Encashment of bank guarantees does not amount to payment of customs duty; refunds with 6% interest ordered

A bench of Justices Abhay S. Oka and Ujjal Bhuyan heard appeals by M/s Patanjali Foods Limited (formerly Ruchi Soya Industries Ltd.) challenging the Gujarat High Court's refusal to direct refund of sums realised by encashing bank guarantees and the application of the doctrine of unjust enrichment under Section 27 of the Customs Act.

The Supreme Court allowed the appeals, set aside the High Court order dated 28.04.2016 and directed immediate refund of the amounts realised on encashment of bank guarantees, with interest at 6% from the dates of encashment until repayment, to be released within four months. The Court held that encashment of bank guarantees furnished as security pursuant to court orders could not be equated with payment of customs duty and, consequently, that Section 27 and the doctrine of unjust enrichment did not apply to the retained amounts. The Court relied on earlier authorities including Oswal Agro Mills and the Constitution Bench decision in Somaiya Organics, and noted that revenue should have either awaited this Court’s decision or obtained renewal of the guarantees instead of encashing them. The Court, in its reasoning, observed: "It is thus evident that respondents had recovered the differential duty amount by adopting coercive method i.e. encashment of the bank guarantees which were offered as security for the differential amount of duty on orders of the High Court... The key word in Section 27 of the Customs Act is ‘paid’. Refund thereunder is permissible only if any duty is ‘paid’ by the claimant which subsequently becomes refundable either fully or in part. In the facts of the present case encashment of bank guarantees offered as security cannot be treated as payment of customs duty... Such encashment of bank guarantees cannot be treated as payment of duty or duty paid by a claimant. In such circumstances, the doctrine of unjust enrichment or Section 27 of the Customs Act would not be applicable."

Background The dispute arose from imports of crude degummed soybean oil by M/s M.P. Glychem Industries Limited (later merged into Ruchi Soya, now Patanjali) in 2002. The importer furnished bank guarantees for the differential duty after the Gujarat High Court granted interim relief permitting clearance on security. Following dismissal of initial writ petitions, the customs authorities encashed the three bank guarantees in January 2013, realising amounts of Rs. 9,19,801; Rs. 45,99,006; and Rs. 22,25,052. Separate appeals to this Court (disposed earlier in Param Industries Limited) had held that the notification fixing tariff value was not "offered for sale" by the Board at the relevant time and that differential duty could not lawfully be claimed.

After this Court’s decision, the appellant sought refunds in June 2015. The department insisted that the appellant comply with Section 27 of the Customs Act and produce documents to negate unjust enrichment. The High Court dismissed the writ petitions but allowed the appellant liberty to produce documents; on failure to satisfy the department, refunds were processed for credit to the Consumer Welfare Fund. The appellant challenged the High Court order by SLPs. The Supreme Court examined the scope of Section 27 and the doctrine of unjust enrichment, recalled precedent in Mafatlal, Oswal Agro Mills and Somaiya Organics, and distinguished DCW Limited where the court had permitted encashment after vacatur of stay due to default. Finding that encashment of bank guarantees was a coercive realisation and not payment of duty, the Court concluded that Section 27 did not apply and directed refund with interest. The appeals were allowed with no order as to costs.

Case Details: Case No.: CIVIL APPEAL NOS. 3833-3835 OF 2025 (ARISING OUT OF SLP(C) NOS. 22572-22574 OF 2016) Case Title: M/S PATANJALI FOODS LIMITED (FORMERLY KNOWN AS M/S RUCHI SOYA INDUSTRIES LTD.) VERSUS UNION OF INDIA & ORS. Appearances: For the Petitioner(s): Mr. Balbir Singh, Senior Counsel For the Respondent(s): Ms. Nisha Bagchi, Senior Counsel