Calcutta High Court: MSME Act Does Not Distinguishes Between Works Contracts & Contracts Having Supply Components or Rendering Services

Calcutta High Court: MSME Act Does Not Distinguishes Between Works Contracts & Contracts Having Supply Components or Rendering Services

The Calcutta High Court by its single judge Justice Sabyasachi Bhattacharyya has observed that there is no distinction whatsoever in the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) between MSMEs undertaking works contracts and those engaging in other contracts, having components of supplying goods or rendering services. Such distinction cannot be artificially incorporated into the Act by the judiciary, which would be interfering with the specific and deliberate intention of the legislature.

In the present case, the respondent 3 claimed to be a Micro, Small and Medium Enterprise (MSME). A contract was entered into between the petitioner 1 and respondent 3 by virtue of which the respondent 3 was to supply the components and erect pipeline and accessories at the Hazaribag LPG Plant of petitioner 1.

Subsequently, certain dispute arose between the parties regarding such transaction consequent to which respondent 3 approached before the West Bengal State Micro, Small Enterprises Facilitation Council (Council) under Section 18 of MSME Act for resolution.

The petitioner 1 raised the question as to maintainability of the said proceeding. Originally, the Council proceeded to decide the matter without deciding the question of maintainability. As such, the petitioners moved a writ petition wherein a Co-ordinate Bench directed that the matter may be heard afresh on the question of maintainability.

In compliance with such direction, the Council passed a reasoned order dated 14 October, 2022, observing that the Council did have jurisdiction to adjudicate the matter in case of contract between the parties having Arbitration Clause as well as in case of ‘Works Contracts’.

The following were the moot questions which arose before the High Court:

(i) Whether the transaction-in-question was a ‘Works Contract’?

(ii) Whether the Council had jurisdiction to take up the dispute between the parties under Section 18 of the MSME Act?

(iii) Whether the writ Court had the jurisdiction to decide such issue?

The Court affirmed that it was a well-settled law that if no arguable issues of fact were to be decided on evidence, the Writ Court has the authority to decide even questions of fact.

Averting to the present case, the Court noted that a specimen was annexed to the Tender Document itself which was captioned as the specimen of ‘general terms and conditions of works contract.’ Clause 1.1 thereunder also stipulated that this was a contract for ‘execution of job’ as defined in the Tender Document.

On perusal of the agreement the judge discerned, “Notwithstanding the sub-division of the documents into sections, Clause 1.6 provides that every section, part or volume shall be deemed to be supplementary or complementary to each other and shall be read as a whole. The clear understanding stipulated therein was that the contractor shall do/perform a work and/or provide facilities for the performance of the work, doing or performing or providing the facilities at the cost and expenses of the contractor, not liable to be paid or reimbursed by the owner.”

The Court held that the petitioner was justified in arguing that the dominant purpose test was erroneously applied by the Council in the impugned order.

Apropos to the issue that whether the present agreement was a ‘Works Contract’ or not, the Court noted the provisions of the contract were in unambiguous terms and indicated that the same was a ‘Works Contract’ and no factual question requiring evidence was required to be decided at all. Hence, the Court held that the matter ought not to be unnecessarily relegated to some other authority but could very well be decided by the Writ Court.

“Since there was a dispute previously as regards the dominant purpose being the test for deciding whether a works contract tantamount to a contract for sale, which would be taxable by the States, the subsequent change of law settles such position and included work contracts within the ambit of the State Taxing Legislations pertaining to sales tax,” the Court observed.

Pertinently, the Court highlighted the Statement of Objects and Reasons of the MSME Act provided that a growing need was being felt to extend policy support for the small enterprises so that they were enabled to grow into medium ones, adopt better and higher levels of technology and achieve higher productivity to remain competitive in a fast globalization area.

In this regard, the Court remarked, “Thus, as in most developed and many developing countries, it is necessary that in India too, the concerns of the entire small and medium enterprises sector were addressed and the sector was provided with a single legal framework. As of then, the medium industry or enterprise is not even defined in any law."

The judge emphasized that the MSME Act was promulgated for facilitating the promotion and development and enhancing the competitiveness of small and medium enterprises and for matters connected therewith or incidental thereto, as featured in the very Preamble of the Act. In such context, the purposive interpretation of all provisions of the said Act ought to aid the extension of such benefits tom the MSMEs and not to deprive such enterprises of the benefits of the Act.

The Court reckoned that, “There is no distinction whatsoever in the Act between MSMEs undertaking works contracts and those engaging in other contracts, having components of supplying goods or rendering services. Such distinction cannot be artificially incorporated into the Act by the judiciary, which would be interfering with the specific and deliberate intention of the legislature.”

The judge vociferously emphasized that it must be kept in mind that while the interpretation of a taxing statute in the context of Article 366 of the Constitution is on the premise of the nature of a transaction, in a beneficial legislation such as the MSME Act, the pivot of adjudication is not the particular transaction taxed but the nature of the enterprise which seeks the benefit of the statute.

The judge asserted that the applicability of the MSME Act was to be tested on the anvil of the eligibility of the enterprise, that was, whether it came within the ambit of the said Act to get its benefits, as opposed to Article 366 (29A) of the Constitution and taxing statutes in general, where the test was whether the particular transaction or activity undertaken by the assessee was taxable.

Thus, the Court opined that the correct proposition of law, would be that, once an enterprise, otherwise coming within the contemplation of the Act, was registered under Section 8(1), the same had to attract the provisions of the MSME act, including Section 18 of the same, vesting authority on the Council to resolve disputes in that regard.

It was concluded by the Court that there is no debar for a company, which is registered under Section 8(1) of the MSME Act, engaging not only in selling goods produced by micro or small enterprises but also rendering services which are provided by such enterprises, or anyone of the two, or both together.

The Court clarified that the said concept was borrowed from revenue jurisprudence, which had no nexus with the benefits sought to be conferred under the MSME Act.

Accordingly, the Court was of the opinion that the Council had correctly assumed jurisdiction under Section 18 of the MSME Act to resolve the dispute between the parties and such exercise was well within the authority of the Council, as sanctioned by the Statute.

Hence, there was no scope of interference with the impugned order of the Council holding that it had jurisdiction to resolve the dispute between the parties.