[Analysis] Practical Insights into Section 43B(h) – Regarding Disallowance of Delayed Payments to MSEs

By CA. Srinivasan Anand G. | Author – Taxmann

Table of Contents

1. Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act)
2. Chapter V of MSMED Act Effective Since 02.10.2006 till date
3. Section 43B(h)
4. Whether Section 43B(h) applies to the following buyer-entities?
5. Section 15 of MSMED Act
6. Timelines u/s 15 of MSMED Act
7. Applicability of Section 43B(h) in various situations
8. Notification No. S.O 2119(E), dated 26.06.2020
9. Identification of MSE Suppliers for Section 43B(h), Sections 16 & 23, MSME Form-1
10. Is 43B(h) applicable to Udyam-Registered MSEs or to Unregistered MSEs as will?
11. Interpreting the Notification by applying “उपक्रमोपसंहारो” Rule adopted By SC
12. Calculation of investment in PME & turnover and updation
13. Updation of turnover & investment in PME figures & re-classification
14. Udyam Registration Number (URN) & Udyam Registration Certificate (URC)
15. What buyer-entities must look for in Udyam Certificate
16. Enterprise classification on URC as appearing under “Enterprise Type”
17. Whether and when Udyam-Registered medium enterprise to be considered as “supplier”
18. What constitutes “actual payment” for Section 43B(h) purposes
19. Payment by cheque effective from what date
20. Issue of equity shares/debentures to MSE Supplier
21. Role of auditors
22. Opportunities for professionals and businesses

1. Micro, Small and Medium Enterprises Development Act, 2006(MSMED Act)

• Section 43B(h) refers to Section 15 of MSMED Act
• MSMED Act, 2006 is a small act of 32 sections
• MSMED Act in force since 02.10.2006
• Chapter V-Delayed Payments to MSEs-sections 15 to 25
• Section 2 of MSMED Act defines the terms used in Section 15 – “appointed day”, “buyer”, “goods”, “supplier”
• Chapter V not repealed or amended or overridden by 43B(h)
• Sums payable to MSEs not “statutory dues” for reporting under Clause 3(vii)(a)/(b) of CARO, 2020 even after introduction of Clause (h) of Section 43B

2. Chapter V of MSMED Act Effective Since 02.10.2006 till date

• Section 15 applies when any buyer buys any goods/services from any “supplier”
• Section 2(n) defines “supplier”- Udyam-Registered MSE
• Section 15: Time limit for payment to the MSE supplier
• Section 16: Interest on late payment @ 20.25% [3X BR] compounded at monthly rests
• Section 23 disallows interest for delayed payment in income-tax assessment
• Disallowance of interest on late payment u/s 23 is irreversible & permanent
• Section 24 gives overriding effect to sections 15 to 23 over other laws

3. Section 43B(h)

• Overrides other sections save 44AD,44ADA,44AE, 44BBB & 115VA
• Deduction otherwise allowable under the Act
• Any sum payable by assessee to micro or small enterprise beyond the time limit specified u/s 15 of MSMED Act
• Sum payable to MSE is overdue u/s 15 of MSMED Act as at year-end
• Sum payable to MSE O/S at year-end becomes overdue after the year-end
• Such sums to be disallowed u/s 43B(h) if claimed on accrual basis
• Disallowance reversible in the year of actual payment
• O/S in respect purchases from MSEs prior to 01.04.2023? Interest liability?

Issues

• Opening Balance (credit) ₹40L
• Purchases in FY 2023-24 ₹10L
• Payments made ₹30L
• Balance on 31.03.2024 ₹20L
• Can buyer claim that O/s ₹20L pertains to opening balance and nothing is to be disallowed u/s 43B(h) for AY 2024-25

4. Whether Section 43B(h) applies to the following buyer-entities?

• Buyer-entities following cash system?
• Buyer-entities eligible & opting for section 44AD/44ADA/44AE/44BBB/115VA?
• Charitable trusts and institutions exempt under sections 11 to 13?
• Buyer-entities with no PGBP (eg Govt Dept, Salaried, Consumers)?
• What about applicability of Chapter V of MSMED Act?
• What if buyer-entity is an Udyam-registered MSME?
• What if non-corporate buyer is exempt from tax audit as turnover ≤₹10 cr & 95% of receipts and payments by prescribed cashless modes?

5. Section 15 of MSMED Act

• Trigger: “Where any supplier, supplies any goods or renders any services to any buyer”
• Word ‘any’ used 5 times in definition of ‘deposit’ shows clear intent of the Legislature to cast the net far and wide – State of Maharashtra v. 63 Moons Technologies Ltd. [2022] 137 taxmann.com 365/173 SCL 53 (SC)
• “Any” means every/all.- Vivek Narayan Sharma v. UOI [2023] 146 taxmann.com 36 (SC)
• Supplier: MSE who has filed Udyam Registration [Section 2(n)]
• “Goods” means every kind of movable property other than actionable claims and money [Section 2(f)]
• A “goods” may be a tangible property or an intangible one. [BSNL v. UOI [2006] 3 STT 245 (SC)]
• Definition of “movable property” [Sec 2(21) of Bharatiya Nyaya Sanhita, 2023]

Issues

• What about Purchase of capital goods? Purchase of intangible assets?
• Purchase of software?
• What about availing of professional services eg Bank asks panel advocate to prepare a search report? Bank gets internal audit/concurrent audit done by CA firm?
• Statutory audit/tax audit/internal audit done by CA firm?
• What about works contract and retention money?
• In Dezhou Shengli Pipeline Crossing Engineering India Pvt. Ltd. v. Ministry of Petroleum and Natural Gas and Ors (legalcrystal.com/1215401), the Delhi High Court held that the MSMED Act defines goods under section 2(f) of the MSMED Act. However, there is no definition of services. It is therefore clear that whether a works contract falls within the definition of goods and services is as yet not certain. IOCL’s position that a works contract, being inherently indivisible cannot be the subject matter of the MSMED Act, cannot be termed as a patent or manifest illegality.

6. Timelines u/s 15 of MSMED Act

• The buyer shall make payment therefore within the time allowed u/s 15
• Will paying bill amount except GST (in case of ITC issues) be Ok?
• Whether date of receipt of invoice relevant for due date u/s 15?
• Timelines to be reckoned from each delivery of goods/services by ‘supplier’
• Timeline u/s 15 computed from date of delivery of goods or rendering of services if no written objection by buyer within 15 days
• If written objection, time-line computed from date of removal of objection
• If no written agreement as to credit period, then to be paid on or before 15 days
• If written agreement as to credit period, then pay by agreed due date not exceeding 45 days

Issues

• What if due date for payment u/s 15 falls on a public/national holiday?
• Pr. CIT v Pepsico India Holding (P.) Ltd. [2023] 156 taxmann.com 25 (Delhi)
• Section 10 of GC Act,1897 applies where, by any Central Act or Regulation, any act or proceeding is directed or allowed to be done or taken in any Court or office on a certain day or within a prescribed period
• Any time-limit for removal of objection?
• Can written agreement stipulate less than 15 days? Say 1 day/3 days/5 days/10 days?
• Can written agreement stipulate more than 60 days?
• Can written agreement be retrospective?
• Can terms of credit on PO/Invoice be considered written agreement?

7. Applicability of Section 43B(h) in various situations

*Interest u/s 16 for late payment &Disallowance u/s 23 apply

8. Notification No. S.O 2119(E), dated 26.06.2020

• Notification has 8 Paras
• Para 1: Classification of Enterprises
• Micro enterprise: investment in plant and machinery or equipment ≤ ₹1 crore and
  turnover ≤ ₹5 crore
• Small enterprise: investment in PME ≤ ₹10 crore and turnover ≤ ₹50 crore
• Medium enterprise: investment in PME ≤ ₹50 crore and turnover ≤ ₹250 crore
• Para 3: Composite criterion of investment and turnover for classification
• If either limit crossed, enterprise will be placed in next higher category
• Reverse graduation to lower category only if both investment & turnover fall below the ceilings
• All units with GSTIN listed against same PAN to be collectively treated as one enterprise for computing investment and turnover limits [Para 3(3)]

9. Identification of MSE Suppliers for Section 43B(h), Sections 16 & 23, MSME Form-1

• Whether unregistered MSE suppliers also to be considered?
• Or only Udyam-Registered MSE Suppliers to be considered?
• Whether financials/ITRs/GSTRs to be called for by buyer-entity from each and every supplier and his MSE status determined?
• Whether CA certificate to be obtained from each supplier?
• Whether suppliers who are medium enterprises are to be considered?
• Whether suppliers of capital goods to be included in the list?
• What about MSE suppliers having UAM/EM-II registrations?
• Whether MSE Suppliers who are Traders to be considered?
• What if MSE Supplier has UR for both trading & manufacturing/service?

10. Is 43B(h) applicable to Udyam-Registered MSEs or to Unregistered MSEs as will?

• UR mandatory for availing all the schemes/benefits [FAQ 4 on MSME Samadhaan Portal]
• One cannot conclude by just reading Para 1 only of Notification 2119
• Meemansa Rule of उपक्रमोपसंहारो cited by Supreme Court approvingly in U.P. Bhoodan Yagna Samiti v Braj Kishore, Civil Appeals Nos. 1866 to 68 of 1988 Dated -9.9.1988
• उपक्रमोपसंहारो अभ्यासेऽपूर्वता फलम्।
• अर्वर्ादोपपत्ती च ललंगं तात्पर्वलिर्वर्े॥
• When you have to draw the conclusion from a writing you have to read it from beginning till end. Without doing it, it is difficult to understand the purpose
• If there is any innovation (apoorvata/navyata) or something new it should be taken note of. Then one must notice the result of such innovation
• Then, find what is intended to be conveyed and in what context

11. Interpreting the Notification by applying “उपक्रमोपसंहारो” Rule adopted By SC

• Para 2: Becoming a micro, small or medium enterprise
• Online Filing of UR on self-declaration basis [Para 2(1)]
• Para 6: Registration process
• PAN & Aadhaar Compulsory
• GSTIN Compulsory unless exempted from GST Registration under CGST Act
• Features of Udyam Portal
• PAN & GST linked details on investment & turnover taken automatically from Govt data bases
• The online system is fully integrated with Income Tax and GSTIN systems

12. Calculation of investment in PME & turnover and updation

• Para 4: Calculation of investment in PME
• Investment=WDV as per ITR less cost of pollution control, R&D and industrial safety devices [OM, dated 6-8-2020 & Item 20 of Udyam Registration Form]
• Calculation linked to ITRs filed of previous years
• Para 5: Calculation of turnover
• Export of goods or services or both to be excluded
• Information on turnover & exports shall be linked to ITR or GSTIN

13. Updation of turnover & investment in PME figures & re-classification

• Para 8: Updation of information and transition period in classification
• Based on the information furnished or gathered from Government’s sources including ITR or GSTR, classification will be updated
• In case of graduation/reverse-graduation, communication will be sent to enterprise about change in status
• When medium enterprise is to be treated as Micro or Small for Section 43B(h): In case of an upward change in terms of investment or turnover or both, and consequent reclassification, an enterprise shall continue to avail of all non-tax benefits of the category (micro or small or medium) it was in before the re-classification, for a period of 3 years from the date of such upward change. [Para 8(5) of the Notification]
• Accordingly, a small enterprise growing to Medium can avail the provision for delayed payment as per Chapter-V of the MSMED Act, 2006. [Q.43. MSME Samadhaan portal]

14. Udyam Registration Number(URN) & Udyam Registration Certificate(URC)

• No PAN-based or name-based search of MSE status enabled on Udyam portal
• Udyam Verify feature allows one to verify whether URN is genuine & allows access to URC
• No indication from URN of status as Micro/Small/Medium
• One has to obtain URN and access URC on portal
• If supplier has not put his URN on Bill or invoice, write to him asking to confirm whether he is MSE within 15 days, and, if so, to share his URN
• If, despite writing for the same & a reminder, URN is not furnished, then, Section 43B(h) cannot be invoked for supplies made till the date of furnishing the same as Name-based search/PAN-based search not enabled now. Law does not compel a man to do what he cannot possibly perform [Canara Bank v. ITO [2009] 121 ITD 1 (Nag.-Trib.)]

15. What buyer-entities must look for in Udyam Certificate

• Access Udyam Certificate through Udyam Number on Udyam portal at https://udyamregistration.gov.in/Udyam_Verify.aspx
• Date of UR (at the bottom of the URC)
• Udyam Registration is not retrospective [Silpi Industries v. Kerala State Road Transport Corporation [2021] 129 taxmann.com 228/167 SCL 536 (SC) ]
• Supplies of goods/services made prior to date of UR will not come u/s 43B(h), and u/ss 15, 16, 22 and 23 of MSMED Act
• Enterprise activity
• If URC shows only Trading activity, transactions with the MSE URC-holder are outside the purview of Sections 15, 16 and 23 of MSMED Act and Section 43B(h)
• Enterprise classification with effective date of classification

16. Enterprise classification on URC as appearing under “Enterprise Type”

17. Whether and when Udyam-Registered medium enterprise to be considered as “supplier”

• When medium enterprise is to be treated as Micro or Small for Section 43B(h): In case of an upward change in terms of investment or turnover or both, and consequent re-classification, an enterprise shall continue to avail of all non-tax benefits of the category (micro or small or medium) it was in before the reclassification, for a period of 3 years from the date of such upward change. [Para 8(5) of the Notification]
• Accordingly, a small enterprise growing to Medium can avail the provision for delayed payment as per Chapter-V of the MSMED Act, 2006. [Q.43. MSME Samadhaan portal]

18. What constitutes “actual payment” for Section 43B(h) purposes

Issues

• Cash payment violating Section 40A(3)/Section 269ST/Second proviso to section 43(1)
• Admitting supplier as a partner in buyer-firm/LLP treating dues as capital contribution?
• Bill of exchange accepted and creditor balance transferred to bills payable
• Payment agreed in kind and made in kind
• Issuing equity shares/debentures in settlement of the claim
• Cheque dated due date or earlier handed over to supplier on due date but encashed after due date
• Cheque dated 31st March entered in books as of 31St March but encashed at April end or in May or June and appearing in Bank reconciliation Statement

19. Payment by cheque effective from what date

• Payment on the cheque being honoured and encashed relates back to the date of the receipt of the cheque, and in law the date of payment is the date of delivery of the cheque. [K. Saraswathy v. P.S.S. Somasundaram Chettiar, Civil Appeal no. 111 (N) of 1981 Dated – 1.5.1989
• CIT v. M/s Ogale Glass Works Ltd. Ogale Wadi, A.I.R. 1954 S.C. 429 Payment by cheque is an ordinary incident of present-day life, whether commercial or private, and unless it is specifically mentioned that payment must be in cash there is no reason why payment by cheque should not be taken to be due payment if the cheque is subsequently encashed in the ordinary course.
• K. Venkata Reddy v. CIT [2001] 117 Taxman 141/250 ITR 147 (A.P) (KVSS,1988)
• Prayag Polytech (P.) Ltd. v. State Bank of India [2022] 143 taxmann.com 95/174 SCL 190 (Delhi) (OTS)
• J & J Dechane v. CIT [1990] 182 ITR 345 (AP). Also see CIT v. Rohtak Delhi Transport (P.) Ltd. [1981] 5 Taxman 305/130 ITR 777 (Punj. & Har.), CIT v. Bharat Motor Service [1986] 26
  Taxman 437/[1987] 163 ITR 843 (Kar.)
• Post-dated cheques? Oriental Textiles v. CIT [2005] 142 Taxman 520/ 273 ITR 47 (All.)

20. Issue of equity shares/debentures to MSE Supplier

• Where debentures were issued to FI in lieu of interest payable and said debentures had been accepted by FI in discharge of debt of O/s interest, same is to be treated as actual payment [M.M. Aqua Technologies Ltd. v. CIT [2021] 129 taxmann.com 145/282 Taxman 281/436 ITR 582 (SC)]
• When creditor agrees to convert a portion of interest into shares, it is to be taken to be ‘actual payment’ [CIT v. Rathi Graphics Technologies Ltd. [2015] 64 taxmann.com 65/378 ITR 107/[2016] 235 Taxman 550 (Delhi)].
• Where assessee-company issued fully-paid up shares to a bank towards interest O/S on term loan, since interest liability stood extinguished, such issue of shares is actual payment of interest [CIT v. Core Emballage Ltd. [2022] 139 taxmann.com 504/443 ITR 157 (Guj.)]

21. Role of auditors

• Send out balance confirmation requests to suppliers
• Balance confirmation request should include a request to them to confirm MSE status and to furnish URN if MSE status claimed
• In their risk assessment, Auditors will have to factor in that balances of trade payables may be suppressed by issuing cheques on 31St March and handing over to suppliers only at April-end. Check BRS as on 31st March thoroughly as regards cheques issued but not presented paying attention to dates of encashment
• Check BRS for each month to see whether cheques issued on due dates are encashed shortly after due dates. If these are encashed after a long time, say after 1/1.5/2 months, confirm directly with MSE supplier as to date he received the cheque
• Check disputes raised with MSE suppliers

22. Opportunities for professionals and businesses

• Udyam-Registered MSE professional firms have to be paid by clients for services within the time allowed by Section 15 of MSMED Act
• As per the data of the Udyam Registration, the net turnover of MSMEs increased from Rs. 24,31,836 crore in 2022-23 to Rs. 1,76,71,897 crore in 2023-24 (till 01.02.2024). [Reply by GOI in Rajya Sabha on 05.02.2024]
• Huge rush for Udyam Registration. Professionals can assist MSEs in obtaining Udyam Registration
• Professionals can design Order Confirmation forms for MSEs. Also help them in restructuring their business to get MSME benefits. Two firms with same partners for same business will not result in clubbing of turnover and investment for MSME definition. Same partners can set up new plant under new firm/LLP without losing their MSE status as both existing and new firms will have different PANs and will not result in clubbing of turnovers
• Huge scope for softwares which help in bulk search of Udyam Numbers on Udyam portal to identify MSE status, activities, date of Udyam and Enterprise Type
• Drafting agreements to stipulate 45 days credit period for past orders without credit period stipulation. There is no stipulation in section 15 that written agreement for credit period should have been entered into before supply/delivery of goods or services
• Designing requests to suppliers to confirm their MSE status with URN within 15 days or else it would be taken that they are not MSEs
• Professionally assist clients in scrutiny of URCs of suppliers to identify suppliers who have to be paid within the time stipulated by Section 15