Volkswagen tax case: Bombay High Court says will decide only whether tax demand is time-barred

The Bombay High Court on Wednesday concluded hearings in auto giant Volkswagen's $1.4 billion tax dispute with Indian customs authorities..Pertinently, the Court said it will only decide on the issue of limitation, i.e. whether the customs authorities failed to adhere to the deadline set by the law for raising the tax demand.After six days of extensive arguments, the Bench of Justice BP Colabawalla and Firdosh Pooniwalla emphasised that the ruling will be limited to whether the show-cause notice (SCN) issued by the customs authorities against the automotive company was time-barred."Although we have heard extensively on all the issues, we will pass orders only on the issue of limitation," the Court stated. It also indicated that even if the petition filed by the German auto giant is allowed and the Court decides against the customs authorities, they are free to take action under Section 28 of the Customs Act for the suppression of facts.The Court granted the customs authorities time until March 10 to file their reply on certain factual aspects, particularly Volkswagen’s claim that no communications were made before 2023 requesting further documents..The dispute revolves around the show cause notice issued by Indian Customs, alleging that Volkswagen misclassified its imports of Audi, Škoda, and Volkswagen vehicles as individual parts rather than Completely Knocked Down (CKD) units, which attract higher customs duties. The SCN covers approximately 33,000 transactions under scrutiny.Volkswagen’s legal team led by Senior Advocate Arvind Datar argued that the show cause notice was issued after a 12-year delay, making it time-barred. Datar emphasized that the company had consistently imported components as parts and not CKD units, and that a 2011 clarification from the revenue secretary validated this classification. He also pointed out that the provisional assessments required to determine the correct duty had not been completed, leaving Volkswagen in a position where it could not pass on the tax burden. “It is life and death for us,” Datar said, stressing how crucial the case is to Volkswagen’s operations in India. He criticized the 1.4 billion USD demand as unreasonable, questioning how the company could be expected to pay such a sum after over a decade of consistent classifications..In response, Additional Solicitor General N Venkataraman, representing the customs authorities, countered that Volkswagen intentionally misclassified its imports. Venkataraman argued that the automaker had failed to disclose key details about its operations, particularly the fact that the Aurangabad plant, where cars are assembled, imported nearly all of its parts, with only assembly taking place at the plant. “We are not at fault for issuing the notice; it is your fault for not classifying the goods correctly,” Venkataraman told the court. He clarified that the show cause notice applies only to the Aurangabad plant’s transactions and not the Pune plant, where Volkswagen manufactures most parts domestically.Venkataraman also contended that Volkswagen misrepresented the nature of its imports, which were not merely parts but nearly complete vehicles. He argued that parts like engines and gearboxes were pre-assembled, making the imports liable for classification as CKD units, subject to higher duties of 30% or even 60% if mounted to the chassis. “Merely because you bring investment, it cannot be an erosion of sovereign space… We as a nation cannot compromise on sovereignty in taxation and regulatory matters,” Venkataraman said. He emphasised that guidelines from the World Trade Organization (WTO) and the World Customs Organization (WCO) were advisory in nature and could not supersede India’s laws on customs duties.Venkataraman also addressed the timing of the show cause notice, asserting that it was based on new information uncovered after a Directorate of Revenue Intelligence (DRI) raid. During the raid, Volkswagen’s Managing Director allegedly admitted that the Aurangabad plant imported 97% of its parts for assembly. Venkataraman argued that the customs authorities had acted within their rights to issue the notice and criticized Volkswagen for not fully disclosing its operations.