2025 (5) TMI 2028 - SC - Customs

Seeking refund of the differential duty - encashment of the bank guarantee furnished as security for differential customs duty - non-filing of refund application in proper format - non-submission of documents like balance sheet profit and loss account etc. for the relevant period - Doctrine of unjust enrichment - compliance with the procedure and requirements of Section 27 of the Customs Act - clearance of the imported goods for home consumption - tariff value fixed for the imported goods in terms of Section 14(2) of the Customs Act 1962 - HELD THAT - It is thus evident that respondents had recovered the differential duty amount by adopting coercive method i.e. encashment of the bank guarantees which were offered as security for the differential amount of duty on orders of the High Court. Under the scheme of the Customs Act duty is assessed provisionally or finally whereafter an assessment order or orderin- original is passed. Post assessment order or order-in-original the concerned importer is required to pay the assessed duty. If the importer does not pay the duty revenue can enforce recovery under Section 142 of the Customs Act as recovery of sums due to the Government. 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 which subsequently becomes refundable either fully or in part. 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. It is evidently clear that respondents are holding on to money of the appellant which they are not authorized to do so as per judgment of this Court in Param Industries Limited 2015 (6) TMI 732 - SUPREME COURT They have no authority in law to hold on to such money and therefore the same has become totally untenable. Thus we set aside the impugned judgment and order of the High Court dated 28.04.2016 and direct the respondents to immediately refund the amounts covered by the bank guarantees to the appellant. Since retention of such amounts is unjust and unlawful the same would carry interest at the rate of 6 percent from the dates of encashment till repayment. Let the repayments with applicable interest be released to the appellant within a period of four months from today. Appeals are allowed. However there shall be no order as to cost.

The core legal questions considered by the Court in this matter were:

1. Whether the doctrine of unjust enrichment under Section 27 of the Customs Act applies to amounts recovered by encashment of bank guarantees furnished as security for differential customs duty.

2. Whether encashment of bank guarantees pursuant to dismissal of writ petitions and without a court order permitting such encashment can be equated to payment of customs duty by the appellant.

3. Whether the department was justified in withholding refund of the amounts recovered by encashing the bank guarantees on the ground of non-compliance with procedural requirements under Section 27 of the Customs Act.

4. The applicability and interpretation of Section 27 of the Customs Act and related judicial precedents concerning refund claims and the doctrine of unjust enrichment.

Issue-wise Detailed Analysis

Issue 1: Applicability of the Doctrine of Unjust Enrichment under Section 27 of the Customs Act

The legal framework relevant to this issue is Section 27 of the Customs Act, which governs refund claims of customs duty paid or borne by a claimant. The provision requires that refund applications be accompanied by documentary evidence establishing that the duty was paid by the claimant and that the incidence of such duty was not passed on to any other person, thereby preventing unjust enrichment.

The Court examined the doctrine of unjust enrichment as elaborated in the nine-Judge Bench decision in Mafatlal Industries Ltd., which clarified that refund claims must be adjudicated under the statute and that refund is permissible only if the claimant has borne the burden of the duty without passing it on. The doctrine is intended to prevent a claimant from recovering duty amounts twice-once from the government and again from others.

However, the Court distinguished the present facts from typical refund claims, emphasizing that the amounts in question were secured by bank guarantees and not paid as duty. Precedents such as Oswal Agro Mills Ltd. and Somaiya Organics (India) Ltd. were pivotal, holding that furnishing a bank guarantee as security does not amount to payment of duty and thus does not trigger the unjust enrichment doctrine under Section 27.

The Court found that since the amounts were recovered by encashment of bank guarantees and not by actual payment of duty, the doctrine of unjust enrichment was inapplicable. The department's insistence on compliance with Section 27 requirements was therefore misplaced.

Issue 2: Whether Encashment of Bank Guarantees Constitutes Payment of Customs Duty

The Court analyzed the nature of bank guarantees furnished pursuant to interim orders of the High Court. The guarantees were security instruments to protect the revenue pending final adjudication of the dispute over differential customs duty. The Court relied on precedents, particularly Oswal Agro Mills Ltd. (both decisions) and the Constitution Bench ruling in Somaiya Organics, which held that encashment of a bank guarantee cannot be equated with payment of duty.

The Court observed that the department encashed the bank guarantees without any court order permitting such action and prior to the final decision of this Court in the related appeals. This was characterized as an arbitrary and coercive act by the department, which should have awaited the outcome of the appeals or sought renewal of the guarantees.

Thus, the Court concluded that encashment of bank guarantees did not amount to payment of customs duty by the appellant, and accordingly, the provisions relating to refund of paid duty under Section 27 could not be invoked.

Issue 3: Justification for Withholding Refund on Grounds of Non-Compliance with Section 27

The department contended that refund claims were not accompanied by proper documentation as required under Section 27, including evidence to negate unjust enrichment. Despite the appellant's submissions that Section 27 was not applicable, the department persisted in demanding these documents and withheld refund.

The High Court upheld the department's position, directing the appellant to produce the requisite documents and process refund accordingly. However, the Supreme Court found this approach erroneous in light of the fact that the amounts were not paid duty but recovered by encashing bank guarantees.

The Court emphasized that since the doctrine of unjust enrichment and Section 27 apply only when duty has been paid and claimed for refund, the department's insistence on procedural compliance was unjustified. The Court also noted that the department's failure to await the final appellate decision before encashing the guarantees was improper.

Issue 4: Interpretation of Section 27 of the Customs Act and Judicial Precedents

The Court undertook a detailed examination of Section 27, highlighting that refund claims must be made within prescribed time limits and accompanied by evidence that the duty was paid and not passed on. The Court reiterated principles from Mafatlal Industries Ltd., which clarified the scope and limitations of refund claims and the doctrine of unjust enrichment.

Further, the Court distinguished the facts of DCW Limited, where the doctrine was applied because the revenue was permitted by the court to encash bank guarantees after the applicant defaulted on payment. In contrast, in the present case, no such permission was granted and the revenue acted prematurely.

The Court reaffirmed the principle that bank guarantees are security instruments and do not constitute payment of duty. It held that the revenue cannot convert such security into payment by unilateral encashment without judicial sanction.

Conclusions

The Court concluded that the doctrine of unjust enrichment under Section 27 of the Customs Act does not apply to amounts recovered by encashment of bank guarantees furnished as security for disputed customs duty. Encashment of bank guarantees does not amount to payment of duty by the appellant.

The department's action in encashing the bank guarantees without court permission and prior to the final adjudication was arbitrary and unlawful. Consequently, the amounts so recovered must be refunded to the appellant forthwith, with interest.

Significant Holdings

"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 which subsequently becomes refundable either fully or in part. In the facts of the present case encashment of bank guarantees offered as security cannot be treated as payment of customs duty."

"The doctrine of unjust enrichment or Section 27 of the Customs Act would not be applicable. It is evidently clear that respondents are holding on to money of the appellant which they are not authorized to do so as per judgment of this Court in Param Industries Limited (supra). They have no authority in law to hold on to such money and, therefore, the same has become totally untenable."

"Furnishing of bank guarantee is only a promise by the bank to pay to the beneficiary the amount under certain circumstances contained in the bank guarantee. 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."

"Respondents had recovered the differential duty amount by adopting coercive method i.e. encashment of the bank guarantees which were offered as security for the differential amount of duty on orders of the High Court... 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."

"We set aside the impugned judgment and order of the High Court dated 28.04.2016 and direct the respondents to immediately refund the amounts covered by the bank guarantees to the appellant. Since retention of such amounts is unjust and unlawful, the same would carry interest at the rate of 6 percent from the dates of encashment till repayment."

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