Drawback SCN quashed for delayed demand; Rule 17 and Section 75(1) applied to mobile phone exports

CESTAT Mumbai allowed the appeal, setting aside the order of the Commissioner of Customs (Export), Air Cargo Complex, Mumbai, and quashing the show cause notice issued for recovery of drawback under Rule 17 of the Customs and Central Excise Drawback Rules, 2017 read with Section 75(1) of the Customs Act. Relying on the Delhi HC decision in AIMS Retail Services and the binding CBIC Circular clarifying that activation/unlocking of mobile phones in India prior to export does not amount to "taken into use," the Tribunal rejected the Department's stand. The show cause notice was also held invalid due to unreasonable delay of over four years without justification.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether export of mobile phones that were unlocked/activated in India prior to export amounted to export of goods "taken into use" so as to disentitle the exporter from drawback under the proviso to Rule 3(1) of the Customs and Central Excise Duties Drawback Rules, 2017 read with Section 75 of the Customs Act, 1962.

1.2 Whether the CBIC clarification dated 25.09.2020, treating unlocking/activation of mobile phones prior to export as "taken into use" for purposes of drawback, was legally sustainable and binding, in light of the judgment of the High Court (affirmed by dismissal of SLP by the Supreme Court).

1.3 Whether initiation of recovery proceedings and issuance of show-cause notice for recovery of drawback after more than four years, in the absence of a prescribed statutory limitation in Rule 17 of the Drawback Rules or Section 75 of the Customs Act, was vitiated on account of unreasonable and unexplained delay.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Nature of activation/unlocking and effect of CBIC clarification on drawback eligibility

Legal framework (as discussed)

2.1 The Tribunal examined the proviso to Rule 3(1) of the Customs and Central Excise Duties Drawback Rules, 2017, which denies drawback in respect of goods which have been "taken into use" after manufacture. The Tribunal also considered Section 75 of the Customs Act, 1962, and the CBIC clarification dated 25.09.2020 which interpreted unlocking/activation of mobile phones prior to export as amounting to goods having been "taken into use", thereby denying drawback.

2.2 The Tribunal relied upon the judgment of the High Court in AIMS Retail Services Pvt. Ltd. & Others, wherein the High Court had examined both: (i) whether activation/unlocking of mobile phones prior to export constituted "taken into use" under the proviso to Rule 3, and (ii) the legal validity of the CBIC clarification treating such activation/unlocking as "taken into use". The said judgment had been affirmed by the Supreme Court by dismissal of the department's SLP with the observation that there was no good reason to interfere with the High Court's order.

Interpretation and reasoning

2.3 The Tribunal noted that the High Court categorically held that unlocking/activating mobile phones as per the procedures adopted by the exporters is mere "configuration" of the product to make it usable and does not constitute "taken into use" under the proviso to Rule 3 of the Drawback Rules.

2.4 The Tribunal further observed that the High Court held the CBIC clarifications to be beyond Section 75 of the Act and the Drawback Rules because they incorrectly interpreted unlocking/activation as "taken into use", and on that ground quashed the clarifications.

2.5 In light of the Supreme Court's refusal to interfere with the High Court's view, the Tribunal treated the legal position as settled and binding: activation/unlocking of mobile phones for enabling their use in a particular geographical territory outside India is merely a configuration process and not "taking into use" for the purpose of the proviso to Rule 3(1).

2.6 The Tribunal therefore held that the department's reliance on the CBIC clarification dated 25.09.2020 to deny drawback and to order recovery, interest and penalties was unsustainable, as that clarification had already been quashed and could not form the legal basis for the impugned order.

Conclusions

2.7 Export of mobile phones which had been unlocked/activated in India prior to export does not amount to export of goods "taken into use" within the meaning of the proviso to Rule 3(1) of the Drawback Rules.

2.8 The CBIC clarification dated 25.09.2020 treating such unlocking/activation as "taken into use" is invalid and non-est in law in view of its quashing by the High Court and affirmation by the Supreme Court.

2.9 The appellant is eligible to receive and retain drawback on the disputed exports made between May 2019 and December 2019, along with consequential benefits, and the order confirming denial and recovery of drawback, interest and penalties on this ground is liable to be set aside.

Issue 3: Validity of recovery proceedings and show-cause notice in view of inordinate delay

Legal framework (as discussed)

3.1 The Tribunal considered Rule 17 of the Drawback Rules and Section 75 of the Customs Act, 1962, noting the department's contention that these provisions do not prescribe any specific period of limitation for issuance of show-cause notice for recovery of drawback.

Interpretation and reasoning

3.2 The Tribunal noted that investigation relating to the relevant shipping bills was initiated in respect of exports covered by shipping bill dated 27.12.2019, and that the CBIC's clarificatory circular was issued on 25.09.2020.

3.3 Despite these facts, the show-cause notice was issued only on 26.03.2024, i.e., after more than four years from the export date and long after issuance of the CBIC clarification. The Tribunal found no proper justification offered by the department for this delay.

3.4 The Tribunal held that even where no specific statutory period of limitation is prescribed, initiation of proceedings after an unreasonable and unexplained delay is not permissible and renders the show-cause notice vulnerable to challenge.

Conclusions

3.5 The issuance of show-cause notice dated 26.03.2024 after more than four years, without any proper justification, is vitiated by unreasonable delay.

3.6 On this ground also, independent of the invalidity of the CBIC clarification, the show-cause notice and the consequent impugned order are liable to be quashed.

Overall disposition

4.1 The Tribunal set aside the impugned order denying drawback and ordering recovery of drawback, interest and penalties, and allowed the appeal with consequential relief to the appellant.

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