Whether to seek the benefit of provisions under MSMED Act, the seller should have registered under the provisions of the MSME Act, as on the date of entering into the contract?

New Clause (h) of Section 43B – Disallowance of Outstanding Dues to Micro & Small Enterprise has been a topic of discussion among the Trade & Professional fraternity.

Query

Whether to seek the benefit of provisions under MSMED Act, the seller should have registered under the provisions of the MSME Act, as on the date of entering into the contract?

Response

In this regard, it would be prudent to reproduce, very pertinent observations of the Supreme Court IN THE MATTER OF Shilpi Industries, etc vs Kerala State Road Transport Corporation & Anr 2021 SCC Online SC 439 :-

“26. …… In our view, to seek the benefit of provisions under MSMED Act, the seller should have registered under the provisions of the Act, as on the date of entering into the contract. In any event, for the supplies pursuant to the contract made before the registration of the unit under provisions of the MSMED Act, no benefit can be sought by such entity, as contemplated under MSMED Act. While interpreting the provisions of Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993, this Court, in the judgment in the case of Shanti Conductors Pvt. Ltd. v. Assam State Electricity Board has held that date of supply of goods/services can be taken as the relevant date, as opposed to date on which contract for supply was entered, for applicability of the aforesaid Act. Even applying the said ratio also, the appellant is not entitled to seek the benefit of the Act…..

….by taking recourse to filing memorandum under sub-section (1) of Section 8 of the Act, subsequent to entering into contract and supply of goods and services, one cannot assume the legal status of being classified under MSMED Act, 2006, as an enterprise, to claim the benefit retrospectively from the date on which appellant entered into contract with the respondent. The appellant cannot become micro or small enterprise or supplier, to claim the benefits within the meaning of MSMED Act 2006, by submitting a memorandum to obtain registration subsequent to entering into the contract and supply of goods and services. 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.”

Following the above-stated ratio, IN THE MATTER OF GUJARAT STATE CIVIL SUPPLIES CORPORATION LIMITED VS MAHAKALI FOODS PVT LTD (UNIT 2) & ANR , [SLP (C) No. 12884/2020, judgment dated October 31, 2022], the SUPREME COURT held that a party who was not the “supplier” as per Section 2 (n) of the MSMED Act, 2006 on the date of entering into the contract, could not seek any benefit as a supplier under the MSMED Act, 2006. A party cannot become a micro or small enterprise or a supplier to claim the benefit under the MSMED Act, 2006 by submitting a memorandum to obtain registration subsequent to entering into the contract and supply of goods or rendering services. If any registration, is obtained subsequently, the same would have the effect prospectively and would apply for the supply of goods and rendering services subsequent to the registration. The same cannot operate retrospectively.