GSTAT Finds Subway Outlet Neutralised GST Cut, Upholds ₹13.32 Lakh Profiteering For Same-Day Base Price Hike

GSTAT Finds Subway Outlet Neutralised GST Cut, Upholds ₹13.32 Lakh Profiteering For Same-Day Base Price Hike

Introduction

The Goods and Services Tax Appellate Tribunal (GSTAT), Principal Bench at Delhi, has upheld a finding of profiteering against a Pune-based Subway outlet, holding that the franchisee increased base prices on the very date the GST rate on restaurant services was reduced from 18% to 5%. Judicial Member Justice Mayank Kumar Jain observed that the timing of the price revision indicated a deliberate attempt to neutralise the tax benefit meant for consumers.

Factual Background

The dispute arose after the GST rate on restaurant services was reduced from 18% to 5% with effect from 15 November 2017. The Director General of Anti-Profiteering (DGAP), in a report dated 14 October 2022, found that A J Enterprises, operating a Subway outlet at Amanora Mall, Pune, had increased base prices of certain menu items on the same day the reduced tax rate came into force. The Tribunal noted that the base price of the 6-inch Hara Bhara Kabab was increased from ₹120 to ₹133.30 and that of the 6-inch Aloo Patty from ₹135 to ₹152.40. It was recorded that prior to 15 November 2017, the base prices had remained unchanged and that the increase coincided exactly with the GST rate reduction notification.

Procedural Background

The GSTAT was examining an appeal challenging the anti-profiteering findings. The Tribunal considered the DGAP report along with the submissions advanced by the franchisee in defence of the price increase before arriving at its conclusions.

Issues

1. Whether the franchisee had contravened Section 171 of the CGST Act by failing to pass on the benefit of GST rate reduction to consumers.

2. Whether the increase in base prices was justified by business-related cost escalations.

3. Whether penalty under Section 171(3A) was imposable for the relevant period.

Contentions

The franchisee argued that the increase in base prices was necessitated by higher royalty payments at 8%, advertisement contributions at 4.5%, lease rent ranging between 9–10% of revenue, fixed common area maintenance charges of ₹41,914 per month, and aggregator commissions averaging 22.7%. It was submitted that these financial burdens justified the upward revision in base prices and that the increase was commercially driven rather than aimed at defeating consumer benefit.

Reasoning and Analysis

The Tribunal rejected the defence, holding that no cogent evidence had been produced to justify either the quantum or the precise timing of the increase. Justice Jain observed that the simultaneous increase in base prices on the very date of GST reduction demonstrated an intent to maintain the same Maximum Retail Price (MRP) that existed prior to 15 November 2017, thereby preventing the tax benefit from being passed on to consumers. The Tribunal emphasised that under Section 171 of the CGST Act, any reduction in tax rate must be passed on by way of a commensurate reduction in prices and that the statutory presumption in favour of consumers can only be rebutted by clear and unequivocal material, which was absent in the present case. The methodology adopted by the DGAP comparing average base prices during the pre-rate reduction period with transaction-wise taxable values in the post-reduction period was upheld as proper and legally sustainable.

Decision

The GSTAT upheld the finding that the outlet had profiteered Rs. 13,32,322 by neutralising the GST benefit. It directed that 50% of the profiteered amount, along with interest at 18% from 28 June 2019, be deposited in the Central Consumer Welfare Fund and the remaining 50% in the Maharashtra Consumer Welfare Fund. However, it held that the penalty under Section 171(3A) of the CGST Act could not be imposed, as the provision came into force only on 1 January 2020, whereas the investigation period ended on 30 September 2019.

In this case the respondent was represented by Mr. Nikhil Gupta and Mr. Rochit Abhishek, Advocates.