The Supreme Court has provided a best ending to the 23-year old customs dispute with regards to the refusal of the customs department to refund the duty which was recovered via bank guarantee.
Justices Abhay Oka and Ujjal Bhuyan directed the refund of customs duty amounts recovered by coercive encashment of bank guarantees. It overturned the 2016 judgment of the Gujarat High Court that had denied Patanjali Foods’ ( former Ruchi Soya) refund claim on grounds of unjust enrichment.
The dispute originated in 2002 when M/s MP Glychem Industries (which later merged with Ruchi Soya) imported crude degummed soybean oil at Jamnagar Port. The customs authorities demanded duty based on tariff values fixed under Section 14(2) of the Customs Act, 1962, rather than the transaction value under Section 14(1).
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Ruchi Soya contested the demand, arguing that the notification fixing the tariff value was not in the public domain and hence unenforceable on the date of import. The Gujarat High Court granted interim relief permitting provisional clearance of goods upon furnishing bank guarantees for the differential duty.
Following the High Court’s dismissal of the petition in 2012, the customs department swiftly encashed the bank guarantees amounting to ₹77.4 lakh without awaiting the outcome of a pending appeal before the Supreme Court in a related matter (Param Industries Ltd.). In 2015, the apex court ruled in Param Industries that tariff value notifications must be publicly available to be legally enforceable, indirectly affirming Ruchi Soya’s position.
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Subsequently, Ruchi Soya filed refund claims with the customs department. However, authorities insisted on compliance with Section 27 of the Customs Act, which incorporates the doctrine of unjust enrichment, requiring proof that the duty burden was not passed on to consumers. Despite multiple communications and partial submissions, the refund was denied. The Gujarat High Court, in 2016, upheld the department’s stance, prompting Ruchi Soya to appeal to the Supreme Court.
The Supreme Court closely observed the legal nature of bank guarantees drawn under judicial orders. Invoking such precedents as Oswal Agro Mills and Somaiya Organics, the Court ruled that encashment of a bank guarantee presented as security is not payment of duty. As there was no actual “payment” on the part of the importer under Section 27 of the Customs Act, the doctrine of unjust enrichment was not applicable.
The Court also criticised the customs department for its act of “extreme haste” in encashing the bank guarantees despite awareness of the pending appeal in the Supreme Court. It declared that such coercive recovery actions, without legal mandate, were arbitrary and unsustainable.
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The apex court noted that the department had no right to retain the amounts after the appellate decision in Param Industries, the Court directed the refund of the full amounts with 6% interest from the dates of encashment.
The operating part of the judgment of the apex court reads as follows:
“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 order- in-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.
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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 (supra). They have no authority in law to hold on to such money and, therefore, the same has become totally untenable.
In the circumstances, 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.”
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