A lawyer for Volkswagen's Indian unit said that the country's $1.4 billion tax demand could become a matter of survival for the company's operations in India, as it continues to contest the order.

The tax notice was issued to Volkswagen unit Skoda Auto Volkswagen India in September, with Indian authorities alleging that the company was using a strategy of breaking down imports of some VW, Skoda, and Audi cars into individual parts to pay a lower duty.

Arvind Datar, the senior advocate representing the unit, told the judges that if Volkswagen India paid all of the claimed taxes and penalties, which totaled $2.8 billion, the company, which employs 6,000 people in India, might not be able to survive.

"That is the seriousness of the situation... "It's a matter of life and death now," he said.

Indian tax authorities have asked the company to pay taxes dating back 12 years, reigniting concerns about lengthy investigations and litigation that could jeopardize foreign firms' plans to invest in the fastest-growing major economy.

Indian authorities accused Skoda Auto Volkswagen India imported almost entire cars in unassembled condition, which carries a 30-35 percent tax, but avoided the levies by misclassifying them as "individual parts" arriving in separate shipments, paying only a 5-15 percent levy.

Last month, the unit went to court, claiming that the tax demand would impede its business plans and harm the foreign investment climate.

Volkswagen is a minor player in India's car market, the world's third largest, where its Audi brand trails competitors in the luxury segment such as Mercedes-Benz and BMW.

The court will continue to hear the case on Thursday.