The fact that the purchaser has not indicated the applicable indirect tax on the goods it intends to purchase cannot always be a ground to challenge the bidding process, the Supreme Court of India clarified in a recent judgment involving a tender process for Indian railways.
The top court was hearing a case where the first three bidders had quoted a different rate of tax in the bid, while the fourth ranked bidder quoted a goods and services tax rate of 18% and argued that the inability of the purchaser to indicate the applicable tax rate vitiated the level-playing field.
The judgment correctly holds that if the risk of tax is on the supplier, it is entirely irrelevant for the government to give guidance on the rate of tax, said Senior Advocate Tarun Gulati.
The principle laid down by the apex court would have far reaching impact on other government tenders, said Abhishek Rastogi, partner at Khaitan & Co.
The Issue At Hand
The dispute in the case related to the tender for procurement of turbo wheel impeller balance assembly part.
The top court was hearing an appeal against the order of the Allahabad High Court which had asked Diesel Locomotive Works, Varanasi to clarify the HSN code with the authorities which would enable the bidders to determine the applicable tax rate on the product being supplied. The high court said that doing so would give a level playing field to all bidders.
The first three ranked bidders quoted a tax rate of 5% in their bids whereas Bharat Forge Ltd. mentioned the applicable GST rate of 18% which increased the size of their bid amount.
The failure to mention the HSN code distorted the tendering process, Bharat Forge argued. Mentioning the concerned HSN Code is necessary to determine the GST rate, which is to be added to the base price to arrive at the final price, it said.
High Court Erred In Its Ruling: Supreme Court
While Bharat Forge managed to secure the relief in the high court, its reasoning did not find favour with the top court.
The bench said the high court had asked the purchaser to clarify the HSN code with the tax authorities whereas there was no provision for such a clarification.
The apex court bench presided by Justice KM Joseph noted that Bharat Forge did not challenge the terms of the tender notice but came to court only after the other companies included a tax rate of 5% in their bids.
The terms of the tender were well-known to the tenderers, the top court said.
The purchaser, the bench said, was making it clear that it will have no liability to shoulder in payment of tax if it turned out that a bidder had incorrectly quoted the rate of applicable taxes and would have to pay additional tax.
Such additional tax would come out from the amount the bidder would receive for supplying the product.
The top court also analysed three clauses from the tender documents which required
All bidders while quoting the rates should clearly indicate the rates of applicable duties and taxes included in the prices quoted by them.
The purchaser would not be responsible for payment of taxes and duties paid by the supplier under misapprehensions of law or misclassification.
Tenderers must familiarise themselves about all the applicable taxes and duties and if the same is not indicated explicitly in their offer then the same would be considered as inclusive.
The top court said these clauses made it clear that the purchaser would not be liable for payment of the taxes if a bidder had quoted a lower rate of tax. The interplay of the three clauses could not have left the bidders or the purchasers in any uncertainty, the bench said.
The court agreed with Additional Solicitor General N Venkatraman that there was no statutory duty cast on the authority to indicate the HSN code in the tender.
The court also said the high court failed to take into account the process involved for determining the HSN code of the product by the purchaser after it consults the GST authorities.
While the judgment clarifies that the purchaser need not always mention the tax rate, experts also pointed out the case specific nature of the ruling.
A lot would depend on how the tax clause and change in law clauses are worded in a tender, said Gulati.
In such situations the judgment cannot be applied, he clarified.