Does Failure to Meet EPCG Export Obligation Attract Penalty If Imported Assets Are Auctioned by Banks? CESTAT Ans.

The Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that interest and penalty cannot be imposed on an importer who failed to fulfil export obligations because the imported capital goods and project assets were auctioned by banks under SARFAESI proceedings. However, the bench of Justice Dilip Gupta (President) and P. V. Subba Rao (Technical Member) upheld the customs duty demand arising from the non-fulfilment of the export obligation. The appellant company had obtained 27 EPCG authorisations between 2007 and 2009 for importing duty-free capital goods required for constructing a hotel project in Gurugram. The imports were made under Notification No. 97/2004-Customs, which allowed concessional imports subject to fulfilment of specified export obligations within a prescribed period. As required under the EPCG Scheme, the company executed bonds and furnished bank guarantees to secure compliance with the export obligation conditions. However, before the hotel project could be completed, the company encountered severe financial distress. Creditors withdrew support, banks initiated recovery proceedings under the SARFAESI Act, and eventually the Debts Recovery Tribunal passed orders that led to the auction of the hotel property and the imported capital goods in September 2011. As a result, the company lost possession and control of the project assets before it could commence operations and generate exports. Following the failure to fulfil export obligations under the EPCG authorisations, the Customs Department sought recovery of the customs duty foregone on the imported capital goods. Even before issuance of the show cause notice, the department encashed bank guarantees amounting to approximately ₹5.95 crore for recovery of the duty liability. Subsequently, a show cause notice was issued demanding customs duty of over ₹5.07 crore along with interest and penalty and proposing confiscation of the imported goods under Section 111(o) of the Customs Act. The adjudicating authority confirmed the duty demand, imposed interest, ordered confiscation of the imported goods and levied penalty under Section 112(a)(ii) of the Customs Act. The company did not dispute the customs duty liability before the Tribunal. Instead, it challenged only: levy of interest; imposition of penalty; and confiscation of the imported capital goods. The appellant argued that its inability to fulfil export obligations was caused by circumstances completely beyond its control. It contended that the auction of the hotel project and imported machinery under SARFAESI proceedings rendered compliance with the export obligation impossible. The company also pointed out that under the EPCG framework, exports by group companies were permissible to a certain extent and that substantial exports had in fact been undertaken through group entities. Further, it had requested relaxation from the DGFT to permit fulfilment of export obligations through other group companies, though the request was rejected. A key aspect of the ruling was the Tribunal's analysis of Paragraph 4 inserted into Notification No. 97/2004-Customs through a 2007 amendment. The provision specifically permits waiver of export obligations where fulfilment becomes impossible because of force majeure or other unforeseen circumstances. The Tribunal observed that the auction of the imported machinery and hotel premises pursuant to SARFAESI proceedings effectively deprived the appellant of the very assets necessary for carrying out the export obligation. The inability to perform therefore arose from circumstances beyond the company's control. The Tribunal extensively relied on judicial precedents dealing with the doctrine of frustration under Section 56 of the Indian Contract Act. It noted that when performance of contractual obligations becomes impossible due to events that could not reasonably be foreseen or prevented, the law recognises that the party should not be penalised for non-performance. The bench referred to earlier decisions including the Bombay High Court ruling in the Settlement Commission matter and the Tribunal's decisions in Taurus Novelties and B.R. Marbles, where relief from interest and penalties had been granted in EPCG cases involving circumstances beyond the importer's control. The Tribunal held that although the customs duty demand remained valid, the interest component could not survive in the peculiar facts of the case. It emphasised that the department had already recovered the principal duty amount by encashing bank guarantees before issuing the show cause notice. The export obligation became impossible because the imported capital goods themselves had been auctioned. The appellant had demonstrated bona fide conduct by attempting to meet obligations through permissible exports by group companies. Accordingly, the demand for interest was set aside. The Tribunal also struck down the penalty imposed under Section 112(a) of the Customs Act. Rejecting the adjudicating authority's view that mens rea was unnecessary, the bench observed that penalty provisions generally require evidence of deliberate wrongdoing or conscious violation. The Tribunal found that there was no evidence of fraud, suppression or mala fide conduct. No misuse of the imported capital goods. Genuine efforts by the appellant to fulfil obligations. Failure arising solely due to unforeseen financial collapse and subsequent SARFAESI auction proceedings. The bench held that such circumstances could not justify penal consequences. The Tribunal further held that confiscation under Section 111(o) of the Customs Act was unsustainable. Since the failure to comply with the notification conditions was attributable to circumstances beyond the appellant's control, the imported goods could not be treated as liable for confiscation. Once confiscation itself failed, the foundation for imposing a penalty also disappeared. Allowing the appeal in part, CESTAT upheld the customs duty demand arising from non-fulfilment of EPCG export obligations; set aside the levy of interest; quashed the penalty imposed under Section 112(a); and set aside confiscation of the imported capital goods. Case Details Case Title: Rajdarbar Heritage Venture Limited Versus Additional Director General (Adjudication) Citation: JURISHOUR-1490-CES-2026(DEL) Case No.: Customs Appeal No. 50378 of 2021 Date: 01.06.2026 Counsel For Appellant: Alok Agarwal, Shri Sharad Srivastav, Shri Rachit Mahajan and Shri Mohit Kalra, advocates Counsel For Respondent: Nikhil Mohan Goyal, authorised representative Click Here To Read Order Read More: DRI Seizes Nearly 105 Kg Ganja in Bihar; Two Held in Major Anti-Narcotics Operation

Does Failure to Meet EPCG Export Obligation Attract Penalty If Imported Assets Are Auctioned by Banks? CESTAT Ans.

Membership Required

Latest articles

Services Used for Setting Up Factory Continue to Qualify as ‘Input Services’: CESTAT

Customs Can’t Enhance Import Value Solely on NIDB Data Without Proof of Comparable Imports: CESTAT

Bona Fide Mistakes Shouldn’t Defeat Substantive Tax Rights: Karnataka High Court Allows Correction of GST DRC-03 Filing Error

Procedural Delay Should Not Defeat Scheme Benefits: CESTAT Directs Manual Processing of SVLDRS Discharge Certificate

More like this

Services Used for Setting Up Factory Continue to Qualify as ‘Input Services’: CESTAT

Customs Can’t Enhance Import Value Solely on NIDB Data Without Proof of Comparable Imports: CESTAT

Bona Fide Mistakes Shouldn’t Defeat Substantive Tax Rights: Karnataka High Court Allows Correction of GST DRC-03 Filing Error

About us

Company

Categories