2025 (2) TMI 596 - HC - Customs

Disentitlement 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 - unlocking mobile phones after they are manufactured - case of Revenue is that the process of unlocking/activating the said mobile phones would be hit by the proviso to Rule 3(1) of Duty Drawback Rules - HELD THAT - The interpretation of the expression taken into use in the proviso to Rule 3 of Duty Drawback Rules is the core of the contest in the present petitions. Accordingly whether the process of unlocking/activation of the mobile phones as employed by the Petitioners constitutes taken into use would be the question determinable. The purpose of duty drawbacks is to ensure that the customs duty paid by the importers or excise/GST paid by local manufacturers on a particular good is not loaded on to the said good/product when exported making such products uncompetitive in the international market. The burden of these duties/taxes collected by the Government are eased in respect of the exporters so that adequate relief is provided to them to compete in international markets with foreign exporters. In addition easing of the said burden allows encouragement for exports which enables earning of foreign exchange for the country. The process of unlocking/activating the mobile phones has also evolved from time to time. Such process initially involved insertion of SIM cards and making a call to the network of the destination country. In recent times it could also be done through air-activation without opening of the packaging or the phone. In the air-activation insertion of a SIM card would also not be necessary. The process of unlocking may further evolve from time to time with technological advancement. However the question is 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. Interpretation of taken into use vis- -vis unlocking/activation of the mobile phones - HELD THAT - It is seen that apart from switching on insertion of sim card and making a call for 5 minutes no other feature of the mobile phone is utilised for the purpose of unlocking/activating the said mobile phone. In addition it is noted that in cases of air-activation the aforesaid steps are also eliminated and the entire process is conducted without even unboxing or unsealing of the mobile phones. A mobile phone is capable of multifarious uses and applications. None of the said features or capabilities of the phone are being utilised during the process of unlocking. The unlocking/activation of the mobile phone enables the same to be used in a particular geographical territory in this case territories outside India and nothing more. Considering the thousands of uses that a mobile phone can be put to mere unlocking cannot constitute use by the Petitioners. 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. Conclusion - 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. Petition allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal question considered in these petitions is whether the act of unlocking mobile phones after they are manufactured disqualifies the Petitioners from claiming duty drawbacks on the export of these mobile phones under Section 75 of the Customs Act, 1962, read with the Customs and Central Excise Duties Drawback Rules, 2017. Additionally, the petitions challenge the show cause notices and orders-in-original that rejected the Petitioners' claims for duty drawbacks, as well as the clarifications issued by the Central Board of Indirect Taxes & Customs (CBIC) that interpret the unlocking process as rendering the phones "taken into use," thus ineligible for duty drawbacks.

ISSUE-WISE DETAILED ANALYSIS

1. Interpretation of "Taken into Use" vis-`a-vis Unlocked/Activated Mobile Phones

- Relevant Legal Framework and Precedents: The key legal provision is the proviso to Rule 3(1) of the Duty Drawback Rules, which states that no drawback shall be allowed if the goods have been "taken into use" after manufacture. The Petitioners argue that unlocking does not constitute "use" as intended by the rule, while the CBIC contends that unlocking amounts to use.

- Court's Interpretation and Reasoning: The Court interprets "taken into use" as a dynamic concept that varies depending on the product. It distinguishes between making a product "ready for use" and actually "using" it. The Court finds that unlocking/activation is a configuration process that does not equate to the mobile phones being "taken into use."

- Key Evidence and Findings: The Court considers letters from OEMs like Samsung and United Telelinks, which state no objection to unlocking and do not consider it as infringing any rights or fair trade practices. The Court also notes that unlocking is a prevalent practice and not objected to by OEMs.

- Application of Law to Facts: The Court applies the interpretation of "taken into use" to conclude that unlocking/activation does not make the phones ineligible for duty drawbacks. It emphasizes that unlocking is merely a configuration to make the phones usable in destination countries.

- Treatment of Competing Arguments: The Court rejects the CBIC's reliance on precedents interpreting "use" under Section 74 of the Act, which deals with imported goods, as not applicable to Section 75, which concerns exported goods.

- Conclusions: The Court concludes that unlocking/activation does not constitute "taken into use" under the Duty Drawback Rules, allowing the Petitioners to claim duty drawbacks.

2. Scope of the Term "Manufacture" under Section 75 of the Act

- Relevant Legal Framework and Precedents: Section 75 of the Act allows for duty drawbacks on exported goods manufactured, processed, or subjected to any operation in India. The term "manufacture" includes processing or any other operation.

- Court's Interpretation and Reasoning: The Court interprets the expanded definition of "manufacture" to include unlocking/activation as an operation that makes the phones ready for export, thus falling within the scope of Section 75.

- Key Evidence and Findings: The Court considers the legislative history and amendments to Section 75, which broaden the scope to include operations like unlocking.

- Application of Law to Facts: The Court applies this interpretation to conclude that the Petitioners' unlocking process qualifies for duty drawbacks under Section 75.

- Treatment of Competing Arguments: The Court finds the CBIC's argument that unlocking is not part of manufacturing unconvincing, given the expanded definition of "manufacture."

- Conclusions: The Court concludes that unlocking/activation is part of the manufacturing process, entitling the Petitioners to duty drawbacks.

SIGNIFICANT HOLDINGS

- Preserve Verbatim Quotes of Crucial Legal Reasoning: "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."

- Core Principles Established: The Court establishes that unlocking/activation is a configuration process that does not amount to the phones being "taken into use." It also holds that the expanded definition of "manufacture" under Section 75 includes such operations.

- Final Determinations on Each Issue: The Court quashes the CBIC's clarifications and the impugned show cause notices and orders-in-original, allowing the Petitioners to claim duty drawbacks on unlocked/activated mobile phones. The Customs Department is directed to process the claims in accordance with the law.