1. The Conflict - Two Legal Worlds

Duty Payment World - Customs Act 1962:

• Sec 12: Customs duty is charged on imported goods.
• Sec 47: Goods cannot be cleared for home consumption unless duty paid.
• Sec 68: If goods warehoused, and warehousing period expires and duty not paid, customs can sell goods.
• Sec 142A (inserted by Finance Act 2011): Customs dues create first charge? Actually Sec 142A says customs dues have priority but subject to Sec 529A of Companies Act. This was inserted to overrule earlier Calcutta HC view.
• Common Law Doctrine: Crown has preferential right over unsecured creditors.

Financing Arrangement World - Banking / SARFAESI:

• Hypothecation / Pledge: Bank finances purchase of imported machinery. Goods hypothecated. Bank has charge registered with ROC under Companies Act Sec 125 and with CERSAI.
• SARFAESI Act Sec 26E (inserted 2016): Notwithstanding anything in any other law, debts of secured creditors shall have priority over all other debts including government dues, including customs duty.
• Companies Act Sec 529A: Secured creditors (workmen + secured creditors) have priority over Crown dues.
• IBC Sec 53: Waterfall - Secured creditors > Government dues (government is operational creditor / unsecured).

Conflict Point: Importer imports machine worth Rs 10 cr, bank finances 80%, importer fails to pay customs duty Rs 3 cr. Customs seizes machine in warehouse. Bank says "I am secured creditor, I funded it". Customs says "I have statutory lien, I will auction it to recover duty". Who wins auction proceeds?

2. Evolution of Law - 3 Phases

Phase 1 - Pre 2011 - Customs Wins - Crown Preference
Calcutta HC in Dytron India Ltd., 1999 ELT 342 held customs duty carries first charge even during insolvency under Sec 529 and 530. Customs could sell goods overriding bank charge.

Phase 2 - 2011 to 2016 - Legislative Overrule
Finance Act 2011 inserted Sec 142A in Customs Act:

"Notwithstanding anything to contrary in any other law, any amount payable under Customs Act shall be first charge on property of defaulter, except that it shall not affect provisions of Sec 529A of Companies Act."

Meaning: Customs is first charge, BUT secured creditors under 529A still above customs. This was clarificatory, not new right.

Phase 3 - Post 2016 - Secured Creditors Win - SARFAESI + IBC
SARFAESI amended with Sec 26E and Sec 35 overrides all other laws. Sec 26E explicitly says secured creditor priority over government dues.

3. Landmark Case Laws - Supreme Court Settles

Case 1: Civil Appeal No. 2568 of 2013 - The Main Customs vs Secured Creditors Case - Supreme Court - Most Cited

Facts: Company imported goods, entered for home consumption under Sec 46 Customs Act, stored in private bonded warehouse under Sec 68. Goods not cleared due to non-payment of duty. Bank had hypothecation over goods. Two show cause notices issued, adjudication orders passed, customs wanted to auction.

Bank argued: We are secured creditor under Sec 529A Companies Act, our dues have priority.

Customs argued: Sec 142A gives first charge to customs.

Supreme Court Held - 5 Principles:

1. Common law doctrine of Crown preference (government dues have priority over unsecured creditors) survives as law in force, but is confined to ordinary unsecured creditors.
2. Customs adjudication and auction powers under Sec 142A do NOT negate or override statutory preference under Sec 529A of Companies Act.
3. Sec 142A is clarificatory and declaratory - It protects overriding preferential creditors under 529A, does NOT create new super-priority for customs over secured creditors.
4. Secured creditors' rights under hypothecation/mortgage, being property rights, cannot be defeated by customs lien arising later.
5. Result: Secured creditors win over customs dues. Customs dues do NOT impact rights of secured creditors.

This judgment is reproduced in TaxTMI, CAClubIndia, SCC Times as "Customs dues do not impact rights of secured creditors".

Case 2: Central Excise vs Secured Creditors - Supreme Court - Secured Loans Priority Over Excise Dues

Rajasthan State Financial Corporation vs Official Liquidator & Ors - SC

Bench headed by Justice S.B. Sinha: Secured debt like outstanding loans will have priority over any other dues like excise and taxes, which are unsecured debts.

Held: Central Excise Act 1944 does NOT provide for first charge on assessee's property. Therefore, secured creditor's mortgage ranks ahead. Government is unsecured creditor.

Applied to Customs: Same logic - Customs Act does NOT explicitly say first charge overriding SARFAESI, except Sec 142A which itself saves 529A.

Case 3: SARFAESI Priority Case - 2022 (7) TMI 527 - HC - Customs

Facts: Prior mortgage and auction sale certificate in favour of secured creditor prevailed over customs department's later claim.

Held: Prior secured creditor interest prevails over later customs dues absent statutory first charge, under SARFAESI overriding effect including Sec 26E. Earlier created security interest ranks ahead of subsequent customs claim.

Principle: First in time, first in right, if secured creditor perfected charge via ROC/CERSAI before customs attachment.

Case 4: Sales Tax vs Secured Creditors - Different Outcome - Supreme Court Distinction

State Tax Officer vs Rainbow Papers Ltd. (2022) SC - IBC

Supreme Court ruled: Under Gujarat VAT Act, State has first charge, so State is "secured creditor" under IBC Sec 53. Therefore sales tax/VAT can claim priority over private debts.

Why Customs Different? Because Gujarat VAT Act explicitly says first charge. Customs Act Sec 142A explicitly saves 529A. Central Excise Act does NOT say first charge. So excise/customs lose, but VAT with first charge wins.

This distinction is crucial.

Case 5: Extra Duty Deposit Refund Case - 2026 - Financing Arrangement Distinct from Duty Payment

Case Laws AT - May 14 2026 - EDD Refund

Facts: Importer paid Extra Duty Deposit (EDD) from promoter's loan. Later claimed refund. Customs argued unjust enrichment - duty passed on to buyer.

Held: Refund of EDD not hit by unjust enrichment where disputed amount shown as recoverable in balance sheet and payment made from promoter's loan that was transaction distinct from import itself.

Principle: Financing arrangement (promoter loan) is distinct from duty payment transaction. Source of funds for duty does not make duty part of financing. Bank cannot claim that because it financed duty payment, it gets charge over refund.

Case 6: Vishal Oil Case - Delhi HC 2023 - Interest on Duty vs Financing

Vishal Oil and Lubricants vs Commissioner of Customs

Bill of Entry 2015, declared as Bitumen, customs withheld for examination, later classified as Used Oil, duty Rs 9,22,210 already paid, but customs wanted interest from date of Bill of Entry to Order-in-Original 2023.

Delhi HC Held: Interest cannot run before underlying liability is determined. Customs cannot treat undetermined liability as delayed payment and charge interest retrospectively.

Principle for Financing: Bank financing interest meter cannot start before duty liability crystallized. Duty liability determined only on assessment, not on filing of Bill of Entry.

4. How Conflict Resolved Today - Waterfall

If Goods Still in Customs Bonded Warehouse (Not Cleared):

1. Customs has lien under Sec 48/68 - can detain.
2. But if bank has registered charge before import, bank can pay customs duty under Sec 47 as agent of importer, clear goods, and then enforce hypothecation.
3. If both claim auction proceeds: Distribution: (a) Workmen dues + Secured creditors pro-rata (Sec 529A) -> (b) Customs dues (preferential under Sec 530(1)(a)) -> (c) Unsecured.

If Goods Cleared and Lying in Factory (Hypothecated):

• Customs cannot seize after clearance unless fraud under Sec 28 / Sec 111. Then customs is unsecured creditor, bank wins under SARFAESI Sec 26E.

If Company in Liquidation / IBC:

IBC Sec 53 waterfall:

1. Insolvency costs + Secured creditors (who relinquish security)
2. Workmen dues 24 months
3. Secured creditors + Workmen dues balance
4. Unsecured, then Government dues (Customs/Excise/GST are operational, 5th rank)
5. So secured creditor bank always above customs.

Practical Advice for Banks Financing Imports:

1. Register charge with ROC and CERSAI before Bill of Entry filing date - establishes priority.
2. Take Tripartite Agreement with Customs Warehouse - bank has right to pay duty and take delivery if borrower defaults.
3. Include clause: Borrower must pay duty within 30 days of assessment, failure = event of default.
4. Do not finance duty payment as part of same hypothecation - finance separately as unsecured - else if customs refunds duty, refund goes to borrower not bank.

For Importers:

If you pay duty from borrowed funds, show it as receivable in books with CA certificate - helps claim refund not hit by unjust enrichment as per 2026 case.