Micro, Small, and Medium Enterprises (hereinafter referred to as ‘MSME’) are a blue-eyed boy for the government nowadays. In the recent budget session of 2023 also, the government has brought many important reforms for a such segment of industries/organisation. MSMED Act, 2006 was introduced with the object to promote and support the MSME sector of the economy and also to help them in the recovery of their appropriate dues through a speedy mechanism by the introduction of MSMED Facilitation centers for adjudicating the matters of MSMEs payment disputes. MSMED Act, 2006 provides numerous benefits to the MSME and therefore proper application of the Act is utmost required for the effective enjoyment of its benefits.
There has been a question in the mind that whether registration as an MSME is required mandatorily for availing benefits of the MSMED Act, 2006 or only meeting of criteria will suffice the purpose and organisation meeting the criteria prescribed under Section 7 of MSMED Act, 2006 will have the right to enforce recourses and avail benefits prescribed under the Act.
In this article, we shall be discussing the core concept of importance and requirement of registration under the MSMED Act, 2006, and will be concluding whether there is any requirement to obtain the registration under MSMED Act, 2006 or not.
Language of Section 8 of the MSMED Act, 2006
“(1) Any person who intends to establish,–
(a) a micro or small enterprise, may, at his discretion; or
(b) a medium enterprise engaged in providing or rendering of services may, at his discretion; or
(c) a medium enterprise engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (65 of 1951),
shall file the memorandum of micro, small or, as the case may be, of medium enterprise with such authority as may be specified by the State Government under sub-section (4) or the Central Government under sub-section (3):”
From the bare perusal of the above provision, due to the usage of the word ‘may, at this discretion’ under clause(a) and (b), it clearly indicates that filing of a memorandum is not a mandatory requirement and it is the discretion of such MSME to obtain the registration or not. Even if any organisation meeting the criteria mentioned under Section 7 of the MSMED Act, 2006 doesn’t obtain the registration, then also, such entity will be construed as MSME for the purpose of the Act.
Recovery mechanism provided under Section 18 of the MSMED Act, 2006
Pursuant to provisions of Section 18 of the MSMED Act, 2006, it is pertinent to note that any party to the dispute i.e., primarily supplier or buyer may make a reference to Micro and Small Enterprises Facilitation Council (hereinafter referred to as ‘MSEFC’) w.r.t any amount due and liable to be paid by buyer under Section 17 of the MSMED Act, 2006.
At the first instance when the reference will be made by the party to the MSEFC, such authority will first try to conciliate the matter either through itself or by referring the matter to the institute or center providing alternate dispute resolution services. Subsequently, if conciliation is not successful, then in that case the MSEFC will take up the dispute for arbitration either by itself or refer the matter to any third-party institute or centre providing alternate dispute resolution services for arbitration. In the end, the award reached on conciliation or arbitration, as the case may be shall be binding on the parties.
It is pertinent to note here that Section 18 is interlinked primarily to Section 17 and further to Sections 15 & 16 of MSMED Act, 2006, under which the word ‘supplier’ has been used outrightly, which indirectly connotes that for availing the facility of Section 15-18 of MSMED Act, 2006, one must be a ‘supplier’.
Whether unregistered MSME will be construed as a ‘Supplier’ for the purpose of the MSMED Act, 2006?
Language of Section 2(n) of MSMED Act, 2006
““supplier” means a micro or small enterprise, which has filed a memorandum with the authority referred to in sub-section (1) of section 8, and includes, —
(i) the National Small Industries Corporation, being a company, registered under the Companies Act, 1956 (1 of 1956);
(ii) the Small Industries Development Corporation of a State or a Union territory, by whatever name called, being a company registered under the Companies Act, 1956 (1 of 1956);
(iii) any company, co-operative society, trust, or a body, by whatever name called, registered or constituted under any law for the time being in force and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises; ”
First school of thought:
As we have understood earlier that there is no mandatory requirement for MSME to obtain registration, but there are certain provisions that create an ambiguity in the mind and raise a question on the relevance of registration as an MSME and filing of a memorandum under Section 8 of MSMED Act, 2006. Further, referring to the provisions of such Section 2(n), the definition of supplier has been divided into two parts and the first part of it states that supplier means micro or small enterprises which have filed a memorandum with the authority referred to in the sub-section (1) of Section 8, which gives an interpretation that only such micro or small enterprise which meets out the criteria specified under Section 7 of the MSMED Act, 2006 and files memorandum under Section 8 of the MSMED Act for obtaining registration shall only have the right to refer the dispute to the MSEFC. Further, the second part is an inclusive part, which includes three other sort of entities/bodies. Now, as per rule of interpretation when both the ‘means’ and ‘includes’ terms have been used to define something, then such definition is considered to be exhaustive in nature. And, therefore it contemplates that the entities mentioned in sub-clauses also have to file memorandum and obtain registration to come under the ambit of ‘Supplier’. In short, mere meeting the criteria prescribed under Section 7 of MSMED Act, 2006 will not suffice the purpose, and registration and filing of memorandum is mandatory in nature for availing benefits under MSMED Act, 2006.
Second school of thought:
Also, from the interpretation of Section 2(n) of the MSMED Act, 2006, which gives the definition of ‘supplier’ by dividing it in two parts by using ‘means’ and ‘includes’, it is to be noted that for the second part stated above there is no mandatory requirement to file the memorandum under Section 8 of the MSMED Act, 2006, as the same has not been specifically stipulated.
Also, further referring to provisions of Section 8 there is one window available for the entities which are already in existence to file their memorandum within 180 days of the commencement of the MSMED Act,2006, which indicates that it is never the intent of the legislature to not to allow any enterprise from availing benefit of MSMED Act, 2006.
Circular dated 1st August, 2007 of Government of India
In the above-said circular, there was a query before the Government, which stated that whether any enterprise which has not filed Memorandum within 180 days can be allowed to file such memorandum? Answering which, the Government of India clarified that there is no bar on the enterprise to file the memorandum post 180 days prescribed under the Act. Also, it stated further that the MSMED Act, 2006 is facilitatory in nature and not regulatory.
Interpreting such circular, it can be said that registration or filing of memorandum under MSMED Act, 2006 is only to facilitate the micro, small or medium enterprises and not to restrict them from availing the benefits of the MSMED Act, 2006.
Important Judgements
M/S Ramky Infrastructure Private Limited V. MSEFC & Anr [Delhi High Court]
In the above mentioned matter, the parties entered into a contract whereby RIL awarded civil work relating to Anoxic Tank and Pipe Line etc at RIL‘s project at Delhi International Airport, to GCIL. Later on, it was the claim of GCIL that despite of several reminders RIL failed to pay the amount. It is to be further noted that at the time of execution of contract, GCIL had not filed Memorandum as prescribed under Section 8(1) of the MSMED Act, 2006 though was fulfilling the criteria prescribed under section 7 of the MSMED Act, 2006. GCIL took the registration later on, which is not barred so far, as we have discussed earlier.
Now, here exists the question of law that whether it is mandatory to file the memorandum under Section 8(1) of the Act in order to fall under the definition of ‘supplier’ under Section 2(n) of the Act?
In the above matter, the Delhi High Court categorically answered the query by interpreting the definition of ‘supplier’ in the similar manner as we have discussed above under the heading second school of thought, and stated that-
“GCIL – being engaged in supply of services rendered by a micro/small enterprise – would fall within the fourth category of entities that are included as a ‘supplier’: that is, a company, co-operative society, trust or a body engaged in selling goods produced by micro or small enterprises or rendering services provided by such enterprises. It is not necessary for such entities to have filed the Memorandum under Section 8(1) of the Act.”
Hence, referring to above judgement it can be said that it is not mandatory to file the memorandum in order to fall under the definition of ‘supplier’ under MSMED Act, 2006.
G.E. T & D India Limited V. Reliable Engineering Projects and Marketing [Delhi High Court-2017]
In this matter also, the High Court of Delhi stated that-
“A unit that is not registered as a supplier does not cease to be one. The registration as a supplier under the MSMED Act makes the availing of the benefit much easier.”
Also, in this matter the supplies were continued to be there even after registration and therefore the supplier was able to avail the benefits of MSMED Act, 2006.
Silpi Industries V. Kerala State Road Transport Corporation & Anr. [Hon’ble Supreme Court]
In the above matter, the Hon’ble Supreme Court categorically stated that the subsequent registration and filing of memorandum post execution of contract will not give retrospective effect and supplier will be able to avail benefit of MSMED Act, 2006 only for prospective acts. And, it was clearly stated that- “If any registration is obtained, same will be prospective and applies for supply of goods and services subsequent to registration but cannot operate retrospectively. Any other interpretation of the provision would lead to absurdity and confer unwarranted benefit in favour of a party not intended by legislation.”
The same interpretation was further upheld by the apex court in the matter of Gujarat State Civil Supplies Corporation Ltd. Versus Mahakali foods pvt. Ltd. (unit 2) & Anr.
Conclusion
By analysing the above discussions and referred provisions and judgements, we can see that there exists a lot of confusion w.r.t registration and filing of memorandum by the MSMEs. The judgement given by Hon’ble Supreme Court, in the matter of Silpi Industries V. Kerala State Road Transport Corporation & Anr. and Gujarat State Civil Supplies Corporation Ltd. Versus Mahakali foods pvt. Ltd. (unit 2) & Anr. (Referred above), whereinthe apex court have specifically denied benefits to the registered MSMEs with retrospective effects, if read in reversed manner brings an interpretation that when the MSME being registered is not getting such benefit, it will be an injustice if unregistered enterprises will be given benefits. Therefore, it makes the registration and filing of memorandum, mandatory. The interpretation to definition of supplier by Delhi High Court in the matter of Ramky Infrastructure Private Limited (referred above) requires attention of superior court or Ministry of MSME to bring clarity as it has categorically discussed the three clauses of Section 2(n) of the MSMED Act, 2006 and somewhere has given different interpretation.
At the last, in my view the registration and filing of memorandum under Section 8 of the Act is mandatory requirement to be fulfilled, because if not so, there was no requirement of such detailed definition of supplier and simple one liner would have sufficed the purpose. But definitely it will be subjective to conclude it because it is going to bring huge impact on the MSME sectors of Indian Economy.
CS Santosh Pandey is a Company Secretary Practicing in New Delhi. He can be reached at info@spcounsels.com
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