Allahabad High Court
Thoughtsol Infotech Private Limited vs Union Of India And 2 Others on 10 March, 2025
Bench: Ashwani Kumar Mishra, Vipin Chandra Dixit
HIGH COURT OF JUDICATURE AT ALLAHABAD Neutral Citation No. - 2025:AHC:34318-DB Reserved AFR Court No. - 29 Case :- WRIT - C No. - 605 of 2025 Petitioner :- Thoughtsol Infotech Private Limited Respondent :- Union Of India And 2 Others Counsel for Petitioner :- Sushant Counsel for Respondent :- Archana Singh, Naman Agarwal, Varad Nath, Vivek Kumar Singh,A.S.G.I. Hon'ble Ashwani Kumar Mishra,J.
Hon’ble Vipin Chandra Dixit,J.
(Delivered By: Hon’ble Ashwani Kumar Mishra,J.)
1. Award of contract for hiring of cloud services for up-gradation of National Data Repository, by the Directorate General of Hydrocarbons, in favour of third respondent company, notwithstanding the lowest bid of petitioner, is the subject matter of challenge in this petition. The petitioner submits that preferential treatment meted out to the third respondent on account of its status as registered Micro & Small Enterprise (in short ‘MSE’), although substantial part of the contract is to be performed by Non-MSE i.e. Amazon Web Services (in short ‘AWS’) is in teeth of the applicable MSME policy and its objectives and thus wholly irrational and arbitrary.
2. Directorate General of Hydrocarbons (hereinafter referred to as ‘DGH’) came to be established under the administrative control of Ministry of Petroleum and Natural Gas, Government of India in 1993. Its object was to promote sound management of oil and natural gas resources having regard to environment, safety, technological and commercial aspects of the petroleum activity. DGH was also entrusted the management of natural exploration and production (E&P) data in the oil and natural gas sector.
3. The E&P data is owned by the Government of India and is a national asset. By way of an amendment introduced in Petroleum and Natural Gas (Amendment) Rules, 2006 every E&P operator in India is obliged to provide free of cost all data earlier obtained or to be obtained as a result of petroleum operations in India to the Central Government or its designated agency. The E&P data policy issued by the Ministry in 2017 contemplates creation of a framework for data assimilation, disclosure, sharing, accessibility and dissemination through a National Data Repository (in short ‘NDR’). This was in accordance with the policy decision taken by the Government of India on 28.2.2014. NDR came to be formally launched to public on 28.6.2017. It is currently operational at OIDB Building at Noida, Gautam Buddh Nagar, Uttar Pradesh.
4. DGH has floated tenders on GeM portal (Government e Marketplace for short ‘GeM’) on 22.3.2024 for hiring of cloud service for upgradation of national data repository on DGH on cloud platform (hereinafter referred to as the ‘cloud contract’). Petitioner and third respondent both qualified technically for the award of cloud contract and after evaluation of their financial bids the petitioner was shortlisted as L1 (lowest tenderer) having offered the most competitive rates for the project. Despite petitioner being the L1 (lowest tenderer) the cloud contract has not been awarded to the petitioner. The reason for it is that third respondent is a registered MSE and in accordance with the applicable provisions it has been given the option to match its financial bid with that of the petitioner.
5. Micro, Small, and Medium Enterprise Development Act, 2006 (hereinafter referred to as ‘the Act of 2006’) as well as policy documents issued thereunder are relied upon by DGH for award of the cloud contract to the third respondent on 26.12.2024.
6. Aggrieved by the award of cloud contract to third respondent the petitioner, a non-MSE enterprise, has filed the present petition. In addition, the petitioner submits that being the lowest tenderer for the cloud contract it ought to be awarded cloud contract. Consequently, a further prayer is made to command the DGH to award the cloud contract in favour of the petitioner.
7. The writ petition was entertained on 10.1.2025 and time was allowed to the respondents to obtain proper instructions. DGH filed a short counter affidavit in the matter on 21.1.2025. Counter affidavit of the third respondent was also filed on 27.1.2025. The matter was heard at some length and this Court passed following orders on 31.1.2025:-
“When the matter is taken up today, learned Senior Counsel for the petitioner Sri J.S.I. Deepak has placed before the Court a written submission annexing documents to show that substantial part of the contract relates to the work undertaken on behalf of Amazon Web service and that the providing of service by the third respondent is only incidental and insignificantly small in comparison to the share attributed to M/s Amazon Web service.
The chart annexed along with written submission, however, is not a part of the writ petition and is not supported by any affidavit. In its absence, it will be difficult for the Court to take cognizance of such materials.
Faced with such observation, learned counsel for the petitioner seeks adjournment as he intends to file an additional affidavit bringing on record such materials.
Let such affidavit be filed within three days.
Respondents will have three days thereafter to submit a reply.
Let this matter appear as fresh once again on 7th February, 2025.
Mrs.Archana Singh appearing for the employer states that a work order has already been issued to third respondent. Such fact, however, is not on record.
We permit the respondents also to place such material on record within three days.
Considering the issues that arise for consideration in the facts of the case, we provide that any settlement of contract in favour of the third respondent shall remain subject to the outcome of the present writ petition.”
8. A supplementary affidavit has been filed by the petitioner to demonstrate that cloud contract has to be executed by two different entities i.e. C.S.P. (Cloud Service Provider) and Managed Service Provider (MSP). Dominant part of the cloud contract is to be performed by CSP. Only incidental or support services are to be provided by MSP i.e. the third respondent. It is specifically asserted that 97% of financial outlay for the cloud contract is appropriated to CSP which is AWS in this case while MSP gets only 3%. According to the petitioner the cloud contract service is to be performed primarily by CSP and therefore, the status of MSP as MSE cannot be a relevant consideration for award of cloud contract. Affidavits in reply are filed by the respondents disputing the claim whereafter hearing in the writ got concluded.
The Contract
9. Before proceeding further it would be apposite to briefly notice the salient features of cloud contract. Bid for the cloud contract were invited by DGH on GeM portal. The bid document contained request for proposal for the cloud contract. Various clauses of the bid documents specify the manner and methodology to be followed in implementation of the cloud contract. Clause 4.2 of the bid document specify the purpose of the bid as upgradation of National Data Repository (NDR 1.0). It records that bid document is being floated for hiring of Managed Service Provider (in short ‘MSP’)/empanelled Cloud Service Provider (in short ‘CSPs’) of MeitY (Ministry of Electronics & Information Technology, Government of India) for providing the necessary cloud IT infrastructure for hosting of NDR 2.0 applications on cloud platform. The broad reasons necessitating requirement of NDR 2.0, as mentioned in the bid document is extracted hereinafter:-
“(a) Existing contract is coming to end and the hardware and other infrastructure needs to be replaced.
(b) Setting up of Virtual data Rooms for anytime/anywhere/any device access of NDR data to achieve larger global footprint.
(c) Raw/Pre-Stack seismic data stored offline to be ingested through application for effective and contact less data delivery.
(d) Majority of No-Go area opened for E&P activities, potentially generating large volume of E&P data.
(e) Application stack needs improved features and better user experience to meet industry expectations and effectively powering E&P Bid Rounds.”
10. Essentially the cloud contract envisages following functions to be performed under the contract:-
“A. Compute Services, Storage – Attached with VMs/VDIs, Data Transfer/ Data Out charges, Database & Analytics, Security/Other Component
B. Storage – Blob/Object/Hot/Archive for E&P Class of Data and CDN Services
C. Support Services
D. Migration One time”
11. Services included in Clauses ‘A’ & ‘B’ broadly consists of compute services and storage. These services are to be provided by CSP. Remaining part of the cloud contract included in Clauses ‘C’ & ‘D’ consists of support services and migration of existing data to be performed by MSP on the propriety software of CSP.
12. DGH is defined as the purchaser in the contract, whereas ‘service’ is specified in clause 34 of the bid document to mean:-
“service” means the service delivered to the Stakeholders of Purchaser or its nominated agencies, employees of Purchaser or its nominated agencies, and to professionals, using the tangible and intangible assets created, procured, installed, managed, and operated by the selected bidder including the tools of information and communications technology.”
13. The bidder was required to submit two bids on GeM portal, i.e. Pre-qualification and Technical bid and (b) financial bid.
14. Evaluation process and criteria has been specified in clause 6 of the bid document. Clause 6.1.2 specify that financial bid of only the qualified bidders who have cleared the pre-qualification and technical evaluation criteria will be opened. The bid document defines the nature of functions to be performed by the CSP and MSP in following terms:-
“Managed service as defined in this BID DOCUMENT are CSP Managed service defined as- The capability provided to the consumer by the CSP, to deploy on-to the cloud infrastructure consumer created or acquired applications, created using programming languages, libraries, APIs, service and tools, supported by the provider. The consumer/MSP does not manage or control the underlying cloud infrastructure including network, servers, operating systems or storage, but has control over the deployed applications and possibly configuration settings for the application hosting environment.
The bidder must comply with the reference link for the managed service wherever applicable, in case the bidder does not comply for managed service requirement, purchaser may reject the bidder.”
15. Clause 13.4.4 of the bid document refers to service of managed support service/helpdesk. Sub-clause 1 to 4 of clause 13.4.4 are also relevant and are reproduced hereinafter:-
“1. The Bidder shall maintain a pool/team of competent resources for providing Service Support at any time (24 hours a day, 7 days a week) via all possible modes including phone, chat, and email support to purchaser for provisioning, configuring, optimising, maintenance, security, performance, troubleshooting etc.
2. The bidder shall provide details of the Service Helpdesk (including help line number, email address, escalation details etc.). This Service Helpdesk will be the single point contact & must be available at any given point of time for supporting the NDR 2.0 set-up & operations. The bidder shall ensure that the proposed team carry out all works in a professional and timely manner.
3. In case bidder is an MSP, it shall have back-to-back support agreement with the offered CSP during the entire tenure of the contract so that all support required by the bidder from the CSP for smooth functioning of the entire solution during the contract period are available to the bidder. The bidder will be responsible for ensuring that level of agreement between the bidder and the CSP is not an impediment in this regard.
4. CSP and bidder shall ensure that the migration of NDR 1.0 to NDR 2.0 is done successfully and optimised in the best possible/optimal manner using service. In case of any discrepancy / delay/challenge during successful migration as defined in this RFP, it will be the responsibility of the CSP & bidder to deploy any professional service that may be required without any additional cost implications to the purchaser.”
16. The bidder is expected to understand the complete architecture of existing NDR 1.0 applications, processes, steps for smooth migration of applications and databases including any interdependencies between applications and data. The bidder is to be responsible for deployment of its application with all security measures/scalability/accessibility on cloud platform in co-ordination with the selected application service provider and in consultation with DGH. Clause 16.3.2 specify the responsibility matrix. It contains table 19 which specify the responsibility of each of the stakeholder. The managed service provider while submitting the bid is required to submit a certificate by the CSP in format ‘A’ according to which they (CSP) are responsible for ensuring 99.5% availability of service, except for archival storage for which the availability shall be 99%. The bid document also contemplates a certificate by the CSP that it shall be responsible for providing single point support and resolution and single console billing for all the service as listed in table 25. The CSP is also required to confirm that the platform service offered by the bidder (MSP) is directly managed service where the CSP manage runtime, middleware, operating system, virtualization, servers, storage, networking, licenses alongwith its upgrades, patches etc. A further declaration was required from the CSP that all service listed in the price schedule (bill of material) shall be available throughout the contract period. In the event any service become obsolete an equivalent or higher version of the same at the same or lower cost was to be provided. Clause 5, 6 and 7 of format A are relevant and are reproduced hereinafter:-
“5. We confirm that, we shall jointly with the Bidder, work towards ensuring monitoring and management of all the required Cloud service for the projects, including monitoring dashboard and logging through a single console.
6. We confirm that we shall provide all necessary assistance and technical support to (Name of the Bidder) during the entire duration of the project. Our Technical team comprising of Technical Solution Architect and Account Manager shall provide all requisite support (such as review of solution design, architecture review, helping in optimizing costs, scalability, operation excellence, high-performance, security recommendations, sustainability etc.) to purchaser during the tenancy of this contract.
7. We agree to provide every functionality offered by Cloud in the form of Secured, Authenticated and Authorized APIs to eliminate challenges with human error, avoid manual humarı interaction to critical databases and provides flexibility to customers to integrate the APIs in their environment as per business requirements.”
17. Clause 16.4.3 contains format CP-3: commercial proposal (bill of materials). The bidder in its commercial proposal is required to specify the discount offered on percentage terms on CSP work/services in clauses ‘A’ & ‘B’ as also the other services provided by MSP in clauses ‘C’ & ‘D’ which are as under:-
“A. Compute service, storage-attached with VMs/VDIs, data transfer/ data out charges, database and analytics, security/ other components;
B. Storage, Blob/object/hot/archive for E&P class of data and CDN service. The functions stipulated in clause A & B are to be performed by the CSP;
C. specifies the support service cost;
while D. contains the cost towards one time migration from hard disk to cloud charges.”
18. The bid also contained a clause providing for purchase preference to be granted to MSEs, which reads as under:-
“1. Purchase preference to Micro and Small Enterprises (MSES): Purchase preference will be given to MSEs as defined in Public Procurement Policy for Micro and Small Enterprises (MSES) Order, 2012 dated 23.03.2012 issued by Ministry of Micro, Small and Medium Enterprises and its subsequent Orders/Notifications issued by concerned Ministry. If the bidder wants to avail the Purchase preference for service, the bidder must be the Service provider of the offered Service. Relevant documentary evidence in this regard shall be uploaded along with the bid in respect of the offered service. If L-1 is not an MSE and MSE Service Provider (s) has/have quoted price within L-1+ 15% of margin of purchase preference /price band defined in relevant policy, then 100% order quantity will be awarded to such MSE bidder subject to acceptance of L1 bid price.
OM No.1 4 2021 PPD dated 18.05.2023 for compliance of Concurrent application of Public Procurement Policy for Micro and Small Enterprises Order, 2012 and Public Procurement (Preference to Make in India) Order, 2017.”
19. A corrigendum to bid was published on 25.7.2024 clarifying the applicability of purchase preference to MSEs. Clause 4 of the corrigendum is relevant for the present purposes and is reproduced hereinafter:-
“4. Purchase preference to Micro and Small Enterprises (MSEs): Purchase preference will be given to MSEs as defined in Public Procurement Policy for Micro and Small Enterprises (MSES) Order, 2012 dated 23.03.2012 issued by Ministry of Micro, Small and Medium Enterprises and its subsequent Orders/Notifications issued by concerned Ministry. If the bidder wants to avail the Purchase preference, the bidder must be the manufacturer of the offered product in case of bid for supply of goods. Traders are excluded from the purview of Public Procurement Policy for Micro and Small Enterprises. In respect of bid for service, the bidder must be the Service provider of the offered Service. Relevant documentary evidence in this regard shall be uploaded along with the bid in respect of the offered product or service. If L-1 is not an MSE and MSE Seller (s) has/have quoted price within L-1+ 15% of margin of purchase preference/price band defined in relevant policy, such Seller shall be given opportunity to match L-1 price and contract will be awarded for percentage of 100% of total value.”
20. A supplementary affidavit has been filed on behalf of the petitioner stating that out of total bid amount of Rs.37.92 crores for the cloud contract a sum of Rs.35.83 crores was to be appropriated towards the procurement of goods and service from CSP under heads ‘A’ & ‘B’, while Rs.89.57 lacs and Rs. 1.19 crores, respectively, were earmarked for the incidental service to be provided by the MSP. It is, therefore, asserted that 97% of the amount payable towards contract value was to be appropriated to CSP of respondent no.3 i.e. ‘AWS’ while the third respondent was to get only 3% of the total contract value for the incidental service towards installation/ setup/ commissioning/ maintenance of the products and service. The petitioner also submits that the third respondent is not the originator of goods and service which are core to the fulfillment of tender floated by DGH.
21. A chart is also annexed by the petitioner alongwith the supplementary affidavit filed on 4.2.2025 according to which CSP components in the bid of petitioner is 97.21 % while MSP component is 2.79%, whereas for the third respondent CSP component is 97.12% while MSP component is 2.88%.
22. We may also refer to the petitioner’s contention that though the contract apparently is for hiring of cloud service for upgradation of NDR, on cloud platform, but its major part consists of providing goods making it a works contract. Clause 12.16 and 13.2.2 of the RFP are relied upon which state that licenses and software are to be purchased on behalf of and owned by and registered in the name of DGH.
23. It is asserted that goods includes intangible products like licenses and software among others. MSE order is also relied upon to submit that intangible products like licences are to be considered as goods. It is, therefore, submitted that since the award of contract includes goods and service both, as such it is to be treated as works contract for which preferential treatment cannot be extended to third respondent under appropriate regulatory MSE scheme.
MSME scheme
24. The Act of 2006 came into force on 2.10.2006 to provide for the promotion, development and enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto. Prior to it the small scale sector was defined under Section 11B of the Industries (Development and Regulation) Act, 1951. Section 29B of the aforesaid Act of 1951 notified items reserved exclusively for manufacture for small scale industry. However, a detailed legal framework in respect of micro, small and medium enterprises was lacking which led to enactment of Act no.27 of 2006. Certain enterprises came to be characterized as the micro, small and medium enterprises under Section 7, 8 of the Act of 2006. Chapter (iv) in the Act of 2006 regulated promotion, development and enhancement of competitiveness of micro, small and medium enterprises. Section 9 provided for measures for promotion and development of such enterprises. Section 10 dealt with providing of credit facilities. Section 11 contemplated procurement preference policy with which we are concerned in the present case.
25. In exercise of power under Section 11 public procurement policy of 2012 was introduced for micro, small and medium enterprises (MSME) vide order dated 23.3.2012. Clause 3 of the 2012 order provided that every central ministry or department or public sector undertaking shall set an annual goal of procurement from micro, and small enterprises from the financial year 2012-13 and onwards with the objective of achieving an overall procurement of minimum of 20% of its total annual purchases of products produced and service rendered by MSEs in a period of three years. After a period of three years i.e. from 1.4.2015 over all procurement goal of minimum of 20% was made mandatory. Clause 6 of the 2012 orders contemplated grant of preference in price quotation in tenders for MSME which reads as under:-
“Price quotation in tenders. – (1) In tender, participating Micro and Small Enterprises quoting price within price band of L1+15 per cent shall also be allowed to supply a portion of requirement by bringing down their price to L1 price in a situation where L1 price is from someone other than a Micro and Small Enterprise and such Micro and Small Enterprise shall be allowed to supply up to 20 per cent of total tendered value.
(2) In case of more than one such Micro and Small Enterprise, the supply shall be shared proportionately (to tendered quantity).”
26. The Public Procurement Policy has been clarified by the Ministry vide office memorandum dated 25.3.2022. Several frequently asked questions have been elaborately explained. Question nos.18, 21, 32, 47 and 48 are relied upon which are reproduced:-
“Q.No.18: Whether this policy is applicable for works/ trading activities also?
Ans. Policy is meant for procurement of only goods produced and service rendered by MSEs. However, traders/ distributors/ sole agent/ Works Contract are excluded from the purview of Public Procurement Policy for MSEs Order, 2012.
Q.No.21: Can MSEs quoting a price within the band L1+15% be given complete supply to tender in case tender item cannot be split /divided?
Ans. In case of tender item cannot be split or divided, etc. the MSE quoting a price within the band L1+15% may be awarded for full/ complete supply of total tendered value to MSE, considering the spirit of the Policy for enhancing Govt. Procurement from MSEs.
Q.No.32: Are Works Contracts a part of service? What is the difference between Works and service?
Ans. Works Contracts are not covered under the purview of Public Procurement Policy for MSEs. The definition is available in GFR Rules 130, 143, 177 & 197.
Q.No.47: Can Joint Ventures take the benefits of the Public Procurement Policy for MSEs Order, 2012?
Ans. No, Under Udyam Registration (and earlier under UAM), there is no provision of registration of Joint Ventures. As mentioned in S. No. 3 above, benefits of the Public Procurement Policy for MSEs Order, 2012 can be availed by those MSEs which are registered on the Udyam Registration portal.
Q.No.48: Can Consortiums with Foreign Company takes the benefits of the Public Procurement Policy for MSEs Order, 2012?
Ans. No, Under Udyam Registration (and earlier under UAM), there is no provision of registration of Consortium. As mentioned in S. No. 3 above, benefits of the Public Procurement Policy for MSEs Order, 2012 can be availed by those MSEs which are registered on the Udyam Registration portal.”
27. Clarification regarding definition of goods and service under the public procurement policy for MSEs order 2012 has further been issued on 9.11.2016 which defines goods and service in following terms:-
“Goods” includes all articles, material, commodity, livestock, furniture, fixtures, raw material, spare parts, instruments, machinery, equipment, industrial plant, vehicles, aircrafts, ships, railway rolling stock assemblies, sub-assemblies, accessories, a group of machines comprising an integrated production process or such other categories of goods or intangible, products like technology transfer, licenses, patents or other intellectual properties (but excludes books, publications, periodicals, etc., for a library), procured or otherwise acquired by a procuring entity. Procurement of goods may include certain small work or some service, which are incidental or consequential to the supply of such goods, such as transportation, insurance, installation, commissioning, training and maintenance;
“”Service” means any subject matter of procurement other than goods or works, except those incidental or consequential to the service, and includes physical, maintenance, professional, intellectual, training, consultancy and advisory service or any other service classified or declared as such by a procuring entity but does not include appointment of an individual made under any law, rules, regulations or order issued in this behalf, “Subject matter of procurement” means any item of procurement whether in the form of goods, service or works or a combination thereof;”
28. Yet another office memorandum came to be issued by the Procurement Policy Decision of the Department of Expenditure, Ministry of Finance, Government of India on 13.1.2023 on which the second respondent placed heavy reliance. The clarification came to be issued on a reference from GeM portal, regarding confusion among buyers on definition of works and service. Clause 2(d) of this order is reproduced hereinafter:-
“2.(d) In case of composite contracts for Goods and service. If the procurement value of Goods is substantial and rendering of Service is incidental then such procurement should be handled as procurement of Goods. Similarly, if the procurement value of service is significant and supply of goods is incidental to the contract then such procurement can be handled as procurement of service.”
29. It is in the context of above statutory scheme mandated for MSEs that the petitioner contends that the cloud contract cannot be awarded to third respondent, on account of its status as the MSME.
Petitioner’s submission
30. It is in the light of the facts noticed above that the petitioner has assailed the award of contract to third respondent on the following grounds:-
“That Respondent No. 3 is not entitled to seek benefits of the MSE Order since it is excluded from seeking benefits under the MSE Order by virtue of the clarification provided in the Office Memorandum bearing No. F. No. 1(3)/2018-MA dated 25.03.2022, which states in response to question number 18 that the MSE Order is meant for procurement of only goods produced and services rendered by MSEs, and that traders/ distributors / sole agent / works contract are excluded from the purview of the MSE Order;
To seek conferment of benefits under the MSE Order, an eligible MSE bidder must prove that all the goods being produced, and the services being rendered are being produced and rendered by the MSE itself. Respondent No. 3 is not the originator of the goods supplied under the RFP;
The basic requirement of the tender floated by the Respondent No. 2 is the availability of a cloud storage and compute solution which is provided by a handful of companies such as Google, Microsoft and Amazon. It is categorically stated that the Respondent No. 3 (or the Petitioner for that matter) does not have the infrastructure to develop cloud solutions in the manner as provided by the companies above-named;
It is also admitted by the Respondent No. 2 and 3 that the cloud infrastructure is supplied by a Cloud Service Provider (CSP). Therefore, it is very clear from the very nature of the tender and the bids submitted that the originator of the cloud storage and compute infrastructure is the CSP and not the Petitioner or the Respondent No. 3. Therefore, the Respondent No. 3 is ineligible to receive benefits under the MSE Order as it is not the producer of the cloud storage infrastructure, rather it is the CSP that is the producer of the said infrastructure;
License and Software under the RFP are “goods”: Clauses 12.16 and 13.2.2 of the RFP state that licenses and software are to be purchased on behalf of and owned by and registered in the name of the Respondent No. 2. The non-exhaustive definition of “goods” as provided for under Rule 143 of the General Financial Rules, 2017 (“GFR”) includes intangible products such as software and licenses, amongst others. It has been clarified by the Director, MSME (MA Division) vide Office Memorandum dated 09.11.2016 that intangible products like licenses are also to be considered as goods in the context of the MSE Order. Therefore, the license and software (being goods) originate from the CSP and therefore, “goods” are not being provided by the Respondent No. 3 to the Respondent No. 2;
“Services”, if any, being provided by the Respondent No. 3 are incidental to the goods supplied by the CSP;
The entire RFP may be broken down into four heads- Compute Services and Storage; Support Services; and Migration (one time). It is relevant to note that the above-mentioned categories are defined and standardised by the Respondent No. 2 in the BoM as laid out in Clause 16.4.2 and 16.4.3 of the RFP. The BoM lays down the various components of goods and services required for fulfilment of the RFP and serves as a comprehensive document for the purpose of understanding the scope of services;
It is submitted that all compute services and storage under heads ‘A’ and ‘B’ are being rendered by the CSP while the services under heads ‘C’ and ‘D’ of the above only pertain to support and migration of existing data (for which the CSP’s proprietary software is used, as is evidenced from the Supplementary Affidavit dated 15.01.2025 filed by the Petitioner;
It is submitted that the services rendered by the Respondent No. 3 are encapsulated in Clause 13.4.4 and 13.4.6 clearly establish that these services are purely incidental and consequential to the supply of the actual goods in the nature of licenses, software, etc., and relate to installation / commissioning / training /maintenance of the products being supplied by the CSP;
It is submitted that the CSP for the Respondent No. 3 has stated that the services being offered by the Respondent No. 3 is the CSP’s directly managed service where it manages runtime, middleware, operating system, virtualization, servers, storage, networking, licenses along with its upgrades, patches, etc. by itself, and that it shall support the Respondent No. 3 to work towards ensuring monitoring and management of all the required cloud services, and that its technical team shall provide all necessary assistance and technical support opted by the Respondent No. 3 during the entire duration of the project;
Lastly, it is also relevant to note that the financial bid of the Respondent No. 3 indicates that approximately 97% of the sums quoted are to be paid to the CSP, while the bidder receives only the balance 3% for its incidental services. The Respondent No. 3 is a trader/distributor of the goods and services provided by its CSP. The CSP is the originator/provider of the goods and majority of the services rendered in the RFP, and that the support services provided by the Respondent No. 3 is merely incidental to the said supply of goods, thereby incorporating all such services within the ambit of supply of goods itself. In such a circumstance, the only role of the Respondent No. 3 is to act as a facilitator between the Respondent No. 2 and the CSP and is hence a mere trader/distributor;
The contract emanating from the RFP is composite in nature, and is hence a works contract, even if it is assumed that the Respondent No. 3 is rendering services, it is submitted that the contract emanating from the RFP would be composite in nature, and by virtue of the same, the contract shall be construed to be a works contract;
Even if assumed (though not admitted) that there are services being rendered by the Respondent No. 3, it is submitted that the said services and goods would be indivisible once a license is issued by a particular CSP, the resultant services would also be rendered by personnel trained to operate and handle such software/platform. In a nutshell, the contract is also composite in nature since the scope of the tender could not be executed without the CSP’s software as cross functionality between two CSPs (Amazon and Microsoft, in the present case) is not technically possible;
The petitioner relies upon the judgment of Bombay High Court, in Sterling and Wilson Private Limited & Ors. vs. Union of India & Ors., AIR2017BOM24 to state that contracts involving the supply of goods along with services constitute composite contracts, which are to be treated as works contracts, and that such contracts would not fall within the ambit of the MSE Order;
It is also urged that this Hon’ble High Court in the case of Rahul Singh US. Union of India 2017SCCOnLineAll3579, upon assessment of the language of Section 11 of the MSMED Act, 2006, held that preference policies could be issued only for procurement of goods and services produced and provided by an MSE, and does not capture within its ambit assignments in the nature of a works contract;
That the above judgments of the Hon’ble Allahabad High Court and the Bombay High Court were not specifically in the context of taxation as alleged and have not been challenged and/or overruled by the Hon’ble Supreme Court of India and hence remain good law, squarely applicable in the present context.”
Reply of Respondents
31. Learned counsel for DGH, however, opposes the writ petition primarily on the ground that the contract in question is not a works contract but is a service contract. It is urged that petitioner has acknowledged the contract to be a service contract, as per the stipulation in the RFP for cloud contract, and is now estopped from asserting the contract to be a works contract. It is submitted that placing of reliance upon the judgment of the Supreme Court in Kone Elevator India Pvt. Ltd. Vs. State of Tamil Nadu and others (2014) 7 SCC 1 is misplaced since it arose out of a taxing statute and has no applicability in the present case. It is also urged that concept of works contract arises in taxing statutes for fiscal purposes and is primarily to regulate construction projects and not for the present purposes. It is also urged that the contract in question for providing cloud service has been characterized as procurement of consultancy service and cannot be treated to be a works contract. The cloud service contract is alleged to be of a distinct nature from a works contract. The DGH, moreover, submits that third respondent in arrangement with AWS has submitted its bid and its status as MSE cannot be questioned as it is duly registered as a MSME. It is also submitted that AWS is an approved cloud service provider by the MeiTY and various critical functions such as cloud migration etc is to be performed by it. Respondents contend that status of trader cannot be attributed to respondent no.3.
32. It is further argued that service provided by respondent no.3 as MSP are critical and its value addition cannot be substituted. Reliance is placed upon the MSE order to submit that the contract in question is not a ‘works contract’ and since third respondent is registered under UDYAM, as such the benefit of MSME are legitimately available to it. Submission is that the third respondent is a network partner of AWS and is not its agent, as is alleged, by the petitioner. The DGH further submits that pursuant to the award of contract to third respondent a kick off meeting has been held and performance bank guarantee etc has been furnished by it. Certain orders for requisition of lease line has also been placed on 13.2.2005.
33. The third respondent contends that the contract has rightly been awarded to it by DGH in accordance with the tender conditions which entitle it to the benefit of MSE procurement purchase order, 2012, issued by the Government of India. It is alleged that contract emanating from RFP is not a works contract; the quantum of service rendered by respondent no.3 is beyond the scope of judicial scrutiny and; the applicability of distinction of works contract to MSE Act is misplaced. The selected contractor argues that its status as registered MSME is not challenged nor there is any challenge to the corrigendum dated 27.5.2024 which makes the purchase reference clause in favour of MSE applicable in the contract itself. It is then submitted that the contract is a service contract and cannot be said to be works contract. It is thereafter argued that in terms of clause 13.4.4 of the RFP the MSP (respondent no.3) was bound to have a back to back support agreement with the empanelled CSP (AWS) for the entire tenure of contract. It is also argued that license in the contract clause is not for purchase of any goods and is merely use of standard language in IT service contract. The RFP does not provide for any sale or purchase of license of software by the bidder from CSP.
34. The third respondent further argues that it does not purchase cloud infrastructure from CSP and that such cloud infrastructure is predominantly pay for use where payment is for the use of technology. There is, however, no sale or purchase of technology. It is also submitted that there is no transfer of goods in the cloud contract. The respondent further argues that quantum of service rendered by respondent no.3, in the contract, is beyond the scope of judicial review. It is then urged that phrase ‘originator of service’ is a self-conceived concept of the petitioner, which is not to be found anywhere in the contract document. Only the MSP is responsible for contract and CSP is only a party to the contract and play a supporting role in executing the contract by MSP. It is also submitted that the quantum of work distributed between MSP and CSP and the flow of money between them would per-se, have no bearing upon the MSE order being accorded or not. The respondents further alleged that unless arbitrariness, perversity or malafide on part of the tendering authority is alleged, the author of tender document is taken to be the best person to understand its requirement and the courts should exercise judicial restraint.
35. Learned Senior counsel on behalf of third respondent also argues that the concept of works contract arises in the context of taxing statute and has no applicability in case of a contract providing for cloud service. It is lastly submitted that by no stretch of imagination it can be said that services rendered by the third respondent are incidental to the service being provided by the CSP. It is also denied that the value addition in the execution by third respondent is negligible or the third respondent acts as an intermediary/agent/trader.
36. We have heard Sri J. Sai Deepak, learned Senior Counsel appearing for the petitioner assisted by Sri Sushant Chandra; Sri S.P. Singh, learned A.S.G.I. assisted by Sri Vivek Kumar Singh, learned counsel for respondent no.1; Ms. Archana Singh, learned counsel for respondent no.2; Sri Amit Saxena, learned Senior Counsel assisted by Sri Varad Nath and Sri Naman Agarwal, learned counsel for respondent no.3 and have perused the materials on record.
37. In order to appreciate the controversy raised in this petition, an element of clarity is required regarding the nature of contract awarded to 3rd respondent. Much of the submissions raised at the bar is with regard to the nature of cloud contract itself. Whether it is a contract of services or it includes goods also so as to make it a works contract; who performs dominant functions in the contract even if it be a contract of services; whether MSP is an agent or subservient partner in the contract in question; whether the status of MSP as MSME can be a relevant consideration for award of contract which has to be substantially performed by the CSP which is not an MSME; whether grant of preferential treatment to third respondent for award of contract is in accordance with the policy objective for which the Act of 2006 has been enacted etc. are the questions that arise for consideration in the facts of the present case.
38. The petitioner has annexed the copy of the compliance document filed by the third respondent which specify the role of CSP in cloud data migration services. Clause 6 is relied upon which specifies that AWS provides a portfolio data transfer service to provide the right solution for data migration project. AWS is to leverage data migration solution based on online data transfer and offline data transfer. Data migration services are to be made available by the CSP for migrating the existing data from DGH to cloud based NDR 2.0 on AWS.
39. According to petitioner clause 12.16 and 13.2.2 of the tender document provides that licenses and software are to be purchased on behalf of and owned and registered in the name of the DGH. Reliance is placed upon the definition of goods under rule 143 of General Financial Rules, 2007 to state that it includes intangible products like software and licenses among others. Our attention has also been invited to the communication of director of MSME contained in the office memorandum dated 19.11.2016 as per which intangible product like licenses are also to be considered as goods in the context of MSE order. The petitioner relying upon such clause asserts that licenses and other intangible products constituting goods as per the MSE order are being supplied to DGH by the CSP and not by respondent no.3. Clause 12.16, relied upon by the petitioner, reads as under:-
“12.16. Equipment’s/Licenses Ownership
1. The Purchaser shall own the software licenses, processes, Documents supplied by the Bidder during this Contract period.
2. However, all the risk and liability arising out of or in connection with the usage of the equipment, assets/components during the term of the Contract shall be borne by the bidder.”
40. Similarly Sub-clause 2 of clause 13.2 (broad scope of activities) reads as under:-
“2. All Licences / application / software / Root access/Admin User name /Admin Account etc. shall be registered in the name of purchaser.”
41. The purchaser in the tender document is the DGH. Office memorandum dated 9.11.2016 issued by the department of MSME, Government of India defines goods and services. The definition of goods contained in the office memorandum has been issued to clarify goods and services. Public Procurement Policy (MSME), 2012 includes such other categories of goods or intangible products like technology transfer, licenses, patents or other intangible properties (excluding books etc.) procured or otherwise acquired by a procuring entity.
42. On behalf of the petitioner reliance is placed upon the Division Bench judgment of Bombay High Court in Sterling and Wilson as well as the judgment of this Court in Rahul Singh, wherein reliance is placed upon the principles laid down by the Supreme Court in Kone Elevators India Pvt. Ltd. (supra) to hold that benefit of MSME regime cannot be extended to a case of works contract.
43. The submission advanced on behalf of the petitioner is countered by Sri Amit Saxena, learned Senior counsel, who contends that clause (29)(A) of Article 366 is the basis of the judgment in Kone Elevator India Pvt. Ltd. (supra) which is reproduced hereinafter:-
“366. Definitions
In this Constitution, unless the context otherwise requires, the following expressions have, the meanings hereby respectively assigned to them, that is to say–
(29A) tax on the sale or purchase of goods” includes–
(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;
(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
(c) a tax on the delivery of goods on hire-purchase or any system of payment by installments;
(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;
(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;
(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;”
44. Submission is that clause (29)(A) was introduced with the object of regulating the taxing statute and has no relevance for the purposes of applying the provisions of MSME Act. For such purposes learned counsel has placed reliance upon the judgment of Calcutta High Court in Hindustan Petroleum Corporation Vs. West Bengal State Micro, Small Enterprises Facilitation Council and others (2023) SCC OnLine Calcutta 1700. Learned Single Judge of the Calcutta High Court after referring to various judgments including the Division Bench judgment of Bombay High Court in Sterling and Wilson as well as judgment of this Court in Rahul Singh observed as under:-
“60. Thus, in the context of the above discussions, the principle of Kone Elevator (supra) was erroneously applied by several High Courts in the judgments cited by the petitioner, as discussed above. The correct proposition of law, in my humble opinion, is that once an enterprise, otherwise coming within the contemplation of the Act, is registered under Section 8(1), the same has to attract the provisions of the MSME act, including Section 18 of the same, vesting authority on the Council to resolve disputes in that regard.
62. Thus, the artificial distinction, about works contracts being excluded from the ambit of the said Act, does not find place within the scheme of the MSME Act itself. The said concept was borrowed from revenue jurisprudence, which has no nexus with the benefits sought to be conferred under the MSME Act. Importing the said concept in the instant context is beside the point and not apt.”
ANALYSIS
45. The respective submissions of the parties on the aspect of cloud contract being a works contract, and by virtue of it being so the inapplicability of MSE policy, can be conveniently segregated into two parts. The first part can deal with the factual aspects of cloud contract so as to determine whether it is a contract of service alone or it includes supply of goods as well. The second part can then deal the question of applicability of MSE policy for award of cloud contract on account of MSE registration as UDYAM of third respondent.
46. We have already extracted various clauses of the cloud contract in order to ascertain the services to be provided to the purchaser by the bidder. DGH undisputedly is the purchaser under the contract. Third respondent admittedly is the bidder/MSP and has partnered with AWS as its CSP.
47. The cloud contract envisages that various licenses and software are to be purchased on behalf of and owned and registered in the name of DGH i.e. the purchaser. Clause 12.16 and 13.2.2, extracted above, indicates in unmistakable terms that the bidder has to provide various licenses and software to the purchaser (DGH) as part of the contract. The Bill of Material (BoM) also indicates that various licenses and software forms part of the cloud contract which are to be transferred by the bidder to the DGH.
48. The Director MSME vide its office memorandum dated 9.11.2016 (quoted above) has specified that intangible products like licenses are also to be considered as goods. Rule 143 of the General Financial Rules, 2017 also defines intangible products such as software and licenses to be goods. The bid document, therefore, clearly shows that the contract awarded to third respondent though is styled as contract of services but it does include supply of goods also to DGH which is the purchaser.
49. The question that then arises for our consideration is as to whether merely for the reason of inclusion of goods in the cloud contract, the contract itself becomes a works contract so as to exclude it from the purview of MSE regime.
50. Reliance is placed for such purposes upon the judgment of Supreme Court in Kone Elevator India Pvt. Ltd. (supra). In para 46 of the said judgment the Supreme Court has culled out following principles:-
“46. At this juncture, it is condign to state that four concepts have clearly emerged. They are:
(i) the works contract is an indivisible contract but, by legal fiction, is divided into two parts, one for sale of goods, and the other for supply of labour and services;
(ii) the concept of “dominant nature test” or, for that matter, the “degree of intention test” or “overwhelming component test” for treating a contract as a works contract is not applicable;
(iii) the term “works contract” as used in clause (29-A) of Article 366 of the Constitution takes in its sweep all genre of works contract and is not to be narrowly construed to cover one species of contract to provide for labour and service alone; and
(iv) once the characteristics of works contract are met with in a contract entered into between the parties, any additional obligation incorporated in the contract would not change the nature of the contract.”
51. The Supreme Court has observed that the concept of ‘dominant nature test’ or ‘degree of intention test’ or ‘overwhelming component test’ for treating a contract as a works contract is not applicable. Once the characteristics of works contract are met in a contract any additional obligation incorporated in the contract would not change the nature of the contract. The Court, therefore, held that installation of a lift and consequential supply of its part to be a works contract.
52. On behalf of the petitioner reliance is also placed upon the judgment in Bharat Sanchar Nigam Ltd. vs. Commissioner of Trade Tax, U.P. Lucknow 2016 SCC OnLine All 4398 to submit that since the contract consists of supply of goods in addition to services it would amount to a works contract and, therefore, would not be treated as contract of services so as to apply the provisions of MSME Act itself.
53. Having given our anxious consideration to the matter in issue we find that the concept of ‘Works Contract’ is predominantly a concept intended to regulate taxing statutes. Clause (29A) came to be added in Article 366 of the Constitution of India by the Constitution (Forty-Sixth Amendment) Act, 1982 with effect from 2.2.1983. The statement of objects and reasons clarify the context in which this provision had to be introduced. For better appreciation of the context we deem it appropriate to reproduce it, hereunder:-
“STATEMENT OF OBJECTS AND REASONS
Sales tax laws enacted in pursuance of the Government of India Act, 1935 as also the laws relating to sales tax passed after the coming into force of the Constitution proceeded on the footing that the expression “sale of goods”, having regard to the rule as to broad interpretation of entries in the legislative lists, would be given a wider connotation. However, in Gannon Dunkerley’s case (A.I.R. 1958 S.C. 560), the Supreme Court held that the expression “sale of goods” as used in the entries in the Seventh Schedule to the Constitution has the same meaning as in the Sale of Goods Act, 1930. This decision related to works contracts.2. By a series of subsequent decisions, the Supreme Court has, on the basis of the decision in Gannon Dunkerley’s case, held various other transactions which resemble, in substance, transactions by way of sales, to be not liable to sales tax. As a result of these decisions, a transaction, in order to be subject to the levy of sales tax under entry 92A of the Union List or entry 54 of the State List, should have the following ingredients, namely, parties competent to contract, mutual assent and transfer of property in goods from one of the parties to the contract to the other party thereto for a price.3. This position has resulted in scope for avoidance of tax in various ways. An example of this is the practice of inter-State consignment transfers, i.e., transfer of goods from head office or a principal in one State to a branch or agent in another State or vice versa or transfer of goods on consignment account, to avoid the payment of sales tax on inter-State sales under the Central Sales Tax Act. While in the case of a works contract, if the contract treats the sale of materials separately from the cost of the labour, the sale of materials would be taxable, but in the case of an indivisible works contract, it is not possible to levy sales tax on the transfer of property in the goods involved in the execution of such contract as it has been held that there is no sale of the materials as such and the property in them does not pass as moveables. Though practically the purchaser in a hire-purchase agreement gets the goods on the date of the hire-purchase, it has been held that there is sale only when the purchaser exercises the option to purchase at a much later date and therefore only the depreciated value of the goods involved in such transaction at the time the option to purchase is exercised becomes assessable to sales tax. Similarly, while sale by a registered club or other association of persons (the club or association of persons having corporate status) to its members is taxable, sales by an unincorporated club or association of persons to its members is not taxable as such club or association, in law, has no separate existence from that of the members. In the Associated Hotels of India case (A.I.R. 1972 S.C. 1131), the Supreme Court held that there is no sale involved in the supply of food or drink by a hotelier to a person lodged in the hotel.4. In the New India Sugar Mills case (A.I.R. 1963 S.C. 1207), the Supreme Court took the view that in the transfer of controlled commodities in pursuance of a direction under a Control Order, the element of volition by the seller, or mutual assent, is absent and, therefore, there is no sale as defined in the Sale of Goods Act, 1930. However, in Oil and Natural Gas Commission Vs. State of Bihar (A.I.R. 1976 S.C. 2478), the Supreme Court had occasion to consider its earlier decisions with regard to the liability of transfers of controlled commodities to be charged to sales tax. The Supreme Court held that where there are any statutory compulsions, the statute itself should be treated as supplying the consensus and furnishing the modality of the consensus. In Vishnu Agencies Vs. Commercial Tax Officer (A.I.R. 1978 S.C. 449), six of the seven Judges concurred in over-ruling the decision, in New India Sugar Mills case while the seventh Judge held the case to be distinguishable. It is, therefore, considered desirable to put the matter beyond any doubt.5. The various problems connected with the power of the States to levy a tax on the sale of goods and with the Central Sales Tax Act, 1956 were referred to the Law Commission of India. The Commission considered these matters in their Sixty-first Report and, recommended, inter alia, certain amendments in the Constitution if as a matter of administrative policy it is decided to levy tax on transactions of the nature mentioned in the preceding paragraphs.6. Device by way of lease of films has also been resulting in avoidance of sales tax. The main right in regard to a film relates to its exploitation and after exploitation for a certain period of time, in most cases, the film ceases to have any value. It is, therefore, seen that instead of resorting to the outright sale of a film, only a leased or transfer of the right to exploitation is made.7. There were reports from State Governments to whom revenues from sales tax have been assigned, as to the large scale avoidance of Central sales tax leviable on inter-State sales of goods through the device of consignment of goods from one State to another and as to the leakage of local sales tax in works contracts, hire-purchase transactions, lease of films, etc. Though Parliament could levy a tax on these transactions, as tax on sales has all along been treated as an item of revenue to be assigned to the States, in regard to these transactions which resemble sales also, it is considered that the same policy should be adopted.8. Besides the above mentioned matters, a new problem has arisen as a result of the decision of the Supreme Court in Northern India Caterers (India) Ltd. Vs. Lt. Governor of Delhi (A.I.R. 1978 S.C. 1591). States have been proceeding on the basis that the Associated Hotels of India case was applicable only to supply of food or drink by a hotelier to a person lodged in the hotel and that tax was leviable on the sale of foodstuffs by a restaurant. But over-ruling the decision of the Delhi High Court, the Supreme Court has held in the above case that service of meals whether in a hotel or restaurant does not constitute a sale of food for the purpose of levy of sales tax but must be regarded as the rendering of a service in the satisfaction of a human need or ministering to the bodily want of human beings. It would not make any difference whether the visitor to the restaurant is charged for the meal as a whole or according to each dish separately.9. It is, therefore, proposed to suitably amend the Constitution to include in article 366 a definition of “tax on the sale or purchase of goods” by inserting a new clause (29A).”
54. We find substance in the argument of Sri Saxena, that the object of introducing clause (29A) in Article 366 is entirely distinct and it may not have much applicability in the present controversy as the clause is not intended to determine the scope and ambit of MSE regime. The judgment of the Supreme Court in Kone Elevators India Pvt. Ltd. (supra) was also in the context of a taxing issue. Though its principles have been applied by the Bombay High Court in Sterling and Wilson (supra) and by this Court in Rahul Singh (supra) yet, on this aspect, we find the reasoning assigned by the Calcutta High Court in Hindustan Petroleum Corporation (supra) to be of considerable weight. In Hindustan Petroleum Corporation (supra) learned Single Judge elaborately examined the context in which clause (29A) was introduced in Article 366 of the Constitution of India. Clause (29A) of Article 366 of the Constitution of India as also the judgment of Supreme Court in Kone Elevators India Pvt. Ltd. (supra) cannot be entirely relied upon for interpreting the object and provisions of the MSE regime. In our view, the applicability of MSE regime for award of cloud contract will have to be determined with reference to the provisions of the Act of 2006 as well as the Public Procurement Policy Order, 2012 and the clarifications issued thereunder.
55. The MSE regime intends to promote development and enhance the competitiveness of micro, small and medium enterprises. The origin of the Act of 2006 as well as its objects have been elaborated examined by the Hon’ble Supreme Court in a recent decision in the case of Lifecare Innovations Pvt. Ltd. & Anr. vs. Union of India 2025 INSC 269. In para 13 the Court traced the origin of MSME scheme in following words:-
“13. The first statutory recognition of MSMEs, measures for their protection, promotion and grant of special benefits was through the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993.17 The 1993 Act was repealed by the comprehensive and promising regime under the present Micro, Small and Medium Enterprises Development Act in 2006, which not only created different classes of enterprises under Section 7, but also established an Advisory Committee to advise the Central government regarding the classification of enterprises, a National Board for MSMEs under Section 3, the functions of which are provided in Sections 5 and 6, inter alia to deal with, “factors affecting the promotion and development of micro, small and medium enterprises and review the policies and programmes of the Central Government” and to “make recommendations on matters referred to it by the Central Government which are necessary or expedient for facilitating the promotion and development and enhancing the competitiveness of the micro, small and medium enterprises”. Section 9 of the Act enables the Central Government to adopt measures that may be necessary for the promotion, development, and enhancement of the competitiveness of MSMEs. Section 10 speaks of progressive credit facilities for these MSMEs. Section 11 is the provision for procurement preference policy. Section 11 is important for our consideration. Under this provision, the Central or State governments notify the preference policies with respect to the procurement of goods and services produced and provided by micro and small enterprises by its ministries, departments, aided institutions, or public sector enterprises. Section 11 is reproduced hereinbelow for ready reference:
“Section 11. Procurement preference policy.– For facilitating promotion and development of micro and small enterprises, the Central Government or the State Government may, by order notify from time to time, preference policies in respect of procurement of goods and services, produced and provided by micro and small enterprises, by its Ministries or departments, as the case may be, or its aided institutions and public sector enterprises.”
56. The provisions of Section 11 of the Act of 2006 as well as the MSE order 2012 has been examined by the Court to observe as under in para 1.1:-
“1.1 Having examined the legal regime concerning the promotion and development of MSEs, we have come to the conclusion that the Procurement Order 2012 has the force of law and is enforceable. While the Act and the Procurement Order 2012 do not create an ‘enforceable right’ for an individual MSE, the statutory authorities and administrative bodies created thereunder are impressed with enforceable duties. They are accountable and subject to judicial review. We have also explained how the scope of judicial review in these matters should transcend the standard power of judicial review to issue writs of mandamus to perform the statutory duty and proceed to examine whether the duty bearers, the authorities and bodies are constituted properly and whether they are functioning effectively and efficiently. By ensuring institutional integrity we achieve our institutional objectives.”
(Emphasis supplied by us)
57. The object of the Act of 2006 is to facilitate the promotion and development of MSE and to enhance its competitiveness. Section 11 of the Act provides for procurement preference policy. It contemplates preference policies for MSME in respect of procurement of goods and services. Goods produced and services rendered by the MSME. The intendment of policy is to promote MSE for the goods produced by it as well as services rendered by it. It is for this purpose that the MSE regime provides for minimum procurement by governmental departments from MSE and the MSE is allowed to match price figures by the lowest bidder if such bid is within the range of L1+15%.
58. MSE regime thus has a definite purpose and object to subserve. It is to promote MSE units registered under the Act of 2006 for the goods produced and the services rendered. The Procurement Policy is to be framed by the respective Government. Section 11 of the Act of 2006 clearly provides that preference policy for procurement of goods and services has to be for the goods produced and services rendered by MSE units.
59. It transpires that various doubts were raised with regard to the applicability of MSME provisions in various circumstances before the concerned Ministry. In order to address such concerns an office memorandum dated 25.3.2022 has been issued which is contained in annexure 11 to the writ petition. In response to question no.18 (extracted in para 24) the Ministry has clarified that MSE policy is meant for procurement of only goods produced and services rendered by MSEs. Traders/distributors/sole agent/works contract are excluded from the purview of public procurement policy for MSE Order, 2012.
60. The explanation offered by the Ministry is categorical and is in accord with Section 11. The policy for procurement is only for the Goods produced by MSEs or Services rendered by MSEs.
61. Since procurement policy is for the goods produced or services rendered by the MSE, the Ministry has clarified that traders/distributors/sole agent/works contract are excluded from the purview of the MSEs Order, 2012.
62. In reply to question no.32 (quoted above) also the position has been clarified by the Ministry and it has been clarified that works contract are not covered under the purview of Public Procurement Policy. Reliance is placed upon clause 143 of the General Financial Rules, 2017.
63. In reply to question no.48 (quoted above) the Ministry has clarified that there is no provision for registration of consortium consisting of a foreign company.
64. When we analyse the object and provisions of the Act of 2006 in conjunction with the Public Procurement Policy for MSEs Order, 2012 and the clarification issued by the Ministry vide office memorandum dated 25.3.2022 it is evident that benefit of MSME regime can be extended in favour of MSEs unit, duly registered as such, for the goods produced by it and services rendered by it, only.
65. The MSE policy/regime since intends to promote the MSEs for the goods produced by it or services rendered by it, the benefit of the policy will not be extended to traders/distributors/sole agent/works contract or to exigencies where goods produced or services rendered is by a consortium consisting of a foreign company. Thus, where registered MSME is not the producer of goods or renders services, but is only assisting the dominant partner, the MSME policy cannot be made applicable.
66. Before proceeding further, we may notice the argument of Sri Amit Saxena that this Court while exercising its writ jurisdiction has extremely limited scope in interfering with contractual matters. For such purposes learned counsel relies upon an observation made by the Supreme Court in para 24 to 26 in Agmatel India (P) Ltd. vs. Resoursys Telecom (2022) 5 SCC 362, which are reproduced:-
“24. The scope of judicial review in contractual matters, and particularly in relation to the process of interpretation of tender document, has been the subject-matter of discussion in various decisions of this Court. We need not multiply the authorities on the subject, as suffice it would be refer to the three-Judge Bench decision of this Court in Galaxy Transport Agencies [Galaxy Transport Agencies v. New J.K. Roadways, Fleet Owners & Transport Contractors, (2021) 16 SCC 808 : 2020 SCC OnLine SC 1035] wherein, among others, the said decision in Afcons Infrastructure [Afcons Infrastructure Ltd. v. Nagpur Metro Rail Corpn. Ltd., (2016) 16 SCC 818] has also been considered; and this Court has disapproved the interference by the High Court in the interpretation by the tender inviting authority of the eligibility term relating to the category of vehicles required to be held by the bidders, in the tender floated for supply of vehicles for the carriage of troops and equipment.
25.This Court referred to various decisions on the subject and stated the legal principles as follows : (Galaxy Transport Agencies case[Galaxy Transport Agenciesv.New J.K. Roadways, Fleet Owners & Transport Contractors, (2021) 16 SCC 808 : 2020 SCC OnLine SC 1035] , SCC paras 14-20)
“14.In a series of judgments, this Court has held that the authority that authors the tender document is the best person to understand and appreciate its requirements, and thus, its interpretation should not be second-guessed by a court in judicial review proceedings. InAfcons Infrastructure Ltd.v.Nagpur Metro Rail Corpn. Ltd.[Afcons Infrastructure Ltd.v.Nagpur Metro Rail Corpn. Ltd., (2016) 16 SCC 818] , this Court held : (SCC p. 825, para 15)
’15. We may add thatthe owner or the employer of a project, having authored the tender documents, is the best person to understand and appreciate its requirements and interpret its documents. The constitutional courts must defer to this understanding and appreciation of the tender documents, unless there is mala fide or perversity in the understanding or appreciation or in the application of the terms of the tender conditions.It is possible that the owner or employer of a project may give an interpretation to the tender documents that is not acceptable to the constitutional courts but that by itself is not a reason for interfering with the interpretation given.’
15. In the judgment inBharat Coking Coal Ltd.v.AMR Dev Prabha[Bharat Coking Coal Ltd.v.AMR Dev Prabha, (2020) 16 SCC 759] , under the heading “Deference to authority’s interpretation”, this Court stated : (SCC p. 776, paras 50-52)
’50. Lastly, we deem it necessary to deal with another fundamental problem. It is obvious that Respondent 1 seeks to only enforce terms of NIT. Inherent in such exercise is interpretation of contractual terms. However, it must be noted that judicial interpretation of contracts in the sphere of commerce stands on a distinct footing than while interpreting statutes.
51. In the present facts, it is clear that BCCL and C1-India have laid recourse to clauses of NIT, whether it be to justify condonation of delay of Respondent 6 in submitting performance bank guarantees or their decision to resume auction on grounds of technical failure. BCCL having authored these documents, is better placed to appreciate their requirements and interpret them. [Afcons Infrastructure Ltd. v. Nagpur Metro Rail Corpn. Ltd., (2016) 16 SCC 818]
52. The High Court ought to have deferred to this understanding, unless it was patently perverse or mala fide. Given how BCCL’s interpretation of these clauses was plausible and not absurd, solely differences in opinion of contractual interpretation ought not to have been grounds for the High Court to come to a finding that the appellant committed illegality.’
16. Further, in the recent judgment in Silppi Constructions Contractors v. Union of India [Silppi Constructions Contractors v. Union of India, (2020) 16 SCC 489] , this Court held as follows : (SCC pp. 501-02, para 20)
’20. The essence of the law laid down in the judgments referred to above is the exercise of restraint and caution; the need for overwhelming public interest to justify judicial intervention in matters of contract involving the state instrumentalities; the courts should give way to the opinion of the experts unless the decision is totally arbitrary or unreasonable; the court does not sit like a court of appeal over the appropriate authority; the court must realise that the authority floating the tender is the best judge of its requirements and, therefore, the court’s interference should be minimal. The authority which floats the contract or tender, and has authored the tender documents is the best judge as to how the documents have to be interpreted. If two interpretations are possible then the interpretation of the author must be accepted. The courts will only interfere to prevent arbitrariness, irrationality, bias, mala fides or perversity. With this approach in mind we shall deal with the present case.’
17. In accordance with these judgments and noting that the interpretation of the tendering authority in this case cannot be said to be a perverse one, the Division Bench ought not to have interfered with it by giving its own interpretation and not giving proper credence to the word “both” appearing in Condition No. 31 of the NIT For this reason, the Division Bench’s conclusion [New JK Roadways v. State (UT of J&K), 2020 SCC OnLine J&K 733] that JK Roadways was wrongly declared to be ineligible, is set aside.
18. Insofar as Condition No. 27 of the NIT prescribing work experience of at least 5 years of not less than the value of Rs 2 crores is concerned, suffice it to say that the expert body, being the Tender Opening Committee, consisting of four members, clearly found that this eligibility condition had been satisfied by the appellant before us. Without therefore going into the assessment of the documents that have been supplied to this Court, it is well settled that unless arbitrariness or mala fide on the part of the tendering authority is alleged, the expert evaluation of a particular tender, particularly when it comes to technical evaluation, is not to be second-guessed by a writ court. Thus, in Jagdish Mandal v. State of Orissa [Jagdish Mandal v. State of Orissa, (2007) 14 SCC 517] , this Court noted : (SCC pp. 531-32, para 22)
’22. Judicial review of administrative action is intended to prevent arbitrariness, irrationality, unreasonableness, bias and mala fides. Its purpose is to check whether choice or decision is made “lawfully” and not to check whether choice or decision is “sound”. When the power of judicial review is invoked in matters relating to tenders or award of contracts, certain special features should be borne in mind. A contract is a commercial transaction. Evaluating tenders and awarding contracts are essentially commercial functions. Principles of equity and natural justice stay at a distance. If the decision relating to award of contract is bona fide and is in public interest, courts will not, in exercise of power of judicial review, interfere even if a procedural aberration or error in assessment or prejudice to a tenderer, is made out. The power of judicial review will not be permitted to be invoked to protect private interest at the cost of public interest, or to decide contractual disputes. The tenderer or contractor with a grievance can always seek damages in a civil court. Attempts by unsuccessful tenderers with imaginary grievances, wounded pride and business rivalry, to make mountains out of molehills of some technical/procedural violation or some prejudice to self, and persuade courts to interfere by exercising power of judicial review, should be resisted. Such interferences, either interim or final, may hold up public works for years, or delay relief and succour to thousands and millions and may increase the project cost manifold. Therefore, a court before interfering in tender or contractual matters in exercise of power of judicial review, should pose to itself the following questions:
(i) Whether the process adopted or decision made by the authority is mala fide or intended to favour someone;
or
Whether the process adopted or decision made is so arbitrary and irrational that the court can say:”the decision is such that no responsible authority acting reasonably and in accordance with relevant law could have reached”;
(ii) Whether public interest is affected.
If the answers are in the negative, there should be no interference under Article 226. Cases involving blacklisting or imposition of penal consequences on a tenderer/contractor or distribution of State largesse (allotment of sites/shops, grant of licences, dealerships and franchises) stand on a different footing as they may require a higher degree of fairness in action.’
19. Similarly, in Montecarlo Ltd. v. NTPC Ltd. [Montecarlo Ltd. v. NTPC Ltd., (2016) 15 SCC 272] , this Court stated as follows : (SCC p. 288, para 26)
’26. We respectfully concur with the aforesaid statement of law. We have reasons to do so. In the present scenario, tenders are floated and offers are invited for highly complex technical subjects. It requires understanding and appreciation of the nature of work and the purpose it is going to serve. It is common knowledge in the competitive commercial field that technical bids pursuant to the notice inviting tenders are scrutinised by the technical experts and sometimes third-party assistance from those unconnected with the owner’s organisation is taken. This ensures objectivity. Bidder’s expertise and technical capability and capacity must be assessed by the experts. In the matters of financial assessment, consultants are appointed. It is because to check and ascertain that technical ability and the financial feasibility have sanguinity and are workable and realistic. There is a multi-prong complex approach; highly technical in nature. The tenders where public largesse is put to auction stand on a different compartment. Tender with which we are concerned, is not comparable to any scheme for allotment. This arena which we have referred requires technical expertise. Parameters applied are different. Its aim is to achieve high degree of perfection in execution and adherence to the time schedule. But, that does not mean, these tenders will escape scrutiny of judicial review. Exercise of power of judicial review would be called for if the approach is arbitrary or mala fide or procedure adopted is meant to favour one. The decision-making process should clearly show that the said maladies are kept at bay. But where a decision is taken that is manifestly in consonance with the language of the tender document or subserves the purpose for which the tender is floated, the Court should follow the principle of restraint. Technical evaluation or comparison by the Court would be impermissible. The principle that is applied to scan and understand an ordinary instrument relatable to contract in other spheres has to be treated differently than interpreting and appreciating tender documents relating to technical works and projects requiring special skills. The owner should be allowed to carry out the purpose and there has to be allowance of free play in the joints.’
20. This being the case, we are unable to fathom how the Division Bench, on its own appraisal, arrived at the conclusion that the appellant held work experience of only 1 year, substituting the appraisal of the expert four-member Tender Opening Committee with its own.”
(italicised matter emphasised in the original; emphasis in bold italics supplied)
26. The abovementioned statements of law make it amply clear that the author of the tender document is taken to be the best person to understand and appreciate its requirements; and if its interpretation is manifestly in consonance with the language of the tender document or subserving the purchase of the tender, the Court would prefer to keep restraint. Further to that, the technical evaluation or comparison by the Court is impermissible; and even if the interpretation given to the tender document by the person inviting offers is not as such acceptable to the constitutional court, that, by itself, would not be a reason for interfering with the interpretation given.”
67. So far as the scope of interference in matters of award of contract by this Court is concerned, the position in law is well settled. Hon’ble Supreme Court in Agmatel India (P) Ltd. (supra) has referred to a long line of judgments requiring restraint to be exercised by the writ court in contractual matters. The restraint in either interpreting the tender clauses or technical evaluation or comparison is equally settled.
68. However, the issue for consideration in this case is not the interpretation of tender or technical evaluation or comparison or bid etc. The question arising in this case is with regard to applicability of MSE policy for award of cloud contract in favour of third respondent.
69. Undisputedly, the petitioner is the lowest bidder for the cloud contract. The award of contract to it is denied only on account of grant of benefit of MSE policy. We are, therefore, required to examine whether MSE policy is applicable in this case or not?
70. Article 14 of the Constitution of India guarantees equality before law to everyone. It is settled that classification under Article 14 must never be arbitrary. The classification must always rest upon some real and substantial distinction bearing a reasonable and just relation to the things in respect to which the classification is made. The test ultimately is of intelligible differentia and the rationale nexus to the object sought to be achieved.
71. If the object of promoting MSME unit in government procurement is not subserved since the goods are either not produced by it or the services are not rendered by it, then the grant of benefit of MSE policy would be arbitrary.
72. It is for this limited purpose that this Court has examined the applicability of MSE policy in the facts of the present case. The MSE policy is categorical. It is to be extended to an MSE only for the goods produced or services rendered by it.
73. In Lifecare Innovations Pvt. Ltd. (supra), Hon’ble Supreme Court has explained the scope of judicial review in such matters. The Court has held that scope of judicial review in these matters should transcend the standard power of judicial review to examine whether the authorities are functioning effectively and efficiently to achieve institutional objectives.
74. The terms of contract have already been examined by us and it is apparent that though it is styled as a contract of services but it does include supply of goods also. The goods are to be supplied primarily by the CSP. Even the services which are to be provided for the cloud contract are to be majorly rendered by the CSP.
75. In this regard the petitioner has pleaded that dominant part of the contract consists of work assigned under heads ‘A’ & ‘B’ which require huge investment into setting up of data warehouses and research and development. This part of the contract is the dominant part and as per the bid submitted by third respondent (MSP) it is to be provided by CSP which is AWS in this case. In para 10 of the supplementary affidavit filed by petitioner on 4.2.2025 following assertions are made:-
“10. That an assessment of the financial proposal of the Respondent No. 3 indicates that out of a total bid of INR 37,92,17,479.47/-, a sum of INR 35,83,14,173.61/- was proposed to be utilized towards the procurement of goods and services from the CSP under Heads A and B of the said proposal, while INR 89,57,854.34/- and INR 1,19,45,451.52/- were earmarked for the fee of incidental services pertaining to installation, commissioning, training and maintenance services under Heads C and D respectively. The above figures indicate that approximately 97% of the Respondent No. 3’s fee proposal was earmarked for purchase of goods and services from the CSP to the Respondent No. 3, i.e. Amazon Web Services, while the balance meagre fee was proposed for the incidental service for installation/set-up/commissioning/maintenance of the products and services offered by the Respondent No. 3’s CSP.”
76. Annexure-2 to this affidavit is a chart containing the financial bid of petitioner and third respondent. As per this chart the share of cloud service provider in the contract for the petitioner is 97.21% while for the third respondent it is 97.12%. The MSP component i.e. role of petitioner and respondent no.3 in terms of financial outlay in the contract is 2.79% for the petitioner while it is 2.88% for the third respondent. The chart (annexure SA-3) is referred to in para 11 of the supplementary affidavit filed by the petitioner.
77. Respondent no.3 has filed its supplementary counter affidavit in reply to the assertions made by the petitioner in supplementary affidavit. Para 10 of the supplementary affidavit has been replied in para 36 which is reproduced hereinafter:-
“36. That the contents of paragraph no. 10 of the supplementary affidavit save as matters of record, are misleading, wrong and denied; in reply thereto, it is submitted a suitable reply has already been given in the preceding paragraphs of this counter affidavit which is not being repeated herein for the sake of brevity.”
78. The figures mentioned in the chart suggesting that 97% of the financial outlay for the cloud contract goes to CSP while the share of MSP remains below 3% is not specifically disputed. In para 32 to 34 of the supplementary counter affidavit the third respondent states that a misconceived narrative is put forth by the petitioner and that predominantly cloud infrastructure is based on ‘pay for use’ principle and the services/cloud payments are variable subject to its usage. The respondent contends that:-
“Without prejudice, it is also submitted that the quantum of work distributed between the MSP and CSP and the flow of money between them would per se have no bearing upon the aspect as to whether the answering respondent is entitled to the benefit of the MSE order or not inasmuch as there could be judicial determination of the appropriate quantum which would make an MSME eligible for the benefits or otherwise”
79. In para 32 the respondent again states as under:-
“The composition of work, distribution of funds becomes immaterial and is not something that the petitioner can be allowed to question at such a belated stage before this Hon’ble Court. It may also be noted that the intention of the MSME Act is to promote, enhance and develop the competitiveness of concerned entities and the same is not be measured in terms of 1 profits they ultimately earn.”
80. In para 34 the respondent state as under:-
“Therefore, the fact that the answering respondent employs 20 CSP-trained specialists underscore the specialized nature of its services and clearly negates the notion of mere trading or reselling. Such specialized personnel would not be required if the answering respondent was simply a resller.”
81. The provisions contained in the tender document as well as specific pleading made in the writ makes it apparent that the contract is to be predominantly performed by the CSP. 97% of the financial outlay for the cloud contract goes to CSP while the share appropriated to MSP is less than 3%.
82. Based upon the services provided by CSP viz-a-viz MSP and their respective shares in performing contract in monetary terms it can be safely concluded that CSP is the dominant partner in the cloud contract which not only performs major part of the contract consisting of compute services and its storage but also provides software licenses, processes and documents on behalf of MSP to DGH for the contract period. The MSP is the subservient partner in the cloud contract which only plays a supporting role in offering support services etc. for which it gets less than 3% outlay of the contract value.
83. Learned counsel for the parties otherwise acknowledge at the bar that providing of cloud compute services as well as storage of data etc. are highly skilled services which are currently limited to few multinational corporations like Amazon Web Services, Microsoft, Google etc. On behalf of the two bidders i.e. petitioner and the third respondent the cloud services are to be provided either by Amazon Web Services or by M/s Microsoft International as CSP. The MSP i.e. the petitioner or third respondent do not have the technical wherewithal to provide cloud compute services or storage etc. which is the dominant part of the contract. Their role in the cloud contract is limited to providing of support services and migrating data on the proprietary software of CSP.
84. Since DGH is a body functioning under the administrative control of Ministry of Petroleum and Natural Gas, Government of India, therefore, the provisions of public procurement policy for MSME Order, 2012, will otherwise be applicable upon it. However, the issue as to whether bidder in the cloud contract is either producing the goods or is rendering the services so as to extend MSME Policy upon it has neither been considered not examined in correct perspective. Routine applicability of MSME Policy in the cloud contract without examining whether necessary ingredients for its applicability are attracted is apparent on record, which is clearly arbitrary.
85. Materials available on record and its careful analysis leaves no room of doubt that goods and services for the cloud contract is not rendered by the bidder in its capacity as MSP (third respondent). It is merely playing a supporting role in providing of cloud services on behalf of AWS/CSP.
86. Whatever be the nomenclature: be it sole agent/distributor/partner/collaborator or consortium member the MSP/bidder (third respondent) cannot be held to be rendering services or providing goods for the cloud contract. This distinction has to necessarily go to CSP (AWS in this case).
87. Although, we are not much impressed by the petitioners’ argument of third respondent not being the originator of service, which is not a term used in the contract, yet, what is apparent is that the CSP (AWS in this case) is predominantly rendering goods and services for the cloud contract, which is not an MSME.
88. Once that be so, the question that arises for our consideration is as to whether preference in the matter of award of cloud contract could have been extended to third respondent only because it is registered as MSE?
89. Structuring of the cloud contract is such that the bidder (third respondent) is the MSP. It acts not only on its behalf but also acts on behalf of CSP in submitting the bid. The cloud contract envisages an agreement between MSP and its dominant partner i.e. CSP. The contract further stipulates a guarantee by the CSP that it shall provide all services which are expected to be provided by the CSP and also extend assurances in assisting MSP in performing its part of obligation under the contract. MSP, therefore, is in collaboration with CSP for performing duties under the cloud contract with dominant functions performed by CSP.
90. MSP and CSP are two distinct entities with different roles assigned to them in the cloud contract. The dominant partner of cloud contract i.e. CSP is not an MSE. The MSE regime does not extend benefit of MSE policy in cases of foreign collaboration or an exigency in which the registered MSE is not rendering the services or plays a subservient role to a dominant partner which is not an MSE. Even foreign collaboration or joint venture, etc., is not permissible in the MSME regime. Works contract are also excluded from its purview. The MSME policy, as is apparent from the Act of 2006 as well as procurement policy of 2012 limits its applicability only to registered MSME units for the goods produced by it or services rendered by it. Nothing more and nothing less.
91. Extending the benefit of MSE policy in award of cloud contract in favour of third respondent would thus run counter to the policy objectives and provisions of MSE regime. Extending such benefit will be wholly irrational and arbitrary. Preferential treatment to third respondent under the MSME policy will not subserve the objective of the policy itself and would be arbitrary.
92. Grant of benefit of MSE policy in favour of third respondent for award of cloud contract since is found impermissible and arbitrary, the consequential award of contract to third respondent cannot be sustained and is quashed. Consequently, this petition succeeds and is allowed. Respondent no.2 is directed to proceed further in accordance with law for award of cloud contract, in light of the observations contained in this judgment.
93. Parties are left to bear their own costs.
Order Date :- 10.3.2025
RA
(Vipin Chandra Dixit,J.) (Ashwani Kumar Mishra,J.)
