CONTENTS
Your Alphabetical Ready Reckoner to FAQs on Timely Payments to MSMEs
Practical Insights into Section 43B(h) - With particular focus on identifying MSE suppliers who fall within Section 43B(h) & checking Udyam Certi cates
FAQ
1
OBJECTS AND RATIONALE OF SECTION 43B(h) OF THE INCOME-TAX ACT, 1961
1. What is section 43B(h) of the Income-tax Act, 1961 all about? 1
2. What are the avowed aims and objects of clause (h) for section 43B? 1
3. 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? 3
4. Is there any interplay between section 43B(h) and MSMED Act, 2006? 4
5. What is the rationale of enacting section 43B(h) in addition to Chapter V of MSMED Act? 4
2
PROVISIONS OF SECTION 43B(h) OF THE INCOME-TAX ACT, 1961
6. What does section 43B(h) provide as regards deduction to a buyer-entity in respect of sum payable to Micro or Small Enterprise? 5
7. 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
8. 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? 7
I-5
8A. What is the new Presumptive taxation scheme under section 44BBC applicable to the operation of cruise ships by non-residents? Will Section 43B(h) apply to assessees availing presumptive taxation scheme under section 44BBC 8
9. 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? 10
10. Whether section 43B(h) would apply in respect of amounts due to Micro or Small enterprises in respect of purchase of Capital Goods? 11
11. Can depreciation be disallowed if payment for the purchase of a xed asset is made beyond 45 days? 12
12. What is meant by “any sum payable by the assessee to a micro or small enterprise”? 12
13. Whether deduction for purchases from micro or small enterprise during nancial year will be allowed if delayed payment made during the nancial year itself? 13
14. 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)? 14
15. What are the consequences if payment is made beyond 45 days but before 31st March? 14
16. 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 nancial year within the time allowed by section 15 of MSMED Act? 14
17. What if the amount outstanding at year-end (31-03-2024) is paid in the next nancial year (2024-25) beyond the time allowed by section 15 of the MSMED Act? 15
18. What if advance is paid to the supplier who is micro or small enterprise? 15
19. 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? 15
20. 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? 16
21. Whether amounts will be disallowed under section 43B(h) if payment delayed but made on average due date? 16
22. 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? 16
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? 18
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? 19
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? 20
24. Whether section 43B(h) applies to retention money? 20
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? 20
24B. If amounts paid during FY 2023-24 to a registered micro or small enterprise is not suf cient to cover opening balance plus purchases during FY 2023-24, how will section 43B(h) work? 21
25. What if provisions are made instead of crediting individual accounts of the Trade Creditors/Suppliers? Can provisions be disallowed? 22
26. Whether disallowance under section 43B(h) can be made while computing book pro t for MAT purpose? 22
3
BUYERS TO WHOM SECTION 43B(h) APPLIES
27. To what kind of buyer-assessee is section 43B(h) applicable? 24
28. What if any charitable trust is making payment to a MSME? Will section 43B(h) apply? 24
29. 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)? 24
30. 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? 24
31. Will section 43B( h ) apply to a buyer-assessee who is Udyam-Registered Micro or Small Enterprise? 25
31A. Whether section 43B(h) will apply to a Sole proprietorship/ partnership rm/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? 25
4
DEFINITION OF “MICRO ENTERPRISE” AND “SMALL ENTERPRISE”
32. What are the de nitions of the terms “micro enterprise” and “small enterprise” 27
33. How is turnover calculated for classi cation of enterprises into micro, small and medium? 29
34. How is investment in plant and machinery or equipment calculated for classi cation of enterprises into micro, small and medium? 29
35. Can you please illustrate classi cation of enterprises based on composite criteria of turnover and investment? 30
36. So will each buyer-entity have to call for the nancials, ITRs and GSTs of every trade creditor/supplier and determine their classi cation as micro enterprise or small enterprise? 33
37. Is section 43B(h) applicable to amounts due to unregistered micro/small enterprises? 37
38. 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? 37
39. Can the buyer-entity take non-mention of Udyam Number on Bills of suppliers as conclusive evidence of non-registration under Udyam? 38
40. How to verify that Udyam Registration number printed on suppliers invoice is genuine? 39
41. Can it be inferred from the Udyam Number printed on Supplier’s invoice that he is a micro or small enterprise? 39
42. Is it possible to obtain Udyam Registration details of a Supplier by searching for his name in Udyam portal? 39
43. Is it possible to obtain Udyam Registration details of a Supplier by searching his PAN on the Udyam portal? 40
44. What details are contained on Udyam Registration Certi cate? 40
45. What should buyer-entities check from the Udyam Certi cate displayed on the portal? 41
46. Is section 43B(h) a “non-tax bene t” for the Supplier micro/ small enterprise? 43
47. What if, as per Supplier’s Udyam Certi cate, under the head “Enterprise Type”, the following details are given in Tabular form 43
48. What if, the Supplier’s Udyam Certi cate shows, under the head “Enterprise Type”, that the supplier is a medium enterprise since nancial year 2020-21? 44
49. What if, as per Supplier’s Udyam Certi cate, the supplier’s status was reverse-graduated from medium enterprise to small enterprise w.e.f. 1-4-2022? 44
50. Whether section 43B(h) shall apply to outstandings in respect of supplies made prior to date of Udyam Registration? 45
51. Whether section 43B(h) will apply if supplier cancels his Udyam Registration? 45
52. Whether supplier can cancel Udyam Registration? If so, how? 46
53. Will Micro or Small Enterprises having Udyog Aadhaar Memorandum or EM-II be regarded as micro or small enterprises for section 43B(h) purposes? 46
54. What is Udyam Assist registration? 46
55. What are Informal Micro Enterprises (IMEs) 47
56. What is the status of IMEs registered on UAP? 47
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? 48
58. What is meant by the terms “the Appointed Day”, “the day of acceptance” and “ the day of deemed acceptance” 50
59. Can you please illustrate how the provisions of section 15 of MSMED Act work? 51
59A. What if buyer-entity has no written agreement with MSE suppliers as regards credit period? 52
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? 52
60. What is average due date? 52
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 53
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? 54
63. What is meant by the term “Supplier”? 54
64. Whether micro enterprise/small enterprise will be regarded as ‘supplier’ for supplies made on or before the date of Udyam registration? 54
65. Whether Udyam-Registered medium enterprises are suppliers? 55
66. Which enterprises shall not be regarded as suppliers for purposes of section 15 of MSMED Act? 55
67. Can it be argued that since section 43B refers to only section 15 of MSMED Act and does not refer to de nition 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)? 55
68. What is the de nition of “Buyer”? 57
69. What if buyer-entity buys goods from Udyam Registered Micro/Small Enterprise whose Udyam Certi cate shows he is a trader? Will section 43B(h) apply? 58
70. How to know the correct status of Supplier, whether he is manufacturer or service provider or trader? 58
71. What if the Status of Micro/Small “Supplier” changes from Manufacturer to Trader? 58
72. What if the Status of Micro/Small “Supplier” changes from Trader to Manufacturer? 59
73. Does Udyam Portal allow search of MSME status of Supplier based on his name? 59
74. Can one do bulk search of Udyam Numbers of many suppliers? 59
75. There is a popular eatery in front of our Of ce 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? 59
76. Will section 43B(h) apply to fees payable to CA rm who is internal auditor/concurrent auditor? 60
77. What if CA rm 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? 60
78. If contract between buyer and Udyam Registered MSE supplier is of the nature of works contract, will section 43B(h) apply? 60
79. Whether section 43B(h ) would apply to provision for statutory audit fees/tax audit fees made as of 31st March of relevant nancial year if CA rm who is auditor is an Udyam Registered micro or small enterprise? 61
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? 62
81. Whether section 145A would impact disallowance u/s 43B(h)? 64
SECTION 43B(h) DISALLOWANCE VIS-A-VIS DISALLOWANCE U/S 23 OF MSMED ACT OF INTEREST PAYABLE TO MSEs
82. 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? 66
83. For computing interest on delayed payments as per section 16, bank rate as of which date is relevant? 67
84. What is meant by calculation of interest compounded at monthly rests? 68
85. Will section 16 of the MSMED Act apply where contract provides that no interest shall be paid for delays in payment? 68
86. Is interest under section 16 of the MSMED Act in addition to interest provided for in the contract? 69
87. Can interest under section 16 of the MSMED Act be waived by the supplier? 69
88. 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? 72
89. 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? 72
90. 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? 73
91. 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? 74
92. If the buyer makes a delayed payment to a supplier and the amount paid is not suf cient 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? 74
93. Is there any directive by Central Govt. for prompt payment of MSE bills by PSUs? 74
94. Is it necessary for the supplier to le any suit or other legal proceedings to enforce buyer’s liability for interest under section 16 of the MSMED Act? 75
95. Whether defaulting buyer is liable to pay interest to a supplier who is an Udyam-Registered Medium Enterprise? 75
96. Whether TDS is deductible from interest payable u/s 16? 75
97. Is interest u/s 16 exempt from tax in supplier’s hands? 76
98. What are the provisions as regards disallowance of interest payable on delayed payments to MSE Suppliers under the MSMED Act? 76
99. What is the means to ensure the disallowance of interest in accordance with section 23 of the MSMED Act? 76
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? 76
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? 79
101. What is the objective of requiring disclosures by buyer in his annual accounts of amounts due to MSE suppliers? 83
102. How is the buyer to identify MSE suppliers to comply with Chapter V of MSMED Act including disclosures in annual audited accounts? 83
103. Is there any penal consequences for the buyer if he fails to disclose dues to MSE suppliers in his audited annual accounts? 85
104. What notes on Accounts are to be added by buyer entities to comply with disclosures under section 22? 85
REPORTING IN TAX AUDIT REPORT OF DISALLOWANCE U/S 43B(h)
105. Whether disallowance u/s 43B(h) requires reporting in Form No. 3CD? 87
105A. What points should the tax auditor consider when reporting in the amended Clause 22 of amounts liable to be disallowed under section 43B(h) in respect of delayed payments to MSEs? 89
105B. What if the Due date for payment to the MSE Supplier under section 15 of the MSMED Act falls on a public or national holiday? 96
106. If delayed payment is made to the MSE supplier along with interest under section 16 of the MSMED Act, is disallowance under section 43B(h) attracted? 97
107. Is it a delayed payment for clause 22 purposes if the buyer entity withholds only the GST component of the bill and pays the rest on or before the due date? 99
108. Can you give us an illustrative checklist on audit of trade creditors for tax audit under Section 44AB purposes keeping in mind the requirements of Clause 22 and Section 43B(h)? 101
CHECKLIST FOR BUYER-ENTITIES
109. 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? 128
11
CHECKLIST FOR MICRO/SMALL ENTERPRISES
110. 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? 131
APPENDICES
Appendix 1: Relevant text of section 43B(h) of Income-tax Act, 1961 135
Appendix 2: Relevant extracts of explanatory circular explaining the provisions of the Finance Act, 2023 136
Appendix 3: Micro, Small and Medium Enterprises Development Act, 2006 137
Appendix 4: New MSME Noti cation (NMN) 141
Appendix 5: Inclusion of wholesale trade and retail trade in MSMEs 146
Appendix 6: Of ce Memorandum regarding activities not eligible for MSMEs registration 147
Appendix 7: Extension of OM No. UAM/MC/01/2017-SME dated 27-7-2017 to Udyam Registration 148
Appendix 8: Activities (NIC Codes) not covered under MSMED Act, 2006 for registration of Udyog Aadhaar Memorandum (UAM) 149
Appendix 9: Bene ts of provisions of delayed payments as per MSMED Act, 2006 available to MSMEs vis-a-vis Traders related 151
5 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’?
Yes No
Agreed credit period is 45 days or less
Due date for payment to be computed based on agreed credit period [Note 1]
Note 1:
Agreed credit period is more than 45 days
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]
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.
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;
(
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
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 No
Due date of payment as per section 15/section 43B(h) 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
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.
[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.
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.
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.
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:
3rd April, 2024
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.
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-
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 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
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.
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]
Buyer”?
According to section 2(d) of the MSMED Act, “buyer” means whoever buys any goods or receives any services from a supplier for consideration.
69. What if buyer-entity buys goods from Udyam Registered is a trader? Will section 43B(h) apply?
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 memorandum 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.
is manufacturer or service provider or trader?
Udyam Certificate shows the activity of the Supplier. The buyer is not required to go beyond the Udyam Certificate. [FAQs 33 and 34]
71. What if the Status of Micro/Small “Supplier” changes from Manufacturer to Trader?
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]
72. What if the Status of Micro/Small “Supplier” changes from Trader to Manufacturer?
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]
73. Does Udyam Portal allow search of MSME status of Supplier based on his name?
As of now, one can only search or verify MSME status on Udyam portal if one has Supplier’s Udyam Number.
74. Can one do bulk search of Udyam Numbers of many suppliers?
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.
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?
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.
76. Will section 43B(h is internal auditor/concurrent auditor?
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 services 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.
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?
Since services were rendered by CA firm prior to the date of Udyam Registration, Section 43B(h) will not apply here.
78. If contract between buyer and Udyam Registered MSE supplier is of the nature of works contract, will section 43B(h) apply?
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 services 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.
79. Whether section 43B(h) would apply to provision for statutory audit fees/tax audit fees made as of 31st March of
Registered micro or small enterprise?
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.
ACT & MSMED ACT
AUTHOR : SRINIVASAN ANAND G.
PUBLISHER : TAXMANN
DATE OF PUBLICATION : SEPTEMBER 2024
EDITION : 2024 EDITION
ISBN NO : 9789364556439
NO. OF PAGES : 184
BINDING TYPE : Paperback
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 analysis for legal compliance for timely payments and the broader implications for business practices.
The Present Publication is the September 2024 Edition, authored by CA. Srinivasan Anand G. This book is amended by the Finance (No. 2) Act, 2024 with the following noteworthy features:
• [Detailed Legal Analysis] Explains Section 43B(h) of the Income Tax Act, including deductions, accounting impacts, and compliance requirements
• [Buyer Obligations] Outlines affected buyers, including Udyam-registered entities and those under different accounting methods
• [Definitions & Classifications] Clarifies 'micro' and 'small' enterprise criteria, verification of supplier status, and tax benefit implications
• [Compliance Under MSMED Act] Covers payment timelines, consequences of delays, and legal requirements for interest on overdue payments
• [Accounting & Reporting] Discusses accounting treatments, disclosure needs in audits, and compliance checklists
• [Practical Guidance] Provides FAQs, real-world scenarios, and practical tips for managing compliance with Section 43B(h)
