Mumbai: The Bombay High Court on Wednesday directed the Customs department to explain how its September 2024 show cause notice to Skoda Auto Volkswagen India raising a tax demand of 1.4 billion dollar was not barred by limitation “situation where a legal remedy is no longer available due to the expiration of the time period within which it should have filed).

A bench of Justices B P Colabawalla and Firdosh Pooniwalla asked the customs to file an affidavit to the effect by March 10. The bench has been extensively hearing the plea filed by the challenging the notice issued in contending that the same was “arbitrary and illegal” . It argued that the demand of over Rs12,000 crore ($1.4 billion) is “exorbitant.”

The customs department has alleged that the company misclassified its imports of Audi, Skoda, and Volkswagen cars as “individual parts” rather than “Completely Knocked Down” (CKD) units, allowing it to pay significantly lower customs duties. CKD units attract a 30-35% duty, whereas Volkswagen reportedly paid only 5-15% by classifying its imports as separate components in different shipments.

One of the main grounds raised by the company is that the department could not have raised the tax demand after all these years. The company has claimed that., for over a decade, it has been paying tax as per the individual parts category. Its counsel Arvind Datar submitted that the customs, now asking to pay the tax as per the CKD unit category, is not fair.

Appearing for customs, Additional Solicitor General N Venkatraman, said a thorough investigation was carried out by the department to understand and come to the conclusion that the company has to pay tax as per the CKD category.

On Wednesday, the bench clarified that it would at this stage only decide the issue on the point of limitation. “On the issue of limitation, please file an affidavit. Though we have heard extensively on all issues, as of now we are only deciding on the issue of limitation because that goes to the root of the case,” the court said while calling for an affidavit by March 10.

The German auto group has been accused of deliberately misleading customs authorities by importing vehicles in a way that minimises tax liability. The government’s 2011 notification specifies duty categories of 10%, 30%, and 60% for different levels of assembly. The company’s counsel, Arvind Datar, argued that since 2011, the company has classified its imports as individual parts and paid tax accordingly.

However, the court noted, “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 paper. It is not effective. Or else all importers will do the same.”