Case Law Details
Oswal Industries Limited Vs Commissioner of Customs (Import) (CESTAT Mumbai)
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Mumbai, decided the appeal filed by Oswal Industries Limited against the Commissioner of Customs (Import), Mumbai Zone-I concerning the encashment of a bank guarantee during the pendency of an appeal and the subsequent rejection of refund on the ground of limitation under Section 27 of the Customs Act, 1962.
The dispute centered on whether a bank guarantee encashed by the department during the pendency of appeal could be treated as “payment of duty” so as to attract the limitation period under Section 27 of the Customs Act, 1962.
The appellant had imported goods under three Bills of Entry dated 21 August 2003. Due to disputes raised by the customs department, the goods were provisionally released on 12 January 2004 against execution of a bond and a bank guarantee of ₹10 lakh. A show cause notice proposing demand of ₹10,27,823 in customs duty culminated in an Order-in-Original dated 9 June 2006 confirming the demand. The appellant challenged this order before the Tribunal.
During the pendency of the appeal, the department encashed the bank guarantee and deposited the amount into the government treasury on 6 February 2007. Subsequently, the Tribunal decided the appeal in favour of the appellant on 8 November 2016, setting aside the order confirming the demand.
Following this, the appellant filed a refund application on 19 March 2018, along with a Chartered Accountant’s certificate addressing unjust enrichment, for the refund of the encashed bank guarantee. The department directed the appellant to approach the refund section (SC/CRARS, NCH), and the appellant accordingly filed another refund application on 17 February 2020 seeking ₹10 lakh.
The Assistant Commissioner rejected the refund claim through an Order-in-Original dated 9 June 2020, citing that it was filed beyond the one-year limitation period under Section 27(1B) of the Customs Act. The Commissioner (Appeals) upheld this rejection on 31 March 2022 on the same ground.
Before the Tribunal, the key question was whether the encashment of a bank guarantee furnished for provisional release of goods could be construed as “payment of duty” to invoke Section 27. The Tribunal examined the provision, which governs refund claims for duty or interest paid or borne by an applicant, and noted that the section applies only where an actual payment of duty has occurred.
CESTAT observed that in the present case, no customs duty was determined at the time of furnishing the bank guarantee. The guarantee had been provided merely as security for provisional release of goods. Therefore, the refund sought was not for duty paid but for the return of a security amount, and hence Section 27’s limitation clause was inapplicable.
To support its reasoning, the Tribunal referred to several Supreme Court decisions. In Mafatlal Industries Ltd. v. Union of India (1997) 5 SCC 536, a Constitution Bench had clarified that Section 27 cannot be interpreted to allow the state to unjustly retain amounts not legally due.
Further reliance was placed on Oswal Agro Mills Ltd. v. Assistant Collector of Central Excise, Division Ludhiana [1995 Supp. (3) SCC 65]. In that case, the Supreme Court held that encashment of a bank guarantee pending judicial determination was improper, as such guarantees were furnished to secure interests during litigation. The Court ruled that the revenue had no authority to encash the guarantee through executive action and directed refund of the encashed amount. Upon review, the Supreme Court reaffirmed that a bank guarantee is merely a security to protect revenue interests and that the amount so secured cannot be equated with payment of duty. Consequently, refund provisions such as Section 11B of the Central Excise Act—identical in language to Section 27 of the Customs Act—were held inapplicable.
The Tribunal also cited the Supreme Court’s recent judgment in Patanjali Foods Ltd. v. Union of India (2025) 30 Centax 305 (SC). In that case, the Court dealt with the same issue—whether refund of a bank guarantee encashed during pendency of an appeal required proof of unjust enrichment under Section 27. The Supreme Court reiterated that encashment of a bank guarantee cannot be treated as payment of customs duty. Since such encashment was not a statutory payment but a security realization, neither Section 27 nor the doctrine of unjust enrichment applied. The Court found that arbitrary encashment of a bank guarantee pending litigation was unlawful and directed immediate refund with interest at 6% per annum from the date of encashment.
Applying these precedents, CESTAT observed that the bank guarantee serves only as a form of security for the department to safeguard potential revenue recovery in the event of an adverse decision against the importer. In the present case, the disputed amount covered by the bank guarantee could not be treated as duty, as the guarantee was furnished before any final determination of liability.
CESTAT found that the department had encashed the bank guarantee despite being aware of the pending appeal before the Tribunal and without obtaining the Tribunal’s permission. Such action was deemed improper since the dispute had not reached finality. The department was expected to await the appellate outcome rather than proceed with encashment.
The Tribunal held that invocation of Section 27 in such circumstances was legally unsustainable, as the bank guarantee amount was not “duty paid.” Consequently, the limitation prescribed under that provision could not bar the refund claim.
Setting aside the orders of both the adjudicating and appellate authorities, the Tribunal directed the customs department to refund the ₹10 lakh furnished as a bank guarantee to the appellant. The appeal was allowed accordingly.
The order was pronounced in open court on 30 July 2025.
FULL TEXT OF THE CESTAT MUMBAI ORDER
This appeal has been filed assailing the legality of the impugned Order-in-Appeal dated 31.3.2022 whereby the Commissioner of Customs (Appeals), Mumbai Zone-I rejected the appeal preferred by the appellant by affirming the Order-in- Original dated 09.06.2020 passed by the Asstt. Commissioner of Customs, CRARS (Import), Mumbai.
2. The issue involved herein is confined to the applicability of limitation as prescribed under Section 27 of the Customs Act, 1962 for the refund of bank guarantee furnished by the appellant, which had been encashed by department during the pendency of appellant’s appeal before this Tribunal which was subsequently allowed in favour of appellant.
3. The factual matrix, shorn of unnecessary details, in brief are that the appellant imported certain material vide three Bills of Entry dated 21.08.2003. Owing to certain dispute raised by the department, the said goods were provisionally released on 12.01.2004 against execution of Bond and furnishing of Bank Guarantee of Rs. 10 lakhs. A show cause notice was issued proposing demand of customs duty amounting to Rs.10,27,823/-culminating in the Order-in-Original dated 09.06.2006 confirming the aforesaid demand of customs duty. Being aggrieved, the appellant preferred an appeal before this Tribunal. During the pendency of appeal, the department encashed the said Bank Guarantee of Rs.10 lakhs and deposited the same in the government treasury vide challan dated 6.2.2007.
4. The Appeal before this Tribunal was eventually decided in favour of the appellant vide Final Order No. A/93721-93722/16/CB dated 08.11.2016 whereby the Order-in-Original dated 09.06.2006 was set aside.
5. Pursuant thereto, the appellant filed an application on 19.03.2018, accompanied by a Chartered Accountant’s certificate regarding unjust enrichment, for refund of the bank guarantee. The appellant was directed by the department to approach the refund section − SC/CRARS, NCH for further action and following the said direction, the appellant submitted an application on 17.2.2020 for refund of Rs.10 lakhs. The said application was rejected by the Adjudicating Authority vide Order-in-Original dated 09.06.2020 on the ground that it was barred by limitation as prescribed u/s. 27 (1B) of Customs Act, 1962 since the application for refund had been filed after the expiry of one year from the date of the Tribunal’s decision. On Appeal filed by the Appellant, the same was rejected by the learned Commissioner (Appeal) on the very same ground of limitation.
6. I have heard learned counsel for the appellant and learned Authorised Representative on behalf of revenue and perused the case records including the written submissions placed on record. As stated earlier, the pivotal question that arises is whether, a bank guarantee furnished for provisional release of goods and encashed during the pendency of appeal, can be construed as ‘payment of duty’ so as to attract the limitation period prescribed u/s 27 ibid. The title of the said provision is ‘Claim for refund of duty’. The relevant portion of the said section is extracted hereunder:-
“27. Claim for refund of duty
(1) Any person claiming refund of any duty or interest.-
(a) paid by him; or
(b) borne by him,
may make an application in such form and manner as may be prescribed for such refund to the Assistant Commissioner of Customs or Deputy Commissioner of Customs, before the expiry of one year, from the date of payment of such duty or interest:
xxx xxx xxx
(1B) Save as otherwise provided in this section, the period of limitation of one year shall be computed in the following manner, namely:-
(a) ………
(b) where the duty becomes refundable as a consequence of any judgment, decree, order or direction of the appellate authority, Appellate Tribunal or any court, the limitation of one year shall be computed from the date of such judgment, decree, order or direction;
xxx xxx xxx”
The title and language of the aforesaid provision is unambiguous and amply clear that it deals with any claim for refund of duty or interest. But in the instant matter there is no such claim as no duty was determined at the time of furnishing of bank guarantee. What had been claimed by the appellant is the refund of Rs.10 lakhs furnished as bank guarantee for provisional release of goods. By any stretch it cannot be treated as ‘duty paid’.
7. Hon’ble Nine Judges’ Constitution Bench of the Supreme Court, in the matter of Mafatlal Industries Ltd. v. Union of India (1997) 5 SCC 536 while interpreting Section 27 of the Customs Act, 1962 and also few other provisions, has laid down that Section 27 ibid cannot be construed as a device enabling the state to unjustly retain amount not legally due.
8. In a similar matter where the revenue encashed the bank guarantee during the pendency of the appeal, the Hon’ble Supreme Court in Oswal Agro Mills Ltd. v. Asstt. Collector of Central Excise, Division Ludhiana; 1995 Supp. (3) SCC 65 (hereinafter referred to as ‘Oswal Agro Mills Ltd. 1’) found the behaviour of the department highly improper and held that bank guarantees were furnished to secure the interest of the parties till determination of matters pending before the Court and it could not be encashed till the decision of the Court. It further held that the Revenue had no power to get the bank guarantee encashed by using its executive fiat. Therefore while allowing the appeal, the Hon’ble Supreme Court directed the revenue to refund the money, collected by encashing the bank guarantee, forthwith. On a review petition filed by the Revenue, for review of the aforesaid order in Oswal Agro Mills 1(supra), while contending that refund was not permissible having regard to the provisions of Section 11B of the Central Excise Act, the Hon’ble Supreme Court while dismissing the review petition in Oswal Agro Mills Ltd. v. Asstt. Commissioner of Central Excise, Division Ludhiana; (1994) 2 SCC 546, has laid down that the bank guarantee is mere security to protect Revenue’s interest. The amount of the disputed tax/duty, secured by way of bank guarantee, cannot be said to be paid to the revenue nor can it be equated with payment of duty. Since there is no question of refund of duty, Section 11B is not attracted. The Hon’ble Supreme Court while dismissing the review petition filed by revenue reiterated the direction contained in Oswal Agro Mills 1 (supra) to repay the amount collected upon encashment of the bank guarantee. It is worth mentioning here that Section 11B of the Central Excise Act is pari materia to section 27 of the Customs Act, 1962.
9. In yet another decision, very recently the Hon’ble Supreme Court in Patanjali Foods Ltd. Vs. Union of India; (2025) 30 Centax 305 (S.C.) while considering an identical issue ‘whether in order to get the refund of bank guarantee furnished by the assessee before the High Court, which has already been encashed by Revenue during the pendency of appeal before the Hon’ble Supreme Court, the assessee has to establish the unjust enrichment as mandated by Section 27, Customs Act, 1962?’ allowed the appeal and reiterated that encashment of bank guarantee offered as security cannot be treated as ‘payment of customs duty’ and therefore the doctrine of unjust enrichment or Section 27 of the Customs Act would not be attracted in such cases. The relevant paragraphs whereof are extracted as under:-
“xxx xxxx
30. ….. .Under the scheme of the Customs Act, duty is assessed provisionally or finally whereafter an assessment order or order-in-original is passed. Post assessment order or order-in-original, the concerned importer is required to pay the assessed duty. If the importer does not pay the duty, revenue can enforce recovery under Section 142 of the Customs Act as recovery of sums due to the Government. The key word in Section 27 of the Customs Act is ‘paid’. Refund thereunder is permissible only if any duty is ‘paid’ by the claimant which subsequently becomes refundable either fully or in part. In the facts of the present case encashment of bank guarantees offered as security cannot be treated as payment of customs duty. Respondents could have either awaited the decision of this Court or could have directed the appellant to renew the bank guarantees. This they did not do. Instead they resorted to arbitrary encashment of the bank guarantees. Such encashment of bank guarantees cannot be treated as payment of duty or duty paid by a claimant. In such circumstances, the doctrine of unjust enrichment or Section 27 of the Customs Act would not be applicable. It is evidently clear that respondents are holding on to money of the appellant which they are not authorized to do so as per judgment of this Court in Param Industries Limited (supra). They have no authority in law to hold on to such money and, therefore, the same has become totally untenable.
31. In the circumstances, we set aside the impugned judgment and order of the High Court dated 28.04.2016 and direct the respondents to immediately refund the amounts covered by the bank guarantees to the appellant. Since retention of such amounts is unjust and unlawful, the same would carry interest at the rate of 6 percent from the dates of encashment till repayment. Let the repayments with applicable interest be released to the appellant within a period of four months from today.
32. Appeals are allowed. However, there shall be no order as to cost.”
10. The bank guarantee is security for the Revenue that in the event the Revenue succeeds or dismissal of assessee’s appeal, department’s dues will be recoverable, being backed by bank guarantee. In the present matter, the disputed amount which was secured by a bank guarantee cannot constitute as duty because it was furnished prior to determination of duty. Despite knowing that the appellant had filed appeal before this Tribunal, during its pendency, the Revenue had encashed the bank guarantee without even taking leave of the Tribunal, which is not proper. Challenging the order before the higher appellate forum itself shows that the dispute hasn’t attained finality. The department ought to have waited for the final outcome of the appeal. The amount of bank guarantee involved herein cannot constitute payment of duty and the invocation of Section 27 ibid is misplaced.
11. Consequently, the impugned order is hereby set aside. The respondent is directed to refund the amount, furnished as bank guarantee, to the appellant forthwith. The appeal is allowed accordingly.
(Pronounced in open Court on 30.07.2025)
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