$1.4 billion tax demand: Prima facie dissatisfied with Skoda Volkswagen's arguments, says Bombay HC

The Bombay High Court on Monday expressed "prime facie" dissatisfaction with Skoda Auto Volkswagen India's arguments against a USD 1.4 billion notice from the Customs department.

The HC also commended a department officer for his dedicated efforts and thorough research prior to issuing the notice. "Prima facie, we are not satisfied with your (Skoda Auto Volkswagen India) argument. This is only prima facie," a division bench of Justices B P Colabawalla and Firdosh Pooniwalla said.

"To entertain such a plea at the stage of show cause notice is something you have to convince us. This is troubling us whether we should entertain the plea at the stage of show cause notice," it added.

The notice claimed the German group, led in the country by Skoda Auto Volkswagen India, allegedly provided misleading information to the department by misclassifying 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, as per the Customs. The department said import of various unassembled parts of cars should have been declared as CKD units.

"One thing though, we must commend the Customs officer because he has painstakingly gone through each number of the part. Because every part has a specific number. Each part has a KEN number," Justice Colabawalla said.

KEN number refers to a unique identification number used primarily for automotive parts, allowing Customs officials to track which specific car model the parts belong to when importing large quantities of individual components.

"This officer has gone through each number and imported. He has done some serious research before issuing the show cause notice," the HC said praising the officer.

If almost all the parts, barring one or two, are imported as individual components and then assembled here at the company's Aurangabad unit, then why should it not be held under the CKD category, the HC noted on Monday.

"It is actually basically a completely built up (CBU) model in an unassembled form. Only difference is that in the CBU model, the car can be driven off once it is cleared here but in the unassembled form it is taken to the unit and assembled with screw driver technology," the HC said.

Since last week, the bench has been hearing a plea filed by the company challenging the September 2024 notice issued to it by the Customs department.

The company has said the demand of over ₹12,000 crore was "exorbitant", "arbitrary and illegal".

The company's counsel, Arvind Datar, had argued that a notification was issued in 2011 under which 30-35 per cent tax was imposed on the CKD model. Datar claimed the company has classified itself as importing individual parts and has paid tax as per that category.

The HC on Monday said the government has issued the 2011 notification specifying the 10, 30 and 60 per cent categories for a purpose, adding "there should not be a method by which the notification is circumvented".

"Otherwise the notification is just a paper. It is not effective. Or else all importers will do the same," the bench noted. The bench will continue hearing the matter on Tuesday.

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