[1] Where an entrepreneur concurrently operates a taxable business and a tax-free business, the method of dividing the common input tax amount into the taxable business and the tax-free business parts related to the tax-free business / Whether dividing the common input tax amount according to the ratio of the value of supply is limited to the case where the common input tax amount is related to the business part in which the common input tax amount and the business part in which the supply value

[2] In a case where there is no supply value for taxable businesses and tax-free businesses during the taxable period or no supply value exists for either of them on the grounds that the business and the business in which the common input tax amount occurred are separated and independent from each other, the method of distributing the common input tax amount

[1] According to Article 17(7) of the former Value-Added Tax Act (wholly amended by Act No. 11873, Jun. 7, 2013); Article 61(1) main text of the Enforcement Decree thereof (wholly amended by Presidential Decree No. 24638, Jun. 28, 2013); where an entrepreneur concurrently runs a taxable business and a tax-free business, the input tax amount related to the tax-free business shall be calculated on the basis of actual attribution; however, where an entrepreneur concurrently runs a taxable business and a tax-free business, an input tax amount, which cannot be classified into actual ownership, shall be divided into the parts related to the tax-free business and the tax-free business (hereinafter “common input tax amount”), should be calculated on the basis of the ratio of the value of supply to the total amount of supply. However, the common purchase tax amount shall not be determined on the basis of the value of supply, if any, related to each business is related to each other’s separate or independent business.

[2] If there is no supply value for taxable businesses and tax-free businesses during the taxable period or there is no supply value for either of them, the common purchase tax amount shall not be divided in proportion to the supply value, on the grounds that the ratio of the purchase value, the ratio of the estimated supply value, etc. is applied, but if a building is newly constructed or acquired and provided for a taxable business or tax-free business, the estimated area shall be divided in proportion to the estimated use area [Article 61(4) of the former Enforcement Decree of the Value-Added Tax Act (wholly amended by Presidential Decree No. 24638, Jun. 28, 2013)].

[1] Article 17(7) of the former Value-Added Tax Act (wholly amended by Act No. 11873, Jun. 7, 2013; see current Article 39(2)); Article 61(1) of the former Enforcement Decree of the Value-Added Tax Act (wholly amended by Presidential Decree No. 24638, Jun. 28, 2013; see current Article 40 of the Value-Added Tax Act; and Article 81(1) of the current Enforcement Decree of the Value-Added Tax Act) / [2] Article 17(7) of the former Value-Added Tax Act (wholly amended by Act No. 11873, Jun. 7, 2013; see current Article 39(2)); Article 61(4) of the former Enforcement Decree of the Value-Added Tax Act (wholly amended by Presidential Decree No. 24638, Jun. 28, 2013);

[1] Supreme Court Decision 2014Du10714 Decided December 29, 2016 (Gong2017Sang, 273)

Seoul Metropolitan Government Agricultural and Food Corporation (Law Firm LLC, Attorneys So-young et al., Counsel for the defendant-appellant)

The head of Song District Tax Office (Law Firm Squa, Attorneys Jeon Sung-sung et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2016Nu37081 decided August 30, 2016

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. According to Article 17(7) of the former Value-Added Tax Act (wholly amended by Act No. 11873, Jun. 7, 2013) and the main sentence of Article 61(1) of the Enforcement Decree thereof (wholly amended by Presidential Decree No. 24638, Jun. 28, 2013; hereinafter “Enforcement Decree”), where an entrepreneur concurrently runs a taxable business and a tax-free business, the input tax amount related to the tax-free business shall be calculated on the basis of actual attribution; however, where an entrepreneur concurrently runs a taxable business and a tax-free business, the input tax amount that cannot be classified into actual ownership (hereinafter “common input tax amount”) shall be divided in proportion to the portion related to the taxable business and the tax-free business, in principle, to be calculated on the basis that the value of supply in the tax-free business accounts for the total value of supply. However, the common purchase tax amount calculated on the basis of the ratio of supply amount is limited to cases where the common purchase tax amount is related between the business and the supply value of each business.

On the other hand, if there is no supply value for taxable businesses and tax-free businesses during the pertinent taxable period or there is no supply value for either of them, on the grounds that the business and the business in which the common input tax amount occurred are separated and independent, the common input tax amount shall not be divided in proportion to the ratio of the supply value. Therefore, it shall be divided in proportion to the ratio of the purchase value, the ratio of the estimated supply value, etc., in applying the ratio of the purchase value, and if a building is newly constructed, acquired, and provided for a taxable business or a tax-free business, the estimated area shall be divided in proportion to

2. The evidence duly admitted by the lower court reveals the following facts.

1) The Plaintiff is a local government-invested public corporation that operates the village market and operates a wholesale market management business, which is a tax-exempt business, its incidental business, real estate rental business, parking lot business, etc.

2) On July 2010, the Plaintiff drafted a plan to successively implement facility modernization projects by dividing it into one phase (one phase from 2011 to 2013; 30,389.16 square meters for land): two phase (2013 to 2015; 7,424.50 square meters for land: 7,424.50 square meters), three phase (period: 2015 to 2018; 15,328.54 square meters for land):

3) Accordingly, on June 16, 201, the Plaintiff started and completed the first-stage project that constructs the 6-dong and 7-dong and 1-dong and 1-dong and around 2015. Around that time, the 2-stage and 3-dong project was established only in its own business plan. Accordingly, the Plaintiff operated a wholesale market management business and real estate rental business in the same way as the previous one in the site where the 2-stage and 3-dong project was scheduled.

4) The Plaintiff reported value-added tax for the second period from the second period to the first period of 2013 (hereinafter “instant taxable period”), and calculated the input tax amount related to the first-stage business (hereinafter “instant input tax amount”) corresponding to the common input tax amount, the actual attribution of which cannot be separated. Pursuant to Article 61(1) of the Enforcement Decree, the Plaintiff calculated the input tax amount related to the tax-free business subject to non-deduction in proportion to the ratio of the supply value of the tax-free business generated at the place of a household market to the total supply value ( approximately 43-47% by each taxable period).

5) After October 25, 2013, the Plaintiff filed an application for reduction or exemption on the ground that the input tax amount of the instant input tax should be calculated pro rataly by the ratio (7.76%) of the area of the scheduled use area related to the duty-free business among the total expected use area, based only on the first-stage business pursuant to Article 61(4)3 of the Enforcement Decree.

6) Accordingly, the Defendant, along with the Plaintiff’s application, divided the instant input tax amount pursuant to Article 61(4)3 of the Enforcement Decree, and the expected usage area should be determined based on the entire 1-3-stage business, not only the first-stage business but also the first-stage business, and accordingly, the input tax amount related to the tax-free business reaches 35.72% of the instant input tax amount. Accordingly, upon receiving the Plaintiff’s application for reduction or correction, rejected the reduction or correction as to

3. Examining the above facts and the following circumstances revealed by the record in light of the legal principles as seen earlier, it is difficult to view the first stage business during the instant taxable period as a separate business part separate from the existing business part operated by the Plaintiff within the place of business in the village market during the same period. Thus, the instant input tax amount is reasonable to calculate the ratio of the value of each supply of taxable businesses and tax-free business generated at the village market business pursuant to Article 61(1) of the Enforcement Decree to the total supply value.

1) The housing market modernization project promoted by the Plaintiff was conducted with the aim of rebuilding major facilities over three stages to resolve the congestion and increase in distribution cost due to the excess entry of agricultural and fishery products and the mixture of wholesale and retail facilities.

2) In the process, the Plaintiff selected a method of circular development to ensure that the existing merchants’ business operations are not temporarily suspended and continued in the process, and divided the site of a village market business place, which is a single business place, in accordance with the stage of the said modernization project, into three minutes. During the first stage of the phase, the merchants, who operated their business in the relevant site, were allowed to move to another site in the village market, and even during the second and third stage of the phase of the phase of the phase of the phase of the phase of the phase of the phase of the phase of the phase of the phase of the phase of the phase of the phase of the phase of the phase of the phase of the phase of the phase of the phase of the phase of the phase of the phase,

3) As can be seen, the Plaintiff continued to run the existing business even while the first phase project is in progress, and the instant project was promoted to improve the business conditions of the existing business, such as modernization of facilities within the place of the village market.

4. Nevertheless, the lower court erred by misapprehending the legal doctrine on the interpretation and application of Article 61(1) and (4) of the Enforcement Decree, thereby adversely affecting the conclusion of the judgment, on the grounds that the supply value generated during the instant taxable period is not related to the instant input tax amount, and thus, determined that the instant input tax amount ought to be divided based on the first-stage business pursuant to Article 61(4)3 of the Enforcement Decree, instead of the instant input tax amount. In so doing, the lower court erred by misapprehending the legal doctrine on the interpretation and application of Article 61(1) and (

5. Conclusion

Therefore, without further proceeding to decide on the remaining grounds of appeal, the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices

Justices Kwon Soon-il (Presiding Justice)