In a landmark judgment, the Delhi High Court addressed the contentious issue of duty drawbacks on mobile phones exported after disabling their "regional locks." The court held that the act of unlocking or activating a new mobile phone to allow its use outside a specific geographical region does not render the device "used" or "second-hand." Consequently, exporters of such mobile phones are entitled to claim duty drawbacks under the prevailing customs regulations.
Background
The case revolved around the interpretation of the second proviso to Rule 3 of the Customs and Central Excise Duty Drawback Rules, 2017. This provision stipulates that no duty drawback shall be allowed on the export of goods that have been "taken into use" after manufacture. The petitioners, engaged in exporting mobile phones, challenged the rejection of their duty drawback claims by customs authorities. The authorities contended that the process of disabling the regional lock constituted "use," thereby disqualifying the goods from duty drawback benefits.
Petitioners' Contentions
The petitioners argued that the activation or unlocking of mobile phones merely renders them "ready for use," distinguishing this process from actual usage. They emphasized that the intent of the proviso is to prevent "used" or "second-hand" goods from availing duty drawbacks. In their view, modifying the phones to meet specific market requirements does not transform them into used goods. Furthermore, they asserted that the unlocking process aligns with the expanded definition of "manufacture" under the Customs Act and the Duty Drawback Rules. The petitioners also highlighted that Original Equipment Manufacturers (OEMs) do not object to the activation of their devices, and there is no governmental prohibition against exporting unlocked or activated mobile phones.
Respondent's Arguments
The Central Board of Indirect Taxes & Customs (CBIC) maintained that the regional lock is a feature implemented by OEMs to restrict device usage to specific regions, primarily to control distribution and pricing. They argued that disabling this lock alters the original condition of the product, thereby constituting "use." According to the CBIC, such alteration disqualifies the goods from duty drawback eligibility, as per the relevant rules.
Court's Analysis
The Division Bench, comprising Justices Prathiba M. Singh and Dharmesh Sharma, delved into the nuances of the terms "taken into use" and "manufacture." The court observed that the primary objective of duty drawbacks is to ensure that taxes and duties paid on goods do not render them uncompetitive in the international market. Interpreting the proviso to Rule 3, the court noted that its purpose is to exclude goods that have been utilized post-manufacture from claiming duty drawbacks.
The court distinguished between "use" and "activation," stating that activation or unlocking is a preparatory step to make the device functional for the end-user. This process does not equate to the device being "taken into use." The judges emphasized that the mere modification to remove regional restrictions does not alter the newness of the product. They further opined that such modifications could fall within the ambit of "manufacture," as defined in the Customs Act, since they adapt the product to suit specific market requirements.
Conclusion
In its ruling, the Delhi High Court concluded that disabling the regional lock on mobile phones to facilitate their use outside a designated region does not render them "used goods." Therefore, such devices remain eligible for duty drawback benefits upon export. This judgment provides clarity for exporters, ensuring that compliance with market-specific requirements does not inadvertently disqualify them from legitimate duty reliefs.
This decision underscores the importance of interpreting trade and customs regulations in a manner that aligns with commercial realities and the overarching goal of promoting international trade competitiveness.
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