The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Ahmedabad Bench, has upheld the recovery of customs duty and interest from two Surat-based exporters who failed to fulfil their export obligations under the Export Promotion Capital Goods (EPCG) Scheme after the embroidery machinery imported by them was destroyed in the unprecedented Surat floods of 2006. 

However, the bench of Justice Somesh Arora (Judicial Member) and Satendra Vikram Singh (Technical Member) set aside the confiscation of the machinery, redemption fine and penalties imposed under the Customs Act, holding that the circumstances surrounding the failure of export obligation did not justify these penal consequences.

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The dispute arose from imports made by Suruchi Creation Pvt. Ltd. and Hans Creations under EPCG licences issued by the Directorate General of Foreign Trade (DGFT), Surat, in August 2005.

Suruchi Creation was granted EPCG Licence No. 5230000555 dated August 8, 2005, permitting the import of a ZSK Flat Computerized Embroidery Machine along with accessories under Customs Notification No. 97/2004-Cus. dated September 17, 2004. The licence was registered at ICD Sachin, Surat, and the machinery was imported under a Bill of Entry dated September 26, 2005. The company saved customs duty of ₹9,75,116 and furnished a bond of ₹24.50 lakh along with a bank guarantee of ₹1.50 lakh.

Hans Creations obtained a similar EPCG licence dated August 9, 2005 and imported an identical embroidery machine under a Bill of Entry dated October 24, 2005. It availed customs duty savings of ₹9,59,808 and furnished a ₹24 lakh bond and ₹1.50 lakh bank guarantee.

Under the applicable EPCG notification, the import concession was conditional upon fulfilment of an export obligation equivalent to eight times the customs duty saved on the imported machinery. Fifty per cent of the obligation was required to be fulfilled during the first six years and the remaining 50 per cent during the seventh and eighth years.

After importation, the machinery was installed at the appellants’ premises. However, the Tribunal recorded that the machines were subsequently submerged in water during the unprecedented Surat floods of 2006 and were damaged beyond repair.

The appellants informed the DGFT authorities about the damage and shifted the machinery to the premises of a sister concern after obtaining approval. The change in location was also endorsed in the EPCG licences. According to the appellants, the machines had become incapable of production and they were left with only the salvage value and insurance claim. The record also noted that flood relief assistance of ₹1 lakh was received from the State Government.

Despite these circumstances, the appellants could not fulfil the prescribed export obligation.

The Customs Department subsequently issued show cause notices in April 2014 demanding recovery of the customs duty saved by the two companies, along with applicable interest.

In the case of Suruchi Creation, the department sought recovery of ₹9,75,116, while in the case of Hans Creations, the demand was ₹9,59,808. The department also proposed confiscation of the imported machinery under Section 111(o) of the Customs Act, 1962, as well as penalties under Section 112(a).

The adjudicating authority confirmed the duty demands with interest, ordered confiscation of the machinery and imposed redemption fine and penalties. The Commissioner (Appeals) subsequently upheld the duty demand and interest and the confiscation, though the redemption fine was reduced to ₹1 lakh and the penalties were reduced to ₹50,000 in each case.

The companies thereafter approached the CESTAT.

Before the Tribunal, the appellants argued that their failure to fulfil the export obligation was entirely attributable to an unforeseen natural disaster and therefore constituted a force majeure situation.

They relied upon Clause 4 of Notification No. 97/2004-Cus., as inserted by Notification No. 72/2007-Cus. dated May 21, 2007. The provision stated that waiver of export obligation could be considered where, because of force majeure or other unforeseen circumstances, an exporter was unable to fulfil the obligation. Such requests were to be considered by a committee comprising representatives of the Department of Commerce and Department of Revenue under the DGFT.

The appellants contended that the floods were beyond their control, that the machines had been installed before being damaged, and that they had duly informed the DGFT authorities about the destruction. They also argued that they had acted bona fide and had no intention to evade customs duty.

They further relied upon decisions dealing with force majeure, remission of duty and penalties, and cited a June 2026 CESTAT decision in Rajdarbar Heritage Ventures Limited, where relief had been granted in circumstances involving failure to fulfil export obligations due to circumstances beyond the assessee’s control.

The Ahmedabad Bench, however, drew a crucial distinction between the existence of circumstances that may justify a waiver and the actual grant of such waiver by the competent authority.

The Tribunal noted that the unprecedented flood, the installation of the machinery, its subsequent damage and the communication with DGFT authorities were not in dispute. It also accepted that the machines had been submerged and damaged beyond repair and that the appellants had received insurance and flood-relief assistance.

Nevertheless, the Tribunal found that the appellants could not produce any order granting waiver of the export obligation either from the committee contemplated under the notification or from the DGFT authorities.

The Bench observed that the specific mechanism for waiver on account of force majeure was introduced only with effect from May 21, 2007. Since the appellants had not obtained such a waiver, the mere existence of the flood-related circumstances could not, by itself, extinguish the customs duty liability arising from non-fulfilment of the EPCG conditions.

The Tribunal also took note of proceedings initiated by the DGFT in relation to the non-fulfilment of export obligation.

According to the record, the Deputy Director General of Foreign Trade passed an order dated February 6, 2019 under the Foreign Trade (Development and Regulation) Act, 1992 and imposed a penalty of ₹47,43,810 on the firm and its director. The appellants stated that they had challenged that order before the Additional Director General of Foreign Trade, Mumbai.

Importantly, however, the Tribunal noted that neither in those proceedings nor through a separate application had the appellants sought the formal waiver of export obligation contemplated under paragraph 4 of the amended customs notification.

The appellants had heavily relied on the CESTAT Delhi decision in Rajdarbar Heritage Ventures Limited v. Additional Director General (Adjudication), decided on June 1, 2026.

In that matter, the Tribunal had held that where export obligations could not be fulfilled because of circumstances beyond the appellant’s control, confiscation under Section 111(o) and penalty under Section 112(a) were not justified. The decision also discussed the requirement of mens rea for imposing penalty under Section 112(a).

The Ahmedabad Bench, however, found the facts materially different.

It pointed out that in Rajdarbar Heritage, approximately 50 per cent of the export obligation had actually been fulfilled, whereas in the present cases there was no fulfilment of export obligation at all. The Tribunal also distinguished the interest issue because, in Rajdarbar Heritage, interest had been demanded under the notification and bond, whereas in the present case interest was demanded under Section 28AA of the Customs Act.

A significant aspect of the ruling is the Tribunal’s reliance on the Supreme Court’s judgment in Commissioner of Customs (Import), Mumbai v. Dilip Kumar & Co.

The Bench reiterated that exemption notifications have to be interpreted strictly and that the burden lies upon the assessee to establish that its case falls within the parameters of the exemption notification. It also referred to the Supreme Court’s decision in Commissioner of Central Excise, Surat-I v. Favourite Industries.

Applying this principle, the Tribunal concluded that the EPCG concession was expressly conditional upon fulfilment of the prescribed export obligation. Where the export obligation was not fulfilled and no competent authority had granted a waiver, the duty saved under the exemption could be recovered along with interest.

While sustaining the customs duty demand and interest, the Tribunal took a different view on confiscation and penalties.

The Bench ultimately set aside the confiscation of the imported embroidery machinery under Section 111(o), the redemption fine and the penalties imposed under Section 112(a) of the Customs Act.

Thus, the decision draws an important distinction between the fiscal consequence of failure to satisfy the conditions of an EPCG exemption and the penal consequences of such failure.

The Tribunal effectively held that the absence of a formal waiver meant that the appellants could not retain the customs duty concession merely on the strength of the force majeure circumstances. At the same time, the circumstances surrounding the destruction of the machinery did not warrant confiscation and penalty in the facts of the case.

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