January 2023
MSME Act, 2006 – 12 Compliance Action Points for Entities Dealing with MSMEs
Sunil Gabhawalla, Chartered Accountant
BACKGROUND OF THE MSME ACT, 2006
The Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) provides for the registration of micro, small and medium enterprises (MSME) based on the specified criteria. It thereafter provides for a host of measures for the promotion, development and enhancement of the competitiveness of micro, small and medium enterprises. It also casts various obligations on entities dealing with such MSME enterprises. This article explains the extent of obligations cast on entities dealing with such MSME enterprises and the consequences of non-compliance with such obligations.
MEANING OF ENTERPRISE AND APPLICABILITY OF MSME ACT
MEANING OF ENTERPRISE AND APPLICABILITY OF MSME ACT
Section 7 of the MSME Act provides the criteria based on which an enterprise is classified as either a micro-enterprise, small enterprise, or medium enterprise. However, before venturing into the specific criteria for classifying an enterprise into micro, small or medium, it may be important to look at the definition of ‘enterprise’ as provided u/s 2(e) of the Act. The said definition is significant and reproduced below for ready reference:
“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.
On a perusal of the above definition, it is very clear that only establishments engaged in the manufacture of specified goods or rendering any service can be considered an ’enterprise’. Therefore, traders and works contractors are not covered under this definition, and the provisions of the MSME Act do not apply to such traders and works contractors. In fact, in its FAQ dated 24th October, 2016, the Ministry of MSME has clarified vide answer to Q. No. 18 that the policy is meant only for procurement of goods produced or services rendered by MSEs, and traders are excluded from the Policy.
Further, various Court rulings have held that works contractors are not covered under the MSME Act, 2006. Useful reference may be made to the decisions in the cases of Rahul Singh vs. Union of India C 42491 of 2016 (Allahabad High Court), Shreegee Enterprises vs. Union of India 2015 SCC Online Del 13169 (Delhi High Court), Samvit Buildcare Pvt Ltd vs. Ministry of Civil Aviation C/SCA/1094/2018 (Gujarat High Court) and Sterling and Wilson Pvt Ltd. vs. Union of India WP - L1261/2017 (Bombay High Court).
Action points for entities dealing with various vendors
1. Check whether the nature of the contract awarded to the vendor invol
“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.
On a perusal of the above definition, it is very clear that only establishments engaged in the manufacture of specified goods or rendering any service can be considered an ’enterprise’. Therefore, traders and works contractors are not covered under this definition, and the provisions of the MSME Act do not apply to such traders and works contractors. In fact, in its FAQ dated 24th October, 2016, the Ministry of MSME has clarified vide answer to Q. No. 18 that the policy is meant only for procurement of goods produced or services rendered by MSEs, and traders are excluded from the Policy.
Further, various Court rulings have held that works contractors are not covered under the MSME Act, 2006. Useful reference may be made to the decisions in the cases of Rahul Singh vs. Union of India C 42491 of 2016 (Allahabad High Court), Shreegee Enterprises vs. Union of India 2015 SCC Online Del 13169 (Delhi High Court), Samvit Buildcare Pvt Ltd vs. Ministry of Civil Aviation C/SCA/1094/2018 (Gujarat High Court) and Sterling and Wilson Pvt Ltd. vs. Union of India WP - L1261/2017 (Bombay High Court).
Action points for entities dealing with various vendors
1. Check whether the nature of the contract awarded to the vendor invol
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