Himachal Pradesh HC Upholds ₹55 Crore MSME Arbitral Award, Says 180-Day EM-II Filing Not Mandatory [Read Order]

Himachal: The Himachal Pradesh High Court has upheld an arbitral award of Rs. 55.18 crores in favor of an MSME supplier, holding that filing of the Entrepreneurs Memorandum Part-II (EM-II) within 180 days under the MSMED Act is not mandatory for micro and small enterprises, and that a fresh cause of action arose when the buyer first denied payment liability, rendering the reference within limitation.

The court of Justice Sandeep Sharma examined whether an MSME supplier must register under Section 8 of the MSMED Act within 180 days to invoke arbitration, and whether a reference filed nine years after supplies were made was barred by limitation.

The court heard CARBC No. 6 of 2018 filed by the Controller of Stores, Northern Railway, challenging an arbitral award dated 05.03.2018 that directed payment of Rs. 4,80,35,154 as principal plus Rs. 50,38,09,370 as interest, totaling Rs. 55,18,44,524 to M/s CBM Industries Pvt. Ltd.

CBM Industries registered with the District Industries Centre, Nahan on 22.12.2004 and obtained permission for production effective 30.04.2005. In May 2007, Northern Railway issued purchase orders for the supply of certain items. CBM supplied the materials without any objection to quality.

However, in June/July 2007, the Controller of Stores stopped payments against purchase orders—including for already supplied materials—alleging that the materials were supplied at much higher rates. Vigilance proceedings were initiated and later handed over to the CBI for investigation.

The CBI investigated but found no evidence of corruption or higher rates. The CBI Court accepted the closure report on 07.01.2012, specifically stating that there was no evidence of criminal conspiracy or misuse of official position.

After closure, CBM made repeated representations between 05.11.2012 and 21.02.2014 seeking release of payments but received no response. On 05.05.2015, CBM filed an online complaint through CPGRAMS on the PM Portal. For the first time, on 02.09.2015, Northern Railway denied payment, stating that “appropriate action will be taken once investigation is brought to logical conclusion.”

On 01.10.2016, CBM made a reference to the MSEFC under Section 18 of the MSMED Act. The Facilitation Council appointed a sole arbitrator on 06.03.2017. Northern Railway challenged the appointment through CWP No. 967/2017, but the petition was disposed of as infructuous on 11.09.2018 after the arbitrator passed the award.

Northern Railway challenged the award primarily on two grounds:

1. CBM did not register under Section 8(1) of the MSMED Act within the stipulated 180 days from the Act’s commencement (02.10.2006), and therefore could not be termed a “supplier”; and
2. the reference was filed nine years after the cause of action allegedly arose in June 2007 when supplies were made, making it hopelessly time-barred.

Mr. Vir Bahadur Verma, Senior Panel Counsel for Northern Railway, relied on Silpi Industries vs. Kerala SRTC and Sonali Power Equipments vs. MSEB, arguing that registration prior to contract is mandatory and the Limitation Act applies to MSME arbitrations.

Mr. Sunil Mohan Goel, Senior Advocate for CBM Industries, countered that CBM had registered with the DIC on 22.12.2004 and commenced production on 30.04.2005, well before the purchase orders in 2007. Filing EM-II within 180 days was not mandatory. On 01.08.2007, the Ministry of MSME clarified that for micro and small enterprises, filing EM was voluntary. Fresh cause of action arose only on 02.09.2015 when payment was first denied.

Justice Sandeep Sharma elaborated on the limited scope of Section 34 review, citing Supreme Court precedents establishing that courts do not sit in appeal over arbitral awards and may interfere only on limited grounds—violation of fundamental policy, patent illegality, or public policy concerns.

On the registration issue, the court noted that Section 8’s proviso states that any person who established a small-scale industry before the Act’s commencement and obtained a registration certificate “may at his discretion” file the memorandum within 180 days.

Critically, Justice Sharma found:
“On 1.8.2007, the Ministry of Micro, Small and Medium Enterprises… clarified that for micro and small enterprises and for medium enterprises rendering services, there is no limitation of 180 days… and filing of EM is voluntary.”

The court quoted the Entrepreneurs Memorandum (Part-II) Data on MSME Sector, which states:
“Filing of EM-II is discretionary for micro, small and medium enterprises… However, it is mandatory for medium enterprises engaged in manufacture….”

Justice Sharma held that EM-II filing within 180 days was not a mandatory requirement for CBM and that the award suffered from no infirmity.

The court endorsed the Allahabad High Court’s view in Uttar Haryana Bijli Vitran Nigam Ltd. vs. P.M. Electronics Ltd., which held that in the absence of material establishing mandatory filing, the requirement cannot be enforced.

On limitation, the court held that because investigation remained pending until the filing of the closure report, CBM could not have invoked MSME arbitration earlier.

The court observed that after the closure report, CBM made representations but received no response, leading to the CPGRAMS complaint on 05.05.2015. It was only on 02.09.2015 that Northern Railway formally denied payment, giving rise to a fresh cause of action.

The court found that Northern Railway’s reply of 02.09.2015 did not reject the claim on limitation grounds and instead suggested the claim was still under consideration.

Justice Sharma further noted that Northern Railway itself decided on 29.12.2017 to unilaterally appoint an arbitrator to determine the quantum of payment, indicating acknowledgment of the dispute as on 02.09.2015.

The court reiterated that an arbitral award cannot be interfered with merely because it is alleged to be erroneous or illegal upon reappraisal of evidence.

The petition was dismissed as devoid of merit.

Mr. Vir Bahadur Verma, Senior Panel Counsel, appeared for the petitioner.

Mr. Sunil Mohan Goel, Senior Advocate, argued the matter for the respondent and was briefed by Mr. Vibhu Anshuman, Mr. Prateek Kr. Srivastava, and Mr. Vipul Sharda of Ares Law Offices.

Case Title: Controller of Stores, Northern Railway vs. M/s CBM Industries Pvt. Ltd. and Another

[Read Order]