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Introduction

Goods & Services Tax (GST)/ Other Indirect Taxes (hereinafter collectively referred to as ‘Indirect Taxes’) dues are treated as operational debts under the Insolvency & Bankruptcy Code (IBC). Operational debts include dues arising from the provision of goods, services, or employment and they are distinct from financial debts. IBC defines operational debts broadly and Indirect Taxes dues typically fall within this category as they arise from the provision of services or supply of goods. IBC establishes a priority hierarchy for the distribution of proceeds during the insolvency resolution process, often referred to as the waterfall. Operational creditors, including those with Indirect Taxes dues, fall below financial creditors in terms of priority. Financial creditors, such as banks and financial institutions, have higher priority for the distribution of proceeds. However, IBC does not provide specific priority for Indirect Taxes dues within the category of operational debts. NCLT, the adjudicating authority for insolvency cases under the IBC, has the power to determine the treatment of Indirect Taxes dues. In specific cases, the NCLT has considered whether Indirect Taxes dues should be classified as operational debts or treated differently based on the specific facts and circumstances. NCLT’s decisions have contributed to the evolving jurisprudence on the treatment of Indirect Taxes dues in insolvency proceedings.

The interpretation of Goods and Services Tax (GST)/ Indirect Taxes dues within the framework of the Insolvency and Bankruptcy Code (IBC) in India has been a subject of legal deliberation and evolving jurisprudence. Here are some key aspects related to the interpretation of GST/ Indirect Taxes dues in the IBC:

1. Overriding effect over all other laws including laws related to revenue and binding nature of Resolution Plan: Section 31(1) of the Insolvency and Bankruptcy Code (IBC) makes it clear that once a resolution plan is approved by the Committee of Creditors it shall be binding on all the stakeholders, including the Government. This is for the reasons that this provision ensures that the successful resolution applicant starts running the business of the corporate debtor on a fresh slate as it were totally new.

In the matter of Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta (2020) 8 SCC 531, it was held by the Apex Court that once a Resolution Plan is approved by the CoC, it shall be binding on all stakeholders. All claims shall have to be submitted and decided by the Resolution Professional (RP) so that a prospective resolution applicant knows exactly what needs to be paid in order, it may then take over and run the business of the corporate debtor.

In the matter of Ghanshyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited 2021 SCC Online SC 313, it has been held by the Tribunal that the Resolution Plan, as has been finalised, is binding upon the parties.

Further in a recent matter of the Garden Silk Mills Versus Commissioner of Central Excise and Customs, Surat-I (2023) 4 Centax 204 (Guj.), it has been held that once the resolution plan is approved and the approval order has been given under Section 31(1) of the Code, the same would have an overriding effect over all other laws in force including the Central Excise Act, 1944.

Thus, it has been held on a number of occasions that IBC has an overriding effect over all other laws including laws related to revenue and a resolution plan, once approved by the Committee of Creditors, has a binding effect on all parties, including the Government.

2. All claims/ dues of Government shall automatically get extinguished and proceedings relating thereto for period prior to resolution stands terminated if not made a part of the plan: The provisions of Section 238 of IBC states that the provisions of IBC shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Further, crown debts do not take precedence even over secured creditors, who are private persons. Therefore, if the departments of Central or State Governments do not file an application or participate in the resolution process, their claims automatically get extinguished and the proceedings related thereto shall stand terminated (following the judgment of the Hon’ble Supreme Court in the case of Ghanashym Mishra (Ghanshyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited 2021 SCC Online SC 313)). – Union of India Versus Ruchi Soya Industries Ltd. 2021 (377) E.L.T. 659 (Kar.).

It was also held in the matter of Ultra Tech Nathdwara Cement Limited v. Union of India 2020 (37) G.S.T.L. 289 (Raj.) that since the 2019 amendment to Section 31 of IBC was clarificatory and declaratory in nature, it would have a retrospective operation. As such, if the resolution plan approved by the National Company Law Tribunal, does not comprise all the claims of the Central/ State Government or the local authority, the said claim shall stand extinguished and the proceedings relating thereto shall stand terminated.

GST Indirect Taxes with IBC

3. Resolution Applicant should decide on payment of pending dues by inclusion in the Resolution Plan: IBC allows the submission of resolution plans by prospective resolution applicants during the insolvency resolution process. These plans outline the proposed revival or resolution of the insolvent entity. In the resolution plan, the treatment of Indirect Taxes dues can vary depending on the specifics of each case. The resolution plan may provide for the payment of GST dues either fully or partially, depending on the financial viability and feasibility of the plan.

Further it has been held that a claim of department from insolvent assessee which is not a part of said plan, cannot be recovered (as decided in the matter of Ruchi Soya Industries Ltd. Versus Union Of India 2022 (380) E.L.T. 8 (S.C.).). In the said matter, the Customs Department did not lodge any claim with Resolution Professional for their dues in respect of the demand in response to Public Notice issued by said authority under Sections 13 and 15 of IBC. It was held that in view of precedent judgment of Apex Court in Ghanashyam Mishra & Sons Pvt. Ltd. reported at (2021) 9 SCC 657, on date of approval of aforesaid Plan by NCLT, all claims of dues from appellant, stood frozen. Accordingly, the claim of Customs authorities, not being a part of said Plan, was held not sustainable. Further the amount deposited by appellant at time of admission of appeal, was also directed to be refunded with interest in terms of Section 31 of Insolvency and Bankruptcy Code, 2016.

4. Benefit of previous amnesty schemes cannot be denied just because payment of tax could not be done because of moratorium under IBC: It is a well-known principle that no one can be expected to do the impossible. In a case where an assessee had applied for availing a scheme under the relevant statute, but could not comply with the conditions due to moratorium, it cannot be said that conditions have not been complied since one could not have done do, because of the moratorium imposed under the IBC law. Thus it has been held that since the assessee could not make the payment (read: comply with the scheme’s conditions) due to legal disability, the benefit of the scheme could not be denied.

 In the matter of Shekhar Resorts Ltd. Versus Union of India (2023) 2 Centax 99 (S.C.), it has been held that, the benefit of SVLDRS Scheme would not be denied to the assessee who could not deposit due amount before last date on account of legal moratorium under IBC and immediately on lifting of mortarium, the appellant had approached  the concerned authorities.

5. Outgoing Directors of a Company, which has undergone resolution, can be called upon to reply in an adjudication process for period prior to resolution: The question is whether a Key Managerial Personnel (KMP) which includes a Director, can be called upon to submit replies and appear before the authorities for transactions relating to the period prior to coming into force of the resolution plan even when it has been held that all claims/ dues of Government shall automatically get extinguished and proceedings relating thereto for period prior to resolution stands terminated if not made a part of the plan (supra)?

In a matter, a Show Cause Notice (SCN) was issued against the ‘Outgoing Chairman & Managing Director’ or ‘Outgoing Director’ or ‘Director’ of M/s. Bhushan Power & Steel Limited (BPSL) and for transactions relating to the period prior to coming into force of the resolution plan. The Court, without expressing any view in the matter, directed the Outgoing Director to raise all the pleas that they had urged in the petition, in their reply to the impugned SCN and for the adjudication proceedings to be concluded in a time-bound manner. Thus, no relief as such from proceedings for the period prior to resolution period, was made available to the petitioners. The adjudicating authority was directed to take into account all such pleas and deal with them in the adjudication order to be passed after giving the Petitioners an opportunity of hearing and considering their requests, if any, as regards summoning persons or documents, in accordance with law (in the matter of Sanjay Singal Versus Union of India (2023) 3 Centax 216 (Ori.)).

6. All proceedings under GST to be stayed till conclusion of proceedings before NCLT and lifting of moratorium: Section 14 of the IBC clearly indicates that there is a complete/ total embargo/ bar to initiate and continue proceedings against the Company before any other authority including the GST authority during the pendency of proceedings before the NCLT and appeal(s) to be filed against the same, if any, when the moratorium/ CIRP is in force and has not been lifted. 

It is also relevant to state that in P. Mohan Raj v. Shah Brothers Ispat Pvt. Ltd. (2021) 6 SCC 258, a three Judge Bench of the Apex Court has categorically held that the moratorium provision contained in Section 14 of the IBC would include proceedings under Section 138 of the Negotiable Instruments Act also and by token of the same reasoning, proceedings initiated by the respondent under the GST Act would also attract the embargo contained in Section 14 of the IBC. It was further held that appeal(s), if any, can be filed only after lifting of the moratorium and completion of the corporation insolvency resolution process. – Associate Decor Ltd. Versus Deputy Commissioner of Commercial Taxes, Bengaluru (2022) 1 Centax 174 (Kar.)

7. No recovery proceedings can be started once moratorium has started: It has been held in various cases that the Insolvency Resolution Professional has powers to take control and possession of all assets of Corporate Debtor and in terms of Section 14 of Code, assets of Corporate Debtor cannot be alienated, transferred or sold to a third party.

The NCLAT, in the matter of Commissioner of Cus. (Preventive), West Bengal Versus Ram Swarup Industries Ltd. 2020 (374) E.L.T. 726 (NCLAT), while confirming the Order of NCLT, in the matter of National Company Law Tribunal, Kolkata Bench, Kolkata in I.A. No. 116 of 2018 in C.P. No. (IB)-349(KB)/2017, confirmed that since ownership of goods remained with Corporate Debtor as on date of initiation of resolution process although possession was with Customs authorities, in terms of Sections 18(1)(f) and 18(1)(g) of Insolvency and Bankruptcy Code, 2016, after initiation of process, Insolvency Resolution Professional has power to take control and possession of all assets of Corporate Debtor and in terms of Section 14 of Code, assets of Corporate Debtor cannot be alienated, transferred or sold to a third party. The matter reached the Apex Court in the matter of Commissioner of Cus. (Preventive), West Bengal Versus Ram Swarup Industries Ltd. 2022 (382) E.L.T. 470 (S.C.) on appeal by the Department. The Hon’ble Supreme Court was however not inclined to interfere with the order passed by the NCLAT and the appeal was accordingly dismissed.

In a similar matter in Sundaresh Bhatt Versus C.B.I. & C. 2022 (381) E.L.T. 731 (S.C.), it has been held that once moratorium is imposed in terms of Section 14 or 33(5) of IBC, 2016, Customs authority can only determine quantum of customs duty and other levies but cannot initiate recovery by means of sale/confiscation, as provided under Customs Act.

8. Insolvency and Bankruptcy Code (IBC) does not address assets over which debtor has no title; such assets are specifically excluded from liquidation process: The intention of the Code was never to address those assets over which a debtor had no title. Such assets, infact, stood specifically excluded from the liquidation process, being assets where the debtor might hold some right, but was not the owner to title of the asset, a pre-condition set out is the inclusion of the asset in question in the inventory of the debtor. – Czarnikow Group Ltd. Versus Senior Intelligence Officer, Directorate Of Revenue Intelligence, Hyderabad Zonal Unit 2022 (380) E.L.T. 595 (Mad.).

9. Company is required to pay the approved percentage for operational creditors to the Department of the Total Demand and not Unpaid Demand; any excess payment has to be refunded: The Department is entitled only to the percentage as approved in the Resolution Plan by the Committee of Creditors of the total demand as per Show Cause Notice or Order and not the unpaid amount. E.g. in case the demand is for Rs. 100/- of which the company has already paid Rs. 60/-, the unpaid amount being Rs. 40/-. Now in case the percentage approved for operational creditors is 20%, the Department will be entitled to 20% of total demand of Rs. 100/- and not 20% of unpaid demand of Rs. 40/- (in which case the total realisation of the Government would be Rs. 60/- (+) Rs. 8/- = Rs. 68/- i.e. 68% against the approved 20%). Thus the entitlement being Rs. 20/- and payment already made of Rs. 60/-, the company is entitled to a refund of Rs. 40/- i.e. Rs. 60/- less Rs. 20/-.

It has been held that the Department would be duty bound to refund the balance amount to the company which will not only be in terms of the resolution plan and thus in accordance with law but will also be a step in the right direction for revival of the petitioner which is the key objective of the Code. There is no question of retaining the said amount. – GGS Infrastructure Private Limited in WP-LD-VC-No. 268 of 2020 judgment dated 22nd December, 2020 [2021 (51) G.S.T.L. 187 (Bom.)]. The same proposition has also been held in the matter of Jagat Janani Services Versus GST Council 2021 (54) G.S.T.L. 283 (Ori.).

10. Where in e-auction, there is sale of assets as a going concern and not transfer of business as a going concern, such supply is not exempted from GST: In an e-auction conducted by the liquidator appointed by NCLT corporate debtor’s business was not transferred as a going concern; rather the corporate debtor’s assets were sold as a going concern. It was held that there was a supply of goods under section 8 of CGST Act, 2017 and it was subject to GST and that it was out of purview of exemption Notification No. 12/2017-Central Tax (Rate), dated 28-6-2017, which covers cases where transfer is supply of service only [Section 11, read with section 8 of Central Goods and Services Tax Act, 2017]. It was thus held that exemption provided under serial no. 2 of the Notification No. 12/2017-Central Tax (Rate), dated 28-6-2017 was not applicable to the said supply of assets, even as a going concern’ and GST at the applicable rate was leviable on the said supply. – Before the Authority for Advance Ruling under GST, Chhattisgarh re: Shikhar Commodities (2023) 2 Centax 269 (A.A.R. – GST – Chh.) (Readers may kindly note that Advance Rulings are applicable only on the party which has sought the Ruling. It can at best have persuasive value for others in similar matters).

Conclusion

It’s important to note that the interpretation and treatment of GST dues in the IBC can vary depending on the specifics of each case and the evolving legal landscape. As the IBC and GST laws continue to be interpreted and refined through judicial pronouncements, further clarity and guidance on the treatment of GST dues in insolvency proceedings are likely to emerge. It is advisable to consult legal experts or seek professional advice for specific cases and up-to-date information on this matter.

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