2020 (12) TMI 914 - HC - Service Tax

Determination of service tax liability on the approval of resolution plant under IBC - Seeking declaration that total liability of the petitioner to the respondent does not exceed ₹ 35,54,682.55 in accordance with the order dated 30.08.2019 passed by the National Company Law Tribunal, Mumbai Bench sanctioning the resolution plan of the petitioner under section 31 of the Insolvency and Bankruptcy Code, 2016 - direction to the respondent not to appropriate an amount of ₹ 6,23,82,214.00 already recovered following the order in original dated 22.07.2020 - seeking direction to the respondent to refund an amount of ₹ 5,88,27,531.45 to the petitioner. HELD THAT - As per the statement of objects and reasons which preceded the bill while being introduced in the parliament, there was no single law in India dealing with insolvency and bankruptcy. There were several laws dealing with different aspects and providing for creation of multiple fora. Existing framework for insolvency and bankruptcy was found to be inadequate and ineffective resulting in undue delays in resolution. Therefore, the said legislation was proposed. Objective of the Code is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the priority of payment of government dues and to establish an Insolvency and Bankruptcy Fund and matters connected therewith or incidental thereto - The Code seeks to provide the National Company Law Tribunal and Debts Recovery Tribunal as the adjudicating authorities for resolution of insolvency, liquidation and bankruptcy. The Code separates commercial aspects of insolvency and bankruptcy proceedings from judicial aspects besides providing for an Insolvency and Bankruptcy Board of India for regulation of insolvency professionals etc.. Insolvency professionals will assist in completion of insolvency resolution, liquidation and bankruptcy proceedings envisaged in the Code. It is evident that focus of the Code is resolution of insolvency and bankruptcy. In other words the thrust is for revival of such corporate persons, partnership firms and individuals facing insolvency and bankruptcy rather than liquidation. The preamble of the Code was examined by the Supreme Court in SWISS RIBBONS PVT. LTD. AND ANR. VERSUS UNION OF INDIA AND ORS. 2019 (1) TMI 1508 - SUPREME COURT . It was held that the preamble gives an insight into what is sought to be achieved by the Code. The Code is first and foremost, a Code for reorganization and insolvency resolution of corporate debtors. Unless such reorganization is effected in a time bound manner, the value of the assets of such persons will deplete. Therefore, the maximization of the value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code. This, in turn, will promote entrepreneurship as the persons in management of the corporate debtor are removed and replaced by entrepreneurs. When, therefore, a resolution plan takes off and the corporate debtor is brought back into the economic mainstream, it is able to repay its debts, which, in turn, enhances the viability of credit in the hands of banks and financial institutions. Thus, it is evident that if the adjudicating authority is satisfied that the resolution plan as approved by the committee of creditors under sub section (4) of section 30 meets the requirements of sub section (2) of section 30, it shall by order approve the resolution plan. Once such approval is granted by the adjudicating authority, it shall be binding on the corporate debtor and its employees, members, creditors (including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed), guarantors and other stakeholders involved in the resolution plan. As per the proviso, before passing an order under section 31 the adjudicating authority has to satisfy itself that the resolution plan has provisions for its effective implementation - From a conjoint reading of section 31(1) and section 238 of the Code, it is quite evident that the provisions of the Code shall have overriding effect. The non obstante clause in section 238 and the use of the expression shall in sub section (1) of section 31 makes it abundantly clear that a resolution plan approved by the committee of creditors and further approved (or sanctioned) by the adjudicating authority would be binding on all creditors including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed. Thus, the resolution plan mentions that the claim of service tax dues falls under the definition of operational creditors. Such dues should be settled at par with other operational creditors under the resolution plan which provides for settlement of dues of operational creditors at the rate of 5% of the principal amount with waiver of interest, penal interest and penalties. The claim amounting to ₹ 1929.85 lakhs was being contested by the corporate debtor before the concerned authority and the amount of admitted claim could not be determined until the outcome of the said proceeding. Therefore, the said amount of ₹ 1929.85 lakhs was kept in abeyance. However, the amount that would come to be determined upon adjudication would be settled at the appropriate time. In the present case, what we have noticed is that section 87(b) (i) was invoked as early as on 18.04.2013 whereas the first show-cause cum demand notice was issued to the petitioner only on 18.04.2015. While invocation of section 87(b)(i) and recoveries made thereunder are highly questionable, it may not be necessary for us to delve into the legality or illegality of the same in the present proceeding because of the binding nature of the resolution plan as approved by the committee of creditors and sanctioned by the Tribunal. However, attempt by the respondent for appropriation of the amount recovered through such questionable means in the face of the resolution place so approved and sanctioned is a live issue and hence needs to be adverted to. Once a resolution plan is approved by the committee of creditors by the requisite percentage of voting and the same is thereafter sanctioned by the adjudicating authority (Tribunal in this case), the same is binding on all the stakeholders including the operational creditors. As a matter of fact, respondent herein as an operational creditor had lodged its claim before the resolution professional. The resolution plan provides for settlement of service tax dues at 5% of the amount of principal dues that would be crystallized upon adjudication, further providing for waiver of interest, penal interest and penalty that may be charged. As we have held above, respondent may be justified in proceeding with the show-cause cum demand notices because that has resulted in crystallization of the total amount of service tax dues i.e., the principal amount payable by the petitioner which is ₹ 7,02,20,725.00. The amount of service tax dues having thus crystallized as above, the resolution plan says that the same would be settled at 5% of the principal dues adjudicated. The word used is adjudicated and not adjusted as sought to be read and applied by the respondent. Therefore, the amount that the petitioner would be required to pay is 5% of ₹ 7,02,20,725.00. In so far the recovered amount i.e. ₹ 6,23,82,214.00 is concerned, the same is part of the total demand determined i.e. ₹ 7,02,20,725.00. After retaining 5% of ₹ 7,02,20,725.00, respondent would be duty bound to refund the balance amount to the petitioner 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. Submissions made by Mr. Jetly that the amount already recovered should be allowed to be appropriated by the respondent and that petitioner should pay 5% of the balance of the principal dues i.e. 5% of ₹ 7,02,20,725.00 less ₹ 6,23,82,214.00 is without any substance and liable to be rejected. There should be no hesitation to hold that principal service tax dues quantified by the respondent vide order in original dated 22.07.2020 has to be settled at the rate of 5%, in other words 5% of ₹ 7,02,20,725.00. The directions of the respondent for appropriation of the amount of ₹ 6,23,82,214.00 already recovered cannot be sustained. Respondent shall retain 5% of ₹ 7,02,20,725.00 from the above amount recovered and thereafter refund the balance amount to the petitioner. To that extent, impugned order in original dated 22.07.2020 is interfered with. Refund shall be made within a period of three months from the date of receipt of a copy of this judgment and order. Petition allowed.

Summary

Issues Involved:
1. Legality of the order in original dated 22.07.2020.
2. Determination of the total liability of the petitioner.
3. Appropriation of the amount already recovered by the respondent.
4. Refund of the excess amount recovered by the respondent.

Issue-wise Detailed Analysis:

1. Legality of the Order in Original Dated 22.07.2020:
The petitioner challenged the order in original dated 22.07.2020 passed by the Commissioner of Central Goods and Services Tax and Central Excise, Mumbai Central, under Article 226 of the Constitution of India. The primary contention was that the order was in violation of the National Company Law Tribunal (NCLT) order dated 30.08.2019, which sanctioned the resolution plan under section 31 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal's order had stipulated that the dues of operational creditors, including service tax liabilities, should be settled at 5% of the principal amount with waiver of interest, penal interest, and penalties. The respondent's order, however, confirmed the total demand of ?7,02,20,725.00, which was inconsistent with the Tribunal's directive.

2. Determination of the Total Liability of the Petitioner:
The Tribunal's order dated 30.08.2019 had kept the claim amount of ?1929.85 lakhs in abeyance, pending adjudication. The resolution plan approved by the committee of creditors (with 90.93% voting share) and sanctioned by the Tribunal provided for settling the dues at 5% of the principal amount adjudicated. The respondent adjudicated the demand covered by three show-cause notices and confirmed the total demand at ?7,02,20,725.00. The Tribunal's order mandated that the liability, if any, that would crystallize upon adjudication, should be settled at 5% of the principal dues adjudicated, with interest, penal interest, and penalties waived.

3. Appropriation of the Amount Already Recovered by the Respondent:
The respondent had recovered ?6,23,82,214.00 from the petitioner by invoking section 87(b)(i) of the Finance Act, 1994, even before the adjudication of the show-cause notices. The petitioner argued that this recovery was illegal and in violation of the Tribunal's order. The Court noted that the respondent's action of appropriating the recovered amount was not justified, as the resolution plan clearly stipulated that only 5% of the principal adjudicated amount was payable, and the rest should be waived. The Court emphasized that the resolution plan approved by the committee of creditors and sanctioned by the Tribunal was binding on all stakeholders, including the respondent.

4. Refund of the Excess Amount Recovered by the Respondent:
The Court held that the respondent could only retain 5% of the principal adjudicated amount, which was ?35,11,036.00 (5% of ?7,02,20,725.00). The balance amount of ?5,88,27,531.45 (?6,23,82,214.00 - ?35,11,036.00) was to be refunded to the petitioner. The Court directed the respondent to refund the excess amount within three months from the date of receipt of the judgment. The Court also rejected the respondent's argument that the State could retain the recovered amount, stating that it would be unjust enrichment and contrary to the principles of justice.

Conclusion:
The Court allowed the writ petition, setting aside the impugned order in original dated 22.07.2020 to the extent it directed appropriation of the recovered amount. The respondent was directed to retain 5% of the adjudicated principal amount and refund the balance to the petitioner within three months. The judgment underscored the binding nature of the resolution plan approved by the committee of creditors and sanctioned by the Tribunal under the IBC.