Introduction
The National Company Law Appellate Tribunal (‘NCLAT’) recently in the case of Principal Commissioner of Customs GST v. Pratim Bayal RP for B.K.M. Industries Ltd.[i] addressed an appeal that had arisen from the impugned order dated 05.06.2023 passed by the National Company Law Tribunal (‘NCLT’) in IA(IBC)/749(KB)2021, wherein certain issues regarding the vesting of goods under s. 126 of the Customs Act, 1962 (‘Customs Act’) were raised. The Principal Commissioner of Customs GST (‘Appellant’) challenged the impugned order on the grounds that the NCLT had erred in its interpretation of the provisions of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and the Customs Act.
Brief Facts
The corporate insolvency resolution process (‘CIRP’) against M/s. B.K.M. Industries Ltd., the corporate debtor (‘CD’), commenced on 30.12.2020. Prior to the initiation of the CIRP proceedings, the machinery exported by the CD had been seized by the customs authorities on 06.03.2019.
Subsequently, the aforementioned machines were confiscated on 03.12.2020 by the customs with an option for redemption on payment of redemption fine u/s 125(i) of the Customs Act.
Thereafter, the CD's resolution professional (‘RP’), after initiating the CIRP, repeatedly requested the return of the seized machinery from customs and finally filed an application seeking direction to release the machinery.
The NCLT observed that the confiscation order dated 30.12.2020 predated the CIRP initiation, suggesting no ownership claim by the RP. Despite the observation, the NCLT ordered on 05.06.2023 the immediate release of seized assets to the RP.
Aggrieved by the decision, the Appellant challenged the NCLT order dated 05.06.2023 before the NCLAT.
Held
The NCLAT noted that the judgment of the Hon'ble Supreme Court in the case of Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes & Customs[ii], which addressed the rights of the Customs Department to assert claims against a CD during the moratorium period under the IBC did not alter the statutory mandate under the Customs Act regarding the vesting of goods upon confiscation.
The NCLAT set aside the NCLT’s non-reasoned order dated 05.06.2023 and upheld the confiscation of goods by the customs under s. 126(1) of the Customs Act emphasises that the goods vest with the Central Government upon confiscation, irrespective of ongoing insolvency proceedings.
It was observed that the RP could have redeemed the machines by paying the fine, as the redemption fine provides a statutory benefit to reclaim the goods.
Citing the various judgments, NCLAT clarified that while s. 125 of the Customs Act provides an option to pay a redemption fine in lieu of confiscation; such redemption does not prevent the vesting of goods in the government under s. 126(1) of the Customs Act.
Our Analysis
It is settled law that confiscation under any statute results in the vesting of property (i.e., the ownership) into the appropriate government. The purpose behind such penal provision is to ensure that the wrongdoer does not enjoy the fruits of the wrong. Once, following the due process of law and through an adjudicatory process, any asset or property is confiscated, the taxpayer is divested of its ownership. It’s a separate point that taxpayers may resort to appellate and writ remedies to challenge such confiscation.
Another noteworthy takeaway from the NCLAT’s decision is that the vesting of confiscated goods in the Central Government under the Customs Act remains unaffected by the subsequent commencement of the CIRP. Once the confiscation has taken place, and later, the CIRP commences, what has already gone from the hands of the CD cannot form part of the insolvency pool.
The decision also reaffirms the legislative intent behind ss. 125 and 126 of the Customs Act ensure customs authorities maintain their rights to confiscate and manage confiscated goods independently, even if insolvency proceedings are initiated after the confiscation. CDs must look into customs obligations diligently, understanding that the option to redeem goods is subject to statutory timelines (120 days) and conditions, even during insolvency. This decision may serve as a guiding principle for future cases where conflict arises between the IBC and the Customs Act.
End Notes
[i] [2024] 162 taxmann.com 745 (NCLAT- New Delhi) [19-04-2024].
[ii] [2023] 1 SCC 472.
Authored by Jitin Bharadwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.