Introduction
The Micro, Small and Medium Enterprise act was brought in 2006 to streamline and protect the MSMEs due to their unequal bargaining power in Market driven economy wherein it provided Statutory mechanism to resolve payment dispute through conciliation, failing which Arbitration proceeding can be initiated under the Arbitration Act, 1996. However, recent interpretation done by the Supreme Court and various high courts which has led to exclusion of work contracts from the ambit of MSME protection has rendered the work contracts more exposed to the contractual inequities, leaving them vulnerable to the systematic exploitation. In this piece, the author will discuss the reasoning behind the exclusion of work contracts from the ambit of MSME along with the possible impacts on the work contracts.
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Work Contracts are separate from commercial Contracts
Work Contracts, also known as composite contracts, involves both the supply of goods as well as provision of services. Work Contracts are not defined under MSME Act, 2006 but it’s meaning has been made clear through judicial interpretations along with reference to the definition mentioned under section 2(119) of the GST Act, 2017. The Supreme Court in the case of CCE Customs v. Larsen & Tourbo LTD, 2015, AIR 2015 SUPREME COURT 3600 held that the work contracts are distinct and a separate from the Commercial contracts because the latter is in the nature of a singular entity whereas the former is a hybrid model involving both goods and services.
The Commercial contracts are determined based on the “Dominant Nature” or “Degree of Intention Test” whereas the test to determine a work contract was laid down by the Supreme Court in the case of CCE Customs v. Larsen & Tourbo LTD, 2015, AIR 2015 SUPREME COURT 3600 wherein it held that those contracts which are though Indivisible but divided into parts by a legal fiction i.e. there is a single Contract but when executing it has been performed into two parts and once there are elements of work contract, then any further obligation will not change its nature.
Similarly, In the Case of Kone Elevators India Pvt Ltd v. State of Tamil Nadu 2014 , apex court held that if a contract was for purchasing of a lift, it will still be classified as work contract as it will not merely involve purchase but also the installation of the lift.
Why work contracts have been put out from ambit of MSME
Work Contract Falls outside the scope of MSME Act because it is neither purely a contract for sale of good nor purely a contract of service so it cannot be considered, simpliciter a contract for goods and services and will be Classified as work contract. Forex: In case of Sterling Wilson Pvt Limited v. Union of India,2017 the contract was a composite contract for supply of goods as well as installation of fire water spray system. Then they are eventually assembled and installed. The said contract satisfies work contract because even though it is a single composite contract but is divided into two parts, creating a legal fiction, one is supply and other is installation. In every judicial precedent this trend has been applied wherein there is no pure contract of Sale of goods and services which is independent of each other. This has been done following the tax jurisprudence and the interpretation done of work contracts for the purpose of taxation.
Furthermore, if we want to prove that a particular contract of sale of goods and services is not work contract then we must prove that it is divisible which means that they both are a separate contract and independent of each other. Otherwise, they will not be able to claim the protection in respect of payment disputes.
Dilution of Legislative Intent and Statutory Rights
The MSME Act is a beneficial piece of legislation, and the legislators intended for any transaction that falls under its purview to be protected. Works contracts were not specifically excluded for this reason. Since the MSME Act does not define “works contract” and only refers to the delivery of goods or services, leaving an immense amount of ambiguity and to cure this ambiguity, the law interpreter applied the concept of strict construction to adopt an exclusionary interpretation, despite their cognizance of the Act’s beneficial nature. Further, section 18, a non obstante clause ensures that statutory dispute mechanism of conciliation followed by arbitration, if conciliation fails, prevail over the contractual dispute’s resolution clause. But this has not been applied in work contracts meaning that work contract has been kept outside section 18 to provide enough contractual autonomy in case of work contract. Thus, weighting more to the contractual clause rather than conciliation.
Such exclusion of work contracts violates the substantive remedy available under the MSME Act as it effectively undermines the intent behind a welfare-oriented statue. The purpose of the act which was to ensure timely payment and fast remedy in case of non-payment for all micro and small enterprises has been defeated by such interpretations which legislature never intended. Such interpretation has distorted the substance and the object of the law.
Way Forward
A comprehensive approach is required to resolve the mismatch between legislative intent and judicial interpretation. To ensure that MSMEs involved in composite contracts are not denied statutory protection, the MSME Act must be amended to clearly define the inclusion of works contracts under its purview. Instead of depending solely on rigid approach, courts may simultaneously embrace a purposive and welfare-oriented interpretive approach that is consistent with the Act’s goal of protecting small businesses. The Ministry of MSME’s sector-specific standards, particularly for contracts involving building and installation, might help further cure ambiguity. The remedial spirit of the Act can be upheld by ensuring that jurisdictional objections are handled effectively with the strengthening of MSME Facilitation Councils institutional competence. If these steps are taken together, the MSME Act will continue to be beneficial in both letter and spirit.
Conclusion
The MSME Act’s exclusion of works contracts demonstrates the conflict between the judiciary’s rigid legislative interpretation and the beneficial legislation’s intended objectives. The lack of a precise definition of “works contract” has culminated in its judicial exclusion, despite the MSME Act’s legislative goal to offer a protective framework for all qualifying micro and small businesses, in payment disputes regardless of the type of contract. Although this interpretation is doctrinally grounded in prudence and consideration of contractual autonomy, it has resulted in the exclusion of some MSMEs, particularly those involved in composite contracts, from the statutory remedies intended to guarantee timely payments and financial stability.
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