The Three-Judge Bench of the Supreme Court comprising CJI. N.V. Ramana and Justices J.K. Maheshwari and Hima Kohli were hearing an Appeal on Friday and held that Customs Authority cannot transgress boundaries and proceed to initiate a recovery in violation of Section 14 or 33(5) of the Insolvency and Bankruptcy Code. The Bench observed that once a moratorium is imposed in terms of sections 14 or 33(5) of the Code, the Customs Authority only has limited jurisdiction to assess/determine the quantum of customs duty and other levies. However, the Authorities can only take steps to determine the tax, interest, fines or any penalty which is due. They cannot enforce a claim for recovery or levy of interest on the tax due during the period of moratorium.
The present Civil Appeal under Section 62(1) of the Insolvency and Bankruptcy Code, 2016 arises out of the impugned judgment dated 22.11.2021 passed by the NCLAT, New Delhi. Vide the impugned judgment, the NCLAT has allowed the appeal filed by the respondent against the order of the NCLT, Ahmedabad whereby the Adjudicating Authority directed the release of certain goods lying in the Customs Bonded Warehouses without payment of customs duty and other levies.
Facts of the case:
The Corporate Debtor was in the business of shipbuilding prior to the initiation of corporate insolvency proceedings against it. As a part of its business enterprise, it used to regularly import various materials for the purpose of constructing ships which were to be exported on completion. Some of these goods were stored by the Corporate Debtor in Custom Bonded Warehouses in Gujarat and Container Freight Stations in Maharashtra. Bills of entry for warehousing were submitted at the relevant time. The Corporate Debtor also took the benefit of an EPCG Scheme and was granted a license under the said scheme with respect to the said warehoused goods.
On 01.08.2017, the NCLT, Ahmedabad passed an order commencing the CIRP against the Corporate Debtor, and the appellant was appointed as the Interim Resolution Professional. In the same order, the NCLT also declared a moratorium under Section 13(1)(a) of the IBC.
On 21.08.2017, the appellant informed the respondent of the initiation of CIRP and sought custody of the warehoused goods and requested the respondent not to dispose of or auction the same. On 29.03.2019, the respondent for the first time issued a notice to the Corporate Debtor regarding non-fulfilment of export obligations in terms of the EPCG license demanding customs duty of Rs. 17,13,989/- with interest. From 02.04.2019 to 07.04.2019, the respondent issued five different demand notices to the Corporate Debtor regarding the nonfulfillment of export obligations under different EPCG licenses for various amounts.
On 25.04.2019, the NCLT passed an order commencing liquidation against the Corporate Debtor under Section 33(2) of the IBC. Vide the said order, the NCLT declared that the earlier moratorium imposed under Section 13(1)(a) of the IBC shall cease to have effect by the operation of Section 14(4) of the IBC. However, a fresh direction was passed under Section 33(5) of the IBC barring the institution of any suit or legal proceeding by or against the Corporate Debtor. Further, the NCLT also appointed the appellant as the liquidator vide the same order.
Thereafter, the respondent filed claims before the appellant for goods warehoused in both Gujarat and Maharashtra on 20.05.2019, 27.05.2019 and 29.05.2019 under the IBC. On 27.06.2019, the appellant informed the respondent through its officers that liquidation proceedings had commenced against the Corporate Debtor and that the goods were to be released to the appellant.
Due to inaction by the respondent, the appellant filed I.A. No. 474 of 2019 before the NCLT under Section 60(5) of the IBC seeking a direction against the Respondent to release the warehoused goods belonging to the Corporate Debtor on 01.07.2019.
At this juncture, for the first time on 11.07.2019, the respondent issued a notice to the Corporate Debtor under Section 72(1) of the Customs Act for custom dues amounting to Rs. 763,12,72,645/- on 2531 Bills of entries. The respondent filed a concurrent claim for the said amount before the appellant under the IBC.
On 25.02.2020, the NCLT allowed I.A. No. 474 of 2019 filed by the appellant and passed the order. The NCLT considered Section 238 of the IBC and held that the non-obstante clause in the IBC, being part of a subsequent law, shall have an overriding effect on proceedings under the Customs Act. Further, looking at the waterfall mechanism under Section 53 of the IBC, the NCLT held that distribution of proceeds from the sale or liquidation of assets shall also prevail over the Customs Act provisions. The NCLT held that, as Government dues, the claims by the respondent would have to be dealt with in accordance with Section 53 of the IBC. Apart from the above, the
NCLT also placed reliance on a circular issued by the Central Board of Excise and Custom, Circular No. 1053/02/2017CX dated 10.03.2017 relating to Section 11E of the Central Excise Act, 1944. The abovementioned circular clarifies that dues under the Central Excise Act would have the first charge only after the dues under the provisions of the IBC are recovered. As Section 142A of the Customs Act is pari materia with Section 11E of the Central Excise Act,1944, the NCLT applied the same rationale to interpret the said section in holding that the provisions of the IBC have priority.
On 04.03.2021, the respondent filed an appeal before NCLAT challenging the order dated 25.02.2020 passed by the NCLT. On 22.11.2021, the NCLAT passed the impugned order, whereby it allowed the appeal filed by the respondent and set aside the directions of the NCLT requiring the respondent to release the warehoused goods to the possession of the appellant without seeking the custom dues. The NCLAT rather directed that the warehoused goods can be released or disposed of as per Applicable Provisions of Customs Act by the Proper Officer.
The NCLAT, in allowing the appeal of the respondent, held that the goods lying in the customs bonded warehouse were not the Corporate Debtor’s assets as they were neither claimed by the Corporate Debtor after their import nor were the bills of entry cleared for some of the said goods. By not filing the said bills of entry, the NCLAT held that the importer, i.e., the Corporate Debtor, had relinquished his title to the imported goods. The NCLAT held that the Corporate Debtor is deemed to have lost his title to the imported goods by the action of Sections 48 and 72 of the Customs Act. As such, the respondent is empowered to sell the goods and recover the government dues.
The NCLAT held that ‘imported goods’, which are subject to levy of Customs, stand on a different footing as payment of customs duty is a consequence of importing the goods rather than a liability on the Corporate Debtor to pay it. The appellant cannot stand on a better footing than the Corporate Debtor that he represents and cannot take possession of assets that the Corporate Debtor itself could not have obtained. Customs duty, therefore, needs to be paid for the release of the warehoused goods.
The NCLAT held that the Customs Act is a complete Code which provides that warehoused goods cannot be released until the import duties are paid. The mere filing of claims under ‘Form C’ by the respondent before the appellant cannot be taken to signify the relinquishment of the right of the respondent over the warehoused goods.
On the issue of priority of IBC over the Customs Act, the NCLAT held that the issue did not arise in the present case, as the goods in question were imported prior in time to the initiation of the CIRP. While the containers were imported between 2012 to 2015, the CIRP was initiated only in 2017 and the Corporate Debtor went into liquidation in 2019. By not paying the import duties, the Corporate Debtor had lost the right to the warehoused goods prior to the initiation of the CIRP. The NCLAT held that these warehoused goods stand on a different footing and cannot be considered assets of the Corporate Debtor which were subject to the IBC provisions.
Aggrieved by the above judgment passed by the NCLAT, the appellant has filed the present Civil Appeal against the impugned judgment.
Submission by the Appellant:
The Corporate Debtor was the owner of the goods. The Senior Counsel referred to Section 48 of the Customs Act and stated that it only applies to goods which are neither cleared nor warehoused by the importer. This Section, however, is not applicable to the present case as the notice issued and Form C filed by the respondent were in relation to warehoused goods. Thus, the notice issued by the respondent under Section 72 of the Customs Act and the consequent Form C does not in any manner attract Section 48 of the Customs Act.
The Corporate Debtor has not lost ownership of the goods as alleged by the respondent. The respondent, by issuing notice under Section 72 of the Customs Act and filing its claim with the liquidator, has admitted that the Corporate Debtor was the owner. Neither Sections 72 nor 48 of the Customs Act signifies any transfer to the respondent. The Corporate Debtor has also never relinquished title to the goods and no communication regarding the same has been made to the respondent.
By submitting claims under Section 38 of the IBC, the respondent has elected to subject its dues to be governed by IBC, and more specifically, to the distribution matrix provided in Section 53 of the IBC. The claims made by the respondent before the appellant are based solely on the Corporate Debtor’s ownership of the goods. The respondent cannot blow hot and cold at the same time by again claiming before this Court that the Corporate Debtor has lost ownership of the said goods.
The respondent could not have exercised its right under the Customs Act, as the statutory charge of the respondent under Section 142A of the Customs Act is expressly subordinate to the IBC.
The respondent’s custody of the Corporate Debtor’s goods is in violation of Sections 14 and 33 of the IBC. Section 14(1)(a) of the IBC expressly prohibits the institution or continuation of proceedings against the Corporate Debtor during the moratorium period. Further, Section 14(1)(c) states that foreclosure, recovery, or enforcement of any security interest against the Corporate Debtor is prohibited.
Submission by the Respondent:
The goods left in the Customs Bonded Warehouse are not the assets of the Corporate Debtor. This is because these goods were never claimed after being imported. As per the record, the goods were imported between the years 2012 and 2015, and the Corporate Debtor started the liquidation process in 2019. In this span of 4 years, the Corporate Debtor never cleared bills of entry for part of the goods and abandoned all the material lying in the Customs Bonded Warehouse. Despite receipt of various demand notices by the respondent, the Corporate Debtor did not clear the goods and hence the same are liable to be sold by the respondent under the Customs Act.
The liquidator can take into his possession only the assets of the Corporate Debtor as under Section 35(1)(b) of the IBC. However, in the present case, the warehoused goods cannot be termed as assets of the Corporate Debtor, until and unless the same is legally cleared from the warehouses upon payment of relevant dues and duties. The Corporate Debtor herein has not even paid the bill of entry for part of the goods.
Section 45 of the Customs Act lays down restrictions on custody and removal of imported goods. It stipulates that all imported goods unloaded in the customs area shall remain in the custody of such person approved by the commissioner till the time the same are cleared for home consumption or are warehoused or transshipped. Further, it provides that if such goods are not cleared as per the criteria mentioned above, they can be sold after permission from the proper officer. Section 71 of the Customs Act further states that no goods shall be taken out of the warehouse except as provided under the Customs Act. Hence, the goods cannot be removed without payment of import duties and charges.
The Corporate Debtor has abandoned the imported goods for several years, refused to pay the import duties and other charges, and has not taken any effort to take possession of the goods for several years. Consequently, the Corporate Debtor has lost its right to the warehoused goods, and hence under Section 72 of the Customs Act, the government authorities are fully authorized to recover the dues. In such a circumstance, where the Corporate Debtor’s title to the goods has been deemed to have been relinquished, the liquidator does not have the authority to take possession of them.
Customs duty is an incidence or consequence of import. Even before the CIRP was initiated, the Corporate Debtor could not have secured the possession of the warehoused goods without paying the due charges. Hence, the liquidator, who is representing the Corporate Debtor, cannot stand on a better footing than the Corporate Debtor itself.
It is further submitted that merely because the respondent had filed its claim before the liquidator, it cannot be said that the respondent had relinquished its rights over the warehoused goods. The claim was filed by the respondent only to realize its dues, and hence cannot be viewed as a relinquishment or abandonment of its rights.
Analysis by the Court:
In light of the arguments advanced and the documents submitted by the parties, the Supreme Court noted that there were two important questions which have their consideration:
Whether the provisions of the IBC would prevail over the Customs Act, and if so, to what extent?
Whether the respondent could claim title over the goods and issue notice to sell the goods in terms of the Customs Act when the liquidation process has been initiated?
It must be noted that this question assumes significance as the warehoused goods belonging to the Corporate Debtor which is under liquidation, are sought to be sold by the Customs Authorities in lieu of custom dues. The respondent has relied on certain provisions of the Customs Act to assume such power. This has been vehemently opposed by the appellant herein, who has argued that once the insolvency process has been initiated against the Corporate Debtor, the IBC becomes squarely applicable and overrides any other enactment giving priority to the charges on the property. The NCLAT has not directly answered this question of law. Rather, it has entered into the facts of the case to distinguish the applicability of the IBC as compared to the Customs Act. The NCLAT held that the Corporate Debtor had abandoned the goods much before the insolvency process was initiated, and thereby the title of the goods had passed to the Customs Authority.
The Supreme Court Bench noted that when goods are imported/exported from India, such goods may be subjected to customs duty as indicated under Section 12 of the Customs Act. When goods are imported, it can be either for home consumption or for transhipment. An importer can either choose to pay the duty and utilize the goods immediately for domestic usage or execute a bond so as to warehouse the said goods. Accordingly, an importer has to submit a bill of entry either for home consumption or for warehousing in terms of Section 46 of the Customs Act, in the prescribed format. When a person chooses to warehouse the goods, he ought to execute a bond in terms of Section 59 of the Customs Act. Such warehoused goods can subsequently be either cleared for home consumption or can be exported.
Section 61 of the Customs Act mandates the time period allowed for warehousing. For example, in the case of capital goods intended for a 100% export-oriented undertaking, warehousing is permitted till such goods are cleared from the warehouse. In case of goods not intended for the such export-oriented purpose, a time period of one year is prescribed in terms of Section 61(1)(c) of the Customs Act. The provision also provides for an extension which could be granted by the appropriate authority, for a period of not more than one year. Under Section 61(2) of the Customs Act, provision is made to charge interest on goods warehoused beyond the period granted.
Section 71 of the Customs Act provides that no warehoused goods shall be taken out of the warehouse, except on clearance for home consumption or export or for removal to another warehouse, or as provided by the Act.
Section 72 of the Customs Act deals with the issue of when the goods can be said to have been improperly removed from the warehouse. It can be noted that when goods are warehoused and the importer has not taken sufficient steps to take the goods out for domestic consumption or for transhipment, within the required time period, then the proper officer has to take steps in terms of Section 72(2) of the Customs Act. The aforesaid provision mandate that it is only after the determination of dues by the proper officer that goods may be sold, in the event that the demanded amount relating to customs duty, interest, fines, and other penalties have not been paid. In that case alone, after such determination, a sufficient portion of goods may be sold.
In the present case, the Corporate Debtor as part of its business used to regularly import and warehouse goods in the custom bonded warehouses from at least 2011. As has already been mentioned above, the CIRP process commenced against the Corporate Debtor on 01.08.2017 by the order of the NCLT. It appears from the record that no notices were issued by the respondent against the Corporate Debtor with respect to the warehoused goods prior to initiation of the CIRP. In fact, all the duty demand notices issued by the respondent were from March 2019 onwards. It is in this context that it is necessary for us to ascertain whether the IBC overrides the Customs Act or vice-versa.
Insolvency and Bankruptcy Code came into force in India on 28.05.2016 to combine provisions relating to insolvency found across different statutes into a single comprehensive instrument. Under the earlier legal regime, different statutes were resulting in multiple parallel proceedings, which inevitably resulted in uncertainty for the creditors over their recovery. One of the objectives behind the enactment of the IBC was to end the conflict between different statutes. In this context, it is to be noted that when the insolvency process (CIRP) commences, the Adjudicating Authority is mandated to declare a moratorium on the continuation or initiation of any coercive legal action against the Corporate Debtor. Section 14 of the IBC prescribes a moratorium on the initiation of CIRP proceedings and its effects. One of the purposes of the moratorium is to keep the assets of the Corporate Debtor together during the insolvency resolution process and to facilitate orderly completion of the processes envisaged under the statute. Such measures ensure the curtailing of parallel proceedings and reduce the possibility of conflicting outcomes in the process. It can be seen that one of the motivations for imposing a moratorium is for Section 14(1)(a), (b), and (c) of the IBC to form a shield that protects pecuniary attacks against the Corporate Debtor. This is done in order to provide the Corporate Debtor with breathing space, to allow it to continue as a going concern and rehabilitate itself. Any contrary interpretation would crack this shield and would have adverse consequences on the objective sought to be achieved. Even if a company goes into liquidation, a moratorium continues in terms of Section 33(5) of the IBC.
The Supreme Court bench noted that the IBC, being the more recent statute, clearly overrides the Customs Act. This is clearly made out by a reading of Section 142A of the Customs Act. The aforesaid provision notes that the Customs Authorities would have the first charge on the assets of an assessee under the Customs Act, except with respect to cases under Section 529A of Companies Act 1956, Recovery of Debts Due to Banks and Financial Institutions Act 1993, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the IBC, 2016. Accordingly, such an exception created under the Customs Act is duly acknowledged under Section 238 of the IBC as well. Additionally, Section 238 of the IBC clearly overrides any provision of law which is inconsistent with the IBC.
The NCLAT, while playing down the effect of Section 142A of the Customs Act and Section 238 of the IBC, has held that the Customs Act is a complete code in itself and no person can seek removal of goods from the warehouse without paying customs duty. The NCLAT relies on the judgment in Collector of Customs v. Dytron (India) Ltd., 1999 ELT 342 Cal., by the High Court of Calcutta, which laid down that customs duty carries the first charge even during the insolvency process under Section 529 and 530 of Companies Act, 1956. However, reliance on the said precedent is not appropriate as the NCLAT has failed to notice that such interpretation has been legislatively overruled by the inclusion of Section 142A under the Customs Act, through Section 51 of the Finance Act of 2011. From the above, it is to be noted that the Customs Act and the IBC act in their own spheres. In case of any conflict, the IBC overrides the Customs Act.
In the present case, the Apex Court were of the clear opinion that the demand notices to seek enforcement of custom dues during the moratorium period would clearly violate the provisions of Sections 14 or 33(5) of the IBC, as the case may be. The Supreme Court held that the respondent could only initiate assessment or reassessment of the duties and other levies. They cannot transgress such boundaries and proceed to initiate a recovery in violation of Sections 14 or 33(5) of the IBC. The interim resolution professional, resolution professional or the liquidator, as the case may be, has an obligation to ensure that the assessment is legal and he has been provided with sufficient power to question any assessment if he finds the same to be excessive.
There was another aspect of this case that needs to be highlighted to portray the inconsistency of the Customs Act visàvis the IBC during the moratorium period. In the present case, the demand notices dated 11.07.2019 was issued by the respondent under Section 72 of the Customs Act, in clear breach of the moratorium imposed under Section 33(5) of the IBC. Issuing a notice under Section 72 of the Customs Act for non-payment
of customs duty falls squarely within the ambit of initiating legal proceedings against a Corporate Debtor. Even under the liquidation process, the liquidator is given the responsibility to secure assets and goods of the Corporate Debtor under Section 35(1)(b) of IBC.
The Customs Act and IBC can be read in a harmonious manner wherein authorities under the Customs Act have a limited jurisdiction to determine the quantum of operational debt – in this case, the customs duty – in order to stake a claim in terms of Section 53 of the IBC before the liquidator. However, the respondent does not have the power to execute its claim beyond the ambit of Section 53 of the IBC. Such harmonious construction would be in line with the ruling in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, REED 2021 SC 03533, wherein a balance was struck by the Supreme Court between the jurisdiction of the NCLT under the IBC and the potential encroachment on the legitimate jurisdiction of other authorities.
In the case of Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, REED 2021 SC 03533, the Supreme Court’s interpretation clearly ignored the fact that there was no “abandonment of goods” which would authorize the Customs Authorities to initiate the adjudicatory process to transfer title to themselves. Before any goods can be declared to have been “abandoned”, the same must be adjudged by some authority after due notice. The position cannot be assumed or deemed. In the case at hand, no such adjudication or notice has been placed on record to suggest that such abandonment of the warehoused goods had taken place prior to the imposition of the moratorium.
The NCLAT, by deciding the question of the passing of title from the Corporate Debtor to the respondent authority, has clearly ignored the mandate of Section 72(2) of the Customs Act relating to the sale. This interpretation of the NCLAT clearly ignores the effects of the moratorium under Sections 14 and 33(5) of the IBC. The fact is that the duty demand notice and notice under Section 72(2) of the Customs Act, were issued during the moratorium period, which has been completely ignored by NCLAT and has resulted in rendering the moratorium otiose. The interpretation provided by the NCLAT, regarding the deemed transfer of title of the goods from the assessee to the Customs Authority under Section 72 of the Customs Act, would fly in the face of Section 14 of the IBC, read with Sections 25 and 33(5). Moreover, the such deemed transfer cannot be countenanced in law as the same would be in breach of Article 300A of the Constitution, as properties are deemed to be transferred to the Customs Authority without there being adequate hearing or any adjudication of any form. Such an interpretation cannot be accepted by the Supreme Court.
The IBC would prevail over The Customs Act, to the extent that once a moratorium is imposed in terms of Sections 14 or 33(5) of the IBC as the case may be, the respondent authority only has a limited jurisdiction to assess/determine the quantum of customs duty and other levies. The respondent authority does not have the power to initiate the recovery of dues by means of sale/confiscation, as provided under the Customs Act. The respondent could not claim title over the goods and cannot issue notice to sell the goods in terms of the Customs Act when the liquidation process has been initiated.
Resultantly, the Supreme Court allowed the appeal and set aside the impugned order and judgment of the NCLAT.
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