INDIRECT TAXES AS OPERATIONAL DEBT UNDER IBC

[Dr. Sanjiv Agarwal]

In SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD VERSUS CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS - 2022 (8) TMI 1161 - SUPREME COURT ( dated 26.08.2022, the insolvency professional (Interim Resolution Professional and Liquidator) of corporate debtor, M/s ABG Shipyard Ltd. filed an appeal before the Supreme Court against the order of National Company Law Appellate Tribunal (NCLAT) to restrain the indirect tax authorities from recovery of tax dues on the basis that the IBC Code, 2016 over rides the provisions of the Customs Act, 1962.

The Customs authorities can only assess the value of goods and the levy of custom duty thereon and submit its claim (operational debt in terms of IBC law) as per the procedure and time lines prescribed under the IBC Code before the adjudicating authority. On the other hand, the interim resolution professional or resolution professional or liquidator, as the case may be, can secure goods from the Customs authorities to be dealt with appropriately under the IBC Code.

On 25.04.2019, the NCLT passed an order commencing liquidation against the Corporate Debtor under Section 33(2) of the IBC. Vide the said order, the NCLT declared that the earlier moratorium imposed under Section 13(1)(a) of the IBC shall cease to have effect by the operation of Section 14(4) of the IBC. However, a fresh direction was passed under Section 33(5) of the IBC barring the institution of any suit or legal proceeding by or against the Corporate Debtor. Further, the NCLT also appointed the appellant as the liquidator.

The respondent tax authorities filed claims before the appellant for goods warehoused in both Gujarat and Maharashtra in May, 2019 under the IBC. On 27.06.2019, the appellant informed the respondent through its officers that liquidation proceedings had commenced against the Corporate Debtor and that the goods were to be released to the appellant. Due to inaction by the respondent, the appellant filed application before the NCLT under Section 60(5) of the IBC seeking a direction against the Respondent to release the warehoused goods belonging to the Corporate Debtor on 01.07.2019.

The NCLT allowed the application filed by IRP and considered Section 238 of the IBC and held that the non-obstante clause in the IBC, being part of a subsequent law, shall have overriding effect on proceedings under the Customs Act. Further, looking to the waterfall mechanism under Section 53 of the IBC, the NCLT held that distribution of proceedings from sale of liquidation of assets shall also prevail over the Customs Act provisions. The NCLT held that, as Government dues, the claims by the respondent would have to be dealt with in accordance with Section 53 of the IBC.

The Customs authority filed an appeal before NCLAT challenging the NCLT order on 22.11.2021, the NCLAT passed the impugned order, whereby it allowed the appeal filed by the respondent and set aside the directions of the NCLT requiring the respondent to release the warehoused goods to the possession of the appellant without seeking the custom dues. The NCLAT rather directed that the warehoused goods can be ‘released or disposed of as per Applicable Provisions of Customs Act by the Proper Officer’.

The NCLAT, in allowing the appeal held that the goods lying in the customs bonded warehouse were not the Corporate Debtor’s assets as they were neither claimed by the Corporate Debtor after their import, nor were the bills of entry cleared for some of the said goods. By not filing the said bills of entry, the NCLAT held that the importer, i.e., the Corporate Debtor, had relinquished his title to the imported goods. The NCLAT held that the Corporate Debtor is deemed to have lost his title to the imported goods by action of Sections 48 and 72 of the Customs Act. As such, the respondent is empowered to sell the goods and recover the government dues.

Further, NCLAT held that the Customs Act is a complete Code which provides that warehoused goods cannot be released until the import duties are paid. Mere filing of claims under ‘Form C’ by the respondent before the appellant cannot be taken to signify the relinquishment of the right of the respondent over the warehoused goods.

On the issue of priority of IBC over the Customs Act, the NCLAT held that the issue did not arise in the present case, as the goods in question were imported prior in time to the initiation of the CIRP. While the containers were imported between 2012 to 2015, the CIRP was initiated only in 2017 and the Corporate Debtor went into liquidation in 2019. By not paying the import duties, the Corporate Debtor had lost the right to the warehoused goods prior to the initiation of the CIRP. The NCLAT held that these warehoused goods stand on a different footing and cannot be considered assets of the Corporate Debtor which were subject to the IBC provisions.

The appellant (Resolution Professional) filed civil appeal before the Supreme Court against grant of custody of warehoused goods to Customs Authorities by the NCLAT. The question before Apex Court was to decide as to whether the IBC Code, 2016 will override Customs Act, 1962 or vice versa if there is any conflict between the two enactments.

The issues before the Apex Court was to answer the following questions:

1. Whether the provisions of the IBC would prevail over the Customs Act, and if so, to what extent?
2. Whether the respondent could claim title over the goods and issue notice to sell the goods in terms of the Customs Act when the liquidation process has been initiated?

The Customs Act, 1962 and the IBC Act, 2016 function in their own spheres. In case of any conflict, the IBC overrides the Customs Act. In present context, this Court has to ascertain as to whether there is a conflict in the operation of two different statutes in the given circumstances. The court is mandated to harmoniously read the two legislations, unless this Court finds a clear conflict in its operation.

The Apex Court noted that IBC Code, being a more recent law shall clearly override the Customs Law. The Apex Court observed and held that the IBC would prevail over the Customs Act, to the extent that once moratorium is imposed in terms of Sections 14 or 33(5) of the IBC, as the case may be. The respondent authority only has a limited jurisdiction to assess/ determine the quantum of customs duty and other levies. The Customs Authority does not have power to initiate recovery of dues by means of sale / confiscation, as provided under the Customs Act.  Further, tax authorities does not have the power to initiate recovery of dues by means of sale / confiscation, as provided under the Customs Act.

The Apex Court observed that in the present case, the Corporate Debtor as part of its business used to regularly import and warehoused goods in the custom bonded warehouses from at least 2011. As has already been mentioned above, the CIRP process commenced against the Corporate Debtor on 01.08.2017 by the order of the NCLT. It appears from the record that no notices were issued by the respondent against the Corporate Debtor with respect to the warehoused goods prior to initiation of the CIRP. In fact, all the duty demand notices issued by the respondent were from March 2019 onwards. Therefore, it was necessary for the court to ascertain whether the IBC overrides the Customs Act or vice versa.

The Apex Court further observed that Insolvency and Bankruptcy Code came into force in India from 28.05.2016 to combine provisions relating to insolvency found across different statutes into a single comprehensive instrument. Under the earlier legal regime, different statutes were resulting in multiple parallel proceedings, which inevitably resulted in uncertainty for the creditors over their recovery. One of the objectives behind the enactment of the IBC was to end the conflict between different statutes.

One of the motivations of imposing a moratorium in terms of section 14(1)(a), (b), and (c) of the IBC to form a shield that protects pecuniary attacks against the Corporate Debtor. This is done in order to provide the Corporate Debtor with breathing space, to allow it to continue as a going concern and rehabilitate itself. Any contrary interpretation would crack this shield and would have adverse consequences on the objective sought to be achieved. The IBC, being the more recent statute, clearly overrides the Customs Act. This is also clearly made out by a reading of Section 142A of the Customs Act.

Section 14 of the IBC prescribes a moratorium on the initiation of CIRP proceedings and its effects. One of the purposes of the moratorium is to keep the assets of the Corporate Debtor together during the insolvency resolution process and to facilitate orderly completion of the processes envisaged under the statute. Such measures ensure the curtailing of parallel proceedings and reduce the possibility of conflicting outcomes in the process.

Further, Section 238 of the IBC clearly overrides any provision of law which is inconsistent with the IBC. Section 238 of IBC provides as under:

“Provisions of this Code to override other laws. The provisions of this Code 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.”

It was held that the respondent tax authorities under Customs Act could only initiate assessment or reassessment of the duties and other levies. They cannot transgress such boundary and proceed to initiate recovery in violation of Sections 14 or 33(5) of the IBC. The interim resolution professional, resolution professional or the liquidator, as the case may be, has an obligation to ensure that assessment is legal and he has been provided with sufficient power to question any assessment, if he finds the same to be excessive.

Apex court formed a view that the demand notices to seek enforcement of custom dues during the moratorium period would clearly violate the provisions of Sections 14 or 33(5) of the IBC, as the case may be. This is because the demand notices are an initiation of legal proceedings against the Corporate Debtor. However, the above analysis would not be complete unless this Court examines the extent of powers which the respondent authority can exercise during the moratorium period under the IBC.

The Customs Act and IBC can be read in a harmonious manner wherein authorities under the Customs Act have a limited jurisdiction to determine the quantum of operational debt – in this case, the customs duty – in order to stake claim in terms of Section 53 of the IBC before the liquidator. However, the respondent does not have the power to execute its claim beyond the ambit of Section 53 of the IBC. Such harmonious construction would be in line with the ruling in GUJARAT URJA VIKAS NIGAM LIMITED VERSUS MR. AMIT GUPTA AND ORS. - 2021 (3) TMI 340 - SUPREME COURT, wherein a balance was struck by this Court between the jurisdiction of the NCLT under the IBC and the potential encroachment on the legitimate jurisdiction of other authorities. The NCLAT has misinterpreted the aforesaid judgment of Apex Court in Gujarat Urja Vikas Nigam Case.

It ignored the fact that there was no “abandonment of goods” which would authorize the Customs Authorities to initiate the adjudicatory process to transfer title to themselves. Before any goods can be declared to have been “abandoned”, the same must be adjudged by some authority after due notice. The position cannot be assumed or deemed. There is no such adjudication or notice has been placed on record to suggest that such abandonment of the warehoused goods had taken place prior to the imposition of the moratorium.

The NCLAT clearly ignored the mandate of Section 72(2) of the Customs Act relating to sale. This interpretation of the NCLAT clearly ignores the effects of the moratorium under Sections 14 or 33(5) of the IBC. The fact is that the duty demand notice and notice under Section 72(2) of the Customs Act, were issued during the moratorium period, which has been completely ignored by NCLAT and has resulted in rendering the moratorium otiose.

The Apex Court in this judgment also portrayed the inconsistency between the Customs Act, 1962 and IBC during the moratorium period. In the present case, the demand notice dated 11.07.2019 was issued by the respondent under Section 72 of the Customs Act, in clear breach of the moratorium imposed under Section 33(5) of the IBC. Issuing a notice under Section 72 of the Customs Act for nonpayment of customs duty falls squarely within the ambit of initiating legal proceedings against a Corporate Debtor. Even under the liquidation process, the liquidator is given the responsibility to secure assets and goods of the Corporate Debtor under Section 35(1)(b) of IBC.

The Apex Court therefore, answered the issues as follows:

1. Whether the provisions of the IBC would prevail over the Customs Act, and if so, to what extent?

The IBC would prevail over The Customs Act, to the extent that once moratorium is imposed in terms of Sections 14 or 33(5) of the IBC as the case may be, the respondent authority only has a limited jurisdiction to assess/determine the quantum of customs duty and other levies. The respondent authority does not have the power to initiate recovery of dues by means of sale/confiscation, as provided under the Customs Act.

2. Whether the respondent could claim title over the goods and issue notice to sell the goods in terms of the Customs Act when the liquidation process has been initiated?

The respondent could not claim title over the goods and issue notice to sell the goods in terms of the Customs Act when the liquidation process has been initiated.

The Supreme Court therefore, allowed the appeal and set aside the impugned order of NCLAT.