I was getting a bit frustrated trying to embed the fonts. I used Atlantis to generate the epub with embedded fonts. The generated ebook was rendered very well on both Calibre reader and Sigil. The Stanza and ibooks apps were unable to handle the embedded font (Sanskrit characters were all gibberish). I got in touch with Atlantis support team and they mentioned that they were able to read the generated ebook on 'Adobe Digital Editions' and 'Sony reader'. Please let me know if you have any other ideas.
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