[FAQs] Liability of Buyer u/s 15 of MSMED Act to Make Timely Payments to MSE Suppliers

Due Date for Payment to ‘Supplier’
(‘Udyam-Registered Micro/Small Enterprise’) as per Section 15 of MSMED Act

Note 1:

• If written objection is raised by supplier within 15 days from date of delivery of goods/date of rendering of service, due date based on agreed credit period of 45 days or less to be counted from date of removal of objection by supplier.
• If written objection is not raised within 15 days, due date to be computed based on agreed credit period from date of delivery of goods/date of rendering of service

Note 2:

• If written objection raised by buyer within 15 days from date of delivery of goods/date of rendering of service, due date to be computed as if agreed credit period is 45 days. The period of 45 days to be counted from the date of removal of objection.
• If written objection is not raised within 15 days, due date is to be computed as if agreed credit period is 45 days from date of delivery of goods/date of rendering of services.

Note 3:

• If written objection raised by buyer within 15 days from date of delivery of goods/date of rendering of service, due date is 15 days from the date of removal of objection by supplier.
• If written objection not raised within 15 days as aforesaid,due date is 15 days from the date of delivery of goods/date of rendering of service.

Section 43B(h) refers to time allowed by section 15 of MSMED Act. Therefore, it is necessary to examine the said section 15.

Section 15 of the MSMED Act reads as under:

“Liability of buyer to make payment.

Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment there for on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day:

Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.”

Paraphrasing section 15 of the MSMED Act, the following position emerges:

• Where any supplier supplies any goods or renders any servicesto any buyer, the buyer shall make payment for the same on or before the date agreed upon between him and the supplier in writing;
• In no case, the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or deemed acceptance; and
• Where there is no agreement in writing with regard to credit period, the buyer shall make payment before the appointed day.

It may be noted that where credit period agreed in writing, payment is to be made on or before the agreed due date which shall in no case exceed 45 days. If credit period not agreed in writing, payment to supplier is to be made before the appointed day.

Though section 43B(h) refers to “the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006”, it does not define crucial terms used in section 15 of MSMED Act which are necessary to give force and life to section 15 as well as section 43B(h). The crucial terms on which sections 15 and 43B(h) hinge are “the appointed day”, “the day of acceptance or deemed acceptance”, “supplier”, “goods”, “service” and “buyer”. These terms are, however, defined in section 2 of the MSMED Act.

The “appointed day” is relevant only if the buyer and the seller have not agreed to any due date for payment in writing. As per section 2(b) of the MSMED Act, “appointed day” means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

The following points are noteworthy:

• “The day of acceptance” means the day of the actual delivery of goods or the rendering of services;
• Where any objection is made in writing by the buyer regarding the acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, “the day of acceptance” means the day on which the supplier removes such objection;
• “The day of deemed acceptance” means where no objection is made in writing by the buyer regarding the acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services.

Illustration 1: No. credit period in writing and no objection in writing from buyer:

Illustration 2: Credit period of 60 days in writing and no objection in writing from Buyer as regards Goods or services:

Illustration 3: No credit period but written objection raised by buyer within 15 days of supply:

If the objection is made after 15 days from the date of supply, the same shall not be considered and the appointed date in this case will be 19-2-2004 i.e. day following immediately after the expiry of 15 days from the date of actual delivery of goods. Accordingly, the due date of payment will be 18-2-2024.

Illustration 4: Credit period of 60 days along with written objection from buyer within 15 days:

If the objection is made after 15 days from the date of supply, the same shall not be considered. Accordingly, the due date of payment as per section 15 will be 19-3-2024.

In that case, entity will have to pay MSE suppliers within 15 days of delivery of goods or rendering of services. To get more time to pay, entities should enter into written agreements with MSEs stipulating the credit period. Maximum credit period that can be stipulated is 45 days.

There appears to be no bar to this under MSMED Act or section 43B(h).

Average due date is a computed date on which with fairness to debt- or and creditor one settlement in full may be made for all variously dated items in an account.

[https://www.merriam-webster.com/dictionary/average%20due%20date]

ICAI’s Study material define “average due date” as under:

“Average due date is weighted average of due dates of various transactions where amount of each transaction is used as the weight”.

Further,

“It is the mean or equated date which a single total payment may be made in lieu of different payments on different dates without loss of interest to either party”.

The unique feature of average due date is that the party making payment on average due date gains nothing nor suffers any loss by making a single payment on average due date.

Average Due Date = Base Date+/-/Total of the products/Total of the amounts

Average due date concept allows a person making payment to compensate payee for delayed payment of a Bill by paying other/later Bill/Bills earlier than their due dates.

Taking base date as 3rd April, average due date is calculated as under:

Total of products/Total amounts = 6,40,00,000/23,00,000 = 28 days

Average due date = 3rd April, 2024 + 28 days = 1st May 2024

On 1st May 2024, entire amount of Rs. 23,00,000 will have to be paid.

In other words, delay in payment of Bills due in April in this case gets compensated by paying early the Bills due in May and June.

There is no bar in Contract Act in making such an agreement. However, the proviso to section 15 of MSMED Act seems to implicitly bar such an arrangement. It is suggested that CBDT issue a Circular clarifying that section 43B(h) is not to be invoked if payments falling due in a quarter are made on an average due date.

The term “Supplier” is defined in section 2(n) of the MSMED Act. Only a “supplier” as defined in section 2(n) of the MSMED Act can avail of the rights under Chapter V of MSMED Act such as right to timely payment under section 15, right to interest on delayed payment under section 16, Right to file plaint with MSEFC for recovery of dues from buyer etc. Section 2(n) defines “supplier” to mean a micro or small enterprise which has filed a memorandum with authority referred to in section 8(1) (i.e. Udyam Registration). The term “supplier” also includes:

• National Small Industries Corporation;
• Small Industries Development Corporation of a State or a Union territory; and
• Any company, co-operative society, trust or body registered or constituted under any law and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises.

It must be noted that only micro enterprises and small enterprises which are Udyam-Registered are considered as suppliers for the purpose of section 15 of the MSMED Act. And they shall be regarded as suppliers in respect of goods supplied by them or services rendered by them on or after the date of Udyam Registration. Udyam Registration is not retrospective. [Silpi Industries v. Kerala State Road Transport Corporation [2021] 129 taxmann.com 228/167 SCL 536 (SC)].

Medium enterprises are not regarded as suppliers and are not entitled to enforce prompt payment under section 15 of MSMED Act and interest for delayed payment under section 16 of the MSMED Act. However, a small enterprise upgraded as medium enterprise shall be regarded as small enterprise for 3 years from the date of upgradation and shall be entitled to rights under section 15 and other provisions of Chapter V of MSMED Act.

An enterprise shall not be deemed to be a “supplier” for Section 15, if it is:

• A micro or small enterprise which has not filed a memorandum (Udyam Registration) under section 8(1)(a) of the MSMED Act;
• Medium enterprises (unless Medium enterprise was a small enterprise anytime in last three years prior to date of supply of goods/rendering of services); and
• Large enterprises (e. manufacturing enterprises which have an investment in plant and machinery or equipment exceeding Rs. 50 crores or turnover exceeding Rs. 250 crores.

The argument cannot be accepted for several reasons. Firstly, the term “appointed day” used in section 15 is defined in section 2(b) of MSMED Act . If that definition is to be ignored on the ground that it is not referred to in section 43B, then section 43B(h) will be rendered nugatory in all cases where there is no written agreement between buyer and the Supplier regarding due date of payment. That section 15 of MSMED Act is to be interpreted in the light of the definition in section 2(b) of the said Act is clear from the following extracts from the Explanatory Memorandum to the Finance Bill, 2023.

The Explanatory Memorandum to Finance Bill, 2023 explains the amendment as under:

“Promoting timely payments to Micro and Small Enterprises

Section 43B of the Act provides for certain deductions to be allowed only on actual payment. Further, the proviso of this section allows deduction on accrual basis, if the amount is paid by due date of furnishing of the return of income.

In order to promote timely payments to micro and small enterprises, it is proposed to include payments made to such enterprises within the ambit of section 43B of the  Accordingly, it is proposed to insert a new clause (h) in section 43B of the Act to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 shall be allowed as deduction only on actual payment. However, it is also proposed that the proviso to section 43B of the Act shall not apply to such payments.

Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days. Thus, the proposed amendment to section 43B of the Act will allow the payment as a deduction only on payment basis. It can be allowed on accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.”

To the same effect is CBDT’s Circular No.1/2024, dated 23-1-2024, which clarifies as under:

21. Promoting timely payments to Micro and Small Enterprises

21.1 Section 43B of the Act provides for certain deductions to be allowed only on actual payment. Further, the proviso of this section allows deduction on accrual basis, if the amount is paid by due date of furnishing of the return of income.

21.2 In order to promote timely payments to micro and small enterprises, payments made to such enterprises have been included withinthe ambit of section 43B of the Act vide Finance Act,  A new clause (h) has been inserted in section 43B of the Act to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 shall be allowed as deduction only on actual payment. However, it has also been provided that the proviso to section 43B of the Act shall not apply to such payments.

21.3 Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45  If there is no such written agreement, the section mandates that the payment shall be made within 15 days. Thus, this amendment to section 43B of the Act allows the payment as deduction only on payment basis. It can be allowed on accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.

Applicability: This amendment takes effect from 1st April, 2024 and will accordingly apply in relation to the assessment year 2024-25 and subsequent assessment years.

Therefore, the intent of section 43B(h) is that section 15 should be interpreted for section 43B(h) purposes in the light of definitions given in section 2 of the MSMED Act. Secondly, it is well nigh impossible for any buyer to scrutinise financials, ITRs and GSTRs of all his suppliers to determine their classification into micro, small or medium enterprise and to call for financials, ITR and GST data from Suppliers every now and then to check whether there is any change in classification. The only feasible and accurate method to validate classification of the Supplier is to refer to his Udyam Registration.

According to section 2(d) of the MSMED Act, “buyer” means whoever buys any goods or receives any services from a supplier for consideration.

Para 2 of Office Memorandum: No. 5/2(2)/2020/E/P&G/POLICY dated 2-7-2021 issued by Central Government has clarified that “The Government has received various representations and it has been decided to include Retail and wholesale trades as MSMEs and they are allowed to be registered on Udyam Registration Portal. However, benefits to Retail and Wholesale trade MSMEs are to be restricted to Priority Sector Lending only.” Central Government’s office memoran- dum 1/4(1)/2021- P&G Policy, dated 1-9-2021, further clarifies that “the benefit to Retail and wholesale trade MSMEs are restricted upto priority sector landing only and, other benefit, including provisions of delayed payments as per MSMED Act, 2006, are excluded. In view of the above Office Memorandum, dated 1-9-2021, a Supplier who is a micro or small enterprise cannot be treated as “Supplier” for section 15 and section 43B(h) purposes if his Udyam Certificate shows his activity as only a trader.

Although there does not appear to be any legal basis in MSMED Act for the Office Memorandum and Wholesale and Retail Trade are treated as distribution services under GATT/WTO, the above position in OM will prevail till any Trader/Traders body challenges the OM in Court and gets it quashed.

Udyam Certificate shows the activity of the Supplier. The buyer is not required to go beyond the Udyam Certificate. [FAQs 33 and 34]

Section 43B(h) will not apply for any supplies of goods made by the Micro/Small “Supplier” on or after the date of the change as reflected in the Udyam Certificate. Buyer not expected to go beyond Udyam Certificate. It would be good idea to search the Udyam Number of Supplier on the Udyam Portal everytime any goods or services are received from him. [FAQs 33 and 34]

Section 43B(h) will not apply for any supplies of goods made by the Micro/Small “Supplier” on or after the date of the change as reflected in the Udyam Certificate. Buyer not expected to go beyond Udyam Certificate. It would be good idea to search the Udyam Number of Supplier on the Udyam Portal everytime any goods or services are received from him. [FAQs 33 and 34]

As of now, one can only search or verify MSME status on Udyam portal if one has Supplier’s Udyam Number.

Udyam Portal does not permit it as of now. Some private players have developed softwares/apps for this purpose. One may use them if found suitable.

If the eatery is registered in Udyam as Service provider, Section 15 of MSMED Act and Section 43B(h) will apply. As there is no written agreement, bills have to be settled within 15 days. It may be a good idea to enter into written agreement with eatery for settlement of bills as a monthly basis. However, case will have to be taken that outer time-limit of 45 days in section 15 of MSMED Act is not exceeded while filing the due date in written agreement and while making the payment.

Nothing in the MSMED Act or Chartered Accountants Act, 1949 disqualifies a CA firm from filing Udyam Registration as a micro or small enterprise. The MSMED Act does not exclude professional ser- vices from the ambit of the expression “service”. Therefore, a CA firm may be registered as a micro or small enterprise in terms of specified turnover and investment by applying for an Udyam Registration.

Since services were rendered by CA firm prior to the date of Udyam Registration, Section 43B(h) will not apply here.

There are judicial decisions which have held that works contract is neither goods nor service and hence works contract activity can be neither manufacturing nor service. 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 on section 2(f). However, there is no definition of services. Section 11 of the MSMED Act states that to facilitate promotion and development of micro and small enterprises, the Central Government can by order notify from time to time the preference policies in respect of the procurement of goods and ser- vices produced and provided by small enterprises by its ministries, departments, agencies etc. 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.

Statutory audit reports are issued after 31st March . Though provision is made, it may be the audit report is issued may be in May or June or July. Section 15 would come into operation only after statutory audit report is issued. Where there is no written agreement between Company and auditor as regards due date of payment, provision will be subject to disallowance if payment of fees is not made within 15 days of submission of statutory audit report to Company. Where there is a written agreement as regards due date of payment, disallowance will be attracted if payment not made within agreed period or 45 days, whichever is less.