Customs broker license revocation overturned after tribunal finds proper due diligence in verifying exporter documents and authorization letters

CESTAT New Delhi-AT allowed the appeal of a customs broker whose license was revoked for alleged violations of Licensing Regulations 10(a), 10(d), 10(e), 10(n), and 13(12). The Revenue claimed two exporters were not available at declared addresses after 18 months. The tribunal held that the broker had obtained proper authorization letters, exercised due diligence by verifying documents including partnership deeds, service tax registration, PAN cards, and IEC codes. The tribunal ruled that grant of Importer/Exporter Code presupposes verification by customs authorities, making it unreasonable to expect brokers to re-verify authenticated documents. The license revocation, security deposit forfeiture, and penalty imposition were set aside.

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The core legal questions considered in this judgment revolve around the alleged violations of specific provisions of the Customs Brokers Licensing Regulations, 2018 by the appellant, a licensed Customs Broker. The issues primarily concern whether the appellant failed to comply with the following regulatory obligations: obtaining valid authorizations from clients (Regulation 10(a)); advising clients to comply with the law and exercising due diligence in verifying information (Regulations 10(d) and 10(e)); verifying the correctness of client details and functioning at declared addresses using authentic documents (Regulation 10(n)); and exercising proper supervision over employees (Regulation 13(12)). Additionally, the propriety of the revocation of the appellant's Customs Broker Licence, forfeiture of security deposit, and imposition of penalty were considered.

Regarding Regulation 10(a), which mandates that a Customs Broker must obtain authorization from each client employing their services, the Commissioner found that the two firms for whom the appellant conducted customs clearance-M/s Impex Trading and M/s Global Trading-were non-existent at the declared addresses. Consequently, the Commissioner held that the authorization letters submitted by the appellant lacked credibility, as they purportedly originated from non-existent entities. The appellant countered by submitting copies of authorization letters and various KYC documents, asserting that the regulation only requires obtaining authorization, which was fulfilled, and that there was no allegation of forgery or denial of these authorizations by the purported firms. The Court noted that the Commissioner's conclusion that the authorization letters had no credibility was erroneous, as the mere non-existence of the firms did not invalidate the authorization letters per se, especially absent any evidence of forgery or denial. Therefore, the appellant was found not to have violated Regulation 10(a).

On the combined issues under Regulations 10(d) and 10(e), which require a Customs Broker to advise clients to comply with the law and to exercise due diligence in verifying the correctness of information imparted to clients, the Commissioner relied heavily on statements from the appellant's G-Card holder, who admitted never having met the partners of the exporting firms and only receiving documents through a representative. The Commissioner inferred that the appellant was aware or ought to have been aware that the firms were fictitious and thus failed to exercise due diligence or advise clients properly. The appellant argued that due diligence does not encompass physical verification and that compliance with KYC norms, as prescribed in the Board Circular dated April 8, 2010, was undertaken by collecting prescribed documents such as partnership deeds, PAN cards, voter IDs, and Importer Exporter Codes. The Court emphasized that the Circular and its annexure specify that only two authentic documents need to be obtained and that physical verification of addresses is not mandated. Further, the Court relied on precedent from the Delhi High Court, which clarified that Customs House Agents (CHAs) are not inspectors tasked with verifying the genuineness of transactions or the existence of clients beyond verifying the authenticity of documents and the Importer Exporter Code, which itself presupposes prior verification by competent authorities. The Court found the Commissioner's reliance on the absence of physical verification and the non-existence of firms at addresses, especially after an 18-month delay in verification, to be misplaced. Consequently, the appellant was held not to have violated Regulations 10(d) and 10(e).

Regarding Regulation 10(n), which requires verification of the correctness of the Importer Exporter Code, GSTIN, identity, and functioning of the client at the declared address by using reliable and authentic documents, the Commissioner found that the appellant failed to produce documents beyond the partnership deed, such as registration certificates or power of attorney, and did not verify the authenticity of the representative managing the export firms. The appellant contended that it had submitted multiple authentic documents including service tax registration, PAN cards, voter IDs, rent agreements, bank details, and mobile numbers, all of which are issued by government authorities and require substantial verification for issuance. The Court noted that the Commissioner's order was self-contradictory, failing to specify which documents were lacking and ignoring the appellant's submissions. The Court also referred to the Delhi High Court's ruling that the Customs Broker's duty is limited to verifying the presence of an IEC number and identity documents, without an onerous responsibility to investigate further unless alerted to suspicious circumstances. The Court concluded that the appellant had complied with Regulation 10(n) as per the prescribed guidelines and that the Commissioner erred in holding otherwise.

With respect to Regulation 13(12), which mandates that the Customs Broker exercise necessary supervision over employees and be responsible for their acts or omissions, the Commissioner observed that the appellant failed to supervise the G-Card holder adequately, who admitted never visiting the client firms or verifying documents independently. The Commissioner held that proper supervision would have prevented fictitious exports and overvaluation. The appellant argued that the G-Card holder acted in accordance with the Board Circular and obtained all required authentic documents, and that there was no evidence of negligence or omission. The Court found that if the documents submitted appeared authentic, the G-Card holder had no reason to doubt them or conduct further verification. The Court also noted the absence of the appellant's own statement in the investigation, which was a procedural deficiency. Precedents were cited indicating that mere absence of physical verification or suspicion does not amount to failure of supervision if due diligence on documents is shown. Therefore, the Court held that the appellant did not violate Regulation 13(12).

On the issue of revocation of the Customs Broker Licence, forfeiture of security deposit, and imposition of penalty, the Court found that these actions were predicated on the erroneous findings of violations of the Licensing Regulations. Since the appellant was held not to have contravened the relevant provisions, the revocation, forfeiture, and penalty were unjustified. The Court also highlighted procedural lapses, including failure to record the appellant's statement during investigation, which undermined the fairness of the impugned order.

In conclusion, the Court set aside the impugned order dated June 26, 2020, restoring the appellant's Customs Broker Licence and quashing the forfeiture and penalty. The judgment affirms the principle that Customs Brokers are obligated to verify client identity and documents as per prescribed KYC norms and regulations but are not required to conduct physical verification or act as investigators into the genuineness of clients or transactions. The grant of Importer Exporter Codes by competent authorities creates a presumption of due diligence on identity verification, relieving Customs Brokers from onerous background checks unless specific red flags arise. The Court emphasized adherence to procedural fairness and the necessity of substantiating findings with clear evidence before revoking licenses or imposing penalties.

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