Unlocking Mobile Phones for Market Compatibility Is Not 'Taken into Use,' Delhi High Court Rules

In a significant relief for mobile merchant exporters, the Delhi High Court has ruled that the process of “unlocking” or “activating” mobile handsets to align them with foreign regional networks does not disqualify an exporter from claiming duty drawbacks under the Customs Act, 1962.

The division bench comprising Justice Prathiba M. Singh and Justice Dharmesh Sharma set aside circulars and show-cause notices issued by the Central Board of Indirect Taxes & Customs (CBIC), which had previously argued that such activation amounted to the goods being “taken into use” after manufacture, thereby rendering them ineligible for drawbacks under the Customs and Central Excise Duties Drawback Rules, 2017 .

The Conflict: Configuration vs. Consumption

The dispute centered on the interpretation of the phrase “taken into use after manufacture.” Merchant exporters, represented by the Mobiles and Electronics Indian Merchants Exporters Association (MEIMEA), routinely purchase locked mobile phones from original equipment manufacturers (OEMs). Because these phones are often "regionally locked" to India, exporters carry out a one-time activation process—ranging from manual SIM insertion to modern "air-activation"—to render the devices marketable in destination countries.

The Customs Department contended that once a device is powered on or a SIM card is inserted, it ceases to be "new" and has been “taken into use,” triggering the second proviso to Rule 3(1) of the Duty Drawback Rules, which disallows drawbacks on used goods.

A Technological Perspective

The Court found this interpretation overly narrow, noting that mobile phones are multi-functional hubs of communication. The unlocking process is a “configuration” for market compatibility rather than a transition of the product into a "used" state.

Notably, OEMs including Samsung India and United Telelinks (manufacturers of Karbonn) clarified in their submissions that they exercise no objection to this practice. They argued that unlocking is an essential, one-time software adjustment to enable the handsets to function abroad, essentially making them “ready to use” for the end consumer.

Key Observations from the Court

The bench emphasized that duty drawbacks are designed to foster global competitiveness by ensuring that domestic taxes aren't loaded onto export goods.

> "The unlocking/activation of the mobile phone enables the same to be used in a particular geographical territory... making the mobile phone more usable in the destination country and the same would therefore not constitute 'taken into use' under proviso to Rule 3 of Duty Drawback Rules."

> "The process of unlocking/activation of the mobile phones, by any method, would not result in depreciation in the value of the said phones."

> "If the product is to be exported to a foreign country and enabled for usage in the local network... unlocking/activating the phone to enable it to be used in the destination country would in the opinion of this Court be mere ‘Configuration’ of the phone for the concerned territory and nothing more."

The Verdict and Its Impact

Quashing the impugned clarifications and the subsequent show-cause notices, the Court has ordered that the Customs Department process individual claims for drawback in accordance with the law.

In a balanced move to address procedural delays, the Court directed that if the drawback claims are processed and granted within three months, no interest is payable. However, should authorities fail to meet this timeline, interest under Section 75A of the Customs Act will apply.

This judgment offers much-needed clarity for the mobile export industry, distinguishing between technical configuration and commercial usage. It reinforces the principle that fiscal incentives for exporters should be construed in a manner that facilitates, rather than hinders, international trade.