Madras High Court
M/S.Eden Exports Company vs Union Of India on 20 August, 2010
Author: K.Chandru
Bench: K.Chandru
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 20.08.2010
CORAM
THE HONOURABLE MR.JUSTICE K.CHANDRU
W.P.NOs.16908, 16909 and 25406 of 2009, 1202, 5062,
6015, 13308, 13407, 13430, 13431, 13613, 14431,
14432, 14650 and 14889 of 2010
and
M.P.Nos.1,1 and 2 of 2009,
1,1,1, 1,1, 1,1,1,1,1,1,1,1,2,2, 2,2 and 3 of 2010
M/s.Eden Exports Company,
rep. By its Partner,
Mrs.Faiqua Shameel
1-G, Jamals Fent Court,
Balarkalvi Avenue,
Ritherton Road, Vepery,
Chennai-600 007. .. Petitioner in W.P.No.25406 of 2009
Tamil Nadu Medicinal Plant Farms &
Herbal Medicine Corporation Limited,
rep. By its Chairman and Managing Director
Mr.G.A.Rajkumar,
Anna Hospital Campus,
Arumbakkam, Chennai-600 106. .. Petitioner in W.P.Nos.16909 of 2009
and W.P.No.16908 of 2009
M/s.Australian Food India Pvt. Ltd.
Plot Nos.22 and 23, Ambattur
Industrial Estate,
Ambattur, Chennai-600 058
rep. By its Vice President-Finance .. Petitioner in W.P.No.1202 of 2010
Health & Glow Retailing (P) Ltd.
Represented by its Authorised Signatory
Mr.Venkata Subbaiah.M.
No.740, Eswari Industrial Estate,
Gate No.2,Hulimava, Bannerghatta Road,
Bangalore-560 076. .. Petitioner in W.P.No.6015 of 2010
Ucal Machine Tools Ltd.
Rep. By its Executive Accounts,
7th Floor, Sigma Wing,
Rajeja Towers,New No.177, Annasalai,
Chennai-600 002. .. Petitioner in W.P.13308 of 2010
M/s.Shreeanna Merchandise Pvt. Ltd.
Rep. By its Manager, T.S.Kataria,
Old No.10, New No.6,
North Terminus Road,
Toll Gate, Chennai-600 081. .. Petitioner in W.P.14650/2010
ABB Ltd.,
No.5 and 6, II Phase,
Peenya Industriesl Area,
Peenya, Bangalore-58
rep. By its Authorised Signatory. .. Petitioner in W.P.14889 of 2010
Foodworld Supermarkets (P) Ltd.
Represented by its Authorised Signatory
Mr.Venkata Subbaiah.M
No.740, Eswari Industrial Estate,
Gate No.2, Hulimava, Bannerghatta Road,
Bangalore-560 076. .. Petitioner in W.P.5062 of 2010
M/s.Mittal Distributors Pvt. Ltd.
4676/21, Ansari Road,
Darya Ganj
New Delhi-110 002. .. Petitioner in W.P.No.13407 of 2010
Jk Tyre & Industries Ltd.
Rep. By its authorised officer,
No.3, Bahadur Shah Zafar Marg,
New Delhi-110 002. .. Petitioner in W.P.Nos.13430,
13431 and 13613 of 2010
Rolta India Private Ltd.,
Rolta Tower 'A',
Rolta Tech Park, MIDC Marol,
Andheri East,
Mumbai-400 093
rep. By Executive Director .. Petitioner in W.Ps.14431
and 14432 of 2010
Vs.
1.Union of India,
rep. By its Secretary,
Ministry of Micro, Small and Medium
Enterprises,
Udyog Bhavan,
New Delhi-110 011.
2.State of Tamil Nadu,
rep. By its Secretary,
Department of Industries and Commerce,
Chepauk, Chennai-600 005. .. Respondents 1 to 2 in
W.P.Nos.25406 of 2009, 1202,
13308, 13613, 14431 and
14432 of 2010
3.Director,
Ministry of Micro, Small and Medium
Enterprises,
Room 254, Udyog Bhawan, Rafi Marg,
New Delhi-110 011. .. Respondent No.3 in
W.P.Nos.25406 of 2009, 1202,
13308 and 13613 of 2010
4.Regional Joint Director of Industries and
Commercial (i/c)/Zonal Officer
MSE Facilitation council,
Thiru Vi Ka. Industrial Estate, Guindy,
Chennai-600 032. .. Respondent No. 4 in
W.P.Nos.25406 of 2009, 1202,
13308 and 13613 of 2010 and
3rd respondent in
W.P.Nos.14889, 14431 and
14432 of 2010
5.M/s.Falcon Prints Pvt. Ltd.
No.69 (Old No.268)
Royapettah High Road,
Chennai-600 014. .. 5th Respondent in W.P.No.25406/2009
Diamond Packaging
No.31, Begam Sahib
II Lane, Anna Salai,
Chennai-600 002. .. 5th respondent in W.P.No.1202/2010
1.The Union of India,
represented by its Secretary,
Department of Small Industries,
New Delhi.
2.National Board for Micro, Small and
Medium Enterprises,
New Delhi.
3.The Secretary,
Ministry of Small and Micro Enterprises,
New Delhi. .. Respondents in W.P.No.16909 of 2009
1.The Union of India,
represented by the Secretary to
Ministry of Micro, Small and Medium
Industries, Udyog Bhavan,
New Delhi-110 011.
2.The Government of Tamil Nadu,
represented by its Director of
Industries and Commerce,
Department of Industries and Commerce,
Chepauk, Chennai-600 005.
3.The Micro, Small and Medium Enterprises
Facilitation Council,
represented by its Chairman,
O/o the Regional Joint Director of Industries
and Commerce,
Thiru-Vi-Ka Industrial estate, Guindy,
Chennai-600 032.
4.Micro Small Enterprises Facilitation Council
Chennai Region, represented by
Zonal Officer/Regional Joint Director of
Industries and Commerce,
Thiru-Vi-Ka Industrial Estate, Guindy
Chennai-600 032.
5.M/s.Expanda Stand (P) Ltd.
Represented by M.Mahadeva Reddy
Managing Director,
SP 86, TAN SIDCO Ambattur Industrial Estate
Chennai-600 058. .. Respondents in W.P.Nos.6015
and 5062 of 2010
5.Zonal Officer/General Manager,
MSEFC/District Industries Centre,
Madurai-625 002.
6.M/s.Renaissance Petrolube Ltd.
C3,D1 & D2-SIPCOT Industries Complex,
Manamadurai, Sivagangi District. .. 5th and 6th respondents in
W.P.No.13308 of 2010
1.Union of India,
rep. By its Secretary,
Ministry of Micro, Small and Medium Enterprises,
Udyog Bhavan,New Delhi-110 001.
2.The Secretary,
M.P.Micro & Small Enterprises Facilitation council,
Directorate of Industries,
Madhya Pradesh,
Vindhyachal Bhawan,
Bhopal.
3.The Director,
Ministry of Micro, Small and Medium Enterprises,
Room No.254, Udyog Bhavan,
New Delhi-110 001.
4.M/s.Bagree Fincom Pvt. Ltd.,
rep. By its Director,
72-A SDA Compound Annexe,
Dewas Naka,
Indore-452 010.
Madhya Pradesh. .. Respondents in W.P.14650 of 2010
4.M/s.Westrix Technologies Pvt. Ltd.
No.7, K.R.J. Building, Velder Street,
Mount Road, Chennai-600 002
rep. By its Managing Director. .. 4th respondent in W.Ps.14889,
14431 and 14432 /2010
1.The Micro Small and Medium
Enterprises Facilitation council,
Chennai Region, rep. By its zonal Officer,
O/o Industries Commissioner and
Director Industries and Commerce,
Behind Ezhilagam, Chepauk,
Chennai-600 005. .. 1st respondent in W.P.Nos.16908/2009
and 13407 of 2010
2.M/s.Raymond Pharmaceutical P. Ltd.
Rep. By its Director Mr.Sudhir Khanna
4/19, 2nd Cross Street,
Dr.Radhakrishnan Nagar,
Thiruvanmiyur, Chennai-600 041. .. 2nd Respondent in W.P.16908 of 2009
2.Kutty Flush Doors & Furniture Co. Pvt. Ltd.
No.1167, Ponamallee High Road,
Koyambedu, Chennai-600 107. .. 2nd respondent in W.P.13407/2010
1.Micro & Small Enterprises
Facilitation Council,
Chennai Region,
Thiru Vi Ka Industries Estate,
Guindy, Chennai-32. .. 1st respondent in W.P.Nos.13430
and 13431 of 2010
2.M/s.Norton Intec Rubber (P) Ltd.
A-4 SIPCOT Complex,
Gummidipoondi-601 201, Chennai .. 2nd Respondent in W.P.Nos.13430
and 13431 of 2010 and 5th
5th respondent in W.P.13613 of 2010
W.P.Nos.25406 of 2009, 1202, 6015, 13308, 13613, 14432, 14650 and 14889 of 2010 have been preferred under Article 226 of the Constitution of India praying for the issue of a writ of declaration to declare Sections 15 to 24 of Chapter V of the Micro, Small and Medium Enterprises Development Act, 2006 (Act 27 of 2006) as ultra vires of the Constitution and strike down the same.
W.P.No.16909 of 2009 has been preferred under Article 226 of the Constitution of India praying for the issue of a writ of declaration to declare the provisions of Sections 15 to 19 of the Micro, Small and Medium Enterprises Development Act, 2006 as unconstitutional and ultra vires the Constitution being in violation of Articles 14 and 16 of the Constitution of India.
W.P.No.5062 of 2010 has been preferred under Article 226 of the Constitution of India praying for the issue of declaration declaring the application of part V comprising of Sections 15 to 23 of the Micro, Small and Medium Enterprises Development Act, 2006 (Act 27 of 2006) to individuals contracting with enterprises defined therein, as ultravires the Constitution and without jurisdiction and to consequently quash the proceedings against the petitioner in Rc No.3838/A1/2009 dated 24.09.2009 issued and consequential proceedings in OP No.MSEFC/CR/28/2009 on the file of the Micro, Small and Medium Enterprises Facilitation Council at Chennai, the fourth respondent.
W.P.No.16908 of 2009 has been preferred under Article 226 of the Constitution of India praying for the issue of a writ of certiorari to call for the records of the first respondent in its proceedings Ref.No.MSEFC/CR.12/2008, dated 10.6.2009 culminating in the impugned award and to quash the same.
W.P.No.13430 of 2010 has been preferred under Article 226 of the Constitution of India praying for the issue of a writ of certiorari to quash the impugned order in MSEFC/CR.4/2007, dated 3.6.2010 passed by the first respondent.
W.P.No.13431 of 2010 has been preferred under Article 226 of the Constitution of India praying for the issue of writ of declaration declaring that the claim raised by the respondent No.2 in MSEFC/CR/04/2007 is without jurisdiction and not maintainable particularly under the provisions of MSMED Act, 2006 and also barred by limitation.
W.P.No.13407 of 2010 has been preferred under Article 226 of the Constitution of India praying for the issue of a writ of prohibition prohibiting the first respondent from acting as the Arbitrator in the dispute raised by the second respondent in O.P.No.MSEFC/CR/37/2009.
W.P.No.14431 of 2010 has been preferred under Article 226 of the Constitution of India for the issue of a writ of mandamus to forbear the third respondent from proceeding with the hearing in O.P.No.MSEFC/CR/20/2010.
For Petitioners : Mr.P.S.Raman, Advocate General
for M/s.Pushpa Menon
Mr.Zaffarulla Khan
Mr.K.S.V.Prasad
Mr.Perumbulavil Radhakrishnan
Mr.Rahul Balaji
Mr.T.Mohan
Mr.Jayesh B.Dolia assisted by
Mr.Aravindan for
M/s.Aiyar and Dolia
Mr.R.Parthiban
Mr.D.Abdullah
For Respondents : Mr.K.Mohanamurali, SCGSC
Mr.M.Dhandapani, Spl.G.P.(W)
Mr.V.Balasubramanian
Mr.R.Saravanakumar
Mr.N.Viswanathan
Mr.B.Ravi
Mr.S.Veerabhagu
Mr.C.Saravanan
- - - -
COMMON ORDER
The questions that arise for consideration in most of the writ petitions are whether Sections 15 to 24 of the Micro, Small and Medium Enterprises Development Act, 2006 (Central Act 27 of 2006) (for short MSMED Act) are unconstitutional and ultravires of the Constitution of India, more particularly whether they infringe Articles 14 and 19(1)(g) of the Constitution. In some cases, the cognizance taken by the Micro, Small and Medium Enterprises Facilitation Council constituted under the Act are sought to be prohibited from proceeding with the enquiry initiated at the instance of the contesting private respondents?
2.This batch of writ petitions came to be posted before this court on being specially ordered by the Hon'ble the Chief Justice vide order, dated 11.8.2010.
3.Heard the arguments of Mr.P.S.Raman, learned Advocate General appearing for M/s.Pushpa Menon, Mr.Zaffarulla Khan, Mr.Rahul Balaji, Mr.Perumbulavil Radhakrishnan, Mr.K.S.V.Prasad, Mr.T.Mohan, Mr.Jayesh B.Dolia for M/s.Aiyar and Dolia, Mr.R.Parthiban, Mr.D.Abdullah for petitioners and Mr.K.Mohanamurali, learned Senior Central Government Standing Counsel appearing for the Union of India and for Director of Ministry of Micro, Small and Medium Enterprises, Mr.M.Dhandapani, learned Special Government Pleader (W), Mr.V.Balasubramanian, Mr.R.Saravanakumar, Mr.N.Viswanathan, Mr.B.Ravi, Mr.S.Veerabhagu and Mr.C.Saravanan for respondents.
4.The Director, Ministry of Micro, Small and Medium Enterprises has filed a counter affidavit, dated 25.2.2010 in W.P.No.25406 of 2009 on his behalf and the Union of India. The fifth respondent in W.P.No.25406 of 2009 has filed vacate stay applications supported by an affidavit. The second respondent in W.P.No.16908 of 2009 has also filed a vacate stay application supported by an affidavit.
5.The MSMED Act came to be enacted by the Parliament with a view to provide for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto, by the Central Act 27 of 2006. It receive the assent of the President on 16.6.2006 and was brought into effect from 2.10.2006 in terms of Section 1(2) of the Act.
6.The objects and reasons as appended to the Bill may be usefully reproduced below:
"Small scale industry is at present defined by notification under Section 11-B of the Industries (Development and Regulation) Act, 1951. Section 29-B 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 countrys economy. Many Expert Groups or Companies 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 enterprises so that they are enable 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."
7.The Act under Section 32(1) had repealed the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 which was in the field from 1993 till 2006. The petitioners are all "buyers" within the meaning of Section 2(d) of the Act have come forward in these writ petitions to challenge the vires of Chapter V of the MSMED Act and in most of the cases Sections 15 to 24 and in some of the cases Section 15 to 19 of the Act.
8.It is also significant to note that the petitioner in W.P.Nos.16908 and 16909 is the Tamil Nadu Medicinal Plant Farms and Herbal Medicine Corporation Limited, which is wholly owned by State of Tamil Nadu, has chosen to challenge not only the proceedings initiated by the Facilitation Council, but also the Constitutional validity of Sections 15 to 19 of the MSMED Act.
9.It is not clear as to how the said Corporation had challenged the vires of the provisions of a Central Act and represented by the learned Advocate General when in most of the cases the State of Tamil Nadu is also a party. Further, under Section 30 of the Act, the appropriate State Government has the power to make rules to carry out the provisions of the Act. Under Section 26, the State government is entitled to appoint such officers and employees for the purpose of the Act. The State Government had also framed rules known as the Tamil Nadu Micro and Small Enterprises Facilitation Council Rules, 2006 and had published it in the Tamil Nadu Government Gazette dated 8.12.2006. Under Rule 3, the Facilitation Council was established in terms of Section 20 of the MSMED Act. In respect of the Facilitation Council for Chennai and the other Zones, the Chair Person is the Industries Commissioner and the Director of Industries and Commerce.
10.Though the learned Advocate General tried to submit that since he is representing only a Government Corporation, which has its own liberty to challenge the vires of a Central Act notwithstanding the stand of the State Government. It is also rather unfortunate that the State of Tamil Nadu though was made a party to all these writ petitions, have not chosen to file any counter affidavit to express its stand on the issue and also whether it would approve its own company to challenge the provisions of the MSMED Act and allowed to be represented by the Advocate General.
11.Be that as it may, the controversy in these cases centers around Chapter V of the MSMED Act. Hence, it is necessary to refer to the provisions of Sections 15 to 24 of the said Act, which are as follows:
"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, 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.
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 time 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.
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.
18. Reference to Micro and Small Enterprises Facilitation Council.(1) Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under Section 17, make a reference to the Micro and Small Enterprises Facilitation Council.
(2) On receipt of a reference under sub-section (1), the Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation and the provisions of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall apply to such a dispute as if the conciliation was initiated under Part III of that Act.
(3) Where the conciliation initiated under sub-section (2) is not successful and stands terminated without any settlement between 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 (26 of 1996) shall then apply to the disputes 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.
19. Application for setting aside decree, award or order.No application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant (not being a supplier) has deposited with it seventy-five per cent of the amount in terms of the decree, award or, as the case may be, the other order in the manner directed by such court :
Provided that pending disposal of the application to set aside the decree, award or order, the court shall order that such percentage of the amount deposited shall be paid to the supplier, as it considers reasonable under the circumstances of the case, subject to such conditions as it deems necessary to impose.
20. Establishment of Micro and Small Enterprises Facilitation Council.The State Government shall, by notification, establish one or more Micro and Small Enterprises Facilitation Councils, at such places, exercising such jurisdiction and for such areas, as may be specified in the notification.
21. Composition of Micro and Small Enterprises Facilitation Council.(1) The Micro and Small Enterprise Facilitation Council shall consist of not less than three but not more than five members to be appointed from amongst the following categories, namely:
(i)Director of Industries, by whatever name called, or any other officer not below the rank of such Director, in the Department of the State Government having administrative control of the small scale industries or, as the case may be, micro, small and medium enterprises; and
(ii)one or more office-bearers or representatives of associations of micro or small industry or enterprises in the State; and
(iii)one or more representatives of banks and financial institutions lending to micro or small enterprises; or
(iv)one or more persons having special knowledge in the field of industry, finance, law, trade or commerce.
(2) The person appointed under clause (i) of sub-section (1) shall be the Chairperson of the Micro and Small Enterprises Facilitation Council.
(3) The composition of the Micro and Small Enterprises Facilitation Council, the manner of filling vacancies of its members and the procedure to be followed in the discharge of their functions by the members shall be such as may be prescribed by the State Government.
22. Requirement to specify unpaid amount with interest in the annual statement of accounts.Where any buyer is required to get his annual accounts audited under any law for the time being in force, such buyer shall furnish the following additional information in his annual statement of accounts, namely:
(i)the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year;
(ii)the amount of interest paid by the buyer in terms of Section 16, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year;
(iii)the amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under this Act;
(iv)the amount of interest accrued and remaining unpaid at the end of each accounting year; and
(v)the amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure under Section 23.
23. Interest not to be allowed as deduction from income.Notwithstanding anything contained in the Income-tax Act, 1961 (43 of 1961), the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction.
24. Overriding effect.The provisions of Sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force."
12.In the fitness of thing, it is necessary to first decide the challenge to the vires of the Act made by the petitioners. The first attack is against Section 15. It is contended that it interferes with the right to enter into contracts with suppliers and therefore, it is violative of Article 19(1)(g). The provisions curtails the freedom to enter into a contract. The challenge to Sections 16 and 17 is that these provisions do not stand the test of logic and do not conform the commercial scenario in the Country. The compound interest ordered is excessive and almost legalise charging of usurious interest. Therefore, the same is violative of Article 14 of the Constitution. Insofar as Sections 18 and 21 was concerned, the Facilitation Council is empowered to conduct quasi judicial proceedings and it does not have any judicial member on it to appreciate and understand the legal nuances so as to have judicial approach. Section 18(2) read with Section 18(4) enables the Facilitation Council to conduct Conciliation as well as Arbitration. Empowering the same authority to do both type of functions will result in prejudice and bias in its decisions. Further the bar under Section 80 of the Arbitration and Conciliation Act, 1996 was not foreseen in framing of Section 18(4). Under the Arbitration and Conciliation Act, 1996, an arbitration can be made only when it is preceded by written agreement between the parties. Therefore, 1996 Act cannot be invoked and the method of resolving the dispute by compulsory arbitration is illegal and an act of arbitrariness.
13.Further, the attack against Section 19 was that it provides for pre-deposit of 75% before challenging a decree, award or other orders made by the Facilitation Council and that it makes it illusory. Similar provisions of pre-deposit found under the SARFEASI Act was frowned upon by the Supreme Court in Mardia Chemicals' case.
14.In addition to these grounds, the State owned Corporation in W.P.No.16909 of 2009 had also contended that Section 15 providing for maximum of 45 days for payment to the supplier by the buyer for goods supplied or services rendered even when the amount due is disputed, is unconstitutional as it deprives the buyer's remedy of dispute regarding such payment and that the provisions of three times bank rate and the payment of compound interest with monthly rests to the supplier is unconstitutional and ultravires of Articles 14, 16 and 19. It is not clear as to how Article 16 is attracted even though such ground was raised in paragraph 16(C) of the affidavit filed in support of the writ petition in W.P.No.16909 of 2009.
15.Before dealing with the rival submissions, it must be noted that the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 came to be challenged by the Andhra Pradesh State owned Transmission Corporation (TRANSCO) before the Andhra Pradesh High Court. The challenge made on two grounds. Firstly, want of Legislative competence for the Central Government in enacting the Law as it impinges upon the power of the State to enact such law. Secondly it creates discrimination.
16.A division bench of the Andhra Pradesh High Court in A.P.Transco Vs. Sri Gowri Sankar Cable Industries and others reported in 2002 (3) ALT 134(D.B.) rejected both grounds including the contention regarding discrimination. Since legislative competence of the Parliament to make the law is not under challenge in these cases, it is unnecessary to refer the passages dealing with the same. But, with reference to the challenge made regarding segregation of small scale and ancillary industries and calculation of interest rate as well as creating an alternative forum of Tribunal including composition of its member, the following passages from paras 69 to 72, 74 to 77, 79 and 80 in that judgment may be usefully extracted below:
"69.The Act, according to the learned Advocate General is invalid being hit by Article 14 on the grounds: (1)all creditors have not been given the same benefits; (2) others who are similarly situate have also not been brought within the purview of the Act; (3)calculation of prime interest rate is unworkable.
70.Article 14 of the Constitution although proclaims equality before law and equal protection of law it does not forbid reasonable classification. Equality clause cannot be enforced in abstract. All laws cannot have universal application. Varying needs of different classes of people require different treatment. A benefit granted to a particular class of industries having regard to the capital they may invest if treated to be forming a separate class or category no exception thereto can be taken.
71.By reason of the provisions of 1951 Act, the Parliament exercises legislative control. While exercising such power, it is for the Legislature only to decide as to what benefits should be granted to a particular class of industries. The small scale and ancillary industries having regard to the policy decision of the Central Government as stated in the Parliament stand on a separate footing. If certain protections had been granted for the purpose of realization of the dues, the same can neither be said to be unreasonable nor discriminatory. Small scale and ancillary industries form a class by themselves.
72.It is, therefore, not for the buyer to raise the ground of constitutionality on the ground that other creditors must also be given the same benefits. The said prayer if granted would amount to legislation. It is well settled that legislature is competent to exercise its discretion and make classification. See Anukul Chandra Pradhan V. Union of India (1997 (6) SCC 1).
74.So far as contention No.3 is concerned, such a practice at least in banking business is prevalent for a long time and interest is payable only by way of compensation paid by the borrower to the creditor for deprivation of use of his money. What would be the rate of interest is a matter of legislative wisdom. The interest anterior to the institution of suit is not a matter or]f procedure. Interest pendente lite in terms of Section 34 of the Code of Civil Procedure may not be the stipulated interest. Interest is required to be paid only when the buyer does not make payment. Ensuring payment for the goods supplied, it is accepted, is the object of the Act. The Apex Court observed that it is always referable to substantive law. If there is a stipulation for rate of interest, the same can be granted. As noticed in the decision Central Bank ( supra), sometimes accounting may have to be taken where compounding interest has been made inasmuch as the interest accrued on the principal sum with periodical rests would become the part of the principal sum only. The bank rate of interest in the trading world is known and widely published. For a big industrialist like the petitioner, it will not be difficult for it to find out the rate of interest which is paid by the Bank to its best borrower. The rate of interest in terms of the impugned Act may be a bit higher than the banking rate. In any event, once the rate of interest is known, having regard to the provisions of the Act, it can always be worked out. Mere hardship as is well known cannot be a ground to strike down an otherwise valid Act. The said provisions, therefore, are not ultra vires Article 14 of the Constitution of India.
75.Section 6 as it originally stood provided that the amount due from a buyer together with interest 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. By reason of Act 23 of 1998, while original Section 6 was numbered as sub-section (1) and sub-sec.(2) was added in terms whereof a statutory Tribunal known as Industry Facilitation Council (hereinafter referred to as the Council) was constituted to act as an arbitrator. By reason of the provisions of section 6(2) thereof, an additional forum has been created. Creation of Courts and tribunals by the State Legislature comes within the purview of Entry 11-A of List III of VII Schedule to the Constitution of India. The Tribunal is merely in the nature of arbitral tribunal. The State has constituted such tribunal. Creditor may only exercise its right of option. If a suit is filed in the civil court, the procedure provided under the Code of Civil Procedure shall have to be followed, whereas in the event the supplier or creditor takes recourse to Section 6(2) of 1993 Act, the provisions of the Arbitration and Conciliation Act, 1996 have to be followed. The interests of the parties are protected by making a provision to prefer an appeal against the order of the Tribunal. In a given case, even the power of judicial review can be exercised by the High Court under Article 226 of the Constitution of India. The ambit and scope of two remedies is essentially the same viz., to recover the amount. Thus, the doctrine of election would apply as the two remedies are essentially not different in its ambit and scope. (See:A.P. State Financial Corpn. V. Gar Re-Rolling Mills (1994 (2) SCC 647).
76.The right to recover an amount from (sic.by) the supplier is common law right. Right to claim interest in terms of a statute is a substantive right. Such a right can be enforced both in a Civil Court as also a Tribunal constituted under a special Act. In a case of this nature, the jurisdiction of the Court and the Tribunal are co-extensive. By reason of the said Act, apart from interest, no right under the said Act to recover the money has been created. Retaining of jurisdiction of the Civil Court and at the same time providing an additional forum, which is in the nature of an arbitration Tribunal, in our opinion, cannot be said to be bad in law. See Premier Automobiles V. Kamlekar Shantaram Wadke (AIR 1975 SC 2238).
77.Creation of alternative forum per se, in our opinion, cannot be held bad in law. Section 6(2) of the Act, therefore, in our opinion, is not invalid in law.
.......
79.While constituting a tribunal, in our opinion, it is not necessary that a person having knowledge in law must be appointed. In any event, the petitioner in the aforementioned case submitted itself to the jurisdiction of the tribunal. The petitioner sat on the fence; he took chance before the Tribunal. Only when the decision of the Tribunal went against it, he had filed the writ petition. In Munindra Kumar V. Rajivgovil (AIR 1991 SC 1607) it was held:
The next question which arises for consideration is as to what direction would be just and proper in the circumstances of this case. We do not agree with the High Court to quash the entire selection made by the Board for the posts of Assistant Engineers (Civil). It may be noted that Rajeev Govil, Vivek Aggarwal and Gyanendra Srivastava who remained unsuccessful had filed the writ petitions after taking chance and fully knowing the percentage of marks kept for interview and group discussion. It is no doubt correct that they cannot be estopped from challenging the rule which is arbitrary and violative of Article 14 of the Constitution, but in modulating the relief, their conduct and the equities of those who have been selected are the relevant considerations. The appellants have joined the post on 28.12.1989 and after completing the training are discharging their duties at different places. It has been submitted on their behalf that some of them had left their earlier jobs and have also become overage. Thus we do not consider it proper in the interest of justice to set aside the selections of the appellants. We have seen the mark-sheet of 295 candidates of the general category who had actually attended the interview and group discussion. So far as the respondents in general category are concerned, they have secured the marks in the following manner:
80.......In terms of the Arbitration and Conciliation Act, 1996, it is not necessary that a lis must be determined by a person having a legal knowledge. The arbitrator need not have an experience in law."
17.The said judgment was taken on appeal before the Supreme Court in Civil Appeal No.5597 of 2002 in A.P.Transco Vs. Bala Conductors (P) Ltd. and another, dated 23.9.2003. The Supreme Court dismissed the appeal and confirmed the order passed by the division bench. The following passages found in the said judgment may be usefully extracted below:
"We are of the view that the High Court was correct in rej4ecting the challenge under Article 14 of the Constitution. The industrial undertakings have been defined with specific reference to the provisions of the IDRA. The IDRA has already created the class by specifying the particular industries in the First Schedule to that Act the control of which is expedient in the public interest to be under/by the Union of India. We are also of the view, and as submitted by the Union of India, that the discrimination, if any, would operate against other industries and not against the buyer, all of whom are similarly situate vis-a-vis the particular industries in question.
In the cases before us admittedly, the appellants had been supplied goods by small scale or ancillary industrial undertakings which had commenced proceedings for recovery of interest under the Act against the appellants. In the circumstances, it is unnecessary for us, to consider the orbit of the definition of the word 'services' and whether it should be limited to services which are incidental to or rendered in connection with the supply of goods of the specified industries."
18.Subsequently, Section 19 of the MSMED Act came to be challenged before the High Court of Kerala. A division bench of the Kerala High Court vide its judgment in K.S.R.T.C. Vs. Union of India reported in 2010 (1) KLT 65 upheld the validity of Section 19.
19.Since MSMED Act under challenge had repealed the earlier Interest on Delayed Payment Act, 1993 and some arguments were based upon the relative merits of the 1993 Act, it is necessary to refer to the relevant provisions of the MSMED Act together with similar provisions found under the 1993 Act. The following table will show the Chapter V of the MSMED Act and the corresponding provisions under the Interest on Delayed Payment Act, 1993 and the changes brought out by the subsequent enactment.
SECTION 15 TO 24 MSMED ACT 2006 Section 15. The Liability of buyer to make pay ment-
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 forty-five days from the day of acceptance or the day of deemed acceptance.
PARI MATERIA SECTION 3 TO 10 INTEREST ON DELAYED PAYMENT ACT 1993, AS AMENDED Act No.23 of 1998 (w.e.f. 10.8.1998) 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: 2*[.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].
Changes made The period has been reduced from 120 days to 45 days 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 (hat 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 *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 dale 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 Rale" means the Prime Lending Rate of the State Bank of India which is available to the best borrowers of the bank.---------- -------- -----------
1.Subs by Act 23 of 1998, s 2 for certain words. 2.Ins. By s.3, ibid. 3.Subs by s.4, for s.4.
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 ilic rate mentioned in section 4 on the amount due to the supplier.
Rate of interest on delayed payment changed from 1.5 times of SBI's PLR to 3 times of the Bank rate notified by Reserve Bank.
Section 17. Recovery of amount due.
.For any goods supplied or services rendered by the supplier, the buyer sha be liable to pay the amount with interest thereon as provided under section 16.
Section 6. Recovery of amount due.-
1 "Section 6(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.].
Section 17of MSMED act substitutes section 6(1) and clarifies any ambiguity as to unconditional liability of buyer.
Section 18.Reference to Micro and Small Enterprises Facilitation Council-
(1) Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may,with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council.' (2)On receipt of a reference under sub-section (1), the Council shall either itself conduct conciliation in the matter or seek the assistance of by making'a reference to such an institution or centre, for conducting conciliation and the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 shall apply to such a dispute as if the conciliation was initiated under Part III of that Act.
(3)Where the conciliation initiated under sub-section (2) is not successful and stands terminated without any settlement between 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 2* Section 6(2)-
[(2)Notwithstanding anything contained in subsection (1), any party to a dispute may make a reference to the Industry Facilitation Council for acting as an arbitrator or conciliator in respect of the matters referred to in that sub-section and the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall apply to such dispute as if the arbitration or conciliation were pursuant to an arbitration agreement referred to in sub-section (I) of section 7 of that Act. ] Section 18 of MSMED Act substitutes section 6(2) and enables taking the help of any institution or centre providing alternate dispute resolution services The reference made under this section to be decided within a period of ninety days.
Section 19. Application for setting aside decree, award or order.
No application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant (not being a supplier) has deposited with it seventy-five per cent of the amount in terms of the decree, award or, as the case may be, the other order in the manner directed by such court: Provided that pending disposal of the application to set aside the decree, award or order, the court shall order that such percentage of the amount deposited shall be paid to the supplier, as it considers reasonable under the circumstances of the case subject to such conditions as it deems necessary to impose.
Section 7.Appeal.-
No appeal against any decree, award or other order shall be entertained by any court or other authority unless the appellant (not being a supplier) has deposited with it seventy-five per cent, oj the amount in terms of the decree, award or, as the case may he, other order in the manner directed by such court or, as the case may be, such authority.
Section 19 provides for interim relief for supplier pending disposal of the buyers application for setting aside any decree/award/order.
Section 20. Establishment of Micro and Small Enterprises Facilitation Council.
The State Government shall, by notification, establish one or more Micro and Small Enterprises Facilitation Councils, at such places, exercising such jurisdiction and for such areas, as may be specified in he notification.
Section 7A. Establishment of Industry Facilitation Council The State Government may, by notification in the Official Gazette, establish one or more Industry Facilitation Councils at such places exercising such jurisdiction and for such areas, as may be specified in the notification.
1) The Micro and Small Enterprise Facilitation Council shall consist of not less than three but not more than five members to be appointed from among the following categories, namcly:-
(i) Director of Industries, by whatever name called, or any othei officer not below the rank of such Director, in the Department of the State Government having administrative control of the small scale industries or, as the case may be, micro, small and medium enterprises; and
(ii) one or more office-bearers or representatives of associations of micro or small industry or enterprises in the State; and
(iii) one or more representatives of banks and financial institutions lending to micro or small enterprises; or
(iv) one or more persons having special knowledge in the field of industry, finance, law, trade or commerce
2) The person appointed under clause (i) of sub-section (1) shall be the chairperson of the Micro and Small Enterprise Facilitation Council.
3)The composition of the Micro and Small Enterprise Facilitation Council, the manner of filling vacancies of its members and the procedure to be followed in the discharge of their functions by the members shall be such as may be prescribed by the State Government.
Section 7B. Composition of Industry Facilitation Council. [}) The Industry Facilitation Council shall consist of one or more members to be appointed from amongst the following categories.:
(i) Director of Industries by whatever name called or any other officer not below the rank of such Director, of the State Government.
(ii) representatives of banks and financial institution;
(id) officer bearers or representative of State Industry Associations; and
(iv) persons having special knowledge in the field of Industry, Finance, law, Trade and Commerce.
(2) The person appointed under clause (i) of sub-section (J) shall be the Chairperson of the Industry Facilitation Council.
(3) The composition of the Industry Facilitation Council, the manner of filling vacancies among, and the procedure to be followed in the discharge of their, functions, by, the members shall be such as may he prescribed by rule by the State Government.
Section 7C. Laying of rules before State Legislature.- Every notification issued and every rule made by the State Government under this Act shall be laid, as soon as may be after it is issued or made, before the State Legislature.] No changes in sum and substance Instead of Industrial Facilitation Council it is Micro and Small Enterprises Facilitation Council.
Instead of office bearers or representatives of state Industry Associations it is substituted representatives of associations of micro or small industry or enterprises in the State.
Section 22. Requirement to specify unpaid amount with interest in the annual statement of accounts-
Where any buyer is required to get his annual accounts audited under any law for the time being in force, such buyer shall furnish the following additional information in his annual statement of accounts, namely:-
(i) the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year;
(ii) the amount of interest paid by the buyer in terms of section 18, along with the amounts of the payment made to the supplier beyond the appointed day during each accounting year;
(iii) the amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under this Act;
(iv)the amount of interest accrued and remaining unpaid at the end of each accounting year; and
(v) the amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure under section 23 .
Section 8. Requirement to specify unpaid amount with interest in the annual statement of accounts. Where any buyer is required to get his annual accounts audited under any law for the time being in force, such buyer shall specify the amount together with the interest in his annual statement of accounts as remains unpaid to any supplier at the end of each accounting year.
Disclosure requirements are more stringent.
Principal dues and interest dues to be shown separately Introduction of penalty for intentional violation of section 22 of the Act.
Section 23. Interest not to be allowed as deduction from income -Notwithstanding anything contained in the Income-tax Act, 1961, the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction.
Section 9. Interest not to be allowed as deduction from income. Notwithstanding anything contained in the Income-tax Act, 1961 (43 of 1961), the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction.
No change in this section except provision gets more effect due to section 22 (v) Section 24. Over riding effect.
The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
Section 10. Overriding effect.-
The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
No change
20.From the above table, it will be seen that the MSMED Act had more or less incorporated the provisions of the 1993 Act. After having found that the previous Act was a toothless Tiger, the Parliament provided tooth and claws in the MSMED Act. The question is whether the changes brought about are so arbitrary or discriminatory and that the mischief sought to be removed are so unconstitutional, the provisions will have to be struck down on grounds of Articles 14 and 19(1)(g) of the Constitution?
21.The first ground of attack is whether reduction of outer time limit for payment to 45 days is unconstitutional. If analogous provisions found in the Interest on Delayed Payment Act, 1993 was upheld by the Andhra Pradesh High Court and confirmed by the Supreme Court, then there can be no further challenge to the similar provisions found in the MSMED Act, 2006. A division bench of the Andhra Pradesh High Court in A.P.Transco's case (cited supra) has held that there was no discrimination in the classification made under the 1993 Act. The said decision was also upheld by the Supreme Court and the arguments based on discrimination was rejected. Even otherwise there is no guarantee for an unrestricted fundamental right to carry on trade and it is always subjected to reasonable restrictions found under the Article 19(6) of the Constitution.
22.It must also be noted that the previous 1993 Act providing for 120 days outer time limit for credit facilities was not working satisfactorily and the Micro and Small enterprises were driven to the point of extinct. Therefore, outer time limit of 45 days was fixed. In normal circumstances, when goods are delivered and services are rendered, payments are to be made instantaneously. It is by agreement credit facilities can be worked out between the parties and such agreements are controlled by the Contract. The Parliament has ample power to restrict such contract. The fixing of time limit is to save the Micro and Small Enterprises from going out of existence due to wanton delay in payments by the buyers. To that extent, right to enter into contract can be curtailed. Such curtailment cannot be said to be either arbitrary or unconstitutional.
23.The argument by some of the counsel that they will have to sell their products in the market and only after getting amounts, they can pay back their supplier cannot be accepted. As already held, there is no absolute freedom to carry on in a trade or business. The Parliament having found that the 1993 Act did not fulfill the objects for which it was enacted and having seen its working for over 13 years, had chosen to enact the MSMED Act. Its attempt was to plug the loopholes found in the earlier Act. The contention of some of the counsel that even if goods are defective or there is deficiency in service, they will be bound to make payments under threat of compulsory arbitration do not find any support from the provisions of the Act.
24.The Act under Section 2(b) while defining "appointed day", also gives further explanation and defined the terms such as "the day of acceptance" and "the day of deemed acceptance". Therefore, there is time enough for a buyer to test the quality of goods supplied and reject the defective goods. The Act nowhere interferes with the other terms of the contract. In effect, the Act is not a substantial provision to interfere with the right to enter into a contract, but it only regulate the time for payment. It cannot be said to be either discriminatory or arbitrary so as to infringe the constitutional guarantee provided under Part III of the Constitution. Therefore, the argument that it curtails the free right to enter into contracts is hereby rejected.
25.The second argument that in default, it provides for compound interest with monthly rests and three times interest as per the lending rates notified by the Reserve Bank also cannot be accepted. It was argued by the counsel for the petitioners that the said provision allows charging of usurious interest. Similar provision under Section 4 of the 1993 Act came to be considered and was upheld by the division bench of the Andhra Pradesh High Court in the A.P.Transco's case (cited supra). The following passages found in paragraphs 44 to 46 may be usefully extracted below:
"44.Provision was made in the Act for payment of interest by the buyers to the small industrial units, on account of non payment of their dues by the suppliers led to the aforementioned enactment is evident from the policy statement of Small Scale Industries made by the Government. By reason of the said Act, benefits are conferred upon the small scale and ancillary units. Ancillary units are those units upon which the large scale industries, medium scale industries survive. Small Scale Industries to a large extent also cater to the need of a large scale industry.
45.The Act seeks to regulate interest on delayed payment. Payment of interest ordinarily is a matter of contract. We may notice that provisions for payment of interest has also been made by the Parliament under the several statutes, as for examine (sic. Example), Code of Civil Procedure, Interest Act 1978, Usurious Loans Act, Sale of Goods Act, Debt Relief Laws etc. Whenever Courts and tribunals are constituted in terms of Entry 11-A of the List III of Seventh Schedule of the Constitution powers are conferred upon such courts and tribunals to grant interest, the rate of which may be fixed by Parliament under such laws, keeping in view the aforementioned aspects.
46.Provisions for payment of interest have also been made in the Land Acquisition Act, 1894, which again is a central statute. It is interesting to note that a constitution bench of the Apex Court in Sunder V. Union of India (2001 (4) ICC 1 (SC)) has held that interest can be paid also on solatium."
The judgment of the A.P. High Court was upheld by the Supreme Court in A.P.Transco's case (cited supra).
26.The present Act has changed the lending rate from that of the SBI to that of the RBI and from one and half times, it has been enhanced to three times. Such payments will have to be made only by the buyer, who defaults in making payment after having accepted the goods and utilized the same for his own business. A person who commits defaults and suffers an order or award or decree from the Facilitation Council alone is bound to pay such interest and such order if found erroneous can be corrected by judicial review by an appropriate legal forum.
27.The argument that the Interest on Delayed Payment Act 1993 is more beneficiary than the MSMED Act, 2006 cannot be entertained as one set of legislation cannot be telescoped into another legislation either for reading down the provisions or for deciding the vires of legislation on hand. The absence of some provisions which are found in the earlier law on in analogous legislation cannot be a ground to strike down the present law on ground of Article 14 of the Constitution. In this context, it is necessary to refer to the judgment of the Supreme Court in State of Tamil Nadu and others Vs. Ananthi Ammal and others reported in 1995 (1) SCC 519. In paragraphs 6 and 7, the Supreme Court held as follows:
"6. In State of M.P. v. G.C. Mandawar a Constitution Bench held that Article 14 does not authorise the striking down of the law of one State on the ground that, in contrast with the law of another State on the same subject, its provisions are discriminatory, nor does it contemplate the law of the Centre or of a State dealing with similar subjects being held to be unconstitutional by a process of comparative study of the provisions of the two. The sources of authority for the two being different, Article 14 can have no application. In Sant Lal Bharti v. State of Punjab this was reiterated.
7. When a statute is impugned under Article 14 what the court has to decide is whether the statute is so arbitrary or unreasonable that it must be struck down. At best, a statute upon a similar subject which derives its authority from another source can be referred to, if its provisions have been held to be reasonable or have stood the test of time, only for the purpose of indicating what may be said to be reasonable in the context. We proceed to examine the provisions of the said Act upon this basis."
28.The next question comes is whether the members of Facilitation Council are having qualification to preside over and to determine the rights of parties? According to the counsel for petitioners, they do not have any judicial bent of mind and packing the council with such persons from the executive is unconstitutional. In this context, reliance was placed upon the judgment of the Supreme Court in Union of India and another Vs. R.Gandhi, President, Madras Bar Association and another reported in 2010 (4) MLJ 734 (SC). Reliance was placed upon paragraph 44 of the said judgment which is as follows:
"44.We may summarize the position as follows:
(a)A legislature can enact a law transferring the jurisdiction exercised by Courts in regard to any specified subject (other than those which are vested in Courts by express provisions of the Constitution) to any Tribunal.
(b)All Courts are Tribunals. Any Tribunal to which any existing jurisdiction of Courts is transferred should also be a Judicial Tribunal. This means that such Tribunal should have as members, persons of a rank, capacity and status as nearly as possible equal to the rank, status and capacity of the Court which was till then dealing with such matters and the members of the Tribunal should have the independence and security of tenure associated with Judicial Tribunals.
(c)Whenever there is need for 'Tribunals', there is no presumption that there should be technical members in the Tribunals. When any jurisdiction is shifted from Courts to Tribunals, on the ground of pendency and delay in Courts, and the jurisdiction so transferred does not involve any technical aspects requiring the assistance of experts, the Tribunals should normally have only judicial members. Only where the exercise of jurisdiction involves inquiry and decisions into technical or special aspects, where presence of technical members will be useful and necessary, Tribunals should have technical members. Indiscriminate appointment of technical members in all Tribunals will dilute and adversely affect the independence of the Judiciary.
(d)The Legislature can re-organize the jurisdiction of Judicial Tribunals. For example, it can provide that a specified category of cases tried by a higher Court can be tried by a lower Court or vide versa (A standard example is the variation of pecuniary limits of Courts). Similarly while constituting Tribunals, the Legislature can prescribe the qualifications/eligibility criteria. The same is however subject to Judicial Review. If the Court in exercise of judicial review is of the view that such Tribunalisation would adversely affect the independence of judiciary or the standards of judiciary, the Court may interfere to preserve the independence and standards of judiciary. Such an exercise will be part of the checks and balances measures to maintain the separation of powers and to prevent any encroachment, intentional or unintentional, by either the legislature or by the executive."
After getting inspirations from that judgment, it was argued that with no judicial member in the Facilitation Council, conferring power on the Council to determine the rights of parties is unconstitutional. It must he noted that the Supreme Court in that judgment dealt with a Tribunal constituted by exercise of power under Articles 323-A and 323-B of the Constitution and also made distinction between a Tribunal and a Court. In the present case, the Facilitation Council is neither a Court nor a Tribunal and only a body of arbitrators and that too of a first instance.
29.It was also argued that even for such Council, there should be judicial member. It may be stated with respect that no such proposition was laid by the Supreme Court. On the contrary, the division bench of the Andhra Pradesh High Court in A.P.Transco's case (cited supra) dealt with similar provisions found in the Interest on Delayed Payment Act, 1993. It has been held that even while constituting a Tribunal person possesses knowledge in law alone must be appointed. Therefore, raising the status of the Facilitation Council to that of a Tribunal or a Court is totally unwarranted.
30.In fact, a Constitution Bench of the Supreme Court in Workmen Vs Meenakshi Mills Ltd. reported in 1992 (3) SCC 336 has held that if a statutory power is given to an executive authority under a statute with defined statutory guidelines, that cannot be held to be unconstitutional. This is because as against such an order of statutory authority, judicial review is always available under Articles 226 and 227 of the Constitution. Therefore, such an argument has to be rejected.
31.The other argument was that after having allowed the Tribunal to adjudicate upon the dispute between the parties and thereby creating resultant order, decree or award (as the case may be), parties are made to suffer even before going to a further forum. Therefore, vesting power on the Facilitation Council, the power of Arbitration is unwarranted. This issue also came to be considered by the division bench of the Andhra Pradesh High Court in A.P.Transco's case (cited supra) and found in paragraphs 75 to 77.
32.The next ground of attack is under Section 19 requiring deposit of 75% of the amounts ordered by the Facilitation Council as a prerequisite to move another Court. The very same challenge made before the Kerala High Court in the decision relating to K.S.R.T.C. Vs. Union of India reported in 2010 (1) KLT 65. In paragraphs 8 to 10, the Kerala High Court rejected such an attack and had observed as follows:
"8.....we find it difficult to accept the contention of the petitioner that the above provision is violative of Art.14 of the Constitution of India. The buyer and the seller are treated differently for valid reasons and grounds. A buyer, when challenges an adverse award, has to make pre-deposit. But, when a seller is non-suited, he need not make any pre-deposit for challenging the order, which is adverse to him. There is nothing wrong with it. If a defeated seller is called upon to make some deposit, it will appear irrational or arbitrary. So, the challenge made to the provision, on the ground that the same violates Art.14, is untenable.
"9......Here, the Arbitrator passes an award in favour of the supplier. If the buyer wants to set aside that award, he has to make pre-deposit of 75% of the amount due under the award. We find similar provisions are there in several legislations and they have been upheld by the Apex Court in several decisions. Some of those decisions are Anant Mills Co. Ltd. V. State of Gujarat ((1975) 2 SCC 175), Seth Nand Lal V. State of Haryana (1980 Supp. SCC 574), Vijay Prakash D.Mehta V. Collector of Customs (Preventive) ((1988) 4 SCC 402) and Shyam Kishore V. Municipal Corporation of Delhi ((1993) 1 SCC 22).
10.The Parliament could have said that an arbitration award passed under S.18 is final and shall not be called in question in any court of law. In that event, the possible remedy that may be open to the affected party is to file a Writ Petition under Art.226 of the Constitution of India. But, in this case, the Parliament has chosen to give a remedy subject to certain restrictions. It is settled position in law that none has any inherent right to file an appeal and no forum has any inherent power to entertain an appeal. The right to file appeal and the power to hear appeal are statutory creations and they have to be exercised subject to the limitations contained in the Statute creating the rights/conferring the powers. The legislature in its wisdom, while making provisions for the development of small scale industries, has provided that once the Arbitrator finds in favour of a small scale industry, if that award is to be challenged before the District Court under S.34 of the Arbitration and Conciliation Act, a pre-deposit of 75% of the amount should be made. In the absence of such a provision for pre-deposit, the award could be executed only after the proceedings before the District Court are over, by virtue of S.36 of the Arbitration and Conciliation Act. So this special provision for making deposit and also further empowering the court concerned to disburse the amount on valid grounds, has been incorporated in the Act to help the small scale industries. Every legislation will create some trouble for some persons, when it seeks to confer benefits on others. Such crudities and inequities are not available as grounds for challenging a legislation...."
33.While analysing the similar provisions found in the Interest on Delayed Payments Act, 1993, the Supreme Court in Snehadeep Structures Private Limited Vs. Maharashtra Small Scale Industries Development Corporation Limited reported in 2010 (3) SCC 34 in paragraph 47 had observed as follows:
"47.The requirement of predeposit of interest is introduced as a disincentive to prevent dilatory tactics employed by the buyers against whom the small-scale industry might have procured an award, just as in cases of a decree or order. Presumably, the legislative intent behind Section 7 was to target buyers, who, only with the end of pushing off the ultimate event of payment to the small-scale industry undertaking, institute challenges against the award/decree/order passed against them. Such buyers cannot be allowed to challenge arbitral awards indiscriminately, expecially when the section requires predeposit of 75% interest even when appeal is preferred against an award, as distinguished from an order or decree."
In the light of the above, the said argument cannot be accepted.
34.The other argument made by the learned Advocate General and by Mr.T.Mohan was that under the provisions of Sections 18(2), 18(3) and 18(4), the Facilitation Council was given dual role of conciliator in terms of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 and thereafter it was conferred with the jurisdiction to act as Arbitrators. This goes against the norms of fairness. Under Section 80 of the Arbitration and Conciliation Act, 1996, it has been made clear that conciliator cannot act as an arbitrator. Section 80(a) reads as follows:
"80.Role of conciliator in other proceedings.-Unless otherwise agreed by the parties,-
(a)the conciliator shall not act as an arbitrator or as a representative or counsel of a party in any arbitral or judicial proceeding in respect of a dispute that is the subject of the conciliation proceedings;
35.Having incorporated the said provision under Section 18(2), it is not open to the Facilitation Council to act an conciliator as well as arbitrator. They have not agreed for the council to discharge the dual role. If they decide to act as conciliators, then they must relegate the parties to an outside arbitrator. In alternative, if they decide to arbitrate the matter, then they should send the parties for conciliation by an outside authority to do conciliation. The argument addressed by the counsel in this regard is not based upon any legal foundation. It can be stated that it may be based on the principle of fairness. Even a regular civil court, by 1976 amendment, has been made to conciliate in cases of matrimonial disputes and they are not prohibited by the CPC from deciding the lis between the parties.
36.Section 18(2) only borrows the provisions of Sections 65 to 81 of the Arbitration and Conciliation Act for the purpose of conducting conciliation. It is not a bar for the same council to arbitrate on the matter. But however if there is any allegation of bias is made out, certainly such issues can be gone into in a judicial review based on concrete materials. In order to avoid the allegation of lack of fairness in other higher forums, it is open to the council to evolve its own rule of business by which members who had participated in the Conciliation may not sit in the Arbitral proceedings. But it is entirely for the Facilitation Council to evolve such a rule of business in future. On that ground, no direction can be issued by this Court.
37.In this context, it is necessary to refer to the judgment of the Supreme Court in Institute of Chartered Accountants of India Vs. L.K.Ratna reported in 1986 (4) SCC 537. In that case, the Supreme Court held that members of Chartered Accountants who sit in the disciplinary Tribunal should not participate in the council meeting to approve their own decision and it may hit on grounds of bias. It is for the Facilitation Council to keep in mind such principle so as to avoid future attacks against their orders in other legal forums.
38.The last attack was against the power being vested with the Facilitation Council to arbitrate the matter and finally to determine the rights of parties can cause prejudice to the buyers. That argument overlooks the fact that the MSMED Act do not foreclose judicial review by any other judicial forum notwithstanding the overriding effect given under Section 24. At the maximum, the Facilitation Council acts as arbitrators at the first instance. It does not foreclose the parties from further agitating the matter to establish their rights in an appropriate legal forum.
39.In the light of the above, the contentions raised in assailing the Chapter V of the MSMED Act are hereby rejected. Hence, W.P.Nos.25406 and 16909 of 2009, 1202, 6015, 13308, 13613, 14432, 14650 and 14889 of 2010 will stand dismissed. No costs.
40.It is also necessary to deal with the individual cases where the vires of Chapter V was not attacked, but certain decisions and notices of the Facilitation Council came to be questioned by some of the writ petitioners.
41.In W.P.No.16908/2009, the challenge is to the order passed by the Facilitation Council, dated 10.6.2009. It was contended that the Facilitation Council ought not to have ordered Conciliation and thereafter to decide the matter. In any event, the question is once the petitioner had participated in the proceedings before the Facilitation Council, then any resultant order will have to be challenged before the appropriate court and certainly the jurisdiction under Article 226 of the Constitution cannot be invoked that too for commercial cause where the right of parties were governed by the contract and intervened by MSMED Act. The attempt to move this court under Article 226 is only to get over the pre-deposit. The attack against the said provision made by the petitioner in W.P.No.16909/2009 has already been repealed elsewhere.
42.Even otherwise, the Supreme Court very recently in Raj Kumar Shivhare Vs. Assistant Director, Directorate of Enforcement and another reported in 2010 (4) LW 1 has held that the statutory forum is created for redressal of grievance that too in a fiscal statute, a writ petition should not be entertained. In that case, an appeal itself was available to the High Court. In repelling that contention, in paragraphs 44 and 45, it was observed as follows:
"44.Therefore, principle laid down in the Ratan's case (supra) applies in the facts and circumstances of this case. If the appellant in this case is allowed to file a writ petition despite the existence of an efficacious remedy by way of appeal under Section 35 of FEMA this will enable him to defeat the provisions of the Statute which may provide for certain conditions for filing the appeal, like limitation, payment of court fees or deposit of some amount of penalty or fulfillment of some other conditions for entertaining the appeal. (See para 13 at page 408 of the report). It is obvious that a writ court should not encourage the aforesaid trend of by-passing a statutory provision.
45.Learned counsel for the appellant relied on a decision of this Court in Monotosh Saha Vs. Special Director, Enforcement Directorate and another (2008) 12 SCC 359. That was a decision entirely on different facts. In that decision Saha preferred an appeal before the appellate tribunal with a request for dispensing with requirement of pre-deposit, but the tribunal directed the deposit of 60% of the penalty amount before entertaining the appeal. When an appeal was preferred before the High Court under Section 35 of the FEMA, the same was dismissed by the High Court holding that no case for hardship was made out either before the tribunal or before it. In the background of those facts, this Court observed that since pursuant to this Court's interim order Rs.10 lacs have been deposited with the Directorate, the appellant was directed to furnish further such security as may be stipulated by the tribunal and directed that on such deposit tribunal is to hear the appeal without requiring further deposit."
43.The Supreme Court while dealing with the very same Section 19 under the MSMED Act in Snehadeep Structures Private Limited case (cited supra), in paragraph 59 had observed as follows:
"59.Section 19 of the 2006 Act reads as follows:
"19.Application for setting aside decree, award or order. No application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant (not being a supplier) has deposited with it seventy-five per cent of the amount in terms of the decree, award or, as the case may be, the other order in the manner directed by such court :
Provided that pending disposal of the application to set aside the decree, award or order, the court shall order that such percentage of the amount deposited shall be paid to the supplier, as it considers reasonable under the circumstances of the case, subject to such conditions as it deems necessary to impose."
This provision, no doubt, requires the deposit to be made before an application under Section 34 of the Arbitration Act is filed. However, we are not inclined to read this provision of a subsequent legislation into the provision in question.
44.The division bench of the Andhra Pradesh High Court in A.P.Transco's case (cited supra), in paragraphs 79 and 80 has held as follows:
"79....In any event, the petitioner in the aforementioned case submitted itself to the jurisdiction of the tribunal. The petitioner sat on the fence; he took chance before the Tribunal. Only when the decision of the Tribunal went against it, he had filed the writ petition...
80.......In terms of the Arbitration and Conciliation Act, 1996, it is not necessary that a lis must be determined by a person having a legal knowledge. The arbitrator need not have an experience in law."
45.Therefore, this court is not inclined to entertain the challenge made to the various decisions of the Facilitation Council. It is always open to the petitioner Corporation to move an appropriate civil court for relief or in alternative if there are any clause for arbitration provided under the terms of contract, to make an application for appointment of an Arbitrator under the relevant terms of the agreement.
46.In W.P.No.5062 of 2010, the prayer is twofold. The first portion relates to the challenge to vires of Sections 15 to 23 of the MSMED Act which has already been answered. The second portion is to the notice dated 24.9.2009 asking the petitioner to answer the complaint made before the council. The notice was challenged on ground that the provisions contained in Chapter V are ultravires. In the present case, since the constitutional validity of Chapter V is upheld, it is for the petitioner to answer the notice issued by the council.
47.In W.P.No.13407/2010, the petition is for a writ of prohibition prohibiting the Facilitation Council to act as an Arbitrator in the dispute raised by the second respondent. Mr.T.Mohan, learned counsel contended that the Facilitation Council should not do both functions, i.e. Conciliation as well as Arbitration and an attention was drawn from Section 80(a). This argument has already been considered and it has been held that it was the Council to make an appropriate rule of business. Otherwise, there is no legal bar in acting as an Conciliator and thereafter to arbitrate the matter. Hence this writ petition cannot be entertained.
48.In W.P.Nos.13430 and 13431 of 2010, the challenge is to the order dated 3.6.2010 by which the Council has passed a final award. The second writ petition is to declare that the claim made by the second respondent is not maintainable. It is on the ground that the transaction was during the years from 1995 to 31.3.2000 and that the MSMED Act came into force only in the year 2006. In respect of the final award passed, a remedy is open to the petitioner to have recourse to Section 19 before an appropriate civil forum. Even whether the claim is time barred can also be gone into by such forum. Hence this court is not inclined to entertain such a challenge.
49.W.P.No.14431 of 2010 is to forbear the third respondent from proceeding with the hearing of the original petition instituted by the contesting private respondent. The grounds raised are similar to one raised in the writ petitions challenging the vires of the Act which has already been answered against the petitioner in the earlier portion of the judgment. The contentions raised in the writ petitions are misconceived and lack in merits. Accordingly, they deserve to be dismissed.
50.In the light of the above legal precedents and the factual matrix involved, all writ petitions will stand dismissed. However, there will be no order as to costs. Consequently, connected miscellaneous petitions stand closed.
vvk To
1.The Secretary, Union of India, Ministry of Micro, Small and Medium Enterprises, Udyog Bhavan, New Delhi-110 011.
2.The Secretary, State of Tamil Nadu, Department of Industries and Commerce, Chepauk, Chennai-600 005.
3.Director, Ministry of Micro, Small and Medium Enterprises, Room 254, Udyog Bhawan, Rafi Marg, New Delhi-110 011.
4.Regional Joint Director of Industries and Commercial (i/c)/Zonal Officer MSE Facilitation council, Thiru Vi Ka. Industrial Estate, Guindy, Chennai-600 032.
5.The Secretary, M.P.Micro & Small Enterprises Facilitation council, Directorate of Industries, Madhya Pradesh, Vindhyachal Bhawan, Bhopal