Indian Oil Corporation LTD., Jagatsinghpur vs. M/S. Adarsh Nobel Corporation LTD.,Khurda

The Ld. Counsel for the Petitioner submits that the Purported Award is unenforceable in law being a nullity and is void ab initio on account of lack of inherent juri iction in MSMEFC to adjudicate any disputes arising from the work contract dated 29.11.2017 and it could not have made reference to arbitration as the subject contract dated 29.11.2017 is a work contract. Since the scope of work was indivisible and composite in nature i.e. construction of one number of VR tank on lump sum basis including design, engineering, construction including civil, electrical, instruments, dyke wall all jobs within the dyke wall, works contract forms a completely different and distinct genre than a contract for supply of goods or for that matter a contract for providing services and does not fall within the ambit of the MSMED Act.

It was further strenuously contended that in the present case MSMEFC, Cuttack could not have seisin of the case because the subject matter was wholly foreign to its juri iction. The MSMEFC lacked inherent juri iction over the subject matter of the dispute i.e. work contract and also lacked the juri iction over the parties as the registration of the Award holder/Petitioner under the MSMED Act, 2006 is subsequent to the date of the contract and even beyond the date of termination of the contract.

Per contra, the Ld. Counsel for the Respondent submits that the Opposite Party was registered as an SSE in 2015 and as the contract was entered into and the supplies were made by it after that date, the MSEFC rightly entertained its claim. It is submitted that therefore, there is no lack of inherent juri iction and the present matter may be dismissed.

Furthermore, it is argued that this court ought not to interfere in a matter pertaining to the MSMED Act in exercise of its writ juri iction. The MSMED Act provides a self-contained statutory mechanism, including arbitration under Section 18 and a remedy of challenge under Section 34 of the A&C Act, subject to Section 19’s pre-deposit requirement. The present writ petition is a device to circumvent the mandatory pre-deposit and defeat the legislative scheme intended to protect small enterprises through expeditious enforcement. Even assuming procedural deficiencies, such issues fall within the scope of Section 34, not Article 226. The High Court’s juri iction under Article 226, though wide, should be exercised sparingly, and cannot be invoked to bypass the statutory framework enacted by Parliament. The present Petitioner having withdrawn its Section 34 petition, ought not to be allowed to forum shop. IV. ISSUE FOR CONSIDERATION

Having heard the parties and perused the materials available on record, this court here has identified the following solitary to be determined: A. Whether the present Opposite Party’s registration date as a MSME being after the date of the contract would have any bearing on the matter at hand? B. Whether the present contract is a works contract and if so, could the MSEFC have entertained a claim arising out of a works contract? C. Whether a writ petition under Article 226 of the Constitution of India is maintainable against an order passed by the Micro and Small Enterprises Facilitation Council under Section 18 of the MSMED Act, 2006, when such order is alleged to have been made without inherent juri iction? V. ISSUE A: WHETHER THE PRESENT OPPOSITE PARTY’S REGISTRATION DATE AS A MSME BEING AFTER THE DATE OF THE CONTRACT WOULD HAVE ANY BEARING ON THE MATTER AT HAND?

A perusal of the Act of 2006 would go to show that the said Act has been enacted for the purpose of promotion and development and enhancing the competitiveness of micro, small and medium enterprises. Section 2(m)(g) and (h) defines small enterprise, medium enterprise and micro enterprise on the basis of the classification as given in section 7 of the said Act. A perusal of section 7 of the said Act stipulates when an enterprise would be a micro enterprise, small enterprise and medium enterprise depending upon the investments it has made. Section 8 stipulates the manner in which a registration is be done and for doing so it is required that the said person and the enterprise shall file a memorandum with such authority as may be specified by the State Government under sub-section (4) or the Central Government under sub-section (3) of section 8. Sub-section (2) of section 8 stipulates the form of memorandum, the procedure of its filing and other matters incidental thereto as may be notified by the Central Government after obtaining the recommendation of the Advisory Committee as appointed under section 7(2) of the said Act. In terms of sub-section (3) of section 8 in the case of medium enterprise the memorandum has to be filed before the authority as notified by the Central Government. In terms of sub-section (4) of section 8 of the said Act micro or small enterprises needs to file their memorandums before the authority as notified by the State Government'. The manner in which the registration is to be carried out is in terms with the procedure notified, by the Central Government.

The text of Section 18 is clear and categoric. The words employed herein are “any party to a dispute”. The text, “any party to a dispute”, cannot be read as a “supplier” by adopting a process of interpretation, by first referring to Section 17, then to Sections 15 and 16 and thereafter, in search of the definition of supplier, to Section 2(n) and finally stopping at Section 8 to hold that “any party to a dispute” will only be an Enterprise which is registered under Section 8 of the Act. This meaning- making process to metamorphosis the clear text “any party” to “a supplier” is not the legal method to understand the true meaning of words employed by the legislature. The age-old principle, referred to as the Golden Rule of Interpretation, is that “words of a statute have to be read and understood in their natural, ordinary and popular sense”. [State of A.P. v. Linde (India) Ltd.1; Grid Corpn. of Orissa Ltd. v. Eastern Metals & Ferro Alloys2] The choice of the words “any party to a dispute” in Section 18 of the Act is deliberate. The legislative device of employing

From a plain reading of Section 2(n), it is clear that the definition of a supplier is relatable only to a micro or a small enterprise and does not encompass a medium enterprise. Supplier not only means a micro or small enterprise, “which have filed a memorandum with the authority referred to under sub-section (1) of Section 8”, but also includes : (i) NSIC, (ii) SIDC, and (iii) company, cooperative society, trust or a body engaged in selling of goods produced by micro or small enterprise and rendered services which are produced by such enterprise. In other words, a supplier will also be an entity engaged in selling goods or rendering services, produced or provided by a micro or small enterprise. All such entities, irrespective of filing of the memorandum will be suppliers. Thus, the definition of a supplier encompasses not only those who have filed a memorandum, but also those who have not filed. The reason for keeping the definition is not difficult to imagine. This is still an unorganised industry, growing, evolving and many of them are at start-up levels. The reason for keeping the definition wide is supported by an Expert Committee.

This Court will now examine Section 8 of the Act relied on by the Petitioners to contend that filing of a memorandum by micro, small and medium enterprises is mandatory. Section 8 is extracted herein for ready reference:

Section 8(1)(a) provides that, “a micro or a small enterprise may, at his discretion” and even a medium enterprise engaged in providing or rendering services, also “may at his discretion” file a memorandum with the authority as may be specified by the Government. This important feature of the statute recognising and vesting of the discretion has not been noticed. There is also a logical follow-up to this choice or discretion vested in the micro or small enterprise and the medium enterprise engaged in rendering services for filing a memorandum in sub-section (4) of Section 8 and also proviso (a) to Section 8(1). As the said sub- section (4) of Section 8 relates to micro or small enterprises, the State Government shall by notification, specify the authority with which such micro or small enterprise may file a memorandum. Considering the choice and discretion specifically provided to these enterprises, it becomes very clear that there is no mandatory prescription of filing a memorandum.

There are three clear features in the statutory regime. To start with, Section 18 of the Act does not use the expression “supplier”, instead employs the phrase, “any party to a dispute, may”. This Court has also noted that the definition of the expression “supplier” is not confined to a micro or a small enterprise which has filed a memorandum under Section 8(1) but also includes companies or other entities engaged in selling goods or rendering services by an enterprise. Thirdly, Section 8 grants a discretion to a micro or a small enterprise in filing a memorandum with the authority.

Further, it is noteworthy that a “micro” [Section 2(h)], “small” [Section 2(m)] or “medium enterprises” [Section 2(g)], formation and existence is simply on the basis of their investment as provided in Section 7 relating to classification of an Enterprise. They subsist without any formal “recognition”, “consent” or “registration”. The Act uses the expression filing of a “memorandum”. That is all. That too, at the discretion of the micro and small enterprises. The cumulative account of these four features is compelling and leads us to the conclusion that an application by a micro or a small enterprise to the Facilitation Council under Section 18 cannot be rejected on the ground that the said enterprise has not registered itself in Section 8, much less that on the date of contract, it was not registered under Section 8. 15. This Court is of the considered view that the legislative scheme of the MSMED Act, 2006 does not make registration under Section 8 a condition precedent for invoking the juri iction of the Facilitation Council under Section 18. The classification of enterprises under Section 7 rests solely upon the quantum of investment, and the legal existence of a micro or small enterprise flows from that statutory classification rather than from filing of a memorandum. The use of the phrase “any party to a dispute” in Section 18 is deliberate, and the Court cannot substitute the expression with “supplier” or any other narrower term. In order to hold otherwise would be to rewrite the statute. The discretion vested in enterprises under Section 8 fortifies this view, making it clear that the object of the Act is to extend protection to MSMEs irrespective of whether they have chosen to file a memorandum.

This Court therefore opines that rejection of an application under Section 18 merely on the ground that the enterprise was not registered under Section 8 would amount to a misreading of the statutory framework. Such a narrow interpretation would defeat the very purpose of the Act, which is to provide expeditious redressal of delayed payments to MSMEs, many of which remain in the informal or evolving sector. The wide definition of “supplier” under Section 2(n), encompassing even entities not filing a memorandum, supports this purposive approach. The scheme of the Act thus makes it evident that the Legislature intended to protect micro and small enterprises at all stages of growth, whether registered or not, so long as they fall within the investment thresholds prescribed. Accordingly, this Court holds that an enterprise cannot be denied access to the Facilitation Council under Section 18 on the mere ground of delayed registration as a MSME.

Moreover, in the present case the Opposite Party had filed its memorandum as a Small Scale enterprise on 13.12.2015. It was also holding a valid NSIC Government Purchase Enlistment Certificate on the date of entering into the contract. Therefore, the mere registration as MSME being after the date of the contract would have no bearing on the present matter. However, given the nature of the contract, could the Council have entertained the claim – remains to be discussed. VI. ISSUE B: WHETHER THE PRESENT CONTRACT IS A WORKS CONTRACT AND IF SO, COULD THE MSEFC HAVE ENTERTAINED A CLAIM ARISING OUT OF A WORKS CONTRACT?

Arbitration is often projected as a cost-efficient mechanism for resolving commercial disputes, but in practice, it can be prohibitively expensive for smaller entities. Arbitrator fees, advocate fees, and related administrative expenses make the process burdensome. Micro, small, and medium enterprises (MSMEs), which typically function with constrained budgets, find themselves disadvantaged against large corporations with vast resources. To mitigate this inequity, the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) introduced statutory arbitration under Section 18. This provision empowers MSMEs to approach state Facilitation Councils, which in turn initiate arbitration or conciliation proceedings. A distinctive feature of this framework is the lower fee structure, prescribed by state councils, ensuring affordability for MSMEs. However, an important question arises: can all disputes involving MSMEs be submitted to this special arbitration regime, particularly disputes arising from “works contracts”? The answer, as previous judicial pronouncements reveal, is far from straightforward.

A central point of debate is the precise legal nature of “works contracts.” The term is frequently misinterpreted as being synonymous with construction contracts. However, statutory definitions reveal a broader scope. Under Section 2(119) of the Central Goods and Services Tax Act, 2017, a works contract encompasses agreements for building, fabrication, installation, repair, improvement, or commissioning of movable and immovable property. The definition extends well beyond traditional construction arrangements. Courts have elaborated on this scope in several decisions. In K. Raheja Development Corporation v. State of Karnataka3, the Supreme Court examined the Karnataka Sales Tax Act, which contained a parallel definition. The Court clarified that the ambit of works contracts is “very wide” and cannot be restricted to conventional understanding. This interpretation was later reaffirmed in Larsen & Toubro Ltd. v. State of Karnataka4, cementing the composite nature of such contracts.

The Supreme Court, in Kone Elevator India Pvt. Ltd. v. State of Tamil Nadu5, delivered a landmark judgment on the legal character of works contracts. A Constitution Bench rejected the earlier “dominant nature test,” which had previously been applied to classify contracts based on their predominant purpose. Instead, the Court held that a works contract, once it satisfies statutory characteristics, retains its dual nature irrespective of additional obligations incorporated. Importantly, such contracts are indivisible in reality but deemed divisible by legal fiction into components of goods and services. This reasoning underscores that works contracts are sui generis and cannot be conflated with ordinary contracts for sale or service. The Court also emphasized examining the “substance over form” of agreements, highlighting that the true object

In Kone Elevators (supra), the Supreme Court observed that the main object of the transaction, the prevailing circumstances, and the customary practices of trade provide critical guidance. It stressed that works contracts inherently combine both goods and services, and even where goods predominate, the contract does not lose its character as a works contract. This dual nature complicates their treatment under statutes designed with binary classifications of buyers and sellers, such as the MSMED Act. Unlike pure sale transactions, works contracts defy simple categorization, creating friction with the structure of statutory arbitration under the MSMED Act. Consequently, while MSMEs benefit from preferential treatment in procurement policies, whether these benefits extend to disputes arising out of works contracts remains contentious.

The MSMED Act aims to facilitate growth of small enterprises through preferential procurement. Several government policies grant MSMEs priority in public tenders. However, a practical dilemma arises when such preferences result in award of works contracts. Can an MSME, after receiving such a contract, invoke the MSMED Act’s dispute resolution framework? The Delhi High Court addressed this in Shree Gee v. Union of India6. In that case, Indian Oil Corporation had granted preference to an MSME bidder, but the Court held that the MSME Procurement Policy, 2012, did not apply to works contracts. The Court

A similar stance was taken by the Allahabad High Court in Rahul Singh v. Union of India7. The Court categorically ruled that works contracts fall outside the ambit of the MSMED Act. The case concerned disputes where MSME suppliers attempted to claim benefits under Section 18 of the Act by categorizing works contracts as simple supply transactions. The Court rejected this approach, holding that the MSMED Act is designed to govern buyer-seller relationships of goods and services, not composite works contracts involving both. The Allahabad High Court’s decision reinforced the principle that statutory arbitration under the MSMED Act is restricted and cannot extend to every form of commercial arrangement involving MSMEs. This judgment aligned with the earlier Delhi High Court ruling, thereby strengthening the judicial view that works contracts are misfits under the MSMED Act’s dispute resolution scheme.

The most influential judgment on this question emerged from the Bombay High Court in P.L. Adke v. Wardha Municipal Corporation8. The dispute concerned an MSME contractor who alleged non-payment for work performed under a works contract and sought to invoke arbitration through the MSME Facilitation Council. The High Court,

Following P.L. Adke (supra), several High Courts have consistently refused to extend the MSMED Act’s arbitration provisions to works contracts. The lack of a Supreme Court stay has given Adke (supra) authoritative value across juri ictions. As a result, MSMEs engaged in composite contracts increasingly find themselves excluded from invoking Section 18 arbitration. This trend has narrowed the scope of disputes that Facilitation Councils may adjudicate, relegating MSMEs in works contracts to regular arbitration under the Arbitration and Conciliation Act, 1996. Although the final pronouncement of the Supreme Court in the Adke appeal is awaited, judicial consensus currently treats works contracts as incompatible with the MSMED Act. This prevailing interpretation underscores the judiciary’s cautious approach in extending statutory benefits to categories of contracts not explicitly contemplated under the MSMED Act, even if such exclusion disadvantages small enterprises.

The Bombay High Court revisited this issue in National Textile Corporation Ltd. v. Elixir Engineering Pvt. Ltd.

The dispute concerned contracts for design, fabrication, and commissioning of industrial piping systems. The MSME contractor approached the Facilitation

In National Textile Corporation (supra), the Bombay High Court elaborated that the Facilitation Council’s juri iction is statutory and limited. Works contracts, being distinct in nature, do not fall within this statutory juri iction. The Court distinguished between errors within juri iction and the absence of juri iction, noting that the latter renders proceedings void ab initio. This reasoning drew upon the Supreme Court’s decision in Ssangyong Engineering & Construction Co. Ltd. v. NHAI10. The Court held that lack of juri iction constitutes a patent illegality, warranting judicial intervention. This reinforces the judicial consensus that statutory arbitration under the MSMED Act is confined to specific contractual relationships and cannot be extended to works contracts by interpretative expansion.

The Delhi High Court in Tata Power Company Ltd. v. Genesis Engineering Company11, was faced with competing claims of 10 (2019) 15 SCC 131 11 2023 SCC OnLine Del 2366 arbitration. Tata Power issued a notice invoking arbitration under Section 21 of the Arbitration and Conciliation Act, 1996, while the MSME contractor approached the Facilitation Council under the MSMED Act. The Court examined the underlying work orders, which involved composite works, and applied the precedents set in P.L. Adke (supra) and National Textile Corporation (supra). It concluded that disputes arising out of works contracts cannot be adjudicated by MSME Facilitation Councils. Consequently, the Court upheld the maintainability of a Section 11 petition and appointed a sole arbitrator under the Arbitration Act. This judgment affirmed that works contracts fall squarely outside the MSMED Act’s purview, directing MSMEs to pursue conventional arbitration rather than statutory remedies.

In Tata Power (supra), the Delhi High Court observed that the legal position on works contracts has been consistently settled by multiple High Courts. The Court stressed that works contracts, regardless of their specific subject matter, are indivisible agreements involving both goods and services. As such, they do not create the seller-buyer relationship contemplated under the MSMED Act. The Court rejected the MSME’s argument that participation in Facilitation Council proceedings by the respondent constituted acquiescence. Juri ictional limits, the Court emphasized, cannot be conferred by consent or waiver. Ultimately, the Court allowed the Section 11 petition and referred the dispute to arbitration under the general framework. This decision further entrenched the principle that while MSMEs enjoy statutory support under the MSMED Act, those benefits do not extend to works contracts, thereby creating a caveat for small enterprises entering such arrangements.

The Micro, Small and Medium Enterprises Development Act, 2006 was introduced with the object of protecting smaller enterprises from delayed payments and to provide a quick forum for resolution through Facilitation Councils. These councils function as quasi-judicial authorities with powers to conciliate or arbitrate disputes between MSMEs and their buyers. The legislative intent was to empower MSMEs by creating a cheaper and faster forum than conventional arbitration. However, when contracts go beyond mere supply of goods or rendering of services and instead involve integrated obligations such as design, construction, installation, and operation, a serious juri ictional issue arises. Such composite agreements, legally categorized as works contracts, do not neatly fit into the scheme of the MSMED Act. Courts have therefore consistently grappled with the question of whether disputes arising out of works contracts can be submitted to the MSEFCs for adjudication or arbitration.

A works contract, under Section 2(119) of the CGST Act, 2017, has a specific statutory definition. It covers agreements for building, fabrication, completion, erection, installation, modification, repair, or commissioning of immovable property wherein transfer of property in goods is involved.

The jurisprudence emerging from the rulings discussed above demonstrates a consistent thread: works contracts are not amenable to the MSMED Act framework. The reasoning rests on statutory interpretation, commercial realities, and legislative intent. Section 18 presupposes a dispute arising from supply of goods or rendering of services, not from indivisible composite agreements involving engineering, construction, and operation. Facilitation Councils were designed as quick forums for delayed payments, not for supervising intricate, continuous obligations. Therefore, judicial pronouncements stress that applying the MSMED Act to works contracts would stretch the statute beyond its legitimate scope. This principle ensures a balance: MSMEs are protected in straightforward supply transactions but must seek remedies under arbitration clauses or ordinary civil processes when engaging in works contracts. Courts have deliberately drawn this boundary to preserve legislative coherence.

The overall judicial approach reflects a careful balance between protecting MSMEs and respecting the complex nature of works contracts. By excluding such contracts from the MSMED Act, courts prevent misuse of an expedited mechanism meant for simple supply disputes. At the same time, by recognizing the primacy of arbitration clauses, courts ensure that parties to works contracts are not left remediless. The common reasoning is that works contracts involve technical supervision, continuous obligations, and indivisible performance, which cannot be adjudicated summarily by MSEFCs. This reasoning was first strongly articulated in Kone Elevator (supra) and has been consistently applied by High Courts. The result is a stable jurisprudential framework that separates simple MSME supply disputes from complex contracts, thereby safeguarding both legislative intent and commercial certainty. Accordingly, this Court also agrees with this view that works contracts are outside the purview of MSEFC.

The scope of work mentioned in the Special Conditions of Contract Part II entered into by the present Parties is reproduced hereinbelow: “1.0 GENERAL Design, Detailed Engineering, Supply, Transportation, Storage. Fabrication. Installation, radiography, inspection, pointing, testing. calibration, inducing all materials, equipment, appurtenances of VR storage tanks (203-TK-012) of 30000 KL nominal capacity at Paradip Refinery as per API-650 latest edition, specifications, scope of work and other related documents attached or referred to. This also includes design. engineering supply. fabrication. installation, painting, testing in all respect as per codes and Standards and Scope of work. Steam coil pipe fitting supply and erection, Civil works like execution of Tank Pad Foundation including soil investigation required for design purpose and all electrical works like, cathodic protection, earthling system comprising earth pits with earth electrodes, earth strips cable trays etc. as per codes and standard and scope of work (Part-A) Construction of Tank dyke area, Underground services (OWS/ CRWS), surface drainage of tank dyke, Barricading as per requitement. pipe supports/ platforms inside tank dyke and other civil works inside tank dyke (Part-B) are also covered in the tender. Sr. Description Tag No. No. Type 1 VR Storage Tank 203-TK- 012 1 (One) Fixed roof Tank

The definition of the word “Works” in the Tender Document is also mentioned as ‘Individually or collectively all engineering, materials, equipments, services and documentation either expressly or by implication required under the terms of the Contract”.

Applying the tests as indicated in the judgments of the Supreme Court, this Court finds in the present case that the contracts in question were indeed works contracts. The details of the scope of works quoted hereinabove demonstrates beyond a shadow of doubt that the scope of the contract involved both goods and services and therefore, the contracts in question is a works contract. It is thus held that the provisions of the MSMED Act could not have been invoked by the Opposite Party. This resultantly shows that the initiation of the statutory arbitration under the provisions of the MSMED Act on the part of Opposite Party in the context of contracts in question before the Facilitation Council, was a stillborn exercise and that the Facilitation Council could not have exercised juri iction to conduct the arbitration proceedings. This renders the impugned awards without juri iction.

In Balvant N. Viswamitra. v. Yadav Sadashiv Mule (dead) through Irs.12 The Apex Court held as follows: