Riya Poddar, Fourth- Year student at Amity University, Noida
INTRODUCTION
Proper classification of goods, as per the guidelines provided by the Harmonised System of Nomenclature ( ‘HSN Code’), is an important dimension in cross-border trade, which not only assists in determining tariff rates but also facilitates free flow of goods across borders. Unperturbed by such a structured foundation, disputes with regard to misclassification continue to remain a persistent challenge within the customs law. The point of conflict often stems from either intended tax fraud or deliberate or unintentional misinterpretation by the department, causing a tussle between the taxpayer and the authorities.
The recent case of Skoda Auto Volkswagen India Pvt. Ltd. v. Union of India and Ors. (2025), (‘Skoda’) has once again brought to the forefront the debate over the systemic defaults within India’s customs landscape. What is controversial is whether the ambiguity in the classification norms is being used very conveniently as a loophole to avoid duty under the mask of interpretation. While the error may be innocent, the likelihood of intentional misinterpretation by the department raises significant questions in the minds of the taxpayers. This blog seeks to analyse the given case in order to uncover the systemic flaws surrounding the misclassification issue and propose a way forward.
SCRUTINY OF THE ISSUE SURROUNDING MISCLASSIFICATION
The Customs Department served a Show Cause Notice to Skoda Volkswagen in September 2024 under Section 28(4) of the Customs Act, 1962 (‘the Act’), raising a substantial demand of $1.4 billion, alleging deliberate misclassification of imported goods to lower import duty payment.
It is well-settled law that the customs authorities can carry out reassessment proceedings for up to five years only. However, the allegations posed by the Directorate of Revenue Intelligence on Skoda Volkswagen for deliberately misleading the custom authorities since 2012 by misclassifying import of cars as “individual parts” rather than “Completely Knocked Down Units” (‘CKD Units’), raises questions about their own intentions as to why the concerned authority remained mum for such a prolonged duration. Such inaction invokes suspicion of either incompetence or a deliberate plan to delay prosecution.
Further, it is pertinent to note that before 2011, the term ‘CKD Units’ lacked a precise and clear definition, leaving it open to subjective interpretation. Ambiguity with regard to the same was addressed on 1st March 2011, when the Central Board for Indirect Tax and Customs (‘CBIC’) issued Notification No. 21/2011-Customs, where CKD Unit has been defined as a kit consisting of necessary parts of a vehicle apart from gearbox and pre-assembled engine. Failure to clearly delineate such important elements provided a foundation for controversies, as seen in Skoda.
INTENT OR OVERSIGHT: THE GREY ZONE
The current Skoda Volkswagen misclassification dispute highlights the multifaceted dynamics between the intentional corporate wrongdoings and the probable negligence of the concerned authorities. Resolution of this ongoing controversy will provide the much-needed clarity on disputes surrounding the misclassification issue.
Examining ‘Intent’ and ‘Oversight’
Notably, the customs authorities have accused Skoda Volkswagen of paying lower import duty on goods for the past 12 years, but the fact that the authorities never raised a single objection on the same for such a significant duration weakens the credibility of their allegations. It is essential to determine whether the delay was a strategic move by the authorities, using it as a revenue-generating tool. Such an approach, if intentional, reflects a broader structural flaw where the authorities prioritise revenue generation, amplifying financial burden on businesses.
Another aspect worth mentioning is the vague and ambiguous classification of HSN Codes. Disputes pertaining to tariffs continue to arise, primarily because they are based on technical product characteristics that lack a clear definition. For instance, car seats, despite being an integral component of a motor vehicle, are classified under Heading 940120 as “seats of a kind used for motor vehicle” rather than Heading 87089900, which deals with “parts and accessories of a motor vehicle”. Such vague and ambiguous distinction in the key terms and norms provides authorities with an upper hand to interpret it in a manner that aligns with their revenue objectives and undermines the very purpose of having codified rules and regulations relating to the same.
THE BIGGER PICTURE: CHALLENGES AND WAY FORWARD
Over the past few years, the customs framework has become increasingly technical and compliance-oriented, thereby heightening the burden on taxpayers. The structural inequality becomes increasingly significant when equating the capabilities of large corporations with those of small businesses and entities. While businesses having ample resources can ensure seamless compliance, in contrast, the smaller entities are disproportionately charged. Recognising this, the Federation of Indian Micro and Small and Medium Enterprises, the leading advocacy association for Indian Small and Medium Enterprises (‘SME’), has also reportedly advocated for simplified and streamlined customs procedures to address structural disparity that involves small exporters. Further, the Economic Survey 2024-25 data also clearly indicates that the SME sector continues to be excessively burdened with regulatory compliance, thereby calling for deregulation to enable SME’s to compete on a more level playing field.
In addition to this imbalance, the financial strain of non-compliance, which results in long pending disputes or imposition of penalties and interests, further aggravates the problems of the bona fide taxpayers. The operational dislocations caused by such issues compel the businesses to allocate their resources in resolving such disputes, thereby affecting their capability to contribute to the economy. Further, problems such as erosion of investors’ trust, delay in clearance of goods or shipments, also significantly affect a company’s ability to maximise profit and generate revenue. This discrepancy not only weakens the taxpayer’s trust on the tax system but also hinders the growth of a country’s economy.
It is pertinent to mention that in the case of M/s. Aska Equipment’s Ltd. v. Commissioner of Customs (Import), the Hon’ble Delhi Bench of Customs, Excise and Service Tax Tribunal (‘CESTAT’), recognised that penalising companies acting in good faith merely on account of a difference of opinion regarding the classification of goods would deter genuine trade practices. A similar judicial approach was adopted by the Hon’ble Delhi Bench of CESTAT in the case of Sarvatra International Vs Commissioner of Customs (ICD).
Undoubtedly, the outcome of the Skoda case is likely to set a judicial precedent, providing the much-needed clarity on issues that extend beyond just the misclassification claim. Hence, the answer to the questions raised in this case will not only determine the fate of the company but also the future of customs enforcement in India.
Roadmap
It is very evident from the challenges being faced by the taxpayers owing to the current HSN classification framework that reform is the need of the hour. Policies must be formulated in a way that not only shields the bona fide taxpayers and businesses from unjust hardships but also ensures compliance on their part. One of the most essential reforms is the implementation of clear and consistent guidelines pertaining to HSN classification. Further, leveraging the use of technology such as Artificial Intelligence-regulated systems can highly minimise the likelihood of errors. Additionally, simplifying the dispute resolution process through digital case tracking and conducting training programmes for both customs officials and Importers can increase compliance and bridge the knowledge gaps that currently exist. Such reforms would guarantee that the system remains approachable in the long run, eventually contributing to a just and equitable economy.
CONCLUSION
The controversial discussion surrounding the misclassification issue points towards the need for a balanced tax compliance approach. While the Act aims to create an integrated and streamlined tax system, its current framework unjustly penalises and burdens honest taxpayers. By plugging systemic loopholes and ensuring equitable treatment for compliant enterprises, the government can preserve the very purpose of the tax system and gain public trust in the tax administration. Legal reforms, supported by firm enforcement mechanisms, are needed to achieve this balance.
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