Judicial Scrutiny of EPCG Scheme Compliance.

Legal Article: Judicial Scrutiny of EPCG Scheme Compliance – A CESTAT Decision in  M/S KASARE VANYA SILK MILLS PVT. LTD. AND D.S. KASARE, DIRECTOR VERSUS THE COMMISSIONER, CUSTOMS, INDORE (M.P.) - 2025 (5) TMI 2141 - CESTAT NEW DELHI

I. Introduction

This decision of the Hon’ble Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi, rendered on 27th May 2025, in the matter of M/s Kasare Vanya Silk Mills Pvt. Ltd. and its Director, Shri D.S. Kasare, addresses crucial questions relating to the Export Promotion Capital Goods (EPCG) Scheme, including fulfilment of export obligations, invocation of extended limitation, confiscation of capital goods, and imposition of penalties under the Customs Act, 1962.

The judgment affirms the foundational legal principles surrounding strict interpretation of exemption notifications, while also extending relief where the Department failed to establish mens rea (intent to evade) or factual suppression necessary for invoking the extended period under Section 28(4).

II. Factual Matrix

The appellants imported capital goods under a zero-duty EPCG authorization, undertaking an obligation to fulfil specified export targets in compliance with the Foreign Trade Policy (FTP). Two Show Cause Notices (SCNs) were issued:

1. First, for alleged non-fulfilment of export obligations leading to recovery of customs duty foregone;
2. Second, alleging diversion/sale of uninstalled machinery, justifying confiscation under Sections 111(j) and 111(o) and duty demand under Section 28(4) along with interest and penalties.

III. Issues for Adjudication

1. Whether the non-fulfilment of export obligations under the EPCG Scheme justifies recovery of duty, interest, and penalties.
2. Whether the extended limitation period under Section 28(4) could be invoked.
3. Whether machinery allegedly diverted or uninstalled justifies confiscation under Sections 111(j) and 111(o).
4. Whether the penalties under Sections 114A, 112(a)(ii), and 117 were legally sustainable.

IV. Findings and Reasoning

A. Export Obligation and Demand of Duty (Upheld)

The Tribunal upheld the demand of Rs. 66,73,239 (duty foregone), apportioned as 50% in the first four years and the remaining in the next two years, along with interest @15%, based on breach of conditions in the EPCG Exemption Notification and Surety Bond executed at the time of import.

The Appellants failed to maintain the average level of exports, as mandated under FTP, and the argument about Sericulture exemption was rejected as misconceived.

B. Confiscation & Demand of Rs. 5,68,072/- – Set Aside

The Department failed to adduce evidence that one machine was cleared and subsequently sold/diverted. Appellants contended it was lying unutilised at Nava Sheva Port.

In the absence of documentary evidence of clearance, the Tribunal set aside both:

• The duty demand under Section 28(4), and
• The confiscation under Sections 111(j) and 111(o).

C. Duty Demand of Rs. 18,69,140/- & Extended Limitation – Set Aside

The Tribunal noted that the excess clearance of machines over the EPCG bond limit was evident from the records with the Department. There was no suppression of facts or fraudulent intention.

Therefore, the extended period under Section 28(4) was not invocable, and consequential duty, interest, and penalties were quashed.

D. Penalties Under Sections 114A, 112(a)(ii),117 – Set Aside

Given the absence of intent to evade duty, and the failure to prove suppression, all penalties imposed on the company and its director were quashed.

V. Summary of the Tribunal’s Ruling

VI. Key Takeaways for Exporters

1. Strict Compliance with EPCG Conditions:
   Importers must ensure timely fulfilment of export obligations, and maintenance of required average export levels, failing which duty, interest, and recovery actions may follow.
2. Avoid Delay in Installation and Utilisation of Capital Goods:
   Capital goods must be installed and used as declared. Any delay or ambiguity can lead to confiscation, unless justified and documented.
3. Maintain Complete Records:
   All EPCG import transactions, clearances, and usage data must be meticulously documented to avoid liability during audits or investigations.
4. Be Cautious with Bond Limits:
   EPCG authorizations have caps on duty forgone. Any clearance beyond the limit should be immediately rectified or declared to the authorities.
5. Disclosure is Key to Avoid Extended Limitation:
   If full facts are declared and accessible to the Department, the extended limitation period under Section 28(4) cannot be invoked.
6. Penalties Are Not Automatic:
   Penalties under Sections 114A or 117 require proof of intentional evasion or gross negligence, not just procedural defaults.

VII. Concluding Remarks

This judgment by the CESTAT serves as an instructive precedent clarifying that mere procedural lapses or excess clearances, if disclosed in good faith, do not automatically attract extended limitation or penal consequences. Exporters operating under the EPCG Scheme must ensure diligent compliance, transparent disclosure, and documentation to avoid protracted litigation and penal exposure.