Every Recipient/Customer is Entitled to the Benefit of tax Rate Reduction by way of Reduced Prices: National Anti-Profiteering Authority [Ref: State Tax Officer Versus Cilantro Diners Private Limited (Case No. 18 Of 2020)]


Application was filed under Rule 128 of the Central Goods and Services Rules, 2017 [“CGST Rules”] alleging profiteering in respect of restaurant services supplied by Cilantro Diners Private Limited (“Respondent”), Franchisee of Subway Systems India Private Limited.

It was alleged that despite the reduction in the rate of GST from 18 per cent to 5 per cent w.e.f. 15.11.2017 (please refer to Notification No. 46 / 2017 – Central Tax dated 14.11.2017), the Respondent had not passed on the commensurate benefit to the customers since it has enhanced the base price of its products.

The Application was examined by the Standing Committee and Screening Committee as per the provisions of Rule 128 of the CGST Rules.

The matter was forwarded to the Director General of Anti-Profiteering, Central Board of Indirect Taxes and Customs (“DGAP”) under Rule 129(1) on 27.03.2019 recommending a detailed investigation as the Standing Committee was of the view that there is a prima facie evidence to show that the Respondent has not passed on the benefit of reduction in the rate of tax on the supply of goods or services or the benefit of Input Tax Credit [“ITC”] to the recipient by way of commensurate reduction in prices.

A notice was issued to the Respondent as per Rule 129 (3) of the CGST Rules calling upon the Respondent to reply as to whether it admits that the benefit of reduction in GST rate w.e.f. 15.11.2017, had not been passed on to its recipients by way of commensurate reduction in prices and if so, to suo-moto determine the quantum thereof and indicate the same in its reply to the notice as well as furnish all supporting documents.

The Respondent filed various documents including but not limited to Copies of GSTR-1 Returns, Copies of GSTR-3B Returns, Copies of Electronic Credit Ledger, Copies of sample sale invoices and purchase invoices, Price lists of the products, separately, for two stores registered under the same GST registration number, Monthly invoice wise summary of item-wise sales, Details of ITC availed and utilised for the period July 2017 to 14th November 2017 by the Respondent etc.

The period covered by the current investigation was from 15.11.2017 to 31.03.2019 and the Authority, vide its Order dated 19.06.2019 extended the time limit to complete the investigation up to 26.09.2019[1], in terms of Rule 129 (6) of the CGST Rules, on the request of the DGAP.

The DGAP completed its detailed investigation and furnished the report dated 13.09.2019 of its findings along with the relevant records in terms of Rule 129(6) to the National Anti-Profiteering Authority (“NAA”). The report was prepared based on various factors including but not limited to-

  • 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
  • The ratio of ITC to the Net Taxable Turnover for determining the impact of denial of ITC that was available prior to restriction
  • A summary of the computation of the ratio of ITC to the taxable turnover was prepared

Let’s understand the issue through following illustration:

If the ITC in respect of restaurant service was 10% of the taxable turnover 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.

The DGAP after analyzing all factors and perusal of documents observed that the Respondent had increased the base prices of the products more than what was required to offset the impact of denial of ITC in respect of items sold during the same period. Hence, the DGAP was of the view that the commensurate benefit of reduction in the rate of tax from 18% to 5% had not been passed on.

The amount of profiteering computed in the present matter was amounting to INR 20,80,087/-


(i) Whether the Respondent has passed on the commensurate benefit of reduction in the rate of tax to his costumers?

(ii) Whether there was any violation of the provisions of Section 171 of the CGST Act, 2017 committed by the Respondent?


The Respondent submitted various submissions; inter-alia includes-

  • 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;
  • that in all the Subway outlets, Sub of the Day (SOTD) was highly popular and was priced at Rs. 130/- inclusive of taxes (Rs. 110/- being the base price) across all outlets before 15.11.2017. However, this base price of Rs. 110/- was incorrectly mapped as Rs. 105/- in several invoices issued during the period from July-2017 to October 2017. This mistake needed to be corrected and the base price of SOTD should be taken as Rs. 110/-;
  • the Franchisor charges Royalty and Advertisement Charges on total turnover (taxable sales) on a weekly basis. After reduction in tax rate from 18 to 5 per cent with no ITC, there was an incremental cost (explained through illustration);
  • that w.e.f. 15.11.2017, ITC on Capital Goods was disallowed, which needed to be treated as a loss of ITC from Capital Goods in the computation of profiteering by the DGAP.


  • The NAA after going through the submissions of the Respondent and upon perusal of the documents / reports/ information made available, directed the Respondent to reduce prices commensurately in terms of Rule 133 (3) (a) of the CGST Rules.
  • The NAA also held that since the recipients of the benefit, as determined, are not identifiable, therefore, the Respondent is directed to deposit an amount of Rs. 20,80,087/- in two equal parts of Rs. 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 by the Respondent from his recipients till the date of its deposit.
  • The aggregate amount of Rs. 20,80,087/- 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 SGST Commissioner.
  • The 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 it has thus resorted to profiteering.
  • The Respondent has committed an offence under section 171 (3A) of the CGST Act, 2017 and therefore, it is liable to penal action. Accordingly, a notice be issued directing them to explain why the penalty prescribed under Section 171 (3A) of the above Act read with Rule 133 (3) (d) of the CGST Rules, 2017 should not be imposed.


Rule 133(3)(d) provides that the NAA may order for imposition of penalty as specified under the CGST Act, 2017. It is relevant to mention here that though the said Rule talks about the imposition of penalty as per the CGST Act, however, there was no provision in this regard.

A new provision i.e., sub-section (3A) under Section 171, has been inserted vide Section 112 of the Finance Act, 2019 empowering the NAA to impose a penalty that is equivalent to 10% of the profiteered amount. The relevant text is extracted hereunder:

“(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 per cent. 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.”

The above extracted provision became effective from 01.01.2020 as per Section 1(2) of the Finance Act, 2019 read with Notification No. 01 / 2020 – Central Tax dated 01.01.2020. It is amply clear that there was no mandatory penalty i.e., equivalent to 10 per cent of the amount so profiteered, either at the time of examination of application by the Standing Committee or conducting of proceedings by the DGAP.

Though the Respondent can take a plea in its reply to the SCN that no penalty should be imposed as the penal provision under the Act was not in existence during the relevant time, however, the Department may contend otherwise.

Therefore, in our view, if the Respondent accepts the profiteered amount and does not challenge this Order before the Higher Court, it would be appropriate to deposit the profiteered amount within a period of 30 days (despite three months’ time has been given) and preclude itself from the levy of penalty.


The views expressed in this article are the personal views and for informational purposes only. The information which is summarized herein does not constitute a professional / legal advice. A detailed and thorough examination of the facts and circumstances of a particular situation are always needed for any legal opinion / advice.

[1] Earlier DGAP was mandated to complete the proceeding within a period of three months or within such extended period not exceeding a further period of three months. Now, the statutory time limit of three months has been extended to six months w.e.f. 28.06.2019, which could be extended for a further period of three months.

(Founder and Managing Partner Abott Law Office, Mob: +91- 97187 04960 E-mail: [email protected])

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Qualification: LL.B / Advocate
Company: Abott Law Office
Location: New Delhi, New Delhi, IN
Member Since: 25 Apr 2020 | Total Posts: 4
Sumit Wadhva is the Founder and Managing Partner of Abott Law Office. Sumit has over nine years of experience in advisory and litigation services. Sumit advises on various issues under the GST, IBC, Customs Law, Special Economic Zones and Foreign Trade Policy. View Full Profile

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