TaxTMI 
TaxTMI 
2020 (4) TMI 569
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.... 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 has increased the base prices of his products. Record shows 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 27.03.2017. 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 (3) was issued on 08.04.2019 (Annex-2), 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 his 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 supporting documents. The Respondent was also allowed to inspect the....
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....ous replies of the Respondent and documents/evidence placed on record, it emerged that 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 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 GST rate on the restaurant service had been reduced from 18% to 5% w.e.f. 15.11.2017 along with the condition that no ITC on the goods and services used in supplying the service would be available to the Respondent 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 of ITC shall be passed on to the recipient by way of commensurate reduction in prices." Thus, the legal requirement of the above provision wa....
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....o Rs. 33,52,358/- during the same period. Further, with effect from 15.11.2017, the rate of tax on restaurant service was reduced from 18% to 5% and no ITC was available to the Respondent. A summary of the computation of the ratio of ITC to the taxable turnover as furnished by the DGAP is at 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) 8,76,260 8,64.783 7,96,749 8,14,566 33,52,358 ITC Availed as per GSTR-3B (B) 63,369 84,567 72,859 82,552 3,03,347 The ratio of ITC to Net Outward Taxable Turnover (C)= (A/B*100) 9.05 % 10. The DGAP has also submitted that the analysis of the details of item-wise outward taxable supplies made during the post-rate reduction period (from 15.11.2017 to 31.03.2019) revealed that the base prices of the different items supplied by the Respondent had been increased by the Respondent, presumably, to offset denial of ITC. The pre and post rate reduction prices of the items sold by the Respondent during the period from 01.07.2017 to 14.11.2017 (Pre-GST rate reduction) and from 15.11.2017 to 31.03.20....
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....of the products while maintaining the same selling prices or by way of not reducing the selling prices of the products commensurately, despite the reduction in the rate of GST from 18% to 5% w.e.f. 15.11.2017 stood confirmed against the Respondent and that the extent of profiteering was Rs. 20,80,087/- (inclusive of GST). Thus 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 of the DGAP was considered by this Authority on 17.09.2019 and it was decided to hear the Respondent on 03.10.2019. Sh. Neeraj Rai, Director represented in person. 15. The Respondent vide his written submissions dated 18.10.2019 made the following submissions:- a. The Respondent stated that in DGAP's report dated 13.09.2019, the method applied to arrive at profiteering was incorrect as the data was not a comparable data since average base prices in the pre-GST periods were used and compared with the item-wise prices in the post-rate reduction period i.e. after 14.11.2017. Further, for the pre-rate reduction period itself, two sets of dates have been used, first from 01.11.2017 to 14.11.20....
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.... 118 118 Royalty Expenses 8% of Basic Price 8% of Basic Price Royalty Amount 8 8.99 GST on Royalty 12% 12% GST Amount 0.96 1.079 Total 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. The Respondent further submitted that after moving to the composition scheme w.e.f. 15.11.2017, he was disallowed ITC on Capital Goods, which needed to be treated as a loss of ITC from Capital Goods in the computation of profiteering by the DGAP. The same is illustrated below:- Non Availability of ITC of Capital Goods (Amount in Rs.) Party Name Invoice Number Date of purchase Basic Amount GST Paid Stellar Gastronom Pvt. Ltd. TC/T/18-19/104 27.04.2018 71045 12788.1 Nirmal Sales Agencies 163 ....
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.... 18 14th Nov 2018 19 28^th Nov 2018 20 12th Dec 2018 21 9th Jan 2019 22 23rd Jan 2019 23 13th Feb 2019 24 27th Feb 2019 25 13th March 2019 26 27th March 2019 f. The Respondent further submitted that the rate of inflation was almost 6% which implied that the profiteering should have been calculated till 31.03.2018 rather than 31.03.2019. g. The Respondent also submitted that due to the above stated reasons, the profiteering amount of Rs. 20,80,087/- was incorrect and due weightage should be given to the above-mentioned points in the final calculation. He further mentioned that as per Annexure 6 of the DGAP Report, the profiteering worked out to be 12% at the Cilantro level and 16% for the store No. 55117. The profiteering percentage was over and above 9.05% ITC and 5% GST which he was paying under the composition scheme. Other Submissions:- h. The Respondent also stated that as per his calculations after factoring in the above points, related to considering correct Average Base Prices of all the item....
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....en arrived at by comparing the average of the base prices of the products supplied during the period from 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 01.11.2017 to 14.11.2017 were taken from the sales data for the period from July 2017 to October 2017. Only those invoices have been taken into account for computing profiteering, where the transaction prices of the products during the period from 15.11.2017 to 31.03.2019 were more than the commensurate base prices of the impugned products. The invoices where the transaction prices were less than the commensurate base prices of the impugned products have not been considered. 17. The Respondent, vide his submissions dated 11.11.2019, filed his contentions against the above supplementary report of the DGAP, which are as below:- a. That he did not agree with the findings of the DGAP because it was common in the restaurant business to offer discretionary discounts to customers and these discounts largely depended on market practices and fact....
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.... resulted in a drastically reduced figure of profiteering, i.e. Rs. 13,79,025/-. He has also claimed that the correct calculation should be as below:- (Amount in Rs.) Profiteering Calculation based on average base price calculated separately for normal sales & discounted sales Month Normal sales Impact Discounted sales Impact Profiteering as per DGAP Report Profiteering as per our Calculation Difference Profiteering as per DGAP Report Profiteering as per our Calculation Difference Total Difference 5.Nov'17 32,756.33 7,289.35 25,466.97 207.37 263.20 (55.83) 25,411.14 6.Dec'17 66,381.95 13,801.65 52,580.30 437.79 817.51 (379.71) 52,200.59 7.Jan'18 55,554.08 12,523.98 43,030.10 713.47 1,469.05 (755.58) 42,274.52 8.Feb'18 50,105.99 12,851.22 37,254.77 27336 340.23 (66.47) 37,188.30 9.Mar'18 60,322.60 16,338.83 43,983.77 597.65 2,333.47 (1,735.83) 42,247.95 1.Apr'18 86,410.52 28,874.89 57,535.63 15,939.96 41,960.89 (26,020.93) 31,514.71 2.May'18 96,046.95 ....
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....eduction Notification gave 2 options, first to opt for 18% GST with ITC benefit or opt for 5% GST without the benefit of ITC, the maximum impact could work out to Rs. 4,82,858/- (without considering the impact of other factors) whereas the DGAP had calculated profiteered amount of Rs. 20,80,087/-, which was 430% higher when compared to the actual benefit received due to reduction in the tax rate. The Respondent also submitted his calculation to buttress his above claim. f. That he did not agree with the finding of the DGAP that all those products in respect of which menu prices were not found in the database of the period from 01.11.2017 to 14.11.2017, base prices have been taken for such items from the period July 17 to October 2017. One such example was the case of SOTD under which the Respondent was selling SOTD at a fixed price of Rs. 110/- till 14.11.2017 (i.e. before the change in GST rate from 18% to 5%); although the sandwich being supplied as SOTD kept changing on a daily basis; that in the case of Store No. 55117, SOTD base price of Rs. 105/- was increased on 18.08.2017 to Rs. 110/- and it remained unchanged till 14.11.2017; that for Store No. 57692, the said bas....
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.... 113,509.89 102,320.50 11,189.39 3.Jun'18 124,145.17 113,877.76 10,267.41 4.1u1'18 162,940.86 150,428.85 12,512.01 5.Aug'18 144,360.77 132,167.57 12,193.20 6.Sept'18 163,382.80 150,353.38 13,029.42 7.Oct'18 200,600.97 185,048.75 15,552.22 8.Nov'18 172,825.46 158,997.70 13,827.76 9.Dec'18 142,026.94 131,742.38 10,284.57 10.Jan'19 136,462.02 125,378.43 11,083.59 11.Feb'19 164,007.58 153,083.85 10,923.72 12.Mar'19 186,122.97 173,602.98 12,519.99 2,080,086.90 1,905,862.58 174,224.32 h. That the finding of the DGAP relating to his Buy One Get One Free Offer (BOGO) were also untenable since only those invoices had been taken into account for computing profiteering wherein the transaction prices of the products during the period 15.11.2017 to 31.3.2019 were more than the commensurate base prices and that the invoices where the transactions prices were less than the commensurate base prices, were not considered: that under this offer, he was offering one Sub Free to his customers under the cover of single....
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....nt; that he wishes to submit that he was not holding inventory more than one week due to the perishable nature of his items; that one of his main raw materials was vegetables prices of which kept changing on day to day basis; that various factors like competition pricing, long term strategies for market penetration, profit margin for sustaining in the market, life cycle of the product, economic and social conditions, cost of the products and capital expenditure, inflation in man-power cost and general year on year inflation, etc. played an important part at the time of fixing the prices of the products; that the computation of profiteering ought to factor the same; that no specific period has been prescribed for investigation under Section 171 of the CGST Act 2017 and the CGST Rules to keep the base prices same; that , the DGAP ,while calculating profiteered amount, has considered sales up to the period from November 2017 to March 2019, i.e. a period of almost 16 months for his investigation which was unacceptable; that the tax rate was reduced from 18% to 5% with effect from 15.11.2017 and he had increased the base sale prices of his products on different dates after 15.11.2017 as....
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.... 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 price of the goods or services or both supplied by him. (3). The Authority referred to in sub-section (2) shall exercise such powers and discharge such functions as may be prescribed. (3A) Where the Authority referred to in sub-section (2) after holding examination as required under the said sub-section comes to the conclusion that any registered person has profiteered under sub-section (1), such person shall be liable to pay penalty equivalent to ten percent of the amount so profiteered: PROVIDED that no penalty shall be leviable if the profiteered amount is deposited within thirty days of the date of passing of the order by the Authority. Explanation:- For the purpose of this section, the expression "profiteered" shall mean the amount determined on account of not passing th....
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.... 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 this provision. This Authority has been working in the interest of consumers as the trade is bound to pass on the benefit of tax reduction and ITC which become available to it due to revenue sacrificed by the Government. This Authority does not, in any manner, interfere in the business decisions of the Respondent and hence the functioning of this Authority and the anti-profiteering machinery is within the confines of the four walls of the provisions of Section 171 of the CGST Act 2017 and in no way violates the tenets of Article 19 (1) (g) of the Constitution. Keeping the above observations in mind, we proceed to address the specific issues raised by the Applicants and the Respondent in the present case. 21. It is clear from the plain reading of Section 171 (1) mentioned above that it deals with two situations one relating to the passing on the benefit of reduction....
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....entioned in Section 171 (1) of the CGST Act, 2017 itself which states as follows:- "Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices." It is clear from the perusal of the above provision that it mentions "reduction in the rate of tax or benefit of ITC" which means that the benefit of tax reduction or ITC has to be passed on by a supplier since it is a sacrifice granted from the public exchequer, which cannot be misappropriated by him. It also means that the above benefit is to be passed on each product to each buyer and in case it is not passed on, the profiteered amount has to be calculated for which investigation has to be conducted on all such impacted supplies made to each recipient, thereby clearly implying that a supplier cannot claim that he has passed on more benefit to one customer, therefore he would pass less benefit to another customer than the benefit which is actually due to that customer. In other words, each customer is entitled to receive the benefit of tax rate reduction or ITC on each product purchased by him. The word "commensurate" me....
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....sector otherwise it would result in denial of the benefit to the eligible recipients. Moreover, the provisions of Section 171 (1), which are abundantly clear, unambiguous and mandatory, truly reflect the intent of the Central and State legislatures. The Respondent cannot deny the benefit of tax reduction to his customers on the above untenable ground as Section 171 provides a clear cut methodology to compute both the above benefits. It would also be relevant to mention here that Section 171 (2) of the CGST Act, 2017 and Rule 122, 123, 129 and 136 of the CGST Rules, 2017 provide the machinery to enforce the provisions of law in the form of this Authority, the Standing and Screening Committees, the DGAP and a large number of field officers of the Central and the State Taxes to implement the anti-profiteering provisions. Hence, the above argument of the Respondent is not tenable. 24. The Respondent has further contended that for calculating the average base price from 01.11.2017 to 14.11.2017, the DGAP has calculated the price after factoring the discount. The actual base price of the menu was much higher. Giving a discount was the norm in this competitive world and depends on vari....
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....l 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 received by the Respondent from each of such buyer. Further, it was also not possible to compare the actual to actual base prices pre and post rate reduction (of SOTD or any other product) as the same buyer may not have purchased the very same product during both the above periods and some of the buyers may have purchased some products during the post-rate reduction period and not during the pre rate reduction period or vice versa. Also, the Respondent has himself stated that he had charged different base prices to his customers for the same product on different days of any particular week/ month during the pre rate reduction period and therefore, the only alternative available was to compute the average base prices for the above period so that comparison could be made with the post rate reduction actual base prices. Therefore we do not find any merit in the claim of the Respondent. 26. The Respondent has co....
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.... 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, availed by the Respondent, has already been accounted for in the computation. Hence, the contention of the Respondent is without any merit. 28. The Respondent has also contended that he ran BOGO offer regularly in Store No. 57692 and gave free Sub (item/product) for every single Sub purchased and the DGAP has calculated profiteering on the second Sub despite it was given free of cost to the customers. The Respondent has also contended that the DGAP has not taken into account those invoices of the post-rate reduction period (15.11.2017 to 31.03.2019), wherein the transaction prices were lesser than the commensurate base prices of the products supplied by him, i.e. where he had passed on excess (more than commensurate) benefit to his customers/recipients. The above conten....
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....the period taken by the DGAP for his investigation was arbitrary as no such 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 up to the period 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 calculation for profiteering should be kept only up to 31.03.2018. In this context, we observe that in this case, while the rate of GST was reduced from 18% to 5% w.e.f. 15.11.2017, the Respondent increased the base prices of his products immediately thereafter and did not pass 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 p....
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.... 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 paid less price while purchasing goods from the Respondent and hence the above amount has rightly been included in the profiteered amount as it denotes the amount of benefit denied by the Respondent. Therefore, the above contention of the Respondent is untenable and hence it cannot be accepted. 34. The Respondent has further contended that right to trade was a fundamental right guaranteed under Article 19 (1) (g) of the Constitution of India and the right to trade included the right to determine prices and such right which had been granted by the Constitution of India could not be taken away without any explicit authority under the law. Therefore, this form of price control was a violation of Article 19 (1) (g) of the Constitution of India. The above contention of the Respondent is not correct as this Authority or the DGAP has not acted in any way as a price controller or regulator as ....
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....ate reduction by way of reduced prices and Section 171 does not offer the Respondent to suo moto decide on any other modality to pass on the benefit of reduction in the rate of tax to his recipients. Therefore, any benefit of tax rate reduction passed on to a particular recipient or customer cannot be appropriated or adjusted against the benefit of tax rate reduction that ought to accrue to another recipient or customer. Therefore, the contention of the Respondent is not accepted. 36. The Respondent has relied upon the decision of this Authority in the case of M/s Flipkart vide Order No. 05/2018 dated 18th July 2018 = 2018 (7) TMI 1490 - NATIONAL ANTI-PROFITEERING AUTHORITY wherein it had been recorded that withdrawal of discounts was the prerogative of the supplier and did amount to profiteering. On a perusal of the above-cited case, it is observed that the issue in that case related to denial of discount of Rs. 500/-, which had been initially offered by the supplier to the buyer at the time of placing the order, but the same was withdrawn by the supplier at the time of supply. In these circumstances, it was held by this Authority that the withdrawal of such a discount does not....