Skoda Auto Volkswagen India Faces $1.4 Billion Tax Demand

In a significant development, the Customs department in India has informed the Bombay High Court that no consignment from Skoda Auto Volkswagen India has been or will be stopped following a tax demand notice of $1.4 billion. The notice was served on the company for allegedly providing misleading information regarding its imports. The case, which has garnered considerable attention, was heard by a division bench comprising Justices B.P. Colabawalla and Firdosh Pooniwalla on Monday.

The tax demand notice, which amounts to over INR 12,000 crore, was served on Skoda Auto Volkswagen India for allegedly misclassifying its imports. The company is accused of declaring its imports of Audi, Skoda, and Volkswagen cars as “individual parts” instead of “Completely Knocked Down” (CKD) units. This misclassification allegedly allowed the company to pay significantly lower customs duties. While CKD units attract a customs duty of 30-35%, Volkswagen declared its imports as separate components in different shipments, paying only 5-15% in duties.

The case was brought to the Bombay High Court last month by Skoda Auto Volkswagen India, which challenged the tax demand notice, terming it “arbitrary and illegal.” The court heard the matter extensively and decided to continue the hearing on February 20.

During the hearing, the bench posed tough questions to the company’s legal representatives. Justice Colabawalla highlighted a potential loophole in the company’s classification strategy. He suggested that the company could import all components of a car except for one item, such as the gearbox, and still classify them as individual parts, thereby paying a lower import duty. This, according to the bench, could be seen as “clever tax planning.”

Justice Colabawalla elaborated, “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.” He further added, “Even if you (petitioner company) import all parts in one assignment except the gearbox and engine, your argument of individual parts would stand, won’t it. Still, you won’t come under the CKD unit component.”

Skoda Auto Volkswagen India has maintained that the tax demand is “exorbitant” and has challenged the notice in court. The company argues that its classification of imports as individual parts is in compliance with the relevant regulations and that the tax demand is unjustified.

The case has significant implications for the automotive industry in India, as it raises questions about import classifications and customs duties. The outcome of the case could set a precedent for how such disputes are handled in the future.

As the hearing continues, the Bombay High Court will delve deeper into the technicalities of import classifications and the legality of the tax demand. The next hearing is scheduled for February 20, and the court’s decision will be closely watched by industry stakeholders and legal experts alike.

The ongoing legal battle between Skoda Auto Volkswagen India and the Customs department highlights the complexities of import classifications and the potential for significant tax demands. As the case progresses, it remains to be seen whether the court will uphold the tax demand or rule in favor of the company. The outcome will undoubtedly have far-reaching implications for the automotive industry and the broader business community in India.