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2024 (1) TMI 829 - HC - Service TaxRecovery of Service Tax dues under the Finance Act, 1994, of a Company which is under liquidation applying IBC, 2016 - HELD THAT A reading of Section 53 of IBC would show that the proceeds from the sale of liquidated assets shall be distributed in the order of priority mentioned in Section 53 of the Act. Importantly, when it comes to the due to the Central / State Government in terms of Section 53(1)(e)(i) of IBC, the distribution from the sale proceeds of the liquidated asset is only in respect of the amount due for two years preceding the liquidation commencement date. A reading of Section 53(1)(e)(i) of the IBC would reveal that it is in three parts, the first part identifies the nature of the due i.e., amount due to the Central / State Government including that which is received on account of the consolidated fund of India / State. The third part is the period in respect of which such amounts ought to be due viz., two years preceding the liquidation commencement date. The middle / second part of the said sub-clause connects the first and the third part by employing the expression in respect of . The expression in respect of has been held by the Hon'ble Supreme Court as an expression of wide import / connotation. It is equivalent to in connection with or in relation to . The amounts due to the Central Government must be in connection with, the whole or any part of the period of two years preceding the liquidation commencement date - in the instant case, the demands are in respect of the period 2012 and 2015-2016 on the basis of the Order in Original in 12 of 2012 and 80 of 2015-16 dated 27.03.2012 and 08.01.2016. It is thus beyond the two years preceding the commencement of liquidation date and the Company having been liquidated and the respondent having failed to lodge any claim under IBC at any stage of the proceeding under IBC and the sale proceeds having been distributed in terms of the waterfall it may not be permissible to sustain the impugned demand notice. As a matter of fact it was informed that the sums realized on the sale of assets of the company liquidated, was inadequate even to discharge the dues of secured creditors. The impugned demand notice is set aside - Petition allowed.
Issues Involved:
1. Enforceability of Revenue Claims against Auction Purchaser under IBC for Service Tax dues. 2. Validity of Demand Notice based on Orders in Original. 3. Relevance of Clause 7 of the Tender Document. 4. Impact of Sections 87C and 88 of the Finance Act, 1994. 5. Priority of Statutory Claims under IBC. 6. Effect of Non-Submission of Claims by Revenue within IBC Timelines. 7. Applicability of Section 53 of IBC regarding Distribution of Liquidated Assets. Summary: Issue 1: Enforceability of Revenue Claims against Auction Purchaser under IBC for Service Tax dues The primary question was whether the revenue could enforce its claims against a successful auction purchaser for service tax dues under the Finance Act, 1994, of a company under liquidation as per the Insolvency and Bankruptcy Code, 2016 (IBC). The court held that the impugned demand notice could not be maintained as it contradicted the provisions of IBC, which overrides other laws due to its non-obstante clause in Section 238. Issue 2: Validity of Demand Notice based on Orders in Original The demand notice, based on Orders in Original dated 27.03.2012 and 08.01.2016, was challenged. The court noted that the Service Tax Department did not submit any claims during the liquidation process. Thus, the demand notice issued after the completion of the liquidation process was deemed unsustainable. Issue 3: Relevance of Clause 7 of the Tender Document Clause 7 of the Tender Document was scrutinized, which stated the purchaser would hold the assets subject to future taxes. The court clarified that this clause did not imply liability for pre-existing taxes. Additionally, any contractual arrangement disrupting the priority order under Section 53 of IBC would be disregarded. Issue 4: Impact of Sections 87C and 88 of the Finance Act, 1994 The court examined Sections 87C and 88 of the Finance Act, which allow recovery of dues from the transferee and create a first charge on the property. However, Section 88 is subject to IBC provisions, and Section 238 of IBC gives it overriding effect. Therefore, the statutory first charge under Section 88 would yield to the IBC's priority mechanism. Issue 5: Priority of Statutory Claims under IBC The court emphasized that statutory claims, including service tax, must follow the waterfall mechanism under Section 53 of IBC. The Finance Act's first charge does not override IBC's provisions, which prioritize the distribution of assets during liquidation. Issue 6: Effect of Non-Submission of Claims by Revenue within IBC Timelines The court highlighted the revenue's inaction in lodging claims within the stipulated IBC timelines. The Supreme Court's decision in RPS Infrastructure Ltd. v. Mukul Kumar was cited, stressing the importance of adhering to IBC timelines. The delay in asserting the claim rendered the demand notice arbitrary and unsustainable. Issue 7: Applicability of Section 53 of IBC regarding Distribution of Liquidated Assets Section 53 of IBC limits the distribution of dues to the Central Government to amounts due for two years preceding the liquidation commencement date. The court noted that the service tax demands related to periods beyond this timeframe, making the demand notice invalid. The auction proceeds were insufficient to cover even the secured creditors' dues. Conclusion: The court set aside the impugned demand notice, ruling it unsustainable for multiple reasons, including the overriding effect of IBC provisions, the revenue's failure to lodge timely claims, and the specific limitations under Section 53 of IBC. The writ petition was allowed, and the demand notice was quashed.
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