Deputy Commissioner of State Tax Vs Dough Makers India Pvt Ltd. (NAA)
Fact of the Case:
The brief facts of the present case are that a reference was received from the Standing Committee on Anti Profiteering on 27.03.2019 by the DGAP, to conduct a detailed investigation in respect of an application (originally examined by the Maharashtra State Screening Committee on Anti-profiteering) (Annex-1) filed under Rule 128 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.) despite reduction in the rate of GST from 18% to 5% w.e.f. 15.11.2017. It was alleged that the Respondent has increased the base prices of his products and has not passed on the benefit of reduction in the GST rate from 18% to 5% w.e.f. 15.11.2017, affected vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017 by way of commensurate reduction in prices, in terms of Section 171 of the CGST Act, 2017. The DGAP in his report has stated that the summary sheet of the extent of profiteering was prepared by the Deputy Commissioner of State Tax, Pune, which was also enclosed with the reference received from the Standing Committee on Anti-profiteering. This above issue was examined by the Maharashtra State Screening Committee and upon being prima facie satisfied that the Respondent had contravened the provisions of Section 171 of the CGST Act, 2017, it forwarded the said complaint with its recommendation to the Standing Committee on Anti-profiteering for further action vide its letter dated 21.02.2019.
Held by NAA:
The profiteering ought to have been computed on the basis of the comparision of pre-rate reduction item-wise average base price with the actual transaction-wise/invoice-wise price charged by the Respondent in respect of his supplies in line with provisions of Section 171 (1) and Section 171 (2) of the CGST Act as has been done by the DGAP in similar cases. This is because profiteering needs to be computed in respect of each supply effected by the registered person/supplier, i.e. the Respondent. We find that the reason for this anomalous computation has been detailed by the DGAP by stating that the Respondent had never furnished the actual invoice-wise / transaction-wise data for the relevant post-rate reduction period at any time during the investigation and hence profiteering could not be computed in respect of every supply/transaction for the post-reduction period. It has also been reported by the DGAP that the Respondent had refused to furnish the requisite transaction-wise / invoice-wise data stating that he was unable to do so because the invoice-wise data (which pertained to multiple outlets) was voluminous and there were technical issues in funishing the same and that he could only provide data containing the day-wise outward taxable supplies. NAA also observe that as investigating agency, the DGAP has been conferred with wide ranging powers under Rules 129 and 132 of the CGST Rules to summon any relevant record which may be required for conducting an investigation. It is a fact that the Respondent is a franchise of M/s Subway Systems India Pvt. Ltd and conducts his business in terms of the franchisee-franchisor agreement and pays royalty to the franchisor in respect of all his sales. Therefore it is imperative that the item-wise invoice-wise / transaction-wise data is maintained at the end of the franchisor also. Since the respondent has expressed his inability to provide the requisite data on account of certain inexplicable technical reasons, we find it a fit case for exercise of the powers granted under the above Rules to the DGAP to summon the record and to recompute the amount of profiteering accordingly. Therefore, without going into any merits/other submissions filed by the Applicants and the Respondent at this stage, NAA find this case to be a fit case for recomputation of the amount of profiteering.
FULL TEXT OF ORDER OF NATIONAL ANTI-PROFITEERING AUTHORITY
1. The Present Report dated 28.08.2019, received on 29.08.2019 by this Authority, has been furnished by the Applicant No. 2 i.e. 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 present case are that a reference was received from the Standing Committee on Anti Profiteering on 27.03.2019 by the DGAP, to conduct a detailed investigation in respect of an application (originally examined by the Maharashtra State Screening Committee on Anti-profiteering) (Annex–1) filed under Rule 128 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.) despite reduction in the rate of GST from 18% to 5% w.e.f. 15.11.2017. It was alleged that the Respondent has increased the base prices of his products and has not passed on the benefit of reduction in the GST rate from 18% to 5% w.e.f. 15.11.2017, affected vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017 by way of commensurate reduction in prices, in terms of Section 171 of the CGST Act, 2017. The DGAP in his report has stated that the summary sheet of the extent of profiteering was prepared by the Deputy Commissioner of State Tax, Pune, which was also enclosed with the reference received from the Standing Committee on Anti-profiteering. This above issue was examined by the Maharashtra State Screening Committee and upon being prima facie satisfied that the Respondent had contravened the provisions of Section 171 of the CGST Act, 2017, it forwarded the said complaint with its recommendation to the Standing Committee on Anti-profiteering for further action vide its letter dated 21.02.2019.
2. The above complaint was examined by the Standing Committee on Anti-profiteering in its meeting held on 11.03.2019 and vide its minutes, the said complaint was forwarded to the DGAP for detailed investigation and to collect evidence necessary to determine whether the benefit of reduction in the rate of GST on supply of “restaurant services” has been passed on by the Respondent to the recipients, which was received by the DGAP on 27.03.2019.
3. The DGAP in his report has stated that on receipt of the said reference from the Standing Committee on Anti-profiteering, a notice under Rule 129 was issued on 09.04.2019 (Annex-2), calling upon the Respondent 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 given an opportunity to inspect the non-confidential evidence/ information which formed the basis of the investigation from 15.04.2019 to 17.04.2019, which was not availed of by the Respondent.
4. The DGAP further reported that the period covered by the current investigation is from 15.11.2017 to 31.03.2019 and that this Authority, vide its Order No. F. No.22011/NAA/19/2018/3819 dated 19.06.2019 (Annex-3), had extended the time limit to complete the investigation up to 26.09.2019, in terms of Rules 129(6) of the CGST Rules.
5. The DGAP has stated that the Respondent had replied to the above said notice vide various letters but did not furnish the complete and relevant documents. Hence, Summons under Section 70 of the Central Goods and Services Tax Act, 2017 read with Rule 132 of the Rules, were issued on 21.05.2019 to Shri. Unmesh Jethanand Bhatija, Director (Authorised Representative of the Respondent), directing him to appear before the Superintendent of Directorate General of Anti-profiteering on 30.05.2019 and produce the relevant documents. In response to the Summons dated 21.05.2019, the Respondent did not appear. However, he had submitted the requisite documents vide letter dated 27.05.2019.
6. The DGAP has further reported that in response to the notice dated 09.04.2019 and subsequent reminders, the Respondent submitted his replies vide his letters/e-mails dated 18.04.2019 (Annex-4), 04.2019 (Annex-5), 07.05.2019 (Annex-6), 20.05.2019 (Annex-7), 21.05.2019 (Annex-8), 30.05.2019 (Annex-9), 31.07.2019 (Annex-10), 02.08.2019 (Annex-11), 14.08.2019 (Annex-12), 16.08.2019 (Annex-13) and 22.08.2019 (Annex-14). The Respondent submitted that he had availed Input Tax Credit (ITC) during the period July 2017 till 14th Nov. 2017 and thereafter he has not availed any input tax credit. The Respondent further submitted that due to nature of his business and the fact that he had multiple outlets, significant number of invoices were being generated on a daily basis, due to which he was unable to provide invoice-wise details of the supplies made by him and could provide day wise outward taxable supplies reconciled with the GSTR-1 and GSTR-3B Returns.
7. Vide the aforementioned e-mails/letters, the Respondent submitted the following documents/information:
(a) Copies of GSTR-1 Returns for the period July 2017 to March 2019.
(b) Copies of GSTR-3B Returns for the period July 2017 to March 2019.
(c) Copies of Electronic Credit Ledger for the period July 2017 to March 2019.
(d) Copy of Tran-1 Return along with copies of ST-3 returns for the period April 2017 to June 2017
(e) Copies of sample sale invoices and purchase invoices.
(f) Price lists of the products.
(g) Monthly invoice wise summary of item-wise sales for the period from October 2017 to March 2019.
(h) Details of ITC availed, utilised and reversed during the period from July 2017 to 14th November 2017.
(i) Details of Closing Stock of inputs on 14th November 2017.
8. The DGAP, in his report, has mentioned that in terms of Rule 130 of the CGST Rules, 2017, the Respondent had been asked by the DGAP vide notice dated 09.04.2019 to indicate whether any information/ documents furnished were confidential. However, the Respondent did not classify any of the information/ documents furnished by him as confidential in terms of Rule 130 of the Rules, ibid.
9. The DGAP has reported that the reference from the Standing Committee on Anti-Profiteering, the various replies of the Respondent and the documents/evidence on record had been carefully examined. 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.
10. The DGAP has also reported that at the outset, it was noted that the Central Government, on the recommendation of the GST Council, vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017, had reduced the GST rate on the restaurant service from 18% to 5% w.e.f. 15.11.2017, with the proviso that ITC on the goods and services used in the supply of said service is not availed.
11. The DGAP has further stated that before enquiring into the allegation of profiteering, it was important to examine Section 171 of the CGST Act 2017 which governs the anti-profiteering provisions under GST. Section 171(1) and 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 was abundantly clear that in the event of benefit of ITC or reduction in the rate of tax, there must be a commensurate reduction in the prices of the goods or services. Further, such a reduction can be in money terms only so that the final price payable by a consumer gets commensurately reduced. This was the legally prescribed mechanism for passing on the benefit of ITC or reduction in the rate of tax to the consumers under the GST regime. Moreover, it was also clear that Section 171 simply did not provide a supplier of goods or services, any other means of passing on the benefit of ITC or reduction in the rate of tax to the consumers.
12. The DGAP in his report has mentioned that the Respondent had been dealing with a total of 255 items while supplying restaurant services before and after 15.11.2017. Upon comparing the average selling prices as per details submitted by the Respondent for the period 01.10.2017 to 14.11.2017, the increase in base prices after the reduction in GST rate w.e.f. 15.11.2017 was evident in respect of 246 items (96.47% of 255 items) supplied by him. This increase in the base prices has been indicated in Annex-16 (Confidential). The lower GST rate of 5% had been charged on the increased base prices of these 255 items, which confirmed that the tax amount was computed @ 18% prior to 15.11.2017 and @ 5% w.e.f. 15.11.2017. However, the fact was that because of the increase in base prices the cum-tax price paid by the consumers was not reduced commensurately for all the items, despite the reduction in the GST rate. Therefore, the only remaining point for determination was whether the increase in base prices was solely on account of the denial of ITC.
13. The DGAP has also stated that the assessment of the impact of denial of ITC, which was an uncontested fact, requires the 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-GST rate reduction period. The DGAP has further illustrated with an example that if the ITC in respect of restaurant service was 10% of the taxable turnover of the Respondent till 14.11.2017 (which became unavailable w.e.f. 15.11.2017) and the increase in the pre-GST rate reduction base price w.e.f. 15.11.2017, was up to 10%, it can be concluded that there was no profiteering. However, if the increase in the pre-GST rate reduction base price w.e.f. 15.11.2017, was by 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 of the products supplied during the pre-GST rate reduction period has to be carried out by taking into consideration the period from 01.07.2017 to 31.10.2017 and not up to 14.11.2017. The reason for doing the same has been stated by the DGAP as below:-
a. Reversal of ITC on the closing stock of input and capital goods as on 14.11.2017 had been effected by the Respondent. The said reversal of credit was not in accordance with the provisions of Section 17 of the CGST Act 2017 read with Rule 42 and 43 of the CGST Rules.
b. The invoice-wise outward taxable turnover in November 2017 was not provided by the Respondent to compute taxable turnover for the period 01.11.2017 to 14.11.2017.
c. Random checks of the invoices for ITC availed in November 2017 revealed that in some cases, credit was taken by the Respondent without fulfilling the prescribed conditions and also some discrepancies were noticed in ITC availed. For instance, the Respondent availed ITC of Rs. 22,368/- in November 2017 on the basis of invoice no. TRL – 135 dated 01.11.2017 issued by M/s Tremont Reality LLP and of Rs. 25,032/- on the strength of invoice no. 270517180107316 dated 02.11.2017 issued by M/s Vamona Developers Pvt. Ltd. A scrutiny of the above invoices has revealed that while the first of the two invoices pertains to the monthly rental charges paid by the respondent for the period from 01.11.2017 to 30.11.2017, the latter invoice relates to the license fees paid for the period from 01.11.2017 to 30.11.2017, implying thereby that the services pertaining to these invoices had not yet been received on the date of availment of ITC by the respondent, which was a violation of the provisions of Section 16(2) (b) of the CGST Act, 2017.
14. The DGAP has further reported that the ratio of ITC to the net taxable turnover had been taken for determining the impact of denial of ITC (which was available to the Respondent till 14.11.2017). On this basis of the statutory documents made available by the Respondent, it was found that the ITC amounting to Rs. 17,16,253/- was available to the Respondent from the period July 2017 to October 2017 which is 8.72% of the net taxable turnover of restaurant service amounting to Rs. 1,96,90,023/- 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 said ITC was not available to the Respondent. A summary of the computation of ratio of ITC to the taxable turnover of the Respondent has been furnished by the DGAP as per Table-A below:-
Table-A
(Amount in Rs.)
