C. N. RAMACHANDRAN NAIR, J.

1. This is an appeal filed by the Commissioner of Customs challenging the order of the Customs, Excise and Service Tax Appellate Tribunal, cancelling the adjudication order issued by him against the respondent confiscating the two BMW cars imported by the respondent under Section 111(o) of the Customs Act and demanding differential duty of customs, interest and penalty for violation of the conditions of customs Notification 44/2002 dated 19.4.2002 under which imported cars were released at concessional rate of duty of 5% as against 160% for the normal import of foreign cars. We have heard standing counsel Sri. John Varghese appearing for the appellant and Sri. G. Natarajan appearing for the respondent.

2. The facts that led to the controversy are the following. Respondent is running a hotel mainly accommodating foreign tourists. Government of India issued customs Notification No. 44/2002 dated 19.4.2002 under Section 25(1) of the Customs Act granting concessional rate of duty at 5% on capital goods imported under valid licence issued under Export Promotion Capital Goods (EPCG) Scheme. The condition for granting concessional rate of duty for the import of capital goods based on licence issued under the EPCG Scheme is that importer should execute surety and guarantee agreement in favour of the customs department to fulfil the export obligation, that is to earn five times the CIF value of the goods imported on FOB basis in convertible foreign exchange within a period of 8 years from the date of issue of licence. A further condition for permitting import of capital goods at concessional rate of duty at 5% is that the importer should, within six months from the date of completion of import, furnish installation report of the capital goods imported in their factory premises. Even though Notification as such is for import of capital goods for installation in production industry, the goods produced wherefrom are for export to earn foreign exchange in terms of the notification, it is admitted that hotels catering to the foreign tourists are entitled to import cars for use by the tourists to earn foreign exchange. The respondent in terms of the notification imported two BMW ILA RHD Limousine from foreign countries availing concessional rate of duty at 5% as against 160% payable for the import of foreign cars. Security bond and bank guarantee were executed in favour of the customs department undertaking that respondent will earn foreign exchange to the extent of 5 times the CIF value within 8 years from the date of issue of licence and they will furnish installation certificate in terms of the notification for the imported cars. There is no dispute on the respondent's entitlement for importing foreign cars for use in the hotel industry because under the import obligation contained in the notification importers rendering services are required to receive payments in freely convertible foreign currency for services rendered through the use of capital goods imported under the notification claiming concessional rate of duty. In fact in terms of the conditions in the notification, what was required by the respondent was to register the two imported cars under Section 66(1) of the MV Act 1988 and make them available for use by the tourists coming to hotel. In fact since installation in the literal sense in respect of capital goods in the form of luxury cars could be done only by producing proof of fitness of the vehicles for rendering services to the foreign tourists coming to hotel, respondent was bound to take tourist taxi permit under the M.V. Act and report compliance within six months in terms of the notification. Respondent on the other hand got the vehicles registered in the name of the Managing Director and Director of the respondent-company respectively and the registration of the vehicles is in the category of "private vehicle". Customs department however did not follow up what the respondent was do