India operations of Chinese ZTE Telecom face insolvency proceedings

The India operations of Chinese telecom equipment company ZTE Telecom India Pvt Ltd will undergo corporate insolvency resolution process (CIRP) after the Chandigarh bench of the National Company Law Tribunal (NCLT) admitted the insolvency application against the company.

Giesecke & Devrient MS India Private Limited (operational creditor), which acted as the sub-contractor of ZTE Telecom India to perform its obligations towards the customer, had filed the insolvency application against the Chinese firm for its failure to pay Rs 40.38 lakh crore.

Brief of the case

ZTE Telecom is contracted by telecom customers to install, supply, render services, etc. for fixed or mobile digital telecommunication network. Giesecke & Devrient MS was engaged as a sub-contractor to perform the obligations of corporate debtor towards the customers.

ZTE Telecom was under obligation to make payments of all applicable taxes on the invoice amount, including but not limited to the Service Tax for services provided. However, Giesecke & Devrient MS till date had not received any payment towards the service tax total amounting to Rs 40.38 lakh.

The default occurred on 20 November 2017, when Giesecke & Devrient informed ZTE Telecom through email that it has already deposited the Service Tax amount with the tax authorities for the invoices raised by it. A demand notice was issued by Giesecke & Devrient on 14 February 2019 and the same has been delivered to ZTE Telecom via registered post.

ZTE gave a reply dated 1 April 2019 to demand notice wherein it was stated that it was making payments from time to time. However, the operational creditor pointed out that four invoices were rejected for various technical reasons and one invoice was not received by the corporate debtor. After the rejection of 4 invoices, it was agreed between the parties that ZTE would release fresh purchase orders under the GST regime for 2016-17, and Giesecke would further release fresh invoices under the GST regime and the same shall be submitted by the petitioner to the respondent for payment.

ZTE uploaded on the portal fresh purchase orders under the GST regime and informed the operational creditor vide email dated 20 November 2017. However, Giesecke informed ZTE that it had already submitted 15% Service Tax component for the cancelled/rejected invoices (ST Invoices) raised earlier under the Service Tax regime before 30 June 2017 and requested the Chinese firm to provide a workaround for the tax component.

The corporate debtor opposed the plea by saying that Giesecke was not required to take 18% tax as mentioned under the GST regime as it can adjust only 15% and the remaining 3% would be borne by the former against the fresh invoices released under the GST regime.  Giesecke was informed that the service tax paid against the unaccounted invoices was not a cost to ZTE and same can be carried forward to the GST regime within six months from 1 July 2017. There were 45 days from the date of submission of the original Service Tax Return. Since, there was a technical issue with the ST invoices, due to which the ST invoices were cancelled. Therefore, there is no amount left due and payable.

ZTE also argued in the tribunal that the invoices submitted by the operational creditor in the tribunal to establish the default were different and were not signed. It also argued that it had pre-existing disputes with Giesecke.

However, the NCLT felt that the documents submitted by the operational creditor were good enough to establish the default, and accordingly it admitted the plea against ZTE Telecom.

The NCLT appointed Naresh Kumar Aggarwal as the interim resolution professional.

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