EPCG export obligation failure sustains differential duty, but confiscation and penalties fall once duty liability is addressed

Under the EPCG scheme, failure to fulfil the export obligation sustained the demand for differential customs duty, and partial fulfilment gave no relief because the notification in force did not provide proportionate benefit. However, once the duty element was addressed, confiscation of the imported capital goods could not be sustained, and the redemption fine and penalty were set aside as unwarranted. The Tribunal also directed verification of amounts already paid and encashed bank guarantees, with adjustment against the differential duty demand after scrutiny of the evidence.

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Issues: (i) whether differential customs duty was payable for failure to fulfil the export obligation under the EPCG scheme and whether partial fulfilment of the export obligation conferred any relief under the applicable notification; (ii) whether confiscation of the imported capital goods and the consequential redemption fine and penalty could be sustained; and (iii) whether the amounts already paid and bank guarantees encashed were liable to be adjusted towards the duty demand.

Issue (i): Whether differential customs duty was payable for failure to fulfil the export obligation under the EPCG scheme and whether partial fulfilment of the export obligation conferred any relief under the applicable notification.

Analysis: The imports were made under the EPCG scheme at a concessional rate of duty, but the export obligation was not fulfilled. In such circumstances, the demand of differential duty was held to be legally sustainable. The plea for proportionate relief on account of partial fulfilment was rejected because the notification did not provide any such benefit during the relevant period.

Conclusion: The differential duty demand was upheld and no relief was granted for partial fulfilment of the export obligation.

Issue (ii): Whether confiscation of the imported capital goods and the consequential redemption fine and penalty could be sustained.

Analysis: Once the differential duty is paid, the assessee goes out of the EPCG scheme, and confiscation of the goods under the Customs Act cannot be sustained. In view of the circumstances leading to non-fulfilment of the export obligation, imposition of redemption fine and penalty was considered harsh and unwarranted.

Conclusion: The confiscation, redemption fine and penalty were set aside.

Issue (iii): Whether the amounts already paid and bank guarantees encashed were liable to be adjusted towards the duty demand.

Analysis: The material placed before the Tribunal indicated payments already made towards customs duty and encashment of bank guarantees, which were required to be scrutinised and adjusted against the differential duty demand after verification of the evidence.

Conclusion: The matter was remanded for verification and adjustment of the amounts already paid towards the duty demand.

Final Conclusion: The duty liability was maintained, but the assessee obtained relief from confiscation, redemption fine and penalty, and the case was sent back for accounting adjustment of payments against the duty demand.

Ratio Decidendi: Where export obligations under an EPCG exemption are not fulfilled, differential duty remains payable, but confiscation and penal consequences cannot be sustained after the duty element is addressed, and prior payments must be verified for adjustment against the demand.

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