TaxTMI 
TaxTMI 
2020 (4) TMI 568
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....of the CGST Rules 2017. The Applicant No. 1 has alleged profiteering, in respect of restaurant service supplied by the Respondent (Franchisee of M/s Subway Systems India Pvt. Ltd.). 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 increased the base prices of his products and had not passed on the commensurate benefit of reduction in the GST rate from 18% to 5% w.e.f. 15.11.2017, effected vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017. 2. The DGAP, in his report, has stated that on receipt of the said reference from the Standing Committee on Anti-profiteering, a notice under Rule 129 was issued on 09.04.2019, 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 by him 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 as well as furnish all the supporting documents to evidence the same. The Respondent was also allowed to inspect the non-confidential evidence/information contained in the applica....
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....ST Act, 2017. 7. The DGAP in his report has stated that vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017, GST rate on restaurant services has been reduced from 18% to 5% w.e.f. 15.11.2017 by the Central Government, on the recommendation of the GST Council with the condition that the ITC on the goods and services used in supplying the service was not taken. 8. The DGAP has further stated that before inquiring into the allegation of profiteering, it was important to examine Section 171 of the CGST Act, 2017 which governed the anti-profiteering provisions under GST. Section 171(1) reads as "Any reduction in rate of tax on any supply of goods or services or the benefit of ITC shall be passed on to the recipient by way of commensurate reduction in prices." Thus, the legal requirement as per the above provisions was abundantly clear that in the event of a benefit of ITC or reduction in the rate of tax, there must be a commensurate reduction in the prices of the goods or services being supplied by a registered person and the final price being charged for each supply had to be reduced commensurately with the extent of the benefit and there was no other legally tenabl....
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....ent. A summary of the computation of the ratio of ITC to the taxable turnover of the Respondent has been furnished by the DGAP in Table-A below:- Table-A (Amount in Rs.) Particulars Jul-17 Aug-17 Sept.-2017 Oct.-2017 Total Total Outward Taxable Turnover as per GSTR-3B (A) 6,39,314 6,12,618 6,41,782 6,46,413 25,40,127 ITC Availed as per GSTR-3B (B) 42,104 48,405 51,075 46,024 1,87,608 The ratio of ITC to Net Outward Taxable Turnover (C)= (NB) 7.39 % 11. The DGAP has further reported that the analysis of the details of item-wise outward taxable supplies made during the period from 15.11.2017 to 31.03.2019 revealed that the Respondent had increased the base prices of different items supplied as a part of restaurant service to make up for the denial of ITC post-GST rate reduction. The pre and post GST rate reduction prices of the items sold as a part of restaurant service during the period 01.07.2017 to 14.11.2017 (Pre-GST rate reduction) and 15.11.2017 to 31.03.2019 (Post-GST rate reduction) were compared and it was established that the Respondent had increased the base prices by more than 7.39% i.e., by more than wh....
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.... maintaining the same selling price or by way of not reducing the selling prices of the products commensurately, despite a reduction in GST rate from 18% to 5% w.e.f. 15.11.2017 stood confirmed against the Respondent. This additional amount of Rs. 7,33,043/- had been realized by the Respondent from the recipients which included both the profiteered amount and GST on the said profiteered amount. Hence, the provisions of Section 171 (1) of the CGST Act, 2017 had been contravened by the Respondent in the present case. 15. The above Report was considered by this Authority in its sitting held on 17.09.2019 and it was decided to accord an opportunity of hearing to the Applicants and the Respondent on 03.10.2019. Notice was also issued to the Respondent directing him to explain why the Report dated 13.09.2019 furnished by the DGAP should not be accepted and his liability for violation of the provisions of Section 171 of the CGST Act, 2017 should not be fixed. Sh. Neeraj Rai, Partner appeared for the hearings. 16. The Respondent vide his written submissions dated 18.10.2019 has made the following submissions stating:- a. That the methodology applied in DGAP's report date....
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....al Amount 8.96 10.07 1.11 Advertisement Expenses 4.5% of Basic Price 4.5 of Basic Price Advertisement Amount 4.5 5.06 GST on Advertisement 18% 18% GST Amount 0.81 0.910 Total Amount 5.31 5.97 0.66 Total 14.27 16.037 1.77 % of Incremental Cost 1.77 d. That after moving to the composition scheme w.e.f. 15.11.2017, he was not allowed to avail ITC on Capital Goods. Hence, to calculate the profiteered amount, he needed to factor in the loss of ITC from Capital Goods, which was 1.074% and the same was needed to be considered for arriving at profiteering. He has also illustrated his loss of ITC on Capital Goods in the Table below:- Non Availability of ITC of Capital Goods Party Name Date of purchase Basic Amount GST Paid Stellar Gastronom Pvt. Ltd. 27.04.2018 71045 12788.1 Nirmal Sales Agencies 23.04.2018 16299 2933.84 Stellar Gastronom Pvt. Ltd. 04.05.2018 41640 7495.2 Stellar Gastronom Pvt. Ltd. 11.05.2018 5280 950.2 Stellar Gastronom Pvt. Ltd. 11.05.2018 1750 210 Stel....
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....the reference base price for SOTD products have been taken as Rs. 110/-. Further, the reference base price of SOTD product which was not supplied during the period from 01.11.2017 to 14.11.2017, was taken from the sales data for the period from July-2017 to October-2017 which was Rs. 105/- during the period. c. That the payment of royalty and advertisement charges was a purely internal agreement between the Respondent and M/s Subway Systems India Pvt. Ltd. d. That the concern of the Respondent in respect of the non-availability of ITC on Capital Goods has already been addressed in para 13 to 15 of the DGAP's Report dated 13.09.2020 and it was revealed that the base prices of the products had been increased by the Respondent to factor the denial of credit. e. That in DGAP's Report dated 13.09.2019, the profiteered amount has been arrived at by comparing the average of the base prices of the products supplied during the period 01.11.2017 to 14.11.2017, with the actual invoice-wise base prices of such products supplied during the period from 15.11.2017 to 31.03.2019. The reference base prices of the products which were not sold during the period from....
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.... (c) No 12730 Dt 10/11/17 SOTD Base Rate Rs. 110/- Total bill Rs. 130/- (inclusive 18% GST). (d) No 13078 Dt 14/11/17 SOTD Base Rate Rs. 110/- Total bill Rs. 130/- (inclusive 18% GST). (e) No 13059 Dt 14/11/17 SOTD Base Rate Rs. 110/- Total bill Rs. 130/- (inclusive 18% GST). That after taking the correct SOTD base price of Rs. 110/-, the Profiteering would be reduced by Rs. 12990/-. v. That due to the increased royalty and advertisement charges, his cost had gone up by 1.77%. Hence, he has increased the base prices of the products to compensate for the loss of denial of ITC in the rate reduction regime. vi. That in BOGO offer, there were 2 Subs, one free of cost and second was charged at the normal price. By doing this, he claimed to have passed on the benefit to the customers through the same Invoice; that all the sales made in respect of the BOGO offer on 02.11.2018 should be excluded from the scope of profiteering and hence, the profiteered amount would reduce by Rs. 4,970/-. He has also enclosed the following sample invoice of BOGO offer for Store No 58855:- (a) Inv No. 45425 dated 2/11/18 Amount Rs. 190/-. (b)....
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....refore, the addition of this 5% amount should be removed and hence the profiteered amount should be reduced by Rs. 34,906/-. 19. This Authority has carefully examined the DGAP's Reports and the written submissions filed by the Respondent placed on record. The issues to be decided by the Authority in the present case are as under:- a) Whether the Respondent has passed on the commensurate benefit of reduction in the rate of tax to his customers? b) Whether there was any violation of the provisions of Section 171 (1) of the CGST Act, 2017 in this case? 20. A perusal of Section 171 of the CGST Act shown that it provides as under:- "(1). Any reduction in rate of tax on any supply of goods or services or the benefit of ITC shall be passed on to the recipient by way of commensurate reduction in prices. (2). The Central Government may, on recommendations of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being in force, to examine whether ITCs availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the p....
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....riod, comparing the prices mentioned therein with the prevailing base prices before the reduction in the tax rate and in the availability of ITC. It is also pertinent that the actual transaction values of the products in the pre and post-tax rate reduction periods are compared for the computation of profiteering. 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 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 passed on to the recipients, and, if tracked down the entire value chain, to the end consumers. The welfare of the consumers who are voiceless, unorganized and scattered is the soul of the above provision. This Authority has been working in the interest of consumers as the trade is bound to pass on the benefit of t....
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....yer of such SKU or unit and in case it is not passed on the profiteered amount has to be calculated on each SKU unit. Further, the above Section mentions "any supply" i.e. each taxable supply made to each recipient thereby clearly indicating that netting off of the benefit of tax reduction by any supplier is not allowed. A supplier cannot claim that he has passed on more benefit to one customer therefore he could pass less benefit to another customer than the benefit which is actually due to that customer. Each customer is entitled to receive the benefit of tax reduction or ITC on each product or unit 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 or unit based on the tax reduction as well as the existing base price of the product or unit or the additional ITC available. 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 or unit to unit and hence no fixed methodology can be prescribed to determine the amoun....
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.... the menu was much higher than the price after factoring the discount. Therefore, the average base price of the items should be considered without excluding the discounts. In this context, the argument of the Respondent is not sustainable. The effective price on which tax was levied was discounted price and hence, to determine the base price of an item, the discounted price was taken for the pre and post rate reduction period. Further, the base price of the product had been arrived at by dividing the total quantity supplied to the total taxable value charged after discount. As per the sample invoices submitted by the Respondent vide submissions dated 11.11.2019, it was observed that he did not mention that the discounts were given due to the GST rate reductions. These invoices revealed that the discounts offered (Sub of The Day-SOTD) were following the general discount pattern which was being followed by the Respondent in the course of his business. Therefore, the above discounts cannot be construed to have been given due to the GST rate reduction and hence, the above claim of the Respondent cannot be accepted. 25. The Respondent further contended that the base price in respect ....
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....on of the profiteered amount given in the Explanation attached to Section 171 which has been quoted above. It is clear from the above explanation that an increase or decrease in the cost of a supplier, due to increase in royalty, advertisement charges or the costs towards the renovation of the store, has no ramification on the amount of profiteering which is computed in line with the provisions of Section 171 of the CGST Act. In case a supplier has not passed on the benefit of the tax rate reduction by way of a commensurate reduction in prices in each of his supplies at the level of each invoice, anti-profiteering provisions will apply to him, irrespective of his costs or whether he makes profits or losses. In any case, the payments made by the Respondent on account of Royalty and Advertisement 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. 27. The Respondent has also contended that after moving to the composition scheme w.e.f. 15.11.2017, he was not allowed to avail ITC on Ca....
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....29. The Respondent has further contended that the annual inflation cost was approximately 6% and hence, profiteering should be calculated until 31.03.2018. It is pertinent to mention here that the scope of profiteering is confined to the question of whether the benefit accruing on account of rate reduction has been passed on to the recipients or not. The Respondent had not ground to increase his prices on the intervening night of 14/15th November, 2017 on account of inflation as he had no data to substantiate the above increase on the above date. Therefore, the contention of the Respondent relating to the increase in his costs on account of inflation does not have any remification on the computation of profiteering. Therefore, this contention of the Respondent is not maintainable. 30. The Respondent has further contended that no period has been prescribed under the Act to keep the base prices the same so the anti-profiteering provisions should not be invoked. The DGAP while calculating profiteered amount has arbitrarily considered sales from November-2017 to March-2019 i.e. almost 16 months after the change in GST rate, which was an unduly long period. Therefore, the period of c....
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.... Authority is charged with the responsibility of ensuring that both the above benefits are passed on to the general public as per the provisions of Section 171 read with Rule 127 and 133 of the CGST Rules, 2017. This Authority has nowhere interfered with the business decisions of the Petitioner and therefore, there is no violation of Article 19 (1) (g) of the Constitution. 32. The Respondent has further contended that the DGAP, while calculating the profiteered amount, was wrongly added a 5% notional amount without explaining any reasons and hence, the profiteered amount be reduced appropriately. This contention 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....