Summary
An importer had furnished bank guarantees, under interim orders of the High Court, for the difference between customs duty under Section 14(1) and tariff-value duty under Section 14(2) of the Customs Act, 1962. After the High Court dismissed its writ petitions, the department encashed the guarantees while the importer's appeals were pending in the Supreme Court, which later held the tariff notification unenforceable. The Court held that encashment of a bank guarantee furnished as security is not 'payment' of duty, so Section 27 of the Customs Act and the doctrine of unjust enrichment do not apply to the return of the amounts, and directed refund with 6% interest.
Issues
- Whether amounts realised by the customs department by encashing bank guarantees furnished as security under court orders constitute duty 'paid' so as to attract Section 27 of the Customs Act, 1962 and the doctrine of unjust enrichment.
- Whether the department could insist that the importer prove, by balance sheets and accounts, that the incidence of the differential duty had not been passed on before releasing the amounts after the Supreme Court held the duty demand unlawful.
- Whether the High Court was right to rely on DCW Limited v. Union of India to hold the doctrine of unjust enrichment applicable.
Provisions considered
- Section 27(1), Customs Act, 1962A refund application lies for duty 'paid' in pursuance of an assessment order or borne by the claimant, and must be accompanied by evidence that the incidence of duty was not passed on. The key word is 'paid'. Encashment of bank guarantees furnished as security on court orders is not payment of duty, so Section 27 and the unjust enrichment requirement embedded in it are not attracted. (¶¶ 22, 23, 30)
- Section 14(1) and 14(2), Customs Act, 1962The original dispute was whether duty was payable on transaction value under Section 14(1) or on the tariff value fixed by notification under Section 14(2); the Supreme Court in Union of India v. Param Industries Ltd. had held the notification was not offered for sale when the goods were cleared and the differential demand was unlawful. (¶¶ 4, 5, 11, 29)
- Section 142, Customs Act, 1962Under the scheme of the Act, duty is assessed and then paid by the importer; if unpaid, the revenue may recover it under Section 142 as sums due to Government. Coercive encashment of security bank guarantees is outside this scheme and is not payment of assessed duty. (¶ 30)
- Section 11B, Central Excise Act, 1944Pari materia with Section 27 of the Customs Act. In Oswal Agro Mills Ltd. (review) and Somaiya Organics (India) Ltd., the Court held that furnishing a bank guarantee for disputed duty pursuant to a court order is not equivalent to payment of duty, so Section 11B is not attracted to its return; the same reasoning applies to Section 27. (¶¶ 19.1, 22, 26, 27)
- Sections 28C and 28D, Customs Act, 1962The department had sanctioned the refund but credited it to the Consumer Welfare Fund under these provisions for alleged failure to disprove unjust enrichment; the Court held the doctrine inapplicable and directed refund to the appellant. (¶¶ 20.3, 30, 31)
Held
- Refund under Section 27 of the Customs Act is permissible only where duty has been 'paid' by the claimant and subsequently becomes refundable. A bank guarantee furnished as security on orders of the court for a disputed differential duty is only a promise by the bank to pay in certain events; its encashment cannot be treated as payment of customs duty. Consequently neither Section 27 nor the doctrine of unjust enrichment applies to the return of such amounts. (¶¶ 26, 27, 30)
- The department acted with extreme haste and arbitrarily in encashing the bank guarantees while the importer's civil appeals were pending in the Supreme Court, there being no direction or leave from the High Court permitting encashment. It could have awaited the Supreme Court's decision or asked the importer to renew the guarantees. Once the Supreme Court in Param Industries held the differential duty demand unlawful, the department had no authority in law to retain the money. (¶¶ 29, 30)
- DCW Limited v. Union of India is distinguishable: there the applicant had defaulted in paying duty despite a positive direction of the High Court, the stay was vacated, and the court itself permitted the revenue to encash the bank guarantee, so the amount stood paid as duty and unjust enrichment applied. No such default or judicial permission existed here, and the High Court erred in relying on that decision. (¶¶ 28, 29)
- The doctrine of unjust enrichment, as explained in Mafatlal Industries, operates where duty has been paid and its burden passed on; it presupposes payment of duty. Where the revenue holds money realised by encashing security and not by collection of assessed duty, the claimant is not required to prove that the incidence was not passed on. (¶¶ 23, 24, 30)
- Retention of the encashed amounts being unjust and unlawful, the amounts carry interest at 6 percent per annum from the dates of encashment until repayment. (¶ 31)
Result
Appeals allowed; the High Court's judgment dated 28.04.2016 set aside; respondents directed to refund immediately the amounts covered by the three bank guarantees with interest at 6% from the dates of encashment till repayment, the repayments to be released within four months; no order as to costs.