Supreme Court Affirms: Encashment of Bank Guarantee Is Not Duty Payment — Clarifies Refund Eligibility Under Customs Act

The Supreme Court has affirmed that the encashment of a bank guarantee does not constitute payment of duty and has clarified the principles governing refund eligibility under the Customs Act.

On 19 May 2025, a Division Bench of the Supreme Court comprising Justice Abhay S. Oka and Justice Ujjal Bhuyan reviewed a set of appeals and held that the encashment of a bank guarantee furnished as security for disputed customs duty does not constitute "payment" under Section 27 of the Customs Act. As such, a refund of these amounts is not governed by the doctrine of unjust enrichment. The Court further ruled that the revenue authorities cannot retain amounts obtained through such encashment when the underlying duty demand is subsequently declared unlawful.

In a set of civil appeals arising from a 2016 judgment of the Gujarat High Court, the Supreme Court of India adjudicated a crucial issue concerning the refund of customs duty collected through the encashment of bank guarantees. The dispute originated when Ruchi Soya Industries Ltd. (now Patanjali Foods Ltd.) imported crude soyabean oil in 2002, and the customs department levied a higher rate of duty based on a tariff notification which, as alleged, was not made publicly available at the time of import. While the High Court initially permitted clearance of goods against bank guarantees, it ultimately dismissed the appellant's writ petitions in 2012, prompting the appellant to pursue legal remedy before the Supreme Court.

The legal tide turned in favour of the appellant when the Supreme Court, in Union of India v. Param Industries Ltd. (2015), held that the customs demand based on a non-published notification was unlawful. This led the appellant to seek a refund of the amounts recovered by the revenue through the encashment of the bank guarantees. The customs authorities, however, declined the refund, invoking Section 27 of the Customs Act and the doctrine of unjust enrichment. The Gujarat High Court upheld this stance, finding that the refund was conditional upon compliance with statutory procedures and evidence that the duty burden had not been passed on.

In deciding the appeals, the Supreme Court considered whether the encashment of bank guarantees constituted “payment of duty” and whether the unjust enrichment principle applied. Drawing upon established precedent, including Mafatlal Industries, Oswal Agro Mills, and Somaiya Organics, the Court clarified that furnishing a bank guarantee is a conditional security arrangement, and its encashment does not amount to actual payment of duty under Section 27. The Court held that in the absence of a formal duty assessment and demand, the amounts realised from the bank guarantees could not be treated as statutory payments attracting the bar of unjust enrichment.

The Supreme Court distinguished the present case from DCW Ltd. v. Union of India, where encashment of the guarantee was judicially sanctioned following a default. Here, the encashment was unilaterally carried out by the revenue without the Court's permission while the matter was sub judice. This, according to the Court, amounted to coercive recovery, rendering the department’s actions legally unsustainable. The earlier judgment in Param Industries having invalidated the very basis of the duty demand, the retention of funds by the revenue was held to be unauthorised.

In conclusion, the Court held that neither Section 27 of the Customs Act nor the doctrine of unjust enrichment applied in the present facts, since there was no valid payment of duty in the eyes of law. The Supreme Court accordingly set aside the Gujarat High Court's order and directed the customs department to refund the amounts recovered via bank guarantees, along with interest at 6% per annum from the date of encashment until the date of repayment. The amounts were to be refunded within four months, with no order as to costs.

Mr. Balbir Singh, Senior Advocate, represented the Appellant.

Ms. Nisha Bagchi, Senior Advocate, appeared for the Respondents.

---

Subscribers can access premium content such as the full text of the case, detailed analysis, ratio decidendi, headnotes, legal research, cited case laws, and the latest updates on statutes, notifications, and more. To subscribe, please click Subscribe.

If you are a subscriber, please explore these resources by clicking the following citation/link.

REEDLAW 2025 SC 05004