SIM Insertion for Unlocking Mobile Phones to Unlock Region Settings is ‘Configuration’: Delhi HC Quashes CBIC Clarifications on Duty Drawback [Read Order]

In a recent ruling, the Delhi High Court ruled that SIM Insertion to mobile phones to unlock the regional setting is ‘configuration’ not usage under the Duty drawback Rules and ordered the customs department to process the duty drawback. The court also quashed the Central Board of Indirect Taxes and Customs’ ( CBIC) clarification.

The petitioners are the exporters and members of the Mobiles and Electronics Indian Merchants Exporters Association (MEIMEA), argued that unlocking mobile phones  either through SIM insertion or "over-the-air" (OTA) activation merely makes the devices "ready for use" and does not amount to "taking into use" as contemplated under the second proviso to Rule 3(1) of the Duty Drawback Rules.

The Customs authorities, relying on CBIC clarifications issued in 2020 and 2021, had rejected the drawback claims, treating unlocked phones as "used" goods.

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The petitioners contended that unlocking is a configuration step to enable foreign usability, not actual use, similar to preparatory steps undertaken for cars, aircraft, or medical devices before their operational deployment.

They also argued that unlocking falls under "processing/operation" as per the expanded definition of "manufacture" under Section 75 of the Customs Act, thereby entitling them to duty drawbacks.

In addition, MEIMEA, by letter dated 10th January, 2020, sought clarification from CBIC on the availability of duty drawbacks for unlocked/activated mobile phones. In response, CBIC, vide clarification dated 25th September, 2020, informed MEIMEA that the unlocking/activation steps undertaken by merchant exporters are post-packaging and post-manufacturing activities. Consequently, the mobile phones are deemed to have been “taken into use” and are thus ineligible for claiming duty drawbacks.

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The aforesaid clarification was challenged by MEIMEA before this Court in W.P.(C) 4744/2021, titled Mobile and Electronics Indian Merchant Exporters Association Trust & Ors. vs. The Joint Secretary (Drawback) & Ors. However, on 19th May, 2021, the said petition was withdrawn by the Petitioner Association with liberty to file a fresh petition raising individual grievances of its members.

Subsequently, MEIMEA, vide letter dated 7th September, 2021, sought a fresh clarification from CBIC regarding the availability of duty drawbacks on exports of unlocked/activated mobile phones. In response, CBIC, vide clarification dated 14th December, 2021, reiterated its earlier position conveyed on 25th September, 2020, and stated that no duty drawback can be claimed by merchant exporters in the present case.

Mr. Aditya Singla, Senior Standing Counsel for CBIC, argued that the process of locking mobile phones by OEMs, known as “regional locks,” ensures the devices are used within designated regions, and that any unlocking or activation performed by the Petitioners disqualifies the phones from receiving duty drawback under Section 75 of the Customs Act, 1962, read with the Duty Drawback Rules.

He submitted that the purpose of the drawback scheme is to incentivize manufacturing and value addition, not mere export promotion, and since the Petitioners neither manufacture nor add value, they are not entitled to duty drawback.

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He also asserted that unlocking or activating phones, which involves unboxing, inserting a SIM card, and making a call, is not part of the manufacturing process but merely a functional adjustment that does not transform the product into a new or distinct entity, citing Tarpaulin International (2010) to support this view.

Further, he added that the unlocking process amounts to the phones being “taken into use” under Rule 3 of the Duty Drawback Rules, relying on Millipore (India) (1999) and Daimler Chrysler (2003), and that even switching the device on qualifies as use under Director of Entry Tax v. Mahindra and Mahindra (2003).

The bench of Justices Prathiba M. Singh and Dharmesh Sharma observed that “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.”

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It was also noted by the court that 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.

“Before exporting a product, unlocking/activating the phone to enable it to be used in the destination country would in the opinion of this Court be mere Configuration of the phone for the concerned territory and nothing more,” added the bench.

The court clarified that if the duty drawbacks are processed and disbursed to the respective Petitioners for the relevant period in accordance with law within three months, no interest shall be payable under Section 75A of the Act.

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However, if the drawbacks are not released within the said period, the Customs Department shall be liable to pay interest on the eligible duty drawback amounts to the respective Petitioners, in accordance with law, from the date of expiry of the three-month period.

Accordingly, the petition was allowed.

To Read the full text of the Order CLICK HERE

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