GST Liability Becomes Operational Debt Post-CIRP: NCLAT Upholds Claim Transfer to Private Creditor, Dismisses Ellison Oil’s Appeal [Read Order]

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has dismissed Ellison Oil Field Services Pvt. Ltd.’s appeal challenging the validity of a debt assignment by the GST Department to a private entity during the Corporate Insolvency Resolution Process (CIRP).

The appeal arose from an order of the NCLT, Mumbai Bench, dismissing Ellison Oil Field Services Pvt. Ltd.’s challenge to a debt assignment deed executed between the GST Department (Respondent No. 2) and CITOC Ventures Pvt. Ltd. (Respondent No. 1).

The corporate debtor, SES Energy Services India Pvt. Ltd., had entered CIRP under Section 10 of the IBC. The GST Department filed its claim of ₹7.88 crore, later crystallised to ₹2.71 crore by order. This claim was admitted by the Resolution Professional (RP) with a voting share of 12.76% in the CoC.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

CITOC Ventures paid the entire admitted claim amount to the GST Department, following which a debt assignment agreement was executed. The RP reconstituted the CoC to reflect CITOC Ventures as a creditor, in compliance with Regulation 28(2) of the IBC Regulations.

This reconstitution was taken on record by the NCLT in February 2024. Ellison Oil challenged the assignment, arguing that tax dues are sovereign in nature and cannot be transferred to private parties, citing Article 265 of the Constitution and provisions of the Maharashtra GST Act.

Ellison Oil contended that the assignment was illegal as tax collection is a sovereign function, non-delegable under law. It argued that the GST Act does not permit assignment of tax dues, and therefore, the CoC’s reconstitution was invalid.

The appellant further claimed that an illegally constituted CoC vitiates approval of any resolution plan, relying on precedents such as Jayanta Banerjee v. Shashi Agarwal and Hindalco Industries Ltd. v. Hirakud Industrial Works Ltd.

The GST Department and CITOC Ventures countered that once CIRP is initiated, tax dues transform into operational debt under Section 5(21) IBC. Consequently, the Department becomes an operational creditor, and Section 5(20) explicitly permits assignment of such debt.

Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here

They argued that the assignment was not of sovereign tax collection powers but of a debt claim, which is legally transferable. The RP maintained that he acted correctly under Regulation 28, duly informing the Adjudicating Authority and CoC of the reconstitution.

Respondents also stressed that Ellison Oil had already received full payment of its admitted claim and thus lacked locus standi to pursue the appeal.

The two-member bench of Rakesh Kumar Jain (Judicial Member) and Naresh Salecha (Technical Member) distinguished between tax dues before CIRP and their status post-admission. It held that while tax can only be levied and collected under statutory authority, once CIRP begins and a moratorium applies, recovery under GST law is barred.

At that stage, the dues crystallise into operational debt, which falls within the IBC framework. As an operational creditor, the GST Department was entitled to assign its debt, and CITOC Ventures lawfully stepped into its shoes. The Tribunal found no error in the RP’s actions and upheld the CoC’s reconstitution. It also noted that Ellison Oil had already been paid its claim, undermining its grievance.

Support our journalism by subscribing to Taxscanpremium. Follow us on Telegram for quick updates