The Bombay High Court on Monday observed that it was 'prima facie' unconvinced by auto giant Volkswagen’s arguments in the case concerning $1.4 billion tax demand against it..The case involves a 1.4 billion USD show-cause notice (SCN) issued by Customs authorities, alleging that Volkswagen misclassified its imports of Audi, Škoda, and Volkswagen vehicles between 2012 and 2024 as individual parts instead of Completely Knocked Down (CKD) units, which attract higher customs duties.A Bench of Justice BP Colabawalla and Justice Firdosh Pooniwalla stated that, prima facie, it was not convinced by Volkswagen's claim that the parts need to be classified as CKD only when all parts are imported as a single kit. Such a reading will defeat the purpose of the law since manufacturers can then bring some parts separately and claim lower tax."The entire fulcrum of your arguments is everything has to come in one go... One kit... Prima facie we are not impressed with the argument. I can easily ask any supplier to bring my car in 4 different packages. In which case, you can say... this is not a car. This is effectively defeating the (2011) notification," the Court stated..The 2011 notification differentiates between various forms of imported vehicles, specifying different customs duties. Imports as CKD kits attract a higher duty while import as parts attract lower tax.Volkswagen is being scrutinized for allegedly misclassifying its imports, which it claims were made as parts, not CKD units. The notice pertains to around 30,000 transactions over a 12-year period..During earlier hearings, Volkswagen's counsel, Senior Advocate Arvind Datar, had argued that the SCN was issued 12 years after the alleged infractions, making it time-barred. Datar emphasized that Volkswagen had consistently imported parts, not CKD kits, and had received clarification from the Revenue Secretary in 2011 validating this practice. In response, Additional Solicitor General (ASG) N Venkataraman, representing Customs authorities, rejected Volkswagen’s claims, accusing the automaker of intentionally misclassifying its imports. Venkataraman pointed to the operations at Volkswagen’s Aurangabad plant, which imports nearly all parts for assembly..Venkataraman further stated that the SCN was issued based on new evidence uncovered during a Directorate of Revenue Intelligence (DRI) raid, which revealed that Volkswagen’s own officers had admitted to importing 97% of the plant’s parts for assembly. He emphasized that Volkswagen had not disclosed this information earlier.During Monday’s hearing, Venkataraman submitted that the SCN was not final order and suggested that Volkswagen has the opportunity to present more information to the authorities and that the matter could be adjudicated within six months if the company cooperates. "We will now pass a common adjudication in all the matters. In 6 months, we will complete everything. They should cooperate,” he said..However, Datar refuse to take up on the offer, pointing out that Volkswagen's imports were consistently classified as parts, not CKD units, and that other automakers, including Maruti Suzuki, followed the same practice, with only Volvo importing vehicles as CKD kits. He emphasized that the SCN was based on a false assumption that all automakers imported CKD units.At this point, the bench advised Volkswagen to present its arguments before the appropriate adjudicating authority, noting that the case involved questions of fact that could be addressed through further submissions. “This is something you should go on before the authority and point out. See... your whole SCN is proceeding on the wrong premise. This is the premise on which you should have proceeded, and the authorities will have withdrawn the proceedings,” the Court observed.The Court also commended the Customs officer who issued the SCN."You should indeed commend the customs officer as he had done some serious research before issuing the SCN by painstakingly going through KEN numbers, VIN numbers, etc,” the Bench remarked..KEN number refers to a unique identification number used primarily to identify parts of car that are meant to be assembled at a single plant.Further, the Court addressed the issue of whether the Aurangabad plant was engaged in manufacturing or merely assembling parts. Datar cited a 2011 report from the Automotive Research Association of India (ARAI), which indicated that more than 50% of activities at the Aurangabad plant involved changing the functional and physical state of parts, qualifying as manufacturing. ARAI is a research institute affiliated with the Ministry of Heavy Industries, Government of India.The Court will continue hearing the matter on Tuesday.
