Bombay HC sets aside NAA’s ruling against McDonald’s Franchisee [Read Judgment]

The division bench of the Bombay High Court has set aside National Anti-Profiteering Authority ruling against McDonald’s franchisee Hardcastle Restaurants Pvt. Ltd.

The Petitioner operated quickservice restaurants under the brand name McDonald’s in Western and Southern India. The Petitioner serves around 2320 types of food and beverages items from its restaurants. The Petitioner is registered under the Goods and Services Tax Act, 2017 in ten States. After the commencement of GST Act till 14 November 2017, the services rendered by the Petitioner were subjected to 18% of GST. A notification was issued on 14 November 2017 reducing the rate of GST to 5% with effect from 15 November 2017. As a result, the Petitioner had to charge GST at 5% on the services rendered without availing impugned tax credit of the taxes paid on input, input services and capital goods.

Some customers of the Petitioner made complaints that, though the rate of GST on restaurant services was reduced from 18% to 5% with effect from 15 November 2017, the Petitioner had increased the prices of product sold, which was an act of illegal profiteering. The Standing Committee on Anti Profiteering examined the complaints. The Standing Committee referred the complaints to the Director-General of Safeguards. The DirectorGeneral called upon the Petitioner to submit a reply to the allegations levelled in the complaints and also to suo-motu determine the quantum of benefit the Petitioner had not passed on to the consumers between 15 November 2017 to 31 January 2018. The persons who had filed the complaints/applications were given the opportunity to inspect the evidence and reply furnished by the Petitioner. The applicants did not attend nor participated any further. The Petitioner filed a reply on 5 January 2018 and denied the allegations.

The NAA a held that Section 171 of the Central GST Act was applicable since there was a reduction in the rate of tax from 5% to 18%. The contention of the Petitioner that there was no methodology was negatived holding that the Authority framed its methodology. It held that only because the CGST was charged at 5% did not mean there was no anti-profiteering since the output tax invoices after 15 November 2017 did not show that benefit has been passed on. Authority observed that the Petitioner increased base prices overnight on 14 November 2017. It held that the Petitioner could not avail the input tax credit after 15 November 2017, and therefore, the benefit in input tax credit from December 2017 to March 2018 could not have been given. Authority held that the Director-General had correctly considered the incremental revenue. The Authority carried out the computation and profiteering amount was derived at Rs.7.49 crores for all products where price increase was over 5.11%. The Authority directed the Petitioners to reduce the prices of its products and to deposit an amount of Rs.7.49 crores to the Consumer Welfare Fund along with 18% interest. The Director-General was directed to continue investigation until the Petitioners reduced the prices commensurate to the reduction in tax and to submit a report. Directions were also issued to initiate penalty proceedings.

The company’s main contention was that relevant NAA order was pronounced by four members of the authority while only three of them were there for the hearing of the case, and thus the company was not given an opportunity to present its case before the fourth signatory.

The division bench comprising of Justice M.S Sanklecha and Justice Nitin Jamdar observed that, when the three members of the Authority had heard the Petitioner and participated in the entire hearing, the collectively signed decision, when the fourth member joined only for signing the order has resulted in violation of the principles of natural justice and fairness, and is liable to be set aside.

The Court relied on the case M/s. Kwality Restaurant and Ice-Cream Co. v/s. The Commissioner of VAT, Trade and Tax Department and Ors and said that, the importance of public confidence in the decision making by the courts and the tribunals. The Court observed that any practice which even remotely suggests a sense of unfairness must be eschewed. It held that our legal system mandates that no one can suffer an adverse order after being subjected to an unfair procedure.

The Court observed that procedural safeguards against executive excesses or apathy apply with equally to the Tribunals responsible for dispensing justice within their sphere of activity. Invoking this broader principle also that the Delhi High Court issued the directions. Thus, fairness and transparency in adjudication will enhance the credibility of the Authority.

While allowing the petition the Court also said that, “The term profiteering, under the Act and Rules, is used in a pejorative sense. Such a finding can severely dent the business reputation. The Authority is newly established. Therefore, as guidance to this Authority, highlighting the importance of fair decision-making is necessary”.