Source: Supreme Court  

Why in News? 

Recently, the bench of Justices Abhay S. Oka and Ujjal Bhuyan has held that the encashment of a bank guarantee by the Customs Department does not amount to payment of customs duty; therefore, Section 27 of the Customs Act,1962 and the doctrine of unjust enrichment do not apply, and the amount must be refunded with interest. 

• The Supreme Court held this in the matter of M/S Patanjali Foods Limited (Formerly Known As M/S Ruchi Soya Industries Ltd.)  v. Union of India & Ors. (2025). 

What was the Background of M/S Patanjali Foods Limited (Formerly Known As M/S Ruchi Soya Industries Ltd.)  v. Union of India & Ors. (2025) Case? 

• M/s M.P. Glychem Industries Limited imported crude degummed soyabean oil in bulk at Jamnagar port in September 2002 and sought clearance for home consumption. 
• The Customs Department refused clearance, demanding higher customs duty based on a tariff value notification under Section 14(2) of the Customs Act, 1962. 
• The importer argued that the tariff notification had not come into effect at the time of import, making them liable only for duty under Section 14(1) of the Customs Act. 
• Due to the impasse with goods being held up, the company challenged the notification's validity before the Gujarat High Court in 2002. 
• The High Court granted interim relief allowing goods clearance against bank guarantees totalling Rs. 77,43,859 for the differential duty amount. 
• M/s M.P. Glychem Industries merged with M/s Ruchi Soya Industries Limited in 2006, which later became M/s Patanjali Foods Limited. 
• The High Court dismissed all writ petitions in September 2012, prompting the company to appeal before the Supreme Court. 
• While appeals were pending, the Customs Department encashed the bank guarantees in January 2013 and appropriated the secured amounts. 
• The Supreme Court in Param Industries Limited case (2015) ruled that such tariff notifications were invalid if not offered for sale by the Central Board at the time of clearance. 
• Following this favourable ruling, Patanjali Foods sought a refund, but the Department invoked Section 27 and unjust enrichment doctrine to deny the claim. 

What were the Court’s Observations? 

• The Supreme Court held that encashment of bank guarantees offered as security cannot be treated as payment of customs duty under the Customs Act. 
• Section 27 of the Customs Act and the doctrine of unjust enrichment are not applicable when amounts are recovered through coercive encashment rather than voluntary duty of payment. 
• The doctrine of unjust enrichment presupposes actual payment of duty by the claimant, which is absent in cases of arbitrary encashment of security instruments. 
• The Customs Department acted with extreme haste in encashing guarantees while the matter was under Supreme Court consideration, instead of awaiting judicial determination. 
• The retention of amounts after the favourable Supreme Court ruling in Param Industries Limited became wholly untenable and unauthorised in law. 
• The Court directed immediate refund with 6% interest from encashment date, recognising such retention as unjust and unlawful appropriation of funds. 

What is the Doctrine of Unjust Enrichment?  

• The doctrine of unjust enrichment is a just and salutary legal principle based on the concept that no person can seek to collect duty from both ends. 
• It prevents individuals from claiming refunds when they have already passed the burden of duty or tax to other persons, thereby avoiding any real loss or prejudice to themselves. 
• The doctrine ensures that refund claims succeed only when the petitioner establishes that they have not passed on the burden of duty to another person and have themselves borne the burden. 
• Where the burden of duty has been passed on to others, the real loss is suffered by the person who ultimately bears the burden, making it just for the State to retain such amounts on behalf of the people. 
• The power of courts is not meant to be exercised for unjustly enriching a person, and this doctrine is inapplicable to the State as it represents the people. 
• In cases of indirect taxes like central excise and customs duty, tax collected without authority of law shall not be refunded unless the claimant proves they had not passed the burden to third parties. 

Relationship between Section 27 of Customs Act and Doctrine of Unjust Enrichment 

• Section 27 of the Customs Act incorporates the doctrine of unjust enrichment as a statutory requirement for processing refund claims of customs duty. 
• Any person claiming a refund under Section 27 must establish through documentary evidence that the duty amount was collected from or paid by them, and the incident had not been passed on to any other person. 
• The provision requires the applicant to furnish evidence proving that they have not transferred the burden of duty to customers or other parties, embodying the unjust enrichment principle. 
• A refund can be denied either in part or wholly by applying the doctrine of unjust enrichment under Section 27, ensuring that only genuine claimants who have actually borne the financial burden receive refunds. 
• Section 27 provides the procedural framework within which the substantive principle of unjust enrichment operates, requiring specific documentation and proof to prevent windfall gains. 
• The section ensures that refund claims are adjudicated under the principle that no person should be allowed to recover duty amounts when they have already recovered the same from their customers or other parties.