WINDING UP OF A COMPANY FOR NON PAYMENT OF SERVICE TAX

[Mr. M. GOVINDARAJAN]

Section 433(e) of the Companies Act, 1956 provides that a company may be wound up if the company is unable to pay its debts. Section 434 of the Act provides when the company is deemed unable to pay its debt.   The said section provides that a company shall be deemed to be unable to pay its debts-

• if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding one lakh rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor;
• if execution or other process issued on a decree or order of any Court  in favor of a creditor of the company is returned unsatisfied in whole or in part; or
• if it is proved to the satisfaction of the court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, thecourt shall take into account the contingent and prospective liabilities of the company;
  

The demand shall be deemed to have been duly given under the hand of the creditor if it is signed by any agent or legal adviser duly authorized on his behalf, or in the case of a firm, if it is signed by any such agent or legal adviser or by any member of the firm.

The issue to be discussed in this article whether non payment of service tax would attract Section 433 (e) and 434 of the Companies Act for winding up of a company with reference to decided case law in ‘Hindustan Dorr Oliver Limited V. Jet Airways (India) Limited’ – 2012 (11) TMI 568 - BOMBAY HIGH COURT

In the above said case the petitioner, the owner of the commercial premises which were let out to the Respondent Company, the Licensor, has invoked Sections 433(e) & Section 434 of the Companies Act, 1956 basically on the ground that the Respondent Company not cleared the service tax liability.

The Petitioners and Respondent entered into a leave and licence agreement on 22nd December, 2006 for the premises for a period of five years. The relevant terms of the agreement are as under:

That the License Fee payable for the balance period of the lock in including notice period of 3 months (namely from 1st July 2009 to 31st January 2010) at the rate of Rs. 14,75,000/- (Rupees Fourteen Lakhs Seventy Five Thousand only) per month by "JET" to "HDO" will be adjusted by "HDO" against the interest free Security Deposit of Rs.88,50,000/-(Rupees Eighty Eight Lakhs Fifty Thousand only) furnished by "JET" to "HDO" at the time of signing the Agreement;

"JET" shall claim no compensation against "HDO" for its voluntarily surrendering the "Licensed Premises" before the expiry of its term in terms of the "Leave & License Agreement"."

The ‘renting of immoveable property’ service was introduced with effect from 01.06.2007 under Section 65 (105)(zzzz). At the time of entering into agreement there was no service tax liability. On 9th July, 2009, the parties entered into a last Memorandum of Understanding (MOU), as the Respondent Company vacated the premises six months prior to the expiry of the agreement. Admittedly, the Petitioners have adjusted the licence fees payable out of deposit of the amount of Rs. 88,50,000/-. There was no deduction of any amount towards the service tax even on that date for the basic reason that there was no agreement whatsoever between the parties with regard to the payment /liability of the service tax.

Further, there is a letter dated 21st July, 2009 addressed by the Petitioner to the

Respondent and the relevant part of the letter read thus-

"I/We, further confirm that I/We have no claim whatsoever against Jet Airways (India) Limited in respect of the above and undertake not to raise and/or cause to be raised any claim in future."

The High Court held that the concept of the service tax has come into force from 01st June, 2007. A challenge was raised to the retrospective demand and it is pending in Supreme Court. The service tax is not a direct tax. It is an indirect tax. The party in a given case, therefore, may agree to pay the service tax as per the terms and conditions of the agreement. Admittedly, there was no such specific agreement with regard to the payment of the service tax. Principally the Petitioner who had let out the premises was liable for such service tax and not the Respondent. taxmanagementindia.com

The High Court further held that considering the scope and purpose of Section 433 of the Companies Act for winding up of a Company, the basic requirement is that the amount should be due and payable and crystallized on the first date of the statutory demand raised and even on the date of filing of such a winding up proceedings. Considering the above position on record, the High Court was not inclined to accept the statement made by the learned counsel appearing for the Petitioner that the amount due and payable was crystallized on the relevant date and even today. The clauses so referred above including the memorandum of understanding and the correspondence makes the things very clear that the Respondent-Company never admitted the liability of service tax. It is not even the case of the petitioner that there was any specific written agreement with regard to the service tax. The contention revolves around the invoices issued as the Respondent Company on certain occasions made a part payment of the service tax as at that time they were occupying premises, is in no way can be stated to be binding agreement, as is sought to be contended by the learned counsel for the petitioner. If there is no agreement and no admitted liability and if basically the service tax is an indirect tax, the High Court did not accept, in view of the agreement between the parties and even considering the lock in period referred that it is sufficient to hold that the Respondent Company is liable for the service tax, as contended. The High Court dismissed the petition of the petitioner.

In the opinion of the author that even though there is no condition in the agreement to pay service tax, the service provider is liable to pay service when his service falls under the service tax net. After the date of enforcement of the said service the agreement should be modified incorporating the service tax liability. The petitioner failed to raise the claim of service tax to the respondent company. It is the fault of the defaulter which would attract the action under Section 73 of the Finance Act, 1994 for non levy of service tax.   Even if it is levied the service tax is payable on receipt basis.   After the introduction of point of taxation the service tax is payable on accrual basis.   In this context the non payment of service tax will not attract the provisions of Section 433(e) and Section 434 of the Companies Act.