High Court Clarifies: Customs Brokers Not Required to Physically Verify Clients

The Hon'ble High Court of Delhi in Aradhya Export Import Consultants Pvt. Ltd. v. Commissioner of Customs (Airport and General), New Delhi (CUSAA 81/2023, decided on July 22, 2024) held that suspension cannot be treated as a penalty under Customs Brokers Licensing Regulations, 2018 (CBLR 2018), and a Customs Broker is not in violation of Regulation 10(n) if they have relied on reliable, independent, and authentic documents like IEC and GSTIN to verify a client's identity without necessitating physical verification of the exporter's veracity.

Facts of the Case

The Appellant, Aradhya Export Import Consultants Pvt. Ltd., was a Customs Broker (CB) that was granted a license on April 12, 2017, by the Commissioner of Customs, New Delhi. The Appellant also held a separate CB License issued by the Mumbai Commissionerate.

The Respondent, Commissioner of Customs (Airport and General), on the basis of information received, sought to investigate transactions undertaken by M/s Fine Overseas, against whom it was alleged that they had fraudulently availed of Integrated Goods and Services Tax (IGST) refund as well as drawback benefits.

On the basis of inquiry and investigation, the Principal Commissioner of Customs issued an order on September 7, 2020, directing the withdrawal of permission granted to the Appellant under Regulation 7(3) of Customs Brokers Licensing Regulations, 2018 (CBLR 2018). The Respondent alleged that the Appellant was liable for infractions under Regulations 10(e) and 10(n) of CBLR 2018.

Pursuant to this, the Commissioner of Customs passed an order on September 15, 2020, suspending the CB License held by the Appellant. After a post-decisional hearing afforded to the Appellant, a final order was passed on October 5, 2020, revoking the suspension that had been in effect.

Aggrieved by this revocation, the Respondent approached the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) by way of an appeal. The CESTAT allowed the appeal, holding that the Appellant had facilitated fraudulent exports and that suspension of the license was a "proportionate penalty." The CESTAT found that no violation of Regulation 10(e) had been made out, but concluded that the Appellant was guilty of violating Regulation 10(n).

The Appellant then approached the Delhi High Court, challenging the CESTAT's order.

Issue

1. Whether suspension can be treated as a penalty under the Customs Brokers Licensing Regulations, 2018 (CBLR 2018)?

2. Whether a Customs Broker is in violation of Regulation 10(n) of CBLR 2018 if they have relied on "reliable, independent, authentic documents, data or information" such as IEC and GSTIN for verification of their client's identity without conducting physical verification?

   
   

Held by the Court

The Hon'ble High Court of Delhi in CUSAA 81/2023 held that:

1. The Court observed that the CESTAT had committed a patent illegality in construing suspension to be a penalty under the CBLR 2018. The Court noted that suspension is a measure which can be adopted by the Respondents in situations where they are of the opinion that immediate action is required against a CB pending investigation and inquiry, as contemplated under Regulation 16.

   
   

2. The Court pointed out that the penalties contemplated under the CBLR 2018 are enumerated in Regulation 18, which provides for monetary penalties of up to fifty thousand rupees for a Customs Broker or F card holder, and up to ten thousand rupees for a G card holder.

   
   

3. The Court held that the CESTAT had, in effect, handed down an order as a result of which an order of suspension would continue in perpetuity, which was unsustainable.

   
   

4. Regarding the alleged violation of Regulation 10(n), the Court examined the statement of Shri Zoheb Moin, the authorized representative and manager of M/s Fine Overseas, which had been recorded on April 4, 2019, under Section 108 of the Customs Act, 1902.

   
   

5. The Court noted that a reading of this statement revealed that Shri Zoheb Moin had duly placed on record the official address, rent agreement, Importer Exporter Code (IEC), Goods and Services Tax Identification Number (GSTIN), and the annual turnover for Financial Year 2017-18 of M/s Fine Overseas, as well as details pertaining to its business activities.

   
   

6. The Court interpreted Regulation 10(n) to mean that a CB would not be in violation of its obligations if it has relied on "reliable, independent, authentic documents, data or information" such as the IEC and GSTIN, which are issued by the Director General of Foreign Trade and GST Officers respectively.

   
   

7. The Court emphasized that Regulation 10(n) does not necessitate a physical verification of the veracity of the exporter. Therefore, the Court found merit in the Appellant's contention that the CESTAT committed a manifest illegality in holding that the Appellant was guilty of failing to discharge its obligation under Regulation 10(n) of CBLR 2018.

   
   

8. The Court concluded that the judgment handed down by the CESTAT was patently erroneous and could not be sustained. Accordingly, the appeal was allowed, and the CESTAT's order dated October 3, 2023, was set aside.

Relevant Sections

"Regulation 10(n) of the Customs Brokers Licensing Regulations, 2018" - "Verify correctness of Importer Exporter Code (IEC) number, Goods and Services Tax Identification Number (GSTIN), identity of his client and functioning of his client at the declared address by using reliable, independent, authentic documents, data or information."

"Regulation 16 of the Customs Brokers Licensing Regulations, 2018" - Pertains to the Commissioner's power to suspend the operations of a Customs Broker pending investigation or inquiry.

"Regulation 18 of the Customs Brokers Licensing Regulations, 2018" - Specifies the monetary penalties that may be imposed on a Customs Broker, F card holder, or G card holder for contravention of the regulations.

Pari Materia / Cases Referred

1. M/s Swastic Cargo Agency Limited vs. Commissioner of Custom [2023 (2) TM 677 (Tribunal-Delhi)] - Referred to by the CESTAT in its order. The case held that a Customs Broker is rightly held to have failed to verify the correctness of documents where the exporters were non-existent, thereby violating their obligations. This precedent was distinguished by the High Court which clarified that Regulation 10(n) does not require physical verification.

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