EPCG exemption and export obligation compliance under foreign trade law: customs cannot disregard DGFT-issued certificates without prior invalidation.

EPCG exemption disputes turn on compliance with licence conditions and the Foreign Trade Policy read with the notification. The commentary explains that where Export Obligation Discharge Certificates have been issued and the validity of the EPCG licences, installation of capital goods, and their use in manufacture are not in dispute, the remaining question is whether third-party exports can validly count towards discharge of export obligation. It states the governing position that customs authorities should not go behind an instrument issued under the FTDR framework unless the competent foreign trade authority has first found it invalid or illegally obtained, and therefore customs demand, confiscation, and penalties cannot be sustained on that basis.

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Issues: Whether the demand of duty, confiscation and penalties under the EPCG exemption could be sustained against the assessee despite the issuance of Export Obligation Discharge Certificates and the claim that third-party exports were validly counted towards fulfilment of export obligation.

Analysis: The exemption under the EPCG notification was held to depend upon compliance with the licence conditions and the notification conditions, read together with the Foreign Trade Policy. The dispute turned on whether exports made through third parties could be counted towards discharge of export obligation for the concerned licences, and whether the customs authorities could sustain demand and penal action when the DGFT had issued EODCs. The Tribunal held that the validity of the EPCG licences, installation of the capital goods and their use for manufacture were not in dispute, and the only controversy was whether the third-party exports could be treated as fulfilment of the export obligation. Relying on the governing legal position that customs authorities cannot go behind an instrument issued under the FTDR regime unless the competent authority under that regime has first found it to be invalid, the Tribunal concluded that the demand and penalties could not be sustained for the two licences that remained in issue.

Conclusion: The issue was decided in favour of the assessee and against the Revenue; the duty demand, confiscation and penalties were set aside for the two licences in dispute.

Ratio Decidendi: Where an exemption and its recovery mechanism are linked to an instrument issued under the foreign trade regulatory framework, customs recovery and penal action cannot be sustained on the basis of alleged invalidity of that instrument unless the competent foreign trade authority has first annulled or found it to have been incorrectly issued or illegally obtained.

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