2025 (3) TMI 1406 - HC - Customs

Entitlement to duty drawbacks when exporting mobile phones which have been unlocked and accordingly they had availed of the drawbacks - HELD THAT - As per the judgement in M/s AIMS Retail Services Private Limited v. Union of India Ors. 2025 (2) TMI 596 - DELHI HIGH COURT this 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. Conclusion - The unlocking of mobile phones for export does not constitute use under the Duty Drawback Rules. Exporters are entitled to duty drawbacks unless explicitly restricted by law. Petition disposed off.

ISSUES PRESENTED and CONSIDERED

The core legal issues considered by the Court were:

Whether the unlocking of mobile phones for export purposes constitutes the phones being "taken into use" under the applicable provisions of the Duty Drawback Rules.
Whether the Petitioner is entitled to claim duty drawbacks on exported mobile phones that have been unlocked.
The validity of the clarifications issued by the CBIC regarding the eligibility of duty drawbacks on unlocked mobile phones.
The applicability of the precedent set in the case of AIMS Retail Services Private Limited v. Union of India & Ors. to the present case.

ISSUE-WISE DETAILED ANALYSIS

1. Unlocking of Mobile Phones and "Taken into Use"

Relevant legal framework and precedents: The issue revolves around the interpretation of the term "taken into use" under the Duty Drawback Rules, which impacts the eligibility for duty drawbacks. The Court referenced its previous decision in AIMS Retail Services Private Limited, which addressed similar issues.
Court's interpretation and reasoning: The Court reasoned that unlocking a mobile phone merely configures it for use in a specific geographical area and does not constitute the phone being "taken into use." The unlocking process does not utilize the phone's features in a manner that diminishes its value or function.
Key evidence and findings: The Court noted that unlocking involves minimal interaction with the phone's features, such as switching it on or inserting a SIM card. In some cases, unlocking is done without unboxing the phone.
Application of law to facts: The Court applied the principles from AIMS Retail Services, concluding that the unlocking process is akin to configuring the phone for a particular territory, which does not equate to "use" under the law.
Treatment of competing arguments: The Respondents argued that unlocking constitutes "use," thus disqualifying the phones from duty drawbacks. However, the Court rejected this view, aligning with its previous judgment.
Conclusions: The Court concluded that unlocking does not constitute "use," and thus, the Petitioner is entitled to duty drawbacks.

2. Entitlement to Duty Drawbacks

Relevant legal framework and precedents: The entitlement to duty drawbacks is governed by Section 75 of the Customs Act and the Duty Drawback Rules. The Court relied on its interpretation in the AIMS Retail Services case.
Court's interpretation and reasoning: The Court emphasized that duty drawbacks are intended to benefit exporters. Any ambiguity in the law should favor the exporter, allowing them to claim drawbacks unless explicitly prohibited by law.
Key evidence and findings: The Court found no evidence that unlocking diminished the phones' value or functionality. Instead, it enhanced their usability in foreign markets.
Application of law to facts: The Court applied the law, determining that the Petitioner's actions did not disqualify them from claiming duty drawbacks.
Treatment of competing arguments: The Respondents' reliance on CBIC clarifications was challenged, with the Court finding these clarifications inconsistent with the law.
Conclusions: The Petitioner is entitled to claim duty drawbacks on unlocked mobile phones.

3. Validity of CBIC Clarifications

Relevant legal framework and precedents: The Court examined the clarifications issued by the CBIC, which purported to deny duty drawbacks for unlocked phones.
Court's interpretation and reasoning: The Court found the CBIC clarifications to be inconsistent with Section 75 and the Duty Drawback Rules. The clarifications were seen as overreaching and contrary to the legislative intent.
Key evidence and findings: The Court noted that the clarifications effectively removed benefits that should be available to exporters, contrary to the law.
Application of law to facts: The Court applied its interpretation to quash the CBIC clarifications, reinforcing the Petitioner's right to claim drawbacks.
Treatment of competing arguments: The Respondents' reliance on the clarifications was dismissed, as the Court found them legally unsustainable.
Conclusions: The CBIC clarifications were quashed, affirming the Petitioner's entitlement 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 unlocking of mobile phones for export does not constitute "use" under the Duty Drawback Rules. Exporters are entitled to duty drawbacks unless explicitly restricted by law.
Final determinations on each issue: The Court set aside the impugned Order-in-Original, quashed the CBIC clarifications, and directed the Customs Department to process the Petitioner's duty drawback claims in accordance with the law.

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