In WPO 2896 OF 2022 -CAL HC-  There is no distinction in the Act between MSMEs undertaking Works Contracts and those engaging in other contracts having components of supplying goods or rendering services, and 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: Calcutta High Court
Justice Sabyasachi Bhattacharyya [27-06-2023]

Read More: Hindustan Petroleum Corporation Limited v. The West Bengal State Micro, Small Enterprises Facilitation Council

Simran Singh

New Delhi, June 28, 2023: The Calcutta High Court has stated that the artificial distinction about ‘Works Contracts’ being excluded from the ambit of the Micro, Small and Medium Enterprises Development Act, 2006 did not find a place within the scheme of the MSME Act itself.

The Single Judge Bench of Justice Sabyasachi Bhattacharyya stated the said concept was borrowed from revenue jurisprudence, which had no nexus with the benefits sought to be conferred under the MSME Act. “Importing the said concept in the instant context was beside the point and not apt,” the Bench observed.

The High 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.

“After passing the above judgment, learned counsel for the petitioners seek limited stay of operation of the said judgment and order. Accordingly, the operation of the judgment and order is stayed for a fortnight from date,” stated the Bench.

In the matter at hand, respondent 3 was 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.

A 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.

A question as to maintainability of the said proceeding was raised by the petitioner 1. Initially, 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 14-10-2022, holding 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 question for consideration before the Bench was:

1. Whether the transaction-in-question was a ‘Works Contract’?
2. Whether the Council had jurisdiction to take up the dispute between the parties under Section 18 of the MSME Act?
3. Whether the the writ court had the jurisdiction to decide such issue?

The Bench stated that it was a well-settled law that if no arguable issues of fact were to be decided on evidence, the Writ Court had the authority to decide even questions of fact.  In the present case, 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.

The Court perused the agreement and stated that “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 Bench referred to the case of Kone Elevator India Private Limited v. State of Tamil Nadu and stated that there was no scope to segregate the work and goods supply components in such a contract, since the dominant purpose theory had been deprecated by the Supreme Court in the said judgment. In fact, the petitioner was justified in arguing that the dominant purpose test was erroneously applied by the Council in the impugned order.

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

The Court explored as to whether the MSME Council had jurisdiction in respect of such a works contract referred to the case laws relied upon by the parties and was of the view that “With utmost respect, the six judgments of different High Courts, although having persuasive value, have not taken a correct view of the applicability of the MSME Act to works contracts. The proposition laid down in Kone Elevator (supra) was in an entirely different context than the MSME Act and has been misinterpreted in the context of the said Act.”

The Bench stated that on a comprehensive reading of Kone Elevator (Supra) it was revealed that the same was entirely in the context of the interpretation of Article 366 (29-A) of the Constitution of India, as introduced by the 46th Amendment of 1982. The fulcrum of the adjudication in the said judgment was the interpretation of the Clause (29-A) of Article 366, in the context of taxing statutes.

The Court stated that 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 perused the Statement of Objects and Reasons of the MSME Act which 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 globalisation area. “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 Court stated that projecting such purpose, 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 stated that it could not be gainsaid that there were several benefits provided in the Act for such enterprises. Even a resolution under Section 18 was commenced, scientifically, by an endeavour of conciliation, followed by arbitration. “Sub-section (5) of Section 18 of the MSME Act stipulates that every reference made under the Section would be decided within a period of 90 days from the date of making such a reference. That apart, as rightly contended by learned counsel, the Council is comprised of experts having domain expertise in the field, which would also facilitate comprehensive and expeditious disposal of such disputes. ”

The Court stated that it was undisputed that MSMEs had been identified on the anvil of such enterprises being micro or small enterprises or medium enterprises, engaged in providing or rendering services or in the manufacture or production of goods pertaining to any nature specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, and which had filed a memorandum within the contemplation of Section 8(1) of the MSME Act.

“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.”

“We also have to keep in mind that whereas 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” and stated 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.

The Court stated that the principle of Kone Elevator (supra) was erroneously applied by several High Courts in the judgments cited by the petitioner. The correct proposition of law, in the Court’s opinion, was 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.

“Even a thorough scrutiny of Section 2(n)(iii) clearly reveals that the benefit intended under the Act it to be given to suppliers, who include any company, by whatever name called, registered or constituted under any law for the time being in force and engaged in selling goods produced by micro or small industries and rendering services which are provided by such enterprises. Thus, there is nothing to debar such 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. ”