Service tax dues from 2012 and 2015-16 cannot be recovered from liquidating company under Section 53(1)(e)(i) IBC

The HC held that service tax dues from 2012 and 2015-16 could not be recovered from a company under liquidation through IBC proceedings. Under Section 53(1)(e)(i) of IBC, government dues are recoverable only for two years preceding liquidation commencement date. Since the tax demands exceeded this two-year period and the respondent failed to lodge claims during IBC proceedings, with sale proceeds already distributed according to statutory priority and being insufficient even for secured creditors, the demand notice was set aside. Petition allowed.

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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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