Courts Cannot Segregate Components Of Composite Contracts To Enforce MSMED Act Compliance: J&K&L High Court

The Jammu & Kashmir and Ladakh High Court has held that it is impermissible for a court to sever or separate the various components of a composite “Supply-Installation-Testing” (SIT) contract solely to ensure compliance with the MSMED Act or the Public Procurement Policy of 2012.

The High Court observed that tender formulation and contract design fall exclusively within the employer's domain unless mala fides or misuse of statutory power is shown.

The Court was hearing a Letters Patent Appeal filed by Micro and Small Enterprises (MSEs) challenging three e-NITs issued by the Kashmir Power Distribution Corporation Limited (KPDCL) for electrification works under the Revamped Distribution Sector Scheme (RDSS).

The appellants sought segregation of the procurement components of the SIT contracts to claim reservation benefits under the MSMED Act and the Procurement Policy of 2012.

A Division Bench comprising Chief Justice Arun Palli and Justice Rajnesh Oswal, while dismissing the appeal, observed that “it is impermissible for the Court to segregate the various components of the contract in question merely to ensure compliance with the MSMED Act and the Procurement Policy of 2012”.

Referring to a series of decisions by the Supreme Court, the Bench further reiterated that “Courts should not interfere with the employer's prerogative in formulating tender conditions and awarding contracts. This right falls within the employer's exclusive domain, barring evidence of malice or misuse of statutory powers”.

The matter arose after the appellants challenged three e-NITs issued for electrification works under the RDSS scheme, asserting that several items included in the contracts were part of the 358 items reserved exclusively for procurement from MSEs under Clause 11 of the Public Procurement Policy for MSEs, 2012.

They argued that the contracts were predominantly procurement-based and that installation was only an incidental component and sought a direction to segregate the procurement components of the SIT contracts so that reserved items could be purchased from MSEs, and to mandate procurement of 25% of non-reserved items from them under Clause 3 of the Procurement Policy.

The J&K and Ladakh High Court examined the nature of the three contracts and held that they constituted composite SIT contracts involving supply, installation and testing. On this basis, the Court rejected the plea that the reserved items under the Procurement Policy must be separated for exclusive procurement from MSEs.

The Bench took note that Clause 6.5.1 of the RDSS Scheme makes the “Quality Assurance and Inspection Plan” an inseparable part of the turnkey contract, which itself establishes the comprehensive nature of the contract.

Referring to the principles laid down in Michigan Rubber (I) Ltd. v. State of Karnataka, the Court reiterated that tender terms are within the exclusive domain of the employer and are not open to judicial interference unless arbitrary, discriminatory, mala fide or contrary to statutory rules.

The Court reproduced the principles summarised in Michigan Rubber, reiterating that “in the matter of formulating conditions of a tender document and awarding a contract, greater latitude is required to be conceded to State authorities unless the action is found to be malicious or a misuse of statutory powers.”

The Court further relied on Airport Authority of India v. CAPSR to emphasise that judicial review in tender matters is extremely limited and that Government departments enjoy full autonomy in defining tender conditions.

Applying these principles, the Bench concluded that it was not open to the Court to restructure or split the e-NITs to bring them within the MSMED Act.

The Court also rejected the plea that the appellants could not be denied relief for lack of participation in the tender process, holding that framing of such an issue by the Writ Court was unnecessary because the appellants were themselves admittedly ineligible.

The Bench held that the appellants failed to establish arbitrariness in the formulation of the composite contracts or demonstrate any violation of statutory requirements.

Accordingly, the High Court dismissed the appeal, affirming that the MSMED Act and the Procurement Policy of 2012 do not apply to the composite SIT contracts issued under the RDSS Scheme, and that courts cannot intervene to restructure tender conditions to enable such applicability.

Case Title: Zain Electricals & Others v. Union Territory of J&K & Others

Citation: 2025 LiveLaw (JKL)

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