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December 24, 2020

Suppliers to quote the HSN Code of the product to be supplied by them in the tender document

by CA Shivam Jaiswal in GST

Suppliers to quote the HSN Code of the product to be supplied by them in the tender document

Harmonized System of Nomenclature or the HSN code is a system that was introduced for the systematic classification of goods all over the country or world. It is a 6-digit uniform code that categorises and classifies more than 5,000 products. Notably, the codes are accepted worldwide. The codes are developed by the World Customs Organisation (WCO), and they came into effect in 1988. There are about 5,000 commodity groups which are identified by a six-digit code. The codes are arranged in a logical and legal structure which is supported by well-defined rules to achieve uniformity in classification.

Disclosing HSN code under GST

With the HSN code acting as a universal classification for goods, the Indian Government had adopted the use of HSN code for classification of goods under GST and levy of GST. Initially, those with a turnover of less than Rs 1.5 Crores under GST were not required to follow HSN. Those with a turnover exceeding Rs 1.5 Crores but less than Rs 5 Crores had to declare the 2-digit HSN codes. Those with a turnover exceeding Rs 5 Crores had to declare the 4-digit HSN codes. Those dealers who were into imports or exports had to mandatorily follow the 8-digit HSN codes.

Let us refer to the case of Bharat Forge Limited vs The Principal Chief Materials Manager Diesel Locomotive Works And 7 Others where the issue under consideration was whether the classification of HSN Code is integral to the tendering process or not.

Facts of the Case:

  • The petitioner herein is a company registered under the provisions of the Indian Companies Act having its registered office at Pune Cantonment, Maharashtra.
  • Diesel Locomotive Works (respondent), Varanasi published a notice inviting e-tender for procurement of Turbo Wheel Impeller Balance Assembly (procurement product).
  • The validity period of offer was 120 days.
  • In case the successful tenderer was not liable to be registered under GST, the Railway shall deduct the applicable GST from his/their bills under reverse charge mechanism [RCM] and deposit the same to the concerned tax authority
  • It was contended by the petitioner that in order to promote local manufacturer and production of Goods and Services in India with a view to enhance employment opportunities, the Government of India had issued “Public Procurement” (Preference to Make in India) Order’ 2017 (the Public Procurement Order, 2017), pursuant to Rule 153(iii) of the General Financial Rules 2017 issued by the Ministry of Commerce and Industry, Department of Industrial Policy and Promotion, Government of India.
  • Petitioner contended that on a comprehensive reading of the Make in India policy; circular issued by the Railway Board and the tender document indicated that the bidders were required to specify the percentage of local content in the material being offered in accordance with the Make in India Policy.
  • The special conditions, inserted in the tender document, further provided that preference to ‘Make of India’ would also be applicable to the subject tender.
  • The Union of India had issued directions to all ministries, Departments & CPSUs that in all procurements, preference shall be given to those products which have at least 50% local content, ordinarily, with such purchase preference existing in the margin of 20%.
  • Petitioner contended that though there was difference of about 17.1% in the base price offered by the other bidder (Krishna Bearings) and the petitioner herein, but because of difference in the GST rates, the difference in the total price quoted became 31.6%.
  • The petitioner had quoted the correct GST rate as 18% whereas the other bidder incorporated wrong rate of 5% for payment towards GST which had resulted in placement of the petitioner at a lower level.
  • It was further contended that the GST rates of the products and services were duly clarified/fixed by the GST Council, using the Harmonized System of Nomenclature (HSN) Codes for each product/service, to specify the rates at which GST would be applicable.
  • The contention was that the procurement product would fall under Chapter 84 of the GST Tariff of India declared by the GST Council and HSN Code 84148030 was relevant for “Turbo charger”, or the Procurement Product, which was chargeable at 18% GST..

Observations of HC on the dispute of the present case

  • There was no dispute about the fact that the petitioner was a local manufacturer recognized and included in the list of approved vendors.
  • Only dispute remained was about the flaw, if any, in the procedure adopted by the Railways in the tendering process.
  • The petitioner was aggrieved by the fact that after opening of the financial bids, the ranking of bidders was done on the total price (all-inclusive price), which was arrived at by adding base price and GST rate (GST value).
  • The bidders selected had quoted GST @ 5%, whereas the petitioner quoted 18% GST rate, which had resulted in increase in the margin of purchase preference for more than 20%.
  • The petitioner could get benefit of Make in India Policy being the local manufacturer, only if the margin of purchase preference was less than or up to 20%.
  • The Make in India policy/Public Procurement Order’ 2017 was framed to promote manufacturing and production of goods and services in India with a view to generate employment and enhance income
  • The respondent Railways had arranged ranking of the tenderers/bidders on the total offered price which figure was arrived by adding GST value in the base price.
  • The explanation of respondent that they were not concerned with GST rates as it was the area of concern of GST authorities and it was the responsibility of the bidders to quote HSN number and corresponding GST rates, was not sound, in as much as, GST value (GST rate) is integral to the tendering process.
  • HC noted that in the matter of award of contract, scope of judicial review was limited.
  • The parameters for interference would be arbitrariness, irrationality, unreasonableness, bias and malafide.
  • The purpose was to check whether choice or decision was made lawfully and not to check whether choice or decision was “sound”.
  • The reason being a contract is a commercial transaction; evaluating tenders and awarding contracts were essentially commercial functions.
  • If the decision relating to award of contract was bona fide, the Court in exercise of the powers of judicial review would not interfere, even if a procedural error in assessment or prejudice to a tenderer was made out.
  • The power of judicial review would not be permitted to be invoked to protect private interest at the cost of public interest, or to decide contractual disputes.
  • The tenderer or contractor with a grievance could always seek damage in the Civil Court.
  • The Court cannot examine the details of the terms of the contract which were entered into by the public bodies or the State.
  • The Courts have inherent limitations on the scope of any such enquiry.
  • If the contract was entered into without ignoring the procedure which can be said to be basic in nature and after an objective consideration of different options available taking into account the interest of the State and the public, then the Court, could not act as an appellate Court by substituting its opinion in respect of selection made for entering into such contract.
  • But, at the same time, the Court could certainly examine whether “decision making process” was reasonable, rational, not arbitrary and violative of Article 14.

Observations of HC on whether the decision-making process was violative of Article 14 or not

  • One of the points which arose for consideration was whether the classification of HSN Code was integral to the tendering process, i.e., whether it had an impact on the selection of tenderers or the choice of tenderers while ranking them after opening the financial bids.
  • It was clarified in the bid document that the applicable GST had to be deducted from the bills of the successful tenderer under reverse charge mechanism and the deposit of the same had to be made to the concerned tax authority.
  • The ‘Statutory Variation clause’ as a ‘disclaimer clause’ was mentioned in the tender document with the obligation on every tenderer to mention the correct rate of tax in the tender document.
  • Further, it was argued that the Railways was not concerned with the misclassification of HSN Code or GST rate if quoted by the tenderer.
  • The contention of respondent was that the tenderer would be required to adjust the basic price to the extent required by higher tax billed as per invoices to match the all-inclusive price as mentioned in the purchase order.
  • The said stand would not change the position at the stage of selection, as there would be disparity in the total price offered on account of difference in the GST rates quoted by each bidder.
  • The fair competition or ‘level playing field’, would, therefore, be denied to each bidder as someone may bag the tender by quoting lesser rate of GST (lesser GST value), which may result in substantial difference in the total price offered by bidders/tenderers
  • The HSN code (Harmonized System of Nomenclature) was provided for each product/service by GST Council to specify the rate at which GST would be applicable.
  • The suppliers have to quote HSN Code of the product to be supplied by them in the tender document, itself.
  • The mentioning of correct HSN Code was necessary to determine the GST rate (GST value) which was to be added in the base price to arrive at the final price offered by the bidder/tenderer.
  • Considering the above, HC found that the explanation of railways was not satisfactory, as selection of bidder was made by inclusion of GST value in the base price.
  • In the situation of any confusion regarding the applicability of correct HSN Code, the Railways ought to have sought clarification from the GST authorities about the correct HSN Code applicable to the procurement product.
  • In HC’s opinion, if the GST value was to be added in the base price to arrive at the total price of offer for the procurement product in a tender, and is used to determine the ranking in the selection process, it was important on the part of the other bidders to clarify the HSN Code, i.e. to clear their stand with regard to the applicable GST rate and HSN Code of the “procurement product”.
  • Thus, the mentioning of HSN Code in the tender document itself shall resolve all disputes relating to fairness and transparency in the process of selection of bidder, by providing ‘level playing field’ to all bidders/tenderers in the true spirit of Article 19(1)(g) of the Constitution of India.
  • For any issue relating to the applicability of correct HSN Code or GST rate, it would then be the duty of respondent to seek clarification from the GST authorities.
  • The respondent (including the bidder) could not get away by saying that they are not required to mention the GST rate or HSN Code in the tender document, as it was integral to the process of selection of tender.

HC, therefore, found it expedient to issue a direction to the General Manager, Diesel Locomotive Works, Varanasi that if the GST value was to be added in the base price to arrive at the total price of offer for the procurement of products in a tender and was used to determine ranking in the selection process, he would be required to clarify the issue, if any, with the GST authorities relating to the applicability of correct HSN Code of the procurement product and mention the same in the NIT (Notice inviting tender)tender/bid document, so as to ensure uniform bidding from all participants and to provide all tenderers/bidders a ‘Level Playing Field’.

Therefore, the HSN code is provided for each product by GST Council to specify the rate at which GST would be applicable. The suppliers have to quote the HSN Code of the product to be supplied by them in the tender document, itself. Correct HSN Code is necessary to determine the GST, which is to be added in the base price to arrive at the final price.

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