Volkswagen has sued Indian authorities to overturn a "impossibly enormous" $1.4 billion tax demand, claiming the request violates New Delhi's import taxation rules for car parts and will jeopardize the company's business plans, according to court documents.

Volkswagen's unit, Skoda Auto Volkswagen India, also told the High Court in Mumbai that the tax dispute jeopardizes its $1.5 billion investments in India and harms the foreign investment climate, according to a 105-page filing reviewed by Reuters.

In the largest ever import tax demand, India in September slapped a $1.4 billion tax notice on Volkswagen for using a strategy to break down imports of some VW, Skoda, and Audi cars into many individual parts to pay less duty.

Volkswagen was accused by Indian authorities of importing "almost the entire" car in unassembled condition, which attracts a 30-35% tax applicable on CKDs, or completely knocked down units, but evading the levies by misclassifying them as "individual parts" coming in separate shipments, paying only a 5-15% tax.

In 2011, Volkswagen India informed the Indian government of its "part-by-part import" model and received clarifications in its support, according to the company's court challenge.

The German automaker is a minor player in India's 4 million-unit-per-year car market, the world's third largest, where its Audi brand trails competitors in the luxury segment such as Mercedes and BMW.

A government source previously told Reuters that if Volkswagen India loses the dispute, it could face penalties totaling $2.8 billion. In 2023-24, VW India reported sales of $2.19 billion and a net profit of $11 million.

The tax dispute comes at a time when Volkswagen is under pressure to reduce costs in order to compete with Chinese rivals and deal with weak demand in Europe. In December, it announced 35,000 planned job cuts in Germany. In its largest market, China, the automaker has announced the sale of some of its operations.