Customs broker licence revocation set aside for lack of proof of violations of Regulations 10(a),(d),(e),(n) and Section 108

CESTAT set aside the order revoking the customs broker licence, forfeiting security deposit and imposing penalty on the appellant-broker. It held that the alleged violation of Regulation 10(a) was unsupported, as the SCN neither alleged absence of authorization nor relied on the Section 108 statement used by the Commissioner. Alleged breaches of Regulations 10(d) and 10(e) were rejected since there was no evidence that the broker failed to advise the importer on compliance or supplied incorrect information, and Section 108 statements not cited in the SCN could not be relied upon. The Tribunal further held that compliance with KYC and online verification satisfied Regulation 10(n), and the broker was not liable for any benami IEC/GSTIN issued by authorities.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether violation of Regulation 10(a) of the Customs Brokers Licensing Regulations, 2018, relating to obtaining and producing authorization from the importer, was established against the customs broker.

1.2 Whether violations of Regulations 10(d) and 10(e) of the Customs Brokers Licensing Regulations, 2018, concerning advising the client to comply with law and exercising due diligence in information imparted to the client, were proved.

1.3 Whether violation of Regulation 10(n) of the Customs Brokers Licensing Regulations, 2018, relating to verification of IEC/GSTIN, identity and functioning of the client at the declared address, was established.

1.4 Whether the adjudicating authority could sustain findings of violation of the aforesaid regulations by relying on statements and materials not cited as relied-upon documents in the show cause notice.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Alleged violation of Regulation 10(a) CBLR, 2018

Legal framework

2.1 Regulation 10(a) obliges a customs broker to obtain an authorization from each client by whom he is employed and to produce such authorization whenever required by the Deputy Commissioner or Assistant Commissioner of Customs.

Interpretation and reasoning

2.2 The Tribunal noted that the show cause notice merely alleged contravention of Regulation 10(a) in general terms and did not specifically allege that the customs broker had failed to obtain authorization from the importer or, having obtained it, failed to produce it when called upon by the competent officer.

2.3 The impugned order nonetheless concluded that Regulation 10(a) was violated on the basis that: (a) no authorization was "miserably" produced; (b) the inquiry officer's observations about KYC lapses; (c) reference to an offence report which did not record any production of authorization; and (d) a statement recorded under section 108 of the Customs Act, 1962.

2.4 The Tribunal found that: (i) the statement under section 108 of the Customs Act was not a relied-upon document in the show cause notice forming the basis of these revocation proceedings and therefore could not be used against the noticee; and (ii) the offence report, even if silent on production of authorization, did not establish that the Deputy Commissioner or Assistant Commissioner demanded authorization and that the customs broker failed to produce it.

2.5 The Tribunal accepted that the customs broker had produced a written authorization from the importer, authorizing it to act as customs broker in respect of import consignments at the relevant port, and that the defence that the show cause notice contained no specific allegation of non-obtaining or non-production of authorization was raised before the Commissioner but ignored in the impugned order.

2.6 It was held that the impugned order could not go beyond the scope of the show cause notice to introduce or build a new factual foundation for a violation of Regulation 10(a), especially in the absence of any evidence showing either non-obtaining or non-production of authorization when required.

Conclusions

2.7 The finding that the customs broker violated Regulation 10(a) was held to be unsupported by the allegations in the show cause notice and by evidence, and therefore unsustainable.

Issue 2 - Alleged violations of Regulations 10(d) and 10(e) CBLR, 2018

Legal framework

2.8 Regulation 10(d) requires a customs broker to advise his client to comply with the provisions of the Customs Act, allied Acts, rules and regulations and, in case of non-compliance, to bring the matter to the notice of the Deputy/Assistant Commissioner of Customs.

2.9 Regulation 10(e) obliges the customs broker to exercise due diligence to ascertain the correctness of any information which he imparts to a client with reference to work related to clearance of cargo or baggage.

Interpretation and reasoning

2.10 The customs broker's case was that: (i) it was unaware of the mis-declaration or concealment of goods or of any BIS/policy violations; (ii) its role was confined to filing the bill of entry based on the declared documents, which on their face did not disclose any policy violation; and (iii) it had carried out due diligence by verifying IEC, GSTIN, PAN, Aadhaar and other particulars of the importer.

2.11 The Commissioner's finding of violation under Regulations 10(d) and 10(e) was primarily based on: (a) the inquiry officer's generic observation that the customs broker was negligent in verifying credentials and scrutinizing documents, and failed to inform Customs of violations; (b) reliance on statements recorded under section 108 of the Customs Act, 1962; and (c) the conclusion that the customs broker did not properly advise the importer regarding authenticity and truthfulness of documents and compliance with section 46(4) of the Customs Act.

2.12 The Tribunal held that nothing in the impugned order or on record established that the customs broker: (i) had failed to advise the importer to comply with customs and allied laws; or (ii) was aware of any non-compliance by the importer and deliberately failed to bring it to the attention of the Deputy/Assistant Commissioner as required by Regulation 10(d).

2.13 It was emphasized that even where an importer violates statutory provisions, such violation by itself does not prove that the customs broker neither advised compliance nor was ignorant of the violation. It is possible that the importer disregarded the broker's advice; such a possibility cannot be excluded in the absence of evidence.

2.14 As regards Regulation 10(e), the Tribunal observed that the provision addresses due diligence in ascertaining correctness of information imparted by the customs broker to its client. No material or finding demonstrated that the broker had supplied any incorrect information to the importer regarding clearance of cargo or any related matter.

2.15 The Tribunal further held that the impugned findings on Regulation 10(d) rested on statements recorded under section 108 of the Customs Act, 1962, which were not cited as relied-upon documents in the show cause notice for these proceedings. A document not relied upon in the show cause notice cannot be used to record adverse findings against the noticee.

Conclusions

2.16 The finding of violation of Regulation 10(d) was held to be unsustainable as there was no evidence that the customs broker failed to advise the importer to comply with law or knowingly failed to report any non-compliance to the proper officer.

2.17 The finding of violation of Regulation 10(e) was also held to be unsustainable, as there was no evidence that the customs broker imparted any incorrect information to the importer or failed in due diligence in relation to information provided to the client.

Issue 3 - Alleged violation of Regulation 10(n) CBLR, 2018

Legal framework

2.18 Regulation 10(n) mandates that a customs broker verify the antecedents, correctness of IEC number, GSTIN, identity of his client, and functioning of his client at the declared address by using reliable, independent, authentic documents, data or information.

2.19 The Tribunal considered and applied the ratio of a High Court decision interpreting analogous obligations of customs house agents under earlier regulations, holding that a customs broker is not an inspector of the genuineness of its client's business but a processing agent of documents and that the issuance of an IEC by the competent authority carries a presumption of due verification by that authority.

Interpretation and reasoning

2.20 The customs broker contended that: (i) it had obtained and verified KYC documents including IEC, GST registration, Aadhaar, PAN, shop and establishment registration, and electricity bill; (ii) the show cause notice did not allege that IEC or GST registration was forged; (iii) KYC documents had been handed over during investigation and were on record; and (iv) Regulation 10(n) does not mandate physical verification of the importer's premises.

2.21 The Commissioner held that: (a) Regulation 10(n) is a fundamental obligation; (b) the offence report indicated that the importer's declared premises, when searched, was occupied by another person and a garments shop; (c) statements under section 108 of the Customs Act from the importer and the customs broker's G-card holder showed that the IEC was lent to a third party and that the customs broker, "in greed of business", accepted documents from the freight forwarder and verified only IEC/GSTIN online; and (d) KYC documents produced later were not time-sensitive and did not demonstrate that they were obtained prior to or at the time of import. On this basis, the Commissioner concluded that the customs broker had not properly verified identity and functioning of the client as required by Regulation 10(n).

2.22 The Tribunal noted that it was undisputed that: (i) the customs broker had verified IEC, GSTIN and other KYC documents; (ii) such documents were issued by DGFT, GST and other competent authorities; and (iii) the broker had not physically visited the importer's premises.

2.23 Relying on the High Court's reasoning in an analogous context, the Tribunal held that: (a) a customs broker is not required to conduct a background or physical verification of every client whose IEC has been issued by the competent authority; (b) grant of IEC/GST registration presupposes that the issuing authority has undertaken necessary checks, and the customs broker is entitled to rely on such official documents; and (c) it would be unduly onerous to require the broker to investigate whether the IEC-holder genuinely functions at the stated address, particularly where statutory documents and online verifications show consistency.

2.24 The Tribunal observed that, even accepting that the importer misused the IEC or that the premises were subsequently found occupied by others, any error or lapse in issuance or monitoring of IEC/GST registration would be attributable to the issuing authorities and not to the customs broker who proceeded on the strength of official documents and online verifications.

2.25 To the extent the Commissioner relied on statements under section 108 to infer a violation of Regulation 10(n), the Tribunal found that these statements, though referred to in the impugned order, were not relied upon as part of the show cause notice for the present proceedings. Consequently, they could not lawfully be used to support adverse findings against the customs broker.

Conclusions

2.26 The Tribunal held that the customs broker had fulfilled its obligation under Regulation 10(n) by verifying IEC, GSTIN, identity and address through KYC documents and online checks, and that Regulation 10(n) does not impose a mandatory requirement of physical verification of the client's premises.

2.27 The finding that Regulation 10(n) was violated was therefore held to be legally untenable and contrary to the settled interpretation of the scope of a customs broker's KYC obligations.

Issue 4 - Use of materials not relied upon in the show cause notice

Interpretation and reasoning

2.28 The Tribunal examined that several adverse findings in the impugned order, including alleged violations under Regulations 10(a), 10(d) and 10(n), were based on statements recorded under section 108 of the Customs Act and on inferences from an offence report, without those statements being expressly cited as relied-upon documents in the show cause notice initiating revocation proceedings.

2.29 It was held that the noticee must be put on clear notice of all documents and evidentiary materials relied upon in the show cause notice, and any document not so relied upon cannot be used to record adverse findings or to sustain penal or regulatory action, as this would offend principles of natural justice.

2.30 On this basis, the Tribunal rejected reliance on such undisclosed statements and held that the Commissioner could not use them to establish violations of the regulations.

Conclusions

2.31 Findings of violation of Regulations 10(a), 10(d) and 10(n) based on statements and materials not relied upon in the show cause notice were held vitiated, and could not sustain revocation, forfeiture or penalty.

Overall consequence

2.32 Since the alleged violations of Regulations 10(a), 10(d), 10(e) and 10(n) of the Customs Brokers Licensing Regulations, 2018 were not legally or factually established, the orders revoking the customs broker's licence, forfeiting its security deposit and imposing penalty were set aside, and the appeal was allowed with consequential relief.

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