Volkswagen seeks quashing of $1.4 billion Customs show cause notice, calls it ‘matter of life and death’

German auto giant Volkswagen approached the Bombay High Court seeking to quash a $1.4 billion show cause notice issued by the Office of the Commissioner of Customs in Maharashtra, which alleges willful tax evasion. The company has warned that if a penalty is levied, its total tax burden could soar to $2.8 billion, a move VW describes as a “matter of life and death.”

The show cause notice, issued by Customs, accuses the automaker of misclassifying imported car parts to avail lower duties of 5-15% instead of the alleged applicable rate of 30-35%. Customs claims this resulted in a substantial loss to the exchequer.

The Customs department on Monday, February 17, informed the Bombay HC that no imports of the company has been or will be stopped following the tax demand notice. The departments alleges that the company misclassified the imports of Audi, Skoda and Volkswagen cars as “individual parts” when it should have been “completely knocked down (CKD)” units, which resulted in Volkswagen paying substantially low custom duties.

A CKD unit is taxed at 30-35% and separate components at 5-15%. The company declared its imports separate components and parts in different shipments.

The bench of Justices B P Colabawalla and Firdosh Pooniwalla heard the matter extensively and will continue the matter on February 20. The bench raised critical questions for Volkswagen in terms of importing parts as per their convenience and labelling the same as an individual part.

“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,” said Justice Colabawalla, reported PTI.

“Even if you 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,” he added.

The company, however, argues that it has followed the same classification practice in all its global manufacturing hubs, including Mexico, Thailand, and Malaysia.

The company contends that a sudden change in interpretation by a single officer could set a dangerous precedent, impacting not just Volkswagen but the entire automobile industry in India.

Volkswagen claims that the same process has been applied to over 30,000 consignments without issue. The company submitted before the court that this is the first instance where a higher levy is being sought, adding that it has been fully compliant with a 2011 notification governing duty rates.

The automaker also raised concerns about the impact on India’s business-friendly image, warning that such an unpredictable tax environment could make the country a “laughing stock” and hinder the Ease of Doing Business efforts.

The case is currently being heard in the Bombay High Court, with further arguments scheduled for the post-lunch session.

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