The Bombay High Court has expressed “prime facie” dissatisfaction with Skoda Auto Volkswagen India’s arguments against a USD 1.4 billion notice from the Customs Department. The company is challenging a September 2024 show-cause notice issued by the Customs Department, which claims that Skoda Auto Volkswagen India allegedly provided misleading information by misclassifying its import of Audi, Skoda, and Volkswagen cars as “individual parts” instead of “Completely Knocked Down” (CKD) units, thereby paying significantly lower customs duties.

The Customs Department asserts that the company should have declared its imports as CKD units, which attract a customs duty of around 35%, instead of declaring them as separate components and paying only around 15% duty. The High Court has questioned the company’s argument, saying that if almost all the parts are imported as individual components and then assembled in India, it should be classified as a CKD unit.

The HC bench has also stated that the 2011 notification specifying that there should not be a method to circumvent the notification, and if all importers do the same thing, the notification will be just a paper. The company, however, claims that the demand of over Rs 12,000 crore customs duty is “exorbitant”, “arbitrary”, and “illegal”, and that it has followed the correct classification and paid tax accordingly. The company’s lawyer, Arvind Datar, argued that a notification was issued in 2011 imposing 35% tax on CKD models, and the company had classified itself as importing individual parts, paying tax accordingly. The HC has not yet decided whether to entertain Skoda Auto Volkswagen India’s plea, expressing “prime facie” dissatisfaction with the company’s arguments.

Volkswagen is facing a significant crisis in India after being accused of evading taxes worth Rs 12,172 crore by the Maharashtra Customs department. The brand’s lawyer has labeled this situation as a “life and death” issue for the brand, sparking concerns that it may be forced to shut down its operations in the country. The customs department alleges that Volkswagen misclassified imports of Audi, Skoda, and Volkswagen vehicles as “individual parts” to evade higher customs duties, resulting in a penalty of 100% of the evaded duty, which amounts to Rs 24,544 crore, the largest penalty ever imposed on a carmaker by the Indian government.

The customs department has issued a show cause notice for 33,000 transactions between 2012 and 2024, and a Volkswagen official has confirmed that over 100 consignments were detained since the notice was issued in September 2024. However, the customs department has assured the Bombay court that no consignments belonging to the group have been detained and will not detain any such consignments in the future.

Despite the legal battle, Skoda Volkswagen has stated that it will continue to import its products into the country and is set to launch its global offering, the Golf GTI, in India soon. The brand’s lawyer has argued that the customs department has not issued a show cause notice in 12 years and has not provided any explanation for the sudden notice. If the penalties are not relieved, it remains to be seen whether Volkswagen will be forced to shut down its operations in India, which would have significant implications for the country’s automotive industry.

The Bombay High Court is currently hearing a case between the Customs Department and Skoda Auto Volkswagen, a German automaker, over a $1.4 billion tax demand notice issued by the Customs Department in September 2024. The notice alleged that the company imported car parts as individual units rather than as “completely knocked down” (CKD) kits, which attract higher import duties. Skoda Auto Volkswagen claims that this is a tax evasion scheme, while the company argues that it has been importing individual car parts for over 20 years and has always paid duties as per the individual parts classification.

The Court has heard the case extensively and questioned the company’s method of importing car parts, suggesting that it may be a way to circumvent tax laws. The Customs Department, however, has assured the court that it has not and will not block any of Skoda Auto Volkswagen’s consignments. The case is scheduled for further proceedings on February 20.

Skoda Auto Volkswagen’s counsel, Arvind Datar, has argued that the company’s method of importing individual car parts is not a new practice, and the authorities had consistently cleared its imports from 2011 to 2024, with duties paid as per the individual parts classification. He also pointed out that the Customs Department had not raised any issues with the company’s imports until a customs officer at Mumbai’s Nhava Sheva port unilaterally decided in 2024 that the company’s imports should be classified as CKD.

The Customs Department, on the other hand, claims that Skoda Auto Volkswagen misclassified its imports of Audi, Skoda, and Volkswagen vehicles, declaring them as separate components instead of CKD units, which attract a 30-35% import duty. The company allegedly paid only 5-15% duty, significantly reducing its tax liability. The case highlights the complex and sometimes contentious relationship between tax authorities and multinational corporations, with the High Court seeking to clarify the facts and determine the validity of the tax demand.