Patanjali Foods Ltd. vs. Union of India: Supreme Court settles refund claims related to customs duty (2025)

Introduction

Date of the Judgment: May 19, 2025

Judges: Abhay S. Oka and Ujjal Bhuyan

When can a company claim a refund on customs duties paid under protest? The Supreme Court of India recently addressed this question in the case of M/S Patanjali Foods Limited vs. Union of India & Ors., focusing on whether the encashment of a bank guarantee provided as security for disputed duties can be considered equivalent to the payment of duty under Section 27 of the Customs Act, 1962. The bench, comprising Justices Abhay S. Oka and Ujjal Bhuyan, examined the nuances of unjust enrichment and the circumstances under which refunds can be claimed.

Case Background

In 2002, M/s M.P. Glychem Industries Limited imported crude degummed soyabean oil at Jamnagar. A dispute arose when the customs department insisted on a higher customs duty based on a tariff value fixed under Section 14(2) of the Customs Act, 1962. M.P. Glychem contended that the relevant notification fixing the tariff value was not in effect at the time of import and, therefore, duty should be paid under Section 14(1) of the Customs Act.

To resolve the impasse, M.P. Glychem filed Special Civil Application No. 9308 of 2002 before the High Court, challenging the validity and effective date of the tariff notification. The High Court admitted the petition and granted interim relief, allowing clearance of the goods upon furnishing a bank guarantee for the differential duty amount.

Subsequently, M.P. Glychem furnished bank guarantees totaling Rs. 9,19,801.00, Rs. 45,99,006.00, and Rs. 22,25,052.00 in three separate writ petitions, after which the goods were cleared under Section 14(1) of the Customs Act.

In 2006, M.P. Glychem Industries Limited merged with M/s Ruchi Soya Industries Limited, which later became known as M/s Patanjali Foods Limited.

The High Court dismissed the writ petitions on September 13, 2012, vacating the interim relief. The appellant then approached the Supreme Court in Civil Appeal Nos. 1808-1813 of 2013.

While the appeals were pending, the department encashed the bank guarantees on January 28, 2013, appropriating the amounts.

The Supreme Court, in a common order dated May 5, 2015, in Union of India Vs. Param Industries Limited, allowed the appeals, holding that the department was not justified in claiming the differential duty based on a notification not available for sale at the time of clearance.

Following this, on June 4, 2016, the appellant filed refund applications seeking the differential duty amounts secured by the bank guarantees.

Timeline:

Course of Proceedings

The initial dispute led to Special Civil Application No. 9308 of 2002 being filed in the High Court, challenging the customs department’s demand for higher duty based on tariff value. The High Court initially dismissed the writ petitions on September 13, 2012, leading to the encashment of bank guarantees by the department.

The appellant then appealed to the Supreme Court in Civil Appeal Nos. 1808-1813 of 2013. The Supreme Court, in its order dated May 5, 2015, in Union of India Vs. Param Industries Limited, allowed the appeals, stating that the department’s claim for differential duty was unjustified as the relevant notification was not available for sale at the time of clearance.

Subsequently, when the department declined to refund the differential duty amounts, the appellant filed Special Civil Application Nos. 14540, 14541, and 14542 of 2015 before the High Court, seeking a direction for the refund without insisting on compliance with Section 27 of the Customs Act. The High Court dismissed these petitions on April 28, 2016, but allowed the appellant to produce necessary documents regarding unjust enrichment.

Legal Framework

This case primarily revolves around the interpretation and application of the Customs Act, 1962, specifically focusing on Section 14 and Section 27.

Section 14 of the Customs Act, 1962, deals with the valuation of goods for customs duty. It outlines how the value of imported goods is determined, which is crucial for calculating the applicable customs duty. The dispute in this case originated from differing interpretations of whether duty should be assessed under Section 14(1) or Section 14(2), based on the effective date and applicability of a government notification fixing tariff value.

Section 27 of the Customs Act, 1962, concerns the refund of customs duty. It stipulates the conditions under which a person can claim a refund of duty paid, including the requirement to establish that the incidence of such duty has not been passed on to any other person, aligning with the principle of unjust enrichment. The section states:

“(1) Any person claiming refund of any duty – (i) paid by him in pursuance of an order of assessment; or (ii) borne by him, 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…”

The core issue is whether the encashment of a bank guarantee, furnished as security for the disputed duty, can be considered equivalent to the “payment of duty” under Section 27, thereby triggering the need to comply with its provisions regarding unjust enrichment.

Arguments

Appellant’s Arguments (Patanjali Foods Ltd.):

• Encashment of Bank Guarantee vs. Payment of Duty:

  The appellant argued that the encashment of bank guarantees, provided as security under the High Court’s interim order, cannot be equated to the “duty paid” as required by Section 27 of the Customs Act. They contended that Section 27, which encapsulates the unjust enrichment principle, does not apply in this case because no additional or differential duty was voluntarily paid; the bank guarantees were merely furnished as security.

  Example: Imagine a student providing a security deposit to a landlord. If the landlord uses that deposit for unpaid rent after the student moves out, it’s not the same as the student willingly paying extra rent. Similarly, the appellant argued that the bank guarantee being encashed isn’t the same as them willingly paying the duty.

• Applicability of Supreme Court Precedents:

  The appellant relied on Oswal Agro Mills Ltd. Vs. Asstt. Collector of Central Excise, Division Ludhiana, endorsed by the Constitution Bench in Somaiya Organics (India) Ltd. Vs. State of U.P., to assert that the doctrine of unjust enrichment does not apply when a bank guarantee is offered as security and subsequently encashed. These cases established that encashment of a bank guarantee is not equivalent to payment of duty, thus falling outside the scope of unjust enrichment.

• Unjust Retention of Money:

  Following the Supreme Court’s ruling in Param Industries Limited, which held that the department was not justified in claiming the differential duty, the appellant argued that the respondents’ retention of the money obtained from encashing the bank guarantees is untenable. They asserted that the department acted hastily in encashing the guarantees, knowing the High Court’s judgment was under review by the Supreme Court.

Respondent’s Arguments (Union of India):

• Non-Compliance with Section 27:

  The respondents argued that the appellant did not provide the necessary documents to support the refund claims as required under Section 27 of the Customs Act. They contended that despite being informed of the deficiencies, the appellant failed to submit documents like balance sheets and profit and loss accounts for the relevant period to demonstrate that the incidence of the differential duty had not been passed on to customers.

• Applicability of Unjust Enrichment:

  The respondents maintained that the doctrine of unjust enrichment applies, and the appellant is entitled to a refund only if it satisfies the requirements under Section 27 of the Customs Act. They argued that the appellant had not cooperated by submitting the necessary financial documents to establish that it had not unjustly enriched itself.

• Lawful Encashment of Bank Guarantees:

  The respondents asserted that they were under no legal injunction to refrain from encashing the bank guarantees after the High Court dismissed the writ petitions. They acted within their rights to secure the revenue due to the government.

Submissions Table:

Issues Framed by the Supreme Court

1. Whether the forcible encashment of bank guarantees by the department, offered as security by the appellant in terms of the interim order of the High Court following dismissal of the writ petitions, can be said to be the duty or the differential duty ‘paid’ by the appellant.
2. Whether the provisions contained in Section 27 of the Customs Act are applicable in the present case, considering the encashment of bank guarantees.

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities

The Supreme Court considered the following authorities:

On the Point of Unjust Enrichment and Bank Guarantees:

• Oswal Agro Mills Ltd. Vs. Asstt. Collector of Central Excise, Division Ludhiana [(1994) 2 SCC 546] (Supreme Court): This case established that furnishing a bank guarantee is not equivalent to payment of excise duty, and therefore, the doctrine of unjust enrichment does not apply when a bank guarantee is encashed.
• Somaiya Organics (India) Ltd. Vs. State of U.P. [(2001) 5 SCC 519] (Supreme Court – Constitution Bench): This Constitution Bench endorsed the decision in Oswal Agro Mills, holding that a bank guarantee cannot be regarded as payment of excise levy that the Government is entitled to retain.

On the Point of Refund and Unjust Enrichment:

• Mafatlal Industries Ltd. Vs. Union of India [(1997) 5 SCC 536] (Supreme Court – Nine-Judge Bench): This case laid down comprehensive propositions concerning refund of excise and customs duty, including the principle that a claim for refund can succeed only if the claimant establishes that they have not passed on the burden of duty to another person.

Distinguished Case:

• DCW Limited Vs. Union of India [(2016) 15 SCC 789] (Supreme Court): The High Court relied on this case, but the Supreme Court distinguished it, noting that in DCW Limited, the court had permitted the revenue to encash the bank guarantee after vacating the stay order due to the applicant’s default in paying the duty.

Legal Provisions Considered:

• Section 14 of the Customs Act, 1962: Deals with the valuation of goods for customs duty.
• Section 27 of the Customs Act, 1962: Concerns the refund of customs duty and the conditions under which a refund can be claimed.

The Court made the following table of which authority were considered by the court and HOW:

Judgment

The Supreme Court allowed the appeals, setting aside the High Court’s judgment and directing the respondents to refund the amounts covered by the bank guarantees to the appellant, along with interest at 6% from the dates of encashment until repayment.

The Court held that encashment of bank guarantees offered as security cannot be treated as payment of customs duty, and therefore, the doctrine of unjust enrichment or Section 27 of the Customs Act would not be applicable.

The Court summarized how each submission made by the parties was treated:

The Court also explained how each authority was viewed:

• Oswal Agro Mills Ltd. Vs. Asstt. Collector of Central Excise, Division Ludhiana [(1994) 2 SCC 546]: The Court cited this authority to support its view that furnishing a bank guarantee is not equivalent to payment of excise duty.
• Somaiya Organics (India) Ltd. Vs. State of U.P. [(2001) 5 SCC 519]: The Court referred to this Constitution Bench decision, which endorsed the decision in Oswal Agro Mills.
• DCW Limited Vs. Union of India [(2016) 15 SCC 789]: The Court distinguished this case, noting that it was factually different as the court had permitted the encashment of the bank guarantee in that case.

What weighed in the mind of the Court?

The Supreme Court’s decision in M/S Patanjali Foods Limited vs. Union of India & Ors. was primarily influenced by the principle that the encashment of a bank guarantee provided as security for disputed duties cannot be equated to the payment of duty under Section 27 of the Customs Act. The Court emphasized that the department’s action of unilaterally encashing the bank guarantees, especially when the matter was under consideration by the Supreme Court, was not justified.

The Court also considered the precedents set in Oswal Agro Mills Ltd. Vs. Asstt. Collector of Central Excise, Division Ludhiana and Somaiya Organics (India) Ltd. Vs. State of U.P., which established that the doctrine of unjust enrichment does not apply when a bank guarantee is offered as security and subsequently encashed. These cases weighed heavily in the Court’s reasoning.

The Court was also influenced by the fact that the department had acted with undue haste in encashing the bank guarantees, even though the matter was under review by the Supreme Court. This action was seen as arbitrary and not in accordance with the principles of fair play.

The Court’s sentiment analysis of the reasons given by the Supreme Court is shown in the following table:

The ratio of fact to law that influenced the court to decide is as follows:

Logical Reasoning

The Supreme Court’s logical reasoning for Issue 1 (Whether encashment of bank guarantees is equivalent to ‘duty paid’ under Section 27) can be represented as follows:

Encashment of Bank Guarantee → Security for Differential Duty → Not Voluntary Payment → Not Equivalent to ‘Duty Paid’ under Section 27

The Supreme Court’s logical reasoning for Issue 2 (Whether Section 27 of the Customs Act is applicable) can be represented as follows:

Encashment Not ‘Duty Paid’ → No Voluntary Payment → Unjust Enrichment Doctrine Not Applicable → Section 27 of Customs Act Not Applicable

Key Takeaways

• Encashment of Bank Guarantee: Encashment of a bank guarantee provided as security for disputed customs duty is not equivalent to payment of duty under Section 27 of the Customs Act, 1962.
• Unjust Enrichment: The doctrine of unjust enrichment does not apply when a bank guarantee is offered as security and subsequently encashed by the department.
• Refunds: Companies are entitled to a refund of amounts secured by bank guarantees if the demand for duty is later found to be unjustified.
• Department’s Actions: The customs department should not act with undue haste in encashing bank guarantees when the matter is under review by higher courts.

Development of Law

The ratio decidendi of this case is that the encashment of a bank guarantee provided as security for disputed customs duty is not equivalent to payment of duty under Section 27 of the Customs Act, 1962, and therefore, the doctrine of unjust enrichment does not apply.

This ruling clarifies the circumstances under which refunds can be claimed and reinforces the principle that the customs department should not act with undue haste in encashing bank guarantees when the matter is under review by higher courts.

Conclusion

In summary, the Supreme Court allowed the appeals filed by M/S Patanjali Foods Limited, holding that the encashment of bank guarantees provided as security for disputed customs duty is not equivalent to payment of duty under Section 27 of the Customs Act, 1962. The Court directed the respondents to refund the amounts covered by the bank guarantees, along with interest, emphasizing that the doctrine of unjust enrichment does not apply in such cases.

Category:

• Customs Act, 1962
  • Section 14, Customs Act, 1962
  • Section 27, Customs Act, 1962
  • Customs Duty Refund
  • Unjust Enrichment
• Supreme Court Judgments
  • Civil Appeals
  • Tax Law
  • Refund Claims

FAQ

1. Q: What does this judgment mean for businesses involved in import/export?

   A: This judgment clarifies that if your business provides a bank guarantee as security for disputed customs duties, and that guarantee is later encashed, it’s not considered the same as paying the duty. If the demand for duty is found to be unjustified, you are entitled to a refund.

2. Q: What is a bank guarantee, and how does it work in customs disputes?

   A: A bank guarantee is a promise from a bank to pay a certain amount if a business fails to fulfill its obligations. In customs disputes, it’s used as security for disputed duties, allowing businesses to clear goods while the dispute is resolved.

3. Q: What is unjust enrichment, and how does it apply to customs duty refunds?

   A: Unjust enrichment is a legal principle that prevents someone from unfairly benefiting at another’s expense. In customs duty refunds, it means you can’t claim a refund if you’ve already passed the cost of the duty on to your customers.

4. Q: What should businesses do if the customs department demands payment of disputed duties?

   A: If you dispute the customs duties, you can provide a bank guarantee as security and challenge the demand in court. If the court rules in your favor, you are entitled to a refund of the amount secured by the bank guarantee.