Bombay HC sets aside Duty Drawback Demand under Customs Act made After Approval of Resolution Plan [Read Order]

The Bombay High Court set aside duty drawback demand under Customs Act, 1962 as it was after approval of resolution plan.  It was that observed that a claim brought to the fore during the pendency of the moratorium period after the claims have been recorded by the adjudicating authority would stand waived off in terms of Section 31A of the Insolvency Bankruptcy  Code (IBC), 2016.

Karthik Alloys Limited, the petitioner challenged the impugned order passed by respondent no.2 demanding a duty drawback of Rs. 10,01,724 (Rupees Ten Lakhs One Thousand Seven Hundred and Twenty-Four only/-) under Section75(1) along with interest under Section 75 A (2) of the Customs Act, 1962 and Rules 18(2) of the Customs and Central Excise Drawbacks Rules, 2017.

The petitioner is a company incorporated under the Companies Act, involved in the manufacturing of ferroalloys and other metals, under the name and style of "Karthik Alloys ltd."

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The petitioner has been successfully resolved under a corporate insolvency resolution process (CIRP) in proceedings before the National Company Law Tribunal, Mumbai Bench ("NCLT")  under the terms of the resolution plan as approved by the Committee of Creditors ("COC").

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The CIRP proceedings were initiated when Vedanth.com Worldwide Ltd. submitted an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 ( "the code") in their capacity as operational creditors. The NCLT allowed the application, and the petitioner was admitted into CIRP vide order dated 17.12.2019. Subsequently, a Resolution Professional ( "RP") was appointed to manage the petitioner's affairs as a going concern. On 06.01.2020, the RP invited claims from the petitioner's creditors through various newspapers.

Based on the claims submitted, the RP formed a COC. The RP received claims from various classes of creditors and admitted statutory dues of Rs. 2.135 Crores. Thereafter, the NCLT declared a moratorium upon the petitioner under Section 14 of the code from 17.12.2019 to 03.03.2023. On 18.11.2020, a show-cause notice was issued by respondent No.2 to the petitioner for nonsubmission of eBRCs (Bank Realization Certificates) and nonrealization of remittance.

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The COC approved the resolution plan submitted by QVC Exports Ltd. on 13.07.2021. QVC Exports Limited acquired 100% ownership of the petitioner when the NCLT approved the resolution plan. The petitioner is now under 100% ownership of QVC Exports Limited. The Assistant Commissioner of Customs, Goa (Respondent No.2) issued an order dated 21.10.2024 directing the petitioner to pay an amount of Rs. 10,01,724/- as duty drawbacks under Section 75(1) of the Customs Act, 1962 ( "the Act") along with interest under Section 75A (2) read with rule 18(2) of the Customs and Central Excise Drawback Rules, 2017.

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Being aggrieved by the order dated 21.10.2024 passed by respondent no. 2 demanding a duty drawback of Rs. 10,01,722/-  (Rs. Ten Lakhs, one thousand and seven hundred and twenty-Four only/-) along with interest, the present petition is filed.

In reply to the petition the respondents have contended that the petitioner had filed 15 shipping bills (under the Drawback Scheme) under Section 75 of the Customs Act, 1962 and Central Excise Duties Drawback Rules 2017, as per All Industry Rate. The respondents contend that the drawback of Rs. 10,01,724 /- (Rs. Ten Lakhs, one thousand seven hundred and twenty-four only/-) was sanctioned and disbursed to the petitioner through respondent no. 2 Electronic Date In charge (EDI) system during the period from 01.01.2018 to 30.06.2018 which is prior to admittance of the petitioner to CIRP. 

It is further contended that the petitioner had not produced any evidence of the realization of export proceeds in the form of Bank Realization Certificates within the period which is a requirement under Section 8 of the Foreign Exchange Management Act, 1999 (hereinafter referred to as “FEMA”) read with Regulation 9 of the Foreign Exchange Management (Export of Goods and Services) Regulations, 2000.

It is further contended that in the absence of evidence in the form of eBRCs, in respect of the 15 shipping bills, which were not received within the time limit stipulated in sub-rule (1) of Rule 18 of the Drawback Rules, 2017, a show-cause notice dated 18.11.2020 was raised on the grounds of non-submission of e-BRCs and nonrealization of remittance. 

In the course of the hearings, the only insistence made upon the petitioner was to provide copies of e-BRC(s) in respect of the exports which occurred in 2018 before the initiation of the CIRP. It is submitted that such production of eBRC(s) was a statutory obligation of the petitioner under the FEMA. 

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It was submitted by the respondents that the petition is not maintainable as a statutory remedy for filing an appeal is contemplated under Section 128(1) of the Act.  counsel Mr. Ranit Basu for the petitioner submitted that no proceedings could have been initiated against them by respondent no. 2 as they had not filed their claim with the RP. After the approval of the resolution plan by the NCLT, the affairs of the petitioner and erstwhile management were transferred to the successful resolution applicant. Consequently, they were not in possession of the show cause notice issued in the pendency of the moratorium period. 

It was further stated even in case any liability may arise such liability cannot be fastened with the fresh management of the petitioner. It is submitted that it would defeat the intention and purpose of this code to grant the revived entity a fresh beginning and a clean slate, if the new management is not released from the obligations and transgressions accrued before the resolution plan was approved. 

It was argued by the respondents that there is no time limit for recovery of drawback disbursed under the act while repelling the contention of the petitioner that since the show cause notice was issued after the moratorium period was declared, under Section 14 of the Code, such proceedings would stand barred.

The personal hearings were held by Respondent No.2 on 22.02.2024 and again on 14.08.2024, wherein neither the petitioner nor the petitioner’s authorised representative were present. The petitioner preferred their responses vide letters dated 26.02.2024 and 13.08.2024, wherein they submitted that M/s Karthik Alloys Ltd. had been admitted for CIRP and a resolution plan had been approved by the NCLT. It was submitted in the letters by the petitioner, that in view of the acceptance of the resolution plan, no dues remain unpaid. 

A division bench of Justice M. S. Karnik and Justice Nivedita P. Mehta found that the respondents did not lodge their demand in respect of the duty drawbacks against the petitioner during the CIRP.  Admittedly, the claim of the respondents is not a part of the approved resolution plan. It is, therefore, abundantly clear that a claim brought to the fore during the pendency of the moratorium period after the claims have been recorded by the adjudicating authority would stand waived off in terms of Section 31A of the code.

The court quashed and set aside the impugned order and allowed the writ petition.

To Read the full text of the Order CLICK HERE

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