Summary On Implications Of Section 43B(h) - Payments Made To MSME

APPLICABILITY

• These amendments will take effect from April 1, 2024, and will, accordingly, apply in relation to the assessment years 2024-2025 and subsequent assessment years.
• Disallowance u/s. 43B of the Act will be attracted in case the supplier is either a microenterprise or a small enterprise (not a medium enterprise).

DEFINITIONS

1. Micro Enterprise ------------- Investment in plants and machinery is less than INR 1 crore, and turnover is less than INR 5 crore.
2. Small Enterprise ------------- Investment in plants and machinery is less than INR 10 crore, and turnover is less than INR 50 crore.
3. A supplier under the MSME Development Act 2006 is defined as a person who is registered under the Act; hence, micro or small enterprises that are not registered under the Act would not be covered under the definition of S-43B(h).

TIME PERIOD

1. If a buyer is entering into an agreement with an MSME supplier, the due date of payment cannot exceed 45 days from the date of actual delivery of goods or rendering of services, as the case may be. Where there is no written agreement, the due date will be the 16th day of actual delivery. Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed 45 days from the day of acceptance or the day of deemed acceptance.
2. Any payments made beyond these time limits (15/45 days) are subject to the conditions of the newly inserted clause (h) in Section 43B, where deductions are allowed only on actual payment.
3. In terms of Sec. 15 of the MSMED Act, payment terms cannot exceed 45 days. Hence, in a scenario where the payment terms have been set beyond 45 days (say, 60 days), then they shall be restricted to 45 days, and the due date shall be ascertained accordingly.

• There may be a situation where some defect in the goods or deficiency in the provision of service is noticed and the buyer, in this situation, makes an objection. The due date shall be counted from the date when the MSME supplier removes an objection. However, the objection is required to be made in writing by the buyer to the supplier.
• Expenses can be claimed only in the year in which expenses are actually paid, unlike other disallowances under U/S 43B, where disallowance will not be attracted even if the payment is made after the financial year but before the due date prescribed under U/S 139(1) of the return filing (that is, the provision of Section 43B allows for a time extension up until the due date of the return) would not apply to such payments under any circumstances.
• There may be a situation where an assessor issues a check to the MSME supplier and, due to some reason, the MSME supplier does not encash it within the due date. In light of the judgment of the Hon'ble High Court of Punjab and Haryana in the case of CIT vs. Hindustan Wire Products Ltd. [2002], disallowance u/s. 43B of the Act should not be attracted.

CONCLUSION

If the payment to the MSME vendor is not made within 45 days from April 1, 2024, the same has to be disallowed (provided agreement in writing is available; otherwise,  15 days).

CONSEQUENCES OF NON-PAYMENT WITHIN 15 OR 45 DAYS

1. Compensatory of the Interest: When any buyer is unable to make the payment of the amount to the supplier as needed under Section 15, the buyer is responsible for paying the compound interest with the monthly rests on that amount from the appointed day to the supplier or, according to the case, from the date immediately following the date agreed on, at three times the RBI repo rate.
2. Prohibition of Interest Payments Made as Compensation to MSMEs: The interest payable or paid amount by any buyer under the provision of Section 23 of the MSME Development Act, 2006, will be disallowed.
3. Expenditure Disallowance: Payment for the purchases to the supplier enrolled as a micro or small enterprise will be disallowed when the buyer does not pay within the specified time duration as per Section 15 of the MSME Development Act, 2006, cited above.