SUPREME COURT HOLDS ENCHASHMENT OF BANK GUARANTEES DOES NOT AMOUNT TO PAYMENT OF CUSTOM DUTY
Introduction
On 19th May, 2025, a two judge bench, presided by Justice Oka and Justice Bhuyan, decided the Appeal titled M/S Patanjali Foods Limited (Formerly Known As M/S Ruchi Soya Industries Ltd.) v. Union of India and Ors .(Civil Appeal Nos. 3833-3835 of 2025) This case concerns a long-standing dispute between M/s M.P. Glychem Industries Limited (now merged with Patanjali Foods Limited) and the Customs Department over the legality of encashing bank guarantees furnished as security against disputed customs duties.
Factual Background
M/s M.P. Glychem Industries Limited (later merged with Ruchi Soya, now Patanjali Foods Limited) imported crude degummed soybean oil in 2002. The Customs Department demanded higher duty based on a tariff value notification under Section 14(2) of the Customs Act, which the importer contested, claiming the notification was not in effect at the time. The Company filed a writ petition and was allowed to clear goods by furnishing a bank guarantee for the disputed duty amount.
Eventually, the High Court dismissed the petition in 2012, leading to the department encashing the bank guarantees in 2013. However, the Supreme Court, in a related case in 2015 (Union of India vs. Param Industries), ruled that since the notification was not publicly available when goods were cleared, higher duty could not be demanded. Based on this, the Appellant sought refund in 2016.
The Department insisted on compliance of Section 27 of the Customs Act, including proof against unjust enrichment. The Appellant contested this requirement, arguing that since the duty was not paid but only secured via bank guarantees, Section 27 did not apply. Despite repeated requests, the department maintained its stance, leading to fresh writ petitions, which were dismissed in 2016. However, the High Court allowed the Appellant to submit documents for processing of refund. The matter is now pending before the Supreme Court under the updated name, Patanjali Foods Limited.
Contentions of the Parties
The Appellant’s counsel argued that the High Court erred in applying the doctrine of unjust enrichment and wrongly dismissed their writ petitions. He emphasized that the real issue was whether forcible encashment of bank guarantees (provided as security under a court order) could be considered as payment of customs duty, which it should not. He argued that Section 27 of the Customs Act, which deals with refunds, does not apply in this case because no duty was actually “paid”—only bank guarantees were encashed. The Counsel cited previous Supreme Court judgments (Oswal Agro Mills Ltd. and Somaiya Organics) to assert that encashment of bank guarantees is not equivalent to duty payment, and hence unjust enrichment does not apply. Furthermore, since the Supreme Court had ruled in Param Industries that the department’s demand for differential duty was unjustified, the Government has no legal basis to retain the money obtained by encashing the bank guarantees.
He further argued that the Government acted hastily and arbitrarily, encashing the guarantees before the Supreme Court gave its final ruling, and is now trying to delay refunding the money under the false pretext of unjust enrichment. Therefore, he urged the Court to set aside the High Court’s judgment and order an immediate refund.
On the other hand, the Respondents’ counsel argued that the encashment was lawful, as it occurred after the High Court dismissed the writ petitions. The Appellant had filed refund claims under Section 27 of the Customs Act but failed to submit required documents. Even after reminders, the Appellant only submitted partial documents. Thus, the authorities credited the refund to the Consumer Welfare Fund, citing non-compliance with the unjust enrichment requirements.
The Respondents maintained that the Appellant’s claim was procedurally flawed, and refund could only be granted if the requirements of Section 27 were met. Therefore, they argued, the High Court rightly dismissed the writ petitions, and the appeals should be dismissed as well.
Court’s analysis of the principles involved
The legal discussion centers on the doctrine of unjust enrichment in the context of refund of customs and excise duties under Section 27 of the Customs Act and Section 11B of the Central Excise Act. A refund can be denied if the burden of duty has been passed on to another party.
- Doctrine of Unjust Enrichment: A claimant must prove they bore the duty themselves and did not pass it on to others to be eligible for a refund.
- Mafatlal Industries Case: Laid down principles governing refund claims under tax statutes, affirming that all refunds must follow statutory procedures and time limits.
- Bank Guarantees not equivalent to Payment: In Oswal Agro Mills Ltd. Vs. Asstt. Collector of Central Excise, Division Ludhiana (1994) 2 SCC 546, the Supreme Court held that furnishing a bank guarantee does not equate to paying duty, so Section 11B (refund provision) does not apply.
- Improper Encashment of Bank Guarantee: Authorities cannot encash bank guarantees unless permitted by the court. Doing so without such direction is improper.
- Distinction from DCW Ltd. Case: In DCW, the Court allowed encashment due to applicant’s default, unlike the present case where the revenue acted prematurely without court approval.
The Court reasserted that coercive recovery (like premature bank guarantee encashment) is impermissible and refund cannot be denied on unjust enrichment grounds if payment was not actually made, but only secured via a bank guarantee.
Decision
In this case, the Supreme Court held that the encashment of bank guarantees provided by the Appellant cannot be considered as payment of customs duty. The Respondents (government authorities) acted arbitrarily by encashing the guarantees instead of waiting for the Court’s decision or asking the Appellant to renew them.
As a result, the doctrine of unjust enrichment and Section 27 of the Customs Act (which typically governs refund claims) do not apply because there was no actual duty paid—only wrongful encashment of security.
Citing its earlier ruling in Union of India Vs. Param Industries Limited (2016) 16 SCC 692, the Court found that the Respondents had no legal authority to retain the money and that doing so was unjust and unlawful.
The Court held:
- The High Court’s Order dated 28.04.2016 was set aside.
- The Respondents were directed to refund the amounts covered by the bank guarantees to the Appellant.
- The refund to carry interest at 6% per annum from the date of encashment until repayment.
- The refund with interest to be made within four months from the date of the judgment.
Conclusion
The Supreme Court dealt at considerable depth with the concept of unjust enrichment in the backdrop of Section 27 of the Customs Act and Section 11B of Central Excise Act. It further interpreted the meaning of ‘Duty Paid’ at considerable length.
Yash Hari Dixit
Associate
The Indian Lawyer and Allied Services
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