CESTAT Principal Bench Sets Aside Interest, Penalty On EPCG Defaulter After Lenders Auction Imported Goods

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) at Delhi has set aside the confiscation of imported capital goods and the levy of interest and penalty imposed on Rajdarbar Heritage Venture Ltd.

The tribunal found that the company could not fulfill its export obligation under the Export Promotion Capital Goods (EPCG) Scheme because the imported goods and hotel premises were auctioned by lenders.

A bench of President Justice Dilip Gupta and Technical Member P.V. Subba Rao observed that “the export obligation could not be met because the goods imported and the premises of the hotel were auctioned.”

The bench consequently held that the confiscation of goods, levy of interest and imposition of penalty could not be sustained. However, it upheld the customs duty demand, which the appellant did not challenge.

The appellant had obtained 27 EPCG authorisations between 2007 and 2009. These authorisations permitted the import of duty-free capital goods for construction of a hotel in Gurugram. The capital goods were imported under 55 Bills of Entry. The appellant also furnished bonds and bank guarantees as required under the scheme.

According to the appellant, delays in completion of the hotel project led to financial difficulties. Proceedings were subsequently initiated under the SARFAESI Act.

Pursuant to an order passed by the Debts Recovery Tribunal on September 20, 2011, a consortium of banks auctioned the imported capital goods along with the hotel premises in September 2011.

The customs department later alleged that the appellant had failed to fulfil the export obligation attached to the EPCG authorisations. A show cause notice sought recovery of customs duty of ₹5.07 crore. It also proposed recovery of interest, imposition of penalty and confiscation of the imported goods. Before issuance of the show cause notice, the department had encashed bank guarantees amounting to ₹5.94 crore.

An adjudicating authority subsequently confirmed the customs duty demand. It also imposed interest and penalty and ordered confiscation of the imported goods.

Before the Tribunal, the appellant stated that it was not contesting the customs duty demand. It challenged only the confiscation of goods, levy of interest and imposition of penalty. The appellant contended that fulfilment of the export obligation became impossible after the imported goods and hotel premises were auctioned.

The Tribunal noted that the applicable notification contains a provision under which waiver of export obligation may be considered. The provision applies where an exporter is unable to fulfil the obligation because of force majeure or other unforeseen circumstances or reasons.

The Tribunal also noted that exports amounting to USD 25,14,072 had been undertaken through group companies. These exports were made to the extent permitted under the scheme. The appellant had also sought permission to fulfil 100% of the export obligation through group companies. That request, however, was not accepted.

The bench further observed:

“The bona fides of the appellant are also clear as the appellant did carry out some exports through group companies to the extent of 50% which was permissible under the Notification.”

Referring to earlier decisions dealing with situations where export obligations could not be fulfilled for reasons beyond an importer's control, the Tribunal concluded that interest and penalty were not sustainable in the facts of the case.

The Tribunal also held that confiscation of the goods could not be justified. It observed that the appellant had reasons beyond its control for not fulfilling the conditions of the notification.

Accordingly, the Tribunal set aside the confiscation of goods, levy of interest, and imposition of penalty. Since the appellant did not challenge the customs duty demand, the Tribunal upheld recovery of the duty foregone under the EPCG scheme.