Custom Refunds and Unjust Enrichment under Indian Customs Law.

1. Legal Basis for Refunds

The primary legal framework is found in the Customs Act, 1962, particularly Section 27.

Section 27 – Claim for Refund of Duty:

“Any person claiming refund of any duty or interest paid or borne by him may make an application for refund before the expiry of one year from the date of payment…”

This allows importers or exporters to claim back excess customs duties, erroneously collected amounts, or duties not legally due.

However, this refund isn’t automatic — it’s subject to an important condition rooted in unjust enrichment.

2. Doctrine of Unjust Enrichment in Indian Customs Law

The doctrine of unjust enrichment was formally incorporated into Indian indirect tax law through amendments made after judicial interpretation — now explicitly included in Section 27(2) of the Customs Act.

Section 27(2)states that:

“No refund shall be made except in cases where the incidence of such duty has not been passed on to any other person.”

Meaning:
Even if an importer paid excess duty, a refund will be denied if the importer has already passed on the duty burden to customers by including it in the selling price.

This prevents double benefit — ensuring the importer does not get refunded for an amount already recovered from others.

3. Purpose of Linking Refunds and Unjust Enrichment

The link between the two is deliberate and policy-driven:

4. Burden of Proof

The onus is on the claimant (importer/exporter) to prove that:

1. The duty was paid in excess, and
2. The burden was not passed on to another party.

Evidence Required:

• Chartered Accountant certificates,
• Balance sheets showing duty treated as recoverable,
• Invoices excluding duty component, etc.

If the evidence is insufficient, the refund is credited to the Consumer Welfare Fund, not paid to the claimant.

5. Key Judicial Interpretations

1. MAFATLAL INDUSTRIES LTD. Versus UNION OF INDIA - 1996 (12) TMI 50 - Supreme Court
   Landmark Supreme Court judgment that cemented the principle of unjust enrichment in indirect tax refunds.
   Held that all refund claims, whether based on constitutional grounds or otherwise, are subject to Section 27 and unjust enrichment.
2. COMMISSIONER OF C. EX., MUMBAI-II Versus ALLIED PHOTOGRAPHICS INDIA LTD. - 2004 (3) TMI 63 - Supreme Court
   Reaffirmed that refunds of customs/excise duties are not maintainable unless the claimant proves that the incidence of duty has not been passed on.
3. UNION OF INDIA Versus SOLAR PESTICIDE PVT. LTD. - 2000 (2) TMI 237 - Supreme Court
   Clarified that unjust enrichment applies even in cases of inputs used in manufacturing, not just final goods.

6. Practical Illustration

Example:
An importer pays Rs. 5,00,000 as customs duty on imported machinery. Later, it’s found that the machinery qualifies for an exemption, and the correct duty is only Rs. 2,00,000.

The importer claims a refund of Rs. 3,00,000.

• If the importer has not passed on this duty to the buyer (e.g., used the machinery internally), the refund will be paid.
• If the importer has recovered the cost by inflating sale prices, the refund will be credited to the Consumer Welfare Fund, as the importer would otherwise be unjustly enriched.

7. Consumer Welfare Fund

• Established under Section 12C of the Central Excise Act, made applicable to Customs through Section 27A.
• Refunds denied due to unjust enrichment are transferred to this fund, which is used for consumer protection activities.

In Summary

***