GST Liability of Advocates Acting as Insolvency Professionals: Delhi High Court Rules Forward Charge Mechanism Applies

Overview of the Dispute

A significant question concerning the intersection of GST law and insolvency practice came before the Delhi High Court in Kanwal Chaudhary Vs Insolvency And Bankruptcy Board of India & Ors. The central legal issue was whether an Advocate, who also holds registration as an Insolvency Professional, remains covered by the reverse charge mechanism applicable to legal services — or whether, when rendering services specifically as an Insolvency Professional, the forward charge mechanism under Section 9(1) of the Central Goods and Services Tax Act, 2017 governs.

The Court's ruling has far-reaching implications for the approximately 283 Advocates currently registered as Insolvency Professionals with the Insolvency and Bankruptcy Board of India (IBBI).

Factual Background

Mr. Kanwal Chaudhary, an Advocate enrolled with the Bar Council of Delhi since 1995, also qualified the Limited Insolvency Examination and obtained registration as an Insolvency Professional with effect from 27th July, 2017. On 13th December, 2018, the NCLT, Delhi Bench admitted an application filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 in CP(IB) No. 408/2018 (Workspace Consulting Pvt. Ltd. v. Ireo Fiveriver Pvt. Ltd.) and appointed Mr. Chaudhary as the Interim Resolution Professional (IRP) for the corporate debtor, Ireo Fiveriver Pvt. Ltd.

In his capacity as IRP, Mr. Chaudhary raised invoices dated 13th August, 2019 and 31st October, 2019 towards professional fees. After Mr. K.V. Jain was appointed as Resolution Professional on 17th September, 2019, a dispute arose over non-payment. Mr. Chaudhary filed applications (CA 430/ND/2019 and CA 1268/ND/2020) before the NCLT seeking release of outstanding amounts.

The Resolution Professional called upon Mr. Chaudhary to furnish GST-compliant invoices, which Mr. Chaudhary declined, asserting that he was neither registered under GST nor obligated to be, being covered by the exemption under Section 9(3) and Section 9(4) of the CGST Act read with Notification No. 12/2017 Central Tax (Rate) and Notification No. 13/2017-Central Tax (Rate), both dated 28th June, 2017.

The NCLT, vide its order dated 7th October, 2020, directed payment of the balance amount of Rs. 49,04,988/- and referred the GST classification question to the IBBI for clarification.

The IBBI, by its order dated 9th March, 2021, concluded that "Insolvency and Receivership" services do not fall within the reverse charge mechanism and directed Mr. Chaudhary to submit GST-compliant invoices for fees charged in his capacity as IRP. Aggrieved by this determination, Mr. Chaudhary approached the Delhi High Court under Article 226 of the Constitution of India.

Forward Charge — The Default Rule

Section 9(1) of the CGST Act, 2017 is the primary charging provision, imposing central tax on all supplies of goods or services. Read with Section 2(107) and Section 22, the CGST Act establishes that the supplier of goods or services is the "taxable person" required to discharge GST liability. This is the forward charge mechanism and constitutes the default rule.

Under this mechanism, the supplier includes GST in the invoice raised and deposits the tax with the Government.

Reverse Charge — The Exception

Section 9(3) of the CGST Act empowers the Central Government, on the recommendations of the GST Council, to notify specific categories of supply where the recipient (rather than the supplier) bears the liability to pay GST. These notified categories are governed by the reverse charge mechanism (RCM).

Two notifications are directly relevant to the taxation of Advocates:

  1. Notification No. 12/2017 Central Tax (Rate) dated 28th June, 2017 — defines "advocate" by reference to clause (a) of sub-section (1) of section 2 of the Advocates Act, 1961 and defines "legal service" as:

"any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority"

  1. Notification No. 13/2017-Central Tax (Rate) dated 28th June, 2017 — specifies categories of services on which central tax under Section 9 shall be paid on reverse charge basis by the recipient, which includes:

"Services supplied by an individual advocate including a senior advocate by way of representational services before any court, tribunal or authority, directly or indirectly, to any business entity located in the taxable territory, including where contract for provision of such service has been entered through another advocate or a firm of advocates, or by a firm of advocates, by way of legal services, to a business entity."

The J.K. Mittal Orders and Their Scope

The petitioner placed significant reliance on interim orders passed by a Coordinate Bench of the Delhi High Court in J.K. Mittal & Company v. Union of India & Ors. — W.P. (C) 5709/2017.