Delhi High Court Clarifies GST Obligations for Advocates Acting as Insolvency Professionals
The Delhi High Court has delivered a significant ruling, asserting that advocates serving as insolvency professionals are mandated to collect and deposit Goods and Services Tax (GST) under the forward charge mechanism. This decision arises from the case Kanwal Chaudhary v. Insolvency and Bankruptcy Board of India.
A Division Bench comprising Justices Prathiba M Singh and Shail Jain has concluded that advocates providing insolvency and receivership services must secure GST registration and adhere to all relevant compliance requirements specific to insolvency professionals. The Court stated, “An Advocate acting as an Insolvency Professional would, therefore, be governed by the ‘forward charge mechanism’, applicable to Insolvency Professionals as a class, rather than the ‘reverse charge mechanism’ typically applied to Advocates rendering legal services.”
Understanding the Forward Charge Mechanism
In the forward charge mechanism, the service provider is responsible for adding GST to the invoice, collecting it from the recipient, and subsequently depositing it with the government. Conversely, the reverse charge mechanism places the onus of depositing GST on the service recipient. The Court clarified that this ruling is confined to services rendered by advocates in their role as insolvency professionals. Legal services provided by advocates will continue to fall under the reverse charge mechanism.
The Case of Advocate Kanwal Chaudhary
This judgment emerged from a petition by Advocate Kanwal Chaudhary, who has been a registered insolvency professional since July 2017. In December 2018, the National Company Law Tribunal (NCLT) appointed Chaudhary as the interim resolution professional for Ireo Fiveriver Private Limited. A dispute arose regarding the payment of ₹49.04 lakh towards his fees and expenses.
Chaudhary argued that as an advocate, he was exempt from obtaining GST registration, contending that any GST on his professional fees should be handled by the corporate debtor through the reverse charge mechanism. However, in March 2021, the Insolvency and Bankruptcy Board of India (IBBI) dismissed this claim, instructing him to submit GST-compliant invoices. Chaudhary subsequently challenged this directive in the High Court.
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Court’s Analysis and Decision
The Court refuted Chaudhary’s assertion that services rendered as an insolvency professional equate to legal services. It emphasized that insolvency professionals undertake distinct roles, such as managing corporate debtor affairs, processing creditor claims, and conducting statutory duties under the Insolvency and Bankruptcy Code (IBC). “Insolvency Professionals as a class are a singular, and distinct class by themselves,” the Court observed.
Moreover, the Bench referred to the GST Scheme of Classification of Services, where “insolvency and receivership services” are classified separately under service code 998241, distinct from legal services. The Court underscored that the specific classification takes precedence over the general legal services category, highlighting that the nature of the service, rather than the professional qualifications of the provider, dictates the applicable GST mechanism.
An affidavit from the Bar Council of India was also noted, supporting the view that functions performed by advocates as insolvency professionals differ from traditional legal services and are subject to GST under the forward charge. The Court upheld the IBBI’s March 2021 decision, directing Chaudhary to issue GST-compliant invoices for his services as interim resolution professional.
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Various legal representatives appeared in the case, including Advocates Rajat Navet, Kushagra Pandit, and Rajat Rana for Chaudhary; Ashish Verma, Nikhil Thakur, and Kriti for the IBBI; and Pulkit Deora, Sagar Pathak, and Vinamra Kothari for the resolution professional KV Jain. Senior Standing Counsel Ruchesh Sinha and Advocate Upasna Vashistha represented the GST Department, while Advocates Preetpal Singh, Simran Kumari, and Pooja represented the Bar Council of India.
