Facts of the Case

The Income Tax Department appointed a Chartered Accountant firm (registered as a Micro Enterprise) as a Special Auditor under Section 142(2A) of the Income Tax Act for conducting audits of multiple entities.

After completion of audits, the firm raised invoices claiming substantial fees. However, the Department determined a lower remuneration under Section 142(2D) and made partial payments.

Aggrieved by the shortfall and delay, the CA firm approached the Micro and Small Enterprises Facilitation Council (MSEFC) under Section 18 of the MSMED Act seeking recovery of the balance amount along with interest.

The MSEFC, after failed conciliation, referred the disputes to arbitration (DIAC). The Income Tax Department challenged this action by filing writ petitions before the Delhi High Court, contending lack of jurisdiction of MSEFC.

  Issues Involved

  1. Whether disputes regarding fees of Special Auditors under the Income Tax Act can be adjudicated under the MSMED Act?
  2. Whether the relationship between the IT Department and Special Auditor constitutes a buyer-supplier relationship?
  3. Whether Section 293 of the Income Tax Act bars arbitration proceedings under MSMED Act?
  4. Whether MSEFC has jurisdiction to entertain such disputes and refer them to arbitration?

 Petitioner’s Arguments (Income Tax Department)

  • Special Audit is a statutory function, not a contractual service.
  • Remuneration is determined strictly under Section 142(2D) and cannot be challenged under MSMED Act.
  • No buyer-supplier relationship exists; hence MSMED Act is inapplicable.
  • Arbitration proceedings are barred due to Section 293, which prohibits civil proceedings relating to tax matters.
  • Remedy lies only through writ jurisdiction, not through MSEFC.

 Respondent’s Arguments (CA Firm)

  • The CA firm qualifies as a supplier, and IT Department as a buyer of services, thus MSMED Act applies.
  • Even without formal contract, commercial relationship and consideration exist.
  • Remuneration under Section 142(2D) is not final or immune from challenge.
  • MSMED Act has overriding effect (Section 24) over other laws.
  • Section 293 bars only civil suits, not arbitration or MSEFC proceedings.
  • Denial of remedy would leave the firm without any effective legal recourse.

  Court Findings / Judgment

  • The Court examined the interplay between the Income Tax Act and MSMED Act.
  • It emphasized that the nature of the Special Auditor’s role is statutory and not purely contractual.
  • The determination of fees under Section 142(2D) is part of a statutory framework, not a commercial bargain.
  • The applicability of MSMED Act depends on the existence of a buyer-supplier relationship, which is doubtful in such statutory appointments.
  • The Court held that jurisdictional issues of MSEFC are critical and can be examined under writ jurisdiction, especially where arbitration may lack inherent jurisdiction.

The Court entertained the writ petitions considering exceptional circumstances involving jurisdictional error.

 Important Clarifications by Court

  • Arbitration can be challenged via writ where there is complete lack of jurisdiction.
  • MSMED Act cannot automatically override statutory schemes like Income Tax Act without satisfying its own conditions.
  • Special Audit under IT Act is not equivalent to a commercial contract.
  • Existence of “consideration” alone does not create a buyer-supplier relationship under MSMED Act.

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

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