value....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the Respondent is not correct because the provisions of Section 171 (1) and (2) of the CGST Act, 2017 mandate that the benefit of reduction in the tax rate is to be passed on to the recipients/ customers by way of commensurate reduction in price, which includes both, the base price and the tax paid. In this connection, it would be appropriate to mention that the Respondent has not only collected excess base prices from the customers which they were not required to pay due to the reduction in the rate of tax but he has also compelled them to pay additional GST on these excess base prices which they should not have paid. By doing so, the Respondent has defeated the very objective of both the Central as well as the State Governments which aimed to provide the benefit of rate reduction to the general public. The Respondent was legally not required to collect the excess GST and therefore, he has not only violated the provisions of the CGST Act. 2017 but has also acted in contravention of the provisions of Section 171 (1) of the above Act as he has denied the benefit of tax reduction to his customers by charging excess GST. Had he not charged the excess GST the customers would have pa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t Charges are purely an internal agreement between the franchiser and the franchisee without any connection with the anti-profiteering provisions applicable to the franchisee, i.e. the Respondent. Hence, this contention of the Respondent is not accepted. 26. The Respondent has further contended that w.e.f 15.11.2017, ITC on inputs and capital goods stood denied to him vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017. Hence, for calculating the base prices after the reduction in the rate of tax with simultaneous denial of ITC, the loss on account of denial of ITC on capital goods ought to have been factored in the computation of profiteering by the DGAP since before 14.11.2017. he was allowed to take ITC on his purchases of capital goods. In the context of this contention of the Respondent, we find that the DGAP has already factored the fact of denial of ITC to the Respondent w.e.f. 15.11.2017 in the computation which is based on the comparison of ratios of the Total ITC available to the Net Taxable Turnover in the pre rate reduction regime with the post rate reduction regime. It is pertinent that for the pre rate-reduction period. ITC on capital goods, if any, a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t, we find it pertinent to mention that in those cases where the Respondent has not charged any price for the products supplied by him to his recipients/ customers, he has done so with the intent of increasing his overall sales and promoting customer loyalty and not to pass on the benefit of tax rate reduction in terms of Section 171 of the CGST Act, ibid, which requires that the benefit of tax reduction has to be commensurately passed on in respect of each supply made by a supplier and thus such benefit has to be passed on to each customer/ recipient and there can be no netting off. The legislative intent behind the anti-profiteering provision being that benefit has to be passed on for each supply, the passing on of any excess (more than commensurate) benefit to some customers cannot be claimed to offset the denial of benefit to other customers, wherein no benefit was passed on or where the benefit passed on was lesser than commensurate. Thus, such offsetting can not be permitted and hence we find no grounds to differ from the DGAP in the context of this issue. If such an offsetting was permitted, it would be detrimental to the interest of those customers/ recipients who had been ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s on the resultant benefit by a commensurate reduction in the prices of his supplies at any point of time till 31.03.2019. In other words, the violation of the provisions of Section 171 of the CGST Act 2017 has continued unabated in this case and the offence continues to date. The Respondent has nowhere produced any evidence to prove from which date the benefit was passed on by him. The fact that the Respondent has not complied with the law till 31.03.2019 implies that profiteering has to be computed for the entire period and hence we do not see any reason to accept this contention of the Respondent. We further observe that had the Respondent passed on the benefit before 31.03.2019, he would have been investigated only till that date. Therefore, the period of investigation i.e. from 15.112017 to 31.03.2019 has been rightly taken by the DGAP. 31. The Respondent has also contended that he finds it inexplicable that the percentage profiteering vis-a-vis net sales turnover computed by the DGAP has sharply risen to 8.83% & 10.15% of net sales turnover for Feb 2019 and March 2019. In this context, we find that the record shows that the DGAP has only calculated the percentage impact of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... has nowhere interfered with the business decisions of the Respondent and therefore, there is no violation of Article 19 (1) (g) of the Constitution. 33. The Respondent has relied upon the case of Shri Kumar Gandhary Vs KRBL Ltd. = 2018 (5) TMI 760 - NATIONAL ANTI-PROFITEERING AUTHORITY Upon perusal of the above-mentioned order of this Authority, it is clear that no profiteering was determined in that case because it was not a case of tax rate reduction and on the contrary, the tax rate had actually risen on the subject goods from the 0% to 5% when GST was rolled out on 1.07.2017 and it was also not a case of net benefit of ITC. Therefore, the above-cited case does not help the Respondent. 34. The Respondent has also relied upon the judgment passed by the Hon'ble Supreme Court of India in the case of Commissioner of Income Tax Bangalore vs. B.C. Srinivasa Setty 1981 2 SSC 460 = 1981 (2) TMI 1 - SUPREME COURT. A perusal of the said decision shows that it does not come to the rescue of the Respondent as no tax has been imposed under Section 171 of the CGST Act, 2017 and hence no machinery is required to assess it. 35. The Respondent has also relied upon the judgment pass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The Authority as per Rule 136 of the CGST Rules 2017 directs the jurisdictional Commissioners of CGST/SGST to monitor this order under the supervision of the DGAP by ensuring that the amount profiteered by the Respondent as ordered by the Authority is deposited in the CWFs of the Central and the State Government of Maharashtra as per the details given above. A report in compliance of this order shall be submitted to this Authority by the Commissioners CGST /SGST within 4 months from the date of receipt of this order. 39. Further, the DGAP vide his Supplementary Report dated 09.12.2019 has reported that M/s Subway Systems India Pvt. Ltd. (SSIPL) had also profiteered by charging royalty and advertisement expenses on the increased value of net taxable sales which was allowed to the franchisee (in this case, the Respondent) to offset the impact of denial of ITC. Further, M/s SSIPL was recommending the sales price of the products to his franchisees but was not involved in the purchase of goods/material or services for the supply of restaurant services. Therefore, given the above, there was effectively no denial of ITC to M/s SSIPL and it appeared to be resorting to profiteering by ch....