Customs Broker Not Liable for Employee’s Acts Without Mens Rea: CESTAT [Read Order]

The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal(CESTAT) ruled that a customs broker could not be penalised under the Customs Act for alleged fraudulent export activities carried out by its employees in the absence of evidence showing knowledge, intent, or involvement of the employer.

The appellant, M/s Sanco Trans Ltd., is a customs broker engaged in clearing export consignments at the Inland Container Depot, Salem. The Directorate of Revenue Intelligence (DRI) initiated investigations into several export transactions in which duty drawback was allegedly fraudulently claimed through fake exporters, inflated export values, and manipulated Bills of Lading.

It was alleged that certain exporters had misdeclared the port of discharge and had routed consignments to destinations different from those mentioned in shipping bills after obtaining the Let Export Order. The investigation further revealed that fictitious firms and third-party Import Export Codes were used to claim duty drawback and that the proceeds were encashed without actual realization of export proceeds.

The DRI alleged that employees of the appellant had facilitated the filing of shipping bills and documentation without proper verification, thereby enabling fraudulent claims of duty drawback. Show cause notices were issued proposing recovery of drawback amounts and imposition of penalties under Section 114 ofthe Customs Act, 1962.

The adjudicating authority confirmed the demand and imposed penalties, holding that the customs broker had failed to exercise due diligence in the discharge of its statutory obligations. Aggrieved by the orders, the appellant approached the CESTAT.

The appellant submitted, through Advocate T. Sundaranathan, that it had acted strictly in its capacity as a customs broker and had no knowledge of any fraudulent activity. He pointed out that the alleged manipulation of Bills of Lading and misuse of exporter credentials were acts carried out independently by third parties and not under the direction or authority of the appellant.

He highlighted that there was no evidence to show that it had derived any benefit from the alleged fraud or that it had abetted the exporters in availing wrongful drawback. Further argued that if certain employees were involved in irregularities, the same could not automatically result in penal liability for the company unless mens rea or conscious involvement was established.

Subsequently, submitted that the disciplinary proceedings, if any, could only be initiated under the Customs House Agents Licensing Regulations (CHALR) and not under the penal provisions of the Customs Act, 1962.

The Bench comprising Ajayan T.V., Judicial Member and M. Ajit Kumar, Technical Member, held that while the DRI was competent to initiate proceedings for recovery of drawback, penalty under Section 114 of the Customs Act could not be imposed unless it was shown that the Customs Broker had consciously abetted or participated in the fraudulent activity.

The Bench observed that mere failure to discharge obligations under the CHALR would not automatically attract penal consequences under the Customs Act. Additionally, emphasized that disciplinary violations and penal liability operate in different spheres and must be examined independently.

Further ruled that vicarious liability cannot be mechanically imposed on an employer for acts committed by employees unless it is established that such acts were committed with the knowledge, consent, or for the benefit of the employer. In the absence of any evidence showing deliberate involvement or mens rea on the appellant, the penalty could not be sustained.

Accordingly, the CESTAT set aside the penalties imposed on the appellant and allowed the appeals with consequential relief.

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