Encashment of bank guarantees offered as security cannot be treated as payment of customs duty: Supreme Court

Supreme Court: While considering the instant appeal revolving around refund of customs duty thereby challenging the decision of Gujarat High Court in Ruchi Soya Industries Ltd. v. Union of India, 2016 SCC OnLine Guj 10110; the Division Bench of Abhay S. Oka and Ujjal Bhuyan*, JJ., opined that in the instant case, the Customs Department resorted to arbitrary encashment of the bank guarantees. Such encashment of bank guarantees cannot be treated as payment of customs duty or duty paid by a claimant. In such circumstances, the doctrine of unjust enrichment or Section 27 of the Customs Act, 1962 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 (…) They have no authority in law to hold on to such money and, therefore, the same has become totally untenable”.

Background and Legal Trajectory:

M.P. Glychem Industries Limited (‘M.P. Glychem’) imported certain quantity of crude degummed soyabean oil of edible grade in bulk at Jamnagar and filed bill of entry on 02-09-2002 seeking clearance of the imported goods for home consumption. Customs department (department) did not clear the goods on the ground that appellant was required to pay higher customs duty on the basis of tariff value fixed for the imported goods in terms of Section 14(2) of the Customs Act, 1962. Contention of the appellant was that at the time of the import of the goods the concerned notification issued by Government of India fixing tariff value under Section 14(2) of the Customs Act had not come into effect. Therefore, appellant was liable to pay duty only in terms of the provisions contained in Section 14(1) of the Customs Act.

Since there was an impasse with the imported goods being held up, appellant filed Special Civil Application before the High Court challenging the validity of the notification issued by the Government of India fixing the tariff value of the imported goods i.e. crude degummed soyabean oil (‘subject goods’) as also the date of coming into effect of the said notification. High Court passed an order dated 07-10-2002 admitting the writ petition and granted interim relief to the effect that for clearance of the goods in question, appellant should furnish a bank guarantee for the difference of duty of customs under Sections 14(1) and 14(2) of the Customs Act, clarifying that this arrangement would be subject to order of final assessment.

On 09-10-2002, appellant had furnished bank guarantee for the differential amount of Rs. 9,19,801.00 through its banker in favour of the department. Furthermore, bank guarantees to the extent of Rs. 45,99,006.00 and Rs. 22,25,052.00 being the differential amounts of duty were furnished. Upon furnishing the bank guarantees, the subject goods were allowed to be cleared by paying customs duty payable under Section 14(1) of the Customs Act.

In the meanwhile, M.P. Glychem Industries Limited merged with Ruchi Soya Industries Limited. While related civil appeals were pending before the Supreme Court, the department on 28-01-2013 encashed the bank guarantees and appropriated the sums covered by the bank guarantees.

The Supreme Court in Union of India v. Param Industries Limited, (2016) 16 SCC 692, held that though the notification might have been published on the date when the goods were cleared, it was not offered for sale by the Central Board of Excise and Customs which took place much thereafter. Therefore, it was not justified and lawful on the part of the department to claim the differential amount of duty on the basis of the said notification.

On 04-06-2016, appellant filed three similar refund applications before the department seeking refund of the differential duty amounts which were secured by means of the bank guarantees. Department issued letter dated 17-06-2015 to the appellant raising two issues: first was regarding non-filing of refund application in proper format and the second was with regard to non-submission of documents like balance sheet, profit and loss account etc. for the relevant period to show that the claim of refund is not hit by the principle of unjust enrichment.

According to the appellant, despite several personal meetings and oral requests, department remained adamant that appellant should discharge the burden that it had not unjustly enriched itself and, therefore, would be entitled to the refund.

The appellant thus approached the Gujarat High Court whereby, the Court via the impugned judgment Ruchi Soya Industries Ltd (supra) dismissed the writ petitions. However, it was observed that despite dismissal of the writ petitions, it would be open to the appellant to produce necessary documents before the department as demanded in the context of the question of unjust enrichment. High Court directed that if such documents were produced by 31-07-2016, department should process the refund applications in accordance with law.

During the hearing before the Supreme Court, the application was allowed, by which the name of the appellant was changed from Ruchi Soya Industries Limited to Patanjali Foods Limited.

Court’s Assessment:

Perusing the matter, the Court noted that since the department and the High Court had insisted that doctrine of unjust enrichment would be applicable on the facts of the instant case, the Court deemed it fit to discuss the doctrine. The Court pointed out that Section 27 of the Customs Act and Section 11B of the Central Excise Act deal with the question of refund. Refund can be denied either in part or wholly by applying the doctrine of unjust enrichment.

The Court explained that Section 27 of the Customs Act emphasises that any person claiming refund of any duty may make an application for refund of such duty and interest, if any, paid on such duty to the Assistant Commissioner of Customs or Deputy Commissioner of Customs if he had paid the duty in pursuance of an order of assessment or borne by him. Such application besides being required to be filed within the stipulated period should also be accompanied by such documentary and other evidence to establish that the amount of duty and interest which is claimed by way of refund was collected from or paid by him and that the incidence of such duty and interest had not been passed on by him to any other person. The Court pointed out that the doctrine of unjust enrichment was discussed at length in Mafatlal Industries Ltd. v. Union of India, (1997) 5 SCC 536, while also considering various questions concerning refund of excise and customs duty collected contrary to law, in all its shades.

Perusing the impugned judgment of the High Court, the Court found that it had relied on the case of DCW Limited v. Union of India, (2016) 15 SCC 789, and held that that the doctrine of unjust enrichment would be clearly applicable. Therefore, burden would be on the appellant to establish that it had not passed on the duty to third parties.

However, the Supreme Court explained that the High Court erred in placing reliance on DCW Limited (supra). “In that case, the dispute was as regards classification of the imported goods. As per the classification of revenue, applicant was required to pay higher duty which the applicant disputed. It was in that factual backdrop this Court held that the authority had rightly applied the doctrine of unjust enrichment”.

The Court explained that In DCW Limited (supra), it was the Court which had permitted the revenue to encash the bank guarantee after vacating the stay order because of persistent default on the part of the applicant in paying the duty. Insofar the present case is concerned, it is true that in the initial round of litigation, High Court had dismissed the claim of the appellant that it was not required to pay higher customs duty in terms of Section 14(2) of the Customs Act but liable to pay duty only in terms of Section 14(1). After the High Court had dismissed the writ petitions, appellant had filed special leave petitions before the Supreme Court, on leave was granted and the petitions were registered as Civil Appeals. It was pointed out that there was no interim order in those batch of civil appeals; however, there was no direction either or leave granted by the High Court to the respondents to encash the bank guarantees furnished by the appellant on orders of the High Court covering the differential amount of duty. The revenue displayed extreme haste and encashed the bank guarantees on 22-01-2013 and 28-01-2013 respectively. Ultimately, those civil appeals were allowed in Param Industries Limited (supra).

The Court pointed out that it is thus evident that the department in the instant case 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.

Therefore, in the facts of the instant case, encashment of bank guarantees offered as security cannot be treated as payment of customs duty. Department 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.

Therefore, the Court set aside the impugned decision of the High Court and directed the department 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.