Courts Update SC: The laudable objectives of Make in India and...

SC: The laudable objectives of Make in India and the GST Acts can not be achieved if at the grassroots level the government agencies show laxity in their implementation

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New Delhi Sept 2(ILNS): The Supreme Court today adjourned its hearing on a plea filed by the Centre challenging the order of Allahabad High Court which had held that mentioning of (Harmonised System of Nomenclature) HSN Code in the tendering document is integral to the process of selection of tenderer, by providing ‘level playing field’ to all bidders/tenderers in the true spirit of Article 19(1)(g) of the Constitution of India. 

Today, the Supreme Court bench comprised of Justice A.M. Khanwilkar, Justice Hrishikesh Roy, and Justice C.T. Ravikumar directed to list the matter after two weeks and said no further adjournment will be granted. 

ASG, Mr. N. Venkataraman appearing for the Centre submitted that he needs time to file a rejoinder. The Court noted that no letter has been circulated.

The SLP filed by the Union of India challenged the order and judgment of the Allahabad High Court whereby it had disposed of the writ petition of Bharat Forge.

Diesel Locomotive Works, Varanasi had published a notice dated April 11, 2019, inviting e-tender for procurement of Turbo Wheel Impeller Balance Assembly (hereinafter referred to as the procurement product), which is critical for a locomotive.

It was contended by the Bharat Forge that in order to promote local manufacturer and production of Goods and Services in India with a view to enhancing employment opportunities, the Government of India had issued “Public Procurement” (Preference to Make in India) Order’ 2017 (in short as 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.  And that the Make in India Policy/Public Procurement Order, 2017 is applicable to all Ministries, Departments, CPSUs.

According to Bharat Forge, the bidders were required to specify the percentage of local content in the material being offered in accordance with the Make in India Policy. 

Further, the Union had issued directions 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%. The margin of purchase preference would refer to the extent to which the price of a local supplier/local product may be above the price quoted by the supplier/ product. 

The lowest bidder (L1) was Krishna Bearings which is a trader importing procurement products from Walbar Corporation, Mexico. L2 and L3 had local sources that were not approved by Diesel Locomotive Works. Bharat Forge was L4. It was contended by them that the difference between L1 and itself was due to differences in GST Rates and that L1 had applied the incorrect rate of 5% instead of 18%.

It was the case of Bharat Forge that GST rates of the products and services have been duly clarified/fixed by the Goods and Services Tax Council, using the Harmonized System of Nomenclature (HSN) Codes for each product/service, to specify the rates at which GST would be applicable. Further that for the procurement product that is under the heading of a “turbocharger”, it was 18%.

Bharat Forge had also contended that it had raised the issue of nonincorporation of relevant HSN Code in the tender document before the tendering authority. It also claims that the product manufactured by it is 97.68% indigenously manufactured and it was the only bidder to attach the Local Content Certificate.

It was also because of the indigenous nature that Bharat Forge was included in the list of “approved vendors” list.

For the aforesaid reasons, Bharat Forge also contended that the fault of the tendering authority, namely Diesel Locomotive Works, Varanasi had led to unfair trade practices as the tenderers took unfair advantage by quoting a substantially lower GST Rate. The acceptance of such bids was against public policy as it gives license to the tendering authority to act in favor of a particular bidder.

Hence, Bharat Forge sought a mandamus directing Diesel Locomotive Works, Varanasi to clarify that the Procurement Product must be taxed @ 18%; to stay the effect of the opening the tender and subsequent awarding; to declare the opening of the Tender a nullity, and to direct inviting fresh tender with HSN Code specified; and to disqualify those bidders that had not entered the correct HSN Code/GST Rate.

The relief was therefore in essence for a level playing field to all bidders/tenderers, by including uniform GST rates in the base price.

However, it was also conceded that as far as the subject tender is concerned, learned counsel for the petitioner submits that the lis does not survive as the procurement product has been supplied subsequent to the fresh tender which has been secured by Bharat Forge.

The contentions raised by the respondents was that the successful bidder had argued that the GST rate should be for the ‘Turbo Wheel Impeller Balance Assembly’ which is a part of Railway locomotives which is for a part of “turbo-supercharger” and not for “turbocharger” and hence the applicable rate was 5%.

The tendering authority insisted that it was for the tenderers to quote the correct rates and statutory duties/taxes. It was submitted that the Railway Board had also issued a circular dated September 5, 2017, after implementation of the GST Act that it shall be the responsibility of the tenderers/bidders to quote the correct HSN number and its corresponding GST rate. And that the purchaser/tendering authority shall not be responsible for the misclassification of the HSN number or incorrect GST rate if quoted by the bidder/tenderer. All the tenderers/bidders have to ensure that they are GST compliant and quote tax structure/rates as per GST law and for this reason, the HSN code was not mentioned in the NIT (Notice Inviting Tender) and bid document.

Hence, in case of non-payment of GST by misclassification or mentioning of incorrect HSN Code, the GST enforcing authorities are equipped to deal with it and penalize the erring person(s).

It was also contended that bidders had to keep a valid offer for 120 days from the date of opening of the tender. In this case, all bidders have quoted 120 days of the validity period of their offer in the tender. The tender was opened on May 13, 2019, and hence all offers were valid up to September 9, 2019, for decision.

During the pendency of the present writ petition, the offer period had expired and, therefore, Bharat Forge was left with no enforceable right.

A subsequent tender for procurement of ‘Turbo Wheel Impeller’ was floated on February 22, 2019, which was the subject matter of challenge in writ petition no.8225 of 2019 (M/s New Tech UOI & Ors), was opened on October 25, 2019, after the final decision in the said writ petition on October 1, 2019. It was secured by the Bharat Forge being L-1, the lowest approved source bidder.

In the subsequent tender also, HSN code and GST rates were not mentioned and no objection was raised by the petitioner. In fact, the tenderers/bidders have to adjust their base price according to the GST rates to match the all-inclusive price as mentioned in the purchase order. All the prayers in the present writ petition, therefore, have become infructuous. Therefore, the writ petition was liable to be dismissed as such.

The High Court observed that the only dispute is about the flaw, if any, in the procedure adopted by the Railways in the tendering process.

The High Court held that the parameters of Judicial review were limited to arbitrariness, irrationality, unreasonableness, bias, and malafide and to check whether choice or decision is made lawfully and not to check whether choice or decision is “sound”.

The Court in the exercise of the powers of judicial review will not interfere, even if a procedural aberration or error in assessment or prejudice to a tenderer is made out.

The tenderer or contractor with a grievance can always seek damage in the Civil Court.

The reason for this was “that such interference may be interim or final, may hold up public works for years, or delay relief and succor to thousands and millions and may increase the project cost manifold.”

“The Court cannot examine the details of the terms of the contract which has been entered into by the public bodies or the State. The Courts have inherent limitations on the scope of any such inquiry. If the contract has been 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, cannot act as an appellate Court by substituting its opinion in respect of selection made for entering into such contract.”

However, it was also held that “at the same time, the Courts can certainly examine whether “decision-making process” was reasonable, rational, not arbitrary and violative of Article 14.”

The High Court considered that one of the points which arises for consideration is whether the classification of HSN Code is integral to the tendering process, i.e., whether it has an impact on the selection of tenderers or the choice of tenderers while ranking them after opening the financial bids.

“The fair competition or ‘level playing field’, would be denied to each bidder as someone may bag the tender by quoting a lesser rate of GST (lesser GST value), which may result in a substantial difference in the total price offered by bidders/tenderers.”

And that the Railways ought to have sought clarification from the GST authorities about the correct HSN Code applicable to the procurement product……Thus, the mentioning of the 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 a ‘level playing field’ to all bidders/tenderers in the true spirit of Article 19(1)(g) of the Constitution of India.”

Therefore The High Court found it expedient to issue directions to the “General Manager, Diesel Locomotive Works, Varanasi that if the GST value is to be added in the base price to arrive at the total price of offer for the procurement of products in a tender and is used to determine interest ranking in the selection process, it 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’.”

The Court said that the factual matrix brings out a very important aspect in contract drafting. The Government agencies should be mindful of the relevant policies and clearly specify the terms so that there is no dispute at a later stage. Here the main cause of concern was the non-incorporation of the relevant HSN Code that had allowed the discrepancy to arise in paying GST. Therefore not only did it lead to litigation costs for the government but also a loss of revenue.

The laudable objectives of Make in India and the GST Acts can not be achieved if at the grassroots level the government agencies show laxity in their implementation, the court said./ILNS/SC/KR/SNG

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