[Opinion] Dealing with MSME Vendors – Compliance

Tushar Gandhi – [2023] 149 taxmann.com 394 (Article)

MSME Act 2006 – Provide for registration of micro, small and medium enterprises based on certain specific criteria. The objective of MSME Act is to promote, develop, enhance the competitiveness of the MEMS enterprises. It also casts certain obligations on entities dealing with MSME vendors. This article explains the obligations cast on entities while dealing with MSME enterprises and the consequences of noncompliance with such obligations

Meaning of enterprise – Section 7 of MSME Act provides criteria for classification of micro, small, and medium enterprise. However, before venturing into criteria for classification of micro, small and medium enterprise, it is necessary first to understand the meaning of the term enterprise. Section 2(e) of the Act gives the definition of enterprise, the same has been reproduce below

“enterprise” means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (55 of 1951) or engaged in providing or rendering of any service or services.

From the definition it is very clear that establishments who are engaged in manufacture of specific goods or provide services can be considered as enterprises. which means traders and works contractors are not cover under the definition and the provisions of MSME Act do not apply to traders and works contractors

Points to be noted

1. Check the nature of the contract in case it involves supply of goods which is not manufactured by the vendor, the provisions of MSME Act do not apply to such transactions. For example, supply of computers by the dealer. The dealer is not manufactures of computer, he is trader, therefore the provisions of MSME Act do not apply
2. In case the contract involves supply of material along with labor the provisions of MSME Act do not apply as this is works contract
3. If the contract awarded is in the nature of service, check whether the vendor provides the services himself or he is just acting as aggregator. If the services are provided by the vendor himself MSME Act applies. For example, a cab service provider provides ten cabs, and he is getting seven cabs from other cab service providers and three cabs service he himself provides. MEMS Act applies only to the extent the transaction which involves three cabs service and for seven cab services MSME Act do not apply as vendor is not proving the same by himself, he is just acting as aggregator

Classification of Enterprise – Section 7 of the Act has given the criteria for micro small and medium enterprise

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