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 during the pendency of the appeal. Relying on SC precedents, the Tribunal held that the bank guarantee serves as security and cannot be treated as duty payment before final adjudication. The Revenue's act of encashing the guarantee without Tribunal's permission was improper, and Section 27 of the Customs Act was inapplicable. The disputed amount did not constitute legally due duty, and the Revenue was directed to refund the encashed amount to the appellant forthwith.

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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.

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