Hi, We were able to fix the problem.
We registred the assembbly in Sandbox mode, so while adding custom activity to the workflow it is giving error. Instead regsiter the assembly in 'None' mode. Please note that you should have 'Deployment Manager' access to register in 'None' mode.
If you are using VS solution to register the assembly, you cant deploy a workflow in 'None' mode, instead use plugin registration tool.
Hope this helps.