The Kerala High Court has ruled that the Customs Department cannot invoke expired bank guarantees, reaffirming that such an act is legally impermissible. The decision came in response to an appeal challenging the invocation of bank guarantees by customs authorities.
Background of the Case
A division bench comprising Justices A.K. Jayasankaran Nambiar and Easwaran S. reviewed the case concerning whether the Customs Department had the authority to enforce expired bank guarantees.
The appellant, a company undergoing the Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016, filed an appeal against the decision of a Single Judge. The judge had ruled that bank guarantees could not be challenged unless there was fraud or irretrievable harm.
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Case Details
The appellant had imported various capital goods under the Export Promotion Capital Goods (EPCG) Scheme, which required furnishing 45 bank guarantees covering the applicable duty. These guarantees were provided by the erstwhile State Bank of Travancore (now State Bank of India).
Due to financial distress, the appellant became subject to insolvency proceedings before the National Company Law Tribunal (NCLT), Kochi Bench. Following this, the Customs Department submitted a claim before the resolution professional, which was subsequently rejected.
After the rejection, the Customs Department issued a letter on January 11, 2023, instructing the bank to encash the bank guarantees issued in favor of the department. The appellant filed a writ petition before the Kerala High Court, but it was dismissed by a Single Judge.
Arguments Presented
- Appellant’s Argument: The appellant contended that the bank guarantees had already expired and were no longer enforceable. Since these guarantees were time-bound and had not been renewed, the Customs Department could not legally demand their encashment.
- Customs Department’s Argument: The department argued that the nature of bank guarantees prevented their expiry unless specifically terminated by the department. Additionally, it was contended that the bank had assured the continuation of these guarantees.
Court’s Observations and Ruling
Upon examining the affidavit submitted by the State Bank of India, the bench noted that the guarantees were no longer valid. The court observed that the Customs Department’s demand for encashment of expired guarantees lacked legal standing.
"In light of the unequivocal stand taken by the bank in their affidavit dated 17.3.2025, the impugned letter issued by the Customs Department seeking to invoke the bank guarantees cannot be sustained."
The Kerala High Court held that invoking expired bank guarantees is legally impermissible. As a result, the impugned letter by the Additional Commissioner and Deputy/Assistant Commissioner of Customs was declared void and unenforceable.
This ruling reinforces the principle that expired financial instruments cannot be enforced unless legally extended. The judgment serves as a precedent for similar cases involving bank guarantees and insolvency proceedings in India.
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In view of the above, the bench allowed the appeal.
Case Title: M/s Itma Hotels India Pvt. Ltd. v. The Additional Commissioner of Customs
Case Number: WA NO. 2183 OF 2023
Counsel for Appellant/ Assessee: K. Sreekumar Sr Adv, Advs M Balagopal, R Sreejith, Ammu Charles, Thressy Thomas, R Devika, Anjali Menon.
Counsel for the Bank. : Adv PV Vinod
Counsel for Respondent/ Department: Suvin R Menon
