Life and death for us: Volkswagen to Bombay High Court on $1.4 billion tax demand by Indian Customs

The Volkswagen group on Monday told the Bombay High Court that the ₹1.4 billion tax dispute with the Indian Customs authorities is a "life and death" battle for the company's operations in India..Senior Advocate Arvind Datar, appearing for Volkswagen, said that Customs' decision to classify import of parts by the company as Completely Knocked Down (CKD) units will have severe consequences for Volkswagen’s operations. "It is life and death for us," he added.Meanwhile, the customs authorities assured the Bombay court that no consignments belonging to Škoda Volkswagen have been detained yet and that they would not detain any such consignments going forward over the $1.4 billion tax demand.This statement came after Volkswagen's counsel said that over 100 of its consignments were detained since the issuance of a show-cause notice (SCN) in September 2024.A Bench of Justices BP Colabawalla and Firdosh Pooniwalla was hearing Volkswagen's plea challenging the SCN issued under the Customs Act. As per the notice, Volkswagen misclassified its imports of Audi, Škoda, and Volkswagen vehicles as "individual parts" instead of CKD units, thereby evading higher customs duties. The SCN pertained to around 33,000 transactions undertaken between 2012 to 2024. .During Monday's hearing, Volkswagen’s counsel Senior Advocates, Arvind Datar and Rohan Shah, argued that the SCN was issued after an excessive delay and is therefore time-barred. He pointed out that the customs authorities had not issued any show-cause notice for 12 years despite the company’s consistent import of parts as standalone components, not CKD units. "The SCN does not contain a single line explaining why it was issued after 12 years. Did I do something wrong?" Datar questioned.He emphasized that according to the Central Board of Excise and Customs (CBEC) manual, assessments should have been completed within six months until 2018. After 2018, the law stipulates that assessments must be completed within a “reasonable time,” a requirement that has not been met in this case, Datar argued..He further contended that no show-cause notice under Section 28 of the Customs Act can be issued before a provisional assessment is completed. However, he highlighted that the provisional assessment has not been completed because certain parts are still awaiting valuation, particularly those imported from related parties. "Until a special valuation report is provided, it is impossible to complete the provisional assessment," Datar said. Volkswagen’s imports, he argued, are still stuck at the provisional assessment stage and the customs authorities should not have issued the SCN in the absence of completed assessments..In support of his case, Datar referred to numerous orders since 2012 where the customs authorities had consistently classified Volkswagen's imports as parts, not CKD units. He argued that the customs authorities are now estopped from changing their position after more than a decade as the consistent classification of imports as parts is a fact that cannot be reversed..At this juncture, the Court remarked that the strategy followed by Volkswagen in importing cars as CKD but without engines is clever tax planning. "What you can do according to you is that to get over higher rate of duty, you can import a CKD without a pre-assembled engine and then import the engine separately. That is clever tax planning," the Bench said. Meanwhile, Datar raised concerns about the exorbitant amount demanded in the SCN. He argued that the scale of the demand makes it unreasonable to rely on alternative remedies, including pursuing the matter before adjudicating authorities. "Merely because my components, along with other parts, can become a car doesn't mean I am importing a car," he maintained..He contended that the classification of imports as CKD units is beyond the scope of their authority, given that Volkswagen had followed a consistent model for importing components as parts.On the other hand, Additional Solicitor General N Venkataraman, representing the customs authorities, argued that Volkswagen had indeed been importing significant parts of whole cars into India, which should have been classified as CKD units. He asserted that the company had misclassified its imports as parts when they should have been classified as CKD units, pointing out that if the engine and gearbox are pre-assembled, the goods are subject to a higher customs duty of 30% or even 60% if mounted to the chassis. .Venkataraman cited statements from Volkswagen's managing directors acknowledging that the company had been importing almost entire vehicles as parts. He argued that under the law, such imports should be taxed accordingly, with the SCN rightly demanding 30% duty after applying relevant exemptions.The arguments will continue on February 20.