Volkswagen challenges Indian customs over Rs 1.4 billion tax demand

German automobile manufacturer Volkswagen has expressed concern over the company's tax dispute with Indian customs authorities. During the hearing on Monday, the carmaker challenged the show-cause notice under the Customs Act on Monday. The company told the Bombay High Court the Rs 1.4 billion tax dispute is a "life and death" battle for the Group's operation in India.

According to a report by Bar & Bench, Volkswagen's counsel has alleged that over 100 of its consignments were detained by Indian customs officials since the issuance of a show-cause notice in September 2024.

The report mentioned that customs officials have alleged that Volkswagen misclassified the imports of its car models Audi, Skoda, and Volkswagen vehicles as "individual parts" instead of Completely Knocked Down (CKD) units, resulting in evasion of higher customs duties.

However, senior advocate Arvind Datar, who appeared for Volkswagen said that classifying import of parts as CKD units will have severe consequences for the company's operations in India.

Datar and advocate Rohan Shah argued that the customs authorities had not issued any show-cause notice for 12 years despite the automaker's consistent import of parts as standalone units not as CKD units.

The show-cause notice by customs comprises around 33,000 transactions undertaken between 2012 to 2024.

The advocates of Volkswagen stressed that the assessment should have been completed within six months of 2018 as per the Central Board of Excise and Customs manual. After 2018, the assessment should be completed within a "reasonable" period. However, Volkswagen's counsel questioned the excessive delay in issuing the show-cause notice.

"The SCN does not contain a single line explaining why it was issued after 12 years. Did I do something wrong?" Datar asked in the Bar & Bench report.

Datar contended that no further show-cause notice can be issued before a provisional assessment is completed under Section 28 of the Customs Act. The provisional assessment is still stuck as some parts of the company are still awaiting valuation.

Further, Datar highlighted orders wherein the customs authorities have classified Volkswagen's imports as parts, not as CKD units since 2012.

Following this the Bench advised that Volkswagen can import a CKD without a pre-assembled engine and then import the engine separately for clever tax planning.

Datar raised concern over the exorbitant amount demanded in the show-cause notice. He said this would prevent them from relying on any alternative remedies, including pursuing the matter. Datar said that the classification of imports as CKD units is under the ambit of customs authorities.

Meanwhile, Additional Solicitor General N Venkataraman, appearing for Custom authorities said Volkswagen has misclassified its imports as parts when they should have been classified as CKD units. Venkataraman said that if the engine and gearbox are pre-assembled, then it's subject to 30 percent customs duty or even 60 percent if mounted to the chassis. He cited the statement of Volkswagen's managing directors saying that the company has been importing almost entire vehicles as parts. He argued that the show-cause notice demanding 30 percent of duty after applying relevant exemptions is valid.

The next hearing of the case is scheduled for 20 February.