SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD V. CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS
Author: Kavan K. Talati, V year of B.B.A.,LL.B. from Unitedworld School of Law, Karnavati University
In the Supreme Court of India
Decided on: August 26, 2022
Bench: J.K. Maheshwari, Ms. Kohli
Citation: 2022 SCC ONLINE SC 1101
Appellant: SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD
Respondent: CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS
Abstract This case deals with the dispute between Sundaresh Bhatt, Liquidator of ABG Shipyard and Central Board of Indirect Taxes and Customs. Sundaresh Bhatt had been appointed as the Liquidator of ABG Shipyard under the Insolvency and Bankruptcy Code, 2016. The Central Board of Indirect Taxes and Customs had issued a notice to ABG Shipyard for recovery of certain indirect taxes amounting to Rs. 9.19 Crore. Sundaresh Bhatt had challenged the notice issued by the Central Board of Indirect Taxes and Customs on the ground that the Central Board of Indirect Taxes and Customs had no power to issue the notice since the matter was sub-judice and the Liquidator had also taken over the possession of the assets of ABG Shipyard. The issue before the court was whether the Central Board of Indirect Taxes and Customs had the power to issue the notice in such circumstances.
Keywords: Customs Act,1961, IBC,2016,Custom Warehouse.
Facts of the Case
ABG Shipyard ("Corporate Debtor") is a company in the business of shipbuilding and, thus, regularly imports various materials for the purpose of constructing ships. Some of these goods were stored by the Corporate Debtor in Custom Bonded Warehouses in Gujarat and Container Freight Stations in Maharashtra when Corporate Insolvency Resolution Process ("CIRP") was initiated against the Corporate Debtor by the Order dated 02.08.2017 passed by the National Company Law Tribunal, Ahmedabad (“NCLT”). Thereafter, the Interim Resolution Professional (“Appellant”), on 21.08.2017, sought for the custody of the warehoused goods from the Central Board of Indirect Taxes and Customs ("Respondent"), and requested them not to dispose of or auction the same. Thereafter, from 29.03.2019 to 07.04.2019, the Respondent issued five different demand notices to the Corporate Debtor raising a total demand of around Rs. 15, 80,00,000.
On 25.04.2019, the NCLT passed an order commencing liquidation against the Corporate Debtor and continuing the moratorium against the Corporate Debtor under Section 33(5) of IBC. Thereafter, the Appellant, appointed as Official Liquidator, requested the Respondent to release the warehoused goods to the Appellant in view of commencement of the liquidation proceedings against the Corporate Debtor. However, due to inaction by the Respondent, the Appellant filed an application before the NCLT under Section 60(5) of the IBC ("Application") seeking for a direction against the Respondent to release the warehoused goods. For the first time, on 11.07.2019, the Respondent issued a notice to the Corporate Debtor under Section 72(1) of the Customs Act for custom dues amounting to INR 763,12,72,645. The Respondent filed a concurrent claim for the said amount before the Appellant under the IBC. The NCLT allowed the Application filed by the Appellant, and directed the Respondent to release the warehoused goods to the possession of the Appellant.
The Respondent, then, filed an appeal before National Company Law Appellate Tribunal (“NCLAT”) challenging the order passed by the NCLT. The NCLAT allowed the appeal thereby directing that the warehoused goods can be “released or disposed of as per Applicable Provisions of Customs Act by the Proper Officer”. Aggrieved by the judgment passed by the NCLAT, the Appellant filed a Civil Appeal before the Supreme Court.
The Hon’ble Supreme Court framed the following issues:
Whether the provisions of the IBC would prevail over the Customs Act, and if so, to what extent?
Whether the Respondent, authorities under the Customs Act, could claim title over the goods and issue notice to sell the goods in terms of the Customs Act when the liquidation process has been initiated?
Contentions on behalf of the Appellant
The Appellant contends that the Respondent has wrongly misinterpreted Section 18 of the Customs Act, 1962 and Section 5 of the Central Excise Act, 1944 by erroneously holding that the Appellant’s claim for refund of the amount paid by them is time barred.
The Appellant further contends that it is entitled to the refund of the amount as the goods were not cleared for home consumption and hence, no liability was attracted.
The Appellant submits that the amount paid by them was not in pursuance of any statutory obligation, and hence, the law of limitation cannot be applied in the present case.
The Appellant also contends that the Respondent has wrongly denied them their right to refund.
Contentions on behalf of the Respondent
The Respondent contends that the Appellant’s claim for refund of the amount paid by them is time barred as per Section 18 of the Customs Act, 1962 and Section 5 of the Central Excise Act, 1944.
The Respondent further contends that the Appellant is not entitled to the refund of the amount as they have cleared the goods for home consumption and hence, the liability has been attracted.
The Respondent submits that the amount paid by the Appellant was in pursuance of a statutory obligation, and hen
Hence, the law of limitation is applicable in the present case.
The Respondent also contends that the Appellant has not provided any valid reason for the delay in filing for the refund and hence, the Respondent was justified in denying the Appellant their right to refund.
The Hon'ble Supreme Court, for the first issue, noted that the Customs Act and the IBC "act in their own spheres". However, a bare perusal of Section 142A of the Customs Act provides that the Custom Authorities would have first charge on the assets of an assesse under the Customs Act, except with respect to cases under Section 529A of Companies Act 1956, Recovery of Debts Due to Banks and Financial Institutions Act 1993, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the IBC, 2016. Such an exception created under the Customs Act is also acknowledged under Section 238 of the IBC wherein an overriding power is given to IBC against any other law that may be inconsistent to it. Another reason for the IBC to prevail over the Customs Act observed by the Supreme Court was that the IBC, being more recent statute, clearly overrides the Customs Act. Further, the Supreme Court observed that prior to IBC, different statues were resulting in the parallel proceedings and one of the objectives behind the enactment of the IBC was to end the conflict between different statues. Since, the demand notices were issued subsequent to initiation of the CIRP and the same requires determination of dues by the proper officer, the Supreme Court held the demand notices, seeking enforcement of custom dues, to be violative of Sections 14 and/or 33(5) of the IBC. It was further noted that, at best, the Respondent could only initiate assessment or re-assessment of the duties and other levies, but not transgress the boundary of moratorium and proceed to initiate recovery against the Corporate Debtor.
While considering the second issue, the Supreme Court observed that issuance of a notice under Section 72 of the Customs Act for non-payment of custom duty falls squarely within the ambit of initiating legal proceedings against a Corporate Debtor, and even under the liquidation process, the liquidator is given the responsibility to secure assets and goods of the Corporate Debtor under Section 35(1) (b) of IBC. Thus, the question of whether the Respondent could issue notice to sell the goods in terms of the Customs Act when the liquidation process has been initiated, was answered in negative by the Supreme Court. Ultimately, the appeal was allowed and the judgment passed by the NCLAT was set aside.
The Supreme Court (SC), in a significant verdict, has ruled that liquidation proceedings in the case of a bankrupt firm will take precedence over recoveries of indirect taxes once a moratorium has been imposed under the Insolvency and Bankruptcy Code (IBC).
While there are catena of pronouncements on section 238 and the overriding effect of IBC over other laws, by way of this judgment, the Supreme Court does not only further the jurisprudence available, but also clarifies the interpretation in respect of custom dues. However, it is also pertinent to note that the judgment was passed in view of the fact that the demand notices were issued by the authorities under the Customs Act after the initiation of CIRP. The court held as regards tax recoveries initiated by the Customs, a department under the CBIC, it “should not” have the first right of recovery from distressed assets after the initiation of a moratorium under the IBC. Moratorium under Section 33(5) of the IBC would not be applicable in case the demand notices were issued prior to initiation of the CIRP since Section 33(5) of the IBC, because unlike Section 14, moratorium under Section 33(4)only bars‘initiation' of the legal proceeding and does not bar the ‘continuation' of the same.
In furtherance to this, the judgment also reinforces the intent behind moratorium during CIRP i.e., to shield the Corporate Debtor against pecuniary attacks. Such a buffer is required to provide the Corporate Debtor with breathing space, to allow it to continue as a going concern and rehabilitate itself.