Once Registered As MSME, The Nature Of Activity Cannot Be A Bar To Any Relief Under The Act: Andhra Pradesh High Court

The bench of Justice R. Ragunandan Rao held that MSME Council cannot dismiss an application under Section 18 of the Act on the ground that the activity between the parties was merely a 'trading activity', thus, not covered by the provisions of the act.

The Court also reiterated that provisions of MSMED Act would override an arbitration clause embedded in the agreement between the parties.

Facts

The petitioner and the 3^rd respondent entered into a contract dated 14.06.2018 for certain construction works. However, the project work could not be executed but the petitioner had by then stationed a sizeable plant and machinery at the site, a further agreement termed as a Memorandum of Understanding, was entered between the petitioner and the 3rd respondent on 20.05.2020. As per this Memorandum of Understanding, the 3rd respondent had agreed to pay a sum of Rs.253 lakhs + GST to the petitioner as consideration for the plant and machinery handed over to the 3rd respondent.

On failure of the 3^rd respondent to pay the amount, the petitioner filed a reference before the MSME Council (2^nd respondent) under Section 18 of the A&C Act. However, the council vide notice dated 23.09.2021 refused to entertain the claim petition of the petitioner on the ground that the activity between the parties was neither manufacturing nor a service activity but merely a 'trading activity', therefore, it was outside the purview of the Act.

Aggrieved by the rejection of its claims by the MSME Council, the petitioner challenged its order by way of a writ petition.

Grounds of Challenge

The petitioner challenged the order of MSME Council on the following grounds:

• The petitioner is validly registered as a small enterprise under the MSME Act, therefore, it is entitled to all the benefits of the act regardless of the nature of activity. (Reliance place on Shah & Parikh v. Urmi Trenchless Technology, 2019 SCC OnLine Bom 340)
• Further, the claims of the petitioner are for recovery of money on accounts of sale of goods and supply of services.

The respondent objected to the maintainability of the claim before the MSME Council on the following grounds:

• The parties have an arbitration agreement between themselves and any dispute, whatsoever arising between the parties has to be resolved by way of arbitration under the agreement.
• Moreover, the view taken by the MSME Council is correct for the reason that the sale of goods is neither a manufacturing activity nor supply of services, therefore, it falls outside the purview of the act.

Analysis by the Court

Firstly, the Court dealt with the issue of whether the arbitration agreement between the parties would override the statutory remedy available to the petitioner under Section 18 of MSMED Act. The Court rejected the objection raised by the 3^rd respondent and held that reference before the MSME Council under Section 18 would be maintainable regardless of any agreement between the parties.

Next, the Court considered the correctness of the reasoning provided by the MSME Council in the impugned notice. The Court held that once an enterprise is registered under the MSME Act, all the benefits of the act would apply to that enterprise.

The Court relied on the judgment of the Bombay High Court in Shah & Parikh (Supra) to hold that an MSME Council cannot dismiss the claim petition merely because the transaction between the parties was a 'trading activity'.

Accordingly, the Court allowed the petition and directed the MSME Council to consider the claim of the petitioner in accordance with law.

Case Title: Dalapathi Constructions v. The State of Andhra Pradesh & Ors. W.P. NO. 4652 of 2022

Date: 05.08.2022

Counsel for the Petitioner: Mr. S. Ram Babu

Counsel for the Respondent: Mr. G. Elisha

Citation: 2022 LiveLaw (AP) 135 

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