I have an 2004 Octavia 1.9TDi. I find that there is a torque oscillations at specific engine RPM (between 1000 and 3000 RPM) depending on gear and gradient of road. On idling, when I hit 3200rpm, the speed oscillated between 3000 and 3200rpm. The problem is seen only at particular rpm. If I rev up or rev down, I dont see any problem.

Anyone got an idea what is causing this??

Clutch slip

If the revs increase but the car doesnt then your clutch is slipping

Your clutch will then bite again and revs will then match speed again

But I see this problem in idling also.. Which is why i suspect the engine..

if then you say idling, you mean not in gear but your foot on the throttle than maybe the throttle sensor is borked (odd as I though there were two running in parallel).

However a change of road speed vs RPM is lost likely a slipping clutch as mentioned above.