S.27 Customs Act Or Doctrine Of Unjust Enrichment Won't Apply To Refund Of Bank Guarantee : Supreme Court Allows Patanjali Plea

The Supreme Court has held that Section 27 of the Customs Act, which requires a person seeking refund of duty to show that the burden was not passed on to the customer, is not applicable when refund is sought of a wrongly invoked bank guarantee.

This is because  encashment of bank guarantees by the Customs Department cannot be treated as payment of customs duty. Hence, neither Section 27 nor the doctrine of unjust enrichment is applicable.

 Holding so, the Supreme Court allowed the Patanjali Food Ltd.'s appeal against coercive encashment of the bank guarantee by the customs department, directing the department to refund the encashed amount within four months with 6% interest.

A bench of Justices Abhay S. Oka and Ujjal Bhuyan heard a dispute dating back to 2002, when Ruchi Soya (later Patanjali Foods) challenged a higher customs duty on imported crude soyabean oil, imposed via a tariff notification they claimed wasn't in force at the time. The Gujarat High Court initially allowed clearance against bank guarantees, but later dismissed the petitions in 2012, leading to encashment in 2013.

In 2015, based on the Supreme Court's ruling in Union of India v. Param Industries Ltd., which ruled that the tariff notification was not enforceable at the relevant time, making the duty demand illegal, Patanjali Foods then sought a refund. The Department resisted, invoking Section 27 of the Customs Act and the principle of unjust enrichment, claiming the appellant must prove it had not passed the burden on to consumers.

Aggrieved by the High Court's dismissal of the writ petitions, holding that unjust enrichment applied, Patanjali appealed to the Supreme Court.

Setting aside the High Court's decision, the judgment authored by Justice Bhuyan dismissed the applicability of Section 27 of the Customs Act, stating that the provision requires importers to establish they have not passed on the tax burden in order to claim a refund, does not apply in cases where the amount was coercively recovered.

Further, the Court held that the doctrine of unjust enrichment was not applicable, as the recoveries made via encashment of bank guarantees were coercive, disentitling the department to retain the amount as payment towards the customs duty.

“In the facts of the present case encashment of bank guarantees offered as security cannot be treated as payment of customs duty. Respondents could have either awaited the decision of this Court or could have directed the appellant to renew the bank guarantees. This they did not do. Instead they resorted to arbitrary encashment of the bank guarantees. 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. It is evidently clear that respondents are holding on to money of the appellant which they are not authorized to do so as per judgment of this Court in Param Industries Limited (supra). They have no authority in law to hold on to such money and, therefore, the same has become totally untenable.”, the court observed.

In terms of the aforesaid, the Court allowed the appeal and directed the Respondent-Department to refund the encashed amounts with 6% interest within four months.

Case Title: M/S PATANJALI FOODS LIMITED (FORMERLY KNOWN AS M/S RUCHI SOYA INDUSTRIES LTD.) VERSUS UNION OF INDIA & ORS.

Citation : 2025 LiveLaw (SC) 634

Click here to read/download the judgment

Appearances:

For Petitioner(s) : Mr. Balbir Singh,Sr.Adv. Mr. Rajesh Rawal,Adv. Mr. Karan Sachdev,Adv. Mr. Ashwani Kumar, AOR

For Respondent(s) : Ms. Nisha Bagchi,Sr.Adv. Mr. Nalin Kohli,Adv. Mr. Sarthak karol,Adv. Mr. Abhishek Singh,Adv. Mr. Pratyush Srivastava,Adv. Mr. B. Krishna Prasad, AOR