HC prima facie dissatisfied with Skoda’s arguments in $1.4 bn tax dispute

The Bombay High Court (HC) on Monday voiced a prima facie dissatisfaction with Skoda Auto Volkswagen India’s arguments in its challenge against a $1.4 billion tax evasion notice, issued by the customs department for paying lesser tax on import of car components.

The two-judge bench led by Justice B.P. Colabawalla also praised a customs’ officer for his “meticulous work and research” before issuing the show-cause notice.

The bench said the carmaker would need to make a compelling case for why the plea should be entertained at this stage. “Prima facie, we are not satisfied with your argument. It is troubling us whether we should entertain the plea at the stage of the show-cause notice,” the bench added.

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Skoda Auto had moved the court on 29 January after the government sought customs duty at CKD (completely knocked down) rates on items imported over the past 12 years. Tax authorities have demanded a customs duty of about ₹11,526 crore (around $1.4 billion), along with interest, from the German automaker and issued a notice to confiscate the imported goods. Apart from the amount, the tax notice of 30 September 2024 challenges the company’s classification of parts and components imported for its Aurangabad factory.

The government says these imports should be classified as CKD kits—unassembled motor vehicle parts—for cars produced between March 2012 and July 2024. CKD implies importing all components of a car in an unassembled state, which can then be put together to get a functional vehicle.

The government has argued that instead of importing CKD kits paying 35% duty, Skoda Auto Volkswagen India Pvt. Ltd used its software NADIN to break down vehicle orders to components and subassemblies. These were then imported at a lower duty of 5-15%, and assembled locally to finished vehicles.

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During the hearing on Monday, the bench made a preliminary observation that if all parts barring one or two are imported as individual components and then assembled at the company’s Aurangabad unit, the imports could potentially fall under the CKD category.

The bench acknowledged the diligent efforts of the customs officer for thoroughly reviewing the imported parts and their corresponding identification number—specifically the KEN number, a unique number that helps customs officials track which car model the parts belong to.

“We commend the customs officer because he has painstakingly gone through each number of the part and done serious research before issuing the show-cause notice,” the judge said.

The company has challenged the tax notice, which had asked the carmaker to explain why its provisionally assessed bills of entry for importing goods between March 2012 and July 2024 should not be reassessed as CKD kits.

Additional solicitor general N. Venkatraman argued that the customs department should be allowed to adjudicate on the matter and seek answers from the company regarding the show-cause notice.

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On the delay in issuing the show-cause notice, he explained that the authorities had sought information from the company for several years; however, it was only after a raid by the Directorate of Revenue Intelligence (DRI) that key documents were discovered, leading to suspicions of duty evasion.

Skoda’s counsel Arvind Datar argued that the tax authorities have misconstrued its NADIN software—to track demand and plan production—as a means to break down vehicle orders into components and subassemblies.

The government has wrongly concluded that the company imported components and subassemblies at lower duty of 5-15%, instead of importing completely knocked down kits and paying a 35% duty, Skoda said.

Datar argued that a notification of March 2011 clearly distinguished between CKD kits and standalone parts, and that this clarification should govern the classification of its imports and make the show-cause notice’s assessment invalid.