Bombay High Court Reviews Skoda Auto Volkswagen India’s Challenge to $1.4 Billion Tax Notice

On Monday, the Bombay High Court expressed preliminary reservations regarding Skoda Auto Volkswagen India’s challenge against the customs department's $1.4 billion (approx. ₹11,526 crore) tax notice. The notice alleges that the automaker underpaid customs duties on imported car components.

A two-judge bench, led by Justice B.P. Colabawalla, acknowledged the detailed work undertaken by the customs department before issuing the show-cause notice. The court noted that Skoda Auto Volkswagen India would need to present a strong case to justify its plea at this stage.

Also Read: Skoda Volkswagen India Files Plea In HC Challenging $1.4 Billion Tax Demand

The company approached the court on January 29, following a government demand for customs duties at completely knocked down (CKD) rates on imports spanning the past 12 years. Authorities have sought approximately ₹11,526 crore (around $1.4 billion), along with interest, and have issued a notice for the potential confiscation of imported goods. The tax notice, dated September 30, 2024, questions the classification of parts and components imported for Skoda Auto Volkswagen’s Aurangabad factory.

The customs department contends that these imports qualify as CKD kits—unassembled motor vehicle parts—used for assembling vehicles between March 2012 and July 2024. CKD kits are subject to a 35% customs duty, whereas the company allegedly categorized the imports as individual components and subassemblies, incurring lower duties of 5-15%.

Also Read: India's $1.4 Billion Tax Demand a Matter of Survival for Volkswagen India Unit: Report

According to the government, Skoda Auto Volkswagen India utilized its software, NADIN, to break down vehicle orders into components and subassemblies. These parts were then imported at a lower duty rate and subsequently assembled into finished vehicles at the Aurangabad plant. The customs department argues that if nearly all parts of a vehicle are imported separately and assembled locally, the classification should fall under the CKD category.

During the hearing, the court took note of the customs department’s investigative efforts, particularly the scrutiny of the KEN number, a unique identifier used to track vehicle parts.

“We commend the customs officer for meticulously reviewing each part number and conducting extensive research before issuing the show-cause notice,” observed the court.

The tax notice requires Skoda Auto Volkswagen to justify why its provisionally assessed import bills from March 2012 to July 2024 should not be reassessed under the CKD classification.

Additional Solicitor General N. Venkatraman, representing the government, asserted that the customs department should be allowed to adjudicate the matter and seek clarification from the company regarding the show-cause notice. He also addressed concerns regarding the timing of the notice, explaining that authorities had been gathering information for several years. A breakthrough came following a raid by the Directorate of Revenue Intelligence (DRI), which uncovered key documents suggesting potential duty evasion.

Also Read: Volkswagen Faces $1.4 Billion Tax Evasion Allegations in India: Here’s What You Need To Know

Skoda Auto Volkswagen’s counsel, Arvind Datar, countered that the tax authorities had misinterpreted the NADIN software, which is intended for production planning, not for altering the classification of imports. He further argued that a March 2011 notification clearly distinguishes between CKD kits and standalone parts and that this differentiation should apply to Skoda’s imports, potentially rendering the tax notice’s assessment incorrect.

The Bombay High Court has yet to decide whether it will intervene at this stage of the proceedings.