EPCG Scheme — Third-Party Exports Valid Under Pre-2015 FTP Regime: CESTAT Chennai Rules in Favour of Licence Holders

Background and Overview

The Customs, Excise and Service Tax Appellate Tribunal, Chennai, in a significant ruling involving a batch of sixteen interconnected appeals, has conclusively held that third-party exports relied upon by EPCG licence holders for the purpose of discharging their export obligations were legally valid and permissible under the Foreign Trade Policy framework that governed the relevant period. The Tribunal further held that Customs authorities cannot override or disregard Export Obligation Discharge Certificates (EODCs) that have been restored and validated by the Directorate General of Foreign Trade (DGFT), unless independently established fraud has been demonstrated through primary documentary evidence.

The two principal entities involved were M/s. P.V. Spinning Mills India (P.) Ltd. (PVSM) and M/s. Alamelu Balaji Spinning Mills Pvt. Ltd. (ABSM), both operating as EPCG licence holders who had availed concessional customs duty benefits for import of capital goods and subsequently discharged their export obligations through third-party exporters.

The EPCG Scheme — Statutory and Policy Framework

The Export Promotion Capital Goods (EPCG) Scheme is a statutory export promotion mechanism framed under Chapter 5 of the Foreign Trade Policy, issued in exercise of powers conferred under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (FTDR Act). The Scheme is administered by the DGFT, which functions as the designated licensing authority under Section 6 of the FTDR Act.

Under this framework:

• DGFT is empowered to issue EPCG authorisations and prescribe export obligation conditions
• DGFT has exclusive authority to interpret FTP provisions under Para 2.3 of the FTP, and such interpretation is binding on all field formations
• EODCs are issued by the competent JDGFT authority upon satisfaction that export obligations have been duly fulfilled
• Notification No. 97/2004-Cus. dated 17.09.2004 and Notification No. 103/2009-Cus. govern concessional duty benefits under the EPCG Scheme and expressly incorporate the FTP framework by adopting the definitions of "Licensing Authority" and "Foreign Trade Policy" from the FTDR Act

Importantly, Clause 4 of the Explanation to Notification No. 97/2004-Cus. specifically recognises multiple modes of fulfilling export obligation, including: (i) export of the same products capable of being manufactured using the capital goods; (ii) exports from different units of the licence holder; and (iii) third-party exports made on behalf of the licence holder, subject to endorsement of relevant details in shipping bills.

Genesis of the Dispute — DRI Investigations

The Directorate of Revenue Intelligence (DRI) initiated investigations against both PVSM and ABSM, alleging fraudulent discharge of export obligations under the EPCG Scheme. The Department's case rested on the following principal allegations:

1. The EPCG licence holders availed concessional customs duty benefits under Notification No. 97/2004-Cus. and Notification No. 103/2009-Cus. against EPCG licences issued by JDGFT, Coimbatore
2. Export obligations were fulfilled by deploying shipping bills of unrelated third-party exporters, procured through brokers and consultants against payment of commission
3. EPCG endorsements were allegedly inserted subsequently in the quadruplicate EP copies of shipping bills, whereas such endorsements were allegedly absent in the Original, Duplicate and Triplicate Customs copies at the time of actual export
4. The exported goods had no genuine nexus with the capital goods imported under the EPCG licences

Duty Foregone — PVSM

Duty Foregone — ABSM

Orders Passed by the Adjudicating Authority

The Commissioner of Customs, Tuticorin passed two separate Orders-in-Original:

• Order-in-Original No. 13/2016 dated 04.08.2016 — in the matter of PVSM
• Order-in-Original No. 14/2016 dated 12.08.2016 — in the matter of ABSM

Both orders:

• Denied EPCG benefits and rejected EODCs
• Confirmed differential customs duty demands along with applicable interest
• Ordered confiscation of imported and indigenously procured capital goods under Section 111(o) of the Customs Act, 1962
• Imposed redemption fine under Section 125 of the Customs Act, 1962
• Levied penalties under Sections 112(a), 114A and 114AA of the Customs Act, 1962 upon the EPCG licence holders, their directors, consultants, chartered accountant and the various third-party exporters

Sixteen Appeals — Parties and Proceedings

The Tribunal clubbed all sixteen appeals for a common hearing given the substantially identical nature of allegations, common evidentiary materials, overlapping parties and the common legal questions involved:

Submissions on Behalf of the Appellants

Primacy of DGFT Jurisdiction