Recovery Notice Falls for Want of Non-Obstante Clause: CESTAT Rules Pre-Liquidation Dues Cannot be Fastened on Purchasers [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal, Ahmedabad (CESTAT), held that a recovery notice issued for pre-liquidation excise and customs dues is without jurisdiction when the underlying fiscal legislation contains no non-obstante clause capable of overriding the scheme of the Companies Act, 1956, therefore, in the absence of such statutory authority, revenue authorities cannot bypass the official liquidator or fasten past liabilities on auction purchasers of assets sold during liquidation.

The appeals were filed by Fmn Enterprise along with connected appellants, who had purchased assets of Varun Seacon Ltd., a one-hundred percent Export Oriented Unit, through an official liquidation process supervised by the Gujarat HighCourt. The company was declared a sick industrial unit by the Board of Industrial and Financial Reconstruction and was subsequently ordered to be wound up.

An official liquidator was appointed to sell the assets, and the purchasers acquired them pursuant to High Court directions requiring them to bear only statutory dues arising after the date of the winding-up order, while all pre-liquidation dues were to be dealt with under the Companies Act, 1956.

The case arose when the adjudicating authority confirmed demands of excise duty, interest, and penalties on the appellants on the ground that duty-free bonded goods lying in the premises of the Export Oriented Unit attracted duty at the time of sale.

Represented by Advocates P. M. Dave, Dhaval Shah and Parth Rachchh, the appellants argued that no recovery of duty can be made from auction purchasers of assets of a wound-up company. They contended that all pre-liquidation statutory dues, whether excise duty, customs duty, or otherwise must be claimed before the official liquidator in accordance with Section 457 of the Companies Act, 1956. Further submitted that only sales tax on the sale transaction itself could be imposed on the purchaser as per the High Court’s order.

They urged that the appellants were neither importers nor transferees of the bonded obligations of the Export Oriented Unit, and without a statutory non-obstante clause, the department could not legally fasten pre-liquidation liabilities on them.

The department, represented by Girish Nair, argued that bonded goods lying in an Export Oriented Unit cannot be removed without payment of duty and that the special conditions applicable to such bonded premises survive even when the goods are sold during liquidation. It was submitted that the Export Oriented Unit had executed general bonds for duty-free procurement, and therefore, duties foregone earlier could be recovered from the purchasers who obtained possession of the bonded goods.

The Bench comprising Somesh Arora, Judicial Member, and Satendra Vikram Singh, Technical Member, set aside the recovery notices and allowed all appeals. The Tribunal held that pre-liquidation dues were to be settled only in accordance with the Companies Act, 1956, and that the purchaser was liable only for statutory dues arising after the winding-up order or taxes applicable on the sale transaction.

The Tribunal noted that no fiscal statute cited by the department contained any non-obstante clause permitting revenue authorities to override the liquidation framework under the Companies Act, 1956, or to bypass the official liquidator. The Bench reasoned that only assets, not the entire business as a going concern had been sold, and therefore, the auction purchasers could not be treated as successors or made liable for any duty under the Central Excise Act, 1944, or the Customs Act, 1962.

The Tribunal reiterated that pre-liquidation dues cannot be recovered from buyers of assets unless there is a specific statutory charge or express overriding provision. Consequently, the demands, interest components, and penalties confirmed by the Commissioner were held to be without jurisdiction, and the recovery notices were quashed.

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