Facts of the Case

This judgment of the Delhi High Court addresses the interplay between the Income Tax Act, 1961 and the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), concerning the fee payable to Chartered Accountant (CA) firms for Special Audits directed under Section 142(2A) of the Income Tax Act. This is fundamentally an Income Tax law dispute; GST features only incidentally, in that the fee ultimately paid to the CA Firm by the Income Tax Department included an 18% GST component along with a TDS deduction — a routine payment computation detail, not a matter the Court adjudicated.

Respondent No. 2, M/s SBG & Co., a partnership firm of Chartered Accountants registered as a "Micro Enterprise" under the MSMED Act, was empanelled with the Income Tax Department and nominated as Special Auditor in cases including that of M/s Sahara India (Firm) under Section 142(2A) of the IT Act. After completing the Special Audit assignments, the CA Firm raised invoices, but the Income Tax Department made only partial payment (and no payment at all for one assignment), eventually determining the fee at Rs. 33,84,000/- under Section 142(2D) and later paying Rs. 35,93,808/- (the base fee plus 18% GST, less 10% TDS). Dissatisfied that this represented only a partial payment of its claimed fee, the CA Firm invoked Section 18 of the MSMED Act and approached the Micro & Small Enterprise Facilitation Council (MSEFC), which referred the dispute to arbitration before the Delhi International Arbitration Centre, appointing a retired Supreme Court judge as arbitrator in one of the two writ petitions. The Principal Commissioner of Income Tax challenged these reference orders before the High Court, contending that the MSEFC lacked jurisdiction over a fee dispute arising from a statutory nomination under the Income Tax Act.

Issues Involved

  1. Whether the Micro & Small Enterprise Facilitation Council, constituted under the MSMED Act, has jurisdiction to adjudicate or refer to arbitration a dispute over remuneration payable to a Special Auditor nominated under Section 142(2A) of the Income Tax Act.
  2. Whether the relationship between the Income Tax Department and the CA Firm, in the context of a statutory Special Audit nomination, constitutes a "buyer-supplier" relationship attracting the MSMED Act, or is instead a purely statutory function governed exclusively by the Income Tax Act and Rules.
  3. Whether, in case of conflict, the Income Tax Act (as a special statute governing Special Audit remuneration) prevails over the MSMED Act (a general statute for MSME payment disputes).

Petitioner's Arguments (Income Tax Department)

  • The MSEFC lacked jurisdiction to entertain or refer to arbitration claims raised by a Special Auditor for fees payable under Section 142(2D) of the Income Tax Act, since the nomination and remuneration determination were exclusively statutory functions under the IT Act and Rules.
  • Determination of a Special Auditor's remuneration required domain expertise available only to the Income Tax authorities (the Commissioner/Chief Commissioner), based on prescribed factors such as nature, quantum, duration and quality of work, and could not be treated as an ordinary commercial "consideration" for goods or services.
  • The IT Department could not be treated as a "buyer" and the CA Firm as a "supplier" merely because the CA Firm happened to be registered as a Micro Enterprise, since the Special Audit assignment was a statutory duty performed for and on behalf of the Assessing Officer.

Respondent's Arguments (CA Firm/MSEFC)

  • The CA Firm, being duly registered as a Micro Enterprise under the MSMED Act, was entitled to invoke the beneficial provisions of that Act, including reference to arbitration under Section 18, for recovering its outstanding professional fee.
  • Full payment for the Special Audit assignments had not been made, and for one assignment no payment at all had been received, justifying recourse to the MSMED Act's dispute resolution mechanism.

Court Order / Findings

  • The Court held that the nature of a Special Audit under Section 142(2A) is a statutory function performed by the CA Firm for and on behalf of the Assessing Officer, and not a commercial engagement; the Income Tax Department is not a "buyer," the CA Firm is not a "supplier," and the remuneration is not "consideration" in the commercial sense contemplated by the MSMED Act.
  • Determination of remuneration under Section 142(2D) and the accompanying Rules (including Rule 14B(5)) is a specialised task requiring the Income Tax Department's domain expertise, considering factors such as nature, quantum, duration and quality of work — a task the MSEFC has no competence to second-guess through arbitration.
  • The Court held that the Income Tax Act is a special statute governing Special Audit remuneration, while the MSMED Act is a general statute for MSME payment disputes, and that in this specific context, the Income Tax Act must prevail over the MSMED Act.
  • Consequently, the MSEFC's references of the CA Firm's fee claims to arbitration were held to be without jurisdiction and were set aside, while leaving open the CA Firm's remedies, if any, to challenge the IT Department's remuneration determination through appropriate proceedings (including writ jurisdiction, but not a civil/commercial recovery suit or MSMED arbitration).
  • The writ petitions filed by the Income Tax Department were allowed and disposed of in these terms.

Important Clarification

This ruling clarifies that a Micro or Small Enterprise's general entitlement to invoke the MSMED Act's arbitration mechanism does not extend to remuneration disputes arising from a statutory nomination under a special taxing statute like Section 142(2A)/(2D) of the Income Tax Act — the special statute prevails, and such professionals must pursue statutory or writ remedies instead. It has no application to, and does not decide, any question of GST law; the passing reference to GST in the payment breakdown is incidental accounting detail.

Sections Involved

  • Section 142(2A) and 142(2D), Income Tax Act, 1961 — Special Audit and remuneration of the auditor
  • Section 18 and Section 20, Micro, Small and Medium Enterprises Development Act, 2006 — Reference to Facilitation Council and constitution of MSEFC
  • Rule 14B, Income Tax Rules, 1962 — Fee for Special Audit

Decision – In Favour of Department (Income Tax Department)

The Delhi High Court ruled in favour of the Income Tax Department, holding that the MSMED Act had no applicability to the Special Audit remuneration dispute, and set aside the MSEFC's references of the matter to arbitration. This is an Income Tax law ruling and does not decide any question of GST.

Case Details

  • Court: High Court of Delhi at New Delhi
  • Case No.: W.P.(C) 13754/2019 and connected CM Appl. Nos., with W.P.(C) 16294/2022 and connected CM Appl. Nos.
  • Coram: Hon'ble Justice Prathiba M. Singh
  • Date of Judgment: 06 July 2023 (Reserved on 9 May 2023)

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