BANK GUARANTEE IS ONLY SECURITY TO SAFEGUARD THE REVENUE AND NOT TO BE CONSIDERED AS DUTY PAID

[Mr. M. GOVINDARAJAN]

A bank guarantee, like a letter of credit, guarantees a sum of money to a beneficiary; however, unlike a letter of credit, the sum is only paid if the opposing party does not fulfill the stipulated obligations under the contract.   It is used to obtain bank guarantee from the assessee under certain circumstances by the taxation authorities.   If the assessee fails to pay the duty/tax then the authority concerned will revoke the bank guarantee and realize the same for tax. 

The issue to be discussed in this article is whether the bank guarantee furnished by the assessee amounts to payment of duty or it is a security to the Revenue to safeguard the interests of the Revenue with reference to decided case laws.

In ‘Commissioner of Customs (Exports) V. M/s Jraj Exports P Limited - 2007 (7) TMI 73 - MADRAS HIGH COURT (order dated 21.07.2007 in CMA No. 1541 of 2007) the High Court held that the bank guarantee furnished cannot be considered as duty paid and it is only security to safeguard the interests of the Revenue.

In ‘Vamadev Exports V. Commissioner of Customs (Appeals), Chennai’ – 2016 (12) TMI 1717 - MADRAS HIGH COURT the assessee is an exporter.  The assessee claimed benefit in terms of the zero duty concessional schemes notified by the Government of India.  The Director General of Foreign Trade issued the license to the assessee and the assessee undertook a specified export obligation as a pre condition to avail the benefit under the scheme.  A bank guarantee for ₹ 7,57,105/- was furnished to the customs authorities for the period from 1.12.97 to 1.12. 2002.

The Customs Authorities issued a letter dated 26.12.2000 to the bankers stating that the petitioner had failed to fulfill pro rata obligation.  The Authority recovered ₹ 4,07,245/- from the bank guarantee.  The assessee discharged its export obligation on 26.5.2003 and communicated the same to the Commissioner of Customs.  Therefore the petitioner requested the Authority vide his letter dated 28.5.2003 to discharge the bank guarantee.  After a lapse of four years, on 22.3.2007 the Authority informed the concerned bank to treat the bank guarantee as cancelled.  The assessee sought for the refund of ₹ 4,07,245/- realized by the Authority from the bank.

On 20.08.2007 the Commissioner of Customs rejected the request of the assessee that the application for refund was filed beyond the period of six months under section 27 of the Customs Act.  The assessee filed appeal before Commissioner (Appeals).   In the meanwhile the assessee intimated his address change to the Authority with due acknowledgment.  The Commissioner (Appeals) dismissed the appeal filed by the assessee on 4.11.2009 as ex parte.  However the said order has not been communicated to the assessee.   The said order was made available to the assessee on 21.05.2014 on his file of application under RTI to know the status of the appeal.

On receipt of the order the assessee immediately filed a writ petition before the High Court seeking refund along with interest.  The writ petition was partly allowed by the Single Judge holding the view of the settled legal position, the assessee would be entitled for refund of bank guarantee and the claim of the interest was rejected.   The assessee filed appeal against the order of Single Judge before the High Court.

The assessee relied on the judgment of Supreme Court in ‘Sandik Asia Limited V. Commissioner of Income Tax’ – 2006 (1) TMI 55 - SUPREME COURT followed in ‘Commissioner of Income Tax, Gujart V. Gujarat Fluoro Chemicals’ – 2013 (10) TMI 117 - SUPREME COURT  the Supreme Court held that there was an inordinate delay on the part of the Revenue in refunding certain amount which included the statutory interest and therefore,  the Supreme Court directed the Revenue to pay compensation for the same and not on interest on interest.

The Revenue relied on the judgment in ‘The Commissioner of Customs v. M/s Areva T&D India Limited (WA No. 299 of 2013, dated 21.04.2014)

The High Court expressed in astonishment that it is strange the Appellate authority did not take into consideration the order of the Court in ‘M/s Jraj Exports (P) Limited’ (supra) when the same was passed as early in July, 2007 itself and was very much within the domain knowledge of the Customs Department.  In fact, the decision in the case of Jraj Exports was noticed and applied on 14.01.2008 by an Assessing Officer, while processing the refund application of the same assessee in another transaction of export and refunded to the assessee.

The High Court analyzed the judgment relied by the assessee.  The High Court observed that the Supreme Court has made out a distinction between a claim of interest and the grant of compensation for inordinate delay in issuance of refund, concluding that while no interest is payable on interest on interest, a claim of compensation for undue delay in effecting refund may be considered, if found justified on the facts and circumstances of a particular case.

The High Court was of the view that the claim preferred by the assessee is really not one of the interest, but, in the nature of compensation for the inordinate delay in the grant of refund.  The High Court held that the sequence of dates and events detailed in this case would show that the assessee had made a request for release of bank guarantee as early as in 2003 after obtaining the Export Obligation Discharge Certificate.   It is only on 22.03.2007 the bank guarantee was discharged by the Department for reasons best known to them.  The claim for refund was rejected by both the original authority as well s appellate authorities on the ground that the application was barred by time.  No other explanation is offered by the Revenue as to what were the circumstances that occasioned the delay of more than eight years.  The assessee has been unfairly deprived of the amount of ₹ 4,07,245/- from 2007 onwards till the order of the High Court on 22.07.2015 directing the grant of refund.  The High Court came to the conclusion that this has caused prejudice to the assessee deserving the grant of compensation.

The High Court held that the delay in granting refund was inordinate, unjustified and wholly unacceptable.  The High Court directed the Department to pay a sum of ₹ 2 lakhs as a compensation for the inordinate delay in grant of refund to the appellant.