Encashment of Bank Guarantee Furnished as Security Is Not 'Duty Paid' Under S.27 Customs Act; Unjust Enrichment Doctrine Inapplicable for Refund: Supreme Court - 2025-05-20

Supreme Court: Encashment of Security Bank Guarantee Not 'Duty Paid'; Unjust Enrichment No Bar to Refund

New Delhi: In a significant ruling, the Supreme Court, comprising Hon'ble Mr. Justice Abhay S. Oka and Hon'ble Mr. Justice Ujjal Bhuyan , has held that the encashment of a bank guarantee furnished as security for differential customs duty does not constitute "payment of duty" under Section 27 of the Customs Act, 1962. Consequently, the doctrine of unjust enrichment is not applicable when claiming a refund of such an encashed amount. The Court directed the Union of India to refund the amounts covered by the bank guarantees to M/s Patanjali Foods Limited (formerly Ruchi Soya Industries Ltd. ) with 6% interest from the dates of encashment.

The decision came in civil appeals filed by Patanjali Foods against a Gujarat High Court judgment dated April 28, 2016, which had dismissed the company's plea for a refund without having to prove it hadn't passed on the duty burden to consumers.

Background of the Dispute

The case originated from the import of crude degummed soyabean oil by M/s M.P. Glychem Industries Limited (later merged with Ruchi Soya , now Patanjali Foods) in 2002. A dispute arose with the Customs department over the applicable duty rate. The department demanded a higher duty based on a tariff value notification under Section 14(2) of the Customs Act, while the importer contended that duty was payable under Section 14(1) as the notification was not effectively in force at the time of import.

Pending resolution, the High Court, in an interim order, allowed clearance of goods upon furnishing bank guarantees for the differential duty amounts (Rs. 9,19,801.00, Rs. 45,99,006.00, and Rs. 22,25,052.00). Subsequently, the High Court dismissed the importer's writ petitions on September 13, 2012. Following this, the department encashed the bank guarantees on January 22 and 28, 2013, while appeals were pending before the Supreme Court.

In a crucial development, the Supreme Court, in Union of India Vs. Param Industries Limited ((2016) 16 SCC 692), decided on May 5, 2015, that the department was not justified in claiming the differential duty as the relevant notification was not offered for sale at the time of clearance.

The Refund Claim and High Court's Stance

Following the Param Industries judgment, Patanjali Foods filed refund applications on June 4, 2015 (Note: Para 12 of the judgment states 04.06.2016, but surrounding dates in Paras 13-16 suggest 2015 for consistency). The department, vide letters dated June 17, 2015, and July 30, 2015, insisted on compliance with Section 27 of the Customs Act, particularly the submission of documents to prove that the claim was not hit by the principle of unjust enrichment.

Patanjali Foods challenged these letters before the Gujarat High Court, arguing that Section 27 and the unjust enrichment principle were inapplicable as no "duty" was paid; rather, security bank guarantees were encashed. The High Court, by its order of April 28, 2016, dismissed the petitions but allowed the appellant to produce documents before the department regarding unjust enrichment.

Appellant's Contentions before Supreme Court

Mr. Balbir Singh, learned senior counsel for Patanjali Foods, argued: * The core issue was whether forcible encashment of bank guarantees, offered as security, could be deemed "duty paid" by the appellant. * Encashment of a bank guarantee is not equivalent to payment of duty under Section 27 of the Customs Act or Section 11B of the Central Excise Act, 1944. * The Supreme Court in Oswal Agro Mills Ltd. Vs. Asstt. Collector of Central Excise and Somaiya Organics (India) Ltd. Vs. State of U.P. had settled that unjust enrichment does not apply when a bank guarantee offered as security is encashed. * The department's retention of money after the Param Industries judgment was untenable, especially given the hasty encashment of guarantees.

Respondent's Submissions

Ms. Nisha Bagchi, learned senior counsel for the Union of India, contended: * The appellant was required to satisfy Section 27 of the Customs Act for refund, including proving no unjust enrichment. * The department was within its rights to encash the bank guarantees after the High Court dismissed the writ petitions. * While refund was sanctioned, it was ordered to be credited to the Consumer Welfare Fund due to non-compliance with unjust enrichment provisions.

Supreme Court's Analysis and Reasoning

The Supreme Court, led by Justice Ujjal Bhuyan , meticulously analyzed Section 27 of the Customs Act and the doctrine of unjust enrichment as laid down in Mafatlal Industries Ltd. Vs. Union of India . The Court emphasized that Section 27 allows for refund of duty "paid" by the claimant, who must also establish that the incidence of such duty was not passed on.

The pivotal question was whether encashment of a bank guarantee equated to "payment of duty." The Court heavily relied on its previous decisions:

* In Oswal Agro Mills Ltd. Vs. Assistant Commissioner of Central Excise, Division Ludhiana , [(1994) 2 SCC 546] ( Oswal Agro Mills Ltd. 2 ), the Court held: > "The amount of the disputed tax or duty that is secured by a bank guarantee cannot, therefore, be held to be paid to the revenue. There is no question of its refund and Section 11-B is not attracted." * This principle was endorsed by a Constitution Bench in Somaiya Organics (India) Ltd. Vs. State of U.P. , [(2001) 5 SCC 519], which stated: > "Furnishing of bank guarantee cannot tantamount to making of payment as it was to avoid making payment of the vend fee that bank guarantees were issued."

The Supreme Court distinguished the High Court's reliance on DCW Limited Vs. Union of India , [(2016) 15 SCC 789]. In DCW Limited , the court had permitted the revenue to encash the bank guarantee due to the applicant's persistent default in paying duty, unlike the present case where the revenue acted unilaterally and hastily.

Applying these principles, the Supreme Court found that the respondents had recovered the differential duty by the coercive method of encashing bank guarantees furnished as security. The Court observed: > "Under the scheme of the Customs Act, duty is assessed provisionally or finally whereafter an assessment order or order-in-original is passed... The key word in Section 27 of the Customs Act is ‘paid’. Refund thereunder is permissible only if any duty is ‘paid’ by the claimant... In the facts of the present case encashment of bank guarantees offered as security cannot be treated as payment of customs duty. Respondents could have either awaited the decision of this Court or could have directed the appellant to renew the bank guarantees. This they did not do. Instead they resorted to arbitrary encashment of the bank guarantees. Such encashment of bank guarantees cannot be treated as payment of duty or duty paid by a claimant. In such circumstances, the doctrine of unjust enrichment or Section 27 of the Customs Act would not be applicable."

The Court concluded that the respondents were holding onto the appellant's money without legal authority, especially after the Param Industries judgment.

The Verdict

The Supreme Court set aside the impugned judgment and order of the High Court dated April 28, 2016. It directed the respondents to immediately refund the amounts covered by the bank guarantees to Patanjali Foods Limited. Recognizing the retention as "unjust and unlawful," the Court ordered that the refund carry interest at the rate of 6 percent per annum from the respective dates of encashment until repayment, to be completed within four months.

Implications of the Judgment

This judgment provides crucial clarity on the treatment of amounts realized through the encashment of bank guarantees furnished as security in customs duty disputes. It reinforces that such recoveries are distinct from "duty paid" and, therefore, claims for their refund (when the underlying demand is set aside) are not fettered by the stringent requirements of proving non-passage of duty burden under the unjust enrichment doctrine. This safeguards assessees against coercive recoveries that are later found to be unlawful.