Tax evasion notices to Volkswagen, Kia: What does Indian law say about importing CKD units - Explained

At the heart of the dispute lie Kia's imports of parts of a car in separate shipments to assemble the vehicles in India, paying a lower tax applicable, circumventing the higher tax outgo when parts come together as a CKD, or a completely knocked down unit, of a car.

The Bombay High Court said it will hear on February 17 a plea filed by Skoda Auto Volkswagen India challenging the tax demand of USD 1.4 billion by Indian customs authorities. Also South Korea's Kia has been accused of dodging $155 million in taxes by misclassifying some car component imports, but the company is contesting the charge privately with officials, Reuters reported earlier.

The primary objective of the customs laws in India is to regulate the import of goods to maintain the competitiveness of the domestic industries. However, concessional rates of import duties are applicable in certain situations to ensure the availability of products as well.Here is what India's law says regarding the import of CKD Units:

Completely Built Units (CBUs) of cars are classified under Chapter 87 of the Indian Customs Tariff Act, 1975 providing for a higher levy of 125% of the import value. However, as a matter of promoting domestic assembly and manufacturing, concessional rates in the form of 35% are applicable in case the cars are imported in CKD (Completely Knocked Down) condition and then assembled in India.

A further lower rate of 15% is applicable in case the imports do not classify as CKDs. The entire dispute revolves around the classification of imports as either CKDs or not as CKDs but as parts and components. It has been alleged that Kia's website showed the Carnival model sold in India as being in "CKD" form, with retail sales of 9,887 units between 2020 and 2022 whereas the imports were intentionally declared as units not being in CKD state.

Rajarshi Dasgupta, Executive Director-Tax, AQUILAW explains," Based on Rule 2(a) of the General Rules of interpretation and multiple judicial precedents, the courts have decided on when parts and components imported shall qualify as CKDs. The same is dependent on the particular facts of the case as when and how were such imports presented for the assessment, whether the parts possessed the essential characteristics of the final product or not, etc."

The proceedings in respect of Kia Motors follow a similar proceeding initiated against Volkswagen’s Indian Unit. While Volkswagen’s woes concern many models, including those of its sub-brands Audi and Skoda, the demand order against Kia concerns the Luxury Carnival Minivan model only.

Sukrit Kapoor, Partner, King Stubb & Kasiva, Advocates and Attorneys said that the dispute between ‘Volkswagen’ and the ‘Indian Central Board of Indirect Taxes & Customs’ has been admitted by the Bombay High Court. However, whether the precedents of the Supreme Court and the Madras High Court shall help veer the decision in favour of Volkswagen will need to be decided by the Bombay High Court upon considering the particular facts of the matter.

What are "Completely Knocked Down (CKD)"Units?
The Notification of Ministry of Finance, Notification No. 12/2012-Customs, dated 17.03.2012, under Serial No. 437, states that "Completely Knocked Down (CKD) kit" means a unit containing all the necessary components, parts, or sub-assemblies for assembling a complete vehicle, but does not include:
a) A kit containing a pre-assembled engine, gearbox, or transmission mechanism.
b) A chassis or body assembly of a vehicle on which any of the components or sub-assemblies (engine, gearbox, or transmission mechanism) is installed.

What provisions govern the imposition of import duties on CKD?
Customs Notification No. 50/2017 specifies concessional Basic Customs Duty rates on CKD imports. Customs Notification No. 57/2017 enumerates specific duty rates for CKD units of motor vehicles, electrical machinery, etc.

What are the prevailing legal precedents governing the scope of imposition of CKD Duties?
In a 2024 ruling of Madras High Court, The Commissioner of Customs (Port-Import), Chennai v. Authority of Advance Rulings & BMW India Pvt. Ltd., the decision went in favour of BMW.
The High Court relied on the judgement of the Supreme Court, i.e. Commissioner of Customs v. Sony India Ltd., (2008) 13 SCC 145 that ruled on the classification of CKD units based on Rule 2(a) of the General Interpretative Rules, which states that Rule 2(a) of the General Interpretative Rules does not apply unless all essential parts are imported together.
The Court rejected the application of Rule 2(a) owing to two primary reasons-
• Essential components (engine, transmission, axle) were not imported together but sourced locally.
• The parts were imported at different times and from different suppliers, which does not satisfy the criteria for classification as CKD kits.

Meanwhile, in 2019, Volkswagen Group India received regulatory and statutory approvals to merge its three passenger car subsidiaries in the country into one entity -- Skoda Auto Volkswagen India -- in order to work more efficiently at all levels to gain significant market shares for Volkswagen and Skoda by 2025. In July 2018, the Volkswagen Group announced investments of around 1 billion euros as part of the India 2.0 project.