EPCG Scheme – Detailed Analysis of Nexus Certificate and Installation Certificate.

Below is a detailed, structured, legally-aligned analysis of the EPCG Scheme focusing on the Nexus Certificate, Installation Certificate, consequences of non-compliance, penalties, precautions, and the settled legal position including the view of the EPCG Committee.

(Analysis is based on the Foreign Trade Policy (FTP), Handbook of Procedures (HBP), DGFT circulars, EPCG Committee decisions, and settled tribunal/judicial precedents.)

The Export Promotion Capital Goods (EPCG) Scheme under the Foreign Trade Policy (FTP) allows import of capital goods at zero customs duty, subject to fulfilment of an export obligation (EO) over a prescribed period (generally 6 years). Compliance under the scheme hinges on two key documents:

1. Nexus Certificate
2. Installation Certificate

Both are integral for establishing eligibility, monitoring EO, and substantiating bona fide use of machinery.

1. Nexus Certificate – Importance and Legal Position

What is a Nexus Certificate?

A Nexus Certificate is issued by the jurisdictional DGFT authority confirming that the capital goods imported under EPCG have a direct nexus with the products/services to be exported to fulfill the export obligation.

Purpose

• Ensures the imported machinery is essential for producing the export product.
• Prevents misuse of EPCG duty exemption for non-export-related machinery.
• Forms the basis for granting EPCG authorisation.

Legal Basis

• Para 5.01 & 5.04 of FTP (General eligibility and nexus requirement)
• Para 5.03, 5.08 & Appendix 5A of the Handbook of Procedures (HBP)

Settled Legal Position / Tribunal View

Courts and CESTAT have held:

• The Nexus Certificate is conclusive evidence of the relationship between export product and imported capital goods.
• Customs authorities cannot question the nexus once DGFT has certified it (CESTAT precedents such as Hindustan Zinc Ltd., Maruti Udyog Ltd., etc.).
• Any doubt on nexus must be referred back to DGFT, not unilaterally interpreted by customs.

View of EPCG Committee

EPCG Committee consistently holds that:

• Nexus is technical and product-specific, and DGFT’s certification is final.
• If nexus is disputed later, post-facto nexus correction may be allowed if:
  • The goods are genuinely used in export production.
  • No mala fide intent is observed.

2. Installation Certificate – Importance and Requirements

What is an Installation Certificate (IC)?

Issued by:

• Independent Chartered Engineer, or
• Technical Authority of the organisation, and endorsed by the jurisdictional DGFT RA.

It certifies:

• Capital goods were installed at declared factory premises/service provider locations.
• They were installed within 6–12 months of import (as per HBP timelines).
• Machinery is functional and used for export production.

Importance

• Establishes actual use of machinery.
• Required for EO monitoring, block-wise reporting, and final redemption.
• Prevents misuse by confirming machinery was not sold, transferred, or diverted.

Legal Basis

• Para 5.03 and 5.14 of the Handbook of Procedures.
• Annexure 5B – Format and timeline for IC submission.

Settled Legal Position

• IC is mandatory for redemption; absence often treated as non-installation.
• DGFT may allow delayed IC on payment of composition fee, when delay is procedural.
• Customs cannot demand duty based solely on delay in IC if installation is proven.

View of EPCG Committee

• Accepts delayed ICs if:
  • Installation is verifiable.
  • There is no intent to misuse.
• Emphasizes strict adherence to timelines because monitoring of EO depends on IC.

3. Consequences of Non-Compliance

Non-compliance may relate to:

• Not obtaining a Nexus Certificate
• Non-submission or delayed submission of Installation Certificate
• Non-fulfilment of export obligation
• Misuse/diversion of capital goods
• Non-installation or partial installation

Below is the impact for each:

A. Absence of Nexus Certificate

• EPCG authorisation may be considered invalid.
• DGFT may deny EO fulfilment because use of machinery in export production is unproven.
• Customs can initiate duty + interest recovery proceedings.

B. Missing/Delayed Installation Certificate

• Treated as non-installation.
• Results in:
  • Demand for full customs duty with interest.
  • DGFT refusal to renew/block EO.
  • Inability to file EODC/redemption.

C. Non-installation or diversion of machinery

• Treated as fraud/misuse.
• Leads to:
  • Confiscation proceedings under Section 111(o) of the Customs Act.
  • Penalty under Section 112(a).
  • Blacklisting from EPCG/other DGFT schemes.

D. Non-fulfilment of Export Obligation

• Entire duty saved becomes recoverable with interest.
• EPCG authorisation de-bonding is not permitted.
• DGFT initiates adjudication and imposes penalties under Section 11(2) of the FTDR Act.

4. Penal Actions for Non-Compliance

Penalties may be imposed by:

(1) DGFT

• Penalty under Section 11(2) of Foreign Trade (Development & Regulation) Act, 1992.
• For serious violations: suspension of IEC, blacklisting, refusal of further licences.

(2) Customs

Under Customs Act, violations attract:

• Section 28 – Duty + interest.
• Section 28AA/28AB – Interest on delayed duty.
• Section 111(o) – Confiscation for breach of conditions.
• Section 112 & 114A – Personal penalties.

(3) GST Authorities (if capital goods were sold/diverted)

• GST reversal with interest.
• Penalty for unauthorised disposal of capital goods.

5. Precautions – Best Practices for EPCG Compliance

Before Import

• Obtain Nexus Certificate from DGFT ensuring:
  • Exact model/technical specs are covered.
  • Harmonised System (HS) code matches the machine’s classification.
• Clearly define export product, production process, and role of capital goods.

At Import Stage

• Ensure proper declaration under EPCG conditions.
• Maintain:
  • Bills of Entry
  • Supplier invoice/specifications
  • EPCG authorisation copy

After Receiving Machinery

• Install machinery within timeline.
• Obtain Installation Certificate (IC) from Chartered Engineer within:
  • 6 months (factory)
  • 12 months (some cases allowed by EPCG Committee)

During the EPCG Period

• Maintain production and export records.
• Keep block-wise EO fulfilment documentation.
• Avoid shifting machinery without prior DGFT permission.

At Redemption

• Submit:
  • Export documents
  • Shipping bills
  • e-BRCs
  • Installation Certificate
  • Nexus Certificate
• Apply for EODC/Redemption within time to avoid demand notices.

6. Conclusion

The EPCG Scheme is a beneficial export-promotion incentive, but it is highly compliance-driven. The Nexus Certificate and Installation Certificate form the foundation for validating EPCG eligibility and EO performance.

• Non-compliance triggers duty recovery, interest, penalties, and possible confiscation.
• However, both DGFT and the EPCG Committee generally adopt a facilitative approach when non-compliance is procedural rather than intentional, allowing post-facto approvals, delayed ICs, or corrective nexus certifications.

The settled legal position is that once DGFT certifies the nexus and installation, customs authorities must accept it, unless evidence of misuse exists.

Maintaining proper documentation, timely submissions, and transparent communication with DGFT/customs ensures smooth operation and discharge of EPCG obligations.