EM-II Filing Held Directory and Limitation in MSME Arbitrations Tied to First Clear Denial of Payment: Commentary on Controller of Stores, Northern Railway v. M/s CBM Industries Pvt. Ltd. & Anr.

1. Introduction

The Himachal Pradesh High Court’s decision in Controller of Stores, Northern Railway v. M/s CBM Industries Pvt. Ltd. & Anr., CARBC No. 6 of 2018 (decided on 20 November 2025, per Sandeep Sharma, J.) is a significant contribution to the law governing:

the status of Micro and Small Enterprises (MSEs) as “suppliers” under the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”);
the applicability and computation of limitation in proceedings under Section 18 of the MSMED Act; and
the extremely narrow scope of judicial interference with arbitral awards under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

At its core, the case concerns a micro/small enterprise supplier which had supplied goods to Northern Railway in 2007, but whose payments were withheld for years owing to vigilance and CBI investigations. The enterprise eventually invoked the statutory machinery under the MSMED Act and secured a very substantial arbitral award (principal plus massive statutory interest). Northern Railway challenged this award under Section 34.

The High Court dismissed the challenge, laying down two particularly important propositions:

For micro and small enterprises, filing the Entrepreneurs’ Memorandum Part-II (EM–II) within 180 days of commencement of the MSMED Act is not mandatory. EM–II filing is directory and voluntary; an enterprise with prior DIC registration and later EM–II can still qualify as a “supplier” under Section 2(n) and invoke Section 18.
For limitation in MSME arbitrations, where payments are withheld due to pending vigilance/CBI proceedings and there is no clear refusal to pay, the cause of action is treated as accruing from the first unequivocal denial of payment (here, a 2015 communication), not from the original “appointed day” in 2007 when payment first became due.

Additionally, the judgment is a detailed reiteration of the Supreme Court’s jurisprudence restricting intervention under Sections 34 and 37 of the Arbitration Act, reinforcing that arbitral awards are not to be re-opened as if on appeal.

2. Factual Background and Procedural History

2.1 The supplier and its registration

Respondent No. 1, M/s CBM Industries Pvt. Ltd., registered itself as an industrial unit with the District Industries Centre (DIC), Nahan, District Sirmaur on 22 December 2004.
It was granted permission to start production of traffic safety products (TS indicator boards, road pavement markers, signage etc.) with effect from 30 April 2005.

The MSMED Act came into force on 2 October 2006. The State of Himachal Pradesh framed the Himachal Pradesh Micro and Small Enterprise Facilitation Council Rules, 2007 on 12 October 2007.

CBM applied for Entrepreneurs’ Memorandum Part-II (EM–II) on 10 March 2008, which was granted on 23 October 2008. The EM–II certificate referred back to the earlier DIC registration date (30.04.2005) as the commencement of production.

2.2 The contracts and stoppage of payment

In May 2007, Northern Railway (through the Controller of Stores) issued various purchase orders to CBM for supply of its products.
CBM supplied the materials; there is no dispute that supplies were made and accepted, and no quality objection was raised contemporaneously.
In June/July 2007, the Controller of Stores issued instructions to stop payment against the purchase orders (including for supplies already made) on the allegation that materials had been supplied at much higher rates.
Vigilance proceedings were initiated and subsequently the matter was handed over to the CBI, which registered multiple regular cases.

2.3 The CBI closure and post-investigation correspondence

The CBI ultimately did not find criminal material to substantiate the allegations and filed closure reports in the CBI Court.
By order dated 7 January 2012, the CBI Court accepted the closure report, holding there was no evidence of criminal conspiracy or misuse of official position.
From November 2012 to February 2014, CBM addressed several representations to Northern Railway seeking release of its payment, but no effective action followed.
On 5 May 2015, CBM lodged an online complaint through CPGRAMS on the PM’s portal regarding stoppage of payment.
On 2 September 2015, the Controller of Stores sent a detailed response, refusing to release payment on the ground that “appropriate action will be taken once investigation is brought to logical conclusion”, effectively denying payment.
On 3 December 2015, another communication from the railway administration indicated that it did not find it a fit case to release payment or withdraw cancellation of purchase orders, and suggested that CBM could resort to arbitration.

2.4 Reference to MSEFC and arbitral award

On 1 October 2016, CBM made a reference to the Micro and Small Enterprises Facilitation Council (MSEFC), Himachal Pradesh under Section 18(1) of the MSMED Act.
The Council first attempted conciliation as mandated by Section 18(2), but the dispute could not be settled.
On 6 March 2017, invoking Section 18(3), the Council appointed Mr. George, retired District & Sessions Judge, as Sole Arbitrator.
The Arbitrator issued notices on 17 March 2017 and conducted proceedings, culminating in an award dated 5 March 2018 (published 19 March 2018).

The Arbitrator allowed CBM’s claim substantially and passed the following key directions:

CBM was held entitled to recover Rs. 4,80,35,154/- (principal) plus Rs. 50,38,09,370/- (interest) up to 28.02.2018, totalling Rs. 55,18,44,524/-.
CBM was further held entitled to continuing compound interest at the rate stipulated in Section 16 of the MSMED Act (three times the RBI bank rate, with monthly rests) from 01.03.2018 till the date of the award and thereafter till realisation.
Costs of Rs. 50,000/- (arbitration fees) and Rs. 1,00,000/- (lump sum litigation expenses) were also awarded.

2.5 Challenge under Section 34

Northern Railway challenged the award under Section 34 of the Arbitration Act, primarily on grounds of:
- Limitation: that the claim was time-barred as supplies ended in May 2007 and the Section 18 reference was made only on 1.10.2016.
- Lack of MSME “supplier” status: that CBM was not a “supplier” under Section 2(n) at the time of the contracts because it filed its EM–II long after the 180-day period contemplated in Section 8 and after the contracts had been performed.
Northern Railway also earlier filed CWP No. 967 of 2017 to challenge the appointment of the Arbitrator and the reference to MSEFC, but that writ petition was later disposed of as infructuous after the arbitral award had already been passed.

3. Summary of the Judgment

The High Court dismissed the petition under Section 34 and upheld the arbitral award. The Court’s core conclusions were:

Extremely limited scope under Section 34: The Court reiterated that it cannot re-appreciate evidence or sit in appeal over an arbitral award. Interference is permissible only on narrowly defined grounds such as conflict with the “public policy of India” or “patent illegality” going to the root of the matter. The petitioner had not even specifically pleaded public policy or patent illegality.
CBM is a “supplier” under the MSMED Act:
- Although Section 8 speaks of filing the memorandum within 180 days, for micro and small enterprises EM–II filing is voluntary and not time-bound.
- The Court relied on a 1 August 2007 notification issued by the Ministry of MSME and a document titled “Entrepreneurs Memorandum (Part-II) Data on MSME Sector”, which clarified that EM–II filing is discretionary for micro and small enterprises engaged in manufacturing or services, and mandatory only for certain medium enterprises.
- CBM had DIC registration since 2004 and had started production in 2005, before the purchase orders of 2007. Its later EM–II registration related back to that production date.
- Therefore, CBM met the definition of “supplier” in Section 2(n) and could validly invoke Section 18.
The claim was not barred by limitation:
- The Court accepted that the Limitation Act, 1963 applies to MSME Facilitation Council/Section 18 arbitrations, following the Supreme Court in Silpi Industries v. Kerala SRTC (2021) 8 SCC 710.
- However, it held that the cause of action for arbitration arose not in 2007 when payment first became due, but when Northern Railway for the first time unequivocally refused to release payment, i.e. through letters dated 2.9.2015 and 3.12.2015.
- Since the reference under Section 18 was filed on 1.10.2016 – within three years from such refusal – the claim was within limitation.
No patent illegality or public policy violation: The Court found no error apparent on the face of the award, no misapplication of substantive law, and no departure from the contract or statutory provisions. Thus, the grounds for setting aside under Section 34 were not made out.

4. Detailed Analysis

4.1 Statutory Framework

4.1.1 MSMED Act: delayed payments and dispute resolution

The MSMED Act provides a special regime for ensuring timely payments to micro and small enterprises:

Section 2(b) – “appointed day”: payment becomes statutorily due on the day immediately after 15 days from actual or deemed acceptance of goods/services, unless a shorter written period is agreed, subject to a maximum of 45 days.
Section 15: obliges the buyer to pay on or before the agreed date or, if none, before the appointed day; the agreed period cannot exceed 45 days.
Section 16: if the buyer fails to pay as required by Section 15, the buyer is liable to pay compound interest with monthly rests at three times the bank rate notified by RBI from the appointed day or agreed date.
Section 17: mandates that the buyer must pay the amount due with interest under Section 16.
Section 18: permits any party to a dispute about “any amount due under Section 17” to refer it to the MSEFC. The Council must first attempt conciliation; if unsuccessful, it either itself acts as arbitrator or refers the matter to an arbitral institution. Section 18(4) confers jurisdiction even when the buyer is located anywhere in India, as long as the supplier is within the Council’s jurisdiction.
Section 2(n) – “supplier”: includes a micro or small enterprise which has filed a memorandum with the authority under Section 8(1), and certain government/State corporations dealing with MSE goods.

4.1.2 Section 8 MSMED Act – Entrepreneurs’ Memorandum

Section 8(1) requires a person intending to establish a micro, small or medium enterprise to file a memorandum with the notified authority. The proviso states that a person who established, before commencement of the Act, a small-scale industry and obtained a registration certificate “shall within one hundred and eighty days from the commencement of this Act, file the memorandum”.

On its face, this looks like a time-bound requirement for pre-existing units. However, as we will see, subsequent government clarification treats this requirement as directory for micro and small enterprises.

4.1.3 Arbitration Act – Section 34 and Section 37

Section 34 of the Arbitration Act allows a court to set aside an arbitral award only on limited grounds, including:

incapacity or invalid arbitration agreement;
denial of proper notice or opportunity to present the case;
award beyond the scope of submission to arbitration;
improper composition/procedure of tribunal; or
if the award is in conflict with the public policy of India, which includes fraud/corruption, contravention of the fundamental policy of Indian law, conflict with justice or morality, or patent illegality on the face of the award (domestic awards).

Section 37 provides for appeals against certain orders (including under Section 34), but the appellate court’s jurisdiction is even more narrow than that of the Section 34 court.

4.2 Issues Before the Court

The High Court effectively addressed three clusters of issues:

Scope of interference under Section 34: Could the Court re-interpret the law and re-assess the facts simply because another view was possible?
Supplier status under MSMED Act: Was CBM a “supplier” under Section 2(n) despite filing EM–II long after the 180-day period and after the 2007 purchase orders?
Limitation: Was the reference to the MSEFC in October 2016 time-barred given that the supplies and appointed day fell in 2007?

4.3 Precedents Cited and Their Influence

4.3.1 Scope of review: Supreme Court’s arbitration jurisprudence

The judgment contains an extensive survey of Supreme Court decisions emphasising the minimalist role of courts in reviewing arbitral awards:

K. Sugumar v. Hindustan Petroleum Corp. Ltd., (2020) 12 SCC 539: Reaffirmed that Section 34 jurisdiction is “highly constricted” and that courts must respect party autonomy and arbitral finality, intervening only in cases of arbitral misconduct or legal perversity.
Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd., (2019) 20 SCC 1:
- Courts must not interfere casually or cavalierly.
- Even if an alternative interpretation of facts or contract is possible, the award must be respected unless its perversity goes to the root of the matter.
- Section 34 cannot be equated with a normal appeal.
Parsa Kente Collieries Ltd. v. Rajasthan Rajya Vidyut Utpadan Nigam Ltd., (2019) 7 SCC 236:
- Interpretation of contract is primarily for the arbitrator.
- Courts may interfere only where the arbitrator’s construction is one that no reasonable person could adopt.
Welspun Specialty Solutions Ltd. v. ONGC Ltd., (2022) 2 SCC 382:
- Discussed the meaning of “public policy of India” and reiterated the grounds: fundamental policy of Indian law, interest of India, justice or morality, patent illegality.
- Confirmed that Section 34 aims to balance minimal judicial interference with preservation of arbitral integrity.
ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 and Renusagar Power Co. v. General Electric Co., 1994 Supp (1) SCC 644: classic authorities on the meaning and expansion of “public policy” and “patent illegality” as grounds to set aside awards.
UHL Power Co. Ltd. v. State of Himachal Pradesh, (2022) 4 SCC 116 and MMTC Ltd. v. Vedanta Ltd., (2019) 4 SCC 163:
- Reiterated that Section 34 does not permit re-appreciation of evidence or substitution of the court’s view for that of the arbitrator.
- Jurisdiction under Section 37 is still narrower.
Larsen Air Conditioning & Refrigeration Co. v. Union of India, 2023 SCC OnLine SC 982:
- Parliament intentionally omitted any power to “modify” an award (unlike under the 1940 Act).
- Court’s role is confined to setting aside or remanding in rare circumstances; modification is impermissible.
Konkan Railway Corp. Ltd. v. Chenab Bridge Project Undertaking, (2023) 9 SCC 85:
- Restated that courts under Sections 34 and 37 should not reverse arbitral findings merely because another interpretation is also possible.
- Emphasised that respect for arbitral awards is integral to commercial certainty.
Bombay Slum Redevelopment Corp. (P) Ltd. v. Samir Narain Bhojwani, (2024) 7 SCC 218:
- Stressed the “very restricted” supervisory role of courts over arbitral awards.
- Highlighted that parties who have chosen arbitration instead of traditional courts are entitled to finality, subject only to the narrow grounds in Section 34.
RELIANCE INFRASTRUCTURE LTD. v. STATE OF GOA, (2024) 1 SCC 479:
- Clarified that “patent illegality” is not any illegality, but one that is self-evident on the face of the award.
- An elaborate re-analysis of pleadings and evidence to dredge up errors is impermissible.
S.V. Samudram v. State of Karnataka, (2024) 3 SCC 623:
- Underlined that Section 37 appellate jurisdiction is even more circumscribed than Section 34.
- Cautioned High Courts against treating Section 37 appeals like full-fledged first appeals on facts and law.

The High Court drew heavily on this line of authority to stress that its hands were substantially tied: unless the award was shown to violate the fundamental policy of Indian law, public policy, or exhibit patent illegality, it was bound to uphold the award.

4.3.2 MSME-specific precedents: Silpi Industries and others

On the MSME side, the primary Supreme Court authority relied upon by Northern Railway was:

Silpi Industries v. Kerala State Road Transport Corp., (2021) 8 SCC 710:
- Held that the Limitation Act, 1963 applies to arbitral proceedings under the MSMED Act.
- Emphasised that to invoke Section 18, an entity must qualify as a “supplier” under Section 2(n), which includes having filed the requisite memorandum under Section 8.

The petitioner also relied on Sonali Power Equipments Pvt. Ltd. v. MSEB & Ors., 2025 SCC OnLine SC 1467, to bolster its argument on limitation and registration, but the High Court’s reasoning turned principally on Silpi Industries and statutory interpretation rather than any detailed application of Sonali Power.

In response, CBM relied on the Allahabad High Court’s decision in:

Uttar Haryana Bijli Vitran Nigam Ltd. v. M/s P.M. Electronics Ltd., FAO No. 1519 of 2017 (Allahabad High Court):
- The Court there held, inter alia, that filing the Industrial Entrepreneurs’ Memorandum was not mandatory and that the MSME benefits could not be denied solely for want of such filing.

The Himachal Pradesh High Court endorsed this approach, relying also on executive clarifications issued by the Ministry of MSME.

4.4 Court’s Legal Reasoning

4.4.1 Threshold: narrow scope under Section 34

Before dealing with the merits, the Court underscored that:

It was not sitting in appeal over the arbitral award.
Its role was limited to testing the award against the grounds in Section 34, especially public policy and patent illegality.
It could not re-evaluate evidence or re-interpret the contract merely because Northern Railway suggested a different view.

The Court noted that Northern Railway’s challenge was not framed in terms of public policy or patent illegality. The core complaints were:

The reference under Section 18 was time-barred; and
CBM was not a “supplier” under the MSMED Act.

Thus, unless those contentions revealed a clear violation of statutory provisions or fundamental policy, the award had to be sustained.

4.4.2 Whether CBM was a “supplier” under the MSMED Act

Northern Railway argued:

The MSMED Act came into force on 2.10.2006; relevant Rules in Himachal Pradesh were notified on 12.10.2007.
CBM applied for EM–II on 10.3.2008 and received the certificate on 23.10.2008 – well beyond the 180 days after 2.10.2006 contemplated in Section 8.
Since CBM did not file the memorandum within 180 days and its EM–II was issued after the period of the contract/purchase orders, it could not be treated as a “supplier” and could not invoke Section 18 for those contracts.

The Court rejected this contention for several reasons:

Pre-existing DIC registration and production:
- CBM had registered with DIC on 22.12.2004 and commenced production on 30.4.2005.
- The purchase orders from Northern Railway were issued in May 2007, after CBM was an established small-scale industrial unit supplying similar goods, including to Northern Railway itself.
Interpretation of Section 8 and the 180-day clause:
- While the Section 8 proviso says that pre-Act small-scale industries “shall” file the memorandum within 180 days, the Court noted that this language had been clarified by the executive authorities.
Ministry of MSME Notification dated 1.8.2007:
- The Office of the Development Commissioner (MSME), Ministry of MSME, issued a notification on 1 August 2007, clarifying that for:
  - micro and small enterprises, and
  - medium enterprises rendering services,
  there is no 180-day limitation from 2.10.2006 for filing the Entrepreneurs’ Memorandum (EM).
- Filing of EM–II was expressly described as voluntary for these categories; they could file EM “anytime they decide to do so”.
Entrepreneurs’ Memorandum (Part-II) Data on MSME Sector:
- This official document from the Development Commissioner (MSME) stated:
  “Prior to enactment of the MSMED Act, 2006 there was a system of registration by small-scale industrial units to the DICs. Now, filing of EM–II is discretionary for micro, small and medium enterprise engaged in both manufacturing and services. However, it is mandatory for medium scale enterprise engaged in manufacture or production of goods pertaining to any industry specified in the First Schedule of the IDR Act, 1951.”
- This confirmed that for micro and small enterprises, EM–II was not a mandatory pre-condition.
Reliance on Allahabad High Court precedent:
- The Court cited Uttar Haryana Bijli Vitran Nigam Ltd. v. P.M. Electronics Ltd., where a similar argument based on mandatory filing of IEM/EM was rejected. The Court agreed that in the absence of clear material making EM filing mandatory, such hyper-technical objections should not defeat MSME claims.

Against this background, the Court distinguished Silpi Industries:

The Supreme Court in Silpi held that the seller must be registered under the MSMED Act as on the date of entering the contract in order to invoke Section 18.
In the present case, CBM:
- was already a duly registered small-scale industrial unit with DIC before the MSMED Act came into force;
- had commenced production long before the 2007 purchase orders; and
- later filed EM–II, which referred back to its pre-Act registration date.
Given the Ministry’s clarification that EM–II is voluntary for micro and small enterprises, the Court held that Silpi’s requirement of registration at the time of contract was satisfied on these facts.

Thus, CBM was squarely within the definition of “supplier” under Section 2(n) and could validly make a reference under Section 18. Therefore, the Arbitrator’s assumption of jurisdiction under MSMED Act was not illegal or perverse.

4.4.3 Limitation and accrual of cause of action

Northern Railway’s principal attack was that the claim was hopelessly time-barred:

Supplies took place up to May 2007.
Under Section 15 read with Section 2(b) (appointed day), the latest date for payment would be June 2007.
Therefore, the cause of action arose in 2007, and any reference made in 2016 was filed after more than nine years, beyond the three-year limitation period under the Limitation Act.
Vigilance/CBI investigations do not suspend limitation, nor can an internal letter written in 2015 be treated as restarting limitation.

The Court accepted, as a matter of law, that:

The Limitation Act applies to MSMED proceedings (following Silpi Industries).
In general, where no prior dispute exists, limitation would ordinarily start on the appointed day when payment becomes due under Section 15.

However, on the particular facts, the Court held that:

Pending vigilance and CBI inquiries:
- In June/July 2007, Northern Railway’s vigilance wing ordered stoppage of payment and initiated inquiries, later taken over by the CBI.
- Multiple CBI cases were registered between 2009 and 2010 in relation to alleged overpricing and corruption in purchase matters.
- The CBI’s closure reports were filed in 2011 and finally accepted by the Special Judge (PC Act), CBI-2, New Delhi on 7.1.2012, finding no evidence of criminal conspiracy or misuse of office.
- During this period, the non-payment was explicitly linked to ongoing criminal investigations and not presented as a final repudiation of liability.
Post-closure conduct and representations:
- After the closure report was accepted, CBM addressed repeated representations (5.11.2012–21.2.2014) seeking release of payment.
- Northern Railway did not send any communication clearly and finally rejecting the claim on limitation or any other ground during this period.
First categorical denial in 2015:
- In response to CBM’s CPGRAMS complaint dated 5.5.2015, the Controller of Stores sent a detailed reply on 2.9.2015, for the first time denying release of payment.
- The letter stated that suitable action would be taken “once investigation is brought to logical conclusion”, effectively signalling that the administration was not willing to release payment in the then-existing circumstances.
- A further letter dated 3.12.2015 reiterated that the administration did not find it a fit case for releasing the payment or withdrawing cancellation of purchase orders, and suggested arbitration.
Accrual of right to apply for arbitration:
- The Court treated 3.12.2015 (referring also to 2.9.2015) as the date when CBM’s right to apply for arbitration accrued under Section 21 of the Arbitration Act and Article 137 of the Limitation Act (“any other application” – three years).
- Until that point, the dispute had not crystallised into a clear and final rejection of CBM’s claims; CBM was, in effect, being told that payment was linked to the outcome of ongoing investigations and internal processes.
Reference within time:
- CBM filed the Section 18 reference on 1.10.2016, within one year of the first clear denial (2.9.2015/3.12.2015), and certainly within the three-year period prescribed by Article 137.
- Therefore, the reference was well within time and not barred by limitation.

The Court also noted:

By sending the 2.9.2015 communication and subsequently contemplating unilateral appointment of an arbitrator (decision dated 29.12.2017), Northern Railway itself treated that period as the cut-off for initiating dispute resolution.
At no stage prior to 2015 had Northern Railway communicated that the claim was refused specifically on the ground of limitation.
On the contrary, the 2.9.2015 letter acknowledged the existence of CBM’s claims, even if to deny payment pending investigations.

Given this factual matrix, the Court held that the Arbitrator’s finding on limitation was a plausible and reasonable view and certainly did not amount to patent illegality or a violation of the fundamental policy of Indian law. Consequently, interference under Section 34 was impermissible.

4.4.4 Confirmation of the award and quantum

On the merits of the monetary award:

There was no dispute that supplies had been made under valid purchase orders.
No credible material was shown to suggest that the Arbitrator awarded amounts beyond the scope of the purchase orders or in violation of the MSMED Act.
The Arbitrator had correctly applied Sections 15, 16 and 17 of the MSMED Act, which leave no discretion on the rate and nature of interest (compound interest at three times RBI bank rate with monthly rests).
The large interest component (over Rs. 50 crores as against approximately Rs. 4.8 crores principal) was a direct statutory consequence of prolonged non-payment and the statutory mandate; it was not the result of any arbitrary discretion.

The Court emphasised that:

Even if the award seemed harsh in economic terms, so long as it faithfully applied the statutory scheme, it could not be termed illegal or perverse.
An arbitral award is not to be interfered with merely because a court might have reached a different conclusion or might have moderated interest if it were trying the case originally.

Finding no contravention of Section 34 grounds, the Court dismissed the petition and affirmed the award in toto.

4.5 Impact and Future Implications

4.5.1 For micro and small enterprises (suppliers)

The judgment is a strong affirmation of the protective intent of the MSMED Act:

It confirms that EM–II filing is not a trap for micro and small enterprises. Provided the unit is otherwise duly registered (e.g., with the DIC) and falls within the economic thresholds, delay in filing EM–II does not automatically deprive it of MSME benefits.
Enterprises that had operated pre-MSMED Act and later regularised themselves under the new regime can still claim “supplier” status for contracts entered during the transitional period, so long as they were functionally micro/small units at the relevant time.
MSMEs can be reassured that government buyers cannot escape statutory interest and Section 18 jurisdiction by hyper-technical arguments about the timing of EM–II filings when government’s own guidelines describe EM–II as voluntary for micro/small enterprises.

4.5.2 For government and large institutional buyers

The decision is a cautionary signal to public sector buyers:

Withholding payment for years under the pretext of vigilance or CBI investigations can have enormous financial consequences under the MSMED Act, due to mandatory compound interest at thrice the RBI bank rate.
Officers must clearly record and communicate decisions on MSME claims. Indefinite “consideration” without a clear acceptance or rejection can later be construed as keeping the cause of action alive, thereby extending the window within which MSMEs may seek Section 18 remedies.
The judgment suggests that where non-payment is linked to pending criminal investigations, courts may view the cause of action as crystallising only upon first clear and final denial, not the original due date. This increases exposure to prolonged interest accrual.

4.5.3 For arbitration law and practice

From an arbitration perspective, the judgment is another reaffirmation that:

Section 34 challenges cannot be used to re-litigate the merits under the guise of public policy or patent illegality.
High Courts are expected to defer heavily to arbitral awards, especially when the arbitrator has applied statutory provisions directly (as with Sections 15–17 MSMED Act).
Government departments should anticipate that courts will show little sympathy to attempts at diluting statutorily protected remedies in arbitration, particularly when the legislature has clearly favoured MSMEs.

4.5.4 Potential areas of debate

The judgment may, however, generate some debate in two respects:

Limitation and investigative delays:
- One could argue that the Limitation Act does not, by itself, provide that pending investigations suspend or defer accrual of cause of action.
- The Court’s reasoning rests on a nuanced factual finding: that until 2015 there was no clear refusal and CBM was led to expect that payment would be considered after investigations. Other courts might be more restrictive in similar circumstances.
Retrospective application of EM–II registration:
- Some prior judicial approaches have treated MSME registration as relevant only prospectively (i.e., the enterprise gets MSME benefits only for contracts entered after registration).
- This decision, relying on official clarifications, tilts towards a more purposive and supplier-friendly interpretation, especially for pre-Act and transitional units.

Nonetheless, given the Court’s reliance on Ministry notifications and established Supreme Court doctrine on minimal arbitration interference, its approach is firmly anchored in existing legal policy favouring MSMEs and arbitration.

5. Complex Concepts Simplified

5.1 “Supplier”, DIC registration and EM–II

A “supplier” under Section 2(n) MSMED Act is essentially:
- a micro or small enterprise; and
- which has filed the prescribed memorandum (EM–I/EM–II) with the competent authority.
Before MSMED Act, small-scale units registered with DICs. After the Act, EM–II replaced or supplemented this system.
Government clarifications make EM–II voluntary for micro and small enterprises, mandatory only for certain medium units.
Therefore, where a unit:
- is clearly small (by investment/turnover criteria),
- has DIC registration and is in production, and
- later files EM–II,
it will usually be treated as a “supplier” even for contracts entered after production but before EM–II issuance, especially if EM–II refers back to the original production date.

5.2 “Appointed day” and statutory MSME interest

The “appointed day” (Section 2(b)) is the day immediately after the expiry of 15 days from the day of acceptance (or deemed acceptance) of goods/services.
If the parties agree in writing to a payment date, that governs, but the agreed period cannot exceed 45 days from acceptance.
If payment is not made by the appointed day/agreed date, the buyer must pay:
- compound interest (interest on interest),
- with monthly rests (interest calculated and added every month),
- at three times the RBI bank rate (a very high rate by any standard).
This is automatic; the arbitrator or court has no discretion to reduce the rate in a way that contradicts Section 16.

5.3 “Public policy of India” and “patent illegality”

An award can be set aside if it is in conflict with the “public policy of India”. This has been limited by the Supreme Court to:
- violation of the fundamental policy of Indian law (e.g., ignoring binding statutes or precedents);
- conflict with the interests of India;
- conflict with justice or morality (e.g., fraud, corruption); and
- patent illegality on the face of the award (for domestic awards).
“Patent illegality” means:
- an obvious, self-evident error, such as ignoring a clear statutory provision or contractual clause;
- not an error that requires detailed re-analysis of evidence or complex inferential reasoning to detect.
A mere alternative or arguably better view on facts or law is not enough to invoke public policy or patent illegality.

5.4 Limitation and “accrual of cause of action”

The Limitation Act prescribes time limits (usually three years for money claims) from when the “cause of action arises”.
In payment disputes, this is generally when:
- payment is contractually due and not made; or
- there is a clear, unequivocal refusal to pay.
If parties keep negotiating and the debtor neither clearly admits nor clearly refuses, the exact accrual date may become fact-sensitive.
Article 137 (residual provision) applies to “applications” such as those initiating arbitration; the limitation period is three years from when the right to apply accrues.
Here, the Court treated the first decisive denial in 2015 as that accrual point, given the unusual context of pending criminal investigations and ongoing internal consideration.

6. Conclusion

The Himachal Pradesh High Court’s decision in Controller of Stores, Northern Railway v. CBM Industries Pvt. Ltd. is a robust affirmation of both:

the pro-MSME objectives of the MSMED Act, and
the finality of arbitral awards under the Arbitration and Conciliation Act.

On the MSME front, the Court clarifies that:

EM–II filing within 180 days of the Act is directory rather than mandatory for micro and small enterprises, consistent with official government clarifications.
A small-scale unit with pre-existing DIC registration and later EM–II can still be a “supplier” entitled to Section 18 remedies for contracts entered in the interim.

On limitation, the Court accepts the applicability of the Limitation Act to Section 18 arbitrations but adopts a fact-sensitive approach:

Where payments are withheld explicitly due to ongoing vigilance/CBI inquiries and the buyer never clearly repudiates liability, the cause of action may be treated as accruing only upon the first clear and final denial of payment.
In such circumstances, even a long delay measured from the original appointed day may not render the claim time-barred.

On arbitration law, the decision is firmly aligned with the Supreme Court’s modern jurisprudence:

Courts under Section 34 cannot function as appellate forums.
They may intervene only when the award is patently illegal, contrary to the fundamental policy of Indian law, or otherwise in conflict with the narrowly construed notion of public policy.
Absent such defects, even large, seemingly harsh awards that faithfully apply statutory commands – such as the MSMED Act’s stringent interest regime – must be upheld.

In the broader legal landscape, this judgment strengthens the accountability of public authorities and large buyers to honour MSME payments promptly, reinforces the statutory deterrent of high compound interest, and signals continued judicial deference to arbitral outcomes. It will likely be cited as an important authority on:

the interpretation of Section 8 and Section 2(n) of the MSMED Act (EM–II and “supplier” status);
the computation of limitation in MSME-related arbitrations, especially where payment is withheld pending investigations; and
the narrow contours of Section 34 review of arbitral awards.

EM-II Filing Held Directory and Limitation in MSME Arbitrations Tied to First Clear Denial of Payment: Commentary on Controller of Stores, Northern Railway v. CBM Industries Pvt. Ltd.