2025 (6) TMI 376 - HC - Customs

Entitlement to duty drawback - whether unlocking of mobile phones would result in withdrawal of duty drawback benefits to the Petitioner? - HELD THAT - This issue is no longer res integra and has been decided in a batch of cases with the lead petition being M/s AIMS Retail Services Private Limited v. Union of India Ors. 2025 (2) TMI 596 - DELHI HIGH COURT the Court has held that 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. The Court has held that duty drawback may be claimed in respect of unlocked mobile phones being exported as the mere act of unlocking does not constitute the phones being taken into use within the meaning of the applicable provisions. Given that a mobile phone is capable of being utilized in several ways the mere unlocking thereof cannot be deemed as the Petitioners having taken it into use. Furthermore this Court has observed that with the expansion of mobile phone manufacturing and assembly in India the volume of exports is expected to increase. The mere fact that the said products are configured for use in foreign jurisdictions cannot operate as a ground to deprive the Petitioners of their rightful claim to duty drawback under the prevailing legal framework. The present case also pertains to the Respondents rejection of the Petitioner s request for duty drawback on unlocked mobile phones being exported. The impugned Order-in-Original dated 26th June 2023 is set aside - Appeal allowed.

Summary

The core legal question considered by the Court was whether the unlocking or activation of mobile phones after their manufacture results in the withdrawal of duty drawback benefits to exporters under the relevant customs and duty drawback laws. Specifically, the issue was whether such unlocking/activation constitutes the mobile phones being "taken into use" within the meaning of the proviso to Rule 3 of the Duty Drawback Rules and Section 75 of the Customs Act, thereby disqualifying exporters from claiming duty drawback benefits.

The Court also examined the validity of clarifications issued by the Central Board of Indirect Taxes and Customs (CBIC), which had taken the position that unlocking or activation of mobile phones amounts to "taken into use," thus denying drawback benefits. The Court considered whether these clarifications were consistent with the statutory provisions and judicial precedents.

Additionally, the Court addressed procedural aspects regarding the processing of duty drawback claims and the entitlement to interest under Section 75A of the Customs Act in cases where claims were delayed due to legal ambiguity.

Issue-wise Detailed Analysis

1. Whether unlocking/activation of mobile phones constitutes "taken into use" under the Duty Drawback Rules and Customs Act, thereby disqualifying exporters from claiming duty drawback benefits.

The Court relied heavily on the precedent set in the batch of cases led by M/s AIMS Retail Services Private Limited v. Union of India & Ors., where a detailed analysis was undertaken. The legal framework involved Section 75 of the Customs Act and Rule 3 of the Duty Drawback Rules, which provide that duty drawback is not payable if the goods have been "taken into use" before export.

The Court interpreted "taken into use" in the context of prior decisions where products utilized for demonstration, research, or exhibition-activities that diminish the product's value-were held to be disqualified from drawback. However, the unlocking or activation of mobile phones was distinguished from such uses. Unlocking was characterized as a mere configuration step that enables the phone to be used in the destination country's network, without utilizing or consuming any of the phone's features that would diminish its value.

Key findings included that unlocking involves minimal use, such as switching on the phone, inserting a SIM card, and making a brief call, or in some cases, "air-activation" without unboxing. The Court emphasized that unlocking enhances the product's usability and value by enabling seamless operation in foreign jurisdictions, rather than diminishing it. It noted that if phones were exported locked, consumers abroad would face high costs or functional limitations, making the product ineffective and expensive.

The Court reasoned that the process of unlocking is akin to configuring the phone to the destination country's network standards, which is necessary for the intended use of the product. It rejected the CBIC's interpretation that unlocking constitutes "taken into use," holding that such a view is not sustainable and goes beyond the statutory provisions.

Competing arguments from the CBIC and Customs authorities, which relied on the clarifications issued in 2020 and 2021 to deny drawback benefits, were found to be inconsistent with the law and judicial precedents. The Court quashed these clarifications and the impugned orders based thereon.

2. Validity of CBIC Clarifications dated 25th September, 2020 and 14th December, 2021

The CBIC had issued clarifications that effectively denied drawback benefits on exported mobile phones that were unlocked or activated, interpreting unlocking as "taken into use." The Court held that these clarifications exceeded the scope of Section 75 and the Duty Drawback Rules. They improperly imposed an interpretation that was not supported by the statutory language or judicial precedent.

The Court quashed these clarifications, emphasizing that in cases of ambiguity regarding benefits to exporters, the interpretation should favor the exporters. The clarifications were held to be ultra vires and contrary to the legislative intent behind duty drawback provisions.

3. Procedural directions regarding processing of duty drawback claims and payment of interest

The Court directed that all individual cases be processed by the Customs Department in accordance with law, consistent with the legal principles established. It clarified that if drawback claims are processed and granted within three months from the date of the order, no interest under Section 75A of the Customs Act would be payable. However, if the processing exceeds three months, the Customs Department would be liable to pay statutory interest on eligible drawback amounts.

The Court also noted that interest was not payable for the prior period due to the existence of legal ambiguity on the issue of unlocking and drawback eligibility.

4. Impact of the judgment on the mobile phone manufacturing and export industry

The Court observed that with the growth of mobile phone manufacturing and assembly in India, exports are expected to increase significantly. It recognized that the ability to configure phones for use in foreign jurisdictions is essential to maintaining the competitiveness and functionality of exported products. Denying drawback benefits on the basis of unlocking would be detrimental to exporters and contrary to the policy objectives of promoting exports.

Significant Holdings

"The unlocking/activating of the mobile phones as per the procedures adopted by the Petitioners herein 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 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."

"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."

"If the drawbacks are processed and granted to the respective Petitioners for the relevant period as per law, within a period of three months, no interest would be liable to be paid under Section 75A of the Act. If, however, the same is not effected within a period of three months, upon the expiry of three months interest would be liable to be paid by the Customs Department on the eligible duty drawbacks to the respective Petitioner in accordance with law."

Final determinations included setting aside the impugned orders denying drawback benefits on unlocked mobile phones, quashing the CBIC clarifications, and directing the Customs Department to process drawback claims in accordance with law. The Court emphasized that unlocking does not amount to "taken into use" and that exporters are entitled to duty drawback benefits on such products.