TaxTMI 
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TaxTMI 
Instruction No. 02/2026-Customs, issued under F. No. 605/04/2020-DBK by the Central Board of Indirect Taxes and Customs (hereinafter 'CBIC'), represents a significant administrative directive aimed at ensuring uniform compliance with binding judicial pronouncements concerning the admissibility of duty drawback on the export of unlocked mobile handsets by merchant exporters. The instruction, dated 19 March 2026, must be understood not as an independent source of substantive law, but as an executive clarification reinforcing the obligation of customs field formations to adhere strictly to the ratio decidendi laid down by constitutional courts, particularly the Delhi High Court and the Supreme Court of India. The issuance of this instruction is rooted in a protracted legal controversy regarding the interpretation of the duty drawback scheme under the Customs Act, 1962, read with the Customs and Central Excise Duties Drawback Rules, 2017, particularly in the context of goods exported 'as such' without any process of manufacture or value addition within India.
At the outset, it is necessary to contextualize the statutory framework governing duty drawback. Duty drawback is a fiscal incentive mechanism designed to neutralize the incidence of customs and excise duties on inputs used in the manufacture of exported goods. The underlying policy objective is to promote exports by ensuring that exported products remain competitive in international markets, free from the burden of domestic indirect taxes. The scheme is primarily governed by Section 75 of the Customs Act, 1962, which empowers the Central Government to grant drawback of duties paid on imported materials used in the manufacture or processing of goods that are subsequently exported. The Drawback Rules, 2017 further operationalize this provision by prescribing conditions, limitations, and procedural requirements for availing such benefits.
Historically, the interpretation of Section 75 and the Drawback Rules has given rise to disputes, particularly in scenarios where goods are imported and subsequently exported without undergoing any manufacturing or processing activity. The core issue in such cases revolves around whether the absence of value addition or transformation in India disentitles an exporter from claiming drawback. In the specific context of unlocked mobile handsets, the dispute acquired considerable prominence due to the high volume and value of such transactions, coupled with the emergence of merchant exporters engaged in arbitrage-driven trade models involving import and re-export.
Customs authorities, in several instances, adopted a restrictive interpretation of the drawback provisions, contending that the benefit was intended exclusively for goods that had undergone manufacture or processing within India. On this basis, claims for drawback filed by merchant exporters of unlocked mobile phones-who imported finished devices and exported them without alteration-were frequently denied. The rationale advanced by the department was that such transactions did not satisfy the essential condition of 'use of imported inputs in the manufacture of exported goods,' and that allowing drawback in such cases would result in undue enrichment and potential misuse of the scheme.
This administrative stance led to litigation, culminating in the filing of writ petitions before the Delhi High Court. In WP(C) No. 9461/2023 [M/s Aims Retail Services Private Limited, M/s Kanushi Enterprises, M/s Aims Migital Technovations Pvt. Ltd., M/s Osiya Overseas LLP, M/s Narayani Overseas LLP, M/s Ashi Creation Private Limited, M/s Iconnect India, M/s Avik Televentures Pvt. Ltd., M/s BTPL Distribution Pvt. Ltd., Ms New Excellent Televentures LLP, M/s Bora Exim Pvt Ltd, Versus Union Of India & Ors. - 2025 (2) TMI 596 - DELHI HIGH COURT], the High Court was called upon to adjudicate the legality of denying drawback to merchant exporters of unlocked mobile handsets exported in the same condition as imported. The petitioners contended that the denial was contrary to the plain language of the Drawback Rules, which, in certain circumstances, permit drawback even on goods exported 'as such,' subject to specified conditions. They further argued that the department's interpretation was ultra vires the statutory scheme and amounted to an impermissible narrowing of the scope of export incentives.
The High Court, after a detailed examination of the statutory provisions, the scheme of the Drawback Rules, and the underlying policy objectives, ruled in favour of the exporters. The Court held that the entitlement to drawback cannot be denied solely on the ground that the exported goods had not undergone manufacturing or processing in India, provided that the applicable rules and conditions permit such benefit. The Court emphasized that the expression 'manufacture or processing' cannot be construed in a manner that excludes all forms of export activity involving imported goods, particularly when the rules contemplate situations where goods are exported 'as such.' The judgment underscored that administrative authorities cannot impose additional conditions or restrictions that are not explicitly provided in the statute or the rules.
The High Court's decision was subsequently challenged by the revenue authorities before the Supreme Court of India by way of a Special Leave Petition (SLP Diary No. 30758/2025) [Union of India & Ors. Versus M/s. Aims Retail Services Private Limited - 2025 (7) TMI 1903 - SC Order]. The Supreme Court, however, declined to interfere with the judgment of the High Court and dismissed the SLP on 18 July 2025. A further attempt to seek review of the decision was also unsuccessful, as the review petition (Civil Diary No. 69677/2025) [UNION OF INDIA & ORS. Versus M/s AIMS RETAIL SERVICES PRIVATE LIMITED - 2026 (3) TMI 1096 - SC Order] was dismissed by the apex court. The dismissal of both the SLP and the review petition effectively rendered the High Court's judgment final and binding, thereby settling the legal position on the issue.
It is in this backdrop that Instruction No. 02/2026-Customs was issued by the CBIC. The instruction explicitly refers to the orders of the High Court and the Supreme Court and directs all field formations to comply with the said orders 'scrupulously.' The use of the term 'scrupulously' is indicative of the Board's intent to ensure strict and uniform adherence, leaving no scope for deviation or discretionary interpretation by field officers. The instruction is addressed to all Principal Chief Commissioners, Chief Commissioners, Principal Commissioners, Commissioners of Customs, and other senior officers under CBIC, thereby covering the entire administrative hierarchy responsible for the implementation of customs laws.
From a legal standpoint, the instruction serves multiple purposes. First, it reiterates the binding nature of judicial precedents under Article 141 of the Constitution of India, which mandates that the law declared by the Supreme Court shall be binding on all courts and authorities. Although the High Court's judgment, strictly speaking, is binding within its territorial jurisdiction, the affirmation of the judgment by the Supreme Court elevates its authority to a nationwide precedent. Consequently, all customs authorities across India are obligated to follow the legal position laid down therein.
Second, the instruction seeks to eliminate inconsistencies in the application of the law by different field formations. Prior to the issuance of the instruction, there may have been instances where certain officers continued to deny drawback claims despite the judicial pronouncements, either due to lack of clarity or reluctance to depart from earlier departmental practices. By issuing a formal directive, the CBIC has sought to harmonize the approach of all field formations and prevent unnecessary litigation arising from non-compliance.
Third, the instruction reflects the principle of administrative discipline, which requires subordinate authorities to act in conformity with the decisions of higher judicial forums. The Supreme Court has, in numerous cases, emphasized that failure to follow binding precedents constitutes judicial indiscipline and undermines the rule of law. The instruction thus reinforces the obligation of customs officers to act within the bounds of legality and to respect the hierarchy of legal authority.
The impact of this instruction on exporters of unlocked mobile handsets, particularly merchant exporters, is both significant and multifaceted. At a fundamental level, the instruction provides legal certainty and clarity regarding the eligibility of such exporters to claim duty drawback. The ambiguity that previously existed due to conflicting interpretations and inconsistent practices has been effectively resolved, enabling exporters to plan their transactions with greater confidence. This certainty is crucial in the context of international trade, where predictability of fiscal incentives plays a key role in pricing, competitiveness, and contractual arrangements.
From a financial perspective, the availability of duty drawback translates into improved liquidity and cash flow for exporters. Since drawback represents a refund of duties paid on imported goods, it reduces the overall cost of procurement and enhances the profitability of export transactions. For merchant exporters operating on thin margins, particularly in high-volume sectors such as mobile phones, the timely receipt of drawback can have a substantial impact on working capital management and business sustainability.
The instruction also has broader implications for the structure and dynamics of the export ecosystem. By affirming the eligibility of merchant exporters to claim drawback on goods exported 'as such,' it effectively legitimizes and promotes re-export trade models. Such models involve the import of goods from one jurisdiction and their subsequent export to another, often leveraging differences in pricing, demand, or regulatory regimes. India, with its strategic location and established trade infrastructure, stands to benefit from the growth of such activities, which can contribute to increased trade volumes, foreign exchange earnings, and employment generation in logistics and allied sectors.
However, it is important to note that the instruction does not dispense with the requirement of compliance with the applicable statutory and procedural conditions. Exporters must still ensure that their claims for drawback are supported by proper documentation, including bills of entry, shipping bills, invoices, and proof of payment of duties. They must also adhere to the prescribed procedures for filing claims, including the correct declaration of drawback rates and compliance with any conditions specified in the Drawback Schedule or through notifications issued by the government. Failure to comply with these requirements may still result in denial of claims or initiation of recovery proceedings.
Furthermore, given the high value and sensitivity of mobile phone exports, customs authorities are likely to continue exercising vigilance to prevent misuse of the drawback scheme. This may include verification of the declared value of goods, scrutiny of trade patterns, and investigation of any suspicious transactions that may indicate fraud or circular trading. The instruction does not curtail the powers of the department to conduct such investigation or to take action in cases of genuine violations; it merely prohibits the denial of drawback on grounds that are inconsistent with the legal position established by the courts.
In a broader jurisprudential sense, the episode underscores the importance of judicial oversight in ensuring that administrative authorities act within the confines of the law. The intervention of the High Court and the subsequent affirmation by the Supreme Court serve as a reminder that executive interpretations of fiscal statutes are subject to scrutiny and must align with the legislative intent. The issuance of the CBIC instruction, in turn, demonstrates the role of the executive in implementing and operationalizing judicial decisions, thereby completing the cycle of legal enforcement.
In conclusion, Instruction No. 02/2026-Customs represents a crucial administrative measure aimed at enforcing the binding judicial determination that merchant exporters of unlocked mobile handsets are entitled to claim duty drawback, even in the absence of manufacturing or processing in India, subject to compliance with the applicable rules. It reflects the interplay between statutory interpretation, judicial adjudication, and administrative implementation, and has far-reaching implications for the export sector, particularly in terms of legal certainty, financial viability, and trade facilitation. The instruction not only resolves a specific dispute but also reinforces foundational principles of administrative law, including adherence to precedent, uniformity in application, and respect for the rule of law.