"Entire tax administration now in a pell-mell:" Madras High Court on the effect of 2019 IBC amendment on tax collection

The Madras High Court recently observed that a 2019 amendment to Section 31 of the Insolvency and Bankruptcy Code, 2016 (IBC) has left the entire tax administration in India in a State of pell-mell (Ruchi Soya Industries Ltd. v Union of India and anr)..The 2019 amendment clarified that once the corporate insolvency process is initiated under IBC and a resolution plan has been approved by the adjudicating authority, such resolution plan would also be binding on the Central/ State government or any local authority to whom a debt or dues are payable, including tax authorities. .Justice C Saravanan went on to explain why this could make things difficult for the authorities concerned when it comes to the recovery of tax. ."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 the corporate debtor under IBC, 2016. This was not the intention when the Act was enacted," he pointed out..The observation was made while dealing with a case involving dispute over the rate of customs duty to be paid on a bill of entry filed by a company that was undergoing the insolvency resolution process initiated by the National Company Law Tribunal (NCLT), Mumbai. .One of the grounds raised by the company/petitioner, M/s.Ruchi Soya Industries Ltd., was that the rights of the Customs Department stood extinguished as it did not come forward with its claims before the Resolution Professional. .In the course of his order, the Judge opined that "tax" should not be equated to "claim" or "operational debt" under the IBC as it is a compulsory extraction of an amount due under law, which cannot be assigned. ."Such sovereign debts cannot be altered whether increased or decreased by any authority, whether by the Court or under a private arrangement or as the case may be approved by creditor, shareholders or by the committee of creditors under the Companies Act, 2013 or Insolvency & Bankruptcy Code, 2016. Corporate re-structuring of financial debt under IBC, 2016 does not mean waiver of extinguishing of sovereign debts", the order stated.The Court further opined that “tax", though it is a crown debt, should not be viewed as an “operational debt" (under IBC) as it is not arising out of a claim in respect of the provision of goods or services including employment..However, following the 2019 amendment to the IBC, the Supreme Court adopted a contrary view earlier this year in Ghanashym Mishra and Sons Vs. Edelweiss Asset Construction, Justice Saravanan observed. .In Ghanashym, the top court ruled that after the 2019 amendment, once a resolution plan under the IBC has been approved by the adjudicating authority, claims or dues owed to Central/State/local authorities (including tax) that are not part of the resolution plan would stand extinguished. ."Though it was also never the intention of the Parliament to enact Insolvency and Bankruptcy Code 2016 (IBC, 2016) to have such far reaching impact on the tax administration, the decision of the Hon’ble Supreme Court has held it otherwise," the Madras High Court observed. .The High Court went on to conclude that it is bound by the interpretation of the law in Ghanashym Mishra.."Though 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 “claim” and “debt” as defined in Section 3 (6) and 3(11) of the IBC, 2016, as mentioned above … this Court is bound by the interpretation placed in the decision of the 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 light of the clarification of the Finance Minster when the 2019 bill was put to discussion in the parliament.".The Court partly accepted a contention forwarded by Ruchi Soya in so far as it related to the extinguishment of the rights of the customs department. .This did not mean that the Customs Department's claim stood extinguished. Rather, the Court directed the petitioner to file an appropriate application before the National Company Law Board "and get the issue clarified from the National Company Law Board that indeed crown debts like the differential 'customs duty' payable to the respondent under the subject bill of entry … were treated as 'operational debt' before it by the 'corporate applicant.'".It is for the petitioner to prove that the customs duty was factored by the corporate applicant in the Corporate Insolvency Resolution Plan submitted to the NCLT, the Court added..A time period of 180 days was given to the petitioner to obtain the said clarification. .If the clarification is obtained, the recovery would be subject to the terms laid down by the National Company Law Board. .However, if it is not obtained, the Court said that the customs authority can recover the duty payable together with interest, in accordance with law. .The effect of official notifications being instantly available on the internet via Government websites.The case concerned a dispute over the amount of basic customs duty payable for a bill of entry filed to clear a consignment of edible oil. Ruchi Soya claimed that a 7.5% customs duty was payable. On the other hand, the Customs Department claimed that an amendment raising the rate payable to 12.5% was applicable. .The first limb of the petitioner's (Ruchi Soya's) arguments was that the amendment cited by the Customs Department was not applicable as the date on which the amendment took effect preceded the bill of entry in question. .In this regard, the petitioner relied on Section 25 (4) of the Customs Act, 1962, which provided that the date on which a notification issued under the said Section would come into force was:1. the date of its issue by the Central Government for publication in the Official Gazette, and,2. 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..The petitioner informed the Court that the second condition (offer for sale) had not been satisfied when the Bill of Entry was filed, since the printed gazette of the amendment notification was dispatched for sale from the Government of India on September 21, 2015. The customs department asserted that the amendment had come into force on September 17, 2015, when the Gazette notification was published. .The petitioner relied on Union of India versus Param Industries Ltd 2015, wherein the Supreme Court had held that if the second condition was not satisfied, the notification cannot be said to have come into force..The Madras High Court, however, opined that the said position of law has been rendered redundant with advances in information technology and the contemporary practice of publishing all government notifications online. When the Param Industries case was decided, the practice of hosting the notification on the website of the Central Board of Excise and Custom had not evolved, the Judge observed. .Since then, there has been a marked difference in the practice of dissemination of statutory information, the Madras High Court said. ."The use of the information technology had changed by leaps and bound since 2001. By 2015, all informations were available at the click of the button of the computer in the website of the Central Board of Excise and Customs which were also physically published in the official Gazette," the order said. .The provision of law (Section 25) was also later amended to reflect this position, the Court noted. As such, this contention by the petitioner was rejected.."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 ... The practice of purchasing printed copies of Gazette publication has been done away over a period of time as the information were made available to the citizens in the official website of the Central Board of Excise and Customs ... the second limb of section 25 (4) of the Customs Act, 1962 requiring publication and offer for sale on the date of receipt issued by the Directorate of Publicity and Public Relation of the Board, New Delhi had been rendered vestigial over a period of time having no useful purpose in the light of the publication of such information in the website ... By 2015, an assessee was no longer required to wait to buy the printed copy of the official Gazette from the bazzar 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", the order stated..Senior Advocate Rajesh Rawal and Advocate V Pushpa appeared for the petitioner. Senor Standing Counsel R Hemalatha appeared for the Customs authorities .[Read Order]