Accounting treatment of delayed interest under MSMED Act 2006

CA Kamal Garg 29 Apr 2024 28,347 Views 0 comment Print CA, CS, CMA | Articles, Featured

Accounting treatment of interest payable by buyer entities for delayed payments to Micro, Small and Medium enterprises as required under the provisions of the MSMED Act, 2006

The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) mandates timely payments from buyers to suppliers. Delays incur interest, but can this be waived? Explore the accounting nuances herein.

Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) provides that:

where any supplier, supplies any goods or renders any services to any buyer,
the buyer shall make payment therefor on or before:

(i) the date agreed upon between him and the supplier in writing or,

(ii) where there is no agreement in this behalf, before the appointed day.

Proviso to section 15 provides 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.

Section 2(b) defines “appointed day” to mean the day following immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

Explanation.—For the purposes of this clause,—

(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 15 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;

(ii) “the day of deemed acceptance” means, where no objection is made in writing by the buyer regarding acceptance of goods or services within 15 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.

1. Date from which and rate at which interest is payable and recovery of amount due

Where any buyer fails to make payment of the amount to the supplier, as required under section 15, 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 compound interest with monthly rests 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 three times of the bank rate notified by the Reserve Bank – Section 16.

Section 17 which is titled as “Recovery of Amount Due”, further provides that for any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the amount with interest thereon as provided under section 16.

2. Can the right to interest for delayed by waived by the Supplier

The preamble to MSMED Act reads as under:

“An Act to provide for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto.”

Supreme Court in Kotak Mahindra Bank Limited vs Girnar Corrugators Pvt. Ltd CA 6662 of 2022, held that the intention of the legislature is clear as the overriding provision is for a particular set of delayed payments recovery mechanism provided under MSMED Act which is also in consonance with object and purpose of the MSMED Act. Sections 15 to 23 of the MSMED Act only provide for special mechanism for adjudication of the dispute along with enforcing certain other contractual and business terms on the parties such as time limit for payments and interest in case of delayed payments.

Waiver is the abandonment of a right which normally every body is at liberty to waive. A waiver is nothing unless it amounts to release. It signifies nothing more than an intention not to insist upon the right. It may be deduced from acquiescence or may be implied. But an agreement to waive an illegality is void on the grounds of public policy and would be unenforceable – Waman Shriniwas v R. B. & Co. Ltd. AIR 1959 SC 689.

This signifies that the right to interest for delayed payment as stipulated in Section 16 of the MSMED Act, 2006 can be waived by the Supplier. Note that ‘right to waive the interest’ is different from ‘right to invoke or sue for recovery of the amount due including such interest, the latter not being waived by the buyer. Moreover, if the supplier waives the right and consequently the buyer does not pay such interest, it cannot be called as ‘offence’ under the law.

As noted earlier, the MSMED Act is providing only a special mechanism for adjudication of the dispute along with enforcing certain other contractual and business terms on the parties such as time limit for payments and interest in case of delayed payments but is nowhere prohibiting the right to waive the interest.

3. Accounting treatment of interest payable by the buyer entity due to delayed payment to the MSME supplier, in case where the MSME supplier has agreed to waive the interest payable

The accounting treatment of interest payable by the buyer entity due to delayed payment to the MSME supplier, in case where the MSME supplier has agreed to waive the interest payable can be analysed by referring to Accounting Standard 29 (“AS 29”) or Indian Accounting Standard 37 (“Ind AS 37), as the case may be, depending upon whether the supplier is an AS compliant or Ind AS compliant entity.

Accounting Standard 29 states that	Indian Accounting Standard 37 states that
A provision is a liability which can be measured only by using a substantial degree of estimation.	A provision is a liability of uncertain timing or amount.
A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.	A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
An obligating event is an event that creates an obligation that results in an enterprise having no realistic alternative to settling that obligation.	An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation. A legal obligation is an obligation that derives from: (a) a contract (through its explicit or implicit terms); (b) legislation; or (c) other operation of law. A constructive obligation is an obligation that derives from an entity’s actions where: (a) by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and (b) as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.
A contingent liability is: (a) a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or (b) a present obligation that arises from past events but is not recognised because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or (ii) a reliable estimate of the amount of the obligation cannot be made.	A contingent liability is: (a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or (b) a present obligation that arises from past events but is not recognised because: (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or (ii) the amount of the obligation cannot be measured with sufficient reliability.
A provision should be recognised when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised.	An entity shall not recognise a contingent liability. A contingent liability is disclosed, unless the possibility of an outflow of resources embodying economic benefits is remote.
An enterprise should not recognise a contingent liability. A contingent liability is disclosed, unless the possibility of an outflow of resources embodying economic benefits is remote.

Now the moot question arises is whether the interest for delayed payment as enshrined in Section 16 results in ‘provision’ or ‘contingent liability’ in terms of AS 29 or Ind AS 37, as the case may be.

Undoubtedly, due to Section 16 of the MSMED Act, 2006, the obligating event has triggered upon the Buyer; but the obligating event by and within itself does not call upon the Buyer to pay the interest ‘automatically’ on happening of the triggering event especially when the Supplier has agreed to waive such interest. Such waiver thus has an ‘alleviating impact’ upon such obligating event.

Hence, in author’s view the following situations may be considered:

S. No.

Situation

AS 29

Ind AS 37

Supplier waived the interest absolutely without any terms and conditions

The probability of outflow is remote. Hence, there is no need for creating ‘provision’ or disclosing ‘contingent liability’

Supplier waived the interest but with some terms and conditions such as (say) for next few years the buyer has to maintain ‘n’ business transactions with the Supplier

The supplier needs to assess the probability of buyer or the supplier himself not adhering to such ‘terms and conditions’ consequent upon to which the supplier then may invoke ‘recovery right’ under section 17 of the MSMED Act, 2006.

If say in Year 1, the probability of non-adherence is remote then there is no need to create ‘provision’ or disclose ‘contingent liability’ at the reporting date; but say in Year 2 the probability of non-adherence is more likely than not then ‘provision’ needs to be created or if say in Year 2 is possible or reliable estimate cannot be made then the same needs to be disclosed as ‘contingent liability’

If say in Year 1, the probability of non-adherence is remote then there is no need to create ‘provision’ or disclose ‘contingent liability’ at the reporting date; but say in Year 2 the probability of non-adherence is more likely than not then ‘provision’ needs to be created or if say in Year 2 is possible or amount of the obligation cannot be measured with sufficient reliability then the same needs to be disclosed as ‘contingent liability’

4. Conclusion

Considering the working capital management policies of the buyer companies/ entities and the regulatory requirements of MSMED Act for making the stipulated scheduled payments to the suppliers, an imbalance may be created within the operating cycle and the profitability. The buyer companies/ entities need to tread carefully while evaluating the analysis made in this write up.