The Bombay High Court is hearing a plea by the German carmaker Volkswagen against a show cause notice issued by the Customs authorities. According to Customs, Volkswagen had been importing almost entire cars, broken down into individual parts, to qualify for a lower tax rate of 5-15%. The tax authorities argue that the duty for cars imported as Completely Knocked Down (CKD) kits should be between 30-35%.
The Bombay High Court today observed that “there seems to be some logic” to the tax authorities’ claims. The court questioned whether importing an entire car, split into separate parts, could be considered a case of tax avoidance.
The High Court further pressed Volkswagen’s legal counsel, asking whether merely breaking up the car into separate parts and having them delivered in different shipments undermines the intended CKD duty rate of 30-35%. The court noted that if such a practice were permitted, it could defeat the very purpose of CKD duties, as manufacturers could all claim lower tax rates by importing individual parts instead of complete CKD kits.
The Customs department argued in court that the tax demand applies specifically to Volkswagen’s Aurangabad facility. It claimed that in this facility, imported parts account for over 97% of the car’s value. Customs further alleged that Volkswagen was effectively importing entire cars in individual parts to reduce its tax liability.
Meanwhile, Volkswagen has opposed the tax claim, likening it to a ‘retrospective’ demand. The company argues that Customs has based the demand on a 2011 notification but only issued the notice in September 2024, after a delay of over 14 years. Volkswagen contends that Customs had allowed the existing practice to continue for over 30,000 shipments before suddenly raising objections in 2024.
Volkswagen has also argued that it claimed the lower tax rate of 5-15% based on advice from the then Revenue Secretary of the Finance Ministry. According to Volkswagen, the Secretary had opined that importing parts should not attract the higher CKD duty of 30-35%.
The company has further warned that such a retroactive tax demand could undermine foreign investors’ confidence in the ease of doing business in India. Volkswagen fears that while the show cause notice currently amounts to $1.4 billion, the imposition of a 100% penalty could inflate the tax bill to over $2.8 billion.
The Bombay High Court is expected to continue hearing the case on 26 February.
(Edited by : Vivek Dubey)
