FAQs on Timely Payments to MSME – An Interplay between Sec. 43B(h) & MSMED Act

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Your Alphabetical Ready Reckoner to FAQs on Timely Payments to MSMEs

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FAQ

1 OBJECTS AND RATIONALE OF SECTION 43B(h) OF THE INCOME-TAX ACT, 1961 1.

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3.

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What is section 43B(h) of the Income-tax Act, 1961 all about?

What are the avowed aims and objects of clause (h) for section 43B? Prior to section 43B(h), were there any legal provisions to ensure timely payments to micro and small enterprises? What is the status of those legal provisions now?

Is there any interplay between section 43B(h) and MSMED Act, 2006?

What is the rationale of enacting section 43B(h) in addition to Chapter V of MSMED Act?

1 1

3 4 4

2 PROVISIONS OF SECTION 43B(h) OF THE INCOME-TAX ACT, 1961 6.

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8.

What does section 43B(h) provide as regards deduction to a buyer-entity in respect of sum payable to Micro or Small Enterprise?

5

Whether non obstante clause in section 43B means that disallowance of interest payable to Micro/Small enterprises for delayed payments under section 23 of MSMED Act would not apply?

7

Whether non obstante clause in section 43B overrides section 44AD, section 44ADA, section 44AE, section 44BBB and section 115VA (Tonnage Tax) and gives section 43B(h) overriding effect over the said sections?

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FAQ

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Whether non obstante clause in section 43B overrides section 145 of the Act so as to disallow payables under clause (h) even in respect of assessees who follow cash basis of accounting?

8

Whether section 43B(h) would apply in respect of amounts due to Micro or Small enterprises in respect of purchase of Capital Goods?

10

Can depreciation be disallowed if payment for the purchase of a fixed asset is made beyond 45 days?

10

What is meant by “any sum payable by the assessee to a micro or small enterprise”?

10

Whether deduction for purchases from micro or small enterprise during financial year will be allowed if delayed payment made during the financial year itself?

12

If goods were purchased on 1-4-2023 from Udyam-Registered Micro/Small Enterprise and payment was made on 31-3-2024, will it be disallowed to the buyer-entity under section 43B(h)?

12

What are the consequences if payment is made beyond 45 days but before 31st March?

13

Whether and how deduction will be allowed for amounts due to micro or small enterprises as at the year-end but paid in the following financial year within the time allowed by section 15 of MSMED Act?

13

What if the amount outstanding at year-end (31-03-2024) is paid in the next financial year (2024-25) beyond the time allowed by section 15 of the MSMED Act?

14

What if advance is paid to the supplier who is micro or small enterprise?

14

What if 50% advance is given in current year and balance 50% is paid to MSE supplier on or before the due date u/s 15 of MSMED Act in the next year?

14

What if 50% advance is given in current year and the balance 50% is paid to MSE supplier beyond the due date under section 15 of MSMED Act in the next year?

14

Whether amounts will be disallowed under section 43B(h) if payment delayed but made on average due date?

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FAQ

22.

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What if cheque is handed over to the supplier on the due date under section 15 of MSMED Act but cheque is encashed by the supplier after the due date?

15

22A. What if Cheque is handed over to Supplier on due date u/s 15 of MSMED Act and he acknowledges as received on that date but presents the cheque after 1 month from date of receiving under tacit understanding with the buyer?

15

23.

What if cheques dated 31st March but handed over to micro/ small enterprises in April-end or May and accounted in books as paid on 31st March? Are these to be regarded as paid on 31st March?

16

23A. What if photocopies of cheques and acknowledgement of MSE suppliers that they received cheque on 31st March are on record will it make any difference to FAQ 23 above?

16

24.

Whether section 43B(h) applies to retention money?

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24A. What if amounts outstanding to MSE suppliers as on 1-42023 (opening balances) are paid after the due date u/s 15 of MSMED Act during FY 2023-24?

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24B. If amounts paid during FY 2023-24 to a registered micro or small enterprise is not sufficient to cover opening balance plus purchases during FY 2023-24, how will section 43B(h) work?

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25.

26.

What if provisions are made instead of crediting individual accounts of the Trade Creditors/Suppliers? Can provisions be disallowed?

19

Whether disallowance under section 43B(h) can be made while computing book profit for MAT purpose?

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3 BUYERS TO WHOM SECTION 43B(h) APPLIES 27.

To what kind of buyer-assessee is section 43B(h) applicable?

21

28.

What if any charitable trust is making payment to a MSME? Will section 43B(h) apply?

21

Whether section 43B(h) will apply to buyer-assessee who, being eligible, opts for presumptive taxation scheme under section 44AD or section 44ADA or section 44AE or section 44BBB or section 115VA (Tonnage Tax)?

21

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FAQ

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Since section 43B(h) overrides section 145 of the Act relating to method of accounting, will section 43B(h) applies to buyerentities carrying on business/profession who follow cash system of accounting?

21

Will section 43B(h) apply to a buyer-assessee who is Udyam-Registered Micro or Small Enterprise?

22

31A. Whether section 43B(h) will apply to a Sole proprietorship/ partnership firm/HUF buyer who is exempt from tax audit u/s 44AB of the Act as his turnover does not exceed ` 10 crores and 95% of his receipts and payments are in prescribed cashless modes?

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4 DEFINITION OF “MICRO ENTERPRISE” AND “SMALL ENTERPRISE” 32.

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What are the definitions of the terms “micro enterprise” and “small enterprise”

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How is turnover calculated for classification of enterprises into micro, small and medium?

26

How is investment in plant and machinery or equipment calculated for classification of enterprises into micro, small and medium?

26

Can you please illustrate classification of enterprises based on composite criteria of turnover and investment?

27

So will each buyer-entity have to call for the financials, ITRs and GSTs of every trade creditor/supplier and determine their classification as micro enterprise or small enterprise?

30

Is section 43B(h) applicable to amounts due to unregistered micro/small enterprises?

34

Our Supplier who is an Udyam-Registered Small Enterprise has purchased a new plot of land worth ` 10 crore for putting up a state of the art plant and had invited us to the Bhoomi Pujan. Can we put his bills on hold without inviting section 43B(h) disallowance and without attracting interest liability u/s 16 of MSMED Act since his investment in Plant, Property and Equipment now exceeds ` 10 crores?

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FAQ

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Can the buyer-entity take non-mention of Udyam Number on Bills of suppliers as conclusive evidence of non-registration under Udyam?

35

How to verify that Udyam Registration number printed on suppliers invoice is genuine?

36

Can it be inferred from the Udyam Number printed on Supplier’s invoice that he is a micro or small enterprise?

36

Is it possible to obtain Udyam Registration details of a Supplier by searching for his name in Udyam portal?

36

Is it possible to obtain Udyam Registration details of a Supplier by searching his PAN on the Udyam portal?

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44.

What details are contained on Udyam Registration Certificate?

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45.

What should buyer-entities check from the Udyam Certificate displayed on the portal?

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Is section 43B(h) a “non-tax benefit” for the Supplier micro/ small enterprise?

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What if, as per Supplier’s Udyam Certificate, under the head “Enterprise Type”, the following details are given in Tabular form

40

What if, the Supplier’s Udyam Certificate shows, under the head “Enterprise Type”, that the supplier is a medium enterprise since financial year 2020-21?

41

What if, as per Supplier’s Udyam Certificate, the supplier’s status was reverse-graduated from medium enterprise to small enterprise w.e.f. 1-4-2022?

41

Whether section 43B(h) shall apply to outstandings in respect of supplies made prior to date of Udyam Registration?

42

Whether section 43B(h) will apply if supplier cancels his Udyam Registration?

42

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Whether supplier can cancel Udyam Registration? If so, how?

43

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Will Micro or Small Enterprises having Udyog Aadhaar Memorandum or EM-II be regarded as micro or small enterprises for section 43B(h) purposes?

43

54.

What is Udyam Assist registration?

43

55.

What are Informal Micro Enterprises (IMEs)

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56.

What is the status of IMEs registered on UAP?

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FAQ

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5 LIABILITY OF BUYER UNDER SECTION 15 OF MSMED ACT TO MAKE TIMELY PAYMENTS TO MSE SUPPLIERS 57.

What is the time allowed by section 15 of MSMED Act for making payment to a supplier who is a micro or small enterprise?

45

What is meant by the terms “the Appointed Day”, “the day of acceptance” and “ the day of deemed acceptance”

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Can you please illustrate how the provisions of section 15 of MSMED Act work?

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59A. A What if buyer-entity has no written agreement with MSE suppliers as regards credit period?

49

59B. Whether agreements with longer credit period upto 45 days can be made retrospectively applicable by clause in agreement to verbal orders of purchases made prior to the date of agreement?

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60.

What is average due date?

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61.

The following are due dates u/s 15 of MSMED Act for payments of various Bills of an Udyam Registered Small enterprise supplier which are outstanding on 31-3-2024

50

Whether Parties can by written agreement agree that Buyer will pay the MSE Supplier on average due date of all bills falling due for payment according to 45 days due date of section 15?

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63.

What is meant by the term “Supplier”?

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64.

Whether micro enterprise/small enterprise will be regarded as ‘supplier’ for supplies made on or before the date of Udyam registration?

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65.

Whether Udyam-Registered medium enterprises are suppliers?

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66.

Which enterprises shall not be regarded as suppliers for purposes of section 15 of MSMED Act?

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Can it be argued that since section 43B refers to only section 15 of MSMED Act and does not refer to definition of “Supplier” in section 2(n) of MSMED Act, section 43B(h) will also apply to amounts due to an unregistered micro or small enterprise (i.e. micro or small enterprise not having Udyam Registration)?

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FAQ

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What is the definition of “Buyer”?

What if buyer-entity buys goods from Udyam Registered Micro/Small Enterprise whose Udyam Certificate shows he is a trader? Will section 43B(h) apply?

How to know the correct status of Supplier, whether he is manufacturer or service provider or trader?

What if the Status of Micro/Small “Supplier” changes from Manufacturer to Trader?

What if the Status of Micro/Small “Supplier” changes from Trader to Manufacturer?

Does Udyam Portal allow search of MSME status of Supplier based on his name?

Can one do bulk search of Udyam Numbers of many suppliers?

There is a popular eatery in front of our Office from where we order tea and snacks for staff, guests and visitors. There is no written agreement as to due date. We settle the bills of the eatery on a monthly basis. Whether section 43B(h) would apply to the Bills of the eatery?

Will section 43B(h) apply to fees payable to CA firm who is internal auditor/concurrent auditor?

What if CA firm submitted internal audit report on 15-3-2024 and obtained Udyam Registration on 16-3-2024 and internal audit fees bill is pending as on 31-3-2024? Will section 43B(h) apply in this case?

If contract between buyer and Udyam Registered MSE supplier is of the nature of works contract, will section 43B(h) apply?

Whether section 43B(h) would apply to provision for statutory audit fees/tax audit fees made as of 31st March of relevant financial year if CA firm who is auditor is an Udyam Registered micro or small enterprise?

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6 COMPUTATION OF AMOUNT OF DISALLOWANCE U/S 43B(h) 80.

Whether disallowance will be of net amount debited to P&L (i.e. amount net of ITC) or amount credited to supplier?

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FAQ

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Whether section 145A would impact disallowance u/s 43B(h)?

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7 SECTION 43B(h) DISALLOWANCE VIS-A-VIS DISALLOWANCE U/S 23 OF MSMED ACT OF INTEREST PAYABLE TO MSEs 82.

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What is the date from which and rate at which interest is payable by buyer who delays payment to a registered micro or small enterprise supplier?

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For computing interest on delayed payments as per section 16, bank rate as of which date is relevant?

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What is meant by calculation of interest compounded at monthly rests?

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Will section 16 of the MSMED Act apply where contract provides that no interest shall be paid for delays in payment?

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Is interest under section 16 of the MSMED Act in addition to interest provided for in the contract?

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Can interest under section 16 of the MSMED Act be waived by the supplier?

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What if payment could not be made within the time-limit stipulated by section 15 of the MSMED Act as the buyer had delayed submission of the bills?

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What if payment could not be made within the time-limit stipulated by section 15 of the MSMED Act as the buyer had not followed the instructions regarding the submission of bills?

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What if supplier’s Udyam Registration number is not mentioned by supplier in letterheads, invoices, bills, delivery challans or other documents and payment is delayed by the buyer as he is unaware of supplier’s MSE status? Can the supplier claim interest in such a case?

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What if supplier’s bill settled but interest under section 16 of the MSMED Act kept outstanding? Will any interest be payable under section 16 of the MSMED Act on the interest amount outstanding?

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FAQ

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If the buyer makes a delayed payment to a supplier and the amount paid is not sufficient to satisfy the total amount (bill amount and interest under section 16 of the MSMED Act), how should the payment be appropriated by the supplier towards principal/towards interest?

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Is there any directive by Central Govt. for prompt payment of MSE bills by PSUs?

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Is it necessary for the supplier to file any suit or other legal proceedings to enforce buyer’s liability for interest under section 16 of the MSMED Act?

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Whether defaulting buyer is liable to pay interest to a supplier who is an Udyam-Registered Medium Enterprise?

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96.

Whether TDS is deductible from interest payable u/s 16?

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97.

Is interest u/s 16 exempt from tax in supplier’s hands?

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98.

What are the provisions as regards disallowance of interest payable on delayed payments to MSE Suppliers under the MSMED Act?

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What is the means to ensure the disallowance of interest in accordance with section 23 of the MSMED Act?

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99A. What are the differences between tax implications under section 43B(h) of the Act and interest liability under section 16 which is disallowable u/s 23 of MSMED Act?

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8 DISCLOSURES OF AMOUNTS DUE TO MSEs IN AUDITED ACCOUNTS 100. What are the requirements regarding disclosure by buyer in his annual accounts of amounts due to MSE suppliers?

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101. What is the objective of requiring disclosures by buyer in his annual accounts of amounts due to MSE suppliers?

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102. How is the buyer to identify MSE suppliers to comply with Chapter V of MSMED Act including disclosures in annual audited accounts?

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103. Is there any penal consequences for the buyer if he fails to disclose dues to MSE suppliers in his audited annual accounts?

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FAQ

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104. What notes on Accounts are to be added by buyer entities to comply with disclosures under section 22?

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105. What are the matters that tax auditor needs to verify and report in clause 22 of Form No. 3CD?

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106. What are the Common Errors in reporting in clause 22 of Form No. 3CD, as noticed by ICAI?

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9 REPORTING IN TAX AUDIT REPORT OF DISALLOWANCE U/S 43B(h) 107. Whether disallowance u/s 43B(h) requires reporting in Form No. 3CD?

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10 CHECKLIST FOR BUYER-ENTITIES 108. Can you give us a checklist of important matters to be kept in mind by buyer-entities while making payments to micro and small enterprises?

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11 CHECKLIST FOR MICRO/SMALL ENTERPRISES 109. Can you give us a checklist of important matters to be kept in to take advantage of protections against delayed payments under section 43B(h) of the Act and sections 15, 16 and 23 of MSMED Act?

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APPENDICES Appendix 1:

Relevant text of section 43B(h) of Income-tax Act, 1961

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Appendix 2:

Relevant extracts of explanatory circular explaining the provisions of the Finance Act, 2023

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Micro, Small and Medium Enterprises Development Act, 2006

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Appendix 4:

New MSME Notification (NMN)

101

Appendix 5:

Inclusion of wholesale trade and retail trade in MSMEs 106

Appendix 3:

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Appendix 6:

Office Memorandum regarding activities not eligible for MSMEs registration 107

Appendix 7:

Extension of OM No. UAM/MC/01/2017-SME dated 27-7-2017 to Udyam Registration 108

Appendix 8:

Activities (NIC Codes) not covered under MSMED Act, 2006 for registration of Udyog Aadhaar Memorandum (UAM) 109

Appendix 9:

Benefits of provisions of delayed payments as per MSMED Act, 2006 available to MSMEs vis-a-vis Traders related 111

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CHAPTER

Liability of buyer under section 15 of MSMED Act to make timely payments to MSE suppliers 57. What is the time allowed by section 15 of MSMED Act for making payment to a supplier who is a micro or small enterprise?

CHART 3: DUE DATE FOR PAYMENT TO ‘SUPPLIER’ (‘UDYAM-REGISTERED MICRO/SMALL ENTERPRISE’) AS PER SECTION 15 OF MSMED ACT

Is credit period agreed in writing by the ‘buyer’ and ‘supplier’?

No

Yes

Agreed credit period is 45 days or less

Agreed credit period is more than 45 days

Due date for payment to be computed based on agreed credit period [Note 1]

Due date for payment to be computed as if agreed credit period is 45 days [Note 2]

Payment to be made by buyer on or before 15 days from date of delivery of goods/date of rendering of service [Note 3]

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 45

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LIABILITY OF BUYER UNDER S. 15 OF MSMED ACT

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.

15. 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: (a) Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment for the same on or before the date agreed upon between him and the supplier in writing;

LIABILITY OF BUYER UNDER S. 15 OF MSMED ACT

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(b) 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 (c) 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.

58. What is meant by the terms “the Appointed Day”, “the day of acceptance” and “ the day of deemed acceptance”.

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: (a) “The day of acceptance” means the day of the actual delivery of goods or the rendering of services; (b) 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; (c) “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

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LIABILITY OF BUYER UNDER S. 15 OF MSMED ACT

goods or the rendering of services, the day of the actual delivery of goods or the rendering of services.

59. Can you please illustrate how the provisions of section 15 of MSMED Act work?

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

3-1-2024

Date of Supply

3-2-2024

Credit Period

Nil

Whether any Objection in writing raised by buyer

No

Date of deemed acceptance

3-2-2024

Appointed Day (day following immediately after the expiry of 15 days from the date of delivery)

19-2-2024

Payment to be made before appointed day

On or before 18-2-2024

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

3-1-2024

Date of Supply

3-2-2024

Credit Period

60 days

Due date of payment as per agreement

3-4-2024

Whether any Objection in writing raised by buyer Due date of payment as per section 15/section 43B(h)

No On or before 19-3-2024

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

3-1-2024

Date of Supply

3-2-2024

Credit Period

Nil

Date of objection in writing

15-2-2024

Date of removal of objection

20-2-2024

Appointed day (day following immediately after expiry of 15 days from the date of removal of objection)

7-3-2024

Payment to be made on or before

6-3-2024

LIABILITY OF BUYER UNDER S. 15 OF MSMED ACT

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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: Date of order

3-1-2024

Date of Supply

3-2-2024

Credit Period

60 days

Due date for payment as per agreement

3-4-2024

Date of objection in writing

18-2-2024

Date of removal of objection

20-2-2024

Payment to be made on or before due date

5-4-2024

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.

59A. What if buyer-entity has no written agreement with MSE suppliers as regards credit period?

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.

59B.Whether agreements with longer credit period upto 45 days can be made retrospectively applicable by a clause in the agreement to verbal orders of purchases made prior to the date of agreement?

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

60. What is average due date?

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

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LIABILITY OF BUYER UNDER S. 15 OF MSMED ACT

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

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.

Average Due Date = Base Date+/-/

61. The following are due dates u/s 15 of MSMED Act for payments of various Bills of an Udyam Registered Small enterprise supplier which are outstanding on 31-3-2024.

Amount

Due Date

5,00,000

3rd April, 2024

8,00,000

2nd May, 2024

10,00,000

13th May, 2024

Calculate the average due date for payment of total dues of ` 23,00,000 Taking base date as 3rd April, average due date is calculated as under: Due Dates

Amount

No. of days from base date

Products

3rd April, 2024

5,00,000

0

0

3rd May, 2024

8,00,000

30

2,40,00,000

13th May, 2024

10,00,000

40

4,00,00,000

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

LIABILITY OF BUYER UNDER S. 15 OF MSMED ACT

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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.

62. Whether Parties can by written agreement agree that Buyer will pay the MSE Supplier on average due date of all bills falling due for payment according to 45 days due date of section 15?

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.

63. What is meant by the term “Supplier”?

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: (a) National Small Industries Corporation; (b) Small Industries Development Corporation of a State or a Union territory; and (c) 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.

64. Whether micro enterprise/small enterprise will be regarded as ‘supplier’ for supplies made on or before the date of Udyam registration?

It must be noted that only micro enterprises and small enterprises which are Udyam - Registered are considered as suppliers for the pur-

52

LIABILITY OF BUYER UNDER S. 15 OF MSMED ACT

pose 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)].

65. Whether Udyam-registered medium enterprises are suppliers?

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.

66. Which enterprises shall not be regarded as suppliers for purposes of section 15 of MSMED Act? An enterprise shall not be deemed to be a “supplier” for Section 15, if it is: (a) A micro or small enterprise which has not filed a memorandum (Udyam Registration) under section 8(1)(a) of the MSMED Act; (b) 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 (c) Large enterprises (i.e. manufacturing enterprises which have an investment in plant and machinery or equipment exceeding Rs. 50 crores or turnover exceeding Rs. 250 crores.

67. Can it be argued that since section 43B refers to only VHFWLRQ RI 060(' $FW DQG GRHV QRW UHIHU WR GH¿QLWLRQ of “Supplier” in section 2(n) of MSMED Act, section 43B(h) will also apply to amounts due to an unregistered micro or small enterprise(i.e. micro or small enterprise not having Udyam Registration)?

The argument cannot be accepted for several reasons. Firstly, the term “appointed day” used in section 15 is defined in section 2(b) of

LIABILITY OF BUYER UNDER S. 15 OF MSMED ACT

53

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 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.

2. 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 Act. 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.

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 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.

54

LIABILITY OF BUYER UNDER S. 15 OF MSMED ACT

21.2 In order to promote timely payments to micro and small enterprises, payments made to such enterprises have been included within the ambit of section 43B of the Act vide Finance Act, 2023. 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 days. 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.

[See FAQ 33 and FAQ 34]

:KDW LV WKH GH¿QLWLRQ RI ³Buyer”?

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

FAQS ON TIMELY PAYMENTS TO MSME – AN INTERPLAY BETWEEN SEC. 43B(H) OF THE INCOME-TAX ACT & MSMED ACT AUTHOR PUBLISHER DATE OF PUBLICATION

: SRINIVASAN ANAND G. : TAXMANN : FEBRUARY 2024

EDITION ISBN NO NO. OF PAGES BINDING TYPE

: : : :

2024 Edition 9789357785334 136 PAPERBACK

Rs. 345 | USD 5

Description This book is a comprehensive guide to ensuring timely payments to Micro, Small, and Medium Enterprises (MSMEs), focusing on Section 43B(h) of the Income-Tax Act, 1961, and its interplay with the MSMED Act, 2006. It provides frequently asked questions, offering: • Clarity on Legal Provisions • Rationale Behind the Laws • Implications for Businesses This guidebook is designed for legal professionals, accountants, business owners, and anyone involved in transactions with MSMEs, providing essential insights into legal compliance for timely payments and the broader implications for business practices.

The Present Publication is the latest 2024 Edition, authored by CA. Srinivasan Anand G. This book is amended up to 1st February 2024 with the following noteworthy features: • Detailed Analysis of Provisions o In-depth examination of Section 43B(h) of the Income Tax Act, 1961 o Analysis of deductions related to payments to MSMEs o Impact of the non-obstante clause on other sections of the Income Tax Act and its implications for accounting methods and capital goods purchases o Discussion on the conditions under which deductions are allowed or disallowed, emphasizing the timing of payments • Application to Various Buyers o Identification of types of buyers affected by Section 43B(h) o Consideration of scenarios involving charitable trusts, entities under presumptive taxation schemes, and different accounting methods o Evaluation of Udyam-registered MSMEs as buyers and their obligations • Definitions and Classifications o Clarification of the terms' micro enterprise' and 'small enterprise' o Criteria for classification based on turnover and investment o Guidance on verifying the status of suppliers and the authenticity of Udyam Registration numbers o Implications for tax benefits based on enterprise classification • Compliance Under the MSMED Act o Explanation of buyers' obligations to make timely payments as mandated by Section 15 of the MSMED Act o Calculation of due dates, definition of 'supplier', and consequences of non-compliance o Legal requirements for interest on delayed payments and methods of calculation • Accounting and Reporting Requirements o Extensive discussion on the accounting treatment of amounts due to MSEs o Disclosure requirements in audited accounts and the tax audit report o Highlighting common errors with checklists for compliance for buyer entities and MSEs • Practical Scenarios and Examples o FAQs addressing real-life scenarios, such as the impact of advance payments and the handling of retention money o Advice on dealing with payments made beyond prescribed time frames o Practical guidance for navigating compliance complexities with Section 43B(h)

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