Volkswagen AG has sued Indian authorities to quash an “impossibly enormous” tax demand of US$1.4 billion, arguing the ask is contradictory to New Delhi’s import taxation rules for car parts and would hamper the company’s business plans, court papers show.
Volkswagen’s unit, Skoda Auto Volkswagen India Pvt Ltd, also told the High Court in Mumbai the tax dispute puts at risk its investments of US$1.5 billion in India, and is detrimental to the foreign investment climate, according to the 105-page filing which is not public, but was reviewed by Reuters.
In the biggest ever import tax demand, India in September last year slapped a US$1.4 billion tax notice on Volkswagen for using a strategy to break down imports of some Volkswagen, Skoda and Audi cars into many individual parts to pay a lower duty.
Photo: REUTERS
Indian authorities alleged Volkswagen imported “almost the entire” car unassembled — which attracts a 30 percent to 35 percent tax applicable on completely knocked down units (CKD), but evaded the levies by misclassifying them as “individual parts” coming in separate shipments, paying just a 5 percent to 15 percent levy.
Volkswagen India had kept the Indian government informed of its “part-by-part import” model and received clarifications in its support in 2011, the company said in the court challenge.
The tax notice is “in complete contradiction of the position held by the government ... [and] places at peril the very foundation of faith and trust that foreign investors would desire to have in the actions and assurances” of the administration, the Jan. 29 court filing states.
The German car manufacturer is a tiny player in India’s 4-million-units-a-year car market, the world’s third largest, where its Audi brand also lags behind competitors in the luxury segment such as Mercedes AG and BMW AG.
A government source earlier told Reuters that with penalties, Volkswagen India might have to pay about US$2.8 billion if it loses the dispute. From 2023 to last year, Volkswagen India reported sales of US$2.19 billion and a net profit of US$11 million.
Volkswagen argues it is not liable to pay higher taxes as it did not import car parts together as a single “kit,” but instead shipped them separately, combining them with some local components to make a car.
To explain what a “kit” is, it refers to a “practical analogy” of buying a chair online from Amazon.com Inc, which is then delivered in one shipment with all parts and fixtures needed to assemble the piece of furniture.
In the case, authorities alleged Volkswagen’s local unit regularly placed bulk orders for cars through internal software which connected it to suppliers in Czech Republic, Germany, Mexico and other nations.
And after the order was placed, the software broke it down into “main components/parts,” roughly 700 to 1,500 for each vehicle depending on the model, which were shipped separately over time.
This was “a ploy to clear the goods without the payment of the applicable duty,” Indian authorities said.
“There is no exclusive utilization of the parts towards manufacture of one specific car,” the company said in the court filing.
Volkswagen India also contests the alleged clandestine software use by arguing it only helps dealers convey car orders so that it could track “consumer demand at a macro level.”
The tax notice “deals a body blow” to the much-advertised “policy of ease of doing business in India for foreign investors,” the company said.
The High Court in Mumbai is due to start hearing the case on Wednesday.
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