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BACKGROUND

MSME is an abbreviation of Micro, Small & Medium Enterprises. MSME is the pillar of economic growth in many developed and developing countries in the world. Often rightly termed as “the engine of growth” for India, MSME has played a prominent role in the development of the country in terms of creating wealth and employment avenues.

Not only it plays a crucial role in providing employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth.

MSMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socio-economic development of the country. Therefore, it is very important for any country to take care of MSME sector as it bolsters the growth of the economy and society.

Having recognised the importance of MSME in the economic growth of the country, India has introduced many incentives and policies to support MSME in the country. However, data inconsistency, problems in interpretation and implementation of policies, compliance issues and various other problems are acting as bottleneck in the growth of the sectors.

In this article, we shall discuss the problem related to Micro. Small and Medium Enterprises Development Act, 2006 (“Act”), registration of MSME and interpretation of registration of MSME through Udyog Aadhaar Memorandum (“UAM) (now Udyam registration) by buyers.

MICRO, SMALL AND MEDIUM ENTERPRISES DEVELOPMENT ACT, 2006

• OBJECTIVE

Micro, Small and Medium Enterprises Development act, 2006 was introduced to formalise and facilitate micro, small and medium enterprises. The act clearly states the criteria of being considered as MSME, filing of memorandum / registration, payment resolution mechanism, recovery of dues compliance requirements etc.  The Act came into effect from October 2, 2006.

As per the report of Expert committee on Micro, Small and Medium Enterprises led by Shri UK Sinha dated June, 2019, despite of important role being played by MSME in India and various initiatives taken by the central and state governments, proper formalisation and full coverage of MSMEs has not been achieved till date. 

Click here to view the report

• REGISTRATION OF MSMEs

Registration of MSMEs plays an important part in formalisation of this sector. It helps the government authorities to collect data and formalise this section, at the same time it helps the MSMEs in availing various benefits and support being offered by government authorities.

The registration requirement of Indian enterprises is primarily governed by the First Schedule to the Industrial Development and Regulation (IDR) Act, 1951. It is mandatory only for a class of Medium enterprises which are engaged in the manufacturing of goods.

The registration of Micro and Small enterprises and Medium enterprises engaged in services activities is discretionary (not mandatory). Following table exhibits the requirement for registration. However, over a period of time, registration has been an intrinsic part of the development of MSMEs itself. Having a registration certificate entitles an MSME for numerous benefits. Particularly after the Act which came into effect from October 2, 2006, availability of registration certificate has assumed greater importance.

One of the critical indicators to ascertain the successful development and growth of the MSME Sector in an economy is the data on the opening of new MSMEs. It depicts the conducive environment provided for the sector to grow.

• FILING OF MEMORANDUM WITH DICs FOR OBTAINING REGISTRATION

Before the introduction of the Act, there was a system of registration by Small Scale Industrial Units (SSI) to the District Industries Centre (DICs). Subsequently, as per the provisions of the Act, MSMEs used to file Entrepreneurs Memorandum (Part-I) at DICs before starting an enterprise. After commencement of production, the entrepreneur concerned used to file Entrepreneurs Memorandum (Part-II)/ [EM-II]. A total of 21,96,902 EM-II filings took place between 2007 and 2015.

• UDYOG AADHAAR MEMORANDUM (“UAM”)

Keeping in view the difficulties faced by MSMEs in filing memorandum with DICs and the objective of ease of business, the registration process of MSMEs was radically simplified with the introduction of Udyog Aadhaar Memorandum (“UAM”), with effect from September 18, 2015. It was an Aadhaar based electronic platform and required a few basic entries including PAN details. Registration certificate was also issued electronically. At the same time, MSME Ministry also introduced a Data Bank, through which data on basic parameters of MSME developments like turnover, number of employees, etc. was collected. Both Udyog Aadhaar and the Data Bank were useful initiatives to address the data issues of MSME sector.

In terms of coverage, 68.89 lakh MSMEs (as on June 12, 2019) got registered through this system. Udyog Aadhaar facilitated registration of MSMEs in a user friendly way.

Problems with Udyog Aadhaar Memorandum:

• Unreliable data: Given that the data entered in UAM was self-verified, it was often not a reliable source of information for lenders and buyers. They were many challenges associated with the Udyog Aadhaar system. Since Udyog Aadhaar was filed on a self-declaration basis, the sanctity and authenticity of the quality of data could not be verified.

• Non – MSME got registered: Many enterprises not falling within the purview of MSME criteria obtained registration through Udyog Aadhaar such as retailers and traders etc. There were many Instances which had also been reported of UAM being filed product-wise. It was proving difficult to conclusively distinguish if Udyog Aadhaar registered establishments were from MSME sector only.

• Non-verification of data: As mentioned above, the Udyog Aadhaar system was based on self-certification and there was no evidence of whether the unit was set up at all. The concept of provisional registration, which helped in pre-start upstage, was missing. In addition to Udyog Aadhaar, there are several other registrations which MSMEs need. For example, for public procurement, all MSME units are to be registered with NSIC.

• UDYAM REGISTRATION

Due to various issues with Udyog Aadhaar Memorandum system, there was a need for cleaning the database and usage of common identifiers (Such as PAN/ GST) to collect reliable data. In order to resolve these problems, the Government of India vide notification no. S.O. 2119(E) dated 26th June, 2020 introduced a new registration system namely Udyam Registration and also revised the criteria for being considered as an MSME. The new criteria now take into consideration the turnover of an enterprise also. With this data related to MSME can be verified as the registration portal will be linked with common identifiers such as PAN and GSTIN.

Click here to read more about the recent amendments and registration system

INTERPRETATION OF PROVISIONS RELATED TO REGISTRATION OF AN MSME

•  Whether registration under the Act is mandatory to be considered as MSME.

For answering this query, we have to consider and analyse Section 2(n) which contains the definition of Supplier, section 7 which deals with the categorisation of MSMEs and Section 8 which deals with the establishment of MSME as per the Act.

Analysis of section 2(n) i.e. definition of Supplier (reproduced below):

““Supplier” means a micro or small enterprise, which has filed a memorandum with the authority referred to in sub-section (1) of section 8, and includes,-

(i) the National Small Industries Corporation, being a company, registered under the Companies Act, 1956;

(ii) the Small Industries Development Corporation of a State or a Union territory, by whatever name called, being a company registered under the Companies Act, 1956; 1 of 1956.

(iii) any company, co-operative society, trust or a body, by whatever name called, registered or constituted under any law for the time being in force and  engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises;”

A normal reading of the definition of the term “Supplier” above indicates that it is not an expansive definition but an exhaustive one. A supplier is defined to mean a micro or small enterprise, which has filed a Memorandum with the authority and includes three other types of entities as indicated in the three clauses of Section 2(n) of the Act. It is a settled law that the definition, which uses the expression “means” and “include” to define a term, is exhaustive. (Thalappalam Service Cooperative Bank Limited and Others v. State of Kerala and Others: (2013) 16 SCC 82)

A micro enterprise is defined under Section 2(h) of the Act to mean an enterprise as classified as such under Section 7(1)(a)(i) or Section 7(1)(b)(i) of the Act and a small enterprise is defined under Section 2(m) of the Act to mean an enterprise classified as such under Section 7(1)(a)(ii) or Section 7(1)(b)(ii) of the Act.

As per Section 7, the criteria for classification of Micro and Small enterprise are as follows. The criteria has been amended vide notification dated 26^th June, 2020 and is effective from 1^st July, 2020.

An examination of Section 2(n) of the Act indicates that it is divided in the following two parts:

• The first part defines a Supplier to mean a micro or small enterprise which has filed a memorandum with the authority referred to in section 8(1) of the Act, and;

• The second part refers to (i) National Small Industries Corporation; (ii) the Small Industries Development Corporation of a State or a Union territory; and (iii) a company, co-operative society, trust or a body engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises.

The parts are joined by the word ―”and”. Usually, this would mean that the conditions as specified in both the parts must be satisfied. However, it is obvious that the same is not an appropriate way to read Section 2(n) of the Act. This is so because, admittedly, neither the National Small Industries Corporation – which is a Government of India Enterprise – nor the Small Industries Development Corporation of a State or a Union territory is required to file a memorandum as referred to under Section 8(1) of the Act. Thus, the two parts of Section 2(n) of the Act are required to be read to exhaust all categories.

The second part, which specifies three categories to fall within the definition of the term “supplier‘, is in addition to the category of small and medium enterprises that have filed the Memorandum under Section 8(1) of the Act. Thus, the term “supplier” as defined under Section 2(n) of the Act must be read to comprise of four categories:

• Micro or small enterprises that have filed the Memorandum under Section 8(1) of the Act;
• National Small Industries Corporation;
• Small Industries Development Corporation of a State or a Union territory; and
• A company, co-operative society, trust or a body engaged in selling goods produced by micro or small enterprises or rendering services provided by such enterprises.

In light of the above, we can conclude that:

1. An enterprise is classified as Micro and Small within the meaning of Section 7(1)(a)(i) and (ii) & Section 7(1)(b)(i) and (ii) of the Act, and has filed Memorandum under section 8 of the Act, it would fall within the definition of a Supplier

• An enterprise engaged in the supply of goods or services rendered by a micro/small enterprise – would fall within the fourth category of entities that are included as a “supplier”: that is, a company, co-operative society, trust or a body engaged in selling goods produced by micro or small enterprises or rendering services provided by such enterprises. It is not necessary for such entities to have filed the Memorandum under Section 8(1) of the Act and to procure goods and services from the third party only.

The aforesaid view is also fortified by the decision of the High Court of Delhi in the case of Ramky Infrastructure Private Limited V. Micro and Small Enterprises Facilitation Council & others.

Click here to view the detailed judgement

It is also mentioned in by the decision of the High Court of Delhi in the case of Godwin Construction Pvt. Ltd. and Others. V. Tulip Contractors and Others.

“A unit that is not registered as a supplier does not cease to be one. The registration as a supplier under the MSMED Act makes the availing of the benefit much easier”

Click here to view the detailed judgement

Registration not mandatory for Micro and Small enterprises: In light of the above, a company, co-operative society, trust or a body engaged in supply of goods and rendering services provided by Micro & Small enterprises or by itself being categorised as Micro or Small enterprise as per section 7 of the Act shall not be required to obtain registration/ Udyog Aadhaar Memorandum to be considered as a Supplier.

• Whether an enterprise should be considered as MSME for only those services which are mentioned in the Udyog Aadhaar Memorandum or Udyam Registration.

As per section 7 of the Act, an enterprise falling within the criteria of Micro, Small and Medium enterprise shall be categorised as such. The type of services being provided by the enterprise shall not make it ineligible to be considered as a Micro/Small Enterprise.  Further, as also stated above, registration is not mandatory for being considered as a Micro/Small Enterprise.

Here a question arises – What types of services are taken into consideration as per the Act to meet the criteria mentioned in Section 7 of the Act? Is there any exclusion? 

The Act does not specify any service for being considered as a MSME. Thus, all services may be considered for falling within the criteria under section 7 of the Act. However, as per notification No. F.No. UAM/MC/01/2017-SME dated 27^th June, 2017. The following good and services shall not be included in the manufacture or production of goods or providing or rendering of services in accordance with Section 7 of the Micro, Small and Medium Enterprise Development Act, 2006:

• Forestry and logging
• Fishing and aquaculture
• Wholesale and retail trade and repair of motor vehicle and motorcycles
• Wholesale trade except of motor vehicles and motorcycles
• Retail trade except of Motor Vehicles and Motorcycles
• Activities of households as employees for domestic personnel
• Undifferentiated goods and services producing activities of private households for own use
• Activities of extraterritorial organisations and bodies

The NIC 2-digit activity 01- crop, animal production, hunting and related activities would also not be included as per Section 7 of the Act except for the sub-classes of activities at 5-digit level given below:

1. Production of eggs
2. Operation of poultry hatcheries
3. Bee-keeping and production of honey and beeswax
4. Raising of silkworms and production of silkworm cocoons
5. Operation of agricultural irrigation equipment
6. Support activities for animal production
7. Preparation of crops of primary markets
8. Cotton ginning, cleaning and bailing
9. Preparation of tobacco leaves
10. Other post-harvest crop activities
11. Seed processing for propagation

Click here to view the notification

Further section 8 of the Act makes it discretionary for all Micro and Small to file memorandum/registration. Thus, it is not mandatory for them to file a memorandum. Non-filing of the memorandum shall not place them outside the purview of the Act.

Thus, if there is any service and good, which falls within the scope of MSME, is not mentioned in the UAM, it shall not render an enterprise falling outside the purview of the Act.

It is advisable to all the buyers to consider the suppliers as Micro OR Small enterprises irrespective of the defects w.r.t to services/goods mentioned in the UAM. Provided the supplier falls within the criteria mentioned under section 7 of the Act at the time of provision of services or supply of goods and the supplier deals in the supply of goods/service not excluded under the Act.