Supreme Court Rules: Encashment of Bank Guarantee Is Not Payment of Customs Duty
Supreme Court Rules: Encashment of Bank Guarantee Is Not Payment of Customs Duty
New Delhi | May 20, 2025 – In a significant ruling on customs law, the Supreme Court has clarified that the encashment of a bank guarantee cannot be treated as payment of customs duty. The decision came while setting aside a Gujarat High Court judgment in the case Ruchi Soya Industries Ltd. v. Union of India.
A Bench comprising Justices Abhay S. Oka and Ujjal Bhuyan held that the Customs Department acted arbitrarily by encashing bank guarantees provided by the importer, and that the money was being wrongfully held by the authorities without legal justification. The Court observed, “They have no authority in law to hold on to such money, and therefore, the same has become totally untenable.”
Background: Import Dispute and Legal Battle
The case began in 2002 when M.P. Glychem Industries Ltd., which later merged into Ruchi Soya Industries Ltd. (now Patanjali Foods Ltd.), imported crude degummed soybean oil at the Jamnagar port. The importer filed a bill of entry seeking clearance for home consumption. However, the Customs Department refused clearance, demanding higher duty based on a tariff value fixed under Section 14(2) of the Customs Act, 1962.
The company challenged the validity and effective date of the tariff notification, claiming that it had not come into force at the time of import, and therefore duty should be assessed under Section 14(1) instead.
Interim Relief and Bank Guarantees
The Gujarat High Court admitted the writ petition and, via interim relief in October 2002, allowed clearance of goods if the importer furnished bank guarantees for the differential duty. The company complied, furnishing three guarantees totaling nearly Rs. 78 lakhs, and the goods were released upon payment of duty as per Section 14(1).
Encashment Without Final Assessment
Years later, in January 2013, the Customs Department encashed the bank guarantees and appropriated the funds—even though civil appeals on the issue were still pending before the Supreme Court. There was no court order authorizing the encashment at the time.
In 2016, the Supreme Court, in a related case (Union of India v. Param Industries Ltd.), held that the tariff notification was not enforceable on the date of import. This supported the appellant’s stand that higher duty under Section 14(2) was not applicable.
Refund Applications and Rejection
In 2016, the importer applied for a refund of the amounts secured by the bank guarantees. The Customs Department rejected the applications, citing procedural deficiencies and invoking the doctrine of unjust enrichment, demanding evidence to prove that the duty burden was not passed on to consumers.
The appellant again approached the Gujarat High Court, which dismissed the writ petitions but gave liberty to the company to submit required documents to the department. The High Court held that the doctrine of unjust enrichment applied, relying on DCW Ltd. v. Union of India (2016).
Supreme Court Analysis and Final Verdict
The Supreme Court disagreed with the High Court’s approach. It clarified that the case in DCW Ltd. involved classification disputes, and encashment there was permitted by the Court. However, in this case, the department acted on its own, without authority.
The Court emphasized that under the Customs Act, duty is payable after an assessment order, and actual payment must be made by the importer. Encashing a bank guarantee given as security does not amount to such payment. Therefore, Section 27 of the Customs Act, which governs refunds, would not apply, and the doctrine of unjust enrichment was wrongly invoked.
The Bench also criticized the department’s haste and coercion, stating they could have waited for the Supreme Court’s ruling or asked for renewal of the guarantees.
Court Orders Refund with Interest
Concluding that the Customs Department had wrongfully retained the appellant’s money, the Supreme Court directed that the full amount covered by the bank guarantees must be refunded immediately. It also ordered the department to pay 6% interest from the dates of encashment until repayment.
Key Takeaway:
This judgment reinforces that security provided through a bank guarantee is not equivalent to actual duty payment. Government departments must act within legal bounds, especially when public funds and private rights are at stake.
Case Title: Ruchi Soya Industries Ltd. (now Patanjali Foods Ltd.) v. Union of India
Citation: 2025 SCC OnLine SC (to be updated)
Bench: Justice Abhay S. Oka and Justice Ujjal Bhuyan
Date of Judgment: May 20, 2025
For the full judgment and legal analysis, visit: SCC Online Article
For Further Learning:
Explore more insightful content on finance, education, and personal development by visiting our
Educational Blog.
For Further Learning:
Explore more insightful content on finance, education, and personal development by visiting our NewsLetter !
Follow on X