Author Default(By CA. Manish Sachdeva, Partner Designate, Hiregange & Associates)
The Insolvency and Bankruptcy Code 2016 (‘the Code’) brought a sea change in the way distressed companies are dealt with. Apart from the usual stakeholders, it has hugely impacted the operation of tax laws on companies undergoing resolution/ revival (CD). To large extent, it has impaired the powers of the tax authorities in the administration of the tax demands from the CD. This piece illustrates the impact of moratorium on some of the administration/ recovery provisions under the GST law vis-à-vis moratorium period.
1. The effects of moratorium period and supremacy of IBC
The CGST Act confers a bulk-load of powers with the officers to discover the contestable issues, adjudicate them, take interim protective measures, and enforce recovery through various means from the assessee. But if assessee in question is a CD, against whom CIRP has been admitted [S. 13 of the Code], moratorium under S. 14 of the Code kicks in. The moratorium inter alia prohibits institution/ continuation of suits/ proceedings against the CD and includes certain other clauses to ensure the assets of CD are held together in a healthy state till the CIRP is concluded.
Section 238 of the Code is another superlative which gives over-riding effect to the provisions of the Code if there is anything inconsistent contained in any other law. Essentially, therefore, there is a two fold test to see if the proceedings under GST law are impaired viz. 1. the coverage and scope of S. 14 and 2. whether the provisions contemplated in GST law are inconsistent with the Code or not?
2. Sec. 14 (1) in adjudication/ assessment proceedings
Four different clauses under S. 14 (1) provides separate protection to CD. Clause (a) inter alia prohibits “institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority”. Many aspects under the GST law surrounds this clause, namely
Refund due to CD: Only those proceedings that are against the CD are debarred, the proceedings which are favourable to the CD continue[1]. Therefore the adjudication of refund applications, appeals/ petitions where the refund rejected is contested by the CD would continue during the moratorium.
Adjudication of notices: The proceedings do not mean “all proceedings”. The moratorium is intended to prohibit debt recovery actions against the assets of CD. The continuation of proceedings that do not result in endangering, diminishing, dissipating, or adversely impacting the assets of CD is not prohibited.[2]
The difference between proceeding to assess or determine liability, and proceeding to recover ‘the assessed or determined liability’ was also noted by the Insolvency Law committee, supporting the view that prohibition in the mere determination of liability is not the intent of S. 14. The things, therefore, points to the principle that adjudication of show cause notice [sans recovery of determined amount] is not prohibited under S. 14[3]. However, in NPIL vs UOI[4], the Gauhati HC re-directed the Commissioner to determine whether a pending proceeding before GST authority is covered by S. 14(1)(a).
As it stands, the wisdom supports the notion that adjudication proceedings such as determination of SCN, pending appeals, etc. should be continued, but there is a good history of Courts taking a view relieving CD from the revenue interferences. Sooner than later, this controversy should be settled for good.
3. Initiation of search, investigation, and summons
The powers under S. 67 (inspection, search) and S. 70 (summoning to give evidence) of the CGST Act are facts discovery proceedings, that take place before the adjudication. The search or investigation exercise on its own does not inure the position of CD, but where this exercise transgresses into attachment/ seizure of the assets, it ceases to become a mere fact-finding exercise.
The Courts have read S. 14 purposefully in the objectives captured in various committee reports. In UIPL vs Kwality Limited[5], the Calcutta HC gathered the objective as “moratorium on initiation of and continuation of legal proceedings, including debt enforcement action ensures a stand-still period during which creditors cannot resort to individual enforcement action which may frustrate the object of the CIRP”.
The stress of S. 14 is on fulfilling the object of CIRP and not merely blocking debt enforcement. This means not only the authorities cannot attach any valuable asset of the CD, but also cannot take possession of the paper books, records, books of accounts, laptops, if it affects the operation of CD. In that sense, there is implied prohibition on the investigation proceedings including search and seizures.
As far as the summons is concerned, there does not appear to be any bar on the officers securing the presence of the person concerned/ RP, so long as the exercise does not turn coercive exercise of securing funds from the CD.
4. Enforcement proceedings
Clause (b) of S. 14 (1) prohibits transferring, encumbering, alienating, or disposing off of the assets or any legal right or beneficial interest in those assets, in the words of Delhi HC all debts recovery actions are stayed during the moratorium period[6]. Therefore all actions of which are likely to endanger, diminish, dissipate or seriously affect the assets of the CD become unenforceable and such protection is to continue during the moratorium period.
The enforcement could be recovery in terms of S. 78 of S. 79 of the CGST Act (voluntary payment, recovery by attachment of movable/ immovable properties, recovery through magistrate) gets to a halt.
The protection also extends to setting off provisions. For e.g. as per S. 79 (1) (a), the officer may deduct the demand amount from the amount payable to the taxpayer [by him or by other specified proper officer], or he can cross adjust the same from refund due to the taxpayer under S. 54 (10) (b) of CGST Act. However, it has been held by NCLAT in Aircel’s[7] case that mutual set-off is not available to creditors during the moratorium phase.
The moratorium also stops the garnishee proceedings available to the officer under S. No. 79 (1) (c) such that it enables the debtor of CD to restrain the proper officer from demanding the money from him, which are held by such debtor to CD’s account[8].
5. Moratorium on provisional attachments
Under S. 83 of CGST Act, the Commissioner in specified cases on fulfilling certain prerequisites can attach any property (including bank accounts) belonging to the taxable person (CD). It appears that S. 83 is completely confiscatory in the sense of not dispossession of assets as prescribed in S. 14.
The difference between confiscation under R. 86A and S. 83 is that while in the former, the un-earned/ contingent assets are embargo whereas, under S. 83, the vested asset of the CD is sought to be dispossessed. In this line of difference, it could be said that S. 83 is more than just a compliance provision, and directly hits S. 14 of the Code, and is accordingly non-invokable during the CIRP phase.
6. Provisional taxes/ Advance taxes / Pre-deposits
A substantial number of CIRP cases result in commencement of liquidation[9]. In the CIRP phase, one eye, therefore, is always on S. 53 of the Code which inter alia puts government dues (including taxes) into a lower bracket. In Om Prakash Agarwal[10] the NCLAT Delhi held that have held that in the CIRP phase, the advance tax liabilities like Income Tax-TDS is not liable to be deducted while making payment to CD, such that this is inconsistent with S. 53 (1) (e) of the IBC.
No TDS deduction: In that sense, an argument could be made for TDS deduction under S. 51 of the CGST Act on account of CD, such that CD could argue this deduction much like income tax is an advance tax [free from encumbrance at deductee’s end], and therefore inconsistent with S. 53 (1) (e)[11].
Pre-deposits, EDD, Provisional duties: If we take a step further, this analogy of relieving from advance tax could be applied in all cases where the taxes are collected in anticipation or on provisional basis. For e.g. CD could prefer an appeal before appellate authority/ tribunal without deposit of pre-deposit [e.g. S. 107 of the CGST][12], or collection of Extra Duty Deposit [leviable in terms of SVB Circular[13]] should also be suspended.
Bank Guarantee: It may also mean non requirement of any Bank Guarantee (if any) for any purpose under the Customs Act [bonded warehousing license, IGCR licensing, Advance Authorization]. It might be an exaggerated argument to extend the analogy to provisional anti-dumping and/ or safeguard duties on imported goods, but who knows?
7. Release of assets/ bank accounts
The initiation of CIRP also puts the IRP into action. S. 18 (1) (f) of the Code requires IRP to take control and custody of any asset over which the CD has ownership rights as available to him through records.
The NCLAT reading S. 18 (1) (f) with reference to S.14 held that the goods that are under the custody of the customs authorities are liable to be returned back to the CD[14]. In that sense, the provisional attachment of assets/ bank accounts, under S. 83 of the CGST Act (unless applied appropriately for payment of tax liabilities) is liable to be refunded to the CD upon initiation of CIRP. Further, all un-appropriated amounts recovered pre-CIRP [(anti) profiteered amounts, the amount paid under protests] could as well fall under this category.
8. Position of ITC vis-à-vis GSTR 2B mismatch, Rule 86A, etc.
Input Tax Credit (ITC) is hot cash for companies facing CIRP. But during the CIRP phase, GSTR 2B mismatches continue to exist, along with, GSTR 1/ 3B mismatch, EWB mismatch, lapses of Rule 36 (4) of CGST Rules. Also, there is R. 86A of CGST Rules that enables the officer to block ITC in specified cases.
At first blush, it may appear CD enjoys protection over ITC from the above lapses. While it is true that S. 14 prohibits alienation of assets belonging to CD, however S. 14 does not put any respite on the compliances that CD has to ensure. Meaning thereby, if S. 16 (2) (aa) of the CGST Act requires CD to ensure availing credit only if the same is uploaded for by his supplier in his return, then it cannot be contested that this provision is relaxed during the CIRP period.
Section 238 gives preference to provisions of Code only where the other provision is inconsistent with the Code, however it is not the case that S. 16 (2) (aa) or for that matter R. 86A of CGST Rules are inconsistent with IBC. It is therefore possible for the tax authorities to use R. 86A to block credits or even deny fresh credit pending compliance under R. 36 (4).
9. Recovery from recipients of GSTR 2A defaults
For the unpaid GST by the CD, the direct route for tax authorities is to prefer claims as operational debt. Realizing the economies of IBC the tax authorities are pursuing the customers of CD by denying ITC to them under S. 16 (2) (c) of the CGST Act. An aspect of this controversy goes along with the regular arguments that the recipient is not responsible for supplier default.
But another crucial angle is that till the time CIRP proceedings are on, the claims of the tax authorities are stayed (S. 14). And the invocation of S. 16 (2) (c) against the recipient is dependent upon exhaustion of the means to recover taxes from the supplier (CD). The combined result is that during CIRP the invokation of S. 16 (2) (c) against the recipient is pre-mature and illegal.
The tax authorities should therefore await the outcome of CIRP for their claim to be decided appropriately. Then, hoping that S. 16 (2) (c) is ‘read down’ in favour of bona fide cases[15], the recipients of CD would be in a much better position than other regular cases. Till that time, the recipients may continue to contest.
It transpires that the threads of IBC are at a very nascent stage as far as the taxes are concerned. In nutshell, the moratorium stops all the recovery proceedings and also gives the Corporate Debtor to regain the funds that were taken from him without proper adjudication. However, the recurring compliance during the CIRP phase [including compliance to S. 16, R. 36 (4) etc.] does not seem to be relaxed for the CD. The IBC law is maturing at rapid speed and it’s very likely that the tax part of the CIRP process will also get its due share, which will in turn open new avenues for CD.
Reference:
[1] Power Grid Corporation of India Ltd. vs. Jyoti Structures Ltd. (11.12.2017 – DELHC): [2017] ibclaw.in 12 HC
[2] Ibid
[3] See DCIT vs Diamond Power Infrastructure Limited, wherein on an application by applicant, the NCLT allowed it to complete the income tax assessment for AY 2013-14 to AY 2019-20: [2020] ibclaw.in 22 NCLT
[4] National Plywood Industries Ltd. vs. Union of India (17.02.2020-GUHC) : (2020) ibclaw.in 70 HC – this order context of this order appears unclear since the Commissioner in his order had held that adjudication of demand is not affected by moratorium, thus answering the reference question.
[6] Power Grid Corporation vs Jyoti Structures Ltd. [2017] ibclaw.in 12 HC
[7] Vijay Kumar V Iyer Vs. Bharti Airtel Ltd [2020] ibclaw.in 18 NCLAT
[8] Sundaresh Bhat RP of Sterling Biotech Limited [CP (IB) No. 490/MB/2018] – NCLT Mumbai order dated 22.09.2020: (2020) ibclaw.in 168 NCLT
[9] https://www.ibbi.gov.in/uploads/publication/f4656f120a5161c281cff40189353824.pdf pg. 16
[10] Om Prakash Agrawal Liquidator-S.Kumars Nationwide Limited Vs. Chief Commissioner of Income Tax (TDS) (2021) ibclaw.in 54 NCLAT
[11] In LML Ltd. [2020] ibclaw.in 86 NCLT case, the NCLT held that capital gain on sale of liquidation assets is not liquidation expenses, therefore not recoverable in priority over other debts. Because GST is a transaction tax, this case’ analogy may not be borrowed in the context of GST. However with respect to TDS provisions, both the laws operate on similar plank such that TDS provisions under both the laws is equivalent to collection of tax in advance.
[12] See GGS Infrastructure Pvt. Ltd. vs CCCE 2021 (51) GSTL 187
[13] CBIC Circular No. 04/2016-Cus
[14] C.Cus vs Ram Swarup Industries Ltd.– NCLAT Delhi [2019] ibclaw.in 74 NCLAT
[15] See On Quest Merchandizing India Pvt. Ltd. vs Govt of NCT of Delhi 2018 (10) G.S.T.L. 182.
