Encashment of Bank Guarantees Is Not “Payment of Duty”
– Supreme Court Clarifies Inapplicability of the Doctrine of Unjust Enrichment to Security Instruments (M/s Patanjali Foods Ltd. v. Union of India, 2025 INSC 733)

1. Introduction

The Supreme Court of India, in M/s Patanjali Foods Limited (formerly Ruchi Soya Industries Ltd.) v. Union of India & Ors. (Civil Appeal Nos. 3833-3835 of 2025, decided 19 May 2025), has pronounced a significant ruling on the refund mechanism under the Customs Act, 1962. The core controversy stemmed from the Customs Department’s encashment of bank guarantees furnished by the importer as security for “differential duty” during pendency of earlier writ petitions. When the importer eventually succeeded before the Supreme Court on merits (in Param Industries Ltd., 2016 16 SCC 692), it sought refund of the amounts realised through encashment. The Department resisted, invoking Section 27 (refund) and the “unjust enrichment” principle, insisting on documentary proof that incidence of duty had not been passed on.

The Supreme Court has now firmly held that:

Encashment of a bank guarantee furnished merely as security does not amount to “payment” of duty. Consequently, the statutory bar of unjust enrichment under Section 27 Customs Act / Section 11B Central Excise Act is inapplicable, and the importer is entitled to immediate refund with interest.

2. Summary of the Judgment

• The High Court of Gujarat had dismissed Patanjali’s writ petitions, compelling it to prove absence of unjust enrichment.
• The Supreme Court reversed the High Court, relying on earlier authorities (Oswal Agro Mills, Somaiya Organics), and distinguished DCW Ltd.
• Directions: Department must refund Rs. 77,43,859 (9.19 l + 45.99 l + 22.25 l) with 6% interest from dates of encashment (22/28-01-2013) within four months.
• No costs were imposed.

3. Analysis

3.1 Precedents Cited and Their Influence

1. Oswal Agro Mills Ltd. v. ACCE, 1994 2 SCC 546 (“Oswal 2”) – Held that furnishing/encashment of a bank guarantee pursuant to court order is not “payment”; Section 11B (refund) therefore inapplicable. Adopted as the central ratio and applied to Customs context.
2. Somaiya Organics (India) Ltd. v. State of U.P., 2001 5 SCC 519 – Constitution Bench approved Oswal; distinguished between “levy” and “collection”; bank guarantees cannot be invoked to collect an invalid levy. Used to reinforce doctrinal soundness.
3. Mafatlal Industries Ltd. v. Union of India, 1997 5 SCC 536 (9-Judge Bench) – Laid down exhaustive propositions on refund and unjust enrichment. Bench drew on propositions (iv)–(viii) to show unjust enrichment applies only when duty is “paid”.
4. DCW Ltd. v. Union of India, 2016 15 SCC 789 – Revenue-friendly ruling where court had expressly permitted encashment after assessee default; Distinguished because here no court order authorised encashment and assessee ultimately succeeded.
5. Param Industries Ltd. v. Union of India, 2016 16 SCC 692 – Earlier round deciding tariff-value notification was unenforceable; formed factual foundation for refund.

3.2 Legal Reasoning of the Court

1. Textual Interpretation of Section 27. The word “paid” in Section 27(1) entails a voluntary remittance pursuant to an assessment order. Security instruments are conceptually different; money travels from bank to Revenue by coercive invocation, not through the assessee’s act of payment.
2. Nature and Purpose of Bank Guarantee. Court reiterates a bank guarantee is a conditional undertaking intended to secure Revenue’s interests pending adjudication. It cannot morph into a tax-collection device unless the underlying liability is upheld.
3. Doctrine of Unjust Enrichment – Applicability Trigger. Mafatlal’s propositions apply only when the assessee has "recovered" duty from customers after paying it to Revenue. Here, since no duty was paid, the doctrine does not trigger.
4. Equitable Consideration & Article 265. Government may levy and collect tax only “by authority of law.” Encashment occurred even though the legal foundation (tariff-value notification) was later struck down; retention of money violates Article 265.
5. Distinction from DCW Ltd. In DCW, court-sanctioned encashment after importer's default → treated as valid collection. In present case, no such direction; Revenue acted unilaterally → invalid collection.
6. Remedy and Interest. Following equitable principles and Section 44 of the Indian Contract Act (unjust retention), Court awards 6 % simple interest, aligning with precedent on similar refunds.

3.3 Potential Impact

• Refund Litigation: Importers/assessees can now directly seek restitution of encashed guarantees without navigating Section 27’s evidentiary rigours.
• Administrative Practice: Customs & GST authorities must refrain from automatic invocation of guarantees once the underlying levy is under challenge, unless authorised by judicial directive.
• Banking & Trade Finance: Clarifies risk profile—banks may insist on clauses reflecting that guarantees are not substitutes for duty payment.
• Broader Tax Jurisprudence: Reinforces levy-collection dichotomy under Article 265 and fortifies taxpayer protections against coercive recoveries.
• Prospective Disputes: Principles likely to extend to Letters of Undertaking, security deposits, and provisional assessments under GST regime (Section 60 CGST Act).

4. Complex Concepts Simplified

Bank Guarantee (BG)

A contractual promise by a bank to pay a beneficiary (here, Customs) if the applicant (importer) defaults. It is security, not actual transfer of funds unless invoked.

Tariff-Value Notification (Section 14(2) Customs Act)

Government may fix a standard value for certain imports; duty is then calculated on that value rather than transaction value. Must be published and “offered for sale” to become enforceable (as clarified in Param Industries).

Unjust Enrichment

Legal doctrine preventing a person from profiting at another’s expense. In tax refund context, if an assessee has passed the tax burden to buyers, refund would unjustly enrich the assessee.

Levy vs. Collection

Levy = legal imposition/assessment; Collection = physical recovery of tax. A levy may exist in law but remain uncollected, and vice versa.

Section 27 Customs Act

Statutory procedure for claiming refund of duty paid. Requires proof that incidence of duty was not passed on. Inapplicable where no payment occurred.

5. Conclusion

The Supreme Court’s decision decisively settles a recurring controversy: security instruments furnished during litigation cannot be treated as tax payment, and therefore lie beyond the reach of the unjust-enrichment bar. By directing immediate restitution with interest, the Court safeguards the constitutional mandate of non-collection of taxes without authority of law and deters revenue authorities from precipitate recoveries.

Practitioners should note that the ruling:

• Creates a clear carve-out from Section 27/11B refund procedure for amounts realised through encashment of security.
• Places the onus on Departments to respect judicial pendency and refrain from coercive encashment absent express authorisation.
• Strengthens the jurisprudential divide between “levy” and “collection,” reinforcing due-process norms in indirect tax administration.

In the broader canvas of fiscal law, Patanjali Foods will serve as a vital precedent ensuring that taxpayers are not trapped in procedural labyrinths when the Revenue holds money that, in law and equity, never belonged to it.