Supreme Court clarifies interest liability under the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993: Snehadeep Structures vs. MSSIDC (2024)

Date of the Judgment: March 5, 2024

Citation: 2024 INSC 201

Judges: Justice Sanjiv Khanna and Justice Dipankar Datta

Can a contractual agreement between a buyer and supplier override the statutory provisions for interest on delayed payments? The Supreme Court of India recently addressed this question in a dispute between Snehadeep Structures Pvt. Limited (SSPL) and the Maharashtra Small Scale Industries Development Corporation Ltd. (MSSIDCL). The core issue revolved around determining the date from which interest is payable on delayed payments to small-scale industrial undertakings under the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993, and the applicability of the 120-day payment limit introduced by a 1998 amendment. The judgment was delivered by a bench of Justice Sanjiv Khanna and Justice Dipankar Datta.

Case Background

The case involves a dispute between Snehadeep Structures Pvt. Limited (SSPL), a supplier, and the Maharashtra Small Scale Industries Development Corporation Ltd. (MSSIDCL), a buyer. The dispute arose from a supply/purchase order dated March 30, 1995, where MSSIDCL was to pay SSPL after the goods were delivered and accepted by the consignee, Maharashtra State Electricity Board (MSEB), and after MSSIDCL received payment from MSEB. The core of the dispute lies in determining the applicability of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993, and its subsequent amendments.

Timeline:

Course of Proceedings

The Division Bench of the High Court set aside the arbitral award dated 30.06.2003. The Supreme Court was hearing an appeal against this order of the High Court.

Legal Framework

The Supreme Court referred to Sections 3, 4, and 5 of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993.

• Section 3: “Liability of buyer to make payment.- Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day: Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed one hundred and twenty days from the day of acceptance or the day of deemed acceptance.” This section mandates that a buyer must pay the supplier by the agreed date, or if no date is agreed, before the ‘appointed day’. The proviso limits the payment period to 120 days from the acceptance or deemed acceptance date.
• Section 4: “Date from which and rate at which interest is payable.- Where any buyer fails to make payment of the amount to the supplier, as required under section 3, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay interest to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at one-and-half time of Prime Lending Rate charged by the State Bank of India.” This section specifies that if a buyer fails to pay as per Section 3, they are liable to pay interest at 1.5 times the Prime Lending Rate of the State Bank of India, from the appointed day or the date agreed upon.
• Section 5: “Liability of buyer to pay compound interest.- Notwithstanding anything contained in any agreement between a supplier and a buyer or in any law for the time being in force, the buyer shall be liable to pay compound interest (with monthly interest) at the rate mentioned in section 4 on the amount due to the supplier.” This section mandates the buyer to pay compound interest on the amount due to the supplier at the rate specified in Section 4.

The court also referred to the definition clauses in Section 2 of the 1993 Act:

• Section 2(b): “appointed day” means the day following immediately after the expiry of the period of thirty days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier; This defines the ‘appointed day’ as 30 days after the acceptance or deemed acceptance of goods or services. It also defines ‘day of acceptance’ and ‘day of deemed acceptance’.
  • Section 2(b)(i): “the day of acceptance” means,- (a) the day of the actual delivery of goods or the rendering of services; or (b) where any objection is made in writing by the buyer regarding, acceptance of goods or services within thirty days from the day of the delivery, of goods or the rendering of services, the day on which such objection is removed by the supplier;
  • Section 2(b)(ii): “the day of deemed acceptance” means, where no objection is made in writing by the buyer regarding acceptance of goods or services within thirty days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;
• Section 2(c): “buyer” means whoever buys any goods or receives any services from a supplier for consideration; This defines a ‘buyer’ as someone who purchases goods or receives services from a supplier for consideration.
• Section 2(f): “supplier” means an ancillary industrial undertaking or a small scale industrial undertaking holding a permanent registration certificate issued by the Directorate of Industries of a State or Union territory and includes,- (i) the National Small Industries Corporation, being a company, registered under the Companies Act, 1956 (1 of 1956); (ii) the Small Industries Development Corporation of a State or a Union territory, by whatever name called, being a company registered under the Companies Act, 1956 (1 of 1956).” This defines a ‘supplier’ to include small-scale industrial undertakings and certain corporations.

The court noted that the proviso to Section 3 and the amendment to Section 2(f), which included the National Small Industries Corporation and the Small Industries Development Corporation of a State or a Union Territory in the definition of “supplier,” were introduced by Act No. 23 of 1998, effective from August 10, 1998.

Arguments

The arguments in this case revolved around the interpretation of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993, particularly regarding the applicability of the 120-day payment limit introduced by the proviso to Section 3, and the determination of the date from which interest is payable. The arguments are summarized below:

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the following issues were discernible from the judgment:

1. Whether the proviso to Section 3 of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993, which limits the payment period to 120 days, is applicable to contracts entered into before its enactment on August 10, 1998.
2. How to calculate and compute interest under the Act, specifically determining the day of acceptance or the day of deemed acceptance.
3. Whether under Section 5, interest as compounded is to be treated as a principal amount.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court did not cite any specific cases or books in its judgment. The authorities considered were the provisions of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993.

Judgment

The Supreme Court dismissed the appeal, upholding the High Court’s decision to set aside the arbitral award. The court clarified that while the contractual relationship between MSSIDCL and SSPL remains unchanged, the applicability of the proviso to Section 3 of the 1993 Act and the calculation of interest would require further examination.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Section 3 of the 1993 Act: The Court interpreted the section and its proviso to determine the liability of the buyer to make payments and the 120-day time limit.
• Section 4 of the 1993 Act: The Court used this section to determine the date from which interest is payable and the applicable interest rate.
• Section 5 of the 1993 Act: The Court considered this section in the context of whether compound interest should be treated as principal.
• Section 2(b) of the 1993 Act: The Court used the definitions of “appointed day”, “day of acceptance”, and “day of deemed acceptance” for calculating interest.
• Section 2(c) of the 1993 Act: The Court used the definition of “buyer” to understand the parties’ relationship.
• Section 2(f) of the 1993 Act: The Court used the definition of “supplier” to understand the parties’ relationship.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to correctly interpret and apply the provisions of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993. The court focused on ensuring that the statutory provisions related to payment timelines and interest on delayed payments were properly considered. The court also emphasized the importance of the date of acceptance or deemed acceptance for calculating interest. The court also considered the fact that the arbitrator had not considered the issue of whether the compound interest under Section 5 should be treated as principal amount.

Fact:Law Ratio

The Supreme Court’s reasoning was structured around the following logical flow:

The Court did not provide any alternative interpretations, rather focused on the correct interpretation of the law.

The Supreme Court quoted the following from the judgment:

• “The contract had, therefore, postulated and the parties had agreed that MSSIDCL would be liable to pay SSPL only after the goods are delivered and accepted by the consignee, namely, Maharashtra State Electricity Board and on the payment being received by MSSIDCL from the MSEB.”
• “Even if, for the sake of argument, it is to be accepted that the proviso to Section 3 would be applicable in respect of supplies or payments due or payable after 10.08.1998, the issue with regard to calculation and computation of interest requires examination and determination of the day of acceptance or the day of deemed acceptance, as interest would be payable only after a period of 120 days from such date.”
• “We would, however, record that the award having been set aside, the provisions of Section 43(4) of the Arbitration and Conciliation Act, 1996 would come into operation and would accordingly apply.”

There was no majority or minority opinion in this case. Both the judges agreed on the same reasoning.

Key Takeaways

• The 120-day payment limit under the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993, is a significant factor in determining interest liability.
• The date of acceptance or deemed acceptance of goods is critical for calculating interest on delayed payments.
• Contractual clauses that contradict the provisions of the Act, particularly concerning payment timelines, may be overridden by the Act.
• The issue of whether compound interest should be treated as principal amount needs to be considered.

Directions

The Supreme Court directed that any adjudication for payment of interest under Sections 3 to 5 of the 1993 Act, including the question relating to application of the proviso, would require ascertainment of the appointed date, the date of acceptance or the deemed date of acceptance. The Court also clarified that MSEB need not be a party to the proceedings.

Development of Law

The judgment clarifies that the 120-day limit introduced by the proviso to Section 3 of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993, modifies contractual agreements between buyers and suppliers. It also emphasizes the importance of determining the date of acceptance or deemed acceptance for calculating interest. The court did not lay down any new principle of law but clarified the existing position.

Conclusion

The Supreme Court dismissed the appeal, upholding the High Court’s decision to set aside the arbitral award. The court emphasized the importance of accurately calculating interest on delayed payments to small-scale industries, particularly concerning the 120-day payment limit introduced by the 1998 amendment to the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993. The court did not provide a definitive ruling on the retrospective application of the proviso to Section 3 but clarified the importance of determining the date of acceptance or deemed acceptance for calculating interest. The Court also noted that the issue of whether compound interest under Section 5 should be treated as principal amount needs to be considered.