2020 (8) TMI 601 - NAPA - GST

Profiteering - restaurant service - allegation that Respondent had not passed on the commensurate benefit despite the reduction in the rate of GST - contravention of section 171 of CGST Act - penalty - HELD THAT - It is clear from the plain reading of Section 171(1) that it deals with two situations one relating to the passing on the benefit of reduction in the rate of tax and the second about the passing on the benefit of the ITC - On the issue of reduction in the tax rate it is apparent from the DGAPs Report that there has been a reduction in the rate of tax from 18% to 5% w.e.f. 15.11.2017 vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017 in the post GST period. It has been revealed from the DGAP s Report that the ITC which was available to the Respondent during the period July 2017 to October 2017 was 11.16% of the net taxable turnover of restaurant service supplied during the same period. With effect from 15.11.2017 when the GST rate on restaurant service was reduced from 18% to 5% the ITC was not available to the Respondent. The DGAP in his Report has stated that the Respondent had increased the base prices of different items by more than 11.16% i.e. by more than what was required to offset the impact of denial of ITC supplied as a part of restaurant service to make up for the denial of ITC post-GST rate reduction. The profiteered amount is determined as Rs. 61, 67, 097/- as has been computed in Annexure-15 of the DGAP s Report dated 25 10.2019. Accordingly the Respondent is directed to reduce his prices commensurately in terms of Rule 133 (3) (a) of the Rules. Further since the recipients of the benefit as determined are not identifiable the Respondent is directed to deposit an amount of Rs. 61, 67.097/- in two equal parts in the Central Consumer Welfare Fund and the Maharashtra State Consumer Welfare Fund as per the provisions of Rule 133 (3) (c) of the CGST Rules 2017 along with interest payable @ 18% to be calculated standing from the dates on which the above amount was realized by the Respondent from his recipients till the date of its deposit. The aggregate amount shall be deposited as specified above within a period of 3 months from the date of passing of this order failing which it shall be recovered by the concerned SGST Commissioner. Penalty - HELD THAT - It is evident that the Respondent has denied the benefit of tax reduction to the customers in contravention of the provisions of Section 171 (1) of the CGST Act 2017 and he has thus resorted to profiteering. Hence he has committed an offence under section 171 (3A) of the CGST Act 2017 and therefore he is liable to penal action under the provisions of the above Section. Accordingly a notice be issued to him directing him to explain why the penalty prescribed under Section 171 (3A) of the above Act read with Rule 133 (3) (d) of the CGST Rules 2017 should not be imposed on him.

Summary

Issues Involved:

1. Alleged profiteering by the Respondent due to non-passing of GST rate reduction benefit.
2. Methodology and computation of profiteering.
3. Respondent's defense on various grounds including commercial expediency, pricing control, and methodology.
4. Compliance with Section 171 of the CGST Act, 2017.

Detailed Analysis:

1. Alleged Profiteering:
The core issue was whether the Respondent had passed on the commensurate benefit of the GST rate reduction from 18% to 5% effective from 15.11.2017 to his customers. The DGAP's investigation revealed that the Respondent had increased the base prices of his products post-GST rate reduction, thereby not passing on the benefit to the consumers. The investigation covered the period from 15.11.2017 to 30.04.2019, and it was found that the Respondent had increased the base prices of 94 items, leading to a net higher cum-tax price incidence on consumers.

2. Methodology and Computation of Profiteering:
The DGAP used a methodology where the average base prices before the rate reduction were compared with the actual post-rate reduction base prices. The Respondent's claim that there was no prescribed methodology under the CGST Act or Rules was countered by the DGAP, stating that the computation was based on the data provided by the Respondent and the legal requirement of passing on the benefit of tax reduction as per Section 171 of the CGST Act, 2017. The DGAP's methodology was found to be reasonable, justifiable, and consistent with the provisions of Section 171.

3. Respondent's Defense:
The Respondent raised several defenses, including:
- Lack of a prescribed methodology for computing profiteering.
- Increase in costs due to various factors like raw materials, rent, and manpower.
- The franchise agreement with Subway India controlling prices.
- The principle of 'commercial expediency' and the right to determine prices.
- The argument of 'netting off' where excess benefit passed to some customers should offset the shortfall to others.

The Authority found these defenses untenable. It was clarified that the benefit of tax reduction must be passed on each SKU/unit to each customer, and netting off was not permissible as it would deny the benefit to individual customers. The Respondent's claim of increased costs coinciding exactly with the date of tax rate reduction was found implausible.

4. Compliance with Section 171 of the CGST Act, 2017:
Section 171 mandates that any reduction in the tax rate or benefit of ITC must be passed on to the recipient by way of commensurate reduction in prices. The Respondent's failure to do so was a violation of this provision. The Authority directed the Respondent to reduce his prices commensurately and deposit the profiteered amount of Rs. 61,67,097/- in the Consumer Welfare Funds of the Central and Maharashtra State Governments along with interest. The Respondent was also liable for penal action under Section 171(3A) of the CGST Act, 2017.

Conclusion:
The Authority concluded that the Respondent had indeed profiteered by not passing on the benefit of the GST rate reduction to his customers, thus violating Section 171 of the CGST Act, 2017. The order directed the Respondent to deposit the profiteered amount and reduce his prices, ensuring compliance with the anti-profiteering provisions.