Allahabad High Court holds that Tendering Authority is liable to provide correct HSN classification where bidders are ranked based on price inclusive of GST
In a recent writ petition1 filed before the Allahabad High Court, the issue regarding the Harmonised System of Nomenclature (HSN) classification of a product was examined. The High Court held that it was incumbent on the Railway Board (Tendering Authority) to provide correct classification and applicable Goods and Services Tax (GST) rate for the products, if the GST value was to be added to the base price to arrive at the total price for ranking of bidders. This was to provide a level-playing field to all the bidders in accordance with Articles 14 and 19(1)(b) of the Constitution of India.
Facts
● Tenders were invited by the Tendering Authority for procurement of Turbo Wheel Impeller Balance Assembly (the product).
The bidders were ranked based on the total price quoted by them, which was inclusive of GST.
● One of the bidders quoted a price inclusive of GST at the rate of 5%, while the price quoted by the petitioner included GST at the rate of 18%. Consequently, there was a significant price difference in the bid by the petitioner and other bidders.
● When the petitioner sought for incorporation of HSN code in the tender document, the Tendering Authority responded that the responsibility to mention the correct HSN was that of the supplier/ bidder.
● The petitioner filed a writ petition, inter alia
challenging the tendering process adopted by the Tendering Authority and sought for a direction to indicate the HSN code of the product in the tender document.Petitioner’s key contentions
● The product falls under Chapter 84 of the GST Tariff as declared by the GST Council, and the HSN Code 8414 is the relevant classification for the product that is subject to GST at the rate of 18%. Accordingly, the other bidders had classified the product incorrectly under HSN 8602, which is subject to GST at the rate of 5%.
● It is the duty of the Tendering Authority to seek clarification on the correct HSN classification and the corresponding GST rates from the GST authorities. In terms of one of the conditions in the tender document, where the bidder is not liable to be registered under the Central Goods and Services Tax Act, 2017 (CGST Act) the Tendering Authority is required to deduct the applicable GST and pay the tax due under reverse charge mechanism.
Tendering Authority’s key contentions
● The bidder is responsible for quoting the correct HSN and the corresponding GST rate. The Tendering Authority will not be responsible for the miscalculation of GST on account of incorrect HSN and its corresponding GST rate.
● It is the responsibility of the respective GST authorities to recover and/ or penalise the bidders on account of mis-classification and resultant underpayment of GST, if any.
● The bidders are required to adjust the base price according to the GST rates to match the all-inclusive total price as mentioned in the purchase order that would be subsequently issued by the Tendering Authority.
High Court’s decision
The High Court limited its judicial review to the issue of the responsibility to provide the correct HSN classification and rate for the product, and accordingly, whether the decision-making process was reasonable, rational and not arbitrary and violative of Article 14 of the Constitution of India.
The High Court held that if the GST value was to be added to the base price to arrive at the total price in order to determine the ranking of the bidder, it was incumbent on the Tendering Authority to provide appropriate classification and applicable GST rate for the product, based on the following observations:
● Article 14 of the Constitution of India embodies the principle of ‘non-discrimination’, which applies to Government policies. If a policy or act of the Government, even in contractual matters, fails to satisfy the test of ‘reasonableness’, then such an act or decision would be unconstitutional;
● Decisions’ or acts that result in unequal and discriminatory treatment would also violate the doctrine of ‘level playing field’
embodied in Article 19(1)(g) of the Constitution of India;
● The GST rate is integral to the tendering process since the bidder is selected by the inclusion of GST value in the base price.
A level playing field would be denied to a bidder, as another bidder may bag the tender by quoting a lesser GST rate, which may result in a substantial difference in the total price offered by the bidders;
● Therefore, the Tendering Authority should have sought clarification from the GST authorities on the correct HSN classification applicable to the product, and it cannot get away by contending that they are not required to mention such classification and rate in the tender document.
PwC comments
This is a very interesting and important decision on the responsibility to determine the HSN classification and applicable GST rates in commercial bids that are evaluated based on GST-inclusive price. In such cases, the High Court has categorically held that it is the duty of the Tendering Authority to provide the correct HSN classification. This decision assumes extensive
significance in bids for Government tenders, including large infrastructure projects. It would also be worth examining if this onus on the Tendering Authority can extend to even determining the nature of the supplies involved in contracts for supply of goods and services, i.e. whether composite supply or mixed supply, works contract etc., since that would impact the classification and GST rate as well for the overall supplies. The extension of this principle to the bidding process of non-Government projects and private contracts also needs to be analysed.
1WRIT C No. 17620 of 2019
If your interest lies in a specific area or subject, do advise us so we can send you only the relevant alerts. For any additional information, please reach out to your PwC relationship manager or write in to[email protected]
About PwC
At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with over 276,000 people who are committed to delivering quality in advisory, assurance and tax services. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. For more information about PwC India visit us at www.pwc.in
Follow us on Facebook, Linkedin, Twitter and YouTube.
In this document, PwC refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.
© 2021 PricewaterhouseCoopers Private Limited. All rights reserved.