Summary: The Delhi High Court held that services rendered by an Advocate in the capacity of an Insolvency Professional are not “legal services” for purposes of the Reverse Charge Mechanism under Notification No. 13/2017-Central Tax (Rate). The petitioner, an Advocate registered as an Insolvency Professional, had acted as Interim Resolution Professional and disputed the requirement to discharge GST under forward charge. The Court examined the definitions and GST notifications and the statutory functions of Insolvency Professionals under the IBC and IBBI Regulations. It held that the nature and character of the service supplied, rather than the individual’s underlying professional qualification, is relevant. Insolvency and Receivership Services constitute a distinct category and are not separately notified for reverse charge. Accordingly, Section 9(1) applies and GST is payable by the supplier under the Forward Charge Mechanism. The Court also held that an Advocate acting as an Insolvency Professional forms part of the same class as other Insolvency Professionals and cannot claim a different GST mechanism merely due to being enrolled as an Advocate. The IBBI communication dated 9 March 2021 was upheld, and the petitioner was directed to furnish GST-compliant invoices.
Advocate Acting as Insolvency Professional Liable to GST Under Forward Charge, Not RCM- Delhi High court
In the recent case of Kanwal Chaudhary Vs Insolvency and Bankruptcy Board of India & Ors. (W.P.(C) 9410/2021) Delhi High Court held that merely because an Insolvency Professional is also enrolled as an Advocate, the services rendered by him in the capacity of an Insolvency Professional cannot be treated as “legal services” for the purpose of availing the Reverse Charge Mechanism (RCM) applicable to advocates.
- Background
- Court observation
- GST on Services Provided by Advocates
- GST on Insolvency Professional Services
- Nature of Service, Not Basic Professional Qualification, Is Relevant
- Specific Classification Prevails Over General Classification
- Bar Council of India Also Supported Forward Charge
- Advocate Can Have Different Professional Capacities
- No Differential GST Treatment Within Same Class of Insolvency Professionals
- Final Decision of Delhi High Court
- 1. Advocate acting as Insolvency Professional – Forward Charge
- 2. Regular Legal Services of Advocate – Reverse Charge Continues
- 3. Petitioner Directed to Issue GST-Compliant Invoice
Background
The petitioner was an Advocate enrolled with the Bar Council of Delhi and had been practising law since 1995.
After enactment of the Insolvency and Bankruptcy Code, 2016, he qualified the Limited Insolvency Examination and was registered as an Insolvency Professional with effect from 27 July 2017.
The NCLT, Delhi Bench appointed him as an Interim Resolution Professional (IRP) in the corporate insolvency resolution process of Ireo Fiveriver Pvt. Ltd.
A dispute subsequently arose regarding payment of his professional fees and the requirement to issue GST-compliant invoices.
The petitioner contended that, being an Advocate, he was not required to discharge GST under forward charge. According to him, GST on his professional services was required to be paid by the recipient under the Reverse Charge Mechanism in terms of Section 9(3) of the CGST Act read with Notification No. 13/2017-Central Tax (Rate).
The NCLT referred the issue to the Insolvency and Bankruptcy Board of India (IBBI).
IBBI, by communication dated 9 March 2021, took the view that “Insolvency and Receivership Services” are not covered under the Reverse Charge Mechanism and directed the petitioner to furnish GST-compliant invoices for the professional fees charged in his capacity as IRP.
The said communication was challenged before the Delhi High Court
Court observation
GST on Services Provided by Advocates
The Court examined Notification No. 12/2017-Central Tax (Rate) and Notification No. 13/2017-Central Tax (Rate).
“Legal service” has been defined to mean any service provided in relation to advice, consultancy or assistance in any branch of law and includes representational services before any court, tribunal or authority.
Notification No. 13/2017 provides for payment of GST under reverse charge on specified legal services supplied by individual advocates, senior advocates or firms of advocates to business entities.
Therefore, the Court recognised that services rendered by Advocates in their capacity as Advocates are generally governed by the Reverse Charge Mechanism.
GST on Insolvency Professional Services
The Court thereafter examined the scheme of the Insolvency and Bankruptcy Code and IBBI Regulations.
An Insolvency Professional has separate statutory duties and responsibilities under the IBC including, inter alia:
- management of affairs of the corporate debtor;
- collection and verification of claims;
- constitution and conduct of meetings of Committee of Creditors;
- preservation and protection of assets;
- management of operations as a going concern;
- inviting resolution plans; and
- performing various statutory and regulatory functions under the IBC.
The Court observed that Insolvency Professionals constitute a distinct professional class governed by an independent statutory and regulatory framework under the IBC and IBBI Regulations.
Services provided by Insolvency Professionals are not separately notified for reverse charge under Notification No. 13/2017.
Consequently, the normal rule under Section 9(1) of the CGST Act applies and the supplier of such services is required to discharge GST under the Forward Charge Mechanism.
Nature of Service, Not Basic Professional Qualification, Is Relevant
This is the most significant finding of the judgment.
The Delhi High Court held that where an Advocate renders services as an Insolvency Professional, the relevant capacity is that of an Insolvency Professional and not that of an Advocate.
For GST classification, what is relevant is the nature and character of the service actually supplied, and not merely the underlying qualification or professional enrolment of the person providing it.
The services rendered as an Insolvency Professional specifically fall under “Insolvency and Receivership Services”, rather than the general category of legal services.
Therefore, an individual cannot claim RCM merely because his basic professional qualification happens to be that of an Advocate.
Specific Classification Prevails Over General Classification
The Court also relied upon the settled principle that a specific entry prevails over a general entry for classification purposes.
Though insolvency-related services may broadly have a connection with law and accounting, the specific nature of services performed is that of insolvency and receivership services.
Accordingly, such services cannot be brought under the general description of legal services merely because the Insolvency Professional is also an Advocate.
Bar Council of India Also Supported Forward Charge
The Bar Council of India, in its affidavit before the Court, also took the position that services provided by Advocates functioning as Insolvency Professionals are significantly different from conventional legal services.
Functions of an IRP/RP such as managing the corporate debtor, receiving claims, conducting Committee of Creditors meetings and carrying out regulatory compliances are not conventional advocacy or legal representation.
Accordingly, the BCI supported the view that such services are liable to GST under the Forward Charge Mechanism.
Advocate Can Have Different Professional Capacities
The Court rejected the argument that an Advocate can only provide legal services and therefore every activity undertaken by him must necessarily remain a legal service.
The IBBI Regulations themselves expressly permit an Advocate having the prescribed experience to qualify and register as an Insolvency Professional.
Therefore, when an Advocate additionally qualifies as an Insolvency Professional, he enters another statutorily recognised professional field.
The Advocates Act and IBC are required to be read harmoniously.
An Advocate is therefore permitted to act as an Insolvency Professional; however, while providing such services, he will be governed by the statutory framework applicable to Insolvency Professionals.
No Differential GST Treatment Within Same Class of Insolvency Professionals
Another important observation of the Court is that Insolvency Professionals constitute one class for the purpose of GST treatment.
An Insolvency Professional who happens to be an Advocate cannot be subjected to a different GST mechanism compared to Insolvency Professionals having qualifications such as Chartered Accountant, Company Secretary, Cost Accountant or managerial experience.
The GST treatment follows the nature of services rendered as an Insolvency Professional and not the original professional qualification of the individual.
Final Decision of Delhi High Court
The Delhi High Court concluded as follows:
1. Advocate acting as Insolvency Professional – Forward Charge
Advocates enrolled with the Bar Council who act as Insolvency Professionals under the IBC shall be governed by the Forward Charge Mechanism.
They are accordingly liable to obtain GST registration and comply with consequential requirements under the CGST Act, Rules and applicable notifications in the same manner as other Insolvency Professionals.2
2. Regular Legal Services of Advocate – Reverse Charge Continues
The ruling is restricted to services rendered by an Advocate in the capacity of an Insolvency Professional.
It does not change the GST mechanism applicable to ordinary legal services provided by Advocates.
Such legal services will continue to be governed by the Reverse Charge Mechanism, wherever applicable in terms of the GST notifications.
3. Petitioner Directed to Issue GST-Compliant Invoice
The petitioner was directed to furnish GST-compliant invoices for the professional fees charged by him for services rendered as Interim Resolution Professional.
The Court accordingly held that the IBBI’s communication dated 9 March 2021 reflected the correct legal position and dismissed the challenge to it.
