Royalty and Advertising Expenses charged by Subway does not amount to Profiteering: CCI

The Competition Commission of India (CCI), observed that royalty and advertising expenses charged by Subway does not amount to Profiteering.

The Respondent, Subway did not have any control on the base price offered by his franchisees to their customers. Franchisees were never instructed, nor they had ever asked for any permission or were they obligated contractually to increase the base value of products sold to offset the impact of denial of ITC.

The present Report received from the Director General of Anti-Profiteering (DGAP) after a detailed Investigation under Rule 133(5) of the Central Goods & Service Tax (CGST) Rules, 2017. The brief facts of the case are that the National Anti-Profiteering Authority (NM) passed in the case of M/s Le Reve Pvt. Ltd. had directed the DGAP to examine M/s Subway Systems India Pvt. Ltd. for possible violation of Section 171 of the CGST Act, 2017 under Rule 133(5) of the CGST Rules, 2017 read with the provisions of Section 171(2) of the CGST Act, 2017.

The DGAP submitted that sub-section (1) of Section 171 of the CGST Act states that- Any reduction in rate of tax on any supply of goods or services or the benefit of ITC shall be passed on to the recipient by way of commensurate reduction in prices”.

The rate of GST in respect of Royalty Services was 12% and the rate of GST on Advertisement Charges was 5% in case of Print media and 18% for other than Print media since implementation of GST and there had been no change in the rates of tax in respect of these services. Therefore, the provisions of Section 171 of the CGST Act were not applicable with respect to these services.

A Three-Member Bench comprising Ravneet Kaur (Chairperson), Sangeeta Verma (Member), and Bhagwant Singh Bishnoi (Member) observed that “On examination of submissions made by the Respondent and as seen from the copy of Agreement between the Franchisee and Franchisor, it had been observed that there was no clause that indicated that the Franchisor was fixing prices or that the Franchisor had been supplying the material and had been retaining the ITC. The Franchisee was only supposed to pay the Royalty Charges at 8% and Advertisement Charges at 4.5% as the case might be on the net sales.”

“The rate of Royalty and Advertisement Charges were mutually agreed with the Franchisee and the Respondent had nothing to do with the individual products sold to the customers. The Franchisee was only supposed to pay the Royalty Charges @ 8% and Advertisement Charges at 4.5% as the case might be on the net sales. The Respondent did not have any control on the base price offered by his Franchisees to their customers and the amount of Input Tax Credit availed by his Franchisees” the Bench concluded.

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