MSME Act Jurisdiction Under S.18 Not Applicable If Supplier Not MSME And Only Sourced Goods From MSMEs: Delhi HC - 2024-02-20

Delhi High Court Clarifies Limits of MSME Act Jurisdiction for Non- MSME Suppliers

New Delhi: The Delhi High Court has set aside an arbitral award issued by an MSME Facilitation Council, ruling that the Council lacked jurisdiction under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 ( MSME Act) because the claimant did not qualify as a 'supplier' under the Act. The court held that merely sourcing goods from micro or small enterprises does not automatically bring a non- MSME entity within the definition of 'supplier' for invoking the special dispute resolution mechanism.

The judgment, delivered by Justice Prateek Jalan on February 20, 2024, came in a petition filed by Indian Highways Management Company Ltd. (IHMCL) challenging an award dated June 5, 2023, passed by the Madhya Pradesh Micro and Small Enterprises Facilitation Council, Bhopal, in favour of Prakash Asphaltings and Toll Highways (India) Pvt Ltd. (PATHIPL).

Background of the Dispute

The dispute arose from an Agreement dated April 29, 2015, under which PATHIPL was to provide toll management services to IHMCL for a period of five years. PATHIPL initiated proceedings before the MSME Facilitation Council seeking recovery of amounts allegedly due from IHMCL under this agreement.

Key Legal Question

IHMCL challenged the award primarily on the ground that the Facilitation Council lacked jurisdiction as PATHIPL was not a micro or small enterprise registered under the MSME Act.

PATHIPL conceded that it was not registered as a micro or small enterprise and was not an MSME in itself. However, it argued that it fell within the definition of a 'supplier' under Section 2(n)(iii) of the MSME Act. This section includes "any company... engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises."

PATHIPL contended that it had procured equipment and material from registered micro and small enterprises for providing services under the agreement and that the amounts claimed from IHMCL were ultimately to be passed on to these MSME vendors. It argued that the Act's objective to support MSME s extended jurisdiction to entities like itself that act as intermediaries sourcing from MSME s.

Court's Analysis

Justice Jalan examined the definition of 'supplier' under Section 2(n) of the MSME Act and the specific terms of the Agreement between IHMCL and PATHIPL.

The court found that the Agreement tasked PATHIPL with acquiring, installing, and maintaining equipment at toll plazas and providing related services. Crucially, Clause 5.4.6 of the Agreement stated that the ownership of the equipment remained with PATHIPL throughout the contract duration, and PATHIPL was free to take back the equipment upon completion or termination.

The court noted:

> "As to the question of whether the respondent was engaged in sale of goods under the Agreement, clause 5.4.6 of the Agreement specifically deals with the ownership of the goods provided by the respondent to the petitioner... Thus, it is clear that the ownership of the equipment/goods provided by the respondent [described as the “Service Provider” in the Agreement] remained with the respondent throughout the duration of the Agreement."

Based on this clause and the scope of work, the court concluded that PATHIPL was not "engaged in selling goods produced by micro or small enterprises" to IHMCL. The services rendered were provided by PATHIPL itself, not directly by micro or small enterprises.

The court held that the Facilitation Council's finding that PATHIPL had merely "procured the equipment/material and service from the MSE units" did not address the central issue of whether PATHIPL qualified as a 'supplier' to IHMCL under the Act.

> "The Facilitation Council has not appreciated the central aspect of the matter at all, which is that the respondent’s acquisition of material and equipment from micro and small enterprises for the purpose of its services to the petitioner, does not render it a ‘supplier’ under the MSME Act. This is a jurisdictional error which goes to the root of the matter."

While the petitioner cited Supreme Court judgments in Silpi Industries and Vaishno Enterprises , the court found it unnecessary to delve into the broader interpretive issue of whether Section 2(n)(iii) could ever apply to non- MSME s, choosing to decide the case based on the specific facts and agreement terms which showed PATHIPL did not meet the criteria even under an expansive reading.

Decision and Implications

Holding that the Facilitation Council lacked the necessary jurisdiction, the Delhi High Court set aside the arbitral award. The court clarified that the parties were free to pursue their contractual remedies under the Agreement. The amount deposited by IHMCL in court was directed to be released.

This judgment clarifies that the MSME Act's dispute resolution mechanism is not available to entities that merely procure goods or services from MSME s and use them in their own provision of services or supply arrangements where the ownership of the goods does not transfer from the intermediary to the final buyer, or where the service is rendered by the intermediary itself, not the original MSME provider. The entity invoking the MSME Act jurisdiction must qualify as a 'supplier' to the buyer against whom the claim is made, either as a registered MSME or potentially meeting the specific criteria under Section 2(n)(iii) by directly selling MSME goods or rendering MSME services to that buyer .

The court did not decide the larger question of whether a non- MSME could ever qualify under Section 2(n)(iii) in different circumstances, leaving that issue open for future determination.

The case was listed as O.M.P. (COMM) 392/2023, with connected applications.