Taxes and duties payable to the Government are “crown debt” and can never be treated as “Operational debt” as defined in Section 5(21) of IBC, 2016-Madras High Court

The subject matter of challenge in thus appeal is a judgement and order dated 11^th February , 2016 passed by a learned single judge dismissing the writ petition holding that the petitioner/assesses  is liable to pay the duty as per the notification dated 17^th September , 2015. Challenging the aforesaid order the writ petitioner/assesses has come up in appeal and the question involved whether the “customs duty” payable under the provisions of the Customs Act, 1962 and the Customs Tariff Act, 1975 is “an operational debt” of the petitioner within the meaning of Section 5 (21) of the IBC Code, 2016 and whether the respondent Customs Department is an “operational creditor” within the meaning of Section 5 (20) of the IBC Code, 2016?

ORDER:

The Court partly accepts the contention of the petitioner in so far as issue relating to extinguishment of the rights of the respondent customs department to claim the customs duty in the light of the decision of the Hon’ble Supreme Court in “Ghanashym  Mishra and Sons Vs. Edelweiss Asset Construction” referred to supra.

FACTS OF THE CASE:

1. In the present writ petition, the petitioner has challenged the reassessment of the Bill of Entry No. 2606926 dated 15.9.2015. It is the case of the petitioner that the amendment to Serial No. 55 to Notification No. 12/2012-Customs dated 17.3.2012 vide Notification No. 46/2015- Customs dated 17.9.2015 which increased the rate of duty from 7.5% to 12.5% cannot be said to have come into force on the date of assessment on 17.3.2012 as per the Section 25 of the Customs Act, 1962 as it stood on the date.

2. The petitioner had filed the above Bill of Entry in advance to clear the consignment of crude palm oil of edible grade in bulk. In the Bill of Entry, the petitioner had proposed to pay Basic Customs Duty (BCD) at 7.5% as per Serial No.55 to Notification No. 12/2012-Customs dated 16.3.2012 as it stood on 15.09.2015.

3. However, after the import and at the time when the said Bill of Entry was taken up for assessment, Serial No.55 to Notification No.12/2012-Customs dated 17.3.2012 was amended vide Notification No.46/2015-Customs dated 17.9.2015. Serial No.55 to Notification No.12/2012-Customs dated 17.3.2012 increased the rate of Basic Customs Duty ( BCD) to 12.5% from 7.5%.  It is the contention of the petitioner that as per Section 25 (4) of the Customs Act, 1962 as it stood them every notification issued under Section 25(1) or (2A) of the Customs Act, 1962 comes into force on the date of its issue by the Central Government for publication in the Official  Gazette and also when it is published and offered for sale on the date of its issue by the Directorate of Publicity And Public Relations of the Board, New Delhi.

4. It is submitted that although the notification had been published in the official Gazette on 17.9.2015, the second condition that it was offered for sale on the date of its issue by the Directorate of Publicity And Public Relations of the Board, New Delhi had not been satisfied and therefore the respondents were not justified in imposing the increased rate of duty on the petitioner as per the amended notification.

5. In support of the above submission, the petitioner has filed a copy of reply dated 12.10.2015 from the Central Public Information Officer, Government of India, Department of Publication addressed to one Sh.Pawan Awasthi of the New Delhi to the effect that the copy of the Gazette of India containing Notification  was received on 21.9.2015 at the Kitab Mahal, Sale Counter of the said Department from the Government of India Press,  Mayapuri , Ring Road, New Delhi and was put up to sale to the general public on 21.9.2015.

6. The petitioner has also filed another communication dated 30.10.2015 addressed to same person from C PIO/Officer-in Charge in response to a RTI application dated 12.10.2015. It is therefore submitted that the notification cannot be said to have come into force on the date of its publication in the official gazette on 19.09.2015. In this connection, reliance is placed on the decision of the Honourable Supreme Court in Union of India versus Param Industries ltd. wherein the Court recognised that if the second condition was not satisfied, the notification cannot be said to have come into force.

7. Learned counsel for the petitioner  fairly conceded that for a similar imports in West Bengal, the issue has been answered against the petitioner in Ruchi Soya Industries Ltd. Vs Union of India  which decision was also affirmed by the Division Bench of the Calcutta High Court in Ruchi Soya Industries Ltd. Vs Union of India  (Calcutta) and that the petitioner’s appeal in SLP No. 7077 of 2016 has been admitted and that the petitioner has been directed to keep the bank guarantee alive pending disposal of the appeal.

8. Alternatively, it is submitted that the petitioner was under the provisions of the Insolvency and Bankruptcy Code, 2016during the pendency of the present writ petition.  It is submitted that a petition under Section of the aforesaid Code was filed by a Financial Creditor namely Standard Chartered Bank and that the National Company Law Tribunal, Mumbai by an order dated 8/15.12.2017 had ordered a moratorium with effect from 15.12.2017 till the completion of the Corporate Insolvency Resolution process.

8. It is submitted that the National Company Law Tribunal, Mumbai had appointed an Interim Resolution Professional and that the Resolution Professional filed  under Section 30 (6) of the aforesaid Code for approval of the Corporate Resolution Plan submitted by a Consortium led by Patanjali Ayurvedic Ltd as Corporate Application as approved by the members of the Committee of Creditors (COC).

9. It is submitted that the Resolution Professional had advertised on 21.12.2017 and called upon the creditors of the petitioner to submit their claims and since the respondent Customs Department did not come forward to participate in the said proceedings before the National Company Law Tribunal, Mumbai, it has lost all its rights as they stood extinguished. Learned counsel for the petitioner submits that thereafter an order was passed on 24.7.2019 by the National Company Law Tribunal, Mumbai whereby the Resolution Plan was approved with certain conditions.

10. A reference was made to an order of [CS1] the National Company Law Tribunal dated 4.9.2019 to state that no party has any right to dictate the terms of the order and that was made clear that while approving the Resolution Plan, the said Tribunal deliberated every aspect of the Resolution Plan in detail and all the claims which were admitted during corporate insolvency resolution plan were being dealt by in terms of the Resolution Plan and anyone who has not filed any claim will not have any right to agitate the same after approval of the resolution plan. In this connection, learned counsel for the petitioner placed reliance on the decision of the Honourable Supreme Court rendered recently in the case of Committee of Creditors of ESSAR Steel India Ltd versus Sathish Kumar Gupta and others, wherein the Honourable Supreme Court dealt with the issue relating to rights of an operating creditor. It is submitted that since the respondent customs department was an operating creditor, it lost all its rights.

11. Opposing the prayer in the writ petition, learned counsel for the customs Department submitted that the writ petition was not maintainable as the petitioner has an alternate remedy by way of an appeal before the Appellate Commissioner. It is further submitted that as on date on the very identical issue, the Calcutta High Court has answered the issue against the petitioner and therefore the writ petition is liable to be dismissed on merits.

12. Facts are not in dispute. The petitioner has an alternate remedy to file an appeal against the assessment before an Appellate Commissioner under Section 128 of the Customs Act, 1962 against the reassessment in the impugned Bill of Entry.

13. Considering the fact that the writ petition has been admitted in the year 2015, any point in relegating the petitioner to work out the remedy before the Commissioner of Customs (Appeals) at this distant point of time straight away without examining the case on merits is not seen. The petitioner has also persuaded the court that a final decision may be given on merits as well.

14. Considering the decision in Union of India versus Param Industries Ltd  (SC) cited by the learned counsel. It was rendered in the context of the prevailing practice and the provisions of the Customs Act, 1962 as it stood then. At that point of time, hosting of the notification through the website of the Central Board of Excise and Customs had not evolved as it was in 2015.

15. The answers obtained under the RTI Act also do not dispute that the fact that the amended notification had been published in the Gazette on 17.9.2015. In this case, not only the notification was posted in the website of the Central Board of Excise and Customs on 17.9.2015 but was also published in the official Gazette of Government of India on 17.9.2015. Therefore, the petitioner cannot complain that it was unaware of the change in the rate of duty merely because the sale of official Gazette was purportedly made only on 21.9.2015.

16. By 2015, an assesses was no longer required to wait to buy the printed copy of the official Gazette from the bazaar or the official says counter of the Government to find out the change in the rate of duty tax after the information were hosted in the official website. In fact, a reading of unamended section 25(4) of the Customs Act, 1962 would also indicate that every notification issued under sub- section (1) or sub- section (2A) shall unless otherwise provided, come into force on the date of the issue by the Central Government for publication in the official Gazette.

17. It  was held that the amended notification came into on the date of its publication in the official Gazette on 17.9.2015 and its publication made  in the website of the Central Board of Indirect Taxes on the said date.

18. The second argument of the learned counsel for the petitioner regarding extinguishing of the rights of  the respondent Customs Department to Duty in view of the Insolvency and Bankruptcy proceedings initiated against the petitioner.

19. It is the case of the petitioner that the respondent Customs Department has lost all its rights over the differential duty demanded in view of the corporate resolution plan approved by the National Company Law Board, Mumbai under the provisions of the Insolvency and Bankruptcy Code, 2016.

20. It should be remembered that Insolvency and Bankruptcy Code 2016 was enacted with a view to provide a speedy mechanism for resolving bankruptcy and insolvency of such person. It is being implemented in a phased manner. The provisions of the Companies Act, 1956 which contained provisions for winding up has been regrafted into the IBC, 206 with modification.

21. Under the scheme of the IBC, 2016, any “operational creditor “ or a “financial creditor” to whom a corporate debtor owes any amount above Rupees One Lakh and above is entitled to file an application for corporate insolvency resolution proceeding against such debtor under Section 9(2) of the IBC, 2016 read with Rule 6 in Form 5 before the NCLT with a fee of Rs.2,000/- accompanied with documents and records as are required under Section 9(3) and under Regulation 7(2). If Corporate Resolution Plan filed by Corporate Applicant is approved by the jurisdictional Company Law Board, the creditors are bound by it.

DELIBERATION ON ISSUE:

1. FIRST OF ALL , section 4 of the Information Technology Act, 2000  makes it clear that where any law provides that information or other matter shall be in writing or in the typewritten or printed form, then, notwithstanding anything contained in such law, such requirement shall be deemed to have been satisfied if such information are matters-

“ (a) rendered or made available in an electronic form; and

 (b) accessible so as to be usable for the subsequent reference.”

2. The above two conditions have been satisfied and therefore the argument based on the decision of the Hon’ble Supreme Court in Union of India versus Param Industries (SC) the facts of the case are to be rejected.

3. An “Operational Debt” in Section 5 (21) of the IBC Code, 2016.“Operational debt” includes both a “claim” and/or a “debt”. These, definitions intertwine and interlock with each other. These expressions have been defined in section 3(6) and 3(11) of IBC, 2016

4. The expression “claim” as defined in Section 3(11) of the IBC, 2016, means-

 “ a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable or secure or unsecured;

 b) right or remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, mature, and mature, disputed undisputed, secure or unsecured.”

A “claim” is a reward for the provision of goods or service or employment. Therefore, “operational debt” cannot include a “tax“ or “duty” under an enactment.

5. For a “claim” to be an “Operational Debt”, it should be in respect of the provision of “goods” or “service” including “employment” as is evident from reading first part of the definition of “operational debt” in Section 5(11) of IBC,2016.

6. To be a “debt” for the purpose of Section 5(21) of IBC, 2016, such a “debt” should in respect of payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

7. Under Article 265 of the Constitution of India, no tax shall be levied except by the authority of law. The expression “taxation” includes the imposition of any tax or impost, whether general or local or special and “tax” shall be construed accordingly under Article 366 (28) of the Constitution of India.

8. Tax as we understand it is a compulsory exaction by the Government. It is a very wide definition which has been employed in Article 366 of the Constitution of India. A tax once determined to be paid in accordance with law is a sovereign debt.

9. “Operational debt” is incurred by a “corporate debtor” by failing to meet his liability to pay or clear the “Operational debt” as defined in Section 5(21) of the IBC, 2016.

 Thus, “tax” and duties levied and collected under law can never be treated as “Operational debt” as defined in Section 5(21) of IBC, 2016.

10. As an importer, such a person is liable to pay customs duty under Section 12 of the Customs Act, 1962 at the rates specified under the Customs Tariff Act, 1975, or any other law for the time being in force.

11. “It is clear that once the Code gets triggered by the admission of a creditor’s petition under Sections 7 to 9, the proceeding that is before the adjudicating authority, being a collective proceeding, is a proceeding in rem. Being a proceeding in rem, it is necessary that the body which is to oversee the resolution process must be consulted before any individual corporate debtor is allowed to settle its claim. A question arises as to what is to happen before a Committee of Creditors is constituted (as per the timelines that are specified, a Committee of Creditors can be appointed at any time within 30 days from the date of appointment of the interim resolution professional). We make it clear that at any stage where the Committee of Creditors is not yet constituted, a party can approach NCLT directly, which Tribunal may, in the exercise of its inherent powers under Rule 11 of NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the parties concerned and considering all relevant factors on the facts of each case.”

12. Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 also does not talk about “crown debts” such as taxes and duties. However, recently the Hon’ble Supreme Court recently has given its decision on “taxes” and “duties” which are crown debts. Thus, a “debt” has to be liability or obligation in respect of “claim” which is due from any person. It includes a “financial debt” and an “operational debt.

13. The Hon’ble Supreme Court in Ghanashym Mishra and Sons Vs. Edelweiss Asset Construction, in its recent decision dated 13.04.2021 in Civil Appeal No.8129 of 2019 has however gives a different view. It was persuaded to accept the contra view in the light of an amendment to the Act in 2019. In paragraph 144, the Court held as follows:

“ 144. Insofar as, the judgment authored by Deepak Roshan, J. is concerned, the    learned Judge has observed,

That since the resolution plan was approved by NCLT on 17.4.2018, 2019 amendment to Section 31(1) of I&B Code would not apply to the said plan. We find, that the finding of the High Court, that the dues owed to the State Government and Central Government would not come within the definition of ‘operational debt’, is incorrect in law in the light of the view that is taken by us. So also the finding, that since the order of NCLT is prior to the date on which Section 31(1) of I&B Code was amended, the provisions of Section 31 would not be applicable, also cannot stand in view of the foregoing observations made by us hereinabove.”

14. The entire tax administration of the country is now in a pell-mell. All the tax authorities will have to make a beeline before the National Company Law Tribunal every time to recover tax dues if under any circumstances proceedings are initiated against corporate debtor under the IBC, 2016. This was not the intention when the Act was enacted.

CONCLUSION:

1. The definition of “Operational Debt” in Section 5(21) of the IBC, 2016 is not intended to include “crown debt” such as taxes and duties payable to the Government and is distinct from the “claim” and “debt” as defined in Section 3 (6) and 3(11) of the IBC,2016, as mentioned above in the beginning of the discussion on the second part of this order, this Court is bound by the interpretation placed in the above decision of the Hon’ble Supreme Court in Ghanashym  Mishra and Sons Vs. Edelweiss Asset Construction, and the reasons given therein and in the light of the amendment to the IBC, 2016 in 2019 and in the light of the clarification of the Finance Minister when the 2019 bill was put to discussion in the parliament.

2. The case is therefore remitted back the respondent to await clarification to be obtained by the Petitioner from the National  Company Law Board as to whether the Corporate Resolution Plan filed by the Corporate Applicant included the “customs duty” to be paid by the Petitioner on the import under the subject bill of entry. In the light of the discussion, the submission of the petitioner that the amending Notification came into force only 21.9.2015 and not on the date of its publication on 17.9.2015 is rejected.

3. It is answered against the petitioner in the light of the provisions of the Information Technology Act, 2000, the decision of the Calcutta High Court and reasons given in this order.

4. The petitioner is given another 150 days to obtain such clarification from the said National Company Law Board. Therefore, during the period of next 180 days from the date of the receipt of this Order, the respective parties are to maintain status quo as on date as far as demand of duty confirmed under the subject bill of entry is concerned.  The respondents shall proceed to recover and/or remit the duty as the case may be at the expiry of 180th day from the date of receipt of this Order. In case, the petitioner produces appropriate clarification from the National Company Law Board within such time, recovery shall be subject to such terms.

5. If the petitioner fails to get any clarification from the National Company Law Board within such time, the respondents shall proceed to recover the amount of duty short paid under the subject bill of entry together with interest from the petitioner in accordance with law.

Relevant Links:

Date: May 29, 2021

About the Author: The summary of this Order has been composed by Ms. Mansi Singh (Research Associate-IBC Law Reporter).

Disclaimer: The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author and IBC Law Reporter do not take responsibility for the same and this document cannot used to be quoted before any authority under any law.

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