High Court To Customs Dept On Volkswagen-Skoda Import Duty Case: Explain Delay In Tax Notice

In the high-stakes legal battle between India and Volkswagen Group, the Bombay High Court has directed the Customs department to explain the delay in delivering the show-cause notice Skoda Auto Volkswagen India, demanding $1.4 billion (₹12,000 crore) in taxes. This is an advancement that we knew would come sooner or later. The court intends to find out if the notice was issued within the legally valid timeframe.

Court Seeks Clarification on Limitation

The bench comprising Justices B P Colabawalla and Firdosh Pooniwalla has asked the Customs Department to file an affidavit by March 10, addressing this specific issue. The court made it clear that while it has extensively heard arguments on various aspects of the case, its current focus is solely on whether the demand violates the time limit prescribed by law.

Customs Defends Its Investigation

On behalf of the Customs Department, Additional Solicitor General N Venkatraman stated that a thorough investigation had been conducted, leading to the conclusion that the company should have been paying tax under the CKD category all along.

The government’s 2011 notification defines tax rates for vehicle imports at 10%, 30%, and 60% based on the level of assembly. The Customs department alleges that the company deliberately structured its imports using NADIN software, to minimize tax payments, thereby bypassing the intended purpose of the notification.

And for the delay, the department had come up with an explanation previously. During one of the previous sessions, the bench asked the customs department:

Their (Volkswagen) argument is that once you (customs) have classified them under one category all these years, can you now re-classify them.

Answering this, Additional Solicitor General N Venkatraman stated that the 'new facts' about how the company was importing and assembling, were only uncovered recently. Volkswagen has been doing the same for over 12 years. The tax department also made it clear that the delay in picking out the discrepancy was due to VW's failure to provide necessary documents in time.

Court’s Observations

The court acknowledged the significance of the 2011 notification and expressed concern over potential misuse. It remarked:

There is a purpose for the 2011 notification. There should not be a method by which the notification is circumvented. Otherwise, the notification is just a piece of paper and ineffective. If allowed, all importers will do the same.

For now, the court has limited its examination to the issue of limitation. Whether the tax demand stands legally valid will depend on whether the Customs department can justify the timing of its notice in its affidavit due by March 10.

Volkswagen Group Tax Evasion: The Story So Far

Skoda Auto- the company that handles Volkswagen Group's India operations was dragged into trouble after an ' intentional misclassification' was picked out by the Customs Department. It was found out that Volkswagen Group evaded 1.4 billion USD in tax by misclassifying semi-built cars as car parts, during the import process.

India levies 30% tax on semi-built cars (CKD kits) and just 15% import duty on car parts. Tnis meant that VW Group had to pay just $981 million in duty if they could break down and mis-classify CKDs as car parts, instead of the 2.35 billion USD otherwise.

Volkswagen used their NADIN software to do this and ship in several units of the Superb, Kodiaq, Tiguan, Audi A4 and A6 under reduced import duty and in seperate shipments ( so that they don't get caught).

Once the discrepancy was picked out by the Customs, the carmaker was taken to court, after it contested the 2.8 Billion USD tax demand (including fine) by the government. This also happens to be the largest India has ever imposed on any automaker. Volkswagen called it a 'matter of life or death'.

The Additional Solicitor General, however, asked Volkswagen to not play the victim and further stated that they would have to follow the law, failing which would initiate action in accordance with the provisions of law.