Director General of Anti-Profiteering Vs M/s Gaurav Sharma Food Industries (National Anti-Profiteering Authority)
1. The present Report dated 31.12.2019 has been furnished by the Director General of Anti-Profiteering (DGAP), under Rule 129 (6) of the Central Goods & Services Tax (CGST) Rules, 2017. The brief facts of the case are that a reference was received by the DGAP from the Standing Committee on Anti-Profiteering on 01.07.2019 recommending a detailed investigation in respect of an application, originally examined by the Rajasthan State Screening Committee on Anti-profiteering under Rule 128 (2) 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 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 of tax reduction as he had increased the base prices of his products. Statement dated 07.02.2019 of Sh. Gaurav Sharma, Proprietor of the Respondent along with estimated cost of goods supplied by him was also enclosed the recommendations of the Standing Committee. On receipt of the said reference from the Standing Committee on Anti-profiteering, a notice under Rule 129 (3) was issued on 12.07.2017 by the DGAP, calling upon the Respondent to reply as to whether he admitted that the benefit of reduction in the 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 the supporting documents. The Respondent was also allowed to inspect the relied upon non-confidential evidence/information which formed the basis of the investigation between 18.07.2019 and 22.07.2019, which was however not availed of by the Respondent.
2. The DGAP has reported that the period covered by the current investigation was from 15.11.2017 to 30.06.2019.
3. The DGAP has also reported that in response to the notice dated 07.2019 and subsequent reminders, the Respondent has submitted his replies vide his letters/e-mails dated 23.07.2019, 17.09.2019, 23.09.2019, 25.09.2019, 04.10.2019, 29.11.2019, 11.12.2019, 21.12.2019 and 26.12.2019 whereby the Respondent has submitted:-
a) That he had increased the base prices of his menu items by 8% (average) after 15.11.2017 due to increase in the cost of various items like vegetables etc.
b) That as per Notification No. 46/2017- Central Tax (rate) dated 14.11.2017, no ITC was available and hence he had increased the base prices of his products after the change in the GST rate from 18% with ITC to 5% without ITC.
c) That as per ITC working during the period from July 2017 to 2017, ITC amounting Rs 2,89,196/- was available which came to approximately 8.80%. Hence, the base prices had been increased to neutralize the denial of ITC.
d) That since 15.11.2017, he had opted the 5% Composition Scheme with no benefit of setting off input credit on the Accordingly, the benefit of pricing on his popular items has been passed on by him to the extent which could cover the loss from the withdrawal of setting off of ITC received before 15.11.2017.
4. Vide the aforementioned e-mails/letters, the Respondent has also submitted the following documents/information:-
(a) Copy of GSTIN Registration.
(b) Copies of GSTR-1 and GSTR-3B Returns for the period from July 2017 to June 2019.
(c) Copy of GSTR-9 Returns for the financial year 2017-2018.
(d) Sales details for the period from August 2017 to June
(e) Price Lists of products (pre and post 15.11.2017).
(f) Sample invoices issued during the pre and post 11.2017.
(g) ITC Ledger from July 2017 to November 2017.
5. The DGAP has further reported that in terms of Rule 130 of the CGST Rules 2017, the Respondent had been informed by him vide notice dated 12.07.2019 that if any information/documents provided by him were confidential, a non-confidential summary of such information/documents could be furnished by him. However, the Respondent did not classify any of the information/documents provided by him as confidential, in terms of Rule 130 of the Rules ibid.
6. The DGAP has also stated that based on a careful examination of the case record, including the reference received from the Standing Committee on Anti-Profiteering, various replies of the Respondent and the 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 stated 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 (1) of the CGST Act, 2017, to ascertain whether the present case was a case of profiteering or not. Section 171 (1) reads as “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 the benefit of ITC or reduction in the rate of tax, there must be commensurate reduction in the prices of the goods or services being supplied by a registered person, the final prices being charged on each supply must be reduced commensurately with the extent of benefit and there was no other legally tenable mode of passing on such benefits to the recipients/consumers.
8. The DGAP has also submitted 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 registered person till 14.11.2017 (which became unavailable to him w.e.f. 15.11.2017) and if the increase in the base prices w.e.f. 15.11.2017 was less than 10%, then this would not be a case of profiteering. However, if the increase in the base prices w.e.f. 15.11.2017, was by a margin of 14%, the extent of profiteering would be 14% – 10% = 4% of the turnover. Therefore, this exercise to work out the ITC in respect of restaurant service as a percentage of the taxable turnover from the products supplied during the pre-GST rate reduction period had to be carried out, though by taking into consideration the period from 01.07.2017 to 31.10.2017 and not up to 14.11.2017. The DGAP has claimed to have done this because there was no reversal of ITC on the closing stock of inputs/input services and capital goods as on 14.11.2017 by the Respondent, which was required under the provisions of Section 17 of the CGST Act, 2017 read with Rule 42 and 43 of the CGST Rules, 2017.
9. The DGAP in his Report has also intimated that the ratio of ITC to the Net Taxable Turnover has been taken as the basis for determining the impact of denial of ITC that was available till 31.10.2017. The DGAP has found that the ITC amounting to Rs. 2,48,994/- was available during the period from July 2017 to October 2017 which worked out to be 8.72% of Net Taxable Turnover of the Respondent from the restaurant service supplies amounting to Rs. 28,54,334/- 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 given in Table-A below:-
Table-A (Amount in Rs.)
