Rs 12,246 crore tax demand: Won't stop consignment of Volkswagen unit: Customs dept to Bombay HC

Mumbai: The customs department on Monday told the Bombay High Court that it has not, and will not, stop any consignment of Skoda Auto Volkswagen India pursuant to a September 2024 show cause notice issued to the German firm seeking Rs 12,246 crore ($1.4 billion) in tax.

The company last month filed a petition in the HC challenging the notice, terming it as "arbitrary and illegal".

The tax demand notice relates to the firm allegedly importing car parts as individual units rather than as “completely knocked down” (CKD) units, which attract higher import duties.

A division bench of Justices B P Colabawalla and Firdosh Pooniwalla heard the matter extensively on Monday and said it would continue the hearing on February 20.

The bench questioned what if the company imports all components of the car except one item and then says they are only parts and not a CKD unit.

"You (petitioner) bring in all the components except for one - let's say the gear box. You would still fall under the parts component and submit import duty at a lower rate. That is just clever tax planning," Justice Colabawalla said.

"Even if you (petitioner company) import all parts in one assignment except the gear box and engine your argument of individual parts would stand, won't it? Still you won't come under the CKD unit component," he added.

Additional Solicitor General N Venkatraman, appearing for the customs department, told the court the central agency under the Ministry of Finance has till date not stopped any consignment of the German automaker and would not do so going forward.

The bench accepted the statement.

Senior counsel Arvind Datar, appearing for Skoda Auto Volkswagen, sought for the show cause notice to be quashed, terming it as illegal and arbitrary.

The authorities cannot now demand such an exorbitant amount in 2024 after having cleared the company's bills from 2011 till 2024 wherein tax was paid as per the individual parts component, he argued.

Datar said the automobile company has been importing individual parts of cars and not a 'completely knocked down' unit (CKD) as claimed by the customs authorities.

"The whole controversy is about whether it is parts of completely knocked down units. The petitioner company has been importing parts since 2001," Datar submitted.

In 2011, a modification was issued increasing the customs duty imposed on CKD units. From 2011 to 2024, the petitioner company did not receive any notice, the senior counsel told the bench.

But in September 2024, one customs officer at the Nhava Sheva port near Mumbai decides that the company's import falls under the CKD unit category (unassembled condition) and issues a show cause notice, Datar argued.

"The authorities did not rake up the issue from 2011 to 2024. Why suddenly in 2024? Till 2023-2024, the company has been paying duty as charged for parts and not CKD. The show cause notice has to be quashed," the senior counsel urged.

The German group, led in the country by Skoda Auto Volkswagen India, has been accused of deliberately misleading customs authorities through its mode of import of parts as individual units rather than as a component of a 'completely knocked down' unit, which attracts higher import duty.

The notice alleged that the company misclassified its imports of Audi, Skoda and Volkswagen cars as "individual parts" instead of "completely knocked down" (CKD) units, thereby paying significantly lower customs duties.

The CKD units attract a 30-35 per cent duty, but Volkswagen declared its imports as separate components in different shipments and paid only 5-15 per cent in duties, it said.

According to authorities, imports of various unassembled parts of cars should have been declared as CKD units.

Instead, the automaker paid a duty of only 5 to 15 per cent by choosing to declare its imports as individual components arriving in separate shipments.