Bombay High Court Seeks Customs Department’s Justification on $1.4 Billion Tax Demand from Skoda Auto Volkswagen India

Mumbai, February 26 – The Bombay High Court has directed the Customs Department to submit an affidavit explaining why its September 2024 show-cause notice demanding $1.4 billion (over ₹12,000 crore) in taxes from Skoda Auto Volkswagen India is not barred by limitation.

A division bench comprising Justices B P Colabawalla and Firdosh Pooniwalla has been extensively hearing the plea filed by the automaker, which has challenged the notice, calling it arbitrary and illegal. The company argues that the sudden tax demand after years of compliance under the existing tax structure is unjustified.

Customs' Allegations Against Volkswagen Group​

The Customs Department has alleged that Skoda Auto Volkswagen India misclassified its imports of Audi, Skoda, and Volkswagen vehicles, declaring them as individual parts instead of Completely Knocked Down (CKD) units. This classification resulted in the company paying significantly lower customs duties.

• CKD units attract a 30-35% duty, whereas Volkswagen paid only 5-15% by importing parts as individual components.
• The authorities claim the company deliberately misled Customs by splitting shipments to avoid the higher duty bracket.

Company’s Defense and Court’s Observations​

Senior counsel Arvind Datar, representing Skoda Auto Volkswagen India, contended that the tax demand is unfair, as the company has been paying duties under the same classification for over a decade. The sudden reclassification to CKD units was unjustified, he argued.

However, Additional Solicitor General N Venkatraman, appearing for the Customs Department, maintained that a thorough investigation revealed that the automaker was liable to pay duties under the CKD category.

The court, however, clarified that at this stage, it would only focus on the issue of limitation. The Customs Department has been directed to file its affidavit by March 10 explaining how the demand is not time-barred.

This case holds significant implications for the automobile sector, particularly regarding customs duty classifications and retrospective taxation. The final ruling on the matter will determine whether Skoda Auto Volkswagen India will have to comply with the massive tax demand or if it will receive relief from the High Court.