2025 (10) TMI 509 - HC - Customs

Four-year CHA license suspension upheld for employee collusion and forged invoices; employer held liable for inadequate supervision

HC upheld misconduct by an employee who colluded with third parties to misuse another entity's IEC and submit forged invoices, finding the appellant ... Revocation of CHA license - employee engaged in facilitation of exports using a third party IEC without proper KYC - duty of appellant to have performed all due diligence and supervise its employees properly - misdeclaration in respect of certain Set Top Boxes which were being exported - applicability of principle of proportionality - HELD THAT:- A perusal of the statement would in fact show that he admits that he was personally responsible for the affairs with M/s Hiba Enterprises. The Managing Director is also responsible. Mr. Ajay Sharma also states that he personally knew Mr. Yusuf Khan from M/s Hiba Enterprises. He has also accepted the knowledge of cancellation of the GST registration of M/s Hiba Enterprises. In fact, he admits that though the GST was cancelled, since the IEC of M/s Hiba Enterprises was valid, he thought of using the said IEC in order to do the business of sending the export consignments on their behalf. The admissions made by Mr. Ajay Sharma also shows that he was completely complicit in the wrong doings and misuse of the IEC of the exporter. Mr. Ajay Sharma had also in the past indulged in similar exports by one Chinese national called Mr. Jason as also admitted that certain bogus/forged invoices were signed and prepared which were mostly imaginary. These statements of Mr. Ajay Sharma leaves no manner of doubt that the employee concerned had connived and colluded with other parties which led to the Appellant also being implicated. In addition, it is also clear that some part of the activity was being done by the said employee through the company. Insofar as filing of documents was concerned, he did misuse the third party’s IEC i.e., of M/s Hiba Enterprises. The law in this regard is also well settled that the principle of proportionality would apply in such cases. This has been so held by this Court in M/s. Ashiana Cargo Services v. Commissioner of Customs (I&G), [2014 (3) TMI 562 - DELHI HIGH COURT] where it has been observed that 'The issue before the Court is the proportionality of the penalty awarded in this case. The CHA Regulations prescribe two penalties: suspension of the license for a particular period of time, and revocation of the license, such that it irretrievably loses its currency. Once the Commissioner reaches a decision, the CESTAT, and this Court, would not ordinarily interfere with the award of punishment, denuding the disciplinary power of the designated authority. That said, the course of action taken by the Commissioner of Customs must depend on the gravity and nature of the infraction by the CHA, and thus, the punishment must be proportional to the violation. Given the civil consequences of revocation for the CHA, read in the background of its freedom under Article 19(1)(g), this principle of law is undisputed.' Under such circumstances, this Court is of the opinion that in order to maintain proportionality and to ensure that the Appellant, which has its own reputation, is not permanently dissuaded from conducting its activities as a CHA, the period of revocation of the license is restricted to 4 years instead of perpetual revocation, i.e., till 21st December, 2025. After considering the application and the due diligence documents, the Customs Department shall take a decision on the renewal of the CHA license of the Appellant - appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether revocation of a Customs Housing Agent (CHA) license is justified where an employee engaged in facilitation of exports using a third party IEC without proper KYC, and the employer contends lack of direct knowledge and asserts employee misconduct and termination? 2. Whether the principle of proportionality applies to disciplinary action under the Customs regime (including CBLR) governing CHAs, and if so, whether perpetual revocation (or otherwise severe revocation) is disproportionate absent aggravating factors or mens rea of the licensee? 3. What weight is to be accorded to voluntary admissions/statements of a senior managerial employee in enforcement proceedings against the employer-licensee? 4. Whether and on what terms a suspended/revoked CHA license may be restored or renewed, including conditions of monetary retribution and submission of enhanced due diligence measures for employee supervision? ISSUE-WISE DETAILED ANALYSIS Issue 1 - Justification for revocation where employee misused third-party IEC Legal framework: CHAs operate under stringent obligations in the Customs Broker Licensing Regulations (CBLR) to verify documents and the identity/credibility of importers/exporters and to exercise due diligence and supervision over personnel. Precedent Treatment: The Court considered prior High Court authorities addressing discipline and revocation of CHA licenses and the necessity of assessing gravity and culpability (including M/s. Ashiana Cargo Services and followed reasoning applied in a later decision restricting penalties). Interpretation and reasoning: The Court examined the voluntary, detailed statement of the senior manager who admitted personal responsibility for dealings with the exporter, admission of knowledge of cancelled GST, use of the exporter's IEC, collusion with third parties, and partial admission that the Managing Director bore responsibility. Those admissions, together with evidence that KYC documents were received on a private email and that filing was done through the employee's actions, establish that the employee 'connived and colluded' and that some illicit activity was carried out through company resources. Ratio vs. Obiter: Ratio - An employer-licensee can be held responsible where employee admissions and documentary practices demonstrate collusion and misuse of CHA functions; mere assertion of employee wrongdoing does not automatically exculpate the licensee where supervisory failures and active misuse through company channels are shown. Conclusion: The record supports institutional responsibility of the CHA for failures of supervision and misuse by a senior employee; revocation in principle was within disciplinary power but must be evaluated for proportionality (see Issue 2). Issue 2 - Application of proportionality to revocation/suspension of CHA license and appropriate sanction Legal framework: Doctrine of proportionality informs disciplinary actions affecting Article 19(1)(g) freedoms and severe civil consequences of revocation; authorities must weigh aggravating and mitigating circumstances and choose between suspension and revocation accordingly. Precedent Treatment: The Court relied on prior decisions emphasizing that revocation is appropriate only for serious infractions with aggravating factors; for lesser infractions suspension may suffice. The Court followed and applied the proportionality analysis from earlier High Court decisions which set aside disproportionate revocations where mens rea of the licensee was absent or record did not support irretrievable loss of trust. Interpretation and reasoning: Although there is evidence of serious misuse by a senior employee and some management responsibility, the Court applied proportionality to avoid permanent civil death. Considering precedent and comparative cases, the Court concluded that a perpetual revocation was disproportionate. The Court balanced gravity (employee collusion, misuse of IEC, forged/bogus invoices) against mitigating considerations (absence of explicit finding of mala fides on part of the corporate entity beyond supervisory lapse and willingness to make monetary retribution and improvement in systems). Ratio vs. Obiter: Ratio - Even where serious regulatory breaches by employees are found, the disciplinary authority must demonstrate proportionality; revocation should be limited to cases where aggravating factors justify permanent exclusion, otherwise a finite period of revocation or suspension may be appropriate. Obiter - Specific numerical determinations in other cases (e.g., amounts or periods) are situational and illustrative of proportionality application. Conclusion: The Court reduces the period of revocation to a finite term (four years), finding perpetual revocation disproportionate in the circumstances while affirming that sanction of revocation may be warranted but must reflect proportionality. Issue 3 - Evidentiary weight of voluntary admission by senior manager and attribution to licensee Legal framework: Voluntary statements of employees recorded in investigation proceedings are admissible and relevant to attribute conduct; corporate responsibility may be inferred where senior managerial personnel admit knowledge/acts or where company systems enabled misuse. Precedent Treatment: The Court treated such admissions as significant, especially where the employee was senior and in-charge of an office and where documentary/operational practices corroborate the admissions. Interpretation and reasoning: The senior manager's admissions were detailed, including acknowledgement of using the IEC, awareness of GST cancellation, receipt of payments, and statements that MD was ultimately responsible. These admissions, coupled with evidence (use of private email for KYC, employee-operated digital signature and filing), justified treating the conduct as not purely individual rogue acts but connected to the CHA's functioning. Ratio vs. Obiter: Ratio - Voluntary admissions by a senior manager can establish culpable conduct attributable to the licensee and negate a complete defense of ignorance, particularly when corroborated by documentary practice and lack of adequate supervision. Conclusion: The employee's voluntary statements materially supported departmental findings against the licensee and warranted disciplinary consequences, subject to proportionality. Issue 4 - Terms and conditions for renewal/restoration of CHA license and role of monetary retribution and enhanced due diligence Legal framework: Renewal/rehabilitation of a revoked/suspended license is within departmental discretion but may be conditioned upon compliance measures, monetary retribution and demonstrable remedial systems to prevent recurrence. Precedent Treatment: The Court noted prior practice where disciplinary resolution included limited suspension, monetary deposits for public or departmental benefit, and conditions on renewal tied to systemic reforms. Interpretation and reasoning: To balance punishment and rehabilitation, the Court ordered limited revocation (till specified future date), directed payment of a specified sum as retribution to the Customs Department and bar-related funds, and required submission of a detailed Due Diligence Document explaining supervisory frameworks and employee verification systems. The Court conditioned consideration of renewal on deposit and satisfactory due diligence documentation, and specified the effective date for any renewal. Ratio vs. Obiter: Ratio - Courts may direct conditional relief by curtailing revocation periods, mandating restitution, and requiring systemic compliance measures as prerequisites for reconsideration of license renewal. Obiter - Specific monetary allocations and exact account details are case-specific implementation directions. Conclusion: The Court permitted limited restoration process subject to monetary deposit and submission of due diligence measures; renewal consideration to follow departmental decision with effect from the prescribed future date upon compliance.