GST: Purchaser Not Bound To Specify Tax Rate In Government Tenders, Says Supreme Court

The government is not obliged to undertake the ordeal of finding out the applicable tax while procuring products, apex court says.

<div class="paragraphs"><p>Consultant would advise the Indian Railway Catering and Tourism Corporation (IRCTC) on steps to improve its existing business and plan strategies to monetise future opportunities.</p></div>
Consultant would advise the Indian Railway Catering and Tourism Corporation (IRCTC) on steps to improve its existing business and plan strategies to monetise future opportunities.

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.

Even if a bidder deliberately quotes an incorrect rate of tax, it does so on its own risk. If there are subsequent demands from the GST department, the government cannot be asked to reimburse the extra amounts demanded.
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 Supreme Court held that since the liability to pay tax is on the supplier, the bidder must make inquiries and make an informed decision as to what would be the relevant classification and rate of tax. A tender or bidding process cannot be invalidated if the buyer has not specified applicable tax rate or bidders have adopted a different tax rate.
Abhishek Rastogi, Partner, 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 liability to pay tax under the GST regime is on the supplier. He must make inquires and make an informed decision as to what would be the relevant HSN Code applicable to the items and the rate of tax applicable.
Supreme Court of India

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.

We are at a loss to further understand how in the name of producing a level playing field, the state, when it decides to award a contract, would be obliged to undertake the ordeal of finding out the correct HSN Code and the tax applicable for the product, which they wish to procure. This is, particularly so when the state is not burdened with the liability to pay the tax. The liability to pay tax, in the case before us, is squarely on the supplier.
Supreme Court of India

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.

If the tender requires the actual amount of tax ultimately levied to be reimbursed, then allowing a bidder to quote a lower rate of tax deliberately would not be proper.
Senior Advocate Tarun Gulati

In such situations the judgment cannot be applied, he clarified.