Rano Motor Vehicle Co., Ltd. (Law Firm LLC, Attorneys Jeon Young-young et al., Counsel for the plaintiff-appellant)

The Head of the North Busan District Tax Office (Government Law Firm Corporation, Attorneys Soh-ho, Counsel for the plaintiff-appellant)

May 20, 2016

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

The Defendant’s each disposition of imposition of corporate tax of 8,19,418,370 won against the Plaintiff on June 21, 2013, corporate tax of 2008, corporate tax of 10,128,514,250 won, corporate tax of 2009, corporate tax of 7,576,370,940 won (total amount of 25,824,303,560 won) shall be revoked.

1. Details of the disposition;

A. On July 14, 200, the Plaintiff, a foreign-capital invested company established by Rednaul Group BV, the Netherlands, investing 70.1% of the equity shares, was granted tax reduction or exemption on the ground that the electronic control engine (hereinafter “instant engine”) constituted a business involving high technology by the Minister of Finance and Economy on December 19, 2003.

B. From 2003 to 2003, the Plaintiff reported the income generated from the instant engine based on the agency sales price of the engine for maintenance and was exempted from corporate tax.

C. The director of the Seoul Regional Tax Office, from August 13, 2012 to January 16, 2013, conducted an integrated investigation of corporate tax for the business year 2007-201 with respect to the Plaintiff (hereinafter “instant tax investigation”), and on February 4, 2013, the director of the Seoul Regional Tax Office revoked the abated or exempted corporate tax for the business year 2008-2010 on the basis of the OEM export price for foreign related parties rather than the sales price of engines for improving the market price of the instant engine, and notified the result of the tax investigation that penalty should be imposed.

D. The Plaintiff filed a request for pre-assessment review on March 6, 2013. On May 27, 2013, the Commissioner of the National Tax Service rendered a decision to the effect that: (a) it is difficult to view all the sales price of the engine for maintenance or the export price of the engine to the foreign related party as the market price of the instant engine; (b) however, he/she may impose tax on the Plaintiff after calculating the amount calculated by multiplying the amount calculated by multiplying the ratio of the relevant parts to the amount of reduction or exemption from among the parts put into the sales of the final product by the market price (hereinafter

E. In accordance with the purport of the aforementioned pre-assessment review determination, the Defendant recalculated the reduced or exempted income and the reduced or exempted income under the cost-based method, and subsequently notified the corporate tax for the business year 2008-2010 as shown in the separate sheet No. 1 on June 21, 2013 (hereinafter “instant disposition”).

F. On September 16, 2013, the Plaintiff filed a tax appeal. On January 20, 2015, the Tax Tribunal rendered a decision to dismiss the remainder of the Plaintiff’s claim on the grounds that it is difficult to expect that the Plaintiff would make a corporate tax return by calculating the amount of reduction or exemption income pursuant to the cost-based law.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1, 2, 5, 6, 7, 14, Eul evidence Nos. 1 through 3 (including each number; hereinafter the same shall apply) and the purport of the whole pleadings.

2. Whether the instant disposition is lawful

A. The parties' assertion

(1) Plaintiff

① In light of the fact that the Defendant’s cost-based method used to calculate the market price of the instant engine is calculated as the margin identical to other parts, and the engine-related reduction and exemption business income is affected by the cost fluctuation of other parts subject to the reduction and exemption, etc., it is unreasonable to calculate the income of the reduced and exempted business, and rather, it ought to be calculated based on the agency sales price of the engine for maintenance, as alleged by the Plaintiff.

② The Plaintiff made inquiries to the National Tax Service regarding the method of calculating the income of the tax reduction or exemption business based on the agency sales price according to the purport of the National Tax Service’s response, and thereafter, the Defendant did not raise any question with the knowledge of the Plaintiff’s calculation method. As such, the Plaintiff trusted the Defendant’s authoritative interpretation and reported the income of the tax reduction or exemption business accordingly, which contradicts the principle of trust and good faith, as the Defendant applied

③ The instant tax investigation constitutes a duplicate tax investigation that was conducted with respect to the same taxable period (2008-2010) and the same tax item as the request for submission of materials (hereinafter “first investigation”) around August 201, and constitutes a duplicate tax investigation, and thus, the instant disposition based on the instant tax investigation is unlawful.

(2) Defendant

① Since the volume of sales of the engine for maintenance is too small and the terms and conditions of trading are not fulfilled according to independent business conditions, the sales price cannot be deemed the market price, and there is no objective market price for the engine of this case. Therefore, it is justifiable to calculate the market price of the engine of this case in accordance with the cost and expenses law.

② The tax authority merely expressed the general opinion on the Plaintiff’s question, and did not issue a public statement of opinion on the basis of the agency sales price. The method of calculating the Plaintiff’s reduced or exempted income is not consistent with the tax authority’s opinion and thus does not violate the principle of good faith

③ Since the Defendant’s primary investigation cannot be seen as a tax investigation, the instant tax investigation is not a duplicate tax investigation, and even if it can be seen as a tax investigation, the instant tax investigation constitutes exceptional grounds for allowing duplicate tax investigation, and thus, the instant disposition based on the instant tax investigation cannot be deemed unlawful.

B. Relevant statutes

Attached Form 2 shall be as shown in attached Table 2.

C. Determination

(1) Whether the calculation of the market price under the cost reimbursement method is unlawful

Article 121-2(2) of the former Restriction of Special Taxation Act (amended by Act No. 10406, Dec. 27, 2010; hereinafter the same) provides that corporate tax shall be reduced or exempted on the income accrued from a business subject to reduction or exemption, but the tax authority may calculate the income by a reasonable method because it does not explicitly stipulate the method of calculating such income.

The sales for calculating the income subject to reduction and exemption may be calculated by applying the market price at the time of trading between independent business operators in accordance with the terms and conditions of trading. Thus, the income accrued from the business subject to reduction and exemption from the market price is the income accrued from the sales of the engine of this case. Since the Plaintiff sold an automobile equipped with the engine of this case and did not sell the engine of this case to the independent business operator, there is no real market price of the engine of this case.

Therefore, in light of the following circumstances, it is difficult to regard the sales price of the agents for maintenance engines as the market price of the instant engine, as alleged by the Plaintiff, in full view of whether the sales price of the agents for maintenance engines can be deemed as the market price of the instant engine, and comprehensively taking into account the overall purport of the statements and arguments stated in Gap, Gap, 11, 12, 24 through 27, and Eul, as the market price.

① The Plaintiff sells the instant engine to a parts agency at a price obtained by deducting the distribution margin from the recommended consumer price. However, the buyer’s parts agency, in principle, is obligated to sell only the net government goods produced by the Plaintiff according to the agency contract, and there is no authority to determine the price of the parts. Therefore, it is difficult to view that the parts agency is an independent business operator or that the conditions on the price of parts

② Although the sales of the instant engine is linked to automobile sales, the sales of maintenance engines are exceptionally made at the time of the occurrence of maintenance demand, so the factors for pricing are different.

③ Engine quantity sold after the completion vehicle between 2008-2010 is merely 12 parts of engine quantity sold for maintenance compared to 434,996, and it is difficult to view that there is a representative nature of engine sales price of an engine for maintenance use.

④ The Plaintiff’s income generated from the reduced or exempted business exceeds the ratio of the reduced or exempted business to the sales amount according to the Plaintiff’s decision on the engine price for maintenance, which is likely to unfairly reduce or exempt taxes.

(3,304,95 (89.2%) 17,203 (10.8%) non-reduction and exemption projects (10.8%) 3,304,95 (17.2%) 17,203 (17.2%) 395,790 (10.8%) 89,792 (72.0%) 3,260,331 (89.1%) 34,794 (27.9%) 2010 and 482,729 (9.3%) non-reduction and exemption projects (16.2%) 209 and 39,792 (10.8%) 3,260,31 (89.1%) 34,794 (27.9%)

Next, as to whether the Defendant’s calculation method is legitimate in assessing the market price of the instant engine, it is difficult to view that the Defendant was unlawful in light of the following: (a) the sales price of the completed vehicle 】 the sales price of the engine in the cost of the instant engine 】 the sales price of the instant engine; (b) the sales price of the instant engine was calculated by deducting the sales price of the engine; and (c) the cost-based method was calculated by calculating the income accrued from the sales of the instant engine; (d) the sales of the instant engine is linked with the sales of the instant engine; (e) the said cost-based method was inevitable in a situation where the reasonable market price of the instant engine is not possible; and (e) the difference between the engine and non-Engine parts 65% and 54%, respectively.

(2) Whether the principle of good faith is violated

In general, in order to apply the principle of trust and good faith to the acts of the tax authorities in tax and legal relations, the tax authorities must issue the public opinion list that is the object of trust to the taxpayer, the tax authorities' statement of opinion does not cause the taxpayer to believe that it is justifiable, and the taxpayer must act in trust to what is the name of the opinion list, and the tax authorities' disposition that is contrary to the above opinion list should result in the violation of the taxpayer's interest (see Supreme Court Decision 2007Du7741, Oct. 29, 2009, etc.). If the expression of opinion of the tax authorities is merely a general opinion list, the application of the above principle is denied (see Supreme Court Decision 2000Du5203, Apr. 24, 201, etc.). The statement of opinion here refers to the opinion that the interpretation of the taxation requirements of the tax authorities, the application of the provisions of the taxation requirements, and the recognition of the facts of taxation (see Supreme Court Decision 2009Nu8789, Aug. 38, 1989).

According to Gap evidence Nos. 3, 10 and 13, around February 2004, the plaintiff mentioned the circumstances that most of the engines of this case were used as half-finished products for manufacture of automobiles and individually sold part of them for the purpose of maintenance, and asked the Commissioner of the National Tax Service for the method of calculating the sales amount of reduced or exempted projects and non-exempt projects. The questioning presented the method of multiplying the sales amount by the cost-oriented method and the sales unit individually sold for the purpose of maintenance, the method of multiplying the sales amount by the quantity of engine parts, etc. used for the sale of automobiles. On April 23, 2004, the National Tax Service responded to the determination that the sales amount for calculating the income subject to reduction or exemption was calculated by applying the market price at the time of selling the parts under the terms of independent trade among the independent business operators. Since the plaintiff filed a report on corporate tax exemption for the business year 2003, the disposition authority rendered a request for corporate tax reduction or exemption by applying the provisions of the Restriction of Special Taxation Act to the Plaintiff’s disposition of reduction or exemption from corporate tax on October 29, 20.

On the other hand, the National Tax Service's response, as a general opinion, cannot be deemed to have expressed the opinion that the agency sale price of an engine for maintenance corresponds to the engine price of this case. In addition, the Plaintiff's assertion of violation of the good faith principle is without merit in light of the Plaintiff's claim for correction of corporate tax and the action of rejection thereof, even though the disposition authority did not dispute the amount of tax reduction or exemption, it cannot be deemed to have issued a public opinion that is the object of taxpayer's trust, and even if there was the Defendant's public opinion statement, it cannot be deemed to have been infringed upon the Plaintiff's act and interest therefrom (see Supreme Court Decision 2007Du504, Dec. 24, 2009).

(3) Whether it constitutes an illegal duplicate tax investigation

In full view of the statements in Gap evidence Nos. 4, 16, and 21 and the testimony of the non-party witness, the defendant, on August 22, 2011, requested the plaintiff to submit to the plaintiff data on the grounds of calculation, the number of annual sales revenues and income reductions, the number of income reductions and exemptions, the grounds of changes in the annual income reductions and exemptions, and the grounds for reduction and exemption from corporate tax reductions and exemptions from 206-201 to 2011 to 310, respectively, with respect to the regular comprehensive audit by the director of the Central Tax Office (from August 22, 2011 to September 9, 201) of the director of the Central Tax Office pursuant to Article 19 of the Corporate Tax Act.

First, as to whether the first investigation constitutes a tax investigation including the submission of data around August 201, 201, the tax investigation means that the tax authorities question taxpayers, etc. to determine or correct the tax base and amount of tax, or inspect or investigate the relevant account books, documents or other things, or order them to submit them (see Article 81-2(2)1 of the Framework Act on National Taxes). However, the first investigation aims not to determine or correct the tax base or amount of tax, but to examine the consistency between the Plaintiff’s income from tax reduction or exemption and other income for the determination of propriety of the tax administration, such as data necessary for taxation, and it did not impose taxes after the investigation. The Plaintiff submitted a revised tax return data of the past corporate tax, and the tax officials did not make an additional investigation within one hour after the amendment of the tax return data, and the tax officials did not have the duty to ask questions, request for tax investigation, etc., or the right to ask questions or to ask questions in the individual tax law, and the Plaintiff’s submission of the above tax investigation cannot be deemed as unlawful or unreasonable reasons.

In addition, the disposition of this case is limited to the calculation method of reduction income based on the data submitted by the Plaintiff, and cannot be deemed directly related to the tax investigation. Thus, even if the tax investigation of this case was conducted duplicate tax investigation, it cannot be deemed that the disposition of this case was unlawful.

Ultimately, this part of the Plaintiff’s assertion is without merit.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit.

[Attachment]

Judges Han Young-gu (Presiding Judge)