State Cannot Recover Unintended Benefit From Contractor After Accepting Lump Sum Contract: Telangana HC

The Telangana High Court on 9 July held that the State cannot withhold a contractor's security deposit by raising a claim of “unintended benefit” from Central Excise Duty exemption after accepting a lump-sum contract value without accounting for the exemption at the tender stage.

A Division Bench of Justices Moushumi Bhattacharya and Gadi Praveen Kumar dismissed the State's appeal and partly allowed the appeal filed by Gammon Engineers and Contractors Pvt. Ltd. by setting aside the liberty granted by the Single Judge to continue an enquiry into the alleged excess benefit. The held:

“We are hence of the considered view that having failed to consider the exemption Notification and having indicated the lump sum estimated value of the work without specifying the item-wise rates and the tax component (pursuant to the exemption), the appellants/State cannot foist the liability on the Contractor/writ petitioner, that too at a belated stage, after the filing of the Writ Petition.”

The dispute arose from an Engineering Procurement and Construction (EPC) contract awarded by the State for execution of the Stage-III Pumping Station under the Kalwakurthy Lift Irrigation Scheme.

Gammon Engineers and Contractors had deposited Rs. 10 crore as security, which the State later retained based on audit objections alleging that the contractor had received an unintended benefit of Rs. 23.93 crore due to exemption from Central Excise Duty and Customs Duty on electro-mechanical equipment.

The Court noted that the Central Government issued the exemption notification on 8 January 2004, nearly a year before the State floated the tender in January 2005. Despite being aware of the exemption, the State prepared the tender and accepted the contractor's bid on a lump-sum basis without specifying any item-wise tax component or revising the estimated project value. The Bench held:

“The abstract placed by the appellants/State and included as part of Writ Appeal No. 246 of 2025, factoring in the Excise Duty exemption, was admittedly not part of the tender document. The said document was included later in the writ proceedings as part of the counter-affidavit. Hence, having entered into an agreement for the lump sum value of the contract, the appellants/State cannot seek to modify the contract value after the execution of the contract.”

The Bench observed that the State could not alter the contractual value after completion of the project by attributing its failure to consider the exemption to the contractor. It noted that the allegation of “unintended benefit” was raised only after Gammon Engineers and Contractors sought refund of the security deposit and approached the Court.

It also held that the Accountant General (Audit) had informed the authorities in July 2024 that no audit objections remained pending regarding the work. Furhter that the subsequent revival of allegations relating to excise duty exemption was arbitrary and appeared to be an attempt to avoid refunding the security deposit.

The judges also held that once the demand based on the alleged unintended benefit was found unsustainable and refund of the security deposit was directed, allowing a parallel enquiry into the same issue would be contradictory. They stated:

“Allowing the Writ Petition and directing refund of security deposit and permitting the appellants/State to go ahead with an enquiry in relation to the alleged unintended benefits would be inconsistent and contradictory.”

Accordingly, the High Court upheld the direction to refund Rs. 10 crore security deposit to Gammon Engineers and Contractors, dismissed the State's appeal, allowed the contractor's appeal, and directed that no further enquiry be conducted regarding the alleged unintended benefit.