I think, this is how it works. Just my assumption based on reading the thread and instructions on website multiple times.
DISCLAIMER : This is just my opinion/interpretation. Please don't treat this as an advice. Do your own research.
a) you send 20$ along with application as return mail fee.
b) if your application goes smoothly, this 20$ is not used. In this case, when u send your passports by mail to get OCI stamped, you DO NOT need to send the 20$ as embassy got your money already.
c) if your OCI application is returned to you for some reason (bad photo, incomplete app etc.), they send you the application back to you for you to fix the errors and resend. I think embassy uses your 20$ to send your application back. Subsequently, when your OCI is approved and reaches DC, when u send the Passports, you need to send additional 20$ to get your passports back, because your initial 20$ is used by embassy already.
Again, just a theory. not confirmed.
cheers