Section 27 of the Customs Act and the Doctrine of Unjust Enrichment Examined in Patanjali Foods Ltd. v. Union of India

Introduction

The Supreme Court of India addressed the complex legal issue of refunding customs duty when it was paid under protest through the encashment of bank guarantees in the landmark judgment that was handed down on May 19, 2025.

The case was Patanjali Foods Ltd. v. Union of India. In its decision, the Supreme Court provided clarification about the applicability of the doctrine of unjust enrichment as well as the reach of Section 27 of the Customs Act of 1962. This decision has significant repercussions for refund claims that involve bank guarantees that were issued as security while the action was at an earlier stage.

History of the Case and Facts of the Situation

In the beginning, M/s M.P. Glychem Industries Limited imported crude degummed soybean oil and submitted a bill of entry in September of 2002. This company later merged with M/s Ruchi Soya Industries Ltd., which is now known as Patanjali Foods Ltd. The Customs Department insisted on imposing a higher customs charge based on a tariff value that was established by a government notification in accordance with Section 14(2) of the Customs Act.

This was opposed by the appellant, who argued that the notification in question was not in effect on the date of import and that it was not made available to the general public. It was their contention that they ought to be subject to duty in accordance with Section 14(1), which is determined by the value of the transaction. In accordance with the directives issued by the Gujarat High Court, the appellant provided bank guarantees for the differential duty in order to ensure that the items obtained clearance.

Following the dismissal of the writ petitions in 2012, the Customs Department redeemed the bank guarantees in January 2013, despite the fact that an appeal against the dismissal was still being considered by the Supreme Court.

An same case, Union of India v. Param Industries Ltd., was heard by the Supreme Court of India in 2015, and the court ruled in favor of international importers. It was determined that the customs duty that was requested in accordance with the notification could not be imposed since the notification in question had not been published or made available to the general public at the time of importation. As a consequence of this, Patanjali Foods made a request for a refund of the bank guarantees that were cashed.

The Conflict in the Legal System

After the Supreme Court had decided that the underlying duty was not legally obligated to be paid, the primary question that needed to be answered was whether or not the Customs Department could keep the bank guarantees that had been redeemed.

Despite the fact that the appellant was not required to comply with Section 27 of the Customs Act, which demands proof that the duty incidence had not been passed on to customers (that is, that there was no unjust enrichment), the department declined to return the amount.

By concluding that the appellant is required to present paperwork in accordance with Section 27 in order to seek a refund, the High Court essentially treated the encashment of the bank guarantee as a payment of duty. This decision was in agreement with the observation made by the department.

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The Supreme Court’s Analysis of the Situation

The Supreme Court conducted an exhaustive investigation into the significance of the notion of unjust enrichment as well as the purpose and extent of Section 27 of the Customs Act. The claimant is required to provide evidence that they have not transferred the obligation to any other individuals in order to be eligible for a refund of the duty that they have paid that is subject to certain criteria.

On the other hand, the Court highlighted that Section 27 is applicable to amounts that are really “paid” as duty. They made a clear distinction between the money recovered through the encashment of bank guarantees that were supplied as security and the money that was paid in cash for the duty.

It was alluded to by the court that other decisions, such as “Oswal Agro Mills Ltd. v. Assistant Collector of Central Excise” and “Somaiya Organics (India) Ltd. v. State of Uttar Pradesh,” had established that the act of providing a bank guarantee is not the same as making a payment. The encashment of bank guarantees is not equivalent to the voluntary or statutory payment of duty; rather, bank guarantees are only a kind of additional security. In light of this, Section 27 does not apply to encashments of this kind.

In addition, the court chastised the actions of the Customs Department for cashing out the bank guarantees in an excessively hasty manner that occurred while appeals were still being considered. It was noted that the department had behaved in a manner that was devoid of lawful power and was arbitrary.

Solutions to the Most Important Problems

This verdict took into consideration the following important legal questions:

According to Section 27 of the Customs Act, can the act of “paying” duty in accordance with a bank guarantee constitute “encashment” of the guarantee?

   It was a resounding decision from the court that it is not. When a responsibility is eventually resolved, the purpose of bank guarantees is to ensure that a payment will be made in the future. According to the Customs Act, a unilaterally made cash withdrawal that takes place while judicial proceedings are still ongoing cannot be considered a form of payment.

2. Does the principle of unjust enrichment come into play when duty is recouped through the use of such encashments?

   Rather, the court decided. The concept of unjust enrichment, which is based on the assumption that a party has received a benefit that they should not keep, does not apply in this case because the assessee did not actually make a payment but rather compelled the encashment of security.

3. Following the decision made by the Supreme Court in the case of Param Industries, was it appropriate for the Customs Department to keep the sums intact?

   Certainly not at all. The Court came to the conclusion that the ongoing withholding of monies was not only unlawful but also without any explanation, especially considering that the Supreme Court had previously decided that there was no discriminatory duty that was owed.

The Consequences and the Way Forward

The ruling previously handed down by the High Court was overturned by the Supreme Court, which also issued an order to the Customs Department to return the money that was obtained through the use of bank guarantees. Additionally, it stipulated that interest with a rate of 6% per year be paid beginning on the date of encashment and continuing until the date of repayment. Four months were allotted to the department in order for them to finish the refund.

The Importance of the Decision

With regard to the clarification of the legal standing of bank guarantees in the context of revenue disputes, this ruling is a landmark judicial decision. It reaffirms the fact that:

The cashing of a bank guarantee does not constitute a statutory payment of duty. Refund mechanisms that are meant for duty that has been “paid” do not extend to security instruments such as bank guarantees. * Unjust enrichment is a legal notion that must be used in a stringent manner and only when the legal conditions that it imposes are satisfied.

Additionally, it sends a message to the authorities in charge of income that the use of coercive measures during the pending period of legal issues is not permitted and is likely to be challenged.

The Finalization

Within the context of the case Patanjali Foods Ltd. v. Union of India, the Supreme Court of India has established a distinct border between the security provided by bank guarantees and the real statutory payments itself. The Court has not only preserved the rights of taxpayers by removing such security mechanisms from the ambit of Section 27 and the notion of unjust enrichment, but it has also imposed much-needed constraint on the powers of the executive branch to recover disputed dues.

It is a principle that no tax or duty can be retained by the government unless it has been legitimately and validly collected, and this ruling underlines that concept. It also assures that lawful refunds are not obstructed by procedural overreach.