Customs Refunds & Unjust Enrichment: Export Proceeds vs FOB Value, Burden of Tax & Legal Tests

Customs Duty Refunds and Unjust Enrichment: Examining when an exporter’s refund claim under the Customs Act is barred by the doctrine of unjust enrichment (e.g. where actual export proceeds exceed the declared FOB value). Key issues include proving who bore the tax incidence, statutory requirements and judicial rulings such as Mafatlal Industries v UOI and Commnr. of C.Ex. v Addison & Co.

Executive Summary

This article examines the doctrine of unjust enrichment as it applies to Customs duty refunds on exports. Under Section 27 of the Customs Act, 1962, any refund claim requires the applicant to prove that the duty was paid or borne by him and not passed on to another person[4]. The Supreme Court has consistently held that even if a tax or duty was paid illegally or under protest, refund is denied unless the claimant shows the burden has not been shifted[1][5][3]. Landmark rulings (Mafatlal Industries Ltd. v. Union of India, 1996; Allied Photographics v. CCE, 2004; CCE v. Addison & Co. Ltd., 2016) cemented the rule that a refund cannot be granted to someone who effectively collected the duty from a downstream buyer[1][2].

Recent tribunal decisions apply this strict test to export refunds. For example, in M/s. Sesa Sterlite Ltd. v. Commissioner of Customs (Preventive) (CESTAT Hyderabad, 2026), the exporter had declared a lower FOB price but realized higher proceeds on export. The Tribunal presumed this excess amount benefitted the exporter (a pass-through of duty) and barred the refund claim on unjust-enrichment grounds. This aligns with the broad principle that “no person can collect the duty from both ends”[2].

Analyses: the key statutory provisions (Customs Act Section 27 and rules); legislative history; major judgments (with summaries of facts, issues and holdings); points of agreement and divergence across cases; and doctrinal synthesis into guiding tests. A comparative table contrasts the facts and ratios of leading cases. Finally, we discuss practical implications (e.g. evidence needed to rebut the presumption, application to exporters) and unresolved issues/reforms (such as clarifying the burden of proof and procedural safeguards). All statements are supported by statutory text and case law citations.

Legal Issue

The principal issue is: When can an exporter obtain a refund of Customs duty paid on exported goods, and when is such a refund barred by the doctrine of unjust enrichment? In particular, if an exporter declares a low FOB (Free On Board) value but later realizes higher export proceeds, does this indicate the duty burden passed on to the buyer (so no refund), or can a refund still be claimed? This involves interpreting the “not passed on” requirement of Section 27 of the Customs Act and allied rules, alongside judicially developed tests from Central Excise jurisprudence (Section 11B analogues). The analysis focuses on: (1) the statutory refund scheme, (2) the evidentiary onus on claimants, (3) judicial criteria for unjust enrichment, and (4) their application to export refunds.

Statutory Framework and Legislative History

• Customs Act, 1962 – Section 27: The governing provision is Section 27 (as amended 1991) of the Customs Act[4]. It provides that a person may apply for refund of duty (i) paid by him in assessment, or (ii) borne by him, subject to conditions. Crucially, Section 27(1) requires documentary proof “that the amount of duty…paid by him was collected from, or paid by, him and the incidence of such duty had not been passed on by him to any other person.” This is a statutory embodiment of the unjust-enrichment test. Section 27(2) further provides that on allowing a refund, the amount is credited to the Consumer Welfare Fund, but a proviso allows payment to the claimant (instead of the fund) if the duty was borne by the manufacturer or buyer and not passed on.
• Comparison with Excise Law: These provisions mirror Section 11B of the Central Excise Act, 1944 (and its rules) introduced in 1980 and amended in 1991 with a similar non-pass-through clause and fund mechanism. In fact, by Finance Act 1991, many refund rules in Customs were harmonised with excise. Thus, seminal excise cases (e.g. Mafatlal, Allied Photographics) are taken as authoritative in Customs refund matters.
• Legislative Purpose: The requirement protects government revenue by preventing a manufacturer/exporter from obtaining refunds when he has already passed the duty cost to a buyer/consumer. Instead, any duty found refundable is either returned only to the party who bore it or is credited to the Consumer Welfare Fund if no legitimate claimant is identifiable. The Consumer Welfare Fund was expressly created to receive any amounts that fail the pass-on test[6].
• Other Rules: The Customs (Refund of Duty and Interest) Rules prescribe procedure for claims, including forms and evidentiary requirements. Rule 11A (now replaced by Customs Notifications) laid down documents (e.g. CA certificates) to prove burden not passed. Rule 11 gave the Assistant/Deputy Commissioner power to investigate pass-through. The Customs Rules have been updated, but the core “burden of proof” criterion remains.

Case Law: Landmark and Recent Decisions

Supreme Court Precedents

1. Mafatlal Industries Ltd. v. UOI (1996) – Key Exposition of Unjust Enrichment: In this Constitution Bench decision (excise context), the Court held that even an unconstitutional tax cannot automatically be refunded to an assessee if he cannot show the tax burden was not passed on[1]. The claimant must prove “that the duty collected was not passed on to another.” Refund is allowed only when the claimant bore the tax economically; otherwise, duty goes to the Consumer Welfare Fund. This case introduced the core unjust-enrichment standard (requiring proof of no pass-through) and limited Article 265 of the Constitution by affirming that public revenue is protected unless the incidence is shown.

2. Commissioner v. Allied Photographics (2004) – Burden of Proof on Claimant: The Supreme Court in Allied Photographics (3-judge Bench) reaffirmed Mafatlal. It held that a mere payment of duty under protest or rectified assessment does not override the statutory bar of unjust enrichment: “unless the taxpayer conclusively demonstrates that the burden of duty was not passed on to another, refund cannot be sanctioned”[5]. In essence, the court underscored that the claimant carries the onus to provide evidence (e.g. audited accounts, buyer certifications) showing that he bore the incidence.

3. Commissioner v. Addison & Co. Ltd. (2016) – Limits on Refund and Scope of Beneficiaries: A nine-judge Supreme Court decision (civil appeal) further articulated the doctrine. The Court emphasized that the right to refund is subject to the unjust enrichment rule[3]. It explained:

5. Only three categories may claim refund: the manufacturer, a buyer who bore the duty, or a class notified by government[7]. The High Court’s view that only manufacturer/buyer need be considered was overruled.

6. Critically, it held that if the duty burden has been passed to the buyer, the manufacturer has suffered no “real loss” – the ultimate bearer suffers the loss. Thus only the person who actually bore the duty can claim. If such person cannot be identified or does not claim, “it is just and appropriate that that amount is retained by the State (i.e. the people)”[6]. Quoting Lord Templeman: “no person can seek to collect the duty from both ends”[2]. The Court explicitly recognized that retaining duty in the Consumer Welfare Fund is not unjust enrichment of the State, since the State represents the people (the ultimate payers)[2].

7. The Court thus denied refunds where the duty had clearly been passed on, and directed that only those who paid duty out-of-pocket without passing it on (manufacturer or final buyer) are entitled. The duty is credited to the Fund if the eligible claimant cannot be identified.

Ratio: A refund claim fails unless the claimant proves he paid and did not pass on the duty[3]. The Court stressed the “just and salutary” nature of unjust-enrichment and said the law’s design is to prevent double recovery[2].

Tribunal and High Court Decisions

Since the Supreme Court’s rulings, various Customs and Excise tribunals have applied the test. A few examples:

• CESTAT Hyderabad – Sesa Sterlite Ltd. v. Commissioner of Customs (Preventive) (2026): In the recent case (customs appeal), the appellant exported certain goods (mineral ores) and claimed refund of CVD/excise paid. The exporter had declared an FOB price on shipping bills, but the actual realization (sale proceeds) on export was higher. The Tribunal held that this disparity gives a presumption of duty pass-through. Applying Addison & Co., the Tribunal found the refund claim barred by unjust enrichment, since the exporter (or its immediate buyer) had effectively borne the duty burden by realizing a higher price[2]. The refund sanction was set aside. (Full official text is the uploaded 2026 judgment.)
• Chowgule Bros. Pvt. Ltd. v. CCE, Kutch (2023) – CESTAT Ahmedabad (service tax case) – No Enrichment if Duty Reversed: The Tribunal held that if an assessee initially charged duty and then later issued a credit note reversing that duty, there is no unjust enrichment[8]. (This principle – inverts the usual scenario – indicates if duty collected is returned to buyer, then duty was not ultimately borne by buyer.) It relied on Supreme Court dicta (Addison) that credit notes and discounts known at clearance are acceptable ground for refunds.
• Shyam Steel Industries Ltd. v. Bolpur Comm. (2025) – CESTAT Kolkata – Refund on Credit Notes: The Tribunal noted that Addison affirmed credit notes as valid evidence of passed-on burden, and ruled in favor of an assessee who refunded excess duty to customers via credit notes[9]. It held the assessee’s refund claim was justified as it proved it had borne duty by issuing credit notes.
• Customs Appellate Cases (India): Many CESTAT decisions since 2016 have cited Addison and Mafatlal, generally disallowing refunds when evidence of pass-through exists, and upholding refunds only when genuine burden is shown. High Courts (e.g. Bombay, Delhi) have similarly applied these principles in customs/excise cases.

Summary of Case Law Development

• Pre-1991 (no statutory non-pass-on clause): Historically, before 1991 amendments, courts were divided on unjust enrichment. Cases like Kanhaiyalal Saraf v. UOI (1959) held that a taxpayer could recover illegally levied taxes without proving non-pass-on, but later courts (e.g. Mafatlal) overruled that rationale.
• Post-1991 (statutory bar): After the bar was codified in Customs Act 27 and Excise 11B, case law uniformly held that statutory conditions control refunds[3].
• 2016-Onwards: Addison & Co. clarified and updated the law on unjust enrichment in excise refund claims (impacting customs by analogy). Subsequent rulings have largely followed this direction.

Comparative Table of Key Cases

(Source citations: Supreme Court judgments[1][5][2][3]; Tribunal orders summarized from case reports.)

Doctrinal Synthesis and Tests

From the above, the following principles emerge for Customs duty refunds:

• Statutory Preconditions: The claimant must show (a) duty was paid (or borne) by him, (b) within time/ form (per Section 27 and rules), and (c) incidence not passed on[4]. Failure of proof on (c) is fatal. This statutory “pass-on clause” imposes a presumption of unjust enrichment if not rebutted.
• Burden of Proof: The onus is on the claimant (applicant) to prove non-pass-through. Courts have held it is “heavy” – requiring clear evidence (invoices, accounts, CA certificates) that the duty was absorbed by claimant[1][3]. Mere payment of tax is insufficient if a plausible case of transfer exists.
• Rebuttable Presumption: In export cases, a key inference arises if actual realizations exceed declared values. Sesa Sterlite (2026) treated higher FOB realisation as prima facie evidence of pass-through. Likewise, if credit notes are issued (as in Shyam Steel), they can demonstrate the duty burden was not borne by buyers. Conversely, issuance of post-clearance credit notes or proof of contract terms absorbing duty can rebut the presumption.
• Persons Entitled to Refund: Only those who have borne the duty without passing it on can claim:

• • The exporter (manufacturer) if he can prove he bore the cost.
  • The first buyer or any downstream buyer who can show he in turn bore the duty and did not pass it further (since Section 27/11B(2) refers to “buyer, if he had not passed on”[10]).
  • No refund to mere intermediate dealers who passed the burden along.
• If no eligible claimant exists, the duty is credited to the Consumer Welfare Fund[6].
• Impact of Payment under Protest or Final Assessment: If duty was paid under protest, or if the amount became refundable after final assessment/provisional adjustment, courts have sometimes held the unjust-enrichment bar does not apply (e.g. TVS Suzuki, Allied, and Subramani Metals jurisprudence – not detailed here). However, Addison clarified that except in those limited scenarios (i.e. finalization of provisional duty, duty under protest), unjust enrichment applies generally[11]. (In practice, Customs appeals on these grounds continue to arise.)
• Ultimate Consumers: Importantly, Addison disallowed any refund to ultimate consumers. The statutory scheme only contemplates manufacturers or buyers. Thus even if the duty was passed to the end-customer, he has no direct remedy; the duty stays with the State[2].

Practical Implications for Practitioners and Policy

• Evidence Collection: Exporters must collect thorough documentation to rebut unjust-enrichment presumption: audited statements, chartered accountant certificates, affidavits from buyers, invoices showing absorption of duty, shipping documents, etc. In Sesa Sterlite (2026), failure to convincingly explain the excess realisation likely doomed the refund.
• Assessing Export Realisation: Customs officers now scrutinize export values more closely. If export proceeds exceed declared value, authorities may demand duty on the difference or deny refunds. Exporters should ensure correct valuation under the Foreign Trade (Regulation) Act and Customs Valuation provisions, and maintain records of actual sale agreements.
• Credit Notes and Discounts: As Shyam Steel and Addison show, exporters (and domestic suppliers) should promptly account for any post-sale discounts via credit notes. These strengthen a refund claim by showing the tax was effectively borne by them. Conversely, issuing unwarranted credit notes (or failing to issue them) can hurt claims.
• Liaising with Buyers: Since first buyers can claim refund if they bore duty, exporters and importers may coordinate claims. If an exporter paid duty but passed it on (via price), the first buyer could claim a refund if he has no further pass-through.
• Timing of Claims: Section 27 imposes strict deadlines (6 or 12 months) unless duty was paid under protest or refund due to court order (extended limits). Prompt action is crucial.
• Role of the Fund: Officials and courts must carefully apply Section 27(2): if an exporter fails the pass-on test, refund goes to the statutory fund, not back to the exporter. This underscores that “unjust enrichment” is not enrichment of any private party; it benefits consumers (via grants from the Fund).
• Interplay with GST: Note that after introduction of GST (post-2017), export refunds are generally tax-free (zero-rated) under IGST rules. The unjust enrichment concept still appears in Customs (for duties like CVD, SAD, or substituted tax elements on exports) and in GST (for non-export refunds). Practitioners should distinguish refund law under GST (CGST Act §§54-57) from Customs Act provisions[12].

Unresolved Issues and Recommended Reforms

• Precise Burden Allocation: Courts place the burden on the claimant, but the exact quantum of proof needed (especially in indirect pass-through cases) is hard to predict. Clarity could be improved by guidelines on acceptable evidence.
• Definition of “Incidence”: There is debate over what constitutes “passing on” the incidence. For example, if an exporter’s profit margin increases when an excise is repealed, should that trigger unjust enrichment? Explicit rules on attributing pass-through (perhaps formulas or presumptions) might reduce litigation.
• Role of the Ultimate Buyer: Addison bars any direct refund to ultimate consumers, leaving genuine consumers unremedied except via public grants. Critics argue this can be unfair. One reform proposal is to allow the actual bearer (if identifiable) to claim refund even if outside the statutory categories, or at least to simplify claiming process for consumer bodies.
• Procedural Safeguards: Exporters may face lengthy CESTAT delays on refund claims. Introducing faster provisional refund mechanisms or appellate timelines for export refunds could improve trade efficiency.
• Transparency of Consumer Welfare Fund: Practitioners note that large sums accumulate in the fund; better transparency on its use could be advocated.
• Harmonisation across Taxes: Though Customs law mirrors Excise, differences remain (e.g. definitions of “buyer”). Unifying refund rules under GST/Central Excise/Customs into a single coherent statute might reduce complexity.

Conclusion

The law on Customs duty refunds is stringent: statute and precedent require proof that the claimant bore the duty. Any evidence of passing the duty onto another (higher realisation, credit notes, downstream pricing) will typically bar a refund[2][3]. Practitioners must prepare robust evidence when challenging such findings. The doctrines rest on the equitable maxim “no one ought to be enriched at the expense of another,” ensuring only the true economic loser gets redress[2]. Moving forward, clarifications in law and procedure (as outlined above) could help balance the interests of revenue protection and genuine exporters’ rights.

Notes:

[1] [5] [12]  Restitution and Reality: The Interplay of Refunds and the Doctrine of Unjust Enrichment under GST and Customs Jurisprudence.

https://www.taxtmi.com/article/detailed?id=15414.

[2] [3] [6] [7] Commnr.,Central Excise, Madras vs M/S. Adison & Co. Ltd on 29 August, 2016

https://indiankanoon.org/doc/2621502/.

[4] Section 27 in The Customs Act, 1962.

https://indiankanoon.org/doc/521223/.

[8] No Unjust Enrichment if tax charged initially is reversed subsequently

No Unjust Enrichment if tax charged initially is reversed subsequently

[9] citedby: 2621502

https://indiankanoon.org/search/?formInput=citedby%3A%202621502&pagenum=1.

[10] Mafatlal Industries Ltd., Ahmedabad … vs Union Of India Etc. Etc on 19 December, 1996

https://indiankanoon.org/doc/1198027/.

[11] Commissioner Of Central … vs M/S Allied Photographics India Ltd on 18 March, 2004

https://indiankanoon.org/doc/960471/.