No Coercive Measures on Bank Guarantee Encashment Pending Appeal: A New Judicial Principle

Introduction

In the matter of Amar Singh and Sons Tree Nuts LLP v. The Superintendent of Customs, EPM, Import & Ors., decided on January 9, 2025, by the High Court of Delhi, the Court addressed critical issues concerning customs duty liabilities, fulfillment of export obligations under advance authorizations, and the encashment of bank guarantees during the pendency of appeals. The case revolves around the petitioner, Amar Singh and Sons Tree Nuts LLP (hereinafter “ASTN”), which imported walnut inshells on a nil duty basis under three advance authorization licenses, subject to an export obligation.

Investigations by the Directorate of Revenue Intelligence (DRAI) culminated in an Order-in-Original (OIO) imposing substantial customs duty demands, penalties, and the threat of encashment of a bank guarantee. Anticipating an appeal, ASTN sought relief from the Court to restrain the Customs Department from encashing the bank guarantee until the appeal process and related statutory pre-deposit requirements were fulfilled. The case provides a significant precedent on the interplay between an assessee’s right to appeal and the Customs Department’s right to recover amounts by encashment of guarantees.

Summary of the Judgment

The High Court, recognizing the statutory scheme allowing appeals to the Customs Appellate Tribunal and supporting circulars, held that the Customs Department cannot coercively recover disputed amounts—such as by encashing an existing bank guarantee—during the statutory limitation period for filing an appeal. Additionally, if the petitioner (or appellant before the Tribunal) deposits the requisite pre-deposit amount, the remaining disputed sums cannot be recovered until the resolution of the appeal.

The Court’s decision specifically restrained the Department from encashing held bank guarantees of ASTN, noting that a substantial amount of duty (over INR 3.53 crores) had already been appropriated and that ASTN was entitled to pursue statutory remedies without facing immediate coercive measures.

Analysis

A. Precedents Cited

During the proceedings, reference was made to Circular No. 984/08/2014-CX dated September 16, 2024, which clarified that no coercive measures should be taken to recover contested dues during the pendency of an appeal when either:

The appeal is filed, and the statutory pre-deposit (7.5% or 10%, subject to a specified limit) is made.
The period for filing the appeal is still open under applicable law.

The Court underscored the legislative intent behind this circular to grant relief to assessees who opt to exercise their right to appeal. This is further supported by Section 129E of the Customs Act, 1962, which prescribes the pre-deposit requirement and, by extension, grants an implicit stay on the balance amount until the appellate authority rules.

B. Legal Reasoning

The Court relied on two layers of reasoning:

Statutory Framework: The Customs Act, 1962, under Section 129A, allows an aggrieved party to file an appeal against an Order-in-Original within three months. During this interval, the Department should refrain from initiating actions that would effectively nullify the right to appeal.
Administrative Circulars: Circular No. 984/08/2014-CX was central to the Court’s analysis. It confirms that if the requisite pre-deposit has been made upon filing an appeal, no further recovery steps (beyond that pre-deposit) may be taken unless the appeal is resolved against the assessee. By extension, the Court found that encashing the petitioner’s bank guarantee before the expiry of the appeal period or without considering the pre-deposit would be a coercive step that defies the spirit of the circular.

C. Impact

This judgment cements the principle that:

An assessee’s right to appeal must be meaningfully preserved, preventing premature recovery measures such as bank guarantee encashment.
Departmental instructions and enabling provisions of customs law converge to protect the legitimate interests of both the Revenue and the importer/exporter. The Revenue’s interests are secured because the Department can act decisively if an assessee fails to file an appeal or loses the appeal. Meanwhile, the assessee is spared undue and potentially irreparable financial hardship from immediate encashment of substantial guarantees.
This ruling will likely guide lower adjudicating authorities and departmental offices in handling similar situations, ensuring that bank guarantees remain an instrument of security rather than a measure to impose instant financial liability before the appeal process is concluded.

Complex Concepts Simplified

Advance Authorisation License:
This license permits duty-free import of materials used in the production of export goods. However, the importer must fulfill export obligations (e.g., exporting a certain quantity of finished products) within a set timeframe.

Show Cause Notice (SCN):
An SCN is a formal document issued to a party believed to have violated legal or regulatory obligations. It details the alleged infractions and the basis for any proposed penalty or recovery.

Order-in-Original (OIO):
The first adjudicatory order by a Customs authority or relevant department, determining the liability and penalties after an SCN is contested or explained by the party in question.

Bank Guarantee Encashment:
When a principal (the Department) claims funds from a guarantee provided by a bank on behalf of the importer/exporter. Encashment is typically sought to recover duties or penalties that the authorities believe are owed.

Pre-deposit Requirement:
A statutory condition mandating that the aggrieved party deposit a percentage of the disputed tax or duty amount before the appellate authority will entertain the appeal. This helps discourage frivolous appeals but prevents the imposition of the full liability when the matter is still under dispute.

Conclusion

The High Court’s decision in Amar Singh and Sons Tree Nuts LLP v. The Superintendent of Customs, EPM, Import & Ors. reaffirms the protective balance struck by customs law: it preserves an importer’s/exporter’s appeal rights and sets a clear framework against the premature exercise of coercive recovery. By holding that the Department must not encash a bank guarantee during the statutory window for appeal or once the appellant pays the necessary pre-deposit, the Court ensures fair play and procedural justice in customs disputes. This precedent will, in turn, provide clarity to both the Department and assessees, reduce litigation, and assure that no undue pressure is placed on the party seeking to avail its appellate remedies.