GST and IBC Overlap: The Delhi High Court Takes a Prudent View

I. Introduction 

The Delhi High Court, in its recent judgment of Kanwal Chaudhary v IBBI & Ors held that when an advocate – registered under the Advocates Act, 1961 – provides services as an insolvency professional, the tax regime applicable ‘would be that which applies to Insolvency Professionals, and not that which applies to Advocates.’ (para 106) The High Court further clarified an advocate is permitted to provide services as an insolvency professional, but to the extent they provide such services, it will be governed by the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and not the law otherwise applicable to advocates when they provide legal services. 

The Delhi High Court’s judgment is a well-reasoned, and bifurcates the legal services provided by an advocate and the services provided by it in the capacity of an insolvency professional under the IBC. And, by doing so introduced clarity about the obligations in respect of Goods and Services Tax (‘GST’) liability of the advocate acting as an insolvency professional.   

II. Basic Facts 

The petitioner was registered as an advocate with the Delhi Bar Council since 1995. The petitioner also registered as an insolvency professional in 2017. In December 2018, the petitioner was appointed as an interim resolution professional for a corporate debtor – Ireo Fiveriver Pvt Ltd – and subsequently, another person took over as the resolution professional. The petitioner demanded the payments for its services as an interim resolution professional but was requested to submit ‘GST compliant invoices’. In response, the petitioner claimed that advocates were not registered nor required to be registered under the Central Goods and Services Tax Act, 2017 (‘CGST Act, 2017’). The petitioner rested its claim on Section 9(3) and (4) of the CGST Act, 2017 read with Notification No. 12/2017 Central Tax (Rate) read with Notification No. 13/2017(Central Tax) (‘impugned notifications’). 

The impugned notifications contained a list of services exempt from GST and services subject to reverse charge mechanism under GST. As per the petitioner, a cumulative reading of the impugned notifications meant that advocates were exempt from registration under GST. Thus, any legal services provided by advocates to corporates were subject to reverse charge. And to this extent, the petitioner argued correctly. The untested part was the petitioner’s argument that: if an advocate provides insolvency services they should be treated as akin to legal services and be subjected to reverse charge.  

The petitioner approached the NCLT claiming exemption from registration. The NCLT, acknowledged the novelty of claim and directed the IBBI to clarify about the GST payable. The Insolvency and Bankruptcy Board of India (‘IBBI’) clarified that the petitioner was required to submit GST compliant invoices for the professional fees and cannot claim exemption from registration by invoking its status as an advocate.  

III. Delhi High Court 

(a) Advocates and Insolvency Professionals: Reverse and Forward Charge

The Delhi High Court made two correct observations by combing through the impugned notifications, various court orders on status of advocates and insolvency professionals under GST: 

firstly, under impugned notifications read with successive court orders, the current legal position was that services rendered by advocates were governed by reverse charge mechanism under the CGST Act, 2017. 

Secondly, the services provided by an insolvency professional were governed by forward charge mechanism under impugned notifications. 

The Delhi High Court’s conclusion on this point was: 

insofar as Advocates are concerned, they are governed by the ‘reverse charge mechanism’ for the purposes of payment of GST, whereas Insolvency Professionals, as a class, are governed by the ‘forward charge mechanism’, for the said purpose. (para 67)

Since the petitioner was registered as both – as an advocate and as an insolvency resolution professional, the Delhi High Court was confronted with the question: what will be the applicable tax regime when an advocate provides services as an insolvency professional?

(b) Insolvency Professionals are a Distinct Class

The Delhi High Court examined the regulatory framework relating to insolvency professionals under the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (‘IBBI Regulations’). The High Court noted that professionals with varied qualifications of law, management, economics, accountancy were eligible to register as insolvency professionals. And advocates were a sub-set of professionals who qualified as insolvency professionals. Underlining the fact that insolvency professionals were governed by IBBI Regulations and issued registration certificates by IBBI, the High Court observed that: 

Insolvency Professionals, therefore, constitute a distinct class, governed exclusively by the IBC and the IBBI Regulations. The fact that such persons possess other qualifications or registrations, would not make them distinct or different from the class as a whole. The Insolvency Professionals as a class, are a singular, and distinct class by themselves. (para 87)

While insolvency professionals may come from varied backgrounds, may possess varied qualifications, once the IBBI registers them as insolvency professionals to that extent they are regulated under IBC Regulations. And form a separate class with no bifurcations based on their previous qualifications.    

(c) Insolvency Services are not Legal Services 

Thereafter, the Delhi High Court examined the scheme of classification under GST and noted that the broad head of ‘Legal and Accounting Services’ had four distinct codes including a residuary category. However, the Revenue Department did not intend to include ‘insolvency and receivership services’ under ‘legal services’ because the former had been assigned a distinct code. This implied two things: insolvency and receivership services were distinct from legal services and services provided by insolvency professional were not ‘legal services’ merely because such a person was also registered as an advocate. 

The above led to an obvious conclusion that: 

when an Advocate renders services as an Insolvency Professional, the role in which he acts is that of an Insolvency Professional, and not that of an Advocate. It is this role– that of a provider of ‘insolvency and receivership’ services –that is determinative of the nature of services rendered for the purpose of classification, and NOT the underlying professional qualification or the registration of the individual concerned. (para 95)

The Delhi High Court held that insolvency professionals as a class as regulated by IBBI and cannot be treated differently based on their qualifications. For example, an advocate acting as an insolvency professional cannot be treated differently from a chartered accountant acting as an insolvency professional. 

(d) Reconciling Role of an Advocate and Insolvency Services

The petitioner’s contention was that it will have to suspend its enrolment as an advocate if insolvency services are treated as distinct from legal services. This is because an advocate under the Advocates Act, 1961 can only render legal services. However, the Delhi High Court did not accept the above argument. The High Court relied on Bar Councils of India’s affidavit where it was clarified that services provided by an advocate as an interim resolution professional were not legal services. The BCI termed services offered by an insolvency professional as ‘professional and managerial services’, incomparable to conventional legal services. Further, the High Court observed that Regulation 5, IBBI Regulations itself prescribes that an ‘advocate enrolled with the Bar Council of India’  was eligible to be registered as an insolvency professional. The High Court concluded that: 

Where another statute, such as the IBC and IBBI regulations permits Advocates to additionally qualify as Insolvency Professionals, it does not derogate from the Advocates Act, 1961. It merely offers another stream or opportunity for Advocates to render more specialised and niche services. Such services may be connected with law, however, thiswould not mean that Advocates shall, for that reason, always be governed by the Advocates Act, 1961 and the Bar Council of India rules, since there is a separate regulatory mechanism for Insolvency Professionals as a class. (para 103)

Thus, the Delhi High Court rejected the petitioner’s categorisation of services offered by an advocate into one single basket: legal services. Instead, the High Court relying on BCI’s affidavit and IBBI Regulations concluded that when an advocate is providing services as an insolvency professional it is not offering legal services. But, a distinct category of services under the aegis and supervision of IBBI. And thus, rejected the petitioner’s argument that it was exempt from registration under CGST Act, 2017 by virtue of its status as an advocate. The petitioner’s services as an insolvency professional were subject to forward charge. And if the petitioner wished to claim its professional fee for services offered as an insolvency professional, it will have to submit GST compliant invoices.   

IV. Conclusion 

The Delhi High Court’s decision is well reasoned and interpreted the CGST Act, 2017 and IBC in a harmonious manner. The High Court reasoned that interpretation of statutes must support an advocate’s ability to render services in other areas of law if it is permitted by a statute. Since an advocate enrolled under the Advocates Act, 1961 can provide services as an insolvency professional under the IBBI Regulations. Thus, to the extent an advocate renders insolvency services it will be regulated by IBC regime and not Advocates Act, 1961. And an insolvency professional cannot claim differentiated treatment merely because it possesses qualifications of an advocate. All insolvency professionals will be subjected to same tax regime, i.e., forward charge under GST.