Dispute Resolution & Arbitration - Arbitration & Dispute Resolution

Gujarat State Civil Supplies Corporation Ltd v. Mahakali Foods Pvt Ltd (Unit 2) & Anr

Background facts

In the present case, seven appeals varying in facts but revolving around a common question of law were heard together, with the lead case filed by Gujarat State Civil Supplies Corporation Ltd (Appellant) against Mahakali Foods Pvt Ltd (Respondent).
The Appellant, by way of a First Appeal, had challenged the Order dated August 20, 2018 passed by the Commercial Court, Ahmedabad in Commercial Civil Misc. Application No. 54/2016 filed under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) read with Section 19 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), whereby the Commercial Court had confirmed the award made by the Madhya Pradesh Micro and Small Enterprises Facilitation Council, Bhopal, holding that the provisions of MSMED Act, 2006 had an effect overriding the provisions of the Arbitration Act and that the Facilitation Council at Bhopal had the jurisdiction to adjudicate upon the disputes between the parties.
The Gujarat High Court (HC) vide Order dated November 13, 2019, dismissed the said First Appeal filed by the Appellant under Section 37 of the Arbitration Act.
Aggrieved by the Order passed by HC, the Appellant filed an Appeal before the Supreme Court (SC).

Issues at hand?

Whether Chapter V of the MSMED Act would override the provisions of the Arbitration Act?
Whether a party to a dispute of any amount due under Section 17 of the MSMED Act would be obliterated of the rights under MSMED Act to refer to the council if an independent arbitration agreement as per Section 7 of the Arbitration Act exists between the parties?
Whether the Micro and Small Enterprises Facilitation Council which had initiated the Conciliation proceedings under Section 18(2) of the MSMED Act would be entitled to act as an arbitrator despite the bar contained in Section 80 of the Arbitration Act?

Decision of the Court

At the outset, the SC delved into the legislative history and the objects and reasons as well as the relevant provisions of the MSMED Act and of the Arbitration Act. The SC opined that the MSMED Act was enacted to provide for facilitating the promotion and development and enhancing the competitiveness of the MSME entities, to provide for a dispute resolution mechanism to avail the remedies provided for in the MSME Act and to extend statutory support to such entities. On the other hand, the Arbitration Act was enacted to consolidate laws relating to arbitration and comprehensively cover international and domestic arbitration as well as conciliation and encourage settlement of disputes, while limiting the supervisory role of the Courts.
With respect to the first issue, the SC considered the statutory interpretation of the maxim 'leges posteriores priores contrarias abrogant' i.e., the later laws shall abrogate earlier contrary laws and the Rule of Construction contained in the maxim 'generalia specialibus non derogant' i.e., general laws do not prevail over special laws, perused the main objects of both the Acts to determine which one is a special enactment overriding another.
The SC noted the unambiguous language used in the MSMED Act such as the provision on the overriding effect of the MSMED Act and the non obstante clauses in Section 18 of the MSMED Act. Upon examining the entire scheme of Arbitration Act, the HC observed it to be a general law relating to the domestic arbitration, international commercial arbitration and for conciliation. SC noted that it does not specify any specific dispute or specific class or category of persons to which the Act shall apply, as has been specified in the MSMED Act. SC opined that even if the Arbitration Act is considered a special statute, in view of the principle that a law enacted later shall abrogate earlier contrary laws, the MSMED Act would supersede 'any other law for the time being in force', including the Arbitration Act. Thus, SC arrived at the conclusion that the provisions of Chapter V of the MSMED Act, 2006 being a special provision shall override the provisions of the general act i.e., Arbitration Act. While arriving at the said conclusion, SC placed reliance upon the decision in Silpi Industries etc v. Kerala State Road Transport Corporation & Anr¹ , wherein SC held the overriding nature of the MSME Act vis-à-vis the Arbitration Act.
With regards to the second issue, SC held that a private agreement between parties cannot obliterate the statutory provisions and if the statutory mechanism under Section 18 (1) of the MSMED Act is triggered then it would override any other agreement independently entered between the parties in view of the non-obstante clause in Section 18 (1) and (4) of the MSMED Act. Further, SC opined that Sections 15 to 23 of the MSMED Act have an overriding effect as per Section 24 of the MSMED Act as it clarifies when anything inconsistent is contained in any other law for the time being in force. It noted that if a party entitled to avail a remedy under Section 18 (1) of the MSMED Act but cannot because of an independent arbitration agreement between the parties then, the purpose of MSMED Act would get frustrated.
Lastly, the SC examined in detail the issue pertaining to the Facilitation Council acting as a conciliator as well as the arbitrator, which is specifically barred under Section 80 of the Arbitration Act. The SC held that the bar under Section 80 of the Arbitration Act is superseded by the provisions of Chapter V of the MSMED Act, and in view of the overriding effect of the MSME Act over the Arbitration Act, the Facilitation Council having acted as the conciliator can act as an arbitrator in the event the conciliation is unsuccessful.
The SC also analyzed the issue as to who shall be eligible for the recourse under the MSMED Act by interpreting the definition of the word 'supplier' under Section 2 (n) of the MSMED Act. It was held that the recourse will only available under the MSMED Act if the registration of a micro or small enterprise or supplier is obtained before entering into the contract. It further held that if any registration is obtained subsequently the same would have an effect prospectively and would apply to the supply of goods and rendering services subsequent to the registration.

Prolific Research Pvt Ltd v. Deputy Commissioner of Income Tax (DCIT)

Prolific Research Pvt Ltd (Assessee/Appellant) is a company engaged in the business of collecting market research data and thereby conducting surveys/interviews in different countries as per their client's specification for various projects. They receive payments for these services on the basis of per interview conducted.
The Assessee company uses the web portal of NEBU, a Netherland based company, for preparing questionnaires and survey designs. For the said services, the Assessee company paid INR 7,24,268 i.e. € 8790, in 6 instalments to NEBU.
Pursuant to reviewing the Income Tax Returns of the Assessee Company, the Assessing Officer held that the combined reading of the meaning of hoisting charges as claimed by the Assessee and the nature of services rendered by NEBU, made it clear that the services which NEBU renders to its clients are Royalty and Fees for Technical Services as defined under Section 9(1)(vii) of the Income Tax Act, 1961 (Act). Thus, it was held that the Assessee failed to withhold the tax before making payments to NEBU.
The Assessing Officer further held that as per Article 12(5) of the India-Netherlands Double Taxation Avoidance Agreement (DTAA), the consideration paid for the services rendered by NEBU falls within the meaning of 'fees for included services'. Thus, it was held that the Assessee was required to deduct tax. Therefore, the Assessing Officer thereby directed the Assessee Company to pay INR 78,264 and INR 20,279 (aggregating to INR 98,543) towards short deduction of taxes and interest on the same under Sections 201(1) and 201(1A) of the Act.
Aggrieved by the above decision of the Assessing Officer, the Assessee Company filed an appeal before the Commissioner of Income Tax, Ahmedabad (CIT(A)).
The CIT(A) observed that the service rendered by NEBU is a type of included services with regards to web hosting and its future use. It held that since the services rendered by NEBU to the Assessee Company are in nature of Royalty and Fees for Technical Services, the consideration paid to NEBU for rendering such services are also in the nature of Royalty and Fees for Technical Services as per Section 9(l)(vi) and (vii) of the Act as well as per Article 12 of the DTAA. Hence, the CIT(A) held that the Assessee Company was liable to withhold tax and thereby dismissed the appeal and upheld decision of the Assessing Officer.
Aggrieved by this Order, the Assessee Company filed the present appeal before the Income Tax Appellant Tribunal (ITAT).

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