Device Activation Before Export is Mere ‘Configuration’: CESTAT Sets Aside Penalty on Export of Unlocked Mobile Phones [Read Order]

The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) ruled that activation and unlocking of mobile phones before export is only “configuration” of the product and does not amount to goods being “taken into use” under the Drawback Rules.

SOL Mobiles Private Limited, the appellant, was engaged in trading of mobile phones of brands such as Samsung, Redmi, Oppo, Honor and Motorola. The company procured mobile phones locally from authorised channel partners in India and exported them through Air Cargo Complex, Mumbai.

During 2018-19, the appellant claimed drawback benefits on export of mobile phones under several shipping bills. The department initiated investigation based on a CBIC clarification dated 25.09.2020 regarding admissibility of drawback on export of unlocked or tested mobile phones.

The department alleged that before export, the appellant had unsealed the original packaging of mobile phones, activated the handsets by placing calls, updating language settings or flashing software and thereafter repacked the phones after removing local SIM cards.

The department treated these activities as prior use of goods and alleged that the exported mobile phones were not eligible for drawback benefits. A show-cause notice was issued proposing the confiscation of export goods valued at Rs. 27.99 crore, the rejection of drawback benefits, and the imposition of penalties on SOL Mobiles and its Vice-President (Finance & Accounts), Manjit Jha.

The Commissioner of Customs confirmed the proposals, ordered confiscation of goods, imposed redemption fine of Rs. 2.70 crore and also imposed penalties under Sections 114(iii) and 114AA of the Customs Act.

The appellant’s counsel argued that the issue was already settled by the Delhi High Court in AIMS Retail Services Pvt. Ltd. v. Union of India, where the court had quashed the CBIC clarification dated 25.09.2020. They argued that unlocking and activating mobile phones for use in a particular geographical territory outside India is merely “configuration” of the product and cannot be treated as goods being “taken into use.”

The counsel also pointed out that the Supreme Court had dismissed the department’s appeal and review petition against the Delhi High Court ruling.

The revenue counsel argued in support of the Commissioner’s order and submitted that the proceedings were valid because neither Rule 17 of the Drawback Rules nor Section 75 of the Customs Act prescribed any limitation period for initiating action.

The two-member bench comprising S.K. Mohanty (Judicial Member) and M.M. Parthiban (Technical Member) observed that the Delhi High Court in AIMS Retail Services Pvt. Ltd. had already held that unlocking or activating mobile phones to make them usable outside India is merely “configuration” of the product and does not amount to “taken into use” under the Drawback Rules. The tribunal also observed that the Supreme Court had upheld the Delhi High Court ruling by dismissing the department’s appeals and review petition.

The tribunal explained that once the CBIC clarification treating activated mobile phones as “taken into use” had been quashed, the allegations of misdeclaration, suppression and misrepresentation against the exporter could not survive. The tribunal further observed that confiscation of goods and imposition of penalties based on the quashed clarification did not stand legal scrutiny.

The tribunal set aside the confiscation order, redemption fine and penalties imposed on SOL Mobiles Private Limited and Manjit Jha and allowed the appeals.

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