Karnataka High Court Sets Aside Central Excise Demand Against Patanjali Foods Limited; Holds Demand Extinguished Due to Non-Inclusion in Insolvency Resolution Plan

Court’s Decision:

The Karnataka High Court set aside the order passed by the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), which held that the appeal filed by the assessee has abated under Rule 22 of the CESTAT (Procedure) Rules, 1982. The High Court ruled that the demand of ₹5,09,15,106/- raised against the assessee stood extinguished as it was not included in the approved resolution plan under the Insolvency and Bankruptcy Code (IBC).

Facts:

1. The appellant (Patanjali Foods Limited, formerly Ruchi Soya Industries Ltd.) is engaged in the manufacture of Edible Refined Oils. An Order-in-Original dated 2.11.2012 was passed by the Commissioner of Central Excise, Mangaluru, confirming a central excise duty of ₹8,06,44,997/- for the period between 14.7.2009 and 26.8.2011. An amount of ₹2,97,29,891/- was appropriated, and a demand for the remaining duty of ₹5,09,15,106/- was raised.
2. During the pendency of the appeal, the National Company Law Tribunal (NCLT), Mumbai, ordered the commencement of the Corporate Insolvency Resolution Process (CIRP) against Ruchi Soya Industries Limited. The CIRP was subsequently concluded with a resolution plan approved by the NCLT on 24.7.2019.
3. After the approval of the resolution plan, the business was taken over by Patanjali Foods Limited, and no claim was filed by the revenue for the excise duty demand during the CIRP.

Issues:

1. Whether the CESTAT erred in holding that the appeal filed by the appellant has abated under Rule 22 of the CESTAT (Procedure) Rules, 1982.
2. Whether the central excise demand of ₹5,09,15,106/- should stand extinguished due to non-inclusion in the approved resolution plan under the IBC.

Petitioner’s Arguments:

1. The petitioner argued that the demand for excise duty was not a part of the approved resolution plan and hence stood extinguished under Section 32A of the IBC.
2. It relied on the judgments of the Supreme Court in the cases of Ghanshyam Mishra v. Edelweiss Reconstruction Company Ltd. and Ruchi Soya Industries Limited v. Union of India, which held that any claims not included in the approved resolution plan are extinguished.
3. The petitioner contended that the CESTAT’s reliance on Rule 22 of the 1982 Rules to hold that the appeal has abated is erroneous.

Respondent’s Arguments:

1. The revenue did not dispute the position of law as laid down by the Supreme Court but contended that the entire excise duty of ₹8,06,44,997/- confirmed by the Order-in-Original cannot be treated as extinguished.
2. The respondent argued that the amount of ₹2,97,29,891/- appropriated by the revenue should not be subject to a refund, even if the remaining demand is extinguished.

Analysis of the Law:

1. The Karnataka High Court referred to the Supreme Court’s decision in Ghanshyam Mishra v. Edelweiss Reconstruction Company Ltd., which clarified that once a resolution plan is approved, all claims not included in the resolution plan stand extinguished, and no proceedings can be continued.
2. The court also relied on Ruchi Soya Industries Ltd. v. Union of India, where the Supreme Court reiterated that any claim not a part of the resolution plan would not survive after the approval of the resolution plan.

Precedent Analysis:

1. The Gujarat High Court in Commissioner of Customs v. Patanjali Foods Limited had held that claims not included in the resolution plan stand extinguished, even if the revenue did not lodge its claim during the CIRP process.
2. This judgment aligned with the Supreme Court’s rulings in Ghanshyam Mishra and Ruchi Soya Industries Ltd.

Court’s Reasoning:

1. The court found that Rule 22 of the CESTAT (Procedure) Rules, 1982, which states that an appeal would abate if a party is adjudicated as insolvent, was incorrectly applied by the Tribunal.
2. Since the CIRP had resulted in a successful resolution and not liquidation, Rule 22 was not applicable, and the appeal could not be deemed as abated.
3. As the demand of ₹5,09,15,106/- was not included in the resolution plan and no claim was filed by the revenue before the IRP, the demand stood extinguished as per the provisions of the IBC.

Conclusion:

1. The Karnataka High Court allowed the appeal, set aside the CESTAT’s order, and declared that the demand of ₹5,09,15,106/- against the assessee has abated.
2. However, it held that the assessee is not entitled to a refund of the amount of ₹2,97,29,891/- already appropriated by the revenue.

Implications:

The judgment reiterates that claims not included in a resolution plan under the IBC stand extinguished, and revenue authorities cannot continue with recovery proceedings for such claims post-approval of the resolution plan. The ruling also highlights the inapplicability of Rule 22 of the CESTAT (Procedure) Rules, 1982, in cases where a resolution plan is approved under the IBC, reaffirming the supremacy of the IBC in resolving corporate insolvency.

Also Read – High Court of Jharkhand Dismisses Appeal – Conviction Upheld for Husband in Wife’s Murder Case; “Mere Suspicion Cannot Replace Proof”