2025 (8) TMI 509 - AT - Customs

Customs Cannot Deny EPCG Scheme Benefits Without DGFT Adjudication Under Section 108 Customs Act

The CESTAT held that customs authorities cannot deny exemption benefits under the EPCG Scheme without prior adjudication or cancellation of the export ... Denial of benefit of exemption on import of two BMW cars though two Bills of Entry - imports made under the EPCG Scheme though a EPCG License - denial of benefit on the ground that Export Obligation has not been fulfilled as the cars have not been used for the intended purpose - HELD THAT:- In Titan Medical Systems [2002 (11) TMI 108 - SUPREME COURT] the Supreme Court observed that once a licence was issued and it was not questioned by the licencing authority, the customs authorities cannot refuse exemption on an allegation that there was mis-representation. The Supreme Court further observed that if there was any mis-representation, it was for the licencing authority to examine and take steps. The aforesaid decision of the Supreme Court in Titan Medical Systems [2002 (11) TMI 108 - SUPREME COURT] was followed by the Delhi High Court in Design Company [2024 (11) TMI 1150 - DELHI HIGH COURT]. The Delhi High Court held that it would be wholly impermissible for the customs authorities to ignore the MIES certificate or deprive holder of the said certificate of the benefits that can be claimed in the scheme, absent any adjudication or declaration of invalidity by the DGFT. The Delhi High Court further held that there cannot be a parallel or a contemporaneous power inhering in two separate sets of authorities with respect to the same subject. If an instrument owes its origin to the FTDR Act, than it is the DGFT which will have to inquire and any action for recovery of benefits claimed and availed would have to necessarily be preceded by the component authority and under the FTDR Act. The Delhi High Court further held that Customs authorities would not have the jurisdiction to question the validity of a certificate referable to the FTDR Act. The customs authority could not have confirmed the demand in the absence of any adjudication by the DGFT cancelling the EODC certificate earlier issued by it certifying that the export obligation had been fulfilled by the appellant. The Customs department would, therefore, not have any jurisdiction to sit in judgment over the EODC issued by the DGFT - the findings that the condition of the Notification has not been fulfilled are based on the statements made by various persons under section 108 of the Customs Act. The Commissioner (Preventive) was not justified in considering the statements made under section 108 of the Customs Act as relevant for coming to a conclusion that the provisions of the Notification had been violated - Penalty under section 112(a) of the Customs Act could also, therefore, not have been imposed upon the appellant or the two Directors. The order dated 10.01.2013 passed by the Commissioner (Preventive) cannot, therefore, be sustained and is set aside - appeal allowed. ISSUES: Whether the Customs authorities have jurisdiction to question or deny benefit of exemption under the EPCG Scheme after issuance and non-cancellation of Export Obligation Discharge Certificate (EODC) by the Directorate General of Foreign Trade (DGFT).Whether the imported vehicles were used for the intended purpose under the EPCG Scheme as required by the Notification and Foreign Trade Policy.Whether statements recorded under section 108 of the Customs Act can be relied upon without following the procedure prescribed under section 138B of the Customs Act.Whether penalties under section 112(a) of the Customs Act can be imposed in the absence of valid evidence and proper procedure.Whether the demand of customs duty and penalties is sustainable when the export obligation has been certified as fulfilled by the DGFT. RULINGS / HOLDINGS: The Customs department does not have jurisdiction to sit in judgment over the EODC issued by the DGFT; once the DGFT has issued and not cancelled the EODC, the Customs authorities cannot deny exemption or demand duty on the ground of alleged non-fulfillment of export obligation. The Court held that 'it would be wholly impermissible for the customs authorities to either doubt the validity of an instrument issued under the FTDR Act or go behind benefits availed pursuant thereto absent any adjudication having been undertaken by the DGFT.'The finding that the vehicles were not used for the intended purpose, based solely on statements recorded under section 108 of the Customs Act without following section 138B procedure, is not sustainable. The Court held that 'the statements made under section 108 of the Customs Act cannot be relied upon if the procedure followed under section 138B of the Customs Act is not followed.'Statements recorded under section 108 of the Customs Act are relevant only if the person making the statement is examined as a witness before the adjudicating authority and the authority forms an opinion that the statement should be admitted in evidence, with opportunity for cross-examination. The Court emphasized that 'the provisions of section 9D of the Central Excise Act and section 138B(1)(b) of the Customs Act have been held to be mandatory and failure to comply with the procedure would mean that no reliance can be placed on the statements.'Penalty under section 112(a) of the Customs Act cannot be imposed when the foundational evidence is inadmissible and the export obligation has been fulfilled as certified by DGFT.The demand of customs duty and penalties is set aside in view of the valid EODC issued by DGFT and absence of any cancellation or adverse adjudication by DGFT. The Court held that 'once the EODC was received, the duty demand is not sustainable.' RATIONALE: The Court applied the statutory framework under the Customs Act, 1962, the Foreign Trade (Development & Regulation) Act (FTDR Act), and the Foreign Trade Policy (FTP), particularly the EPCG Scheme and related Notifications. It relied on the principle that the DGFT is the competent authority to administer and adjudicate export obligations and related certificates under the FTDR Act, and Customs authorities cannot override or question such instruments absent DGFT adjudication.The Court followed binding precedents including the Supreme Court's decision in Titan Medical Systems and the Delhi High Court's decision in Design Company, which establish that Customs authorities cannot refuse exemption or question the validity of DGFT-issued certificates without DGFT's prior cancellation or adjudication.The Court emphasized the mandatory procedural safeguards under sections 108 and 138B of the Customs Act (and corresponding provisions under the Central Excise Act) regarding admissibility of statements recorded during inquiry. It recognized that statements recorded during investigation may be coerced and thus require examination and opportunity for cross-examination before being admitted as evidence.The Court rejected the Customs authority's reliance on statements made under section 108 without compliance with section 138B, holding that such reliance violates mandatory procedural requirements and renders the evidence inadmissible.The Court underscored that the EPCG Scheme's export obligation is to earn foreign exchange through use of imported capital goods, and fulfillment of such obligation is certified by DGFT through issuance of EODC. Absent cancellation or adverse finding by DGFT, Customs cannot impose duty or penalties on the importer.