why handled exception not thrown back to client?

I have a listener listening for soap request:

<flow name="application-main">

<http:listener config-ref="storis-httpListenerConfig"

path="${application.path}">

<http:response

statusCode="#vars.httpStatus default 200">

<http:body>#payload</http:body>

<http:headers>#attributes.protocolHeaders default {}</http:headers>

</http:response>

<http:error-response

statusCode="#vars.httpStatus default 500">

<http:body>#payload</http:body>

<http:headers>#attributes.protocolHeaders default {}</http:headers>

</http:error-response>

</http:listener>

<apikit-soap:router

config-ref="application-soapkit-config">

<apikit-soap:message>#payload</apikit-soap:message>

<apikit-soap:attributes>#[

%dw 2.0

output application/java

---

{

headers: attributes.headers,

method: attributes.method,

queryString: attributes.queryString

}]

</apikit-soap:attributes>

</apikit-soap:router>

</flow>

I have a validation check in the main flow, like following

<validation:is-null

message="UUID cannot be null or empty string"

value="#vars.application.UUID" doc:name="Validation" />

Then I have error handler handling the validation error:

<on-error-propagate enableNotifications="true"

logException="true" type="VALIDATION:NOT_NULL">

<ee:transform

xmlns:ee="http://www.mulesoft.org/schema/mule/ee/core"

xsi:schemaLocation="

http://www.mulesoft.org/schema/mule/http http://www.mulesoft.org/schema/mule/http/current/mule-http.xsd http://www.mulesoft.org/schema/mule/ee/core http://www.mulesoft.org/schema/mule/ee/core/current/mule-ee.xsd"

doc:id="cdafca59-789a-4ed5-873b-f593dedf12c5"

doc:name="Validation Error">

<ee:message>

<ee:set-payload><![CDATA[%dw 2.0

output application/java

ns soap http://schemas.xmlsoap.org/soap/envelope

---

{

  body: {

    soap#Fault: {

      faultcode: "soap:Server",

      faultstring: "VALIDATION FAILED"

    }

  } write "application/xml"

}]]></ee:set-payload>

</ee:message>

<ee:variables>

<ee:set-variable variableName="httpStatus"><![CDATA[400

]]></ee:set-variable>

</ee:variables>

</ee:transform>

<logger level="INFO" doc:name="Logger" doc:id="1f617926-b084-4cd6-86b5-cf8864219963" message="After Validation error handling: #payload"/>

</on-error-propagate>

I saw the error handling payload but it is not thrown to the client, the response client got is still the request. Can't figure out why the error payload is not returning back to the calling client.