Doctrine of unjust enrichment with respect to refund of duty :

When an importer imports goods, he has to pay the customs duty on such goods. This duty is recovered from the purchasers when these goods are sold by the importer. In other words, the burden of duty is passed on to the purchaser. Subsequently, if the importer makes a claim for refund of duty and on acceptance of such claim if he retains the amount of refund with himself without passing it to the purchaser, then this would be called as unjust enrichment.

Therefore, wherever there is an over assessment or excess collection of duty, the refund shall be given only to the person who at the material time of grant of refund, bears the burden of duty and interest, if any. When the person who bears the burden of duty refund ed is not identifiable or has not come forward to claim the refund, the refund shall be paid into a fund called ‘Consumer Welfare Fund’. The importer or the clearing agent has to prove that he has not passed the burden of duty, in order to claim refund of duty.

Example:

The importer has imported an article, which has been valued at ` 1000/-. The customs duty on this article comes to ` 250/-. Now the importer adds his profit margin of say ` 250/- and sells the article for ` 1500/-. Now the price charged by the importer consists of the duty element which has been passed on to the buyer.

If later on it is found that there was an error in assessment resulting in excess collection of duty, such excess collection is liable to be refunded. But as may be seen above, the importer has passed on the burden of duty to the purchaser and if any refund is granted to him, it would confer on him, the benefit to which he does not have a valid right. Therefore in such cases the refund is credited to the “Consumer Welfare Fund”.

The most important decision on refund is by a Nine Member Bench of the Supreme Court in Mafatlal Industries Ltd. v. U.O.I.- 1997 (89) E.L.T. 247. The salient features of this judgment can be summarised as under:

a. The theory of unjust enrichment is valid and constitutional. However, the theory that the manufacturer would be unjustly impoverished in case of demands has not been agreed to.

b. Section 11B and section 27 (Customs Act) are self contained codes for refunds and resort to civil suits or writs is not permissible unless the taxing provision is struck down as unconstitutional. The general theory laid down in certain judgments of both the Supreme Court and High Courts that refund could be claimed within three years of discovery of mistake has been disapproved.

c. Unless the levy is struck down as unconstitutional, all Courts must exercise jurisdiction in terms of section 11B and refuse to grant relief if the incidence of tax has been passed on.

d. Whatever amount is collected as duty will have to paid to the Government. If excess is collected than that payable, it would be credited to the Consumer Welfare Fund or given as refund to the person who has borne the incidence of duty.

The Supreme Court has held in Solar Pesticides case 2000 (116) ELT 401 that refunds will not be allowed on captive consumption of inputs as the incidence of duty paid on the inputs are passed on to the customers.

Further, the Supreme Court in the case of CCE v. Allied Photographics 2004 (166) ELT 3 has held that doctrine of unjust enrichment applies even when duty is paid under protest. It has been held that even if there is no change in price before and after assessment (i.e. before and after imposition of duty), it does not lead to the inevitable conclusion that incidence of duty has been passed on to the buyer, as such uniformity may be due to various factors.

The principle of unjust enrichment applies in case of refund after provisional assessment as what is paid at the time of provisional assessment is customs duty and not only deposit [Bussa Overseas v. UOI 2003 (158) ELT 135(Bom.)]. As per CBEC Circular No. 40/2002-Cus. dated 17.07.2002, unjust enrichment provisions apply to provisional assessment also.

Section 28D provides that every person who has paid duty 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.