VSV Scheme Is Non-Tax Benefit Applicable Even To Medium Enterprise, Clarifies Bombay High Court

Since the VSV Scheme is a non-tax benefit applicable even to a Medium Enterprise, the High Court clarified that the Petitioner was entitled to make a claim under the VSV Scheme”;

The Division Bench comprising Justice B. P. Colabawalla and Justice Firdosh P. Pooniwalla observed that the VsV scheme proposed to refund 95% of the liquidated damages deducted under contracts entered into with the Government/PSUs on the fulfilment of the specified eligibility conditions.

Facts of the case:

The Petitioner/ Assessee, engaged in rendering services of electronic automation, information, communication, and technical solutions, and manufacturing of Meteorological Instruments, Radar Equipment, GPS Devices, to various Government bodies and PSU undertakings carrying out shipbuilding, was upgraded/re-classified as “not an MSME” on May 09, 2023. Later, in Feb, 2024, the Petitioner made application to claim advantage of the VSV Scheme. However, it was not permitted to make the claim on the ground that it was not an MSME. The Petitioner therefore conveyed the same to the GeM helpdesk informing them that it was unable to make the claim on the GeM portal and that an error cropped up stating that it was not an MSME. The Petitioner also wrote to Director, Department of Expenditure, Ministry of Finance, but was informed that it would not be able to make a claim under the VSV Scheme as it was “not an MSME”, by the GeM helpdesk.

Observations of the High Court:

The Bench noted that as per Section 7 and Section 8 of the Micro, Small and Medium Enterprise Development Act, 2006, the Ministry of Micro, Small and Medium Enterprise issued Notification No.S.O.2119(E) dt. Jun 26, 2020, whereby the Government framed criteria, inter alia, for classifying an Enterprise as a Micro, Small and a Medium Enterprise under the MSME Act and also the form and procedure for filing the Memorandum known as 'Udyam Registration'.

The Bench also took note of Clause 8(5) of the said Notification which provided that in case of an upward change in terms of investment in plant and machinery or equipment, or turnover, or both, and consequent re-classification, an Enterprise would maintain its prevailing status till the expiry of one year from the close of the year of registration.

The Bench found that Clause 8(5) of the said Notification was substituted by another Notification dt. Oct 18 2022 and the substituted Clause 8(5) provided that in case of an upward change in terms of investment in plant and machinery or equipment, or turnover, or both, and consequent re-classification, an Enterprise shall continue to avail of all non-tax benefits of the category (Micro or Small or Medium) it was in before the re-classification, for a period of three years from the date of such upward change.

Thus, the Bench pointed out that the use of the word “medium” in the bracketed portion of Clause 8(5) makes it clear that Clause 8(5) applied to an upward change and re-classification of even a Medium Enterprise.

Finding that the Petitioner was unable to deliver/complete various projects contracted with the Government/PSUs between the period of Feb 2020 and Mar 2022, due to constraints arising from the COVID-19 Lockdown, the Bench observed that the contracting Government undertaking / authority deducted liquidated damages under the contracts entered into with the Petitioner.

The Bench observed that in light of many references from various MSMEs regarding difficulties faced due to the COVID19 pandemic, the Finance Ministry, vide Office Memorandum dated Feb 06, 2023, framed the VSV Scheme under which it proposed to refund 95% of the liquidated damages deducted under contracts with Government/PSUs inter alia on the conditions that the contractor/supplier should be registered as a MSME as on Mar 31, 2022.

The Finance Ministry issued an Office Memorandum dated Apr 11, 2023 whereby the eligibility conditions for applying under the VSV Scheme were modified and provided that the supplier/contractor would be eligible for the VSV Scheme if it is registered (for any category of goods and services) as a Medium, Small or Micro Enterprise as per the prevalent scheme of the Ministry of MSME on the date of the claim made by the supplier/contractor, added the Bench.

The Bench concurred with the Petitioner that Clause 8(5) creates a legal fiction of treating a Micro or Small or a Medium Enterprise as such, for a period of three years, from an upward change/re-classification in its status, notwithstanding the fact that its status may have changed due to its upward change/re-classification for the limited purpose of availing of all non-tax benefits.

Hence, the Bench pointed that that “if a Small Enterprise becomes a Medium Enterprise [by virtue of its upward re-classification], for availing of all non-tax benefits, it will continue to be treated as a Small Enterprise for a period of three years from such upward change/re-classification.

Similarly, if a Medium Enterprise is classified as “not an MSME” by virtue of its upward re-classification, for availing of all non-tax benefits, it will continue to be treated as a Medium Enterprise for a period of three years from such upward change/re-classification”, added the Bench.

Therefore, the High Court allowed the Assessee's petition and directed the Department to entertain the Petitioner's claim under the VSV Scheme.

Counsel for Petitioner/ Assessee: Advocates Rohan Kadam, Rucha Vaidya, Nadeem Shama and Prashant Bothre

Counsel for Respondent/ Revenue: Advocates Savita Ganoo, Sangeeta Yadav and Umesh Gupta.

Case Title: Marine Electricals India vs. Union of India

Case Number: W.P No.3080 of 2024

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