The Delhi High Court has ruled that advocates acting as insolvency professionals are liable to collect Goods and Services Tax (GST) from recipients of their services and deposit it with the government under the forward charge mechanism. A Division Bench of Justices Prathiba M Singh and Shail Jain held that advocates providing insolvency and receivership services must obtain GST registration and comply with the requirements applicable to insolvency professionals as a class.
An Advocate acting as an Insolvency Professional would, therefore, be governed by the ‘forward charge mechanism’, which is applicable to Insolvency Professionals, as a class, and not by the ‘reverse charge mechanism’, which is otherwise applicable to Advocates rendering legal services, the Court said.
Under the forward charge mechanism, the service provider adds GST to the invoice, collects it from the recipient and deposits it with the government. Under the reverse charge mechanism, the recipient of the service is responsible for depositing GST.
The Court clarified that its ruling applies only to services rendered by advocates in their capacity as insolvency professionals. Legal services provided by them as advocates will continue to be governed by the reverse charge mechanism.
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The judgment came on a petition filed by Advocate Kanwal Chaudhary, who has been registered as an insolvency professional since July 2017. In December 2018, the National Company Law Tribunal appointed Chaudhary as the interim resolution professional for Ireo Fiveriver Private Limited, and a dispute subsequently arose over the payment of his fees and expenses.
Chaudhary contended that being an advocate, he was not required to obtain GST registration, and any GST payable on his professional fees had to be deposited by the corporate debtor under the reverse charge mechanism. The Insolvency and Bankruptcy Board of India rejected this position and directed him to submit GST-compliant invoices in March 2021.
The Court rejected Chaudhary’s argument that services provided by an advocate as an insolvency professional continued to qualify as legal services. It held that an insolvency professional performs a role distinct from that of an advocate, managing the affairs of corporate debtors, receiving claims from creditors, conducting Committee of Creditors meetings and performing other statutory duties under the Insolvency and Bankruptcy Code.
Insolvency Professionals as a class are a singular, and distinct class by themselves, and the Court referred to the GST Scheme of Classification of Services, where “insolvency and receivership services” are specifically classified under service code 998241.
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The specific classification must prevail over the general category of legal services, and it is the nature of the service and not the underlying professional qualification of the service provider that determines the applicable GST mechanism.
The Court took note of an affidavit filed by the Bar Council of India stating that the functions performed by advocates acting as insolvency professionals are different from conventional legal services and attract GST under forward charge.
The Court upheld the IBBI’s March 2021 decision and directed Chaudhary to issue GST-compliant invoices for the fees charged by him as interim resolution professional.
Chaudhary was represented by Advocates Rajat Navet, Kushagra Pandit and Rajat Rana. The IBBI was represented by Advocates Ashish Verma, Nikhil Thakur and Kriti.
