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Dated: 20.03.2025

CESTAT Chandigarh- principle of unjust enrichment did not apply to the refund of redemption fine and penalty

Case Overview:

The case involved an appeal by the Commissioner of Customs, Ludhiana, challenging the refund granted to M/s Shree Grace Creations by the Commissioner (Appeals), CGST, Ludhiana. The dispute revolved around:

1. Classification of imported goods (blankets and bed sheets).
2. Denial of a refund claim due to the principle of unjust enrichment.
3. Transfer of the refund amount to the Consumer Welfare Fund instead of returning it to the importer.

The CESTAT Chandigarh tribunal ruled in favor of M/s Shree Grace Creations, dismissing the customs department’s appeal.

Background of the Case:

Import & Initial Classification:

• The importer, M/s Shree Grace Creations, brought in polyester semi-furnished double ply blankets and bed sheets.
• The importer classified them under Chapter Sub-heading 63014000 of the Customs Tariff Act, 1975.
• However, the Special Investigation and Intelligence Branch (SIIB) conducted an examination and reclassified the goods as “Other Pile Fabric of Man-Made Fibers” under Sub-heading 60019200, attracting a higher Basic Customs Duty (BCD) of 10% or ₹100/kg, whichever was higher.

Customs Action:

• Customs authorities issued a Show Cause Notice (SCN) on 27.08.2017 alleging misdeclaration.
• The Order-in-Original dated 23.01.2018 confirmed the classification change and imposed:
  • Higher customs duty recovery.
  • Redemption fine of ₹1,00,000 under Section 112(a) of the Customs Act, 1962.
  • Penalty of ₹1,40,000.
• The importer paid the duty under protest and filed an appeal.

Commissioner (Appeals) Ruling & Refund Dispute:

• The Commissioner (Appeals), CGST, Ludhiana, ruled in favor of M/s Shree Grace Creations on 28.05.2020, setting aside the classification change and confirming that the duty was wrongfully charged.
• As a result, the importer was entitled to a refund of ₹16,35,238 (customs duty, fine, and penalty).
• However, instead of returning the refund amount, the Refund Sanctioning Authority (RSA) transferred it to the Consumer Welfare Fund, arguing that the importer had passed the cost to customers, triggering unjust enrichment.

Tribunal’s Key Findings & Ruling:

1. Unjust Enrichment Not Applicable:

• The tribunal ruled that unjust enrichment does not apply, as the customs duty was wrongly collected due to incorrect classification.
• The importer submitted a Chartered Accountant (CA) certificate, which confirmed that the burden of duty was not passed on to customers.
• The customs department failed to disprove this evidence.

2. Refund of Redemption Fine & Penalty Justified:

• The tribunal reaffirmed that redemption fines and penalties cannot be transferred to the Consumer Welfare Fund.
• Only customs duty and interest can be subject to unjust enrichment claims.

3. Consumer Welfare Fund Transfer Incorrect:

• The tribunal ruled that the customs department wrongfully transferred the refund to the Consumer Welfare Fund.
• Since the refund was lawfully due to the importer, the tribunal ordered its return.

Final Tribunal Decision:

• The appeal by the Commissioner of Customs, Ludhiana, was dismissed.
• The refund of ₹16,35,238 was ordered to be returned to M/s Shree Grace Creations.
• Unjust enrichment was ruled out as a reason for denying the refund.

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Source: CESTAT Chandigarh

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