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A clear judicial divergence has emerged on whether works contracts fall within the MSMED Act’s protective framework — the majority view across High Courts excludes them, but the Calcutta High Court has challenged this consensus with purposive reasoning rooted in the Act’s beneficial character.
A works contract is a composite contract that involves both the supply of goods and the provision of services as a single, integrated and indivisible transaction. It is characterised by its composite nature, where both components are inseparable parts of one contractual obligation. The concept applies to various composite contracts including engineering, procurement, and construction contracts. The fundamental distinction between a works contract and an ordinary supply or service contract lies in this composite and indivisible character, which often results in permanent integration with immovable property.
Sections 15, 16, and 18 of the MSMED Act establish a framework for resolving disputes and protecting micro and small enterprises from payment delays. However, these provisions are triggered only when a supplier “supplies goods” or “renders services” as explicitly stated in Section 15. Works contracts, by their very nature, bundle both supply and service as a single transaction rather than as separate standalone activities. Courts have consistently ruled that works contracts cannot be artificially separated into their components for the purpose of claiming MSMED Act protection. The Allahabad High Court in Rahul Singh v. Union of India [2017 SCC OnLine All 3579] held that a works contract is “essentially an indivisible contract” which “forms a completely different and distinct genre” from a contract for supply of goods or provision of services. The Delhi High Court in TATA Power Company Limited v. Genesis Engineering Company (2023 SCC OnLine Del 2366) applied these principles to supply and installation contracts, holding that disputes from works contracts are not amenable to the jurisdiction of the MSME Facilitation Council. The Bombay High Court in P.L. Adke v. Wardha Municipal Corporation (2021 SCC OnLine Bom 13986) upheld this view.
The Calcutta High Court in Hindustan Petroleum Corporation Limited [WPO No. 2896 of 2022] challenged the majority consensus with persuasive reasoning. The Court observed that the MSMED Act is beneficial legislation enacted to facilitate promotion, development and enhancement of competitiveness of micro, small and medium enterprises. Principles of interpretation of beneficial legislation mandate a liberal and purposive construction. The Court’s most compelling argument is that the cases relied on by the majority (the Kone Elevator and Larsen & Toubro line) dealt with taxation statutes focused on the nature of the transaction for tax levy purposes. In contrast, the MSMED Act’s focus should be on the nature of the enterprise seeking protection, not on dissecting individual transactions.
The anomaly is stark: entities executing works contracts are permitted to register as MSMEs, but upon registration, they are denied the very benefits that registration is meant to confer. This defeats the Ease of Doing Business principles and creates legal uncertainty. The MSMED Act does not distinguish between MSMEs undertaking works contracts and those engaged in other contracts. Such distinction, if intended by the legislature, should have been expressly incorporated. Until the Supreme Court resolves the divergence, works-contract MSMEs remain vulnerable — without access to MSME Facilitation Councils and the faster dispute resolution they provide.
