EPCG compliance under service exports and vehicle imports must be judged reasonably, not by premature customs findings.

Under the EPCG scheme, customs cannot finally determine non-fulfilment of export obligation before the licensing authority decides a pending discharge application, particularly where the obligation is linked to services and requires assessment within the licensing framework. The text also notes that exemption conditions must be applied reasonably: alleged personal use of imported vehicles, without an express requirement of exclusive use, and the absence of an installation certificate for movable cars did not justify confiscation, duty demand or penalties. The operative effect discussed is that notification conditions must be read in light of their purpose and practical feasibility, rather than by imposing impossible compliance standards.

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Issues: (i) Whether the customs authorities could conclude that the export obligation under the EPCG scheme had not been fulfilled before the licensing authority had decided the pending application for export obligation discharge certificate, particularly where the obligation related to services; and (ii) Whether alleged personal use of the imported cars and non-production of an installation certificate justified confiscation, duty demand and penalties under the EPCG exemption notification and the Customs Act, 1962.

Issue (i): Whether the customs authorities could conclude that the export obligation under the EPCG scheme had not been fulfilled before the licensing authority had decided the pending application for export obligation discharge certificate, particularly where the obligation related to services.

Analysis: The exemption under the EPCG scheme was conditioned on fulfilment of export obligation within the prescribed period, but the licensing authority remained the statutory body competent to determine whether that obligation had been discharged. Customs could initiate action for breach of notification conditions, yet it could not pre-empt the licensing authority by finally deciding shortfall in export obligation before the period for compliance had run and while the application for discharge certificate was still pending. The judgment further held that, where the obligation was to be discharged through services, customs authorities lacked the statutory domain expertise and legal authority to assess whether the service-related foreign exchange earning target had been met.

Conclusion: The finding that export obligation had not been achieved was without authority of law and could not be sustained against the assessee.

Issue (ii): Whether alleged personal use of the imported cars and non-production of an installation certificate justified confiscation, duty demand and penalties under the EPCG exemption notification and the Customs Act, 1962.

Analysis: Use of the imported vehicles for purposes other than earning foreign exchange, by itself, was held not to amount to breach of the EPCG scheme conditions where the notification did not require exclusive use in the manner assumed by the adjudicating authority. The requirement of an installation certificate was also treated as inapplicable in the conventional sense to motor vehicles, since such conveyances are movable and cannot be installed like fixed capital goods; importing and registering the vehicles necessarily implied waiver of that rigid requirement. On the facts, the alleged non-compliance did not furnish a valid basis for confiscation, duty recovery or penalty.

Conclusion: The confiscation, duty demand and penalties were unsustainable and liable to be set aside.

Final Conclusion: The impugned order was set aside in its entirety, and the appeals succeeded with consequential relief.

Ratio Decidendi: Where the EPCG obligation concerns service exports, customs authorities cannot substitute their own determination for that of the licensing authority on fulfilment of export obligation, and conditions in the exemption notification must be construed reasonably so as not to insist on impossible compliance for movable vehicles.

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