Facts of the Case

  • The Income Tax Department appointed a CA Firm (M/s SBG & Co.) as Special Auditor under Section 142(2A).
  • After completion of audits, the CA Firm raised invoices claiming substantial fees.
  • The Department determined lower fees under Section 142(2D) and made partial payments.
  • Dissatisfied, the CA Firm invoked Section 18 of MSMED Act seeking recovery of balance amount with interest.
  • The MSEFC referred disputes to arbitration (DIAC).
  • The Income Tax Department challenged such references before the Delhi High Court.

  Issues Involved

  1. Whether Special Audit under Section 142(2A) creates a contractual (commercial) relationship.
  2. Whether MSMED Act applies to disputes regarding Special Audit fees.
  3. Whether MSEFC has jurisdiction to refer such disputes to arbitration.
  4. Whether Section 293 of Income Tax Act bars such proceedings.

  Petitioner’s Arguments (Income Tax Department)

  • Special Audit is a statutory function, not a contractual arrangement.
  • Fee determination under Section 142(2D) is statutory and final in nature.
  • No buyer-supplier relationship exists → MSMED Act not applicable.
  • Arbitration proceedings are barred under Section 293 of IT Act.
  • Only remedy available is writ jurisdiction, not MSMED proceedings.

  Respondent’s Arguments (CA Firm)

  • There exists a commercial relationship involving services and consideration.
  • CA Firm qualifies as “supplier” and IT Department as “buyer” under MSMED Act.
  • MSMED Act has overriding effect (Section 24) over other laws.
  • Determination under Section 142(2D) cannot be final due to bias and lack of appeal mechanism.
  • Arbitration via MSEFC is valid; Section 293 only bars civil suits, not such proceedings.

 Court’s Findings / Order

  • The Court examined the interplay between MSMED Act and Income Tax Act.
  • It held that:
    • Special Audit under Section 142(2A) is statutory in nature.
    • There is no conventional contractual relationship between parties.
    • Fee determination under Section 142(2D) is part of a statutory mechanism.
    • MSMED Act provisions cannot override the specific statutory scheme of the Income Tax Act in this context.
    • MSEFC lacks jurisdiction in such disputes.
  • Accordingly, references to arbitration were set aside / stayed.

 Important Clarifications by Court

  • Statutory duties ≠ commercial contracts.
  • MSMED Act applies only where buyer-supplier relationship with consideration exists.
  • Special Auditors function as extensions of tax authorities, not independent contractors.
  • Arbitration cannot be invoked where statute provides exclusive mechanism.

Link to download the order - https://delhihighcourt.nic.in/app/showFileJudgment/PMS06072023CW137542019_185006.pdf

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