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The Delhi High Court recently answered significant legal issues with respect to the disputes arising out of the Micro Small and Medium Enterprises Development Act, 2006 (Hereinafter ‘MSMED Act, 2006’).

Justice Pratibha M. Singh, in a series of judgments delivered last week, dealt with the following issues;

(i) Whether the supplier ought to be registered under MSMED Act, 2006 on the date when the contract is executed between the parties, in order to avail the arbitral mechanism prescribed under the Act? [Grand Mumtaz Hotel v. Deputy Commissioner North East Government of NCT Delhi, WP (C) 16588 of 2022, delivered on July 5, 2023]

Answered in affirmative;

The court said, “Registration of an entity under the MSMED Act, 2006 after the contract is executed and that too after the services have been rendered, cannot give benefit of the provisions of the Act, to such entity”

The petitioner in the present case was seeking quashing of the reference order dated October 8, 2022 passed by the Deputy Commissioner, North East, NCT of Delhi, acting as Micro and Small Enterprises Facilitation Council (MSMEFC) under the MSMED Act, 2006.

By the impugned order, the Facilitation Council forwarded the reference sought under Section 18 by respondent no. 2 to Delhi International Arbitration Centre (DIAC).

Judgments relied: Silpi Industries v. KSRTC, 2021 SCC OnLine SC 439, Gujarat State Civil Supplies Corporation v. Mahakali Foods, 2022 SCC OnLine SC 1492, Malani Construction Company v. DIAC, 2023 SCC OnLine Del 1665.

(ii) Whether an independent claim can be entertained by the MSEF at the instance of the buyer? [Uniseven Engineering and Infrastructure Pvt. Ltd. v. MSEFC, WP (C) 11233 of 2021, delivered on July 5, 2023]

Answered in negative;

The court observed, “The plain reading of the statute makes it categorically applicable only in respect of claims recoverable by Suppliers, who are registered under the Act as Micro or Small Enterprises. Since the MSMED Act, 2006 itself has been enacted for the purpose of extending benefits to Suppliers, who are registered under the Act as Micro or Small Enterprises, it does not contemplate the reverse obligation i.e. claims relating to the amount recoverable from the Suppliers under the MSMED Act, 2006. Thus, a literal reading of the various provisions shows that a Buyer cannot maintain an independent claim against the Supplier under the MSMED Act, 2006.”

In the present case, respondent no. 2 who was the buyer, sought a reference under Section 18 of the MSMED Act against the supplier as an independent claim.

The said claim was allowed vide the impugned order dated September 14, 2021 and the petitioner was directed to pay Rs. 9,59,66,352 to respondent no. 2.

Judgments distinguished on facts: Silpi Industries v. KSRTC, 2021 SCC OnLine SC 439, Steel Authority of India v. MSEFC, AIR 2012 Bom 178.

Provisions relied: Ss. 15,16,17,18 of the MSMED Act, 2006.

(iii) Whether the Facilitation Council (MSEFC) can entertain references to arbitration from Medium Enterprises, in addition to those made by Micro or Small Enterprises under the MSMED Act, 2006? [Sterlite Power Transmission Limited v. EPC Solutions, WP (C) 13758 of 2021, delivered on July 5, 2023]

While noting that respondent no. 1 was registered as a micro-enterprise during the relevant period, the said question was answered in affirmative;

The Court observed, “Going by the settled legal position, as also the fact that the MSMED Act, 2006 is a beneficial legislation for Micro, Small and Medium Enterprises and ought to be construed in a manner that is beneficial to such enterprises. Thus, even if on the date when the reference application was filed before the MSEFC, the supplier i.e. Respondent No.1 had upgraded itself to the Medium Enterprises, it cannot be deprived of the benefits of the provisions of the MSME Act, 2006 and the impugned reference order would be liable to be upheld.”

Judgments relied: Silpi Industries v. KSRTC, 2021 SCC OnLine SC 439, Gujarat State Civil Supplies Corporation v. Mahakali Foods, 2022 SCC OnLine SC 1492.

(iv) Whether the provisions of the MSMED Act, 2006 apply to CA firms appointed as Special Auditors under Section 142(2A) of the IT Act, 1961? [Pr. Commissioner of Income Tax v. MSEFC, WP (C) 13754 of 2019, delivered on July 6, 2023]

Answered in negative;

While holding that provisions of the IT Act would prevail over the provisions of the MSMED Act, 2006, Court said, “The CA Firm may be registered as a Micro or Small enterprise and may be entitled to invocation of the jurisdiction of the MSMED Act for other purposes. Insofar as the assignment is one which is emanating from a statute i.e., under Section 142(2A) of the IT Act, the determination of the remuneration is solely the prerogative of the Commissioner or the Chief Commissioner… The invocation of the provisions of the MSMED Act under such circumstances, in respect of Special Audit remuneration under Section 142(2D) of the IT Act, would, therefore, not be tenable and is completely misplaced.”

The principal commissioner of Income Tax filed the aforesaid writ petition challenging the directions of arbitration passed by MSEFC, an authority established under Section 20 of the MSMED Act, 2006.

Judgments relied: Pratius Merchants Pvt. Ltd. v. Deputy Commissioner of Income Tax, (2018) 404 ITR 474 (Guj), DLF Ltd. v. Additional Commissioner of Income Tax, (2014) 366 ITR 390 (Del).