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TMI Blog2025 (2) TMI 596X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... -original issued in these petitions are encapsulated in a tabular form hereinunder for ease of reference: Sr.No. Case No. Details of the Impugned Order Duty Drawback Involved I. Cases where SCN has been challenged 1. W.P. (C) 9461/2023 SCN dt. 24th May, 2023 Rs. 2,14,09,854/- (already disbursed) Rs. 55,05,150/- (not disbursed) 2. W.P. (C) 10932/2023 SCN dt. 24th March, 2023 Rs. 26,15,232/- (already disbursed) Rs. 11,10,900/- (not disbursed) 3. W.P. (C) 10936/2023 SCN dt. 16th May, 2023 Rs. 5,03,486/- (already disbursed) Rs. 3,00,995/- (not disbursed) 4. W.P. (C) 10947/2023 SCN dt.19th June, 2023 Rs. 18,22,979/- (already disbursed) Rs. 2,07,198/- (not disbursed) 5. W.P. (C) 10975/2023 SCN dt. 11th May, 2023 Rs. 5,44,503/- (already disbursed) Rs. 33,98,486/- (not disbursed) 6. W.P. (C) 11030/2023 SCN dt 17th May, 2023 Rs. 38,78,148/- (already disbursed) Rs. 36,20,466/- (not disbursed) 7. W.P. (C) 1449/2024 SCN dt 30th August'23 Rs. 23,85,138/- (already disbursed) Rs. 7,78,695/- (not disbursed) 8. W.P. (C) 1499/2024 SCN dt 21st June, 2023 Rs. 28,66,909/- (already disbursed) Rs. 10,14,936/- (not disbursed) 9. W. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 17 of the Duty Drawback Rules on the ground that the same is violative of the Article 14 of the Constitution of India. I(A). Brief Facts 5. The case of the Petitioners is that they are exporters of mobile phones of different brands and models which they procure either directly from the original equipment manufacturers (hereinafter "OEMs") or from distributors, dealers, channel partners, etc. The Petitioners are members of the Mobiles and Electronics Indian Merchants Exporters Association (hereinafter "MEIMEA"). 6. It is stated that some of the mobile phones purchased by the Petitioners are "locked" by the OEMs i.e., usage of the said mobile phones is restricted to a specific geographical location, also referred to as the "regional lock", which in the present case would be India. The said locked mobile phones are stated to be 'unlocked' or 'activated' by the Petitioners, to allow their use outside India, by various methods. Unlocking/Activation Method 1 7. One method of unlocking/ activation is by inserting a SIM card and making a call to a foreign number by undertaking the procedure set out below: i. The mobile handset is first removed from sealed boxes. Since the batte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vities. Accordingly, the said mobile phones have been "taken into use" and are ineligible for claiming duty drawbacks. The said clarification is reproduced hereunder: Clarification dated 25th September, 2020 "The undersigned is directed to refer to your letter No. FIEO/EP 4(1)/2020 dated 10.01.2020 seeking clarification in reference to a representation from Mobiles and Electronics Indian Merchant Exporters Association (MEIMEA) regarding availability of Duty Drawback on the export of 'unlocked' mobile handsets by merchant exporters. 2. It is noted that the activities undertaken by merchant exporters on mobile handsets/phones like activation and unlocking of mobile phones by inserting in Indian SIM card, placing a call for about 5 minutes, testing of handsets before 'use' export, re-flashing of software for a particular region, etc. are all post manufacturing and post packaging activities. Clause (i) of second proviso to Rule 3 (1) of the Customs and Central Excise Duties Drawback Rules, 2017 provides that so Duty Drawback shall be allowed on export of goods that have been taken into use after manufacture. As the said mobile handsets/phones entered for export have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The MEIMEA on several occasions including vide letters dated 30th June, 2022, 11th August, 2022 and 17th August, 2022 sought urgent release of the drawback on mobile phones exported since October, 2020 from the Commissioner of Customs, ACC Exports, New Delhi. However, the MEIMEA did not receive any response from the Customs Department. 14. Thereafter, it is stated that the Customs Department initiated proceedings under the Act against the Petitioners qua the claim of duty drawback on unlocked/activated mobile phones exported in the relevant period. SCNs were issued to the Petitioners by the Customs Department. In some cases the said SCNs have been adjudicated and corresponding Order-in-Original have also been passed by the Customs Department rejecting the claim for duty drawback on the exports of unlocked/activated mobile phones by the Petitioners. The said claims have been rejected by the Customs Department by relying on the Clarifications issued by the CBIC. 15. The Petitioners have assailed the respective SCNs and Order-in-Original passed in each case. Hence, the present petitions. II. Submissions on behalf of the Petitioners 16. Mr. V. Lakshmikumaran, ld. Counsel appearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the process of unlocking/activation, the same cannot be said to have been "taken into use". In support of this argument, the Petitioners have placed reliance on the following examples: a. Cars: Assembly, emissions and safety testing, driving for fuelling and delivery to showroom make cars "ready for use". The car is "taken into use" when registered, handed over to the owner and driven for personal or commercial purposes. b. Medical devices: Calibration, software setup, trial runs, and staff training make medical devices "ready for use". The medical devices are "taken into use" when deployed for patient diagnostics or treatment. c. Aircraft: Assembly, system checks, test flights, and delivery to airline company make aircrafts "ready for use". The aircrafts are "taken into use" when actually used for carrying passengers or cargo service. Similarly, it is submitted that the software installation, factory quality tests and unlocking for regional compatibility make the mobile phones "ready for use". The same are taken into use when the customer connects the said phones to a network and operate it for communication or applications. 21. Accordingly, it is argued by the ld. Counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the process of locking of mobile phones, also referred as "regional locks", is a feature which is incorporated by OEMs in order to ensure that the phones are not used outside the jurisdiction of territorial region for which they are intended. It is submitted that since the OEMS are supplying the Petitioners locked mobile phones, any operation carried out by the Petitioners such as unlocking/activation would bar the said mobile phones from being eligible to receive duty drawback under Section 75 of the Act read with the Duty Drawback Rules. III.(A).Purpose of granting duty drawbacks 28. It is submitted by the ld. Counsel for CBIC that the statutory scheme of the Act qua grant of duty drawbacks is designed to incentivize domestic manufacturers and value addition rather than mere promotion of exports. The duty drawback scheme canvased from the relevant provisions of the Act and the Duty Drawback Rules would show that there is a conscious differentiation between merchant exporters and manufacturing exporters. This differentiation, as per the ld. Counsel, is to promote value addition activities in the form of processing, assembling or manufacturing. 29. Considering th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. Daimler Chrysler India Pvt. Ltd. v. Union of India, 2003 SCC OnLine Bom 901 that operating of a device for the purpose for which it is imported would amount to its "use". 35. The ld. Counsel submits that even if the Court was of the view that the process of unlocking/activation of the mobile phone does not qualify as use for the purpose for which it was imported or manufactured, then as per the decision of the Supreme Court in Director of Entry Tax v. Mahindra and Mahindra, (2003) 11 SCC 749, even the act of switching the phone on would amount to the same being "taken into use". 36. The distinction between products being "taken into use" and "ready for use", as argued by the Petitioners, is artificial in nature as per the CBIC. The ld. Counsel has distinguished the examples relied upon by the Petitioners in support of the contention qua "ready for use", on the ground that the steps such as assembly, calibration and trial runs are part of the manufacturing process of the device/machinery, since in the absence of the same the said device/machinery would not have the essential characteristics of being a finished product. III.(D).Limited scope of judicial scrutiny 37. It is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is submitted that Section 74 merely deals with goods which are imported into India for re-export. Thus, the said cases cannot be relied upon to interpret Section 75 of the Act. 41. In fact, in Section 74 (1) and 74 (2) of the Act, the distinction has been maintained between goods which are imported and exported without being used on the one hand and goods which are imported and used or whose values are depreciated before export of the same. Even in the latter case, the drawback that is given is of a lesser value, but it is not rejected forthright. 42. Lastly, ld. Counsel also submits that irrespective of whether the Petitioners are treated as manufactures or non-manufactures, the Petitioners would be entitled to drawback on the basis of 'all industry rate'. V. Analysis & Findings 43. Heard the parties. The Court has also perused the written submissions submitted on behalf of the parties. 44. At the outset, it is noted that during the course of hearing, the Petitioners have not pressed on the challenge to the vires of Rule 17 of the Duty Drawback Rules. Hence, the Court need not venture to decide the same. V.(A). Statutory Regime of the Act qua Duty Drawbacks 45. Exports ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an order permitting clearance for exportation has been made by the proper officer, a drawback should be allowed of duties of customs chargeable under this Act on any imported materials of a class or description used in the manufacture or processing of such goods or carrying out any operation on such goods, the Central Government may, by notification in the Official Gazette, direct that drawback shall be allowed in respect of such goods in accordance with, and subject to, the rules made under sub-section (2): Provided that no drawback shall be allowed under this sub-section in respect of any of the aforesaid goods which the Central Government may, by rules made under sub-section (2), specify, if the export value of such goods or class of goods is less than the value of the imported materials used in the manufacture or processing of such goods or carrying out any operation on such goods or class of goods, or is not more than such percentage of the value of the imported materials used in the manufacture or processing of such goods or carrying out any operation on such goods or class of goods as the Central Government may, by notification in the Official Gazette, specify in this beh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the parties and the aforesaid provisions, it is evident 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. 50. The concept of duty drawbacks has been well explained by Supreme Court in Liberty India v. CIT, 2009 (241) ELT 326 (SC), wherein the Court observed as under: "17. The next question is - what is duty drawback? Section 75 of the Customs Act, 1962 and Section 37 of the Central Excise Act, 1944 empower Government of India to provide for repayment of customs and excise duty paid by an assessee. The refund is of the average amount of duty paid on materials, of any particular class or description of goods used in the manufacture of export goods of specified class. The Rules do not envisage a refund of an amount arithmetically equal to customs duty or central excise duty actually paid by an individual importer-cum-manufacturer. Sub-section (2) of Section 75 of the Customs Act requires the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y actual check or otherwise the statements made in support of the claim for drawback. [...]" 53. The Statement of Objects and Reasons of the Finance Bill, 1995 sets out the rationale behind amending the meaning of manufacture in Section 75 of the Act as under: "Clause 61 seeks to amend section 75 of the Customs Act so as to allow drawback not only on goods manufactured in India but also on goods processed or subjected to any operation in India. This clause also proposes to insert new sub-section (3) with a view to enabling the grant of drawback with retrospective effect in specified cases." 54. In addition, the Rule 2(e) of the Duty Drawback Rules defines the term manufacture as under: ""manufacture" includes processing of or any other operation carried out on goods, and the term manufacturer shall be construed accordingly; " 55. A conjoint reading of Section 75 of the Act, as amended, along with the Duty Drawback Rules introduced from time to time would show that the purpose of the said provisions is to encourage not mere complete manufacturing but even steps such as processing, assembling, refining, or any other value addition to the product. 56. The Petitioners in thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Pvt. Ltd. "Respected Sir, This is in relation to the letter received from your good-office bearing file No. VIII/ 12/ ACE/ SHED/ Status/ 147/ 19, wherein opinion/ legal comments have been required by our good-office, basis intelligence gathered by Custom authorities regarding unscrupulous exportation of various models of Samsung brand mobile phones being as follows: * Seals of certain mobile phone boxes were tampered either to remove complimentary accessory or to make any other modification/ alteration. * Mobile phones are being exported as SIM unlocked by way of using Indian SIM for a period of minimum 5 minutes Given the above background, we would like to inform your good-office that the above-mentioned exports are not being made by Samsung India Electronics India Private Limited ('SIEPL/ the Company') and accordingly the Company has no nexus/ control over such exports. Further, in our view, the above-mentioned instance do not amount to infringement of any intellectual Property Right ('IPR')/ trademark law or any other fair-trade practice. As such, it is requested from good-self to direct the requirement of opinion/ legal comments to the assessee making such export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile handsets are identical with the handsets manufactured in an unlocked condition itself. It is relevant to state here that unlocking causes removal of certain software restriction in the handsets and such removal cannot be treated as having used for either technical or commercial parlance, merely because a particular way of unlocking process was resorted to. You may also note that we manufacture mobile handsets in unlocked condition as well as in locked condition - for instance, we manufacture certain mobile handsets for 'Reliance - Jio network' only, restricting its use with their network only. Having said the above, such locked mobile handsets when unlocked are at par with other mobile handsets manufactured in an unlocked condition for all the technical and commercial purposes. In view of the above, we confirm that the said process of unlocking is an integral process to make the mobile handsets operational and marketable outside India. It should therefore be construed as an extension of the manufacturing process owing to the inbuilt limitation surrounding its usage qua a geography or network, as the case may be. Such one-time / limited activity of unlocking essentia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly referred to as "Smart-Phones", have multi-dimensional and multifarious usages which are, in fact, incapable of being listed in one place. 63. The mere possible range of usage of a mobile phone would show that the scope of such "use" is vast and undefinable. The expression "taken into use" has to be interpreted in this context. 64. The second dimension is that the phrase "taken into use" would be capable of varying interpretations depending on the product in question. The said phrase cannot be understood to have identical/universal meaning for all products. The phrase "taken into use" is, thus, a dynamic concept and its meaning would depend upon the nature of use and could vary from product to product and industry to industry. 65. The Customs Department has relied on a number of decisions to interpret this term. In M/s. Millipore (India) Private Limited, Bangalore v. Union of India and Others, 1999 SCC OnLine Kar 221, the Karnataka High Court was concerned with the question as to whether a particular equipment which has been exhibited, demonstrated and, thereafter, re-exported, would be eligible for duty drawback under Section 74 of the Act. The High Court of Karnataka observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 of the Customs Act. Section 75 of the Customs Act refers to the use in the manufacture of goods. There is no such contemplation under Section 74 and therefore, the use for exhibition would be covered under the term used under Section 74 (2). The refund has rightly been granted. No case for interference is made out." 66. In the above decision the Karnataka High Court noted that there is a difference between display and demonstration. In the said case since the machineries were operated, albeit, for a short time for demonstration and, therefore, did not remain a new machinery. The Karnataka High Court being conscious of the distinction between Section 74 and Section 75 of the Act held that, in the facts of that case, refund would only be available under Section 74 (2) of the Act. 67. The next case relied upon by the Customs Department is Daimler Chrysler India Pvt. Ltd. v. Union of India, 2003 SCC OnLine Bom 901, wherein a fully built car was imported from South Africa for the purpose of study and development of component parts of the car. As part of the study and research, the imported car was driven from Pune to Mumbai for more than 242 Kms. The Bombay High Court was considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earch for which it was imported, can it be said that car was not used for the purpose for which import was made. The answer, in our opinion should be in the negative. [...] 25. Turning to the facts of the present case, on the legal canvas quoted hereinabove, one has to take into account the purpose for which the import of car was made and the scheme under which it was imported. The import of the car in question was in made under the policy of the Government of India, which permitted free importability of the goods for certain categories of imports not involving foreign exchange remittances. In the case at hand, car was imported under clause 98(xii) quoted supra, which permitted import of the prototypes and samples by the actual users, industrial or research and development institutions as per the terms of the policy framed in this behalf. After importation of car it was actually used as a specimen for conducting research to imitate spare parts thereof, with a view to develop its manufacture in India. The car was driven within factory premises for the said purpose. In our opinion, on the factual matrix of this case, which is not in dispute, the car was used for the purpose for w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des for refund of the tax where the prescribed authority is satisfied that any specified goods upon which the tax had been paid had been exported or conveyed out of the Calcutta Metropolitan Area within a period of six months from the date of their entry therein "without being consumed, used or sold therein". Rule 14 (4) deals with the exemption from the levy of the tax of goods brought into the Calcutta Metropolitan Area for the purposes of exhibitions organised by local authorities or organisations approved by the State Government, if the conditions therein stated are satisfied. 2. The respondents proposed to bring within the Calcutta Metropolitan Area a Heidelberg Four-Colour Sheetfed Offset Press, Model MOV, for the purposes of exhibition. They applied for exemption from payment of the tax under Rule 14 (4). The application was rejected. The tax was then paid. The said machine was exhibited and, in the words of the affidavit filed on behalf of the respondents in this Court: "Those who were interested in these machines wanted demonstration. It was demonstrated." The respondents then wanted to remove the said machine from the Calcutta Metropolitan Area within six months of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perated the exported mobile phones, the moment the said mobile phones have been switched on and any function thereto has been utilised, the same would constitute 'use' under the proviso to Rule 3 (1) of the Duty Drawback Rules. This argument cannot be sustained, in the opinion of this Court, as the decision of the Supreme Court in Mahindra (supra) does not support the stand of the Customs Department. It is settled law that interpretation by the Courts of words and expressions under one statute cannot be relied upon as a guide for interpreting words and expressions in another statute unless both the statutes are pari materia legislations or it is expressly provided for in the statute under consideration. In this regard, the Supreme Court in Jagatram Ahuja v. CGT, (2000) 8 SCC 249 has observed as under: "23. We find that Kantilal Trikamlal case [(1976) 4 SCC 643 : 1977 SCC (Tax) 90 : (1976) 105 ITR 92] supports the view taken in Getty Chettiar case [(1971) 2 SCC 741 : (1971) 82 ITR 599]. Added to this, Section 2(15) of the Estate Duty Act, defining "property" came up for consideration in Kantilal Trikamlal case [(1976) 4 SCC 643 : 1977 SCC (Tax) 90 : (1976) 105 ITR 92]. We may stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive and non-functional. 74. Further, it would be pragmatic to assume that for a consumer the process of unlocking/activation of mobile phones would result in value addition over a locked/non-activated mobile phone. Thereby, allowing the unrestricted use of the said mobile phones. The process of unlocking/activation of the mobile phones, by any method, would not result in depreciation in the value of the said phones. 75. A manufacturer, in order to test the mobile phone before finally packing the product may have checked the same by activating it in a particular network in the same country of manufacture. If the phone is used in the same country where it has been manufactured, then there would be no difficulty. Whenever the customer travels abroad on a different carrier or network, international charges are collected and if the mobile phone is locked to a particular region or network then the customer would have to find alternatives to operate the said mobile phone or purchase proper plans to use the phone in a foreign territory. However, if the product is to be exported to a foreign country and enabled for usage in the local network through service providers in the said country a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. 80. The respective impugned SCNs and the Orders-in-Original passed by the Respondents, relying on the Clarifications, which take a contrary position to the findings of this Court, are also quashed. 81. The Court has, however, not examined each of the cases as to whether duty drawbacks are liable to be granted or not to the Petitioner therein. The individual cases shall be processed by the Customs Department for drawbacks in accordance with law. 82. It is made clear that if the drawbacks are processed and granted to the respective Petitioners for the relevant period as per law, within a period of three months, no interest would be liabl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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