In this case, "it is very costly" refers to the service being done on the vehicle.
I would write the original sentence as "Mohan is servicing a vehicle by screwdriver" or "Mohan is servicing a vehicle with a screwdriver", so you must look at the action of the sentence as the "it".
The word costly generally refers to an action that is being taken. In "Mohan is buying a vehicle. It is very costly", costly refers to the action of buying the vehicle. However, if the action of buying the vehicle was not the focus of the sentence, the vehicle itself would be described as expensive, rather than costly. The same goes for the screwdriver, because it is also an object not an action: "Mohan is servicing an expensive vehicle by screwdriver".