July 29, 2025

CONFIGURING CLARITY: SC UPHOLDS EXPORTERS’ RIGHT TO DUTY DRAWBACK ON UNLOCKED PHONES

BACKGROUND

1. The Hon’ble Supreme Court, in the case of M/s Aims Retail Services Private Limited vs. Union of India &
Ors. [SLP (CIVIL) Diary No.30758/2025], dismissed the Revenue’s Special Leave Petition (‘SLP’) against the
Judgment of the Hon’ble Delhi High Court which held that exporters were eligible to claim Duty Drawback
on the export of ‘Unlocked’ Mobile Phones under Section 75 of the Customs Act, 1962 (‘Customs Act’) read
with the Customs and Central Excise Duties Drawback Rules, 2017 (‘Drawback Rules’).

FACTS OF THE CASE

2. The Respondents were merchant exporters, exporting mobile phones to geographies not directly served by
OEMs. However, some of the phones exported by them were integrated with regional locks by OEMs to
restrict phone usage to specific geographies.

3. Therefore, in order to ensure that the phones were compatible with the telecom networks in the
destination country, the Respondents adopted unlocking practices, such as inserting SIM cards and placing
a brief call to make phones functional globally or Over the Air activation which could be done without even
unsealing the phone boxes.

4. However, the Central Board of Indirect Taxes and Customs (‘CBIC’), through its Clarification dated July 2017,
took the view that such unlocking or activation amounted to the mobile phones being ‘taken into use’
before export. This interpretation was based on the proviso to Rule 3(1) of the Drawback Rules, which
disqualifies goods from drawback if they have been used between the time of manufacture and export.
Relying on this Clarification, the Revenue denied drawback claims to various exporters, including the
Respondent, on the grounds that unlocking the mobile phones qualified them as having been taken into
use.

5. The said Clarification was initially challenged by the Mobiles and Electronics Indian Merchant Exporters
Association Trust (‘MEIMEA’) before the Hon’ble Delhi High Court vide Writ Petition No.(C) 4744 of 2021.
However, the Hon’ble Court held that the matter should be pursued through individual petitions by affected
members and granted liberty to do so in its Order dated May 19, 2021.
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6. Subsequently, various merchant exporters filed individual petitions before the Delhi High Court as well as
the Bombay High Court.

HIGH COURT’S OBSERVATIONS & DECISION

7. While the petitions in Bombay remain pending, the Delhi High Court, in its Judgment dated February 13,
2025 (W.P.(C) 9461/2023 – Aims Retail Services Pvt. Ltd. vs. Union of India), quashed the CBIC’s
clarification thereby rendering them eligible to claim Duty Drawback on the export of such ‘unlocked’
mobile phones.

8. The Delhi High Court whilst quashing the CBIC’s clarification dated September 25, 2020 and thereby
restoring eligibility for duty drawback to merchant exporters of unlocked mobile phones inter alia held as
follows:
• Interpretation of “Taken into Use”:
Unlocking or activating mobile phones before export by inserting a SIM, switching on the device, and
making a brief call does not amount to “use” in a legal sense.
• Limited Nature of Unlocking:
The unlocking process does not involve the use of any core functionalities of the smartphone. In cases
of “air-activation,” even physical unboxing is avoided. Thus, the phones remain functionally intact and
unused from a commercial standpoint.
• Purpose and Effect of Unlocking:
Unlocking merely enables compatibility with networks in the destination country. It adds value to the
phone’s usability overseas but does not depreciate its value or exhaust its utility in any way.
• Statutory Context:
The Court noted that Section 75 of the Customs Act was amended in 1995 to include not just
manufacture, but also processing or carrying out any operation. Therefore, such preparatory steps for
export fall within the ambit of operations permissible before export without triggering disqualification
from drawback.

SUPREME COURT’S DECISION

9. The Department, being aggrieved by the Delhi HC’s decision, filed an SLP before the Hon’ble Supreme Court
against the Judgment of the Delhi High Court. However, the Hon’ble Apex Court, dismissed the SLP, by
stating that there was no ground for interfering with the decision of the Delhi HC in the Aims retail (supra),
 July 29, 2025
which affirmed that the unlocking or activation of mobile phones prior to export whether through physical
means or remote air-activation constitutes a technical configuration and does not amount to the goods
being ‘taken into use’.

TCA COMMENTS

THE HON’BLE SUPREME COURT DREW THE CURTAIN ON THIS LONGSTANDING BATTLE AND DECLINED TO
STIR THE SETTLED WATERS OF THE DELHI HIGH COURT’S REASONED JUDGMENT. BY REFUSING TO INTERFERE
WITH THE HIGH COURT’S REASONING, THE SUPREME COURT HAS EFFECTIVELY UPHELD THE VIEW THAT THE
UNLOCKING OR ACTIVATION OF MOBILE HANDSETS, FOR THE PURPOSE OF ENABLING THEIR FUNCTIONALITY
IN OVERSEAS MARKETS, DOES NOT AMOUNT TO ‘USE’ IN A MANNER THAT WOULD DISQUALIFY EXPORTERS
FROM CLAIMING DUTY DRAWBACK.

THIS JUDICIAL ENDORSEMENT NOT ONLY LENDS FINALITY TO THE CONTROVERSY BUT ALSO STRENGTHENS
THE LEGAL POSITION OF MERCHANT EXPORTERS WHO HAVE LONG OPERATED IN A CLIMATE OF
UNCERTAINTY DUE TO THE CBIC’S 2020 CLARIFICATION. IT ALSO DEMONSTRATES THE IMPORTANCE OF
JUDICIAL RESTRAINT IN MATTERS WHICH HAVE ALREADY BEEN ADDRESSED WITH DETAILED REASONING BY
A CONSTITUTIONAL COURT, AND UNDERSCORES THE IMPORTANCE OF STATUTORY CONSISTENCY IN TAX
ADMINISTRATION.

IMPORTANTLY, THE SUPREME COURT’S DECISION SENDS A BROADER SIGNAL REGARDING THE LIMITS OF
ADMINISTRATIVE CIRCULARS AND CLARIFICATIONS THAT LACK CLEAR LEGISLATIVE BACKING. THE RULING IS
EXPECTED TO PAVE THE WAY FOR UNIFORM RELIEF ACROSS JURISDICTIONS AND RESTORE CONFIDENCE
AMONG EXPORTERS, WHILE ALSO CALLING UPON THE REVENUE AUTHORITIES TO REVISIT POLICY
FRAMEWORKS THAT MAY HAVE BEEN DRIVEN MORE BY REVENUE CONSIDERATIONS THAN LEGAL MERIT.

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