EPCG Licence Holder Relief: CESTAT Delhi Sets Aside Interest and Penalty Where SARFAESI Auction Rendered Export Obligation Impossible
Case Background and Overview
Case: Rajdarbar Heritage Venture Limited Vs Additional Director General (CESTAT Delhi)
The present case before CESTAT Delhi raises a significant question in customs law — can interest and penalty be sustained against an EPCG licence holder whose imported capital goods were forcibly auctioned under SARFAESI proceedings, making fulfilment of export obligations a practical impossibility? The Tribunal answered in the negative, providing meaningful relief to an assessee caught in the crossfire of financial distress and regulatory compliance requirements.
The assessee, Rajdarbar Heritage Venture Limited (formerly known as M/s. Global Heritage Venture Ltd.), was engaged in the hotel and hospitality sector. Between 2007 and 2009, the assessee obtained 27 Export Promotion Capital Goods (EPCG) authorisations from the Directorate General of Foreign Trade (DGFT) for importing duty-free capital goods intended for construction of a hotel project in Sector-42, Gurugram, Haryana.
Imports Under EPCG Scheme and Bond Obligations
Pursuant to the authorisations granted, the assessee imported capital goods under Notification No. 97/2004-Cus. dated 17.09.2004 through a total of 55 Bills of Entry spread across three customs stations:
- 33 Bills of Entry at Inland Container Depot, Tughlakabad, New Delhi
- 9 Bills of Entry at Inland Container Depot, PPG, New Delhi
- 13 Bills of Entry at Air Cargo, New Customs House, New Delhi
In accordance with the conditions prescribed under the Notification, the assessee executed bonds and furnished bank guarantees at each port of import, binding itself to fulfil the prescribed export obligation or pay the duty foregone along with applicable interest.
Financial Distress and SARFAESI Proceedings
The hotel construction encountered severe delays attributable to circumstances outside the assessee's control. Financial creditors withdrew support, lenders backed out of the project, and the assessee found itself unable to sustain the construction activity. Consequently, proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) were initiated against the assessee for recovery of outstanding dues.
Pursuant to an order dated 20.09.2011 passed by the Debts Recovery Tribunal (DRT), the consortium of lender banks proceeded to auction the imported capital goods together with the hotel premises through a public auction in September 2011. Critically, this auction took place before the expiry of the first block period within which the export obligation was required to be fulfilled under the Notification.
The effect was stark — the assessee was stripped of possession and control over the very goods imported under the EPCG Scheme, making it physically and legally impossible to achieve the required export performance.
Departmental Action: Bank Guarantee Encashment and Show Cause Notice
Following the SARFAESI auction, the customs department encashed bank guarantees aggregating to Rs. 5,94,63,918/- at the respective ports towards recovery of duty foregone on the EPCG imports. This encashment occurred prior to the issuance of any show cause notice.
Subsequently, a show cause notice dated 30.09.2019 was issued demanding:
- Customs duty of Rs. 5,07,83,188/- along with interest
- Penalty under
Section 112(a)andSection 112(b)of the Customs Act, 1962 - Confiscation of goods under
Section 111(o)of the Customs Act, 1962
The assessee filed a detailed response disputing the levy, but the Additional Director General, by order dated 31.12.2020, confirmed the duty demand with interest, imposed penalty, and ordered confiscation of the imported goods.
Issues Framed by the Adjudicating Authority
The Additional Director General framed five interconnected questions for determination: