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 obligation discharge certificate (EODC) by the DGFT. Following Supreme Court and Delhi HC precedents, the tribunal ruled that customs lack jurisdiction to question the validity of certificates issued under the FTDR Act. The demand and penalty imposed based on statements under section 108 of the Customs Act were unjustified. The order by the Commissioner (Preventive) denying exemption and imposing penalties was set aside, and the appeal was allowed.

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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.

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