Customs Wrongly Encashed Bank Guarantee during Appeal Pendency: CESTAT Directs Refund, Rejects Limitation Claim [Read Order]
CESTAT held that encashing bank guarantee does not amount to “payment of duty” while denying the Customs’ claim of bar by limitation.
![Customs Wrongly Encashed Bank Guarantee during Appeal Pendency: CESTAT Directs Refund, Rejects Limitation Claim [Read Order]](https://images.taxscan.in/h-upload/2025/11/03/2102001-customs-encashed-bank-guarantee-appeal-pendency-cestat-refund-taxscan.webp "Customs Wrongly Encashed Bank Guarantee during Appeal Pendency: CESTAT Directs Refund, Rejects Limitation Claim [Read Order]")
The Mumbai Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) recently directed the Customs department to refund a bank guarantee that was encashed by them during the pendency of an appeal which was eventually answered against the customs.
The factual matrix follows the appellant, M/s Oswal Industries Ltd. (Oswal Industries) who had imported goods vide three bills of entry dated August 21, 2003, and procured provisional release of the goods on January 12, 2004 against execution of a bond and furnishing of a bank guarantee of ₹10,00,000.
A show-cause notice (SCN) was issued and subsequently an original order dated June 9, 2006 which confirmed customs’ demand of ₹10,27,823. The order was challenged by the appellant before the CESTAT. However, the Customs encashed the bank guarantee and deposited the proceeds in the Government treasury on February 6, 2007.
Subsequently, the Tribunal passed a decision in favor of Oswal Industries by a final order dated November 8, 2016 which set aside the original adjudication.
Following the favourable order, the appellant sought refund of the enhanced bank guarantee and filed an on March 19, 2018 (with a Chartered Accountant’s certificate) and a subsequent application on February 17, 2020 - both of which were refused by the Customs on the ground that the claim was time-barred under Section 27 (1B) of the Customs Act, 1962.
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The customs’ rejection was upheld by the adjudicating authority and the Commissioner (Appeals), prompting the present appeal.
Anil K. Gidwani, Advocate, appeared for Oswal Industries while Rajiv Ranjan, Authorized Representative, appeared for the Revenue.
The Bench of Ajay Sharma, Member (Judicial).analysed the scheme and language of Section 27 and observed that the provision governs claims for refund of duty or interest “paid by him” or “borne by him.”
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The Bench relied on the Supreme Court decision in Mafatlal Industries Ltd. v. Union of India (1997) where it was laid down that ‘Section 27 cannot be construed as a device enabling the state to unjustly retain an amount not legally due’.
The Apex Court had in similar fashion observed in Oswal Agro Mills Ltd. v. Asstt. Collector of Central Excise, Division Ludhiana (1995) that the Customs had displayed improper behaviour and that bank guarantees were furnished to secure the interest of the parties till determination of matters pending before the Court and it could not be encashed till the decision of the Court.
Following the interpretation of law in the above precedents, CESTAT HELD THAT the one-year limitation under Section 27 could not be invoked to defeat a refund of sums realized by encashment of security.
Accordingly, the Tribunal directed the Customs to refund the bank guarantee amount.
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