The Hon’ble National Anti-Profiteering Authority (NAA), in the case of DGAP vs. Hardcastle Restaurants [Case No. 79/2020 dated December 9, 2020] held that, the Hardcastle Restaurants (Respondent) has committed an offence by denying the  benefit of rate reduction to the buyers of his products in contravention of the provisions of Section 171(1) of the Central Goods & Services Tax Act, 2017 (“CGST Act”) during the period from November 15, 2017 to January 31, 2018 and has thus resorted to profiteering amounting to Rs. ₹ 7,49,27,786/-. However, penalty under Section 171(3A) of the CGST Act cannot be imposed as Section 171(3A) ibid came into effect only on January 01, 2020 and the same cannot be applied retrospectively.

Facts:-

The Respondent is a company, engaged in the business of operating quick service restaurants under the brand name of “Mcdonalds” under a franchisee agreement with the multi-national company Mcdonalds India Private Limited. The Respondent is operating about 300 restaurants in the 10 States of Andhra Pradesh, Chhattisgarh, Goa, Gujarat, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Tamilnadu and Telangana. The Respondent was selling 1844 products as on November 15, 2017 when the rate of GST on the restaurant services being provided by him was reduced from 18% to 5% by the Central and the State Governments vide Notification No. 26/2017-Central Tax (Rate) dated November 14, 2017 with the stipulation that the Respondent would not be entitled to the benefit of ITC on the above service w.e.f. November 15, 2017. Accordingly, the Respondent was required to pass on the benefit of tax reduction to his recipients as per the provisions of Section 171 of the CGST Act and its consequences, if he did not pass on the benefit.

On the basis of the analysis of the details of the product-wise outward taxable supplies made during the period between November 15, 2017 to January 31, 2018, the DGAP found that the Respondent had increased the base prices of the items supplied by him to neutralise the effect of ITC of 9.11% which was not available to him after the rate reduction w.e.f. November 15, 2017. The DGAP had compared the pre and post GST rate reduction average prices of the items sold during the period between November 15, 2017 to January 31, 2018 and after taking into account the entire quantity of the products sold during the above period, DGAP found that the Respondent had increased the average output taxable value i.e. the base price by 10.45% to offset the denial of input tax credit of 9.11% as was evident from the Report. Therefore, the DGAP had concluded that the Respondent had not passed on the benefit of reduction in the rate of tax from 18% to 5% as he had increased the base prices by more than 9.11% to 100.09% in respect of 1,730 items out of total 1,844 items i.e., 93.82% of the total items supplied by him after November 15, 2017. And on the basis of the pre and post reduction GST rates, the impact of the denial of ITC and the details of the outward supplies made during the period between November 15, 2017 to January 31, 2018, as per the GSTR-1 or GSTR-3B Returns of the Respondent, the amount of net higher sale realization due to increase in the base prices of the products, despite the reduction in the GST rate from 18% to 5%, with denial of ITC, the profiteered amount came to Rs. 7,49,27,786 as per the Report.

Issues:-

  • Whether the Respondent has passed on the benefit of tax reduction to his customers w.e.f. November 15, 2017 as per the provisions of Section 171(1) of the CGST Act or not?
  • If not, then what is the quantum of the profiteered amount as per the provisions of Section 171(1) read with the Explanation attached to Section 171 of the CGST Act?
  • Whether the Respondent is liable to the penalty prescribed under Section 171(3A) of the CGST Act?

Held:-

The Hon’ble National Anti-Profiteering Authority, in Case No. 79/2020 dated December 9, 2020 held as under:

  • No elaborate mathematical calculations are required to be prescribed separately for passing on the benefit of tax reduction and computation of the profiteered amount. The Authority was under no obligation to provide the same to the Respondent. The Respondent cannot deny the benefit of tax reduction to his customers on the above ground and enrich himself at the expense of his buyers as Section 171 of the CGST Act provides clear cut methodology and procedure to compute the benefit of tax reduction and the profiteered amount.
  • The Respondent cannot claim violation of Article 14 on the ground that he has not been allowed to include his costs in the prices on the date of reduction in the rate of tax as such a claim would be against the provisions of Section 171(1) ibid. The Respondent had enough time from July 01, 2017 to November 14, 2017 to increase his prices due to increase in his cost however, sudden increase in his cost on November 15, 2017 is a deliberate attempt not to pass on the benefit of tax reduction and appropriate the amount of benefit. Therefore, rejects this contention of the Respondent as not maintainable.
  • Stated that, there are several statutory bodies which exercise quasi-judicial functions but they are not required to be composed of Judicial Members. Similarly, the Assessing Officers, Commissioners of Appeal under the Income Tax Act, 1961 and the CGST Act, the Authorities on Advance Rulings and the Dispute Resolution Panel under the Income Tax Act, 1961 all perform quasi- judicial functions but there is no requirement that such persons who must be possessing either a law degree or have had judicial experience. Such a requirement is not only impractical but would also render several statutory authorities unworkable. Concluded that NAA hasn’t replaced any Courts, cannot be equated to a Court or a Tribunal and hence the mandate of having a Judicial Member cannot be said to apply to NAA.
  • Noted that, power to frame methodology and procedure is generally and widely available to all the judicial, quasi-judicial and other statutory bodies and no favour has been shown to this Authority by granting it power to frame its own methodology and procedure under Rule 126 of the CGST Rules. Such a power has been conferred on the GST Tribunal under Section 111(1) of the CGST Act and the Competition Commission under Section 36 of the Competition Act, 2002. This Authority has similarly framed its methodology and procedure under Rule 126 of the CGST Rules vide Notification dated March 28, 2018. The Respondent does not have the power of legislature to frame the methodology and procedure and hence any such methodology and procedure suggested by him cannot be accepted being illogical, arbitrary, inequitable and being ultra vires of Section 171 of the CGST Act and Article 14 of the Constitution. The Respondent had wrongly claimed that he had passed on the benefit at the entity level whereas the evidence on record shows otherwise.
  • Opined that, the benefits of tax reduction and ITC are to be passed on by each registered person by commensurate reduction in prices on each supply to every recipient and this Authority is empowered to examine whether these benefits have been passed on or not. To assist this Authority while making such examination, an investigating agency designated as the DGAP has been created under Rule 129 of the CGST Rules, to conduct detailed investigation and submit Report to this Authority under Rule 129(6) of the CGST Rules to determine whether the above benefits have been passed or not in terms of Section 171(1) red with Rule 133(1) of the CGST Rules. The Respondent has computed the net incremental revenue as 9.43% on the Restaurant service by comparing the revenue at the pre rate change prices and the post rate change prices after reducing the incremental costs from it. In this regard it can be noted that in case the incremental revenue is taken to be 9.43% then it is more than the denial of ITC of 9.11% and hence the Respondent has profit margin of 0.32% as per his own admission which proves that he has profiteered to the extent of 0.32%. Therefore, the Respondent cannot claim that he was not required to pass on the benefit of tax reduction.
  • Held that, the Respondent is liable to pass on the benefit of GST rate reduction from 18% to 5% with denial of benefit of ITC, as was notified by the Central and the State Governments vide Notification No. 41/2017-Central tax (Rate) dated November 14, 2017e.f. November 15, 2017. It is also established that the Respondent has not passed on the benefit of above tax reduction and denied benefit of rate reduction to the buyers of his product to his customers w.e.f. November 15, 2017 to January 31, 2018 and he has thus resorted to profiteering. Therefore, he is apparently liable for imposition of penalty under the provisions of Section 171(3A) of the CGST Act.. However, perusal of the provisions of Section 171(3A) of the CGST Act under which penalty has been prescribed for the above violation shows that it has been inserted in the CGST Act, January 01, 2020 vide Section 112 of the Finance Act, 2019 and it was not in operation during the period from November 15, 2017 to January 31, 2018 when the Respondent had committed the above violation and hence, the penalty prescribed under Section 171(3A) of the CGST Act cannot be imposed on the Respondent retrospectively.
  • Directed the Respondent to deposit 50% of the profited amount of ₹ 7,49,27,786/- i.e., ₹ 3,74,63,893/-in the Central Consumer Welfare Fund and the balance 50% in the Consumer Welfare Funds of the 10 States along with 18% interest payable from the dates from which the above amount was realized by the Respondent from his recipients till the date of deposit in the respective Consumer Welfare Funds within a period of 3 months from the date of passing of this order.

Comments:-

The Hon’ble NAA had earlier vide Case No. 14/2018 dated November 16, 2018, held the Respondent guilty of profiteering and directed him to deposit profiteered sum, which was set aside and remanded back to NAA by order of the Hon’ble Bombay High Court in Writ Petition No. 3492 of 2018 dated October 1, 2019, however, another Writ Petition was filed challenging constitutional validity of Rule 126 of the CGST Rules. Subsequently, a Transfer Petition (Civil) No.s 290-292 of 2020 dated February 19, 2020 was filed before the Hon’ble Supreme Court for transfer of petition before the Hon’ble Delhi High Court which was allowed and listed before the Hon’ble Delhi High Court. However, the same was withdrawn by Petitioner with a liberty to raise all issues before NAA [W.P. (C) 3909/2020 dated July 7, 2020].

Relevant provisions:-

Section 171 of the CGST Act:

Anti-profiteering measure.

171. (1) Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices.

(2) The Central Government may, on recommendations of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being in force, to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.

(3) The Authority referred to in sub-section (2) shall exercise such powers and discharge such functions as may be prescribed.

(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.

Explanation.- For the purposes of this section, the expression “profiteered” shall mean the amount determined on account of not passing the benefit of reduction in rate of tax on supply of goods or services or both or the benefit of input tax credit to the recipient by way of commensurate reduction in the price of the goods or services or both.”

Rule 126 of the CGST Rules:

“126. Power to determine the methodology and procedure.-

The Authority may determine the methodology and procedure for determination as to whether the reduction in the rate of tax on the supply of goods or services or the benefit of input tax credit has been passed on by the registered person to the recipient by way of commensurate reduction in prices.”

Rule 129 of the CGST Rules:

129. Initiation and conduct of proceedings.-

(1) Where the Standing Committee is satisfied that there is a prima-facie evidence to show that the supplier has not passed on the benefit of reduction in the rate of tax on the supply of goods or ser`vices or the benefit of input tax credit to the recipient by way of commensurate reduction in prices, it shall refer the matter to the Director General of Anti-profiteering or a detailed investigation.

(2) The Director General of Anti-profiteering shall conduct investigation and collect evidence necessary to determine whether the benefit of reduction in the rate of tax on any supply of goods or services or the benefit of input tax credit has been passed on to the recipient by way of commensurate reduction in prices.

(3) The Director General of Anti-profiteering shall, before initiation of the investigation, issue a notice to the interested parties containing, inter alia, information on the following, namely:-

(a) the description of the goods or services in respect of which the proceedings have been initiated;

(b) summary of the statement of facts on which the allegations are based; and

(c) the time limit allowed to the interested parties and other persons who may have information related to the proceedings for furnishing their reply.

(4) The Director General of Anti-profiteering may also issue notices to such other persons as deemed fit for a fair enquiry into the matter.

(5) The Director General of Anti-profiteering shall make available the evidence presented to it by one interested party to the other interested parties, participating in the proceedings.

(6) The Director General of Anti-profiteering shall complete the investigation within a period of six months of the receipt of the reference from the Standing Committee or within such extended period not exceeding a further period of three months for reasons to be recorded in writing as may be allowed by the Authority and, upon completion of the investigation, furnish to the Authority, a report of its findings along with the relevant records.”

Rule 133 of the CGST Rules:

“133. Order of the Authority.-

(1) The Authority shall, within a period of six months from the date of the receipt of the report from the Director General of Anti-profiteering determine whether a registered person has passed on the benefit of the reduction in the rate of tax on the supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices.

(2) An opportunity of hearing shall be granted to the interested parties by the Authority where any request is received in writing from such interested parties.

(2A) The Authority may seek the clarification, if any, from the Director General of Anti Profiteering on the report submitted under sub-rule (6) of rule 129 during the process of determination under sub-rule (1).

(3) Where the Authority determines that a registered person has not passed on the benefit of the reduction in the rate of tax on the supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices, the Authority may order-

(a) reduction in prices;

(b) return to the recipient, an amount equivalent to the amount not passed on by way of commensurate reduction in prices along with interest at the rate of eighteen per cent. from the date of collection of the higher amount till the date of the return of such amount or recovery of the amount including interest not returned, as the case may be;

(c) the deposit of an amount equivalent to fifty per cent. of the amount determined under the above clause along with interest at the rate of eighteen per cent. from the date of collection of the higher amount till the date of deposit of such amount in the Fund constituted under section 57 and the remaining fifty per cent. of the amount in the Fund constituted under section 57 of the Goods and Services Tax Act, 2017 of the concerned State, where the eligible person does not claim return of the amount or is not identifiable;

(d) imposition of penalty as specified under the Act; and

(e) cancellation of registration under the Act.

Explanation: For the purpose of this sub-rule, the expression, “concerned State” means the State 7 or Union Territory in respect of which the Authority passes an order.

(4) If the report of the Director General of Anti-profiteering referred to in sub-rule (6) of rule 129 recommends that there is contravention or even non-contravention of the provisions of section 171 or these rules, but the Authority is of the opinion that further investigation or inquiry is called for in the matter, it may, for reasons to be recorded in writing, refer the matter to the Director General of Anti-profiteering to cause further investigation or inquiry in accordance with the provisions of the Act and these rules.

(5) (a) Notwithstanding anything contained in sub-rule (4), where upon receipt of the report of the Director General of Anti-profiteering referred to in sub-rule (6) of rule 129, the Authority has reasons to believe that there has been contravention of the provisions of section 171 in respect of goods or services or both other than those covered in the said report, it may, for reasons to be recorded in writing, within the time limit specified in sub-rule (1), direct the Director General of Anti-profiteering to cause investigation or inquiry with regard to such other goods or services or both, in accordance with the provisions of the Act and these rules.

(b) The investigation or enquiry under clause (a) shall be deemed to be a new investigation or enquiry and all the provisions of rule 129 shall mutatis mutandis apply to such investigation or enquiry.”

DISCLAIMER: The views expressed are strictly of the author and A2Z Taxcorp LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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