Delhi HC: Mobile phone unlocking is mere 'configuration' for export, Not 'taken into use' under Duty Drawback Rules| SCC Times

Delhi High Court: A petition was filed under Article 226 considering whether the act of unlocking mobile phones after they are manufactured would disentitle the petitioners from claiming duty drawback on export of the said mobile phones under Section 75 of the Customs Act, 1962 read with Customs and Central Excise Duties Drawback Rules, 2017. Prathiba M Singh, J., quashed the impugned show cause notices and CBIC clarifications and held that the unlocking/activating of the mobile phones as per the procedures adopted by the petitioners is mere ‘configuration’ of the product to make it usable and does not constitute “taken into use” under proviso to Rule 3 of the Duty Drawback Rules.

The Court further held that “The Clarifications go beyond Section 75 of the Act and the Duty Drawback Rules since the interpretation sought to be given by CBIC is that unlocking/activation of mobile phones constitutes “taken into use”. The said interpretation which is contained in the Clarifications is not sustainable.”

The petitioners, members of the Mobile and Electronics Indian Merchants Exporters Association (MEIMEA), are exporters of mobile phones procured from original equipment manufacturers (OEMs) or distributors. Some of these mobile phones are ‘locked’ for use in a specific geographical region, such as India. Before export, the petitioners unlock or activate these devices using methods like inserting a SIM card or through “over-the-air” (OTA) activation. The petitioners claimed duty drawbacks on the export of these unlocked/activated mobile phones, but the Customs Department rejected these claims, citing Clause (i) of the second proviso to Rule 3 of the Duty Drawback Rules, which disallows duty drawbacks on goods that have been “taken into use.” The department only allowed drawbacks for devices exported without unlocking or activation.

The MEIMEA initially sought clarification from the Central Board of Indirect Taxes & Customs (CBIC) regarding duty drawbacks on such phones. The CBIC, through clarifications issued on 25-09-2020 and 14-09-2021, maintained that unlocking/activation constitutes post-manufacturing use, making the devices ineligible for duty drawbacks. MEIMEA challenged this clarification in a petition before the High Court but later withdrew it, opting to file fresh petitions for individual grievances. Despite multiple representations to the Customs Department, the petitioners did not receive a response. Subsequently, the department issued Show Cause Notices (SCNs) and later passed Orders-in-Original rejecting the petitioners’ duty drawback claims, relying on CBIC’s clarifications.

Aggrieved by the rejection of their claims and the reliance on CBIC’s clarifications, the petitioners have filed the present writ petitions challenging the SCNs and Orders-in-Original. They also contest the validity of Rule 17 of the Duty Drawback Rules, arguing that it violates Article 14. The petitioners assert that unlocking/activation does not constitute “use” in the sense intended by the drawback rules and that CBIC’s clarifications arbitrarily deny them legitimate export incentives. The petitions seek relief in the form of quashing the SCNs and orders, as well as a declaration that duty drawbacks should be granted on exported mobile phones, irrespective of unlocking/activation.

On the aspect whether the unlocking/ activation of the mobile phone, through insertion of sim card or through ‘air-activation’ or any other process, constitutes ‘taken into use’ in terms of the proviso to Rule 3 of Duty Drawback Rules, the Court noted that the mere possible range of usage of a mobile phone would show that the scope of such “use” is vast and undefinable. The expression “taken into use” must be interpreted in this context. The second dimension is that the phrase “taken into use” would be capable of varying interpretations depending on the product in question. The said phrase cannot be understood to have identical/universal meaning for all products. The phrase “taken into use” is, thus, a dynamic concept and its meaning would depend upon the nature of use and could vary from product to product and industry to industry.

Placing reliance on Director of Entry Tax v. Mahindra and Mahindra, (2003) 11 SCC 749, the Court observed that the argument by Customs Department that irrespective of the purpose for which the petitioners have operated the exported mobile phones, the moment the said mobile phones have been switched on and any function thereto has been utilised, the same would constitute ‘use’ under the proviso to Rule 3(1) of the Duty Drawback Rules as it is settled law that interpretation by the Courts of words and expressions under one statute cannot be relied upon as a guide for interpreting words and expressions in another statute unless both the statutes are pari materia legislations or it is expressly provided for in the statute under consideration.

The Court noted that the product-in-question has been utilized either for demonstration, research, exhibition, etc., in a manner so as to diminish its value. The same had utilized the capabilities of the product and did not add any additional feature or value to the product. Thus, in the facts of the present case, the unlocking/activation of a mobile phone makes the product more accessible and more useful considering the purpose for which it has been manufactured i.e., facilitation of communication and optimum utilization of all the features of a mobile phone. The Court remarked “it would be pragmatic to assume that for a consumer the process of unlocking/activation of mobile phones would result in value addition over a locked/non-activated mobile phone. Thereby, allowing the unrestricted use of the said mobile phones. The process of unlocking/activation of the mobile phones, by any method, would not result in depreciation in the value of the said phones.” Thus, before exporting a product, unlocking/activating the phone to enable it to be used in the destination country would in the opinion of this Court be mere Configuration of the phone for the concerned territory and nothing more.

The Court concluded that the development of standards in the field of telecommunication which enables usage of mobile phones across countries may be rendered ineffective if such configuration is held to the detriment of the OEM or the traders/exporters. With the growth of mobile phone manufacturing/ assembling in India more and more exports would take place and the mere fact that the said products are configured for use in foreign countries cannot deprive the Petitioners from duty drawbacks under the prevalent law discussed hereinabove. Drawbacks are benefits which are given to exporters and in the case of any ambiguity such benefits should go in favour of the exporters and not the other way round. The unlocking/activation of the mobile phone merely makes the mobile phone more usable in the destination country and the same would therefore not constitute “taken into use” under proviso to Rule 3 of Duty Drawback Rules.

Thus, the Court quashed the impugned SCNs and the orders-in-original passed by the respondents, relying on the clarifications given by CBIC.

[Aims Retail Services Private Limited v. UOI, 2025 SCC OnLine Del 861, decided on 13-02-2025]

Advocates who appeared in this case:

Petition No. W.P.(C) 9461/2023 and CM APPL. 36114/2023