Introduction:
The Delhi High Court, in the case of M/S Aims Retail Services Private Limited v. Union Of India & Ors., ruled that merely unlocking or activating a new mobile phone by disabling the regional lock imposed by Original Equipment Manufacturers (OEMs) does not render the mobile phone a “used” good under the Customs and Central Excise Duty Drawback Rules, 2017. The petitioners, exporters of such unlocked mobile phones, challenged the rejection of their duty drawback claims by customs authorities because unlocking constituted “use” under the second proviso to Rule 3 of the Duty Drawback Rules. A division bench of Justices Prathiba M. Singh and Dharmesh Sharma ruled in favour of the exporters, holding that unlocking a phone does not amount to taking it into use and does not diminish its value or alter its fundamental nature.
Arguments of Both Sides:
The petitioners contended that the activation process was merely a technical step making the phones “ready for use” rather than “taken into use.” They argued that the intention behind Rule 3 was to bar duty drawbacks for used or second-hand goods, not new products modified to meet market requirements. They pointed out that unlocking a mobile phone does not diminish its functionality or value but rather enhances its usability in international markets. They further argued that OEMs do not object to unlocking, nor does the government prohibit exports of unlocked phones. Moreover, they asserted that unlocking falls within the broader definition of “manufacture” under the Customs Act and the Duty Drawback Rules.
On the other hand, the Central Board of Indirect Taxes & Customs (CBIC) argued that regional locks are imposed by OEMs to ensure phones are used only in designated jurisdictions. It contended that unlocking alters the phone from its original manufacturer-imposed condition, thereby disqualifying it from duty drawbacks. Customs authorities further claimed that unlocking requires unboxing, inserting a SIM card, powering on the phone, and making a test call—steps that constitute use under Rule 3. The government emphasised that unlocking fundamentally changes the phone’s regional restriction and is not part of the manufacturing process.
Judgement:
The High Court rejected the customs authorities’ arguments, stating that unlocking does not amount to “use” under the Duty Drawback Rules. It emphasised that mobile phones have vast and diverse applications, and turning them on for a few minutes to unlock them does not constitute “use” in the conventional sense. The Court noted that Rule 3 aims to prevent duty drawbacks on goods that have been used in a manner that depreciates their value. However, unlocking does not diminish a phone’s worth but instead enhances its usability. The Court also distinguished the present case from precedents cited by the customs authorities, observing that in previous cases, products had been used for demonstration, research, or exhibition, thereby reducing their value. In contrast, unlocking simply facilitates international compatibility without affecting the phone’s original features.
The judgment further highlighted that duty drawback provisions aim to promote not only full-scale manufacturing but also processes like refining, assembling, and modifications that add value. The Court noted that without unlocking, mobile phones would be impractical in other jurisdictions due to international call charges and regional app restrictions. By unlocking the phones, exporters were merely making them functional for their intended purpose without affecting their value. The Court directed customs authorities to process the petitioners’ claims by the law.