A Bombay High Court bench comprising Justices BP Colabawalla and Firdosh Pooniwalla stated on Wednesday that its ruling will be limited to only whether the show cause notice (SCN) issued by the customs authorities to Skoda Auto Volkswagen India is time-barred or not.
Earlier, Volkswagen’s lawyer Arvind Datar had argued that the customs duty demand of USD 1.4 billion is a matter of “life and death for us”, which meant that it could make survival difficult for the company in India. Datar criticised the 1.4 billion USD (approximately Rs 12,000 crore) demand as “unreasonable”, questioning how the company could be expected to pay such a sum after more than a decade of consistent classifications.
After six days of extensive arguments, the bench stated that its ruling will be limited only to whether the show cause notice issued by the Customs authorities against the automotive company was time-barred.
“Although we have heard extensively on all the issues, we will pass orders only on the issue of limitation,” the court stated.
It also indicated that even if the petition filed by the German auto giant is allowed and the court decides against the customs authorities, they are free to take action under Section 28 of the Customs Act for suppression of facts.
The court granted customs authorities time until March 10 to file their reply on certain factual aspects, particularly Volkswagen’s claim that no communications were made before 2023 requesting further documents.
Volkswagen has blamed Customs authorities for taking as long as 12 years to review some shipment records, but customs authorities stated that the investigation was delayed because the company did not provide necessary documents on time.
Volkswagen’s lawyer Arvind Datar also argued the customs duty demand is contradictory to Indian tax rules on imports of car parts. Government lawyers and Volkswagen lawyers presented arguments in court hearings about how imports should be classified.
Last week, Additional Solicitor General N Venkataraman had told Volkswagen’s lawyer Arvind Datar in court, “Don’t be the victim here. If you don’t follow the law then we will initiate action.”
The matter reached the bench after customs authorities, in a show cause notice to Skoda Auto Volkswagen India, alleged that it had provided misleading information to the customs 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 customs duty of around 35% but Skoda Volkswagen declared its imports as “separate components” in different shipments and paid only around 15% customs duty. The customs department stated that the import of unassembled parts of cars should have been declared as CKD units.
“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 Bombay HC had questioned.
“It is basically a completely built-up (CBU) model in an unassembled form. The only difference is that in the CBU model, the car can be driven off once it is cleared here but in its unassembled form, it is taken to the unit and assembled using screwdrivers,” the HC said.
The Bombay HC bench said the government has issued the 2011 notification specifying that “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 thing,” the Bombay HC bench had stated.
However, the company stated that the demand of over Rs 12,000 crore customs duty was “exorbitant”, “arbitrary, and illegal”. The company’s lawyer, Arvind Datar, had argued that a notification was issued in 2011 under which a 35% tax was imposed on CKD units. The company claimed that it had classified itself as importing individual parts and paid tax as per that category.