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Oswal Agro Mills Ltd... v. Asstt. Collector Of ...
Factual and Procedural Background
The matter arises from a review petition filed by Respondents 1 and 2 against the Supreme Court’s order dated 26 November 1993 in SLP (C) No. 18175 of 1993. The underlying dispute concerned the excise classification of toilet soap. In the original appeal before the Supreme Court, interim relief had required the assessee–appellants to pay 50 % of the disputed duty and to furnish bank guarantees for the remainder. When the appeal was ultimately allowed, the Court left questions of refund to be decided by the statutory authorities.
On 14 May 1993 the appellants sought refund and release of the bank guarantees from the excise authorities. Perceiving inaction, they moved the Punjab & Haryana High Court, which on 18 October 1993 ordered the authorities to decide the refund claim within a month and directed the appellants to extend the guarantees. The appellants challenged this directive before the Supreme Court. Meanwhile, on 15 November 1993 the excise authorities rejected the refund on the basis of Section 11-B of the Central Excises and Salt Act, 1944 and, on 17 November 1993, encashed the guarantees for Rs 1,18,00,000.
By its order of 26 November 1993 the Supreme Court allowed the appeal, held that the guarantees were not before the High Court for adjudication, ruled that the authorities lacked power to encash them after losing the merits appeal, and directed immediate repayment to the State Bank of Patiala. Respondents 1 and 2 now seek review of that ruling.
Legal Issues Presented
- Whether furnishing a bank guarantee pursuant to a court’s interim order is equivalent to payment of excise duty, thereby attracting the refund provisions of Section 11-B of the Central Excises and Salt Act, 1944.
- Consequently, whether the excise authorities lawfully encashed and retained proceeds of the bank guarantees after the assessee had succeeded on merits.
- Whether the High Court was correct in directing extension of the bank guarantees pending disposal of the refund claim.
Arguments of the Parties
Respondents 1 and 2
- Invoked Section 11-B, contending that the guarantees should be treated as money “deposited” toward excise duty, obliging the appellants to prove that the duty incidence had not been passed on to customers.
- Argued that, absent such proof, the authorities were entitled to encash and retain the guarantee amounts.
- Relied on Union of India v. Jain Spinners Ltd. (1992) 4 SCC 389 to support the proposition that Section 11-B governs refunds of sums deposited pursuant to court orders.
No detailed arguments of the appellants were recorded in the opinion.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Union of India v. Jain Spinners Ltd., (1992) 4 SCC 389; 61 ELT 321 | Section 11-B applies when excise duty deposited in court is withdrawn by authorities; refund requires proof of non-passing of duty incidence. | The Court distinguished Jain Spinners, noting it concerned actual deposits withdrawn by the authorities, whereas a bank guarantee is only security and not payment; hence Section 11-B is inapplicable here. |
Court's Reasoning and Analysis
The Court began by analysing the statutory trigger for Section 11-B: a “claim for refund” presupposes prior payment of duty to the revenue. It observed that a bank guarantee serves merely as security pending outcome of litigation, not as payment of duty.
Distinguishing Jain Spinners, the Court held that while Section 11-B indisputably governs sums actually paid and later sought to be refunded, the provision has no application where only a guarantee was furnished. Should the revenue ultimately succeed, it may invoke the guarantee; if it fails, the guarantee is ordinarily discharged.
Since the earlier appeal had been decided in favour of the assessee, the revenue had no subsisting right to encash the guarantees. The High Court’s order mandating their extension therefore lacked jurisdiction. Consequently, the excise authorities’ act of encashment, predicated on Section 11-B, was ultra vires.
Holding and Implications
REVIEW PETITION DISMISSED. The Supreme Court reaffirmed that the bank guarantees were wrongly encashed and ordered Respondents 1 and 2 to refund Rs 1,18,00,000 to the State Bank of Patiala within two weeks. Costs of Rs 5,000 were imposed on the respondents, and I.A. No. 3 in the appeal was disposed of.
Implications: The decision clarifies that a bank guarantee furnished pursuant to interim judicial orders is not tantamount to payment of excise duty; therefore, Section 11-B does not govern its release or retention. While not creating new precedent, the ruling reinforces the limited ambit of Section 11-B and protects assessees from wrongful encashment of security instruments once they prevail on merits.
Order
1. This is a review petition filed by Respondents 1 and 2 in SLP (C) No. 18175 of 1993. By our order dated November 26, 1993, we granted special leave and, having heard the appeal, we allowed it and directed Respondents 1 and 2 to refund the monies recovered by them from the State Bank of Patiala upon certain bank guarantees.
2. The appellants had filed an earlier appeal in this Court against a decision of CEGAT regarding the classification of toilet soap for the purposes of excise duty. Interim orders were passed in the appeal whereby stay of recovery of excise duty pursuant to the impugned order of CEGAT was granted on condition that 50% thereof was paid by the appellants to the excise authorities within 3 months and for the balance 50% the appellants furnished bank guarantees. The appeal was, ultimately, allowed. This Court then stated that it “did not propose to go into the question of the refund as it is a matter to be dealt with by the authorities concerned in accordance with law. The appellants shall have to apply for refund and the authorities shall be required to deal with it in accordance with the law. It is for the authorities, therefore, to decide the question as per law.”
3. Accordingly, on May 14, 1993 the appellants wrote to the first respondent and requested him “to refund the amount and the bank guarantees deposited from time to time under Supreme Court of India's interim orders during the pendency of the above-referred appeals”. Since, in their view, the refund application was not being dealt with, the appellants filed a writ petition on August 27, 1993 before the High Court of Punjab and Haryana seeking its expeditious disposal. On October 18, 1993 the High Court issued a direction to the excise authorities to dispose of the claim of the appellants for “refund/release of bank guarantees” within one month. The High Court directed the appellants to have the bank guarantees extended till the final disposal of the claim for refund. Against this order of the High Court the special leave petition aforementioned was filed, on which leave to appeal was granted and the appeal was allowed by the order of which review is now sought.
4. The excise authorities passed an order on November 15, 1993 holding that the amount deposited by the appellants in court and withdrawn by the excise authorities and the amounts covered by the bank guarantees furnished by the appellants pursuant to the interim orders of this Court were not refundable to the appellants having regard to the provisions of Section 11-B of the Central Excises and Salt Act, 1944. The bank guarantees not having been renewed, the first respondent then issued upon the bank a demand, pursuant to which the bank guarantees were encashed on November 17, 1993. By our order of November 26, 1993, allowing the civil appeal as aforestated, we held that the direction issued by the High Court in regard to the extension of the bank guarantees was bad because the bank guarantees were not the subject-matter of the application for refund pending before the excise authorities. Once this Court had decided the earlier appeal against the excise authorities they did not have the power to get the bank guarantees encashed. Accordingly, we directed the excise authorities to repay the amounts collected upon the bank guarantees to the bank.
5. Section 11-B of the Act provides that person claiming refund of any duty of excise may make an application for refund of such duty to the Assistant Collector of Central Excise before the expiry of six months from the relevant date and in such form as may be prescribed and the application shall be accompanied by such documentary or other evidence as the applicant may furnish to establish that the amount of duty of excise in relation to which such refund is claimed was collected from or paid by him and the incidence of such duty had not been passed on by him to any other person.
6. Mr A.K Ganguli, learned counsel for Respondents 1 and 2 submitted that the provisions of Section 11-B were attracted to the bank guarantees in question; that the bank guarantees, furnished under the interim orders of this Court as a condition of stay of recovery of excise duty from the appellants, should be deemed to be equivalent to monies deposited in Court; that, therefore, it was for the appellants to establish before the excise authorities that they had not passed on the incidence thereof to their customers; and that, since the appellants had failed to establish this, the excise authorities were entitled to encash the bank guarantees and retain the amounts thereof.
7. Mr Ganguli relied upon the judgment of this Court in Union of India v. Jain Spinners Ltd. (1992) 4 SCC 389, (1992) 61 ELT 321 This was a case in which the High Court had, on a writ petition filed by the assessee, granted interim stay of collection of a demand of excise duty on condition that the assessee deposited in court stated sums and for further clearances gave bank guarantees for the amounts of the disputed duty. By a subsequent order the excise authorities were permitted to withdraw the amounts deposited by the assessee in court. The writ petition filed by the assessee succeeded, and it applied to the High Court for refund of the amounts which had been deposited by it and which had been withdrawn by the excise authorities. The High Court allowed the application. The excise authorities filed an appeal in this Court against the High Court's order. This Court held that under the provisions of the Act a duty was cast upon the Assistant Collector of Excise to consider the question. It could not be disputed that the amount which was deposited by the assessee in the High Court and was withdrawn by the excise authorities was towards the excise duty which was assessed. The provisions of Section 11-B were attracted and the assessee was not entitled to take advantage of the order by which the deposit had been made unless it succeeded in showing to the statutory authorities that it had not passed on the whole or any part of the duty in question to others. This Court said that if the contentions advanced by counsel for the assessee were accepted it would defeat the amended provisions of the Act. It would then be open to assessees to obtain orders from the courts, as had happened in the case before it, and, instead of paying the assessed amount of duty to the authorities, deposit it in court and raise the plea that what it had deposited in court was not duty and the assessee was entitled to get a refund, either directly from the court or, if it had been withdrawn, from the authorities, notwithstanding that it had passed on the duty to others.
8. The judgment in the case of Jain Spinners (1992) 4 SCC 389, (1992) 61 ELT 321 applies to a case where excise duty has been deposited in court pursuant to an interim order and has been withdrawn by the excise authorities. In such a case, clearly, the assessee has to make an application for refund and to such a case, therefore, the provisions of Section 11-B squarely apply.
9. Section 11-B applies when an assessee claims refund of excise duty. A claim for refund is a claim for repayment. It presupposes that the amount of the excise duty has been paid over to the excise authorities. It is then that the excise authorities would be required to repay or refund the excise duty.
10. The question, therefore, is whether it can be said that the furnishing of a bank guarantee for all or part of the disputed excise duty pursuant to an order of the court is equivalent to payment of the amount of the excise duty. In our view, the answer is in the negative. For the purposes of securing the revenue in the event of the revenue succeeding in proceedings before a court, the court, as a condition of staying the demand for the disputed tax or duty, imposes a condition that the assessee shall provide a bank guarantee for the full amount of such tax or duty or part thereof. The bank guarantee is required to be given either in favour of the principal administrative officer of the court or in favour of the revenue authority concerned. In the event that the revenue fails in the proceedings before the court the question of payment of the tax or duty, the amount of which is covered by the bank guarantee, does not arise and, ordinarily, the court, at the conclusion of its order, directs that the bank guarantee shall stand discharged. Where the revenue succeeds the amount of the tax or duty becomes payable by the assessee to the revenue and it is open to the revenue to invoke the bank guarantee and demand payment thereon. The bank guarantee is security for the revenue, that in the event the revenue succeeds its dues will be recoverable, being backed by the guarantee of a bank. In the event, however unlikely, of the bank refusing to honour its guarantee it would be necessary for the revenue or, where the bank guarantee is in favour of the principal administrative officer of the court, that officer to file a suit against the bank for the amount due upon the bank guarantee. The amount of the disputed tax or duty that is secured by a bank guarantee cannot, therefore, be held to be paid to the revenue. There is no question of its refund and Section 11-B is not attracted.
11. We find, therefore, no merit in the review petition. We reiterate our finding that the bank guarantees given by the appellants were not properly the subject-matter of the writ petition before the High Court and the High Court was in error in directing the appellants to renew the same. We reiterate our direction to the first and second respondents forthwith to repay to the State Bank of Patiala, Overseas Branch, Millar Gang, Ludhiana, the amount of Rs 1,18,00,000 collected upon the bank guarantees within two weeks.
12. The review petition is dismissed. The first and second respondents shall pay to the appellants costs quantified in the sum of Rs 5000.
13. This order will also dispose of I.A No. 3 in the appeal.
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