DGAP Vs. Smookey Kitchen Foods OPC Pvt. Ltd. (CCI)
Introduction: The recent case of DGAP Vs. Smookey Kitchen Foods OPC Pvt. Ltd., a franchisee of Subway India Private Limited in Ghaziabad (Uttar Pradesh), has brought to light allegations of denying customers the benefit of tax reduction. The Competition Commission of India (CCI) carefully considered reports, submissions, and case records to assess the franchisee’s compliance with Section 171(1) of the CGST Act, 2017.
Detailed Analysis: The case revolves around the franchisee, M/s. Smookey Kitchen Foods OPC Pvt. Ltd., supplying various food products as part of the Subway brand. The investigation period spanned from 15.11.2017 to 30.06.2019, during which a reduction in the tax rate from 18% to 5% was implemented on restaurant services without Input Tax Credit (ITC) benefits.
DGAP’s findings revealed that the Respondent increased base prices of certain products more than necessary, despite the reduction in the GST rate. The denial of ITC post-GST rate reduction prompted the franchisee to offset the impact by raising base prices, resulting in a failure to pass on the commensurate benefit to consumers.
The methodology employed by DGAP in computing the profiteered amount was deemed correct by the CCI, justifying the comparison of discounted average base prices before and after tax rate reduction. The Respondent’s contention on exclusion of discretionary discounts was rejected, as transaction price under Section 15 of CGST Act, 2017 was considered for both base price determination and profiteering calculation.
The Respondent’s request to calculate the profiteered amount up to the next price revision post-GST rate reduction was dismissed by the CCI, emphasizing the absence of a prescribed investigation period under the CGST Act, 2017.
Regarding the Respondent’s claim to reduce the additional 5% GST on the profiteered amount, the CCI maintained that as it was part of the excess price collected, it could not be reduced. The Respondent was, however, granted the option to claim any excess tax paid separately.
Challenges to the calculation of base prices, including increased royalty expenses and delivery expenses, were assessed and rejected by the CCI. The Commission found that the profiteered amount determined by DGAP, Rs. 6,58,523/-, was appropriate and directed the Respondent to reduce prices accordingly.
Conclusion: The CCI concluded that the franchisee, Smookey Kitchen Foods OPC Pvt. Ltd., violated Section 171(1) of the CGST Act, 2017, by denying customers the benefit of tax reduction. A penalty under Section 171(3A) could not be imposed retrospectively, and the Respondent was directed to deposit the profiteered amount in consumer welfare funds. The CCI further instructed monitoring authorities to ensure compliance and directed the concerned Commissioners to submit a report within four months.
FULL TEXT OF THE ORDER OF COMPETITION COMMISSION OF INDIA
1. The National Anti-Profiteering Authority (NAA) vide Interim Order No. 23/2020 dated 13.10.2020 in this matter had passed the following order:-
i. we observe that the DGAP, vide his clarificatory report dated 24.06.2020, had reported that while computing the quantum of profiteering, the sales data of the World Sandwich Day (WSD) on 03.11.2017 had been excluded while working out the product-wise base prices for the pre-tax rate reduction period, i.e., from 01.11.2017 to 14.11.2017. We find that under this offer, the Respondent was offering one similar product free for every product purchased by a customer on 03.11.2017. We also observed that the DGAP had reported that the 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 read with Section 171 of the CGST Act 2017, directs the DGAP to reinvestigate this case and recompute the quantum of profiteering by duly incorporating the sales data of the World Sandwich Day as on 03.11.2017 in the calculation of the pre-tax rate reduction prices. While reinvestigating the matter on the above lines, all other contentions made by Respondent before this Authority during the course of the hearings might also be considered and also directed to reinvestigate the matter and submitted the Report keeping in view the aforesaid issues’.
2. The brief facts of the case had been mentioned in the NAA’s I.O. No. 23/2020 dated 13.10.2020 and the same are reproduced below:
(a) A reference was received from Standing Committee on Anti-profiteering, under Rule 128 of the CGST Rules, 2017. on 01.07.2019 to conduct a detailed investigation alleging that the Respondent had not passed on the benefit of reduction in the GST rate from 18% to 5% w.e.f 15.11.2017 vide Notification dated 46/2017-Central Tax (Rate) dated 14.11.2017 by way of commensurate reduction in price, in terms of Section 171 of the CGST Act, 2017.
(b) The DGAP had examined the above reference from the Standing Committee on Anti-profiteering on 01.07.2019 and a Notice under Rule129(3) of the CGST Rules, 2017, was issued by the DGAP to the Respondent on 09.07.2019 to reply whether he admitted that the benefit of reduction in GST rate w.e.f 15.11.2017, had not been passed on to the recipients by way of commensurate reduction in prices and if so, to suo moto determine the quantum thereof and indicate the same in reply to the Notice as well as furnish all supporting documents to evidence the same. The rate of GST on service supplied by the Respondent was reduced from 18% to 5% 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.
(c) The Period covered by the current investigation was from 15.11.2017 to 30.06.2019.
(d) The Respondent had submitted to the DGAP that the ITC amounting to Rs. 99,582/- was available to the Respondent during the period July, 2017 to October, 2017, which was 6.03% of the net taxable turnover of the restaurant service amounting to Rs. 16,50,592/- supplied during the same period. Further, 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 ration of ITC to the taxable turnover of the Respondent had been furnished in Table-A below: –
“Table- A” (Amount in Rs.)
