Applicability Of The Msmed Act, 2006 To Works Contracts: A Critical Analysis Of Judicial Divergence

INTRODUCTION:

The applicability of the Micro, Small and Medium Enterprises Development Act, 2006 ("MSMED Act") to a works contract has emerged as a contentious legal issue with significant ramifications for the construction and contracting industry in India. As infrastructure development accelerates across the country and contractual disputes proliferate between enterprises, a fundamental question has come to the fore: Whether Works Contract fall within the ambit of the MSMED Act's protective framework? A study of the prevailing jurisprudence highlights divergence. The consistent position emerging from several High Court decisions across the country is that works contracts, by their very nature, fall outside the ambit of the MSMED Act. Notwithstanding the same, the Hon’ble High Court of Calcutta has adopted a contrary position, holding that MSME Council does have jurisdiction to adjudicate certain disputes in respect of Works Contract. This Article interrogates the reasoning advanced across these judicial pronouncements, basis which the majority view rests and also scrutinizes the contrary view advanced by the Calcutta High Court. The article further advocates the need for an effective mechanism to resolve this judicial divergence and restore consistency to the law governing Works Contract under the MSMED Act.

I.              WHAT IS A WORKS CONTRACT: DEFINITION AND LEGAL FRAMEWORK

A works contract is a composite contract that involves a combination of both - supply of goods and provision of services. It is characterized by its indivisible nature, where both components are inseparable parts of a single contractual obligation. The Hon’ble Supreme Court in “Kone Elevators India Pvt. Ltd. Vs State of Tamil Nadu and Ors. 2014 [SSC OnLine SC 430] while laying down the characteristics of a Works Contract, held that a Works Contract, though indivisible by nature, is bifurcated by legal fiction into a sale of goods component & a labour/service component. The Court further held that the term “Works Contract” under Article 366 (29A) of the Constitution must be construed to broadly encompass all genres of Works Contract, and that once a contract satisfies the essential characteristics of a Works Contract, any additional obligation, cannot alter its fundamental nature. The concept has been applied to various composite contracts including engineering, procurement and construction contracts.

The fundamental distinction between a works contract and a normal contract for supply of goods or services lies in the composite and indivisible nature of works contracts thereby, involving both supply of materials and provision of services, often resulting in permanent integration with immovable property. In contrast, a normal contract separately involves either goods or services, is clearly classifiable, and typically relates to movable property or standalone services.

Works contracts, by their very nature, are composite agreements that bundle together both the supply of goods and the provision of services as a single, integrated transaction, not as separate supply of goods or rendering of services.

II.           WORKS      CONTRACTS      AND                      MSMED                ACT:     THE EXCLUSIONARY VIEW

Chapter V of the MSMED Act establishes a comprehensive framework for resolving disputes and protecting micro and small enterprises from disputes pertaining to delayed payments. Particularly, Section 17 & 18 provides for recovery of amount due and references to the Micro and Small Facilitation Council as a mandatory precursor to Arbitral Proceedings.

However, the invocation of these provisions is triggered only when a supplier either "supplies goods" or "renders services," as explicitly mentioned in Section 15.

Similarly, Section 16 provides for payment of interest on delayed amounts specifically for "goods supplied or services rendered," which, by its plain language, excludes works contracts. Even Section 18 permits suppliers to approach the Micro and Small Enterprises Facilitation Council (MSEFC) only for recovering amounts which exclusively pertain to transactions involving either the supply of goods or the rendering of services in their standalone form.

A critical dimension of this exclusionary view is found in judicial refusal to divide the Works Contract into its constituent elements of goods supply and service provision. The Courts have consistently ruled that Works Contract, is an indivisible composite contract which involves supply of material, application of labour & provisions of skill and services in an inseparable manner which cannot be artificially separated or divided into their service and goods components.

An authoritative exposition of the exclusionary view is found in the Judgment of the Division Bench of the Allahabad High Court in Rahul Singh v. Union of India [2017 SCC OnLine All 3579] which held:

"A reconstruction of Section 11 bears out that it empowers the Central Government to formulate preference policies in respect of

(a) procurement of goods produced by MSE and (b) services provided by a MSE. The words 'services provided' as used in the said provision must necessarily be read as disjunctive to the expression good produced. It cannot possibly be disputed that a 'works contract' forms a completely different and distinct genre than a contract for supply for goods or for that matter a contract for providing services. A works contract is essentially an indivisible contract which may involve not just the supply of goods but also the provision of labour and service."

Proceeding further, the Division Bench also held that the MSMED Act contains no legislative warrant for deconstruction of a Works Contract into its constituent elements for the purpose of attracting its protective provisions, as follows:

"No provision of the 2006 Act bids us to deconstruct a works contract into elements relating to supply of goods and provision of service. Neither section 11 nor the Public Procurement Policy, 2012 appears to envisage a composite and distinct category of contract such as a work contract actually is".

The principle enunciated by the Allahabad High Court was further elaborated by the decision of the Hon’ble Delhi High Court in TATA Power Company Limited v. Genesis Engineering Company [2023 SCC OnLine Del 2366]. In this case, the Hon’ble Court, applying these principles of composite contracts, held that Work Orders in question fell within the category of composite contracts involving both supply of goods and the element of labour and service. Having so characterized the contract, the Court held that: “dispute/claims arising from Works Contract are not amenable to the jurisdiction of Facilitation Council constituted under the MSME Act".

This view has been further affirmed by the Hon’ble Bombay High Court in a series of decisions including Sterling Wilson Pvt. Ltd vs Union of India and Ors [2017 SSC OnLine Bom 6829] and P.L. Adke v. Wardha Municipal Corporation [2021 SCC OnLine Bom 13986].

Notably, majority of the High Courts that have subscribed to the exclusionary view, have grounded their interpretation of the term “Works Contract”, in Supreme Court’s reasoning in Kone Elevator (supra). Notwithstanding this convergence of judicial opinion, the Hon’ble Calcutta High Court, in a distinct line of decisions, has declined to subscribe to this exclusionary view and has, drawing upon a distinct reading of the same decision, arrived at the contrary conclusion that Works Contract does fall within the protective ambit of the MSMED Act.

III.        THE JUDICIAL DIVERGENCE: THE CASE FOR INCLUSION OF WORKS CONTRACT WITHIN THE AMBIT OF THE MSMED ACT

The Hon’ble Calcutta High Court's Judgment in Hindustan Petroleum Corporation Limited vs The West Bengal State, Micro, Small Enterprise Facilitation Council and Ors. [2023 SSC OnLine Cal 1700] and its subsequent ruling in Board of Major Port Authority for the Syama Prasad Mukherjee Port v. Marinecraft Engineers Private Limited [2025 SSC OnLine Cal 4836] challenged the prevailing consensus by advancing compelling reasoning in favour of inclusion of Works Contract.

The Calcutta Court, at the outset, affirmed that the MSMED Act is unequivocally a piece of beneficial legislation enacted "to provide for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises" and that its provisions must accordingly be interpreted in a manner consistent with this foundational purpose.

The most cogent argument advanced by the Calcutta High Court in support of its dissenting position lies in the contextual delimitation of the Supreme Court’s decision in Kone Elevator (supra). The Court observed that the question before the Supreme Court in that case was not the interpretation of the MSMED Act, 2006, rather the ratio was formulated in context of the interpretation of Article 366 (29-A) of the Constitution of India, which falls within the domain of taxing statutes.

It is a well settled principle of statutory interpretation that taxing statutes are to be construed strictly and literally. It is in adherence to this principle of strict construction that the Supreme Court in the case of Kone Elevator, arrived at its characterization of Works Contract for the purposes of Article 366 (29-A). The Calcutta High Court drew a crucial distinction between

this approach of strict construction, which is appropriate to taxing statutes, and the liberal and purposive construction that must govern the interpretation of beneficial legislation, such as the MSMED Act, with a view to facilitating the fullest advancement of its intended benefits to the beneficiaries under the statute.

IV.         THE CRITIQUE

It is pertinent to note that entities executing works contracts are permitted to register as MSMEs, but upon registration, they are denied the very benefits that the registration is meant to confer. This defeats the Ease of Doing Business principles and creates legal uncertainty. The Andhra Pradesh High Court in “Dalapathi Constructions vs State of Andhra Pradesh [2022 SSC OnLine AP 2013]” opined that once an entity is registered as a micro or small enterprise under Section 8(1) of the MSMED Act, all the provisions of the Act, including Section 18, which vests jurisdiction on the Council to adjudicate disputes become operative.

Not to mention that the MSMED Act does not, in any of its provisions, draw a distinction between MSMEs undertaking a Works Contract and those engaged in other contracts having components of supplying goods or rendering services. Such a distinction, if intended by the legislature, should have been expressly incorporated in the statutory text. To artificially incorporate such distinction through judicial interpretation, in absence of any legislative mandate to that effect, amounts to an impermissible interference with the specific and deliberate intention of the legislature.

The MSMED Act was promulgated with the purpose of facilitating the promotion and development of enhancing the competitiveness of micro and small enterprises and the same is reflected from the statement of objects and reasons of the MSME Act, which provides that across the world, the emphasis has now shifted from “Industries” to “Enterprises”, and that policy support must be extended to all small enterprises to help them grow and to remain competitive in a fast globalization era. This foundational objective, as reflected in the Statement of Object and reasons of the MSMED Act, mandates a purposive interpretation of the Act’s provisions so as to extend its benefits to all registered MSMEs.

The majority view’s reliance upon Kone Elevator (Supra), a decision rendered in the context of the constitutional characterization of Works Contract for the purpose of the taxing power under Article 366 (29-A) of the Constitution, as binding for the purpose of MSMED Act represents a misapplication of legal principles developed in an entirely distinct context.

In our considered opinion, the majority view taken cannot be construed as imposing a blanket exclusion of Works Contract from the purview of the MSMED Act. Rather, the question of jurisdiction ought to be determined with reference to the facts and nature of the dispute at hand, and not solely on the basis of classification of the contract. Since no uniform formula can be applied for determining the nature of the contract, the issue of jurisdiction must remain dependent upon, and be determined in accordance with, the particular facts and circumstances presented.

In a practical scenario, construction contractors, particularly small and medium enterprises, face chronic payment delays from public sector clients. The denial of access to MSME Facilitation Councils removes a vital recourse for addressing such delays. This undermines the very objectives of the MSME promotion and Ease of Doing Business initiative that the legislature sought to advance through the enactment of the MSMED Act, 2006.

V.            CONCLUSION

The judicial exclusion of works contracts from the MSMED Act, based primarily on taxation jurisprudence, represents a misapplication of legal principles developed in an entirely different context. A holistic consideration of the legislative framework, policy objectives underlying the MSMED Act, and the applicable principles of statutory interpretation all converge in support the inclusion of works contracts within the protective ambit of the MSMED Act.

The view adopted by the Calcutta High Court, premised upon a liberal and purposive interpretation of the MSMED Act as a beneficial statute, and drawing a principled distinction from the view upheld across by other High Courts is more consonant with the spirit of the MSMED Act, 2006.

In the interest of legal certainty and consistency with statutory purpose, there is a pressing need for a pronouncement by the Supreme Court laying down a clear and uniform rule on the applicability of the MSMED Act to works contracts.

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