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TMI Blog2023 (12) TMI 229X X X X Extracts X X X X X X X X Extracts X X X X ..... he sales data of the World Sandwich Day (WSD) was an outlier and hence an exception. We find this exclusion improper because in several similar cases pertaining to other franchisees of M/s Subway India, the sales data of WSD or sales data related to a similar "Buy One Get One" scheme, was not excluded by the DGAP while computing profiteering in similar cases of franchisees of M/s Subway India. It was apparent that the exclusion of the sales data of 03.11.2017 makes the computation of profiteering in this case different from the computation made in the case of Order Nos. 14/2020, 17/2020, 18/2020, and 36/2020 wherein the DGAP had not excluded the sales data of Buy One Get One (BOGO) offer or the WSD offer offered by those Respondents while working out the product-wise base prices for the period from 01.11.2017 to 14.11.2017. Hence the method used for computation of profiteering, in this case, becomes an aberration and thus unacceptable". ii. "In terms of the above observation and without dwelling upon any other aspect of the case and without going into any other contentions of the Respondent, this Authority, under the powers conferred on it under Rule 133 (4) of the CGST Rules rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 5%, the said ITC was not available to the Respondent. A summary of the computation of ration of ITC to the taxable turnover of the Respondent had been furnished in Table-A below: - "Table- A" (Amount in Rs.) Particulars Jul-2017 Aug-2017 Sept.-2017 Oct.-2017 Total Total Outward Taxable Turnover as per GSTR-3B(A) 4,84,207 4,11,860 3,75,948 3,78,577 16,50,592 ITC Availed as per GSTR-3B (B) 24,294 26,549 19,937 28,802 99,582 Ratio of ITC to Net Outward Taxable Turnover (C) =B/A*100 6.03% (e) The Analysis of the details of item-wise outward taxable supplies during the period 15.11.2017 to 30.06.2019, reveals that the Respondent had increased the base prices of different items supplied as part of restaurant service to make up for the denial of ITC post-GST reduction. To ascertain the profiteering on the basis of the aforesaid pre and the post GST rates, the DGAP had explained the methodology with the help of one illustration viz. of a particular item "6" 'Paneer Tikka' for which the average base price had been calculated during the pre-GST reduction period of 1st November, 2017 to 14 November, 2017 and then profiteering had been calculated for post ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he computation has become flawed and has resulted in an inflated quantification of the profiteered amount; that in other words, it was very common in the restaurant business to offer discretionary discounts to customers based on the business and market practices such as sales, inventory position, competition, competitor strategy, market penetration, customer loyalty, and other similar factors; that as the supplier, he was not only offering these discounts but also had the right to withdraw the discounts and promotional offers anytime and that there was no rule governing that any deal or discount could not be withdrawn until the expiry of a specified period; (c) That the DGAP has erred by computing the average pre rate reduction prices based on the total sales, by including the discounted as well as normal sales, during the period 01.11.2017 to 14.11.2017; that if the discounted prices of the World Sandwich Day had been excluded the profiteered amount would stand reduced by Rs. 88,270/-. (d) That DGAP ought to have taken the pre-tax rate reduction average prices (without considering discounted sales) and compared the same with the post-tax rate reduction average prices so that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... till June 2019, ignoring the fact that the Respondent had the fundamental right to increase the prices of his products, which he has exercised only after 15 months (approx.) from the of tax rate reduction and thus the DGAP has worked like a price controlling authority improperly; that there were no guidelines in the statute itself that prescribed the mechanism to be followed by the Respondent for revision of price and up to what period, the prices of products should not be increased; that thus the profiteered amount ought not be calculated on the increased price of the products in his case. (g) That the DGAP has erred in including the 5% GST paid by him in the profiteered amount because the GST has been paid to the government was based on the base price charged to the customers. Since, according to the DGAP's report, the base price should have been reduced and accordingly, the GST amount payable should also be less than as compared to the actual GST amount collected from the customers. However, the collection of the GST amount on the increased base price from the customers has been already deposited with the Government of India along with monthly tax liability. Therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been considered by the DGAP while calculating the base prices after rate reduction; that online food delivery has emerged as one of the most fast-paced developments in the e-commerce space; that this sector has revolutionized the entire outlook towards the food industry as consumers now have the privilege to choose from a wide variety of cuisines, anywhere, anytime from a range of restaurants listed online; that this has happened due to the emergence of the concept of 'aggregator business model', wherein the business players provide a single online window to customers for ordering food online from a wide variety of restaurants registered on the portal. The aggregators were collecting a fixed margin of the order amount received by the restaurant from the customer as service charge and in turn, handled the actual delivery of food itself; that he had started working with aggregators like Swiggy, Zomato, Uber Eats, etc. from April 2018 onwards, which charge 12-15% service fee for delivery of products; that his online sales amounted to around 45% of his total sales and that he accordingly paid them Rs. 9,18,627/- on account of the delivery fee, inclusive of GST amounting to Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 - (3,597.65) (3,597.65) (19,040.61) July'18 - (15,358.48) (15,358.48) May'19 - (4,213.05) (4,213.05) (19,571.53) Aug'18 - (26,450.92) (26,450.92) Jun'19 - (4,336.00) (4,336.00) (30,786.92) Total - (137,797.33) (137,797.33) - (78,614.07) (78,614.07) (216,411.40) (m) That he had also been supplying a few MRP based products like soft drinks that attracted GST @28% plus 12% Cess; that in the post-rate reduction period, his costs had increased because the ITC on 28% GST and 12% Cess was not available to him anymore; that in such cases of supply of MRP based products where the tax incidence on him had increased due to denial of ITC, needed to be excluded from the profiteered amount. (n) That the calculation of the profiteered amount should only have been up to 31.03.2018 and not up to June 2019 as was done by the DGAP; that neither the provisions of Section 171 of the CGST Act 2017 and the relevant CGST Rules 2017, nor the notified methodology and procedure, prescribed any period up to which a registered person has to keep the base prices unchanged; that since he was operating restaurant service and was not holding inventory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over, which is as below :- SI. No. Total Turnover Total Expenses Net Profit % of Turnover Year Ended March 2018 Rs. 42,23,300 Rs. 57,55,216 Rs (15,31,916) (36.27%) Year Ended March 2019 Rs. 42,54,848 Rs. 55,64,855 Rs (18,67,577) (43.89%) (p) That as per the DGAP Report, the percentage of the profiteered amount to his net sales turnover was 9.91%; that this calculation has been worked out based on only those products/ SKUs where the commensurate benefit was not passed on without adjusting those cases where a higher than commensurate benefit was passed on to the customers; that discounts offered by him to his customers were ignored in the computation; that the computation by the DGAP has not taken into consideration the increase in his royalty and advertising expenses as also the expenses incurred on capital goods purchased by him; that for the period from February 2019 to June 2019, the profiteere amount calculated by the DGAP was on the higher side of net sales turnover as compared to the overall Average percentage calculated by the DGAP which was because he had increased prices in the month of February 2019 to account for several other business factors. The DGAP h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er period of one month, for reasons to be recorded in writing, as might be allowed by this Authority, upon being satisfied that the supplier had contravened the provisions of Section 171, forward the Application with its recommendations to Standing committee for further action; that in the DGAP Report, nothing was mentioned either about the complaint or the examination of the Application by the State Level Screening Committee and as to when the complaint was forwarded by the State Level Screening Committee to the Standing Committee recommending further investigation; that therefore it was not clear to him whether the Standing Committee had considered the written complaint within the period of limitation prescribed under Rule 128 (1) of the CGST Rules, 2017 and as to whether the State Level Screening Committee had completed its preliminary scrutiny within the prescribed period; that the Standing Committee could not have started its scrutiny in line with Rule 129 of CGST Rules 2017 beyond the prescribed period of limitation. 5. Supplementary Reports were sought from the DGAP on the submissions of the Respondent. In response, the DGAP vide his Reports dated 18.03.2020 and 24.06.2020 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2017, it was observed that these invoices contained special offer of WSD. For example: "Table- D" (Amount in Rs.) Invoice No. 1/A-9172 dated 03.11.2017 Invoice No. 1/A-26991 dated 02.11.2018 Item Price (Rs.) Qty Item Price (Rs.) (IN) WSD BTPH 6 inch Sub 0.00 2 12" Hara Bhara Kabab Sub 600 6" - Paneer Tikka Sub 70.00 2 (IN) WSD BOGO Any Ft 0.00 6" - Chicken Seekh Sub 77.50 2 12" -Hara Bhara Kabab Sub 0.00 From the perusal of above table, it was observed that the transaction value was reflected in main course items only and the prices of other items were Zero (Nil). Thus, the Respondent's contention that special treatment at WSD had been found to be correct and had been treated as a special category. The transaction value of same item of 03.11.2017 had been compared with same item of 02.11.2018 and 03.11.2018 (for 6 invoices) to compute profiteering. Accordingly, two separate profiteering computation sheets had been prepared: i. For invoices of WSD ii. For all other invoices excluding WSD. The profiteering for World Sandwich Day was Rs. 7,835/- and the detailed working for the same was enclosed as Annex-1 of the DGAP's Report dated 01.02.2021. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... till the previous month of the date on which notice of investigation was issued. Section 171 (1) of the CGST Act, 2017 was very clear which states that any reduction in the rate of tax or the benefit of ITC had to be passed on to the recipient by way of commensurate reduction in price. Therefore, Section 171 of the CGST Act, 2017, was neither violative of Article 19 (1) (g) of the Constitution of India nor does it interfere with the right to trade, as Section 171 of the CGST Act, 2017 nowhere seeks to fix the prices at which the goods and services ought to had been supplied. The said Section 171 only requires the supplier to pass on the benefit of reduction in rate of tax or the benefit of ITC to the recipients by reducing the price commensurately and does not require the supplier to seek any approval to conduct trade or fix prices of the products supplied by him. Therefore, there was no violation of the right of the Respondent enshrined under Article 19 (1) (g) of the Constitution of India. D. That for the contentions raised by the Respondent on 5% additional GST amount added on profiteered amount should be removed, it was to mention that on account of increase in base price mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited by the respondent was different from the instant case as in the case of M/s KRBL, the pre-GST rate was nil and for the first time a tax of 5% was imposed on the impugned product. G. That for the contention raised by the Respondent that increases in delivery expense paid to Online E-Commerce Platforms should be considered in calculation of base price after rate reduction; it was to mention that DGAP does not look into aspect of costing in course of this investigation of profiteering. As per the Section 171 of the CGST Act, 2017 H. any benefit of rate reduction shall have to be passed on to the buyer. H. That for the contention raised by the Respondent impact on the Profiteered amount due to reduction in base price of the products post GST rate should be considered; it would be appropriate to mention that benefits passed on by the Respondent in some instances where the prices charged were lower than the price arrived at after incorporating the impact of denial of ITC was to a different set of consumers. The sum of total amount of such additional benefit passed could not be claimed to offset against the increased prices charged from other set of customers. I. That for the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AA and a copy of the investigation report dated 01.02.2021 was provided to the Respondent as per the Minutes of the meeting of Authority held on 03.02.2021 to file his consolidated written submissions in respect of the above report of the DGAP. The Respondent vide letter dated 22.03.2021 (confidential) filed his written submissions. 8. Copy of the above submissions dated 22.03.2021 filed by the Respondent was supplied to the DGAP for supplementary Report under Rule 133(2A) of the CGST Rules, 2017. The DGAP filed his clarifications dated 31.05.2021 on the Respondent's submissions and, inter-alia clarified that all the contentions raised by the Respondent in his submissions, were already addressed in the Investigation Report dated 29.01.2021 Further the Respondent vide e-mail dated 09.05.2022 had submitted that he did not have additional information to submit. 9. The Respondent was directed by the Commission to appear before it on 10.08.2023, 26.10.2023 and 16.11. 2023. The Commission has carefully considered the Reports of the DGAP, submissions made by the Respondent and the case records. It was observed that this case pertains to a franchisee namely M/s. Smookey Kitchen Foods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been passed on by him. 12. In the matter of contention raised by Respondent that the DGAP, for computation of the profiteered amount, has compared the discounted average base prices of the products which were being charged by the Respondent during the pre-tax rate reduction period with the actual post-tax rate reduction base prices of these products. Further, as regards exclusion of any type of discretionary discount both prior to GST rate-reduction & post rate-reduction, DGAP has clarified that transaction price (as per Section 15 of CGST Act, 2017) has been considered, both for determination of base price and calculation of profiteering. Based on the average pre-tax rate reduction base price the commensurate base price has been computed by adding denial of ITC of 6.03% and compared with the actual base price of the product. The above methodology employed by the DGAP for computing the profiteered amount appears to be correct, reasonable, justifiable and in consonance with the provisions of Section 171 of the CGST Act, 2017 and has been successively approved by the erstwhile Authority in the cases of tax reduction and hence the same can be relied upon. 13. The Respondent has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be considered in calculation of base price after rate reduction. As regards the additional cost of GST paid under Reverse Charge by the Respondent to Subway India Private Limited on the increased amount of Royalty and Advertisement Expenses, the Commission finds that these were the part of the business process and hence were inbuilt in the basic cost of the product/item. Any increase on this account can't be passed on to consumer by cutting into the tax relief provided by the Government. Therefore, in all circumstances, reduced tax benefit has to be passed on to the consumer. Further, the case of M/s KRBL cited by the Respondent is different from the instant case as in the earlier case, the pre-GST rate was nil and for the first time a tax of 5% was imposed on the impugned product after implementation of GST w.e.f. 01.07.2017. Therefore, the above contention of Respondent is not tenable and hence the provisions of Section 171 were not attracted. 16. The Respondent has also contended that increase in delivery expenses paid to Online E-Commerce Platforms should be considered in calculation of base price after rate reduction. In this regard, the Commission finds that the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 171 read with Rule 133 (3) (c) of the CGST Rules 2017, along with interest payable @ 18% to be calculated from the dates on which the above amount was realized by the Respondent from his recipients till the date of its deposit. The above amount of Rs. 6,58,523/- 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 CGST/SGST Commissioner. 20. It is evident from the above narration of facts that 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 committed an offense under Section 171 (3A) of the above Act and therefore, he is liable for imposition of penalty under the provisions of the above Section. However, since the provisions of Section 171 (3A) have come into force w.e.f. 01.01.2020 whereas the period during which the violation occurred is w.e.f. 01.07.2017 to 30.06.2019, hence the penalty prescribed under the above Section cannot be imposed on Respondent No. 1 retrospectively. Accordingly, Show Cause Notice directing him to explain why the penalty prescribed unde ..... 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