MSMED Act Applicable to Works and Service Contracts, Not Limited to Goods Supply: Madras High Court

The Madras High Court has held that claims arising out of works and service contracts are maintainable under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), rejecting the argument that the Act applies only to disputes relating to supply of goods. The bench of Justice S. Sounthar dismissed a civil revision petition challenging the jurisdiction of the Micro and Small Enterprises Facilitation Council (MSEFC), Chennai, to adjudicate a payment dispute arising from a civil works contract. A petition was filed under Article 227 of the Constitution, challenging an order of the MSEFC that had rejected an application questioning its jurisdiction under Section 16 of the Arbitration and Conciliation Act, 1996. The dispute arose from a contract awarded for execution of piling and civil works for silos forming part of a coke handling system. The contractor, a registered micro or small enterprise, claimed that substantial amounts were due for work already executed. The contract stipulated completion within a specified time frame, but following delays, the contract was terminated by the employer. Subsequently, the contractor approached the MSEFC seeking recovery of over ₹5.76 crore towards unpaid dues. As conciliation failed, arbitral proceedings were initiated under Section 18 of the MSMED Act. The employer objected to the maintainability of the claim, contending that the contract was purely a works contract and not one involving supply of goods, and therefore fell outside the scope of the MSMED Act. Before the High Court, it was argued that the MSMED Act permits recovery only for amounts due towards goods supplied or services rendered, and that a works contract does not qualify as either. Reliance was placed on several judicial precedents, including the Supreme Court’s ruling in Kone Elevator India Pvt. Ltd. v. State of Tamil Nadu, to contend that works contracts stand on a different footing and cannot be brought within the ambit of the MSMED Act. Rejecting these submissions, the High Court undertook a detailed examination of the definitions and scheme of the MSMED Act. The Court noted that the Act defines a “buyer” as a person who buys goods or receives services, and a “supplier” as a micro or small enterprise that supplies goods or renders services. Sections 15 and 16 of the Act mandate timely payment for goods supplied or services rendered, while Section 18 provides a special dispute resolution mechanism through the Facilitation Council. The Court emphasised that the Act is not confined to goods alone but expressly covers services. It held that execution of civil works pursuant to a contract clearly constitutes rendering of services. In the present case, the contract did not involve sale or supply of goods at all, but was purely for execution of works at site, which amounted to rendering services within the meaning of the MSMED Act. Distinguishing the Kone Elevator judgment, the Court observed that the issue in that case related to classification of composite contracts for taxation purposes under sales tax law. The decision did not deal with recovery of dues for services under a beneficial legislation like the MSMED Act. Therefore, reliance on that judgment was misplaced. The Court also dealt with the argument based on the use of the word “or” in Section 15 of the MSMED Act, which refers to supply of goods “or” rendering of services. It held that in order to advance the object of the Act, the word “or” must be read conjunctively as “and” in appropriate cases, particularly where contracts involve both supply of goods and services. A restrictive interpretation, the Court cautioned, would defeat the purpose of the legislation, which is intended to provide a speedy and less cumbersome remedy to micro and small enterprises. Relying on settled principles of statutory interpretation and recent Supreme Court authority recognising the MSMED Act as a beneficial statute, the High Court held that the Facilitation Council had jurisdiction to entertain the claim. The Court further noted that even in hybrid contracts involving both goods and services, claims under the MSMED Act would be maintainable. On the procedural objection that the challenge under Section 16 of the Arbitration Act could only be raised after the final award, the Court held that since the issue went to the root of jurisdiction under the MSMED Act, it was appropriate to examine the matter at the present stage. Concluding that the claim before the MSEFC was legally maintainable, the High Court dismissed the civil revision petition and upheld the order of the Facilitation Council. No costs were imposed, and the connected miscellaneous petition was closed. Case Details Case Title: Chennai Petroleum Corporation Limited Versus Micro and Small Enterprises Facilitation Council Case No.: CRP.No.3446 of 2025 and CMP.No.18768 of 2025 Date: 03.02.2026 Counsel For Petitioner: Om.Prakash Counsel For Respondent: C.Sathish Click Here To Read Order Read More: ITC Can’t Be Denied on Limitation Grounds After S. 16(5) Amendment: Madras High Court

MSMED Act Applicable to Works and Service Contracts, Not Limited to Goods Supply: Madras High Court

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