McDonald's Franchisee Made Illegal Profit Of ₹ 7.49 Crores By Denying Benefit Of GST Reduction To Customers : Anti Profiteering Authority [Read Order]


The National Anti Profiteering Authority has found that Hardcastle Restaurants, a franchisee of McDonalds, did not pass on the benefit of Input Tax Credit(ITC) and reduction of GST rates to customers, and has amassed illegal profit to the tune of Rs.7.49 crores between November  15,2017 to January 31,2018

The Authority has directed the franchisee to reduce prices in commensurate with GST reduction and ITC benefit as per Section 171 of the Goods and Services Tax Act. The franchisee has been further directed to deposit the illegally amassed profit of Rs.7.49 crores as per Rule 133(3)(c) of CGST Rules 2017 in 50:50 proportion with the Centre and 10 states in Western and Southern India where the franchisee was running its outlets, within a period of three months with 18% interest.

Section 171 of the GST Act contains the "anti-profiteering clause" which states that any reduction in GST rates or the benefit of input tax credit should be passed on to the recipient by way of "commensurate reduction in prices".

The GST rate on restaurant services was reduced from 18% to 5% with effect from November 14, 2017.  The Director General of Anti-Profiteering found on investigations that the franchisee had not made commensurate reduction in prices to reflect GST reduction. Rather, it increased the base prices of products from November 15 to offset GST reduction, so as to make the prices same as before. Also, the franchisee had availed ITC benefit of Rs.9.33 crores till November 2017, which was also not passed on to the customers. Based on the report of the Director General, the Authority initiated proceedings.

The franchisee denied that it had indulged in profiteering. It stated that ITC was denied from November 2017; also the cost of products had gone up. The cost of food and beverages had gone up due to the abrupt denial of ITC which had constrained it to increase the base prices to  negate this impact and such increase was also not commensurate with the increase in the costs.  Reliance was placed by the franchisee on Section 64A of the Sale of Goods Act to argue that benefit of tax reduction need be given to recipients only if there is a prior agreement to that effect . The methodology of assessing quantum of profits was disputed. It contended that it had not made excessive profit as it was hardly making  profit, as the tax incremental cost computed by the DGAP was 9.11 % as against the incremental price margin of 9.43%. and hence he had benefited only by 0.32%.

The Authority consisting of Chairman B N Sharma,  J C Chauhan, R Bhagyadevi and Amand  Shah rejected all arguments made by the franchisee point by point in a 42 page order issued on November 15.

The defence that price rise was due to inflation and rise in operational expenses was found to be untenable. It was found that the franchisee had  overnight increased the prices w.e.f. 15.11.2017 the day from which the rate of tax was reduced. Further, the increase was exactly equal to the  amount by which the tax had been reduced and the same MRP which was  being charged on 14.11.2017 was also charged on 15.11.2017.

The Authority made a detailed reference to the modus adopted by the franchisee to pocket the benefit of tax reduction. One of the products, "Regular McCafe Latte"  had the base price of Rs. 120.34/- before November 14.  As per earlier GST rate of 18%, the tax component was Rs. 21.66/- and the product was sold at Rs.142/- . After November 15, when the rates were slashed down to 5%, the base price of the product was increased by Rs. 14.90/- to Rs.135.24/- and Rs. 6. 76/- were charged as GST and the above product was supplied at the same MRP of Rs. 142/-.

"The Respondent had not only compelled his customers to pay extra base price of Rs. 3.94/- per item and he had also forced them to pay extra GST of Rs. 0.20/- and thus the benefit or Rs. 4.14/- per piece  had been denied to the customers. Had the Respondent not increased the price of the above product the same would have been supplied at the MRP of Rs. 137.86/- only and the customer would have got the benefit of Rs. 4.14/- in the MRP", the Authority observed regarding this.

The argument that tax benefit need be passed on only if there is an agreement to that effect as per Section 64A of the Sale of Goods Act was rejected holding that Section 171 of GST applied with full force wherever there was benefit of tax reduction or ITC. The basic aim is to ensure that both the benefits of reduction in the rate of tax and the ITC are passed on to the consumers by commensurate reduction in the prices, observed the Authority.

The Authority further held that Section 171 was clear and unambiguous. The provisions of Section 171 are very clear which state that both the benefits- tax reduction and ITC- have to be given in the case of every supply. Therefore, the benefit is required to be passed on at the product level as the recipient would be different in each supply of the product. Every consumer is entitled to receive the above benefits. The Respondent has no discretion to deny these benefits on any ground or to grant them on the basis of his own convenience.

The contention that there was no profiteering was also discarded, observing that it had, in conscious disregard of the provisions of Section 171, resorted to profiteering as  it had no ground whatsoever to increase his prices on the eve of tax  reduction. It was observed :

"Respondent squarely falls in the definitions(of profiteering) mentioned by the Respondent himself as he had not only realised his usual margin of profit which he was charging but had also pocketed the amount which he was bound to pass on to his customers due to reduction in the rate of tax and benefit of ITC. The Respondent must remember that the benefit of reduction in the rate of tax as well as the benefit of ITC have been given by the Central as well as the State Government by sacrificing their own revenue in favour of the general public and the Respondent has no right to appropriate them"

It was also found that the franchisee had committed offence under Section 122(1)(i) of the GST Act, and show-cause notice was issued for imposing penalty under the provision.

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