The Delhi High Court clarified that unlocking or activating mobile phones to disable “regional locks” does not classify them as “used goods,” making exporters eligible for duty drawbacks. The ruling, delivered by a bench of Justices Prathiba M. Singh and Dharmesh Sharma, resolves a contentious issue affecting India’s mobile phone export industry.
The court quashed clarifications issued by the Central Board of Indirect Taxes & Customs (CBIC) that denied duty drawbacks to exporters of unlocked/activated mobile phones. The CBIC had argued that unlocking phones amounted to “taking them into use,” disqualifying them under the Customs and Central Excise Duties Drawback Rules, 2017. However, the court rejected this interpretation, emphasizing:
“Unlocking/activation is merely a configuration step to make phones usable in foreign markets. It does not equate to ‘use’ under the law.”
Background: What Are Duty Drawbacks?
Duty drawbacks refund customs or GST paid on goods later exported, ensuring Indian products remain competitive globally. Under Rule 3 of the Duty Drawback Rules, exporters cannot claim benefits if goods are “taken into use” post-manufacturing. The CBIC argued that unlocking phones triggered this clause, but the court disagreed.
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Exporters, represented by advocate V. Lakshmikumaran, contended that unlocking mobile phones makes them “ready for use” but doesn’t constitute actual use. They argued that the proviso aims to exclude second-hand goods, not configured ones. Additionally, manufacturers like Samsung and Karbonn confirmed that unlocking doesn’t infringe intellectual property or devalue phones. They also highlighted newer “air-activation” methods that unlock phones without unboxing or SIM insertion, further distancing the process from “use.”
CBIC’s Stand
The CBIC insisted that regional locks ensure phones are used only in intended regions. They argued that unlocking involves unboxing, inserting SIMs, and making calls, which detaches the product from its manufacturing process.
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The court highlighted critical distinctions in its analysis. First, it emphasized that the purpose of duty drawbacks is to incentivize value addition, including processing or operations post-manufacturing. Unlocking aligns with this goal. Second, the court noted the multi-functionality of mobile phones, stating that their uses are “vast and undefinable.” Merely enabling cross-border functionality doesn’t equate to using the device. Finally, the court observed that unlocked phones retain their value and marketability, unlike goods used for demonstrations or trials.
“Unlocking is a one-time activity to meet market needs. It doesn’t utilize the phone’s features like calls, apps, or health monitoring.”
The court also distinguished precedents cited by CBIC, noting that prior cases involved goods used in ways that diminished their value, such as machinery demonstrations.
Case title: M/S Aims Retail Services Private Limited v. Union Of India & Ors. and batch
