By Dhwani Pandya

MUMBAI (Reuters) - A lawyer for an Indian unit of German carmaker Volkswagen said on Monday the country's $1.4 billion tax demand could become a matter of survival for its business in the country, as it continues to contest the order.

The tax notice was slapped on Volkswagen unit Skoda Auto Volkswagen India in September, with Indian authorities claiming 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.

The senior advocate representing the unit, Arvind Datar, told the judges that if Volkswagen India were to pay all the claimed taxes and penalties - a total of $2.8 billion - the company, which employs 6,000 people locally, may not be able to survive in India.

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

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

Indian authorities alleged Skoda Auto Volkswagen India imported almost entire cars in an unassembled condition - which attracts a 30-35% tax - but evaded the levies by mis-classifying them as "individual parts" coming in separate shipments, paying just a 5-15% levy.

The unit went to court last month, arguing the tax demand will hamper its business plans and is detrimental to the foreign investment climate.

Volkswagen is a tiny player in India's car market, the world's third biggest, where its Audi brand lags competitors in the luxury segment like Mercedes-Benz, and BMW.

The court will continue hearing the case on Thursday.

(Reporting by Dhwani Pandya and Aditi Shah; Editing by Jan Harvey)