2025 (8) TMI 102 - AT - Customs

Tribunal Rules Bank Guarantee Is Security, Not Duty Payment; Revenue Must Refund Encashed Amount

The CESTAT Mumbai allowed the appeal, setting aside the impugned order that permitted the Revenue to encash the bank guarantee furnished by the appellant ... Refund claim - furnishing of bank guarantee for provisional release of goods and encashed during the pendency of appeal - Applicability of limitation as prescribed u/s 27 of the Customs Act, 1962 for the refund of bank guarantee furnished by the appellant - section 27 (1B) of Customs Act, 1962 - HELD THAT:- Hon’ble Nine Judges’ Constitution Bench of the Supreme Court, in the matter of Mafatlal Industries Ltd. v. Union of India [1996 (12) TMI 50 - SUPREME COURT] while interpreting Section 27 of the Customs Act, 1962 and also few other provisions, has laid down that Section 27 ibid cannot be construed as a device enabling the state to unjustly retain amount not legally due. In a similar matter where the revenue encashed the bank guarantee during the pendency of the appeal, the Hon’ble Supreme Court in Oswal Agro Mills Ltd. v. Asstt. Collector of Central Excise, Division Ludhiana [1993 (11) TMI 66 - SUPREME COURT] found the behaviour of the department highly improper and held 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. It further held that the Revenue had no power to get the bank guarantee encashed by using its executive fiat. Therefore while allowing the appeal, the Hon’ble Supreme Court directed the revenue to refund the money, collected by encashing the bank guarantee, forthwith. The bank guarantee is security for the Revenue that in the event the Revenue succeeds or dismissal of assessee’s appeal, department’s dues will be recoverable, being backed by bank guarantee. In the present matter, the disputed amount which was secured by a bank guarantee cannot constitute as duty because it was furnished prior to determination of duty. Despite knowing that the appellant had filed appeal before this Tribunal, during its pendency, the Revenue had encashed the bank guarantee without even taking leave of the Tribunal, which is not proper. Challenging the order before the higher appellate forum itself shows that the dispute hasn’t attained finality. The department ought to have waited for the final outcome of the appeal. The amount of bank guarantee involved herein cannot constitute payment of duty and the invocation of Section 27 ibid is misplaced. The impugned order is hereby set aside. The respondent is directed to refund the amount, furnished as bank guarantee, to the appellant forthwith - Appeal allowed. ISSUES: Whether the encashment of a bank guarantee furnished for provisional release of goods during the pendency of an appeal can be construed as 'payment of duty' under Section 27 of the Customs Act, 1962, thereby attracting the one-year limitation period for refund claims.Whether Section 27 of the Customs Act, 1962 applies to claims for refund of amounts realized by encashment of bank guarantees that were furnished as security and not as actual duty payment.Whether the doctrine of unjust enrichment is applicable to refund claims arising from encashment of bank guarantees during the pendency of appeals.The propriety of the Revenue's action in encashing bank guarantees without awaiting the final adjudication of appeals. RULINGS / HOLDINGS: The encashment of a bank guarantee furnished for provisional release of goods cannot be construed as 'payment of duty' within the meaning of Section 27 of the Customs Act, 1962, and therefore the limitation period prescribed therein does not apply to refund claims of such amounts.Section 27 deals explicitly with claims for refund of 'duty or interest paid by him' and does not extend to amounts secured by bank guarantees which are not 'duty paid.'The doctrine of unjust enrichment and the limitation provisions of Section 27 are not attracted in cases where the Revenue encashes bank guarantees, since such guarantees are 'mere security to protect Revenue's interest' and do not constitute payment of duty.The Revenue's encashment of the bank guarantee during the pendency of the appeal without leave of the Tribunal was improper and unauthorized; the department ought to have awaited the final outcome of the appeal.The impugned orders rejecting the refund claim on limitation grounds under Section 27 are set aside, and the Revenue is directed to refund the encashed bank guarantee amount forthwith. RATIONALE: The Court applied the statutory framework of Section 27 of the Customs Act, 1962, which prescribes a one-year limitation period for refund claims of duty or interest 'paid by him.' The section's language and title clearly restrict its application to actual payments of duty or interest.Precedent from the Supreme Court's Constitution Bench in Mafatlal Industries Ltd. established that Section 27 cannot be used as a device for the State to unjustly retain amounts not legally due.Authoritative Supreme Court decisions in Oswal Agro Mills Ltd. (1995) and its review (1994) clarified that bank guarantees are security instruments and their encashment does not amount to payment of duty, thus Section 27 or analogous provisions (such as Section 11B of the Central Excise Act) do not apply.The recent Supreme Court decision in Patanjali Foods Ltd. reaffirmed that encashment of bank guarantees during pendency of appeals is not 'payment of customs duty' and hence refund claims are not subject to Section 27 or the doctrine of unjust enrichment; the Court emphasized the illegality of arbitrary encashment and ordered refund with interest.The Court recognized that the Revenue's retention of money collected through encashment of bank guarantees without judicial or appellate sanction is unauthorized and unjust, mandating immediate refund with interest.