TMI Blog2020 (4) TMI 569X X X X Extracts X X X X X X X X Extracts X X X X ..... ices 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 9.05% 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 ₹ 20,80,087/- as has been computed in Annexure-11 of the DGAP Report dated 13.09.2019. Accordingly, the Respondent is directed to reduce his prices commensurately in terms of Rule 133 (3) (a) of the above Rules. Further, since the recipients of the benefit, as determined, are not identifiable, the Respondent is directed to deposit an amount of ₹ 20,80,087/- in two equal parts of ₹ 10,40,043.50/- each in the Central Consumer Welfare Fund and the Maharashtra 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 starting from the dates on which the above amount was realized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent 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 relied upon non-confidential evidence/information or any data supplied by the Applicant No. 1 between 15.04.2019 and 17.04.2019, which was however not availed of by the Respondent. 3. The DGAP has reported that the period covered by the current investigation was from 15.11.2017 to 31.03.2019 and that this Authority, vide its Order dated 19.06.2019 (Annex-3)., had extended the time limit to complete the investigation up to 26.09.2019, in terms of Rule 129 (6) of the CGST Rules, on the request of the DGAP. 4. The DGAP has also reported that in response to the notice dated 09.04.2019 and subsequent reminders, the Respondent has submitted his replies vide his letters/e-mails dated 19.04.2019 (Annex-4), 12.06.2019 (Annex-5), 19.06.2019 (Annex-6), 17.07.2019 (Annex-7), 24.08.2019 (Annex-8) and 05.09.2019 (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 was abundantly clear that in the event of a benefit of ITC or reduction in the rate of tax, there must follow a commensurate reduction in the prices of the goods or services being supplied by a registered person and that the final price being changed on each supply had to be reduced commensurately with the extent of benefit and that there was no other legally tenable mode of passing on such benefit of ITC to the recipients/consumers. 8. Further, the DGAP has intimated that the assessment of the impact of denial of ITC, which was an uncontested fact, required determination of the ITC in respect of restaurant service , as a percentage of the taxable turnover from the outward supply of products , during the pre-rate reduction period. For instance, if the ITC in respect of restaurant service was 10% of the taxable turnover of a registrant till ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 31.03.2019 (Post-GST rate reduction) were compared and it was found that the Respondent had increased the base prices of the products supplied by him by more than what was required to offset the impact of denial of ITC in respect of items sold during the same period and hence, the commensurate benefit of reduction in the rate of tax from 18% to 5% had not been passed on. 11. The DGAP has further stated that the next step was to compute the amount of profiteering in this case. It was pertinent that as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ₹ 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 14.11.2017 and the second from 01.07.2017 to 31.10.2017. He stated that the above method was untenable since for calculating the average base prices for the period 01.11.2017 to 14.11.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18% 5% GST Amount 18 5.62 Total 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Stellar Gastronom Pvt. Ltd. TC/T/18-19/104 14.08.2018 62139 11185.02 Total 607965.42 109328.8 Turnover of 2018-19 (Rs.) 10179424.6 loss of GST on Capital Goods 1.074% e. The Respondent further submitted that in the restaurant business, he has to extend several promotional offers and discounts/deals to attract more customers and hence, he ran the Buy One Get One (BOGO) offer regularly in the case of Store No. 57692 under which one Sub was offered free for every single Sub purchased. He submitted that the DGAP in his report has calculated profiteering on the second Sub also despite it having been given free of cost to customers and therefore, the profiteering calculated on the same should be completely removed from the sales made on the below-mentioned dates. He further stated that he ran the BOGO offer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 items, Royalty and Advertisement Charges impact on his costing, loss of ITC in Capital Goods, excluding Profiteering on the BOGO Sales (Free SUBs), factoring general inflation and limiting the scope of arriving at profiteering till 31.03.2018, the profiteering worked out to be merely ₹ 22,101/- as per Annexure-5, which was less than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 factors such as sales, inventory position, competitor strategy, market penetration, customers' loyalty etc. He cited the decision of this Authority given in the case of M/s Flipkart (Case No. 5/2018 dated July 18, 2018 = 2018 (7) TMI 1490 - NATIONAL ANTI-PROFITEERING AUTHORITY) wherein it was held that withdrawal of discount was a prerogative of the sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dec-18 802117 130948 16% Jan-19 733092 119556 16% Feb-19 759524 147967 19% Mar-19 914793 169336 19% Grand Total 11966630 1866182 16% c. That the DGAP's calculation of profiteering was flawed as he ought to have considered the fact that giving discounts was a general business practice. The DGAP should have worked out the calculation based on the non-discounted base prices for non discounted sales and the discounted prices for discounted sales, for the two periods, separately, which would have resulted in a drastically reduced figure of profiteering, i.e. ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 59.39 126,275.82 5.Aug'18 144,198.09 36,437.95 107,760.15 162.67 - 162.67 125,495.41 6.Sept'18 163,382.80 37,887.39 125,495.41 - - - 148,807.34 7.Oct'18 198,264.08 45,672.94 152,591.15 2,336.88 6120.69032 (3,783.81) 125,503.37 8.Nov'18 170,562.07 42,227.26 128,334.82 2,263.39 5,094.83 (2,831.44) 110,285.94 9.Dec'18 142,026.94 31,741.00 110,285.94 - - - 100,285.94 10.Jan'19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % 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 ₹ 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 ₹ 105/- was increased on 18.08.2017 to ₹ 110/- and it remained unchanged till 14.11.2017; that for Store No. 57692, the said base price of SOTD was increased from ₹ 105/- to ₹ 110/- on 23.08.2017; that he was submitting sample bills to evidence his above claim in respect of both his stores; that after taking the correct SOTD base price of ₹ 110/-, the amount of profiteering would stand reduced by ₹ 13,263 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total Amount 5.31 5.97 0.66 Total 14.27 16.037 1.77 Impact of increase in Royalty:- Royalty Impact (Amount in Rs.) Month Profiteering as per DGAP Report Profiteering as per our Calculation after royalty adjustment Difference 5.Nov'17 32,963.70 28,813.46 4,150.24 6.Dec'17 66,819.74 58,760.79 8,058.96 7.Jan'18 56,267.54 48,888.43 7,379.12 8.Feb'18 50,379.75 45,120.55 5,259.21 9.Mar'18 60,920.25 55,660.77 5,259.48 1.Apr'18 102,350.48 91,616.43 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed on the benefit to the customers through the same Invoice and therefore all the sales on BOGO dates should be excluded from the scope of calculating profiteering; that he was enclosing sample invoice of BOGO and the dates of BOGO for both his stores, as is given below:- For Store No 57692 (a) Inv. No. 25010 dated 9/5/18 Amount ₹ 185/-. (b) Inv. No. 33039 dated 12/9/18 Amount ₹ 255/-. (c) Inv. No. 39816 dated 9/1/19 Amount ₹ 220/-. For Store No 55117 (a) Inv. No. 42413 dated 2/11/18 Amount ₹ 220/-. (b) Inv. No. 42423 dated 2/11/18 Amount ₹ 2201-. (c) Inv. No. 42450 dated 2/11/18 Amount ₹ 220/-. S. No. BOGO Offer in Store No. 57692 BOGO Offer in Store No. 55117 1 13th December 2017 2nd Nov 2018 2 10th Jan 2018 3 24th Jan 2018 4 28th Feb 2018 5 21 st March 2018 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conomic 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 part of his normal business practice and to offset inflation which has not been considered by the DGAP; that the profiteered amount should be calculated on the basis of the difference in base prices which existed just before reduction in rate and immediately after that; that the profiteered amount should be calculated up to 31.03.2018 and beyond that period any increase in prices should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 the benefit of reduction in rate of tax on supply of goods or services or both or the benefit of input tax credit to the recipient by way of commensurate reduction in the price of the goods or services of both. 20. In the context of deciding the present case, we observe that Section 171 of the CGST Act 2017 itself defines the term profiteered which means the amount determined on account of not passing on the benefit of reductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit 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 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 DGAP's 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 Respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C 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 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 var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. 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 various factors. It was the call of the business to decide upon the period and quantum of discount that was needed to be given to sustain in business and to attract more customers. Therefore, the average base prices of the items should be considered without excluding the discounts. The contention of the Respondent is not correct. It is clear that the effective price on which tax was levied was discounted price and hence, the discount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 contended that in India, M/s Subway Systems India Pvt. Ltd. Charges 8% and 4.5% Royalty and Advertisement Charges respectively. When 18% GST was charged on the restaurant services, he used to pay to the franchisor, Royalty calculated as a percentage of the Total Sales less GST @ 18% (i.e. on taxable value). However, under the Composition Scheme, he had started paying Royalty and Advertisement charges, calculated as a pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led 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 contention of the Respondent is not correct because the computation done by the DGAP is based on the transaction value as per the provisions of Section 15 of the CGST Act, 2017 and all discounts including the supply of free Sub, which do not form part of such value, cannot be included in the price of the product. The Respondent has himself submitted that the discounts offered by him were given following his general market p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod. 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 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 15.11.2017 to 31.03.2019 has been rightly taken by the DGAP. 32. The Respondent has also claime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 they do not have the mandate to regulate the same. The Respondent is free to exercise his right to practice any profession or to carry on any occupation, trade or business, as per the provisions of Article 19 (1) (g) of the Constitution. He can also fix his prices and profit margins in respect of the supplies made by him. Under the provisions of Section 171 of the Act, ibid, this Authority has been only authorized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stomer. 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 ₹ 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 amount to profiteering since the said discount offered had no connection with the base price of the products supplied. The facts of that case are totally at variance with the facts of the present case wherein the Respondent has claimed that giving discounts was a norm in the competitive world and a call of business. Therefore, the case cited above has no relevance in the context of the present case. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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