Mobile phone unlocking before export doesn't constitute "taken into use" under duty drawback rules, exporters entitled to benefits

Delhi HC ruled that unlocking mobile phones before export does not constitute "taken into use" under duty drawback rules, allowing exporters to claim duty drawback benefits. The court held that unlocking is merely configuration to make phones usable in foreign jurisdictions, not actual use. CBIC clarifications restricting duty drawback for unlocked phones were quashed as unsustainable and beyond statutory provisions. The court emphasized that mobile phones have multiple uses and mere unlocking cannot deprive exporters of rightful duty drawback claims under prevailing legal framework.

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The core legal question considered in these petitions is whether the unlocking or activation of mobile phones prior to export disqualifies exporters from claiming duty drawback benefits under the Customs Act, 1962 and the Duty Drawback Rules. Specifically, the Court examined whether unlocking constitutes "taken into use" of the goods, thereby rendering them ineligible for duty drawback.

Another related issue is the validity and interpretation of the clarifications issued by the Department of Revenue (CBIC) dated 25th September, 2020 and 14th December, 2021, which denied duty drawback benefits on unlocked mobile phones by treating unlocking as "taken into use."

Additionally, the Court considered the implications of prior judgments on similar facts and the proper procedural course for processing duty drawback claims in light of the findings.

Issue-wise Detailed Analysis:

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

The relevant legal framework includes Section 75 of the Customs Act, 1962, and Rule 3 of the Duty Drawback Rules, which govern eligibility for drawback benefits. The proviso to Rule 3 excludes goods that have been "taken into use" from drawback claims.

Precedents analyzed include a batch of cases culminating in the lead judgment in M/s AIMS Retail Services Private Limited v. Union of India & Ors., where the Court undertook a detailed examination of the nature of unlocking/activation vis-`a-vis "use." The Court noted that prior decisions denying drawback benefits involved cases where the product was utilized in a manner that diminished its value, such as for demonstration or research, without adding value.

The Court reasoned that unlocking or activating a mobile phone does not diminish its value or utilize its features beyond what is necessary to enable its use in the destination country. The process involves minimal steps such as switching on, inserting a SIM card, or making a brief call, or even "air-activation" without unboxing. This is essentially a configuration step to enable the phone's use in a foreign territory, aligning with the product's intended purpose of facilitating communication.

The Court emphasized that if the phone remained locked, it would be ineffective or prohibitively expensive to use abroad due to international call charges and restricted app functionality. Unlocking thus adds value by enabling unrestricted use without constituting "use" in the sense contemplated by the law.

It was observed that the telecommunications industry's standardization allows phones manufactured in one country to be used seamlessly in others. Denying drawback benefits on the basis of unlocking would penalize exporters and manufacturers, contrary to the policy of encouraging exports.

The Court concluded that unlocking/activation is mere "configuration" and does not amount to "taken into use" under the proviso to Rule 3. Therefore, the clarifications by CBIC treating unlocking as "taken into use" were held to be beyond the statutory provisions and unsustainable.

2. Validity of the CBIC clarifications dated 25th September, 2020 and 14th December, 2021:

The clarifications effectively denied duty drawback benefits on unlocked mobile phones, interpreting unlocking as "taken into use." The Court found these clarifications to be ultra vires and inconsistent with the statutory scheme and judicial precedents.

The clarifications were quashed on the ground that they went beyond the scope of Section 75 and the Duty Drawback Rules, imposing a restrictive interpretation detrimental to exporters.

3. Treatment of Show Cause Notices and Orders-in-Original issued based on the clarifications:

The impugned Show Cause Notices dated 16th and 19th June, 2023, and the Orders-in-Original relying on the clarifications were quashed. However, the Court did not decide the merits of each individual case regarding duty drawback eligibility but directed that claims be processed afresh in accordance with law.

4. Procedural directions regarding processing of drawback claims and interest:

The Court directed the Customs Department to process and grant duty drawback claims within three months. If processed timely, no interest under Section 75A of the Act would be payable. If delayed beyond three months, statutory interest would be payable on eligible drawback amounts.

The Court acknowledged the prior ambiguity in the legal position concerning unlocked phones and accordingly exempted the Department from paying interest for the past period.

5. Impact of pending Special Leave Petition challenging the lead judgment:

The Court noted that the Department has challenged the lead judgment by way of a Special Leave Petition and ordered that the present order be subject to the outcome of the SLP.

6. Consistency with other judgments on similar facts:

The Court referred to a recent decision in M/s IConnect India v. Union of India & Others, which followed the same reasoning as the lead judgment, reinforcing that unlocking does not amount to "taken into use" and that duty drawback claims on unlocked phones should be allowed.

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. Accordingly, the Clarifications issued by the CBIC are quashed."

"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 impugned Show Cause Notices dated 16th June, 2023 and 19th June, 2023 are set aside. The Petitioners' case for drawbacks shall be processed by the Customs Department in accordance with law."

These principles establish that unlocking mobile phones before export does not amount to "use" that disqualifies duty drawback claims, and that administrative clarifications contrary to this interpretation are invalid. The Court has reinforced the pro-export policy embedded in the Customs Act and Duty Drawback Rules by interpreting the provisions in favor of exporters where ambiguity exists.

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