Supreme Court upholds quashing of contract awarded to MSME acting on behalf of Amazon

The Supreme Court recently upheld an Allahabad High Court decision quashing the award of a ₹37.92 crore cloud services contract to CloudThat Technologies, a registered Micro and Small Enterprise (MSE), on the ground that the bulk of the contract would be executed by Amazon Web Services (AWS), a non-MSME entity. [CloudThat v. ThoughtSol].A Bench of Justices MM. Sundresh and Rajesh Bindal held,“We do not find any ground to interfere with the impugned order passed by the High Court. The Special Leave Petition is, accordingly, dismissed.”.The Directorate General of Hydrocarbons (DGH), functioning under the Ministry of Petroleum and Natural Gas, had floated a tender in March 2024 for cloud-based upgradation of its National Data Repository (NDR).While Thoughtsol Infotech emerged as the lowest bidder (L1) after technical and financial evaluation, the contract was instead awarded to CloudThat Technologies by invoking the price-matching preference granted to MSMEs under the Public Procurement Policy for MSEs, 2012.This decision was challenged before the Allahabad High Court by Thoughtsol, which argued that the award of the contract to CloudThat violated both the letter and spirit of the MSME policy, since 97% of the contract’s scope was to be undertaken by Amazon Web Services, CloudThat’s cloud service provider (CSP), which is not registered as an MSME..On March 10, a Division Bench of Justices Ashwani Kumar Mishra and Vipin Chandra Dixit ruled in favour of Thoughtsol. The Court held that CloudThat, while technically registered as an MSME, played a subordinate and facilitative role in the contract as a managed service provider (MSP), with AWS performing the dominant technical functions.“Goods and services for the cloud contract are not rendered by the bidder in its capacity as MSP. It is merely playing a supporting role in providing cloud services on behalf of AWS,” the High Court held..The Court noted that under the contract, AWS would be responsible for critical services such as computing, data storage, analytics, software licensing and ongoing support. These accounted for 97% of the total financial outlay. CloudThat, on the other hand, would only handle incidental services such as migration support and helpdesk functions, valued at less than 3%.It further noted that CloudThat did not originate or provide the core cloud technology, software, or infrastructure; it merely facilitated AWS’s services under a back-to-back support arrangement.The High Court concluded that extending MSME preference to such a bidder would defeat the objective of the Micro, Small and Medium Enterprises Development Act, 2006, which envisages price preference only for MSEs that produce the goods or render the services being procured.Referring to government memoranda and FAQs clarifying the MSME policy, the High Court emphasised that traders, intermediaries, or entities acting on behalf of foreign companies were expressly excluded from receiving MSME benefits.“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,” the Court ruled.The Court directed DGH to re-evaluate the tender process and award the contract in accordance with law, effectively requiring it to reconsider Thoughtsol’s bid..CloudThat was represented by Senior Advocate Dama Seshadri Naidu with Advocates Ajith Wiliiyam S and Karunakaran. .ThoughtSol was represented by Senior Advocates Mukul Rohatgi and J Sai Deepak with a team from King Stubb & Kasiva comprising Advocates Sukrit R Kapoor, Aayushya Aankul, Navnit Kumar. Advocates Divyanshu Kumar Srivastava and Saurabh Pandey also represented ThoughtSol..The government organisation was represented by Additional Solicitor General Brijender Chahar, with Advocates Shravan Yammanur and Mangesh Krishna ..[Read order]