TaxTMI 
TaxTMI 
2023 (7) TMI 382
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....iled the present writ petitions challenging the directions for reference to arbitration passed by the Respondent No. 1 i.e., the Micro & Small Enterprise Facilitation Council (hereinafter 'MSEFC') - an authority established under Section 20 of the MSMED Act. Respondent No. 2 i.e., M/s SBG & Co. is a partnership firm of Chartered Accountants (hereinafter 'CA Firm') of which Mr. S.B. Gupta is a Partner. The said CA Firm is also registered as a `Micro Enterprise' under the provisions of the MSMED Act. 3. The CA Firm, being on the panel of the Income Tax Department (hereinafter 'IT Department'), was nominated as a Special Auditor by the IT Department in four cases for carrying out Special Audit in terms of Section 142(2A) of the IT Act. 4. After the completion of the said Special Audit assignments and the submission of the final audit reports, the CA Firm raised four invoices in respect of the said audits. The grievance of the Special Auditor- CA Firm is that qua the invoices raised, the full payment has not been made. Further, in respect of one of the assignments the payment has not been received at all. 5. Under such circumstances, the CA Firm invoked the provisions of the M....
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.... IT Department requested the CA Firm to not submit the Special Audit report to M/s Sahara India (Firm) in terms of the directions by the order dated 24th May 2013 passed in W.P.(C) No. 3273/2013 titled 'Sahara India (Firm), Lucknow v. Commissioner of Income Tax, Delhi (Central)-1, New Delhi & Others'. 15. The CA Firm, through letter dated 18th November 2013, sought clarification regarding the submission of the Special Audit report to M/s Sahara India (Firm) upon completion of the Special Audit. It also submitted Fee Bill No. 43 dated 14th November 2013, for an amount of Rs. 1,11,37,500/- (exclusive of Service Tax) and Rs. 1,25,14,095/- (inclusive of Service Tax) to the IT Department along with the timesheet in respect of the said Special Audit assignment. 16. On 5th September 2016, W.P.(C) No. 3273/2013 titled 'Sahara India (Firm), Lucknow v. Commissioner of Income Tax, Delhi (Central)-1, New Delhi & Others' was disposed of. 17. In 2018, having not received the payment of its fee bill, the CA Firm filed a writ petition being W.P.(C) No. 1773/2018 titled 'M/s SBG & Co. vs. The Union of India & Ors.' before this Court, regarding the payment of its fees. 18. W.P.(C) No. 17....
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.... held for conciliation between the parties, conciliation proceedings between the parties failed and were accordingly terminated. It may be pertinent to note that the IT Department raised objections over the applicability of Section 16 of the MSMED Act to payments pursuant to order under Section 142(2D) of the IT Act, as recorded in the minutes of the joint meeting held on 20th December 2018. Further, in its written submissions before the MSEFC, the IT Department challenged the jurisdiction of the MSEFC. 26. Finally, on 19th September 2019, the MSEFC passed the impugned reference order, whereby the MSEFC referred the case to the DIAC under Section 18(3) of the MSMED Act for initiating arbitration proceedings. 27. The DIAC thereafter, issued letter dated 28th September 2019 informing the CA Firm and the IT Department of the impugned reference and the details regarding the arbitration proceedings, such as filing of statement of claims as also other formalities pertaining to the arbitration proceedings. 28. In response to the same, while the CA Firm filed its statement of claim with DIAC, the IT Department vide letter dated 19th November 2019, challenged the jurisdiction of DI....
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....e-entities by the CA Firm. 36. Consequently, the CA Firm sent letters to the IT Department dated 3rd December 2014, 20th June 2018 and 19th December 2018 regarding the payment of fees for the Special Audits of SIFCL, Reverse and Oracle, respectively, along with the respective invoices. The details of the invoices are set out as under: - (i) SIFCL-Invoice No. 21 dated 3rd December 2014 for Rs. 1,56,91,605/- (exclusive of Service Tax) and Rs. 1,76,31,088/- (inclusive of Service Tax) (ii) Reverse-Invoice No. 75 dated 20th June 2018 for Rs. 1,96,12,500/- (exclusive of GST) and Rs. 2,31,42,750/- (inclusive of GST) (iii) Oracle- Invoice No. 23 dated 19th December 2018 for Rs. 2,01,45,000/- (exclusive of GST) and Rs. 2,37,71,100 /- (inclusive of GST) 37. On 12th July 2019 and 19th July 2019, the IT Department passed orders under Section 142(2D) of the IT Act, determining the remuneration of the CA Firm with respect to the Special Audits of Oracle and Reverse, respectively. The amounts determined under Section 142(2D) of the IT Act by the IT Department are set out below. (i) Oracle at Rs. 67,50,000/- (exclusive of GST) i.e., Rs. 79,65,000/- (inclus....
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.... DIAC issued letters in all the three cases to the CA Firm and the IT Department intimating them about the impugned references and the details regarding the arbitration proceedings, such as filing of statement of claims as also other formalities pertaining to the arbitration proceedings. 45. In response thereto, the CA Firm filed its statement of claims in the arbitration proceedings regarding all the three entities. 46. On 7th July 2022, the Ld. Sole Arbitrator, passed a combined order in the arbitration proceedings in all the three cases, whereby last opportunity was granted to the IT Department to appear in the proceedings as also to file its Statement of Defense and other relevant documents on or before 22nd July 2022, else it would be proceeded against ex-parte. 47. Thereafter, the ld. Arbitrator passed further orders dated 8th September 2022 and 12th October 2022 in the said arbitration proceedings. 48. Aggrieved by the impugned reference orders dated 10th December 2021 and the proceedings emanating therefrom, the IT Department filed the present petition. 49. Vide order dated 25th November 2022, this Court stayed the impugned reference orders dated 10th Decembe....
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....lity of the MSMED Act, requires the existence of a buyer and supplier relationship and agreement between the parties. Reference is made to Section 2(d) as also Section 15 and Section 24 of the MSMED Act in this regard. As per his submission, there is no 'consideration' which is paid in terms of the Indian Contract Act, 1872 and therefore, it cannot be held that the relationship is a contractual relationship. On the other hand, in fact, it is a relationship where the assignment has been given to the statutorily appointed Special Auditor, which would directly be under the supervision of the Chief Commissioner, Income Tax. Owing to the specialized nature of the assignment, the provisions of the MSMED Act cannot be invoked. F. That reference is also then made to the statement of claims filed by the CA Firm before the DIAC wherein it is clearly alleged that the consideration determined is palpably incorrect, which therefore takes it into the jurisdiction of the IT Act and not under the MSMED Act. G. That Section 24 of the MSMED Act would not be applicable and would not be attracted in this case inasmuch as the Act itself would apply only if the conditions under Section....
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....entertained by the Court. M. That the earlier writ petition filed by the CA Firm in 2018 i.e., W.P(C) 1773/2018 titled 'SBG & Co. Chartered Accountants through its Partner v. The Union of India & Ors.' the CA Firm took a specific plea that there is no alternate efficacious remedy except to file a writ petition at the stage when the Commissioner of Income Tax had not taken any decision on the CA Firms' fee payable under Section 142(2D) of the IT Act. N. That relying upon paragraph 14 as also upon the plea in the said writ petition it was further argued that as per the guidelines envisaged in the proviso to Section 142(2D) of the IT Act as laid down in Rule 14B of the IT Rules, there was a duty to determine the fee upon the IT Department. O. That, overall, there are four Special Audit assignments in which the CA Firm was nominated by the IT Department. In respect of all the four assignments, the IT Department has made its determination regarding the amounts. The only option/remedy available to the Respondent- CA Firm is a challenge through a writ petition. However, the Respondents have not challenged the same by way of a writ petition. P. That ther....
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.... the IT Act, it is the discretion of the CA Firm so appointed to accept or decline such offer before the nomination of the CA Firm by the IT Department. He relies upon 'Dhanesh Gupta & Co. vs. CIT [327 ITR 246]' in support of this submission. D. That the reports which were submitted by the CA Firm, were fully accepted by the IT Department and no deficiencies were raised. All the Special Audit assignments were also carried out on time. Since there exists a promise to pay, the word 'remuneration' as used in Section 142(2D) of the IT Act would have to be deemed to be 'consideration'. E. That in terms of Section 142(2D) of the IT Act is concerned, the determination by the IT Department shall be final and the expenses including the fees are to be paid by the Assessee. However, as per the proviso inserted with effect from 1st June 2007, the phrase relating to finality of determination was conspicuously missing. In respect of the assignments given after 1st June 2007, the payment of fee is to be made by the Central Government. The Commissioner, IT Department is thus stated to be an interested party subject to bias. If such finality was read into the proviso, it would be ....
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..... K. That the since the dispute is about the quantum of money payable and the facts would have to be gone into, civil proceedings would have to be initiated. He relies upon 'State of UP. & Ors. v. Bridge & Roof Co. (India) Ltd. [Civil Appeal no. 10774/1996] in support of this submission. L. That the order passed in the earlier writ petition being WP(C) 1773/2018 filed by the Respondent, the issue was not decided on merits. Thus, the bar of res-judicata would not be applicable in the case of WP(C) 13754/2019. Reliance is placed upon 'Workmen vs. Board of Trustees of Cochin Port 1978 AIR 1283', 'Gulabchand Chhotalal vs. State of Bombay 1965 AIR 1153' and 'ITC vs. CCE & Anr' 2004 Scale 540. M. That the Petitioner has filed the present writ petition in a malafide manner. N. That the Respondent has computed the fee as approved in 'Rakesh Raj & Associates vs. CIT[WP(C) No. 1230/2015] and Dhanesh Gupta & Co. vs. CIT [2010]327 ITR 246 (Del). Further, the objection is irrelevant as the issue in the present case relates to the jurisdiction of the MSEFC over the dispute and not the quantum of fee payable. O. It is specifically submitted, that the P....
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....ut of any administrative law. Courts refer to Civil Courts, Criminal Courts and High Courts. Tribunals can be either private Tribunals (Arbitral Tribunals), or Tribunals constituted under the Constitution (Speaker or the Chairman acting under Para 6(1) of the Tenth Schedule) or Tribunals authorized by the Constitution (Administrative Tribunals under Article 323A and Tribunals for other matters under Article 323B) or Statutory Tribunals which are created under a statute (Motor Accident Claims Tribunal, Debt Recovery Tribunals and consumer fora). Some Tribunals are manned exclusively by Judicial Officers (Rent Tribunals, Motor Accidents Claims Tribunal, Labour Courts and Industrial Tribunals). Other statutory Tribunals have Judicial and Technical Members (Administrative Tribunals, TDSAT, Competition Appellate Tribunal, Consumer fora, Cyber Appellate Tribunal, etc)." 19. Similar observations were made by the Supreme Court in SREI Infrastructure Finance Limited (supra) as under: "14. Arbitration is a quasi judicial proceeding, equitable in nature or character which differs from a litigation in a Court. The power and functions of arbitral tribunal are statutorily regul....
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....tribunal is a tribunal against which a petition under Article 226/227 would be maintainable; (ii) The non-obstante clause in section 5 of the Act does not apply in respect of exercise of powers under Article 227 which is a Constitutional provision; (iii) For interference under Article 226/227, there have to be `exceptional circumstances'; (iv) Though interference is permissible, unless and until the order is so perverse that it is patently lacking in inherent jurisdiction, the writ court would not interfere; (v) Interference is permissible only if the order is completely perverse i.e., that the perversity must stare in the face (vi) High Courts ought to discourage litigation which necessarily interfere with the arbitral process; (vii) Excessive judicial interference in the arbitral process is not encouraged; (viii) It is prudent not to exercise jurisdiction under Article 226/227; (ix) The power should be exercised in `exceptional rarity' or if there is `bad faith' which is shown; (x) Efficiency of the arbitral process ought not to be allowed to diminish and hence interdicting the arbitral process shoul....
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.... Rs. 15,25,000/- Rs. 1,61,06,088/- Total Rs. 7,70,59,033/- Rs. 2,06,69,320/- Rs. 5,63,89,713/- 61. As per the table set out above after adjusting the amounts paid, the total amount outstanding as per the CA Firm is liable to be paid by the Department. In order to recover the outstanding amounts, the CA Firm approached the MSEFC under the MSMED Act, which in turn referred the disputes to the DIAC for arbitration. 62. In the first case i.e., W.P.(C) 13754/2019, the arbitration proceedings were stayed vide order dated 23rd December 2019. The order dated 23rd December 2019 passed in W.P.(C) 13754/2019 is set out below: "Issue notice. Notice is accepted by Mr. Ramesh Singh, leamed standing counsel on behalf of respondent no. 1. Let notice be issued to the remaining respondents to be served through all modes. Counter affidavit be filed within a period of four weeks. Rejoinder, if any, be filed within a period of two weeks thereafter. The Income Tax Department has filed the present petition impugning the order dated 19.09.2019 passed by the Micro and Small Enterprises Facilitation Council, New Delhi (hereinafter referred to as ....
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....o. 2 could not have invoked the jurisdiction of the MSME Council. He further submits that even otherwise since Respondent no. 2 had on the first instance approached this Court and directions were passed and the payment has been made in terms thereof, no further action can lie. Mr. Ramesh Singh, Standing Counsel for Respondent no. 1 submits that the jurisdiction of the MSME Council is de hors the provisions of the Income Tax Act. He also relied upon Section 24 of the MSMED Act, 2006 to argue that the provisions in Sections 15 to 23 shall have effect notwithstanding the provisions of the Income Tax Act. He also refers to the decision of the Division Bench of this Court in LPA 91/2019 titled M/s Bharat Heavy Electricals Ltd vs. Micro and Small Enterprises & Anr. This issue would require consideration. I am of the prima facie view that once Respondent No. 2 has been paid its statutory audit fees, in terms of the orders passed by this Court, the jurisdiction of MSME Council could not have been invoked. In view of the above, till the next date of hearing, the order dated 19.09.2019 and the proceedings emanating therefrom shall remain stayed. List on 21st April 2020" 63. Howev....
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.... the purpose of bringing out this enactment as set out in the Objects and Reasons is as under: "STATEMENT OF OBJECTS AND REASONS Small scale industry is at present defined by notification under section 11B of the Industries (Development and Regulation) Act, 1951. Section 29B of the Act provides for notifying reservation of items for exclusive manufacture in the small-scale industry sector. Except for these two provisions, there exists no legal framework for this dynamic and vibrant sector of the country's economy. Many Expert Groups or Committees appointed by the Government from time to time as well as the small-scale industry sector itself have emphasised the need for a comprehensive Central enactment to provide an appropriate legal framework for the sector to facilitate its growth and development. Emergence of a large services sector assisting the small-scale industry in the last two decades also warrants a composite view of the sector, encompassing both industrial units and related service entities. The world over, the emphasis has now been shifted from "industries" to "enterprises". Added to this, a growing need is being felt to extend policy support for the small e....
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....g promotion and development and enhancing the competitiveness of small enterprises and medium enterprises. (i) empower to prescribe harmonised, simpler and streamlined procedures for inspection of small and medium enterprises under the labour laws enumerated in clause 15, having regard to the need to promote self-regulation or self-certification by such enterprises. (j) prescribe for maintenance of records and filing of returns by small and medium enterprises with a view to reduce the multiplicity of often-overlapping types of returns to be filed; (k) Make further improvements in the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 and making that enactment a part of the proposed legislation and to repeal that enactment. 3. The Bill seeks to achieve the above objects." 68. The above SOAR would show that the entire focus of the legislation was to enact a law to support small-scale industries engaged in the manufacturing sector and extending the said support in a comprehensive manner to the services sector. It is of specific relevance to point out that insofar as Chapter V of the MSMED Act relating to d....
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....buyers, if required under law to pay interest, would refrain from withholding payments to small scale and ancillary industrial undertakings." ............. 30. Sections 3 to 6 of the Act, 1993 are as follows: "Section 3. Liability of buyer to make payment.- Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor 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 one hundred and twenty days from the day of acceptance or the day of deemed acceptance. Section 4. Date from which and rate at which interest is payable.- Where any buyer fails to make payment of the amount to the supplier, as required under section 3, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay interest to the supplier on that amount from the appointed day or, as the case may be, from the date immediatel....
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....buyer as per Section 3, it is relevant to notice the event contemplated under Section 3 is "where any supplier supplies any goods or renders any services to any buyer". The incidence of liability is supply of goods or rendering any service. The Act is clearly prospective in nature and shall govern the incidence of supply and rendering service which happens after enforcement of the Act i.e. 23.09.1992. 33. The second part of Section 3 is "buyer shall make payment". Obviously, question of payment shall arise only after supply of goods or rendering any service. Thus, by virtue of Section 3, both the incidents i.e. supply or service on the one hand and payment on the other has to be after the enforcement of Act, 1993. Statutory provision of Section 3 further creates statutory liability to make payment on the agreed day in writing between the buyers and the supplier and if there is no agreement then before appointed day. The fact that agreement in writing between buyer and supplier for supply and payment is prior to the enforcement of the Act is neither relevant nor material, what is material is that supply and services had to be after the enforcement of the Act, only then the ....
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....(iii) any company, co-operative society, trust or a body, by whatever name called, registered or constituted under any law for the time being in force and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises;" 75. Section 15 of the MSMED Act provides that if any 'supplier' i.e., a Micro or Small enterprise supplies any goods or renders services to a 'buyer' the payment for the same shall be made as agreed between the parties. As per the said section the maximum period for payment to 'Supplier', cannot exceed 45 days, as stipulated therein. In case of delay in payments, Section 16 provides for interest at a rate much higher than that provided by banks. Further, Section 17 of the MSMED Act, stipulates that the 'Buyer' would be liable to pay the interest in terms of Section 16. The said provisions read as under: "Section 15: Liability of buyer to make payment. Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, ....
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....en the parties, the Council shall either itself take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section(1) of section 7 of that Act. (4) Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India. (5) Every reference made under this section shall be decided within a period of ninety days from the date of making such a reference." 78. Section 24 of the MSMED Act provides that the said Act would have overriding effect over the MSMED Act. The said provision is set out below. "Section 24: Overriding Effect-The provisions of sections 15 to 23 shall have effect notw....
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....icer having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts multiplicity of transactions in the accounts or specialised nature of business activity of the assessee, and the interests of the revenue, is of the opinion that it is necessary so to do, he may with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, direct the assessee to get either or both of the following namely:- (i) to get the accounts audited by an accountant, as defined in the Explanation below sub-section (2) of section 288 nominated by the Principal Chief Commissioner or Chief Commissioner or Principal/ Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars, as may be prescribed and such other particulars as the Assessing Officer may require; (ii) to get the inventory valued by a cost accountant, nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in this behalf and to ....
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....ment." 83. A perusal of the above provisions would show that in the process of making an enquiry for the purposes of carrying out an assessment, the Commissioner/other officials of the IT Department are permitted to seek the assistance of Chartered Accountants, who are registered with the Institute under Section 2(1)(b) of the Chartered Accountants Act, 1949. 84. In terms of Section 142(2D) of the IT Act, such accountant, who may be engaged for the purpose of audit, is to be paid "remuneration". The said remuneration is to be determined by the Commissioner or the Principal Commissioner, Chief Commissioner or the Principal Chief Commissioner. Upon being determined, the said remuneration, shall be final. 85. In respect of Special Audits directed prior to 1st June, 2007 the remuneration is recoverable from the Assessee but, after the enactment of the Proviso to Section 142(2D) i.e., with effect from 1st June, 2007, the remuneration is to be paid by the Central Government. 86. Rule 14B of the IT Rules provides the guidelines for the manner in which the remuneration for Special audits is to be determined. The said Rule reads as under: "14B.-Guidelines for the purpos....
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....re the audit is assigned to him. The auditor, to whom the work is assigned, is not under any obligation to accept the assignment and is very much at liberty, while making offer for appointing him as special auditor or while accepting the assignment, to insist upon payment of such fee as he may deem adequate for the work assigned to him. Therefore, necessarily he needs to know, what will be paid to him for the work proposed to be assigned to him. If the remuneration demanded by the person proposed to be appointed as special auditor is not acceptable to the Chief Commissioner or the Commissioner, as the case may be, he may not assign the work to him. But it would be difficult to accept that the special audit can be assigned to a person without fixing either the remuneration or the norms on which the remuneration is to be calculated after the work is completed and conveying the same to him. Taking such a view would amount to giving an arbitrary power to the Chief Commissioner or the Commissioner, as the case may be, to fix any fee which he may decide to fix irrespective of the quantum of the work and the scale on which the remuneration is to be determined taking the quantum of work in....
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.... Section 142(2D) of the Income-tax Act (as amended) also provide that the expenses of, and incidental to, such audit shall be paid by the Central Government. As per sub-section (3) of section 142, the assessee shall be given an opportunity of being heard in respect of any material gathered on the basis of any inquiry under sub-section (2) or any audit under subsection (2A) and proposed to be utilised for the purposes of the assessment. Thus, from the aforesaid provision, it appears that the object and purpose of special audit is as such to facilitate the Assessing Officer to arrive at correct taxable income and for which the Assessing Officer is authorized to direct the assessee to get the books of account audited by an accountant authorized by the Assessing Officer, in case, the Assessing Officer is of the opinion that books of account are complex in nature and there are multiplicity of transactions, for which, accounts are required to be audited through the special auditor. As observed hereinabove and even as per sub-section (3) of section 142 ample opportunity shall be available to the assessee to make submission/comments on the report of the special auditor and therefore, there....
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....(2A) is an enabling provision to help and assist the Assessing Officer to complete scrutiny assessment with the help of assistance of an accountant. There has been substantial expansion of scope and ambit of special audit under section 142(2A) of the Act with effect from June 1, 2013. The amended section has been widened to include volume of accounts, doubts about correctness of accounts, multiplicity of transactions in the accounts or specialised nature of business activity of an assessee. These amendments by Finance Act, 2013 with effect from June 1, 2013, substitute the words 'nature and complexity of accounts of the assessee'. We are not concerned with the said amendment in the present case as the impugned order in question directing special audit was passed on March 25, 2013, before the amendments became effective. We are, therefore, primarily concerned with whether or not keeping in view the nature and complexity of accounts and the interest of Revenue direction for special audit is justified for the reasons set out in the order dated March 25, 2013. (We have not examined the constitutional validity of the amended provisions and we express no opinion on the s....
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....ccepted by the IT Department. 94. Thus, the determination of the remuneration is a task, which is of a specialized nature, which only the Income Tax Department would be able to undertake. The same is evident from the orders which have been passed in the present two writ petitions itself, where the IT Department, after considering comparable assignments, has concluded that the amounts claimed by the CA Firm were highly exaggerated and were not commensurate. 95. At the time when the nomination is made, the finality attached to the determination of the remuneration by the Commissioner or Chief Commissioner is well within the knowledge of the accountant/CA Firm. 96. The nature of the Audit and the manner in which remuneration is to be determined would require domain expertise and knowledge which the MSEFC cannot possess. Moreover, the function which is in effect delegated to the Audit firm is one which is exercised under the Income Tax Act and would be purely governed by the said statute. Payment of remuneration is also based on the factors prescribed in the Rules as discussed above. 97. The nature of the assessment is not commercial but is a statutory nomination for the as....