Disabling ‘Regional Lock’ Of Phone To Allow Use Outside India Doesn’t Make It ‘Used Goods’ Ineligible For Duty Drawbacks: Delhi High Court

The Delhi High Court has held that merely unlocking/ activating a new mobile phone by disabling the “regional lock” which is put by original equipment manufacturers to restrict usage to a specific geographical location, does not make the mobile phone a “used” good.

A division bench of Justices Prathiba M. Singh and Dharmesh Sharma thus held that exporters of such mobile phones will also be eligible to claim duty drawbacks.

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.

Second proviso to Rule 3 of the Customs and Central Excise Duty Drawback Rules, 2017 provides that no duty drawback will be allowed on export of goods that have been ‘taken into use’ after manufacture.

In the case at hand, Petitioners’ claim of duty drawbacks on export of unlocked/ activated mobile phones was rejected on the ground that the process of unlocking the mobile phone would require it to be “taken into use”, thus triggering the above provision.

Contentions

Petitioners contended that by activating the mobile phones, they were merely making mobile phones “ready for use” which is distinct from the same being “taken into use”.

It was submitted that the intention of the proviso is to ensure that ‘used’ goods or ‘secondhand’ goods are disallowed from availing duty drawbacks. However, in the present case, the process of unlocking/activating the mobile phones does not make the same ‘second-hand’ or ‘used’ goods but rather, it is a modification to meet the specific market requirements.

Petitioners further contended that the process of unlocking/activating the phone would also fall within the expanded scope of the term “manufacture” under the Customs Act and the Duty Drawback Rules.

It was further pointed out that OEMs themselves have no objection to Petitioners activating their mobile phones and even the Government has not in any manner prohibited exports of unlocked/activated mobile phones.

The Central Board of Indirect Taxes & Customs on the other hand argued 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 the territorial region for which they are intended.

It was 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.

It was further pointed out that the process of unlocking/activation of the mobile phones would require the phones to be unboxed and powered up, inserting sim cards and making a call to the export destination. The said process is substantially detached from the entire process of manufacturing or processing of the said mobile phones, it was argued.

The Petitioners then submitted that there is also a new process of “air-activation” whereby mobile phones are unlocked/activated through a computer system, without even unboxing or unsealing of the mobile phones.

Findings

At the outset, the High Court observed that the range of usage of mobile phones is “vast and undefinable”. It is used in communication, as a source of entertainment, for business, accessing banking services, word processing, monitoring user’s health, and so on.

Thus, the Court said that the expression “taken into use” has to be interpreted taking into context the innumerable number of applications of the device.

Since in the present case, apart from switching on, insertion of sim card and making a call for 5 minutes, no other feature of the mobile phone is utilised for the purpose of unlocking/activating, Court said,

“Considering the thousands of uses that a mobile phone can be put to, mere unlocking cannot constitute use by the Petitioners. The development of standards in the field of telecommunication which enables usage of mobile phones across countries may be rendered ineffective if such configuration is held to the detriment of the OEM or the traders/exporters. With the growth of mobile phone manufacturing/ assembling in India more and more exports would take place and the mere fact that the said products are configured for use in foreign countries cannot deprive the Petitioners from duty drawbacks under the prevalent law discussed hereinabove.”

Court added that unlocking/activation of the mobile phone merely makes the mobile phone more usable in the destination country. It does not in any manner result in depreciation in the value of the said phones. Thus, the Court ruled that unlocking/activating would not constitute “taken into use” under proviso to Rule 3 of Duty Drawback Rules.

It refused to apply various precedents cited by the Customs to defend its case. It observed,

“…in each of the cases, the product-in-question has been utilized – either for demonstration, research, exhibition, etc., in a manner so as to diminish its value. The same had utilized the capabilities of the product and did not add any additional feature or value to the product. Thus, the said decisions are in sharp contrast to the facts of the present case wherein the unlocking/activation of a mobile phone makes the product more accessible and more useful considering the purpose for which it has been manufactured i.e., facilitation of communication and optimum utilization of all the features of a mobile phone.”

In its 49-page judgment, the Court also observed that the purpose of drawback provisions is to encourage not mere complete manufacturing but even steps such as processing, assembling, refining, or any other value addition to the product.

Court said by unlocking the mobile phone, Petitioners were enabling users from other countries to use the product. Otherwise, it observed, “If the mobile phone is not unlocked/activated and it is used in a different territory than the country where it was unlocked/activated, the consumer would not find it possible to use the said phone properly in the jurisdiction. Calls made by the customer would then become chargeable as international calls. Moreover, none of the apps can be used based on the territory where the customer is located. Such issues would make the product totally ineffective, expensive and non-functional.”

As such, the Court directed the Customs to process the claims of Petitioners in accordance with law.

Case title: M/S Aims Retail Services Private Limited v. Union Of India & Ors. and batch

Citation: 2025 LiveLaw (Del) 189

Case no.: W.P.(C) 9461/2023 and batch

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