Service tax department claims the first right to recover dues from Kingfisher Airlines

MUMBAI: Lenders to Kingfisher Airlines are likely to face a hurdle from an unexpected quarter in their bid to recover loans from the grounded carrier. The service tax department has claimed the first right to recover dues by attaching ‘Kingfisher House’ located in Vile Parle, a western suburb in Mumbai, and two company helicopters.

“The tax department is seeking the recovery of around Rs 100 crore from the defunct airline, which includes statutory dues of Rs 62 crore and interest,” said a senior tax department official privy to the development. “We have also frozen certain bank accounts of the company to recover dues.”

The department has filed petitions with the Debt Recovery Tribunal (DRT) in Mumbai and in Bangalore, where a consortium of banks headed by the State Bank of India is fighting to recover their money. The others include Axis Bank, Bank of Baroda, Bank of India, Central Bank of India and Corporation Bank.

More than 17 banks had collectively lent over Rs 7,000 crore to the Vijay Mallya-promoted airline and have now started the recovery process. Some of them have taken steps to declare Kingfisher Airlines a willful defaulter.

According to a senior tax official, the carrier, which stopped operations in October 2012, allegedly did not deposit the service tax collected on ticket sales with the department and diverted the money for other purposes.

The government has said that stern action will be taken against service tax evaders and provisions in the Finance Act relating to arrest and prosecution will be enforced in right earnest.

“The service tax dues representing the sovereign debt has priority of recovering tax dues vis-à-vis state banks and other consortium banks,” said Advait Sethna, a counsel representing the revenue department. “The dues will be around Rs 100 crore, including interest.”

“Service tax dues, all of the said dues being in the nature of Crowned Debt/Sovereign Debt, confer a statutory first charge on the applicant for the recovery thereof, inter-alia, under section 88 of the Finance Act which was (HAS?) overriding application,” according to the petition filed by the department in the tribunal.

“We are not aware of any filing before the DRT Mumbai,” Prakash Mirpuri, vice president of corporate communications at Mallya’s UB Group, said in an email reply. “The tax department has filed an intervention petition to implead themselves in the case filed before DRT Bangalore.”

According to the law, once a company is declared a willful defaulter, criminal proceedings can be initiated against its promoters and directors, who will also not be allowed to raise fresh funds from banks and set up new ventures for five years. As per RBI guidelines, it will have to be proved that the borrower diverted funds taken from a bank and did not repay the loan despite having the ability to pay it.

"The service tax department's claim, as does any other revenue claim against an insolvent company, enjoys a preferential right above unsecured creditors, in law," said Fereshte Sethna, founding partner at Dutt Menon Dunmorrsett. "While tax dues will rank below the overriding priority accorded to claims of workmen & secured creditors. Of course, that is hardly a deterrent to an unsecured creditor asserting its claims."