SC Reaffirms MSME Status Cannot be Claimed by a Mere Intermediary: Cloudthat Technologies Private Limited v. Thoughtsol Infotech Private Limited & Ors.
BRIEF FACTS
The judgment, Cloudthat Technologies Pvt. Ltd. v. Thoughtsol Infotech Pvt. Ltd.1 affirmed the ruling pronounced by the Allahabad High Court in Thoughtsol Infotech Pvt. Ltd. v. Union of India.2 The ruling constitutes an important exposition of the law governing procurement preference given to Micro, Small and Medium Enterprises (“MSMEs”) in public tenders. In this matter, the Directorate General of Hydrocarbons issued a tender on 22 March 2024 for the hiring of cloud services for the upgradation of the National Data Repository onto a cloud platform. Thoughtsol Infotech Pvt. Ltd. (“Thoughtsol”) emerged as the lowest bidder in the financial evaluation. However, the contract was awarded to Cloudthat Technologies Pvt. Ltd. (“Cloudthat”) on the basis that it was a registered Micro and Small Enterprise eligible for procurement preference under the Public Procurement Policy for Micro and Small Enterprises (2012), which permits such enterprises to be awarded the contract despite not being the lowest bid.
Thoughtsol challenged the grant of the MSME preference to Cloudthat stating the cloud service upgradation contract was not a pure service contract but a composite works contract, since it involved the supply and transfer of software and licences and such works contracts are expressly excluded from MSME procurement preference. Further, Thoughtsol contended that Cloudthat merely acted as an intermediary, while the core services and infrastructure were provided by Amazon Web Services, a non-MSME foreign entity to whom nearly 97% of the contract value was payable. Cloudthat argued that the MSME policy did not contain any fixed financial threshold to determine ineligibility for procurement preference and that the respondent’s valid registration entitled it to such benefit.
ISSUES FOR CONSIDERATION
The Allahabad Court considered two key issues (i) whether MSME benefits can be claimed solely on the basis of registration where the registered MSME does not itself perform the substantive portion of the contract, and (ii) whether a cloud service upgradation contract involving the supply and transfer of software and licences constitutes a “works contract” that falls outside the ambit of MSME preference.
JUDGEMENT OF ALLAHABAD HIGH COURT
The Allahabad High Court held that notwithstanding its description as a service contract, the agreement involved the supply and transfer of software and licences, which are legally recognised as goods. Since the contract involved both goods and services, it was held to be a composite works contract, falling outside the scope of MSME procurement preference under the applicable policy framework.
The Allahabad High Court further held that MSME procurement preference under Section 11 of the MSME Act is contingent upon the MSME itself producing the goods or rendering the substantive services under the contract. Mere possession of registration was held to be insufficient in the absence of actual performance and control by the MSME. The Court rejected the Cloudthat’s contention that financial dominance was irrelevant, holding that the applicable test is one of substance, control, and dominant performance rather than arithmetic precision. On a holistic assessment, Amazon Web Services was found to be the dominant performer under the contract, while the Cloudthat’s role was limited and subservient. The Court concluded that the routine and mechanical application of MSME preference solely on the basis of registration, without examining the actual role of the bidder, was arbitrary and violative of Article 14 of the Constitution. Consequently, the award of the contract in favour of Cloutthat was quashed.
The Allahabad High Court ruling was appealed before the Supreme Court by Cloudthat by way of a Special Leave Petition. However, it was dismissed by the Supreme Court, thereby affirming the decision of the Allahabad High Court.
OUR THOUGHTS
By emphasising substance over form and rejecting front-ending arrangements, the Court has reinforced the underlying objective of the MSME regime to promote genuine MSME participation and capability. The recognition of software and licences as goods further has significant implications for cloud, SaaS, and digital procurement contracts, many of which may fall within the category of works contracts.
The decision thus serves as an important precedent for procurement authorities and bidders alike, ensuring that MSME benefits are applied in a manner consistent with constitutional principles of equality and non-arbitrariness. It compels contracting agencies to adopt a more rigorous evaluation of MSME claims, ensuring that benefits are applied in a manner consistent with constitutional principles of equality, transparency, and non-arbitrariness. For bidders, it signals that compliance with the substantive performance requirement is non-negotiable, and that attempts to exploit MSME registration without genuine capacity will not withstand judicial scrutiny. Ultimately, the ruling strengthens the integrity of public procurement, aligns MSME benefits with their intended purpose of fostering indigenous enterprise, and sets a clear benchmark for future disputes in the rapidly evolving digital procurement landscape.
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