[1] In a case where a person who supplies goods or services is in a quid pro quo relationship with the supply of goods or services, whether it is included in the value of supply that serves as the tax base for value-added tax (affirmative)

[2] The case holding that in a case where Gap corporation operating an information and communications business, etc. entered into an agreement with users to receive a certain amount of penalty or a discounted amount within the limit of a discounted amount when they terminate a contract within the agreed period on the condition that users use the services of Gap corporation for a certain period, instead of discounting mobile telephone charges, Internet communication charges, and mixe-type rents, etc., on the condition that users use the services of Gap corporation for a certain period, the tax authorities filed a report on value-added tax for the pertinent business year, including penalty, etc. received from the terminated users who terminated the contract during the agreed period, and requested correction of value-added tax on penalty, etc., but the tax authorities rejected it, in light of all the relevant circumstances, the tax authorities should consider the penalty, etc. as compensation for the supply of the goods or services of Gap corporation as a whole.

[1] Article 29(1) of the Value-Added Tax Act provides that “The tax base of value-added tax on the supply of goods or services shall be the aggregate of supply values of goods or services supplied in the pertinent taxable period,” and Article 29(3) provides that “The supply value of goods or services referred to in paragraph (1) refers to the value falling under each of the following subparagraphs. In this case, the value-added tax shall include payments, charges, fees, and all other things of monetary value received from a person who receives goods or services regardless of any pretext, but shall not include value-added tax” under subparagraph 1 provides that “where payments are made in money: The payment is made in cash:” (Article 13(1)1 and (5) of the former Value-Added Tax Act before wholly amended by Act No. 11608, Jun. 7, 2013). The purport of Article 48(1)8(1) of the former Enforcement Decree of the Value-Added Tax Act is also the same.

According to the language and text and structure of each of the above statutes, since the value of supply, which serves as the tax base for value-added taxes, refers to the value of the supply of goods or services, which is a price related to the supply of goods or services, and thus, cannot be the value of supply, such as penalty, damages, etc., not the value of supply. However, even if a person who supplies goods or services receives money from a person who receives it as a cause of penalty, if the substance is in a price relation with the supply

[2] In a case where Gap corporation operating an information and communications business, etc. entered into an agreement with users to receive penalty or discount within a certain amount (hereinafter “liability agreement”) on the condition that users use the services of Gap corporation for a certain period of time, instead of discounting mobile telephone rates, Internet communications charges, and bus rates, etc., on the condition that users use the services of Gap corporation for a certain period of time, and the tax authorities rejected the application for refund of value-added tax on the relevant business year including the penalty, etc. received from the terminated users who received discount of mobile telephone charges, the case holding that the lower court erred by misapprehending the legal doctrine on the condition that the user would have received discount from the end of the obligatory use period, and that the user would have received an increase in the value-added tax on the goods or discount charges, and that the user would have received an increase in the value-added tax on the goods or discount charges, even if the user would have received an increase in the value-added tax on the goods or discount charges after the expiration of the obligatory use period, and that the user would have received an increase in the value of the goods or discount from Gap.

[1] Article 13(1)1 and (5) (see current Article 29(1) and (3)1 of the former Value-Added Tax Act (wholly amended by Act No. 11608, Jun. 7, 2013); Article 29(1) and (3)1 of the Value-Added Tax Act; Article 48(1) (see current Article 29(3)) of the former Enforcement Decree of the Value-Added Tax Act (wholly amended by Presidential Decree No. 24638, Jun. 28, 2013); Article 29(1), (3)1, and (7) of the Value-Added Tax Act; Article 70(1)3 of the Enforcement Decree of the Value-Added Tax Act / [2] Article 29(1) and (3)3 of the Value-Added Tax Act; Article 70(1)3 of the Enforcement Decree of the Value-Added Tax Act

[1] Supreme Court Decision 81Nu412 delivered on March 13, 1984 (Gong1984, 707) Supreme Court Decision 97Nu1572 delivered on December 9, 1997 (Gong1998Sang, 334)

KT Co., Ltd. (Bae, Kim & Lee LLC, Attorneys Song-chul et al., Counsel for the defendant-appellant)

Head of a tax office (Law Firm Lee & Lee, Attorneys Kim Jong-hun et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2017Nu32915 decided August 17, 2017

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. A. Article 29(1) of the Value-Added Tax Act provides that “The tax base of value-added tax on the supply of goods or services shall be the total amount of supply value of goods or services supplied in the pertinent taxable period,” and Article 29(3) provides that “The value of supply under paragraph (1) refers to the value falling under each of the following subparagraphs. In this case, the value-added tax shall include payments, charges, fees, and all other things, regardless of the pretext thereof, which are received from the person who receives the goods or services, but shall not include value-added tax,” and subparagraph 1 provides that “where payments are paid in money: The payment is made in cash:” (Article 13(1)1 and (5) of the former Enforcement Decree of the Value-Added Tax Act before wholly amended by Act No. 11608, Jun. 7, 2013).

B. According to the language and text and structure of each of the above statutes, since the value of supply, which serves as the tax base of value-added tax, is a price for the supply of goods or services, which is a price for the supply of goods or services, and thus, it cannot be the value of supply (see, e.g., Supreme Court Decisions 81Nu412, Mar. 13, 1984; 97Nu1572, Dec. 9, 197; 97Nu15722, Dec. 1, 197). However, even if a person who supplies goods or services receives money from the person who receives the goods or services, if the substance is in a relationship with the price for the supply of goods or services, it is reasonable to view that

2. Review of the reasoning of the lower judgment and the evidence duly admitted by the lower court reveals the following circumstances.

A. The Plaintiff is a corporation operating the information and communications business, etc. (hereinafter referred to as the “information and communications service provider”) and (1) when the user agrees to use the mobile phone service for a certain period (the agreed period) according to the rate system chosen by the user. If the user agrees to use the mobile phone service for a certain period, the user gives a discount on the price of the mobile phone terminal, part of the mobile phone fee, etc., and if the user terminates the mobile contract within the agreed period, the user agrees to receive a penalty or a discounted refund within a certain amount of discount within the agreed period, and (2) when the user agrees to use the Internet telecommunications service provider for a certain period (the agreed period) by the fee system chosen by the user, the user shall set the fee for the use of the Internet telecommunications service, and if the user agrees to use it for a certain period, the user shall provide free gift (such as merchandise coupons or bicycles) or discount on part of the rent for the terminal, such as the Internet fee and the stop, and if the user terminates the contract in violation of the agreement within the agreed period, each of each of the agreement.

B. In filing a value-added tax return from January 201 to January 2014, the Plaintiff entered into each of the instant obligatory use agreements with the Plaintiff and filed a tax base for penalty or discounted return (hereinafter “liability, etc.”) received from the user who terminated the contract and received a discount on the mobile telephone charges, Internet telecommunications charges, and Internet telecommunications terminal, etc.

C. On July 25, 2014, the Plaintiff filed a claim for rectification with the Defendant for the refund of value-added tax on the penalty for breach of contract for the first term portion in 2011, and the Defendant refunded the entire amount of the claim for rectification to the Plaintiff on November 10, 2014.

D. On November 19, 2014, the Plaintiff filed an application for rectification with the Defendant for the refund of value-added tax on penalty, etc. from February 2, 2011 to February 2, 2013. Accordingly, on January 27, 2015, the Defendant: (a) granted value-added tax on the ground that the penalty, etc. calculated based on the discount amount of mobile telephone charges, Internet telecommunications charges, or the rent, etc. via the mix method constitutes penalty for which the service was supplied without the supply; (b) on the other hand, on the ground that the penalty, etc. calculated based on the discount amount of the device provided in the supply of Internet telecommunications services is not subject to value-added tax; and (c) on the ground that the penalty, etc. calculated based on the discount amount of the device, etc. provided in the supply of Internet telecommunications services, based on the breach of the agreement, the Plaintiff rejected the application for rectification on the ground that it should be included in the value-added tax

E. On January 29, 2015, the Plaintiff filed a claim for the refund of value-added tax on the charges for mobile telephone, Internet communications charges, and the amount of discount fees, etc., calculated on the basis of the discount fees by mix (services), among the penalty for the last period of January 2014. Accordingly, on March 31, 2015, the Defendant rejected the Plaintiff’s claim for correction on the ground that it constitutes the value of the service provided even in the case of the penalty for breach of contract on March 31, 2015 (hereinafter “the second rejection disposition”), including the first rejection disposition, constitutes the value-added tax base, and thus, constitutes “each of the instant dispositions” and “the total amount of penalty, etc.

3. Examining these factual relations and the legal principles as seen earlier, even if some of the instant amounts are subject to penalty, it should be viewed as compensation for the supply of goods or services by the Plaintiff as a whole in light of the overall context. The reasons are as follows.

A. The Plaintiff established a mandatory use agreement with the user of mobile telephone and Internet communications services on the basis of the fee system chosen by the user, on the condition that the user uses the Plaintiff’s service for a certain period of time, instead of discounting mobile telephone charges, etc., on the condition that the user would terminate the contract within the agreed period, thereby failing to maintain the above discounted condition, the Plaintiff entered into an obligatory use agreement with the content that the user would return part of the previously discounted amount.

B. The discount of mobile phone charges, etc. under each of the instant obligatory use agreements is conditional discount, which serves as the condition for the rescission of the termination even among the users, and the user was entitled to maintain the period of compulsory use and choose to either receive the discount of mobile phone charges, etc. or terminate the discount even before the end, and refund part of the discounted amount.

C. According to each of the instant obligatory use agreements, the amount to be returned when the user terminates the contract even within the agreed period is increased due to the lapse of the number of days of use, and the amount to be returned has to be reduced exceptionally or exceptionally after a certain period of time. This is a structure that increases the amount to be returned as a result of the increase in the discounted amount. Therefore, the reduction in the amount to be returned after a certain period of time is merely a measure to reduce the burden on the user who uses the long-term service.

D. Even if a tax invoice was issued by the Plaintiff on the basis of the Plaintiff’s discount rate based on the terms and conditions of supply to exclude the discount rate from the value of supply, the Plaintiff’s additional payment of the discount rate to the Plaintiff on the ground that the user’s termination of the contract while receiving the discount rate benefit on the terms and conditions of use for the agreed period constitutes a case where the value of supply under the initial tax invoice increases due to subsequent causes, and thus, the Plaintiff could issue the revised tax invoice in accordance with Article 32(7) of the Value-Added Tax Act and Article 70(1)3 of the Enforcement Decree of the Value-Added Tax Act (see Supreme Court Decision 2009Du19984, Jul. 28, 2011).

E. Ultimately, the instant amount can be deemed as an amount of additional payment by selecting termination even though the user who entered into each of the instant obligatory employment agreements with the Plaintiff. As such, it appears that there exists a quid pro quo relationship with the Plaintiff’s supply of goods or services.

4. Nevertheless, solely based on the circumstances indicated in its holding, the lower court determined that the instant amount did not constitute the value-added tax base by not only the proceeds from supply of goods or services provided to users but also the penalty that the Plaintiff received from users who violated the contract. In so doing, the lower court erred by misapprehending the legal doctrine on the imposition of value-added tax without exhaust all necessary deliberations, thereby adversely affecting the conclusion of the judgment. The

5. Therefore, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Jae-hyung (Presiding Justice)