PROFITEERING MAKES CHOCOLATES BITTER

[Dr. Sanjiv Agarwal]

Can chocolates always taste sweet and crunchy ! The answer may be different for consumers and manufacturer or supplier of chocolates. The National Anti-profiteering Authority (NAA) has recently pronounced an Order dated 07.12.2018 that when GST was reduced from 28% to 18% on chocolates w.e.f. 15 November, 2018, but supplier did not reduced the prices but continued to sell at same prices, it was a case of profiteering in contravention of the provisions of section 171 of the CGST Act, 2017. [Pushpak Chauhan and DGAP, CBIC, New Delhi v. Harish Bakers & Confectioners Pvt. Ltd., Gurugram  (2018) 12 TMI 473(NAA) ].

Brief Facts

On a complaint by complainant to Standing Committee, it was alleged that despite reduction in GST rates from 28% to 18%  w.e.f. 15.11.2017 on ‘Nestle Munch Nuts’ and ‘Cadbury Dairy Milk Chocolates’, the supplier continued to sell these products at same price as before rate reduction which was also supported by copies of invoices, thus indulging in profiteering in contravention of section 171 of CGST Act. The details of invoices are as follows:

Sale Invoice No.	Sale Invoice Date	Description of Product	Base price (Rs.) (without GST)	Rate of GST Charged (in percentage)	price Charged (Rs.) (including GST)
299238	10.11.2017	Nestle Munch Nuts	15.63	28%	20.00
		Cadbury Dairy Milk	31 .25	28%	40.00
311392	16.1 1.2017	Nestle Munch Nuts	16.95	18%	20.00
		Cadbury Dairy Milk	33.90	18%	40.00

 

	Pre 15.11.207			Post 15.11.2017
Description of product	Base Purchase price (Rs.)	Base Sale price (Rs.)	Margin of Profit	Base Purchase Price (Rs.)	Base Sale price (Rs.)	Margin of profit
A	B	C	D=(C-B)/B	E	F	G=(F-E)/E
Nestle Munch Nuts	14.01	15.63	11.50%	15.20	16.95	11.50%
Cadbury Dairy Milk	27.90	31.25	12.00%	30.27	33.90	12.00%

 

The matter was referred to Director General of Anti-profiteering (DGAP) which investigated the complaint as per procedure.

Supplier’s Submissions

The DGAP sought comments from the supplier as also suo-moto determination of quantum of benefit which had not been passed on after price reduction between 15.11.2017 to 31.03.2018. It submitted that since base price had been increased by the distributors, it increased the base prices keeping the same profit margin (15 % and 12 %) and sold the products at the original maximum retail price (MRP) as there was no change in the MRP.

While supplier submitted copies of purchase and sale invoices from November, 2017 to March, 2018 alongwith copies of returns, viz, GSTR-3B and GSTR-1, details of invoice wise outward supplies were not provided.

The supplier also submitted that :

1. The complaint against it of not passing on the benefit of reduction in the GST rate to the customers and making profit was wrong as it had given details of all the basic components of the prices of the chocolates on the invoices and the benefit of tax rate reduction has been passed to the complainant.
2. It had not made any additional profit after the reduction in the rate of tax and that it had reduced the tax rate from 28% to 18%.
3. It had sold the chocolates after charging the applicable rate of tax on base prices which were calculated on the basis of the cost of the purchases and mark- up and hence it had not resorted to profiteering.
4. In fact the base prices of the above products had been increased by the Distributors as the cost of Nestle Munch Nuts to it was ₹ 14.01 per unit before 15.11.2017 which was increased to ₹ 15.20 after 15.11.2017
5. It had sold the same at the base price of ₹ 15.63 before 15.11.2017and at the base price of ₹ 16.95 after 15th November, 2017, thus keeping the margin same at 11.5%.
6. The cost of Cadbury Dairy Milk Chocolate was ₹ 27.90 per unit before 15th November, 2017 which was increased to ₹ 30.27 after 15th November, 2017 therefore, it had increased the base price from Rs.  31.25 to Rs.  33.90 maintaining the margin at 12% and hence he had not profiteered.
7. It had reduced the rate of tax on the chocolates from 28% to 18% w.e.f. 15.11.2017 as per the Notification No. 41/2017- Central Tax (Rate) dated 14.11.2017.
8. It did not intend to benefit on account of tax reduction and had not contravened the provisions of Section 171 (1) of the CGST Act, 2017.
9. Since the Distributor had increased the basic purchase price, it was also forced to increase the basic sale price however, it had not increased the profit margin.
10. Quantity discounts through various schemes which could not be construed as discounts on the basic prices as they had no connection with the reduction in the rate of tax as these discounts were not provided on every purchase and the amount was also different on each schemes. It was further pleaded that the above discounts did not fall in the category of benefit of GST rate reduction given to it.

11. It had not received any such benefit and it statutory obligation under Section 171 of the CGST Act, 2017 would arise only on the receipt of the benefit.

It also relied upon Dinesh Mohan Bhardwaj v. Vrandavaneshwree Automotive (P) Ltd.  (2018) 4 TMI 1377 (NAA) decided by NAA on 27.03.2018 stating that the entire scheme of GST was ITC based i.e. the recipient of the goods and services took credit of the GST paid by it on the purchase of goods and services and used such ITC while discharging GST output tax liability on supply of goods and services and since no additional ITC was available to it he was bound to enhance the base prices of the subject products.

In the instant case, both the distributors of Nestle and Cadbury also made submissions.

DGAP findings

The DGAP after examining the facts of the case reported that vide Notification No. 41/2017-Central Tax (Rate) dated 14.11.2017 the rate of tax on Chocolates was reduced from 28% to 18% w.e.f. from 15.11.2017. The invoices of distributor of Cadbury had given discount to the retailer on the base price.

The invoice of Cadbury distributor categorically mentioned that the ‘Anti- Profiteering provisions under GST Act require that you pass on the benefits of GST rate reduction given to you; to the consumers’. Similarly, the distributor of Nestle Chocolates had also sold Nestle Munch Nuts 32 Gm. bars through it's various sales invoices between November 2017 to March 2018 giving a discount clearly mentioning on the invoices ‘with GST benefits where applicable’.

It was observed by DGAP that though the base prices were increased but since discounts were given by the distributors to the retailer, it was bound to pass on the benefit of reduction in the rate of tax w.e.f. 15.11.2017 to the customers. It was responsible for passing on the benefit as it was a registered supplier under the CGST/SGST Act, 2017.

It was revealed that supplier had purchased 910 units of Nestle Munch Nuts 32 Gm. and 4646 units of Cadbury Dairy Milk Chocolate during the period between 15.11.2017 to 31.03.2018. It had failed to supply the details of the invoices of the outward supplies pertaining to the above period and hence he had presumed that the above quantity of the Chocolates was sold during the period between 15.11.2017 to 31.03.2018. The DGAP had therefore, concluded that the supplier had resorted to profiteering of ₹ 15,958/-. Thus, it had profiteered an amount of ₹ 4.69 from the complainant vide invoice date 16.11.2017 while selling two units of these products to it as per following details :

Product	MRP (Rs.)	Before 14.11.2017 (Rs.)			15.11.2017 to 31.03.2018 (Rs.)				Profiteering per unit (Rs.)	Total profiteering in Rs.
		Amount charged	Base price GST	GST rate	Amount charged	Base price GST	GST rate	Unit sold
Nestle Munch Nuts	20	20	15.63	28	20	16.95	18	910	1.56	1416
Cadbury Dairy Milk	40	20	31.25	28	40	33.90	18	4646	3.13	14542
							Total Profiteering			15,958

 

According to DGAP, since the supplier was a registered supplier under GST law, it was legally bound to pass on the benefit of reduction in rate of tax to its customers.

Prices included both the base prices and also the tax charged on it and therefore, any excess amount collected from the recipients must be returned to them and if they were not identifiable, the same was to be deposited in the Consumer Welfare Fund (CWF).

NAA findings

Based on the submissions and DGAP report, the NAA observed as follows:

1. The supplier had increased the base price by ₹ 1.56 per unit in respect of the Nestle Munch Nuts and ₹ 3.13 for the Cadbury Dairy Milk and hence the MRP charged on both the above products had remained ₹ 20/- and ₹ 40/- per unit respectively before and after the reduction in the rate of tax. Therefore, it was established that the supplier had in fact increased the base prices of these Chocolates and sold them at the same MRPs which he was charging before the reduction in the rate of tax instead of reducing the same and had hence not passed on the benefit of such reduction to the above complainant.
2. The supplier was duly registered under the CGST/SGST Act, 2017 and therefore, he was under legal obligation to follow the Notification dated 14.11.2017 vide which the rate of GST was reduced from 28% to 18% on both the above products.
3. It cannot deny the accountability as well as the duty cast upon it under the above Notification by contending that it had not increased the base prices whereas he had charged the increased base prices on both the above products after 15.11.2017.
4. It failed to produce any evidence to show that it had taken up the issue of giving benefit of reduced rate of tax to the customers with distributors and informed them that he was bound to reduce the MRPs due to reduction in the rate of tax and both of them should either reduce/not increase the base prices or compensate it on account of the benefit which it was required to pass on to its customers, therefore, it is quite apparent that he had deliberately charged the enhanced prices with an intention to pocket the amount which he was bound to pass on to the recipients.
5. It can also not legally maintain that since it had not received the benefit from the distributors and hence it would not pass on the same as it was bound by the provisions of Section 171 being a registered dealer.
6. Mere charging of 18% GST after 15.11.2018 cannot be construed to have resulted in the passing of the benefit unless the MRPs were reduced and the base prices were maintained.
7. The claim that profit margins had remained the same is also not tenable as it had not only increased the base prices but had also earned additional margin on the enhanced prices.
8. It had further forced the customers to pay additional GST on the increased base prices otherwise the customers should have got further benefit of reduced base prices.
9. Perusal of the tax invoices issued by both the distributors shows that they had given discounts to pass on the benefit of tax reduction with specific endorsements that it was required to pass on the benefit of reduced rate of GST.
10. The supplier being a registered dealer under the CGST/SCST Act, 2017 is under legal obligation to pass on the benefit to its customers on account of the reduction in the rate of tax whether he was given any discount by the distributors or not.
11. The amount of profiteering has to include the amount of additional profit margin and the additional tax charged by the supplier as both of them had been illegally charged by it otherwise the recipients should have got further benefit of reduction in the MRPs of both the products.

The NAA thus concluded that the supplier of chocolates had indulged in profiteering in violation of the provisions of Section 171 of the CGST Act, 2017 and has not passed on the benefit of reduction of tax as per the Notification dated 14.11.2017 in respect of the subject products to its customers and therefore, it is liable for action under Rule 133 of the CGST Rules, 2017.

The supplier had also issued incorrect invoices while selling the above products to its customers as he had not correctly shown the basic prices which he should have legally charged from them. The supplier had also forced them to pay additional GST on the increased prices and had also earned additional profit through the incorrect tax invoices which would have otherwise resulted in further benefit to the customers in the shape of reduced prices.

Conclusion

The supplier was directed to reduce the sale prices of the above products immediately commensurate to the reduction in the rate of tax as was notified on 14.11.2017 and pass on the benefit of reduction in the rate of the tax to its customers.  Further it was directed to refund the same to the complainant along with interest @ 18% w.e.f. 16.11.2017 till the same is paid

Since supplier has also voluntarily deposited an amount of ₹ 1295/- in the Consumer Welfare Fund (CWF), therefore, the balance profiteered amount of ₹ 14,658.31 (15,958 - {1295 + 4.69}) will be deposited into the CWF by the supplier as per the provisions of Rule 133 (3) (c) of the CGST Rules, 2017 along with the interest at the rate of 18% to be calculated from the date of collection of the higher amount till the date of the deposit of such amount.

It was ordered that these amounts shall be refunded or deposited as above within a period of three months from the date of receipt of the order failing which the same shall be recovered by the DGAP and refunded or deposited as has been directed.

DGAP was directed to conduct further investigation in respect of the sales made by the supplier after the above period to assess the amount of profiteering made by the supplier  and submit report.

The supplier had also issued incorrect invoices while selling the above products to its customers as he had not correctly shown the basic prices which he should have legally charged from them. The supplier had also forced them to pay additional GST on the increased prices and had also earned additional profit through the incorrect tax invoices which would have otherwise resulted in further benefit to the customers in the shape of reduced prices.

Thus, supplier  has knowingly and consciously acted in contravention of the provisions of the CGST Act, 2017 by issuing incorrect invoices which is an offence under Section 122 (1) (i) of the CGST Act and hence it is liable for imposition of penalty under the above Section read with Rule 133 (3) (d) of the CGST Rules, 2017.

For levy of penalty, the principles of natural justice shall to be observed.

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