Mr. Subhash Chandra Goyal Sole ... vs K B Ispat Private Limited

NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI Company Appeal (AT) (Ins) No. 166 of 2022

IN THE MATTER OF: Subhash Chandra Goyal Sole Proprietor of Goyal Enterprises D-707, Signature -11, Sarkhej- Sanand Road, Sarkhej, Ahmedabad ...Appellant

Vs.

K B Ispat Private Ltd. (CIN No. U27310GJ2010PTC063359) Survey No 15/3, Bhavnagar- Vallabhipur Highway Near Ghanghli, Village- Maglana Tal- Sihore Dist. Bhavnagar Registered address at; Plot No. 93A, Gita Chowk Krishnanagar, Bhavnagar, Pin 364001. ...Respondent

Present: For Appellant : Mr. Vivek H Shah and Mr. Kunal Vaishnav, Advocates For Respondents : Ms. Anushree Kapadia, Advocates

DR. ASHOK KUMAR MISHRA, TECHNICAL MEMBER

1. The appeal has been filed by the Appellant- 'Subhash Chandra Goyal'

Sole Proprietor of Goyal Enterprises under Section 61 R/w Section 9 of

the 'Insolvency and Bankruptcy Code, 2016' (in short 'Code') against the

Company Appeal (AT) (Ins) No.166 of 2022 Page 1 of 21 impugned order dated 01st December, 2021 passed by the 'Adjudicating

Authority' (National Company Law Tribunal), Ahmedabad Bench in CP

No. CP(IB) 555/9/NCLT/AHM/2019.

2. The Appellant has sought the following reliefs:

a. That the impugned order as passed by the Adjudicating

Authority be set aside;

b. That the application filed by the appellant under section 9

of the Insolvency and Bankruptcy Code, 2016 against the

Respondent be allowed and the Corporate Insolvency

Resolution Process be initiated against the Respondent-

Corporate Debtor;

c. Pending the hearing and final disposal of the present

Appeal, direct the Respondent to deposit the amount of

Rs. 26,89,290 so admitted by them before this Tribunal

etc.

3. The Appellant is a trader of Iron & Steel and other metals etc. The

Appellant does not have warehouse and once it gets the order from

the manufacturer/Supplier then it places the order on the other

supplier / manufacturer and asked them to directly supply the

material to the Manufacturer/Supplier / Corporate Debtor (CD) in

the present case. The Appellant is the Sole Proprietor of M/s. Goyal

Company Appeal (AT) (Ins) No.166 of 2022 Page 2 of 21 Enterprises. It is stated by the Ld counsel for the Operational

Creditor(OC)/Appellant that the CD has approached the Appellant

for providing supplies of Sponge Iron etc. goods to the CD which will

be used by the CD as raw materials / process materials for its plant

at Bhavnagar - Vallabhipur Highway. The business dealing between the

Operational Creditor (OC) and CD commenced from 2018 and thereafter,

CD was placing orders on the Appellant / OC and the OC have been

procuring the materials from the supporting manufacturer / suppliers and

thereafter directly being supplied to the CD. A look at Tax Invoices of OC

dated 04th May, 2019 (appearing at page 48 of the Appeal paper Book)

reveal that even supplier reference is also mentioned. It is also revealed

from the Appeal paper book that 42 consignment of materials each ranging

of invoice values between Rs. 5 lac to Rs.12 lacs approx. has been supplied

and the Appellant has furnished the GST Invoice and also the supplier /

manufacturer invoice alongwith the E-way bills since the time that was

prescribed under the GST Laws and the CD has never disputed any

supply. The CD was aware of the source of material from where the

Appellant was suppling the materials. The Appellant had supplied Sponge

Iron in lumps and Sponge Iron and other goods of Iron and Steel to the CD

on 04th May, 2019 for a total value of Rs. 30,21,749/-. It is also submitted

that in the said supplies, the CD has raised Debit Notes dated 10.05.2019

for a value of Rs. 3,32, 459/- for quality issues which has been accepted

by the Appellant and acknowledged and accounted to the credit of the CD

Company Appeal (AT) (Ins) No.166 of 2022 Page 3 of 21 by the Appellant and is making only a claim of Rs. 26,89,290/- which has

not paid by the Appellant. At page 12 of the Appeal paper book, the

Appellant states as follows: The details of three invoices at dispute are as

under:

Sr. Date Invoice Date Debit Notes No. Amount (in (in Rs.) Rs.) 1. 4th may, 1,017,467/- 10th May, 112,649/- 2019 2019 2. 4th may, 993,135- 10th May, 108,917/- 2019 2019 3. 4th may, 1,011,147/- 10th May, 110,893/- 2019 2019 Total 3,021,749 332,459/-

4. What the Appellant is stating that the balance outstanding of

Rs.26,89,290 became due and payable on the next date of invoice i.e.

05.05.2019 as per agreed terms and conditions.

5. The Ld counsel for the Appellant has stated that they are chasing for these

payments since 11.05.2019 and being aggrieved due to non-payment of

legitimate dues of the CD, the Appellant was constrained to prefer demand

notice in Form-3 & Form-4 under the Code vide notice dated 01.07.2019.

The Ld. Counsel for the Appellant has stated that there is a default in the

payment and it is an unpaid operational debt and hence it is just and

equitable that CIRP be initiated against the CD.

6. The Ld counsel for the Appellant has also stated that they have received

the reply of demand notice on 22.07.2019. The Ld counsel for the

Appellant has also stated that in the demand notice, the CD has admitted

Company Appeal (AT) (Ins) No.166 of 2022 Page 4 of 21 the Debt and hence the Appellant has filed the application under Section 9

of the Code before the Adjudicating Authority for initiation of the CIRP

against the CD/Respondent.

7. While the Respondent side in its reply has submitted the followings:

a. That an alert circular No. 13/Kol-S/2019 has been issued by the

Commissioner of CGST Tax and Central Excise, Kolkata South

Commissionerate, Kolkata - 700107 in which it is mentioned that on

verification one M/s. Rathank Retails Pvt, Ltd was found to be a non-

existent & fictious company who passed huge amount of irregular input

tax credit to various recipients throughout India without physical

supply of goods as revealed from the analysis of their GSTR-1 data filed

for the period December, 2017 to September, 2018.

b. It is further stated that it is observed in the said circular that the said

tax payers issued fake invoices fraudulently only to pass on illegal

benefit of input tax credit to the recipients of fake invoices and,

therefore, the input tax credit availed by the recipients are required to

be denied/disallowed with applicable interest and penalty as per law

(refer page 74-75 of the Appeal paper book). One of the recipients from

the non-existent company in the present proceedings which is reflected

at page 75 of the Appeal paper book is M/s.Ranthank Retails Pvt. Ltd.

(GSTIN - 19AAICR1096E1Z8)

Company Appeal (AT) (Ins) No.166 of 2022 Page 5 of 21 c. It is also submitted by the Respondent that the Appellant supplied the

goods and raised invoices by levying tax in the Form of CGST @9% and

SGST @9%.

d. The CD on receipt of material releases the payment of the invoice

alongwith tax so levied and then claim credit in the GST Returns on the

said tax paid which are purchased from the Appellant.

e. The Respondent is worried that if the input tax credit which the

Appellant has availed from the alleged non-existent supplier gets

disallowed then the said credit being not available to the Appellant will

in turn disentitle the Respondent Company/CD to avail the credit from

the said transaction. The amount involved for the period from

01.04.2018 to 19.07.2019 towards inputs tax credit is to the tune of

Rs. 59 lacs approx. which will get rejected on the purchases made from

the Appellant to the tune of Rs. 3.3 Crore. As a result, the CD will have

to burden with this liability to pay the entire tax to the extent of Rs. 59

lacs alongwith interest and penalty on the said amount.

8. The Ld. Counsel for the Respondent has submitted that they are willing to

pay the amount of Rs. 26,89,290 but has asked the Appellant to provide a

bank guarantee of an equal amount of GST which the Respondent Company

has paid to the Appellant for the purchases made for the said period. The Ld

counsel further stated that they are still willing to pay the amount once they

provide the bank guarantee for the GST amount involved of approx. Rs.59

lacs. These matters were persisting between the Appellant and the CD

Company Appeal (AT) (Ins) No.166 of 2022 Page 6 of 21 between May and June, 2019. In the meantime, the Appellant has sent a

demand notice dated 06.07.2019 to the CD which was delivered to the CD on

08.07.2019 seeking recovery of dues illegitimately to extort money and create

undue pressure on the CD which is nothing but an abuse of process of law.

9. It was also submitted by the learned counsel for the Respondent/CD that

they have explained through an additional affidavit dated 12.06.2020 before

the Adjudicating Authority which indicates that the GST Registration No. of

M/s. Rathank Retails Pvt, Ltd, GST No. Registration Number viz

19AAICR1096E1Z8, the supplier of the appellant has been cancelled

w.e.f.18.06.2019. It proved that the said supplier of the appellant is a non-

genuine party and the input tax credit which the appellant has availed from

the alleged non-existent suppliers shall be disallowed as a result of which the

Respondent/CD shall not be in a position to avail input tax credit from the

said transactions.

10. In the demand notice which has been received by the Appellant on 22nd

July, 2019, the CD/Respondent has emphatically stated as follows which is

appearing at page 72 and 73 of the Appeal paper book:

Company Appeal (AT) (Ins) No.166 of 2022 Page 7 of 21

11. The CD/Respondent has cited the judgment of Hon'ble Supreme court

Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software Pvt. Ltd, AIR 2017 SC 4532

to supplement its case that there is a genuine pre-existing dispute.

Company Appeal (AT) (Ins) No.166 of 2022 Page 8 of 21 The Respondent in view of the reasons stated above has sought the appeal to

be dismissed along with exemplary costs.

12. The Adjudicating Authority while passing the impugned order has

elaborately gone into the analysis of fact and related law as stated below:

"8.......The Corporate Debtor had, in its letter received by the

Operational Creditor on 22.07.2019, has admitted the debt and

was ready to pay the due amount on providing the Bank

guarantee till the assessment. Though the letter in respect to the

dispute of ITC was received by the operational creditor after 10

days after the i.e. statutory period of reply to the demand notice

as per section 8 of IB Code, the dispute seems to real and

genuine. It is the bonafide right of the Corporate Debtor that the

amount paid for GST must be assessed without any complication.

The objection of the Operational Creditor in respect that no such

agreement was made by and between the Operational Creditor

and Corporate Debtor for giving the Bank guarantee for GST

dispute is not well founded. Such a situation arose after Rathank

Retails Private Limited was declared as a fictitious company.

Such, situation was not in picture since the inception of the

business relations with the Operational Creditor.

9. The contention of the Operational Creditors that all the 42

consignments delivered to the Corporate Debtor were purchased

from other than the aforesaid fictitious company, and the

Company Appeal (AT) (Ins) No.166 of 2022 Page 9 of 21 Operational Creditor used to attach the original suppliers invoice

along with its invoice was also not born by record, as not even a

single invoice of the original supplier has been attached by the

Operational Creditor in the petition. On the other side, the

Corporate Debtor is still ready to pay the alleged due amount of

the Operational Creditor on giving the Bank Guarantee till the

assessment of ITC. The apprehension of the Corporate Debtor is

genuine, as if the transactions of the Operational Creditor prove to

be non-genuine, the Corporate Debtor would have bear to the

additional GST along with interest and penalty. In view of the

above, pre-existing dispute under section 8 (2) (a) of IB Code fully

established. The petition of the Operational Creditor for initiation

of CIRP under section 9 of IB Code is rejected."

13. We have heard ld counsels for the parties and have analyzed the

information provided by them and the relevant provisions of the Code and

related law laid down by the Hon'ble Apex Court on the subject and as such

record following observations:

a. It is not in dispute that the Appellant is a 'Trader' and whenever he used to

get any order from any source, he used to put corresponding order on the

supplier/manufacturer of that particular goods and used to directly ask

them to make direct supply to the concerned source/CD.

b. It is also not in dispute that in the present case the involvement of

CGST/SGST issue is not involved.

Company Appeal (AT) (Ins) No.166 of 2022 Page 10 of 21 c. It is also not in dispute that the CGST Commissionerate, Kolkata has not

issued the above stated alert circular no. 13/Kol-S/2019 which involves

M/s. Rathank Retails Pvt, Ltd and in that details the name of Subhash

Goyal is also existing at page 75 of the Appeal paper book.

d. It is also not in dispute that the GST Authorities have not cancelled the

M/s. Rathank Retails Pvt, Ltd, GST No. Registration Number viz

19AAICR1096E1Z8 (appearing at page 33 of the Reply /objections on

behalf of the Respondent/CD). The said firm date of registration is

13.12.2017 and date of cancellation is 18.06.2019. Search result is also

covering the period of 2018-2019 (page 33 of the Reply/Objections of the

Respondent/CD)

e. As far as the outstanding of amount of invoice to be paid by CD is

concerned amounting to Rs. 26,89,290/-, CD is conspicuous of its inputs

tax credit of Rs. 59 lacs likely to get rejected on the purchase made from

Appellant for a value of Rs. 3.3 Crore from 01.04.2018 to 19.07.2019 and

this will be an additional liability to the CD to pay Rs. 59 lacs alongwith

interest and penalty, if GST Department, Kolkata finally come to the

conclusion that the transactions of the Appellant with other parties are

proved to be non-genuine. Accordingly, as an abundant precaution, the

CD has asked for a bank guarantee for the above amount with a requisite

validity till its assessment by GST Department is over. The Appellant is not

interested in providing the bank guarantee in spite of their mutual

discussions in the month of May/June 2019 and even during the course of

Company Appeal (AT) (Ins) No.166 of 2022 Page 11 of 21 hearing was not willing to provide the bank guarantee. In the reply to the

demand notice also, this is the issue of very deep disputes between the

parties as the Appellant has purchased goods from suspicious source and

will badly damage also the image of the CD. In the reply to the demand

notice, it is categorically stated that out of total purchases of Rs.

3,89,87,276/- the CD has paid Rs. 3, 62,97,986/- and the only amount

outstanding is Rs. 26,89,290/- whereas in case of taking adverse stand or

irregularity of the Appellant may result into a loss of input tax credit

amounting to Rs.59,47,211.62 with interest and penalty. All this reflects

that there is a serious dispute between the Appellant and the CD.

f. The Respondent has raised the dispute on the issue of the Input Tax

Credit in the reply to the demand notice itself. Although they have not

replied within 10 days which is directory in nature but has replied in a

very short period (Demand notice is dated 01st July, 2019. Reply received

from CD by Appellant on 22nd July, 2019). Hence, it meets the criteria of

Section 9 of the Code for raising the dispute. As in the circumstances

stated above, this is not a moonshine defence.

g. The IBC is a summary proceeding. The role of the Code is limited to

Insolvency Resolution to Corporate Persons in a time bound manner & in

case of initiation of CIRP by Operational Creditor, the Operational debt

must be undisputed. As far as the GST dispute is concerned, he is free to

approach Appropriate Forum under Chapter - V of the Sale of Goods Act,

1930 for redressal of its grievance.

Company Appeal (AT) (Ins) No.166 of 2022 Page 12 of 21 h. It is also evident that the CD is a going concern and it has a turnover of

Rs. 186 Crore (approx.) during 2018-19 and is a profit-making company

and profit before tax is Rs. 3 Crore(approx.) and it has generated a net

cash flow from operating activities Rs. 3.83 Crore (appearing at page131 of

the Appeal paper book). It is also stated in the reply that the Company is

having 60 employees and is paying a wages and salary to the extent of Rs.

75 lacs. The Company is having a good reputation in the market and its

statutory audit report is also available in the appeal paper book at page

125. The Statutory Audit Report vide page 127 para -VII also reflects that

there are no dues of sales tax authority.

i. There are certain provisions of the Code which are involved for initiation of

CIRP by Operational Creditor. For brevity and clarity, a few of them are

extracted below: Section 3,(10) (11) & (12) Section 5(20) &(21), Section 8

& 9 of the Code.

"Section 3(10) - "creditor" means any person to whom a debt

is owed and includes a financial creditor, an operational

creditor, a secured creditor, an unsecured creditor and a

decree-holder;

Section 3 (11) "debt" means a liability or obligation in respect

of a claim which is due from any person and includes a

financial debt and operational debt;

Section 3 (12) "default" means non-payment of debt when

whole or any part or instalment of the amount of debt has

Company Appeal (AT) (Ins) No.166 of 2022 Page 13 of 21 become due and payable and is not [paid] by the debtor or

the corporate debtor, as the case may be;

Section 5(20) "operational creditor" means a person to whom

an operational debt is owed and includes any person to

whom such debt has been legally assigned or transferred;

Section 5(21) "operational debt" means a claim in respect of

the provision of goods or services including employment or a

debt in respect of the [payment] of dues arising under any law

for the time being in force and payable to the Central

Government, any State Government or any local authority;

Section 8 -: Insolvency resolution by operational

creditor.

(1) An operational creditor may, on the occurrence of a default,

deliver a demand notice of unpaid operational debt or copy of

an invoice demanding payment of the amount involved in the

default to the corporate debtor in such form and manner as

may be prescribed.

(2) The corporate debtor shall, within a period of ten days of

the receipt of the demand notice or copy of the invoice

mentioned in sub-section (1) bring to the notice of the

operational creditor--

Company Appeal (AT) (Ins) No.166 of 2022 Page 14 of 21

(a) existence of a dispute, [if any, or] record of the pendency of

the suit or arbitration proceedings filed before the receipt of

such notice or invoice in relation to such dispute;

(b) the [payment] of unpaid operational debt-- (i) by sending

an attested copy of the record of electronic transfer of the

unpaid amount from the bank account of the corporate debtor;

or (ii) by sending an attested copy of record that the

operational creditor has encashed a cheque issued by the

corporate debtor.

Explanation.--For the purposes of this section, a "demand

notice" means a notice served by an operational creditor to

the corporate debtor demanding [payment] of the operational

debt in respect of which the default has occurred.

Section 9 - Application for initiation of corporate

insolvency resolution process by operational creditor.

(1) After the expiry of the period of ten days from the date of

delivery of the notice or invoice demanding payment under

subsection (1) of section 8, if the operational creditor does not

receive payment from the corporate debtor or notice of the

dispute under sub-section (2) of section 8, the operational

creditor may file an application before the Adjudicating

Authority for initiating a corporate insolvency resolution

process.

Company Appeal (AT) (Ins) No.166 of 2022 Page 15 of 21 (2) The application under sub-section (1) shall be filed in such

form and manner and accompanied with such fee as may be

prescribed.

(3) The operational creditor shall, along with the application

furnish--

(a) a copy of the invoice demanding payment or demand

notice delivered by the operational creditor to the corporate

debtor;

(b) an affidavit to the effect that there is no notice given by the

corporate debtor relating to a dispute of the unpaid

operational debt;

(c) a copy of the certificate from the financial institutions

maintaining accounts of the operational creditor confirming

that there is no payment of an unpaid operational debt [by the

corporate debtor, if available;]

(d) a copy of any record with information utility confirming

that there is no payment of an unpaid operational debt by the

corporate debtor, if available; and

(e) any other proof confirming that there is no payment of any

unpaid operational debt by the corporate debtor or such other

information, as may be prescribed.]

(4) An operational creditor initiating a corporate insolvency

resolution process under this section, may propose a

Company Appeal (AT) (Ins) No.166 of 2022 Page 16 of 21 resolution professional to act as an interim resolution

professional.

(5) The Adjudicating Authority shall, within fourteen days of

the receipt of the application under sub-section (2), by an

order-- (i) admit the application and communicate such

decision to the operational creditor and the corporate debtor

if,--

(a) the application made under sub-section (2) is complete;

(b) there is no [payment] of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor

has been delivered by the operational creditor;

(d) no notice of dispute has been received by the operational

creditor or there is no record of dispute in the information

utility; and

(e) there is no disciplinary proceeding pending against any

resolution professional proposed under sub-section (4), if any.

(ii) reject the application and communicate such decision to

the operational creditor and the corporate debtor, if--

(a) the application made under sub-section (2) is incomplete;

(b) there has been [payment] of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice for

payment to the corporate debtor;

Company Appeal (AT) (Ins) No.166 of 2022 Page 17 of 21

(d) notice of dispute has been received by the operational

creditor or there is a record of dispute in the information

utility; or

(e) any disciplinary proceeding is pending against any

proposed resolution professional: Provided that Adjudicating

Authority, shall before rejecting an application under sub-

clause (a) of clause (ii) give a notice to the applicant to rectify

the defect in his application within seven days of the date of

receipt of such notice from the adjudicating Authority.

(6) The corporate insolvency resolution process shall

commence from the date of admission of the application under

sub-section (5) of this section."

j. The above provisions of the Code clearly provides for the

requirements of following three criteria's before admission of a

petition under Section 9 of the Code for initiation of CIRP by

Operational Creditor (i) the 'Debt' must be due and payable in law

(ii)there must be occurrence of default & (iii) the 'Debt' must be

undisputed.

k. The accumulation of input tax credit is a pool and if the said pool

gets tainted then it is a grey area whether the dealer in the pool is

permitted to withdraw any amount from the said pool irrespective of

Company Appeal (AT) (Ins) No.166 of 2022 Page 18 of 21 the period of transaction. In the present case, situation is being

perceived.

l. It is very much clear that the amount is outstanding. But the

amount is not due and payable in the law as is very much evident

from the facts that one of the supplier of the Appellant has on the

basis of intelligence input and investigation conducted by 'anti

invasion' branch of the Commissionerate of GST has revealed that

the concerned supplier has taken registration under GST Regime is

nonexistent and fictious, resulting into perceived loss of more than

two times of the outstanding amount loss to the CD without any

mistake on the part of the CD. It has created a cumbersome

situation and CD has asked for corresponding bank guarantees

which has been refused by the Appellant and hence it has resulted

into a dispute. So, it can be concluded that it is not meeting the

criteria of either debt is due and payable in law or the Debt must be

undisputed which are the pre-requisite for the admission of case

under Section 9 of the Code. The Appellant is not even meeting the

criteria 'as enunciated in Section 9(5)(d) as no notice of dispute has

been received by the Operational Creditor. The Operational Creditor

has raised the issue with a dispute that the Appellant is not

Company Appeal (AT) (Ins) No.166 of 2022 Page 19 of 21 providing bank guarantee. The Appellant /OC has factually failed to

communicate that there is no existence of dispute

m. The Hon'ble Supreme Court has already amplified the role of the

Adjudicating Authority on the question of consideration of dispute in

Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software Pvt. Ltd, AIR 2017 SC

4532 at para 40:

"All the adjudicating authority is to see at

this stage is whether there is a plausible

contention which requires further

investigation and that the "dispute" is not a

patently feeble legal argument or an

assertion of fact unsupported by evidence....

The Court does not at this stage examine the

merits of the dispute except to the extent

indicated above. So long as a dispute truly

exists in fact and is not spurious,

hypothetical or illusory, the adjudicating

authority has to reject the application."

n. All these reflects that the application has been filed with the sole

motive of chasing for payments. Now Hon'ble Supreme Court has

already settled the matter that the provisions of the Code is not

intended to be a substitute to be a recovery forum. The Hon'ble

Supreme Court in Civil Appeal No.9597 of 2018, "Transmission

Company Appeal (AT) (Ins) No.166 of 2022 Page 20 of 21 Corporation of Andhra Pradesh limited Vs. Equipment Conductors

and Cables Limited" vide para 15 has already held that IBC is not

intended to be a substitute to a recovery forum and also laid down

that whenever there is existence of real dispute, the IBC provisions

cannot be invoked. The Code cannot be used whenever there is

existence of real dispute and also whenever the intention is to use

the Code as a means for chasing of payment or building pressure for

releasing the payments.

o. In view of the above stated position fact and law, we are unable to

disagree with the Adjudicating Authority and uphold the view of the

Adjudicating Authority. The Appeal is dismissed. No order as to

costs.

[Justice Rakesh Kumar] Member (Judicial)

(Dr. Ashok Kumar Mishra) Member(Technical)

30th May, 2022

New Delhi

Raushan.K

Company Appeal (AT) (Ins) No.166 of 2022 Page 21 of 21