Supreme Court Rejects MSME Claim Involving Cloud Services Outsourced To Non-MSME Entity Before The Hon’ble Supreme Court Of India

Summary:

^[1]The Supreme Court upheld the decision of the Allahabad High Court which had quashed a ₹37.92 crore contract awarded to CloudThat Technologies, a registered Micro and Small Enterprise (MSE), for cloud services on behalf of Amazon Web Services (AWS). The Court endorsed the High Court’s view that allowing an MSME to act merely as a conduit for a non-MSME foreign entity violated the intent of the Public Procurement Policy for MSEs, 2012. The Directorate General of Hydrocarbons (DGH) was directed to re-evaluate the tender in accordance with law.

Facts:

In March 2024, the DGH floated a tender for cloud-based upgradation of the National Data Repository (NDR). Though ThoughtSol Infotech emerged as the lowest (L1) bidder after technical and financial evaluations, the contract was awarded to CloudThat Technologies under the MSME price preference clause.

• ThoughtSol challenged the award before the Allahabad High Court, contending that 97% of the contract was to be executed by AWS—a non-MSME—and that CloudThat was only a managed service provider playing a subordinate role.
• On March 10, 2025, a Division Bench of the High Court held that the MSME benefits could not be extended to entities acting on behalf of foreign service providers. The contract awarded to CloudThat was thus quashed. The Supreme Court, without interfering with the judgment, dismissed CloudThat’s Special Leave Petition.

Issues:

Whether a registered MSME can claim benefit under the Public Procurement Policy when the substantive contract performance is outsourced to a non-MSME foreign entity?

Held:

The Supreme Court affirmed that:

1. The MSME policy is intended to benefit domestic micro and small enterprises that produce goods or render services themselves.
2. CloudThat, acting as an intermediary for AWS—which was to perform core services such as computing, data storage, analytics, and licensing—could not be the beneficiary of MSME preference.
3. Allowing such arrangements would undermine the objectives of the Micro, Small and Medium Enterprises Development Act, 2006, and lead to unfair exclusion of genuine domestic bidders.
4. The Directorate General of Hydrocarbons must re-evaluate the tender, effectively reconsidering ThoughtSol’s bid.

Analysis:

This judgment sets an important precedent against misuse of MSME benefits through backdoor outsourcing. The Court’s reasoning ensures that policy preferences are not used to disguise commercial arrangements that bypass the intended beneficiaries. It reinforces the principle that MSME status must reflect actual value addition or service performance by the registered entity—not merely contractual facilitation.

^[1] THOUGHTSOL INFOTECH vs. UNION OF INDIA & ANR.

Special Leave Petition

Judgment Date: May 15, 2025