It is possible to upgrade a mercenary when it is stationed. I have tested with colonies, starbases and shipyards, and with all of them it works.
Support ticket: #AIY-378-53678
In this case, the upgrade is really a "down grade" so its probably not an "exploit"
But its definitely a bug. Thanks for the report.
Screenshots are up.
Thanks. We just fixed it internally and it will be available when we update the patch.
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