CIRP u/s 9 cannot be initiated If a dispute regarding Service Tax Credit/Refund existed before the issue of Demand Notice: NCLAT

The New Delhi bench of the National Company Law Appellate Tribunal ( NCLAT ) in the matter of Feng it was held that the Corporate Insolvency Resolution Process (CIRP) under Section  9  of the Insolvency Bankruptcy Code, (IBC), 2016 cannot be initiated if a dispute regarding service tax credit/refund existed before the issue of demand notice

A Master Service Agreement (“MSA”) was signed between the corporate debtor and the operational creditor on 17.9.2015 with a validity of five years up to 16.9.2020.  By the MSA, the Respondent as “Sub-Contractor” or “Service Contractor” was expected to execute the Works as stated in the MSA, which included Site Construction, Network Planning and Optimization, Telecom Implementation, and Final Acceptance, as covered in the “Scope of Works” in the MSA.  Subsequently, supplementary agreements were executed between the corporate debtor and operational creditor/respondent in continuation of the MSA which covered various aspects of the Works and certain other provisions.

 The Appellant has further stated that by the work completed by the respondent, invoices were raised by the respondent from time to time and due payments were made by the corporate debtor to the operational creditor.  Four invoices were issued by the respondent, but they were not found in order by the corporate debtor since there was change from the Service Tax regime to the Goods and Services Tax regime (GST). 

The Appellant has further stated that the operational creditor issued a demand notice under section 8 demand notice dated 14.2.2019 and the Appellant specifically stated all the facts relating to the four invoices which were rejected by the corporate debtor’s payment system and which were later issued after cancelling the earlier purchase orders issued under the service tax regime.  

The Senior Counsel for Appellant has argued that four invoices were issued incorporating the service tax, which was not acceptable to the corporate debtor, and therefore, these invoices were rejected by the payment system, and after mutual discussion between the corporate debtor and operational creditor, four fresh invoices incorporating GST were issued, which were fully honoured and paid by the corporate debtor.  

It was argued that the existence of a dispute relating to non-payment of service tax amount by the corporate debtor is a hypothetical and illusory dispute, which has been raised by the corporate debtor to avoid payment of the liable dues and it cannot be the reason for not admitting section 9 petition. 

A two-member bench comprising Justice Rakesh Kumar, Member (Judicial) and Dr. Alok Srivastava, Member (Technical) observed that the Adjudicating Authority has erred by not considering the various emails communication exchanged between the corporate debtor and operational creditor as evidence of a pre-existing dispute.

Further observed that a dispute regarding credit/refund of the service tax amount which is claimed to have been paid by the operational creditor to the government existed before the issue of demand notice under section 8 and further that such a dispute was a “real” dispute and not merely an assertion or ploy of the corporate debtor to avoid taking care of his liability.  

“The Corporate Insolvency Resolution Process which was initiated against the corporate debtor as a result of the Impugned Order will abate forthwith and the corporate debtor shall be released from the rigours of CIRP and other effects of moratorium under section 14 of IBC with immediate effect”, the NCLAT held while allowing the appeal.  

To Read the full text of the Order CLICK HERE

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