Unjust Enrichment Under Customs- The Both End Advantage

Before initiating the discussion , it is apt to quote reference made by the Apex Court regarding unjust enrichment in the case of Mafatlal Industries Ltd and others Vs Union of India & others -1997 (89) E.L.T. 247 (S.C.).
“The doctrine of unjust enrichment is a just and salutary doctrine No person can seek to collect the duty from both ends. In other words, he cannot collect the same duty from his purchaser at one hand and also collect the same duty from the State on the ground that it has been collected from contrary to law. The power of a Court is not meant to be exercised for unjustly enriching a person. “

The principle or doctrine of unjust enrichment means that no person should be allowed to avail double benefit at another’s expense. The person who has paid duty and claiming refund from the Government cannot be permitted to collect duty from the buyer , otherwise he will be unjustly enriching himself and creates an inequitable situation.

From the Point of View of Contract Law and Equity
“Unjust enrichment” means retention of a benefit by a person that is unjust or inequitable. Unjust enrichment occurs when a person retains money or benefit which belongs to someone else in justice, equity and good conscience.

The doctrine of unjust enrichment, therefore, is that no person can be allowed to enrich inequitably at the expense of another. A right of recovery under the ‘doctrine of unjust enrichment’ arises where retention of a benefit is considered contrary to justice or against equity.

According to Section 68 of Contract Law– If a person is incapacitated of entering into a contract or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his conditions in life, the person who has furnished such supplies is entitled to be reimbursed from the person’s property of such incapable person.

According to the Black’s Law Dictionary
The retention of benefit by others without offering compensation, wherein compensation is reasonably expected. A benefit received from other not intended as a gift and not legally justifiable for which the beneficiary must make restitution or recompense .

Understanding the Principle of Unjust Enrichment Under Tax Matters

The principle of unjust enrichment is the essential part of tax refund process and no refund of tax would be sanctioned without the test of principle of unjust enrichment.

“Doctrine of Unjust Enrichment” is a term which is generally used by the Customs and Central Excise authorities in the matter of claim for refund of excess paid duty. Whenever, it is found by the Customs and Central Excise authorities that the party is entitled for refund of duty and incidence of duty has not been passed on to any other person, refund amount is sanctioned and paid to the party, if it is not hit by the doctrine of unjust enrichment.

Similarly, to see that tax refund is not hit by bar of unjust enrichment, documentary evidence is produced before the customs authorities for claim of refund. Generally, reliance is placed on Chartered Accountant’s (C.A.) certificate which is an important document issued by a Chartered Accountant certifying that the incidence/burden of tax has not been passed on to consumers or any other person. It is an evidence furnished by claimant to show that his refund is not hit by the bar of unjust enrichment.

The mechanism under Customs Act, 1962 is in place to furnish the proof of unjust enrichment by the mandate of Section 28(1A) and 28D of the Customs Act, 1962.

Why such Proof of Unjust Enrichment is Needed
In view of general principle of equity,contract law and specially in terms of Section 27(1A) and 28D of the C.A.62, which reads as under;
Section 27(1A) reads as under;
The application under the sub-section (1) shall be accompanied by such documentary or other evidence (including the documents referred to in section 28C) as the applicant may furnish to establish that the amount of duty or interest , in relation to which such refund is claimed was collected from, or paid by, him and the incidence of such duty or interest , has not been passed on by him to any other person.

Section 28D- Presumption that incidence of duty has been on to the buyer;
Every person who has paid the duty on any goods under this Act shall unless the contrary is proved by him, be deemed to have passed on the full incidence of such duty to the buyer of such goods.
A valid rebuttable presumption is raised that in every case incidence of duty has been passed to the buyer of the goods. Therefore, proof that duty incidence has been borne or suffered by the claimant/assessee/buyer has to be submitted before the customs authorities. Such proof comes in the form of CA’s certificate to rebut the general presumption of passing of incidence of duty.

Unjust Enrichment and Consumer Welfare Fund
Often it is seen that claim of refund meets the necessary ingredients of Section 27 except unjust enrichment, then refund is sanctioned as Government will not afford to retain with them in view of principle of equity, so it would be credited into consumer welfare fund . Interestingly, many of the refunds are sanctioned but they find their way to the Consumer Welfare Fund as they are hit by the doctrine of unjust enrichment.

Consumer Welfare Fund (CWF)
The concept of consumer welfare fund results from doctrine of unjust enrichment and in case of not meeting the criterion of unjust enrichment, refund gets its way to CWF instead to asessee/claimant. This gives rise to consumer welfare fund.

Statutory Backing
As per the Central Excises and Customs Laws (Amendment) Act, 1991 (Act No. 40 of 1991) read with the Notification No.30/91-CE(NT) dated 19.09.1991, Chapter IIA containing Sections 12A, 12B, 12C and 12D has been inserted in the Central Excise Act, 1944 with effect from 20.09.1991. By the said amendment, provision for establishment of the Consumer Welfare Fund has been made under Section 12C(1) of the Central Excise Act, 1944. Under the provisions of Section 12C(2) ibid, the amount of duty is to be credited to the Fund in such manner as may be prescribed. Under the provisions of Section 12D(1) ibid, any money credited to the Fund is utilized by the Central Government for the welfare of the consumers in accordance with such rules as that Government may make in this behalf. Accordingly, Consumer Welfare Fund Rules, 1992 came into force.

Consequential Refund by the Appellate Authority or Court, when Money is Already Credited to Consumer Welfare Fund

Under the proviso to Rule 3 of the Consumer Welfare Fund Rules, 1992, any amount having been credited to the Fund is to be paid from the Fund as ordered or directed to be paid to any claimant by orders of the appellate authority or court. Then in such case refund amount which has been already ordered to be credited to the Consumer Welfare Fund, but it is seen it is hardly paid from the Consumer Welfare Fund, whenever the party gets relief from the appellate authority or court.

Another strange observation, whenever refund amount is sanctioned but ordered to be credited to the Fund by the lower customs authority, nobody has a clue whether this amounts really credited to Fund or order remains merely on paper . In one case even after expiry of nine years from passing of order by lower authority , refund amount was not credited to consumer welfare fund.

Legal Validity of Principal of Unjust Enrichment Under Customs Act, 1962

Section 27 contains unjust enrichment clause and emphasize that no refund of duty shall be sanctioned without meeting the ingredients of unjust enrichment. Section 27 is mother section for refund of any duty, which deals with claim of refund of any duty under customs act and in terms of unjust enrichment clause, every refund of duty under Section 27 has to pass the test of unjust enrichment.

There are two other section 26 and 26A of the customs act, which talks about refund of export duty an refund of duty in certain cases respectively. Reading of all these three section indicates that Section 26 and 26A has limited application , whereas Section 27 has a very wide range as it covers refund of any duty claimed/borne by any person.

Apart from Section 27, operations of other section also governs refund of duty, same are illustrated below.
Conditions/Statutory Provisions under which Refund of Customs Duty Arises;
(i) Refund claimed under Section 27 of Customs Act, 1962.
(ii) Refund of export duty under Section 26 of the Customs Act, 1962,
(iii) Refund of import duty in certain cases under Section 27A of the Customs Act, 1962.
(iv) Refund of duty as goods assessed and cleared provisionally under Section 18 of the Customs Act, 1962.
(v) Duty Drawback claim under Section 74 and 75 of the Customs Act,1962.
(vi) Refund of pre-deposit of duty/interest in terms of appellate authorities under Section 129E and 129EE
(vii) Refund of excess duty paid by the importer/exporter due to wrong assessment. Refund under Section 27
(viii) Consequential Refund which arises out of appellate authority , Court’s order. Refund under Section 27
(ix) Duty paid under protest;
(x) Refund of excess ADD- Section 9A of CTA, 1975;
(xi) RF and PP is also refunded consequential to higher Appellate Authority /Court’s order;
(xii) Deposits made during investigation .
(xiii) Refund of Security/BG paid during provisional release;

Now the question arises whether principle of unjust enrichment is applied in all the aforementioned conditions ?

The answer is not affirmative . The reading of section 27 and the clause containing therein tells us that principle of unjust enrichment would be applicable in case of refund of any duty. It means, if the case does not relates to duty, issue does not fall under the ambit and scope of section 27 of the Act. For example , many instances has come to notice, that customs authorities unnecessarily apply doctrine of unjust enrichment, in the case of refund of penalty and even fine, which is unwarranted as section 27 concerns with duty and by no stretch of imagination it can be said that there would be any case of passing of incidence of penalty and fine. Further, if deposits is made during investigation before assessment and if the same is required to be refunded , no case for unjust enrichment. Similarly if duty is paid but imported goods received in short quantity , then no question arises for passing of incidence of duty due to short landing of imported goods., so no case of unjust enrichment. Moreover in case of refund of duty under section 74 and 75 of the Customs Act, 1962 , refund is not require to meet this doctrine.

It also emerge from the plain reading of section 27 and entire scheme of refund that for refund of duty under section 27, pre-requisite condition is importation of goods and subsequent sale thereof . These two words ( imported goods and sale of goods) are in conjunction, therefore unjust enrichment is subject to sale of imported goods as passing of burden of duty assessed, levied and paid thereon, would only become reality in case of sale of goods by importer to some buyer/purchaser.Therefore refund and unjust enrichment thereof is interdependent on passing of incidence of duty to buyer from importer.

Significance of CA’s Certificate to Comply with the Provisions of Unjust Enrichment.

The refund of duty require thorough scrutiny before passing or rejecting of refund order by the adjudicating authority. The adjudicating authority should exercise primary scrutiny of test of principle of unjust enrichment before passing any tax refund order. For testing of unjust enrichment, C.A.’s certificate is a substantial document as per the statutory provision. C.A. is the statutory auditor of the assesses, who verify records/books of accounts of business, balance sheet and certify that the incidence/burden of duty have not been passed on to the buyer and there is no scope of availing double benefit of duty by the claimant. In the absence of C.A.’s certificate, no refund of tax or duty cannot be entertained by the adjudicating authority as prescribed by the statute.

Relevant Board Circulars

C.B.E. & C. Circular No. 572/9/2001-CX., dated 22-2-2001
C.B.E. & C. Circular No. 572/9/2001-CX., dated 22-2-2001, states that Central Excise and Customs Refund/rebate claims in all types of cases, processing of refund start from the point of view of unjust enrichment provisions and accordingly claimant should be asked to submit the evidence to establish his claim that incidence of duties whose refund are being claimed has been borne by him and that the same has not been passed on to the buyer, where the claimant is unable to furnish this evidence or otherwise, he is not entitled to refund.

Board Circular No. 6/2008-Customs, dated 28-4-2008

Further, an elaborate instructions vide C.B.E.C. Circular No. 6/2008-Customs, dated 28-4-2008 have been issued for adopting procedure for refund of 4% SAD (CVD). In this circular, it has been clarified that the principle of unjust enrichment needs to be examined before sanction of refund of 4% SAD (CVD). It also allowed the importer to submit a certificate from the Statutory Auditor/Chartered Accountant who certifies the annual accounts of the importer that incidence of 4% SAD (CVD) was not passed on to the buyer of the imported goods and importer have duly discharged tax liability of ST/VAT on sale of imported goods in the domestic market.

Board Circular No. 7/2008-Customs, dated 28-5-2008

C.B.E.C. Circular No.7/2008-Customs, dated 28-5-2008, directed that the jurisdictional authorities to follow due procedures and not to pass an order of refund in routine or casual manner. Further, it says that sanctioning the refundable amount but crediting the same to the Consumer Welfare Fund without going through the due process provided in Section 27 of the Customs Act, 1962 and not looking into details of the material evidence on record to deny the refund to the assessee on the ground of unjust enrichment is not proper. So it was instructed to field formation officers to go through the factual details of the case before passing an order so that unnecessary hardships caused to the applicants can be avoided.
Therefore, CA’s certificate is one of the vital document should not casually ignored while passing adjudication order for the Customs duty refund is concerned.

The Principle of Unjust Enrichment has Evolved through Following Important Case Laws;

Mafatlal case –a landmark judgement

Constitutionality of the law for unjust enrichment in the case of Mafatlal Industries Ltd Versus Union of India –
A nine Judges Bench of the Hon’ble Supreme Court with 8-1 majority decision has upheld the constitutionality of the law for unjust enrichment in the case of Mafatlal Industries Ltd Versus Union of India – This remarkable judgement (120 pages containing 305 paras) has been referred and followed in several cases but in some cases, it has also been distinguished. Now, it is a point of consideration whether doctrine of unjust enrichment is relevant in the matter of claim for refund of excess paid duty or any deposit amount.
The doctrine of unjust enrichment was elaborately discussed in the landmark judgment of Constitutional Bench of Supreme Court in this case of Mafatlal Industries Ltd. v. Union of India, reported at 1997 (89) E.L.T. 247 (S.C.). Following observations of the Supreme Court in the said judgment are important to note as far as the doctrine of Unjust Enrichment is concerned :
(i) Bar of unjust enrichment is applicable irrespective of statutory provisions and it is part of Indian Constitutional jurisprudence.
(ii) Doctrine of unjust enrichment is not confined in its operation only to tax refund claims. It is operative in respect of all other money claims against the State.
(iii) That the doctrine of unjust enrichment would apply to any and every form of remedy that a person may adopt under the law. Meaning thereby, it would also apply to the ordinary remedy of a civil suit and constitutional remedy of a writ petition.

Principle of Unjust Enrichment Would be Applicable in Respect of Captive Consumption of Imported Raw material.( Very Important Judgement)

In Union of India v Solar Pesticides Pvt Ltd 2000(116) ELT, 401,SC 577, mater was before a three judge bench of Supreme Court, wherein it was held that principle of unjust enrichment incorporated in section 27 of the Customs Act, would be applicable in respect of imported raw material , which is captively consumed in the manufacture of final product. It was held that refund can only be granted when it is shown that incidence of duty has not been passed on to the purchaser of finished goods.

In Sahkari Khand Udyog Mandal Ltd V CCE,2005 (181) E.L.T 328 (S.C), it was held by the Supreme Court that doctrine of unjust enrichment is based on equity. The Apex Court held that regardless of applicability of Section 11B of Central Excise Act, the doctrine can be invoked to deny the benefit of refund to which a person is not otherwise entitled.

Bar of Unjust Enrichment is not Applicable to Imported Capital goods
The H.C of Kerala in Commissioner of Customs , Cochin Versus Westfort Hi-Tech Hospital Ltd in Customs Appeal No. 17 of 2017, vide it order dated 6-11-2017 ,has held that bar of unjust enrichment is not applicable to imported capital goods, namely Operating Theatre Lights . Burden of proof discharged by assessee by producing certificate issued by Chartered Accountant but not considered by either of the lower authorities , therefore refund rightly allowed by Tribunal under Section 27 of Customs Act, 1962.

The principle of unjust enrichment is based on the theoretical foundation of the law governing restitution.
In Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644, the Supreme Court has observed that the principle of unjust enrichment proceeds on the basis that it would be “unjust” to allow one person to retain a benefit received at the expense of another person. The principle of unjust enrichment is based on the theoretical foundation of the law governing restitution.

No question of Passing on Burden of Customs duty on Quantity of Goods not Received at all.

The High Court of Gujrat in Principal Commissioner of Customs Versus Hazira LNG Pvt Ltd in Tax Appeal No. 1058 of 2017 with Civil Application (OJ) No. 881 of 2017, decided on 15-2-2018 has held that in case of short landing of goods , no question of passing on burden of Customs duty arises as quantity of goods not received at all . Further, fact of not passing on duty confirmed by Chartered Accountant’s certificate is substantiated. Therefore impugned Tribunal’s order granting refund sustained.

In Consequential Refund Arising out of Finalization of Provisional Assessment, the Doctrine of Unjust Enrichment Cannot be kept out.

In Manglore Refinery & Petrcohemical Ltd . Versus C.C., Manglore , the CESTAT, Banglore Final Order Nos. 47-51/2011, dated 25-1-2011 in Appeal Nos. C/763-767/2008 reported in 2011 (274) E.L.T. 120 (Tri. – Bang.) has held that in consequential refund arising out of finalization of provisional assessment, the doctrine of unjust enrichment cannot be kept out.

No Application of unjust enrichment in deposits made during investigation.

In Commissioner of Central Excise Versus Advance Steel Tubes ltd vide Central Excise Appeal No. 62 of 2014, decided on 6-3-2018, the High Court of Allahabad, held that amount deposited during investigation under protest and shown in balance-sheet as revenue expenditure, not subjected to unjust enrichment inasmuch as Department itself while adjusting confirmed demand from such deposit did not consider cost structure of goods and also did not apply unjust enrichment principle to such demand .
Refund of redemption fine and penalty – Principle of Unjust Enrichment not applied
In Commissioner v. Umax Enterprises – 2015 (320) E.L.T. A35 (S.C.)], the Supreme Court double bench on 18-3-2011 after condoning the delay dismissed the Petition for Special Leave to Appeal (Civil) CC No. 1363 of 2011 filed by Commissioner of Customs (Export), Mumbai, against the Judgment and Order dated 12-4-2010 of Bombay High Court in Custom Appeal No. 34 of 2010 (Commissioner v. Umax Enterprises). While dismissing the appeal , the SC recorded following observation;
In the said case the appellant- Revenue has raised the substantial question of law before Bombay High Court ,as to whether a claim for refund of redemption fine and penalty has to comply with the test of unjust enrichment set out in Section 27 of the Customs Act, 1962 , the HC in its impugned order had dismissed in limine the appeal filed by the Commissioner of Customs (Export) for want of substantial question of law after recording the submission of the learned counsel for the appellant-Revenue and observed that it had already been decided by the Division Bench of the High Court in the case of United Spirits Ltd. – 2009 (240) E.L.T. 513 (Bom.) holding that bar of unjust enrichment is not applicable to refund of redemption fine and thus no question of law involved in the matter.

In the case of unconstitutional levy, the assessee would not be entitled to refund.
In the S.R.F Limited v Assistant Collector of Central Excise , 2001(134) E.L.T 324 (S.C) 2002,(1) SCC 480, the Apex Court held that even in the case of unconstitutional levy , the assessee would not be entitled to refund , unless it is established that incidence of duty has not been passed to others.

Bar of unjust enrichment cannot be applied when there is no change in the sale price of the final product.

In Associate Cement Companies Ltd V CCE , Jamshedpur , 2001(130) , ELT , 277 Tribunal , Kolkatta supports the view that bar of unjust enrichment cannot be applied when there is no change in the sale price of the final product and hence the duty incidence cannot be said to be passed on the buyer of the goods.

In Design Classics Exports (P) Ltd. Versus Commissioner of Customs, Chennai, 2004 (172) E.L.T. 423 (Tri. – Chennai), the CESTAT ,South Zonal Bench , Chennai vide final order No. 533/2004, dated 2-7-2004 in Appeal No. C/282/2003, it was held that in case of customs duty paid on imported capital goods – the doctrine of unjust enrichment is not applicable to claim for refund of customs duty paid on capital goods , therefore claimant is entitle for refund under Section 27 of Customs Act, 1962.

In Escorts Yamaha Motors Ltd Versus Commissioner of Customs., New Delhi,
Vide Final Order No. A/871/2000-NB, dated 10-10-2000 in Appeal No. C/271/2000-NB, 2000 (122) E.L.T. 883 (Tribunal) the CEGAT, New Delhi has held that bar of unjust enrichment under Section 27 of Customs Act, 1962 is not applicable to amount found refundable on finalization of provisional assessments under Section 18 ibid.

Conclusion– Unjust Enrichment is an important provision under tax matters and it precludes accrual of double benefit to the person claiming it . It prohibits person in respect of collection of duty paid by him from both the ends i.e. State and purchaser. Section 27 contains clause of unjust enrichment , therefore in every refund of duty under Section 27 , this doctrine would be applicable. Generally refund which is out of ambit and scope of Section 27, this doctrine has not much role to play. CA’s certificate is an important documents to show that the incidence of duty has been passed or otherwise. This doctrine also bars even the Government to retain the benefit unjustly and this result into crediting of refund amount into Consumer Welfare Fund. The customs authorities are expected to apply judiciously this principle after thorough scrutiny of documents in order to have minimum lis which is also in the tune of Government intentions. The Courts are also having divergent views in matter of this doctrine.

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