Micro Small & Medium Enterprises Development Act Is Not Applicable To Work Contracts Even With Elements Of Supply In It: Andhra Pradesh High Court

Brief facts of the case

The question in the writ petitions was about the applicability of the Micro Small and Medium Enterprises Development Act, 2006 to the contracts entered into by the contractors with the petitioners'-Steel plant and the consequences thereof.

The senior counsel for petitioner Mr. V. Ravinder Rao contended that although there was an element of supply in certain aspects of the contract, the essential work that was being executed by the contractor-respondent was civil construction/erection or also called works contract. He pointed out that these contracts are not a standalone supply contracts or service contracts and therefore MSMED Act did not apply.

The counsel for respondent Mr. Sri C.V. Mohan Reddy and Ramachandra Rao Gurram submitted that the petitioners- Steel Plant had given benefits to the contractors at the time of tender itself, recognized their status as a small scale industry by waiving the security deposit, cost of tender papers, etc. Furthermore, the respondent contractors were all registered under MSMED Act. If a purposive interpretation was given to the provisions of the Act, it would be clear that the purpose of the enactment was to facilitate the development and enhancement of MSMED.

Issues of Law

The essential issues that arose for consideration was:

1. whether the contractors who were the successful tenderers for certain works awarded by the petitioner can invoke the provision of MSMED Act for redressal of their grievances?

2. Whether such contracts can be called 'service' contracts under MSMED Act?

Finding of the Court

The court looked into the facts of one of the lead cases. The work in question was relocation of New Steel Yard and Civil Associate works with sub-orders as civil and structural works; modular furniture work; supply of water system works, electrical, telecom, Lan-datacom & Air-conditioning works; erection, testing, & commissioning of water system works, electrical, Air-conditioning works etc.

The value of the work was Rs. 11,96,84,455/-. A reading of the agreement showed that the tender was referred to as a contractor only and not a supplier and there was an arbitration clause for resolution of disputes. The court also observed that the supply work was essentially limited to Rs. 1.49 crores only. Thus, predominant part of the work was civil and structural work only. Supply element was a small part.

The court relied on Commissioner of Central Excise & Customs Kerala v. Larsen & Tubro (2016) in which the term "works contract" was explained:

"The additional obligations in the contract would not alter the nature of contract so long as the contract provides for a contract for works and satisfies the primary description of works contract. Once the characteristics or elements of works contract are satisfied in a contract then irrespective of additional obligations, such contract would be covered by the term "works contract".

The Court examined the purpose and intent of the Act and was of the opinion that the services that were referred to under the MSMED Act could not be treated as every service that is rendered. The services referred to must have a direct connection with the manufacture and production of goods.

Therefore, Justice D.V.S.S. Somayajulu held that the work under MSMD Act would not apply to work contracts which were awarded by the Vishakapatnam Steel Plant by a process of tender. Some element of supply was involved in these works but that by itself was not enough for the Court to hold that the stand of the respondents was correct.

On the issue of whether the facilitation Council have the jurisdiction to entertain the dispute, the Court observed that:

"once this Court holds that the Act does not apply; the facilitation council also does not have the jurisdiction to entertain and decide this sort of dispute. It means that the subject matter is wholly outside its power or totally foreign to its ambit. Therefore, the petitioners are fully within their rights in raising the issue and seeking a decision by this Court. It is an admitted case that the petitioners have appeared under protest before the Facilitation Council. Once a party appears before the Court or a Tribunal and raises an issue about the jurisdiction of the said Tribunal, it cannot be said that they have submitted to its jurisdiction. They are appearing under protest."

Furthermore, placing reliance on Silpi Industries v. Kerala State Road Transport Corporation (2021), the Court observed that to claim the benefits under MSMED Act, a memorandum has to be submitted before entering into the contract of supply of goods and services.

Thus, the court allowed the writ petition as the MSMED ACT was not applicable to the contract. because of two reasons: contracts were work contracts with an element of supply and not mere supply and service contracts and facilitation council did not have jurisdiction as memorandum under the Act was not filed before entering into the contract.  

Case Title: RASHTRIYA ISPAT NIGAM LIMITED, VISAKHAPATNAM STEEL PLANT v. THE UNION OF INDIA , and connected matters

Citation: 2022 LiveLaw (AP) 74

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