MSME Facilitation Council Can't Arbitrate Matters Pertaining To Individual Service Providers Outside The Scope Of MSME Act: Delhi High Court

The Delhi High Court single bench of Justice Prateek Jalan held that the MSME Facilitation Council does not have the jurisdiction to arbitrate matters pertaining to individual service providers who do not fall under the definition of 'supplier' under the MSME Act. The same would be violative of Section 34 of the Arbitration and Conciliation Act, 1996. 

Brief Facts:

The matter pertained to an agreement between the parties which outlined the provision of toll management services by the Respondent to the Petitioner, with a stipulated term of five years extendable by mutual agreement. The Petitioner approached the Delhi High Court (“High Court”) and filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) challenging an award rendered by the Madhya Pradesh Micro and Small Enterprises Facilitation Council, Bhopal.

Petitioner contended that the award should be set aside because the claims made by the Respondent were outside the jurisdiction of the Facilitation Council under Sections 17 or 18 of the MSME Act. It argued that the Respondent, not being a micro or small enterprise, is not eligible under the MSME Act.

Sections 17 and 18 of the MSME Act specify the recovery of amounts due and the reference to the Micro and Small Enterprises Facilitation Council, respectively. The Petitioner asserted that the MSME Act applies only to a supplier registered at the time of the contract.

The Respondent acknowledged that the Respondent is not registered as a micro or small enterprise under the MSME Act. However, it contended that the Respondent qualified as a 'supplier' under Section 2(n)(iii) of the MSME Act, emphasizing that the definition includes entities engaged in selling goods produced by micro or small enterprises and rendering services provided by such enterprises. It argued that Section 2(n)(iii) does not mandate a 'supplier' to be a registered micro or small enterprise but focuses on entities benefiting micro or small enterprises through the sale of goods or services. 

Observations by the High Court:

The High Court held that even with the Respondent's expansive interpretation of Section 2(n)(iii) of the MSME Act, the Respondent does not fulfil the definition of a 'supplier.' It held that the Agreement in question didn't entail the sale of any goods from the Respondent to the Petitioner. The services provided by the Respondent to the Petitioner were carried out by the Respondent itself, not by a micro or small enterprise. The Agreement assigned the Respondent the responsibility of procuring and installing equipment at the Petitioner's toll plazas and maintaining it for five years, along with other contracted services. 

The High Court emphasized that neither the tender issued by the Petitioner nor the bid submitted by the Respondent necessitated the provision of goods or services by a micro or small enterprise. The engagement between the parties was characterized as a principal-to-principal basis, and the Petitioner was not held liable under the MSME Act for invoices raised by vendors upon the Respondent, even if the Respondent procured goods from a micro or small enterprise.

Therefore, the High Court held that it cannot be asserted that the Respondent was "engaged in selling goods produced by micro or small enterprises" in the context of Section 2(n)(iii) of the MSME Act. Consequently, the High Court set aside the award rendered by the Facilitation Council.

Case Title: Indian Highways Management Company Ltd. vs Prakash Asphaltings and Toll Highways (India) Pvt. Ltd.

Citation: 2024 LiveLaw (Del) 241

Case Number: O.M.P. (COMM) 392/2023, I.A. 18599/2023 & I.A. 22069/2023

Advocate for the Petitioner: Mr. A.P. Singh, Ms. Akshada Mujwar and Mr. Varnit Vashishtha

Advocate for the Respondent: Mr Dharmendra Rautray, Ms Ginny J. Rautray, Mr Navdeep Singh, Ms Devika Thakur and Mr Ranvijay Singh

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