TaxTMI 
TaxTMI 
TaxTMI 
2023 (7) TMI 382
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.... 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 MSMED Act and approached the MSEFC by way of reference....
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.... 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. 1773/2018, was disposed of vide order dated 26th February 2018, with a direction that....
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....nd 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 DIAC in terms of Section 293 of the IT Act. Further, it sought minimum 7 days' time to file the statement....
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.... 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/- (inclusive of GST (ii) Reverse at Rs. 60,90,000/- (exclusive of GST) i.e., Rs. 71,86,200/- (inclusive of GST) 38. However, at this stage, no remuneration was determined by the ....
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....ormalities 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 December 2021 along with the proceedings emanating therefrom. 50. It is of import to note that during the course of the proceedings in the present petitions, the IT Department passed an order dated 8th May 2023 under Section 142(2D) of the IT Act with....
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....erms 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 15 and the definition of 'buyer' under Section 2(d) of the MSMED Act are satisfied. The Petitioner/IT Department cannot be termed as a 'buyer' within the meaning of the MSMED Act as there is no 'consideration' which has been paid. There is also no agreement but a 'nomination' which has been made by t....
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....ommissioner 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 there has been no delay by the IT Department in approaching this Hon'ble court by way of the present writ petitions. Further, it is submitted that the proceedings before an authority lacking inherent jurisdiction are nullity and thus, void ab initio. 52. On 17th March 2023, the Court directed both the parties to bring their respective computations of the amounts pai....
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....t 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 unconstitutional and violative of Article 14. Reliance is also placed on the salutary principle of natural justice that no man can be a judge in his own cause to argue that the IT Department cannot be judging its own case as to whether the determination is final. Reliance is placed upon two decisions of the ld. Supreme Court in 'J. Mohapatra & Co and Anr. v. State of Orissa & Anr. [Civil Appeal No. 6814/198....
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.... 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 Petitioner, by its own admission has accepted that there lies no remedy in the IT Act against the order under Section 142(2D) of the same, and thus the Respondent cannot be left remediless and would be entitled to explore alternate remedies that it may be eligible for. P. That the present petitions are not maintainable on account of non-maintainability of writ jurisdiction during arbitral proceedings. Further as the jurisdiction of the MSEFC over the dispute was not challen....
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....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 regulated. The tribunals are special arbitration with institutional mechanism brought into existence by or under statute to decide dispute arising with reference to that particular statute or to determine controversy referred to it. The tribunal may be a statutory tribunal or tribunal constituted under the provisions of the Constitution of India. Section 9 of the Civil Procedure Code vests into the Civil Court jurisdiction to entertain and determine any civil dispute. The constitution of tribunals has been with intent an....
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....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 should be completely avoided.;" 57. Thus, even while applying the strict test for entertaining of writ petitions in arbitral proceedings, a case where the MSMED Act may itself not be applicable, would constitute an exceptional circumstance. Thus, the issue as to whether the MSEFC had jurisdiction ought to be considered at the threshold itself inasmuch as, if the provisions of the MSMED Act, 2006 have no application, the Petitioner cannot be subjected to the lengthy arbitral proceedings under the said Act which also entails various other consequences including extremely high rates of interest under Section 16 of the ....
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....pted 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 the 'MSME Council) whereby the matter has been referred to arbitration before the Delhi International Arbitration Centre (DIAC). The case of the petitioner is that Respondent no. 2, a firm of Chartered Accountant who is on the panel of the Income Tax Department, was appointed as a special auditor for the Income Tax Department for carrying out special audit of Sahara India (Firm). The Respondent no. 2 carried out the audit and since its statutory fee under Section 142(2D) was not paid, it was constrained to file a WP (C)1773/2018 titled M/s S.B.G. & Co. vs. The Union of India & Ors. before this Court for seeking directions to the Petitioner for the payment of its dues. The said petition was disposed ....
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....tricals 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. However, in the second case i.e., W.P.(C) 16294/2022, the Sole Arbitrator was appointed and thereafter the arbitration proceedings were stayed vide order dated 25th November 2022. The said order dated 25th November 2022 in W.P.(C) 16294/2022 is set out below: "CM APPL. 50998/2022 (for exemption) Allowed, subject to all just exceptions. The application shall stand disposed of W.P.(C)16294/2022 & CM APPL. 50997/2022 (Interim Stay) 1. Notice. Although the second respondent is stated to have been placed on advance notice, none has appeared on its behalf when the matter was called. Consequently, let learned counsel for the petitioner take steps for service upon the said respondent through all permissible modes includi....
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....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 enterprises so that they are enabled to grow into medium ones, adopt better and higher levels of technology and achieve higher productivity to remain competitive in a fast globalisation area. Thus, as in most developed and many developing countries, it is necessary that in India too, the concerns of the entire small and medium enterprises sector are addressed and the sector is provided with a single legal framework. As of now, the medium industry or enterprise is not even defined in any law. 2. In view of the above-mentioned circumstances, the Bill aims at facilitating the promotion and development and enhancing the competitiveness of small and medium enterprises and seeks to- (a) provide for statutory definitions of "small enterprise" and "medium enterprise". (b) provide for the establishment of a Nationa....
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....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 delayed payments is concerned, the same was based on the provisions of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 (hereinafter, 'Delayed Payments Act, 1993'). 69. The Delayed Payments Act, 1993 was meant to create a statutory liability upon the 'buyers' to make payments to 'suppliers' under the said Act. The Delayed Payments Act, 1993 was considered in the decision of the Hon'ble Supreme Court in Shanti Conductors Pvt. Ltd. & Anr. etc. v. Assam State Electricity Board & Ors. etc. (2019) 19 SCC 529. The said judgment deals with the incidence of payments, however, in the process it discusses the provisions of Delayed Payments Act, 1993. The relevant portion of the judgment is set out below: "28. Before we consider the issues which have arisen in these appeals it is necessary to notice the provisions of the Act, 1993. In the Parliament, the Governmen....
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....ing 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 immediately following the date agreed upon, at one and half time of prime Lending Rate charged by the State Bank of India. Explanation.- For the purposes of this section," Prime Lending Rate" means the Prime Lending Rate of the State Bank of India which is available to the best borrowers of the bank. Section 5. Liability of buyer to pay compound interest.- Notwithstanding anything contained in any agreement between a supplier and a buyer or in any law for the time being in force, the buyer shall be liable to pay compound interest (with monthly interests) at the rate mentioned in section 4 on the amount due to the supplier. Section 6. Recovery of amount due.- (1) The amount due from a buyer, together with the amount of interest calculated in accordance with the provisions of sections 4 and 5, shall be recoverable by the supplier from the buyer by way of a suit or other proceeding under any law for the time being in force. (2) Notwithstanding anything ....
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....s 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 liability of payment shall accrue. 34. We have already noticed that the purpose and object of legislation was prompt payments of money by buyer which has been statutorily ensured in Act, 1993 by containing mandatory provisions of payment of interest. 35. Section 4 which deals with date from which and rate at which interest is payable. The liability to make payment of the amount to the supplier only arises when any buyer fails to make payment as required under Section 3." Thus, even under the Delayed Payments Act, 1993 the provisions were for the benefit of Suppliers and Buyers were expected to make prompt payments, failing which, notwithstanding any agreement, buyers were saddled with the liability of higher rates of interest. 70. Coming to the MSMED Act, Chapter V of the Act specifically deals with delayed payments to 'suppliers' who are Micro and Small Enterprises. Chapter V comprising of Section 15 to Section 25 is clear in its title which reads as under: 'CHAPTER V: DELAYED PAYMENTS TO MICRO AND SM....
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....on 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. Section 16: 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 15, 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 compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank. Section 17: Recovery of amount due. For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the amount with interest thereon as provided under section 16." 76. A perusal of Section 16 of the MSMED Act makes it clear that the provision contemplates the following: (i) payment of compou....
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.... inconsistent therewith contained in any other law for the time being in force." 79. A reading of the aforesaid sections makes it clear that Sections 15 to 18 of the Act are inter-linked with each other and are also linked to the title of the chapter i.e., Chapter V: Delayed Payments to Micro and Small Enterprises. The benefit of interest to the Suppliers which are Micro/Small Enterprises under Section 16, is substantial. Further, as per Section 16 and 17 of the MSMED Act the liability thereto is upon the 'buyer' to release payments to the 'supplier' as also to pay interest in case of failure to make timely payment. The overriding effect of the same is envisaged in Section 24 of the Act. Special Audit under Section 142(2A) of the IT Act 80. Under the IT Act, an Assessee has to file returns as specified in the Act and the Rules. The said returns ought to be verified as provided for in Section 140 of the IT Act. The Assessee may also make self -assessment under the provisions of Section 140A of the IT Act. Thereafter, the IT Department is to undertake assessment of the tax payable. 81. Under Section 142 of the IT Act, the IT Department may, undertake an enquiry for the purpose of....
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.... prescribed form duly signed and verified by such cost accountant and setting forth such particulars, as may be prescribed, and such other particulars as the Assessing Officer may require: Provided that the Assessing Officer shall not direct the assessee to get the accounts so audited or inventory so valued unless the assessee has been given a reasonable opportunity of being heard] (2B) The provisions of sub-section (2A) shall have effect notwithstanding that the accounts of the assessee have been audited under any other law for the time being in force or otherwise. (2C) Every report under sub-section (2A) shall be furnished by the assessee to the Assessing Officer within such period as may be specified by the Assessing Officer: Provided that the Assessing Officer may, suo motu, or on an application made in this behalf by the assessee and for any good and sufficient reason, extend the said period by such further period or periods as he thinks fit; so, however, that the aggregate of the period originally fixed and the period or periods so extended shall not, in any case, exceed one hundred and eighty days from the date on which the direction under sub-section (2A) is receive....
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....t of the persons referred to in the Explanation to sub-section (2) of section 288, for the purposes of sub-section (2A) of section 142. (2) Where the Assessing Officer directs for audit under sub-section (2A) of section 142 on or after the 1st day of June, 2007, the expenses of, and incidental to, audit (including the remuneration of the Accountant, qualified Assistants, semi-qualified and other Assistants who may be engaged by such Accountant) shall not be less than rupees three thousand seven hundred and fifty and not more than rupees seven thousand and five hundred for every hour of the period as specified by the Assessing Officer under sub-section (2C) of section 142. (3) The period referred to in sub-rule (2) shall be specified in terms of the number of hours required for completing the report. (4) The Accountant referred to in sub-section (2A) of section 142 shall maintain a time-sheet and shall submit it to the Chief Commissioner or Commissioner, along with the bill. (5) The Chief Commissioner or the Commissioner shall ensure that the number of hours claimed for billing purposes is commensurate with the size and quality of the report submitted by the Accountant." 87....
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.... 14B (5) of the IT Rules also specifies clearly that the number of hours claimed have to be commensurate with the size and quality of the report. Thus, the scheme of the Act and the Rules entails the following steps: - (i) Submission of Expression of Interest (ii) Nomination by the Department (iii) Conduct of Special Audit (iv) Submission of report (v) Determination of remuneration payable (vi) The payment of remuneration. 90. The nature of Special Audit under Section 142(2A) of the IT Act has been clearly explained in 'Pratius Merchants Pvt. Ltd. v. Deputy Commissioner of Income Tax, [2018] 404 ITR 474 (Guj)' and in 'DLF Ltd. v. Additional Commissioner of Income Tax, (2014) 366 ITR 390 (Del)'. The relevant portion of Pratius Merchants Pvt. Ltd. (supra) reads: "6.1 At this stage, it is required to be noted that section 142(2A) of the Income-tax Act has been amended with effect from June 1, 2013 and it provides that if at any stage of the proceedings before him, the Assessing Officer, 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 speciali....
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....ed order is required to be considered. 6.2 Identical question came to be considered by the Delhi High Court in the case of DLF Ltd. (supra). In the said decision, the Delhi High Court has considered the scope, ambit and powers of the Assessing Officer while passing order under section 142(2A) of the Income-tax Act. In the said decision, it is observed that section 142(2A) of the Income-tax Act is an enabling provision to help and assist the Assessing Officer to complete the scrutiny assessment with the assistance of an accountant. In paras 10, 11, 26 and 27, the Delhi High Court has observed as under (page 398 of 366 ITR): "The aforesaid rulings when appraised and reflected, state that while examining the question of complexity in accounts, we have to apply the test of 'reasonable man' by replacing the word and qualities of a reasonable man, with the word and qualities of a reasonably competent Assessing Officer. The question of complexity of accounts has to be judged applying the yardstick or test; whether the accounts would be complex and difficult to understand to a normal Assessing Officer who has the basic understanding of accounts etc., without the aid, assistance....
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....iability. The importance and relevancy of the legislation cannot be underestimated and it is a power available with the Assessing Officer to aid and assist him. Accounts should be accurate and provide real time record of the financial transactions of the assessee. Preparation of accounts is the work of the accountant on the payrolls or employed by the assessee. In order to ensure reliability and accuracy, enterprises resort to internal audit and an external audit which can be a statutory audit. Internal audits are normally conducted in house generally by acquainted or qualified accountants. Statutory audit is compulsory under the Companies Act, 1956 or when stipulated by the Act and accounts have to be audited by a qualified Chartered Accountant." 91. A perusal of the decision extracted above shows that the purpose of Special Audit is for helping and assisting the AO. It is also for the purpose of facilitating the assessment and for proper determination of the tax liability after arriving at a correct taxable income. In effect, therefore, the Special Audit is made for and on behalf of the AO owing to the complexity of the transactions and such other factors as are set out under Se....