In a case where Gap corporation and Eul corporation engaged in the business of manufacturing and selling alcoholic beverages products and Eul corporation engaged in the business of importing and selling alcoholic beverages products share the amount of common expenses based on their sales revenue, and Gap corporation succeeded to the status under the settlement contract by taking over the sales tax invoice after receiving the corresponding amount of excess expenses from the other party, and Gap corporation and Byung corporation engaged in the business from Eul corporation, respectively, issued a tax invoice and reported and paid value-added tax, and the tax authority imposed value-added tax in addition to the output tax amount on Gap and Byung corporation on the grounds that the tax authority did not deduct the input tax amount for the excess expenses and provided services to the other party, the case holding that in a case where Gap corporation was found to be unlawful in addition to the output tax amount related to the excess expenses.

Article 48(1)2 of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 2035, Feb. 18, 2010); Article 48(1)2 of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 2035, Feb. 18, 2010) provides that “A” and “B” corporation engaged in the manufacture and sales of alcoholic beverages products shall share common expenses, such as common expenses and advertisement expenses, based on the total sales amount or sales amount of the relevant products; and “B” corporation shall succeed to the status of common expenses settlement agreement upon acquiring all of the sales tax invoices from “B”; and “B” and “B” corporation in a special relationship shall not include “B”, a transferor of the relevant business year immediately preceding the immediately preceding business year’s sales amount; and “B” and “B” corporation shall be deemed to have a separate basis for calculating its input tax amount based on Article 48(1)2(3) of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 207).

Articles 17(1) and 17(2)2 (see current Article 37) and (7) (see current Article 39(1)4) of the former Value-Added Tax Act (Amended by Act No. 9915, Jan. 1, 2010); Article 39(2) of the former Enforcement Decree of the Value-Added Tax Act (Amended by Presidential Decree No. 22043, Feb. 18, 2010); Article 60(3) (see current Article 77); Article 48(1)2(a) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 22035, Feb. 18, 2010)

Puuria Korea Co., Ltd. and one other (Attorneys Kim Jong-hwan et al., Counsel for the plaintiff-appellant)

[Plaintiff-Appellee] Plaintiff 1 and 1 others (Law Firm Namsan, Attorney Lee Chang-chul, Counsel for plaintiff-appellee

Seoul High Court Decision 2016Nu35146 decided September 27, 2016

The part of the lower judgment against the Plaintiffs regarding the imposition of value-added tax is reversed, and that part of the case is remanded to the Seoul High Court. The Plaintiffs’ remaining appeals and the Defendants’ appeals are dismissed.

The grounds of appeal are examined.

1. Judgment on the plaintiffs' grounds of appeal

A. As to the grounds of appeal Nos. 1, 2, and 4

(1) Article 26 subparag. 5 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that “any excess or unjustifiable amount, among losses incurred as a result of jointly operating or operating the same organization, business, etc. with persons other than the pertinent corporation, as prescribed by Presidential Decree, shall not be included in deductible expenses.” The main sentence of Article 48(1)2(a) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22035, Feb. 18, 2010; hereinafter referred to as “instant provision of the Enforcement Decree”) provides that “where a non-joint investment business entity has a special relationship with each subparagraph of Article 87(1) of the former Corporate Tax Act, an amount exceeding the share of sales of the pertinent corporation’s sales from the total sales in the immediately preceding business year shall not be included in deductible expenses,” and the proviso provides that “where the amount of sales of goods or services pursuant to Article 26(2) of the former Enforcement Rule of the Corporate Tax Act shall be included in deductible expenses.”

(2) The lower court acknowledged the following facts in full view of the admitted evidence.

① On February 2, 2000, Plaintiff PRI Co., Ltd. (former trade name before the change: career sirens Co., Ltd.; hereinafter “PRI”) entered into the instant joint security account settlement agreement with the company engaging in the import and sale of fice products, etc. (hereinafter “JBIC”), which is a liquor, on the basis of the total sales amount of both companies, the joint expenses, such as joint personnel expenses, office operation and maintenance expenses, etc. during each fiscal year, shall be shared based on the total sales amount of the relevant products; however, if the difference between the joint expenses actually paid and the common expenses calculated according to the apportionment ratio among the end of each fiscal year, the joint expenses for fice products shall be shared based on the sales amount of the relevant products; however, if one party receives the corresponding amount from the other party and issues the sales tax invoice to the other party.

② On April 14, 2006, the Plaintiff PRK (hereinafter “PRK”) succeeded to the status under the KBIC’s joint security settlement agreement of the instant case when taking over all the business related to the import and sale of PRK from JBIC.

③ From April 1, 2006 to June 30, 2007 (hereinafter “the first period”), the Plaintiffs shared common expenses based on “the sales revenue in the immediately preceding business year.” On December 2007, Plaintiff PRK’s revocation of the permission to establish a direct sales outlet in the Seoul metropolitan area, thereby reducing Plaintiff PRK’s sales revenue, and rapidly increasing Plaintiff PRK’s sales revenue in importing and selling the said products. As such, the period from July 1, 2007 to June 30, 2009 (hereinafter “second period”) shared common expenses based on “the sales revenue in the pertinent business year.”

④ Accordingly, with respect to the sharing of common expenses among the Plaintiffs in a special relationship, the Defendants included the sales revenue of JBIC, the transferor of the business, in the sales revenue of the immediately preceding business year, and during the second period, the joint expenses should be shared based on the sales revenue of the immediately preceding business year in accordance with the provisions of the Enforcement Decree of the instant case, and then the amount in excess of the joint expenses should be deducted from deductible expenses, and each of the instant corporate tax was imposed.

(3) As to the first period, the lower court determined that: (a) as to the first period, it is reasonable to set the allocation ratio on the basis of the annual sales calculated in accordance with Article 55(2) of the former Corporate Tax Act, on the grounds that: (b) Plaintiff PRK acquired all of the business related to the import and sale of the ice products from JBIC; (c) the JBIC immediately closed its business after the transfer of the pertinent business; (b) Plaintiff PRK succeeded to the status under the instant joint expense settlement agreement following the transfer and takeover of the pertinent business; (c) the sales of either party in the immediately preceding business year was less than one year; and (d) it is reasonable to set the allocation ratio on the basis of the annual sales of either party’s previous business year on the basis of the number of months in the immediately preceding business year, if there is a difference in the number of months in the number of months in the previous business year, including Plaintiff P

(4) Furthermore, with regard to the second period, the lower court does not appear to mean that it would be possible to follow other reasonable criteria in cases where unreasonable results arise in light of the language and text of the provision of the Enforcement Decree of this case. ② Even if the provision of this case was amended to allow taxpayers to choose the allocation standards in the immediately preceding business year’s sales or the pertinent business year’s sales, it cannot be applied retroactively to this case, and even under the amended provision, it does not allow taxpayers to arbitrarily choose the allocation standards in the immediately preceding business year’s sales or in the pertinent business year’s sales or in the pertinent business year’s sales. ③ It is not considerably unreasonable to apply the allocation standards under the provision of the Enforcement Decree of this case merely because the rapid increase or decrease in the corporate sales in the pertinent business year’s sales or in the pertinent business year’s sales. Rather, the lower court determined that the allocation standards under the provision of the Enforcement Decree of this case’s provision of the same would be reasonable in light of the structure of the relevant provision and its amendment.

(5) Examining the records in light of the aforementioned provisions and related legal principles, the lower court’s determination is justifiable, and contrary to what is alleged in the grounds of appeal, there were no errors by misapprehending the legal doctrine on the interpretation and application of the Enforcement Decree and the Enforcement Rule provisions, and no

Supreme Court Decision 2007Du8058 Decided May 15, 2008 cited in the ground of appeal is not appropriate to be invoked in this case because the case is different.

B. Regarding ground of appeal No. 3

Article 17(1) and (2)2 of the former Value-Added Tax Act (amended by Act No. 9915, Jan. 1, 2010; hereinafter the same) provide that the amount of value-added tax to be paid by an entrepreneur shall be the amount calculated by deducting the amount of input tax from the amount of output tax; and that “the amount of input tax for expenditures not directly related to the business” shall not be deducted from the amount of output tax; and Article 17(7) of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 22043, Feb. 18, 2010; hereinafter the same) upon delegation of Article 60(3) of the former Enforcement Decree of the Value-Added Tax Act (amended by Act No. 22043, Feb. 18, 2010; hereinafter the same) shall be governed by

According to the reasoning of the judgment below, the following facts are revealed: (a) during the period of Nos. 1 and 2, the Plaintiffs did not include the JBIC’s sales in the immediately preceding business year’s sales in the immediately preceding business year of the pertinent business year; or (b) issued a tax invoice and reported and paid the value-added tax by setting a joint expense apportionment ratio based on the sales revenue of the pertinent business year, not the sales revenue of the immediately preceding business year; and (c) the Defendants should include the sales revenue of the JBIC, the transferor of the business, in the sales revenue of the Plaintiff PRK in the immediately preceding business year; and (d) calculated the joint expense apportionment ratio based on the sales revenue of the immediately preceding business year; and (e) deducted the input tax amount for the portion of the portion of the joint expenses disbursed in excess of the ratio; and

Examining these facts in light of the provisions and relevant legal principles as seen earlier, ① the Plaintiffs settled the amount of excess expenditure in accordance with the allocation standard of common expenses after paying common expenses, such as common expenses and advertisement expenses, for their own business that accrue from sales. Even if the allocation standard is not consistent with the criteria under Article 17(2)2 of the former Value-Added Tax Act and Article 60(3) of the former Enforcement Decree of the Value-Added Tax Act, it is merely a result of denying business relations under the above statutes, and it is difficult to find legal grounds to deem that the Plaintiffs provided services separately from their sales business. ② If the Plaintiffs’ provision of services is deemed to have been added to the output tax amount, the deduction tax amount can again be deducted from the output tax amount, which is directly related to the supply of services that are subject to the above taxation, and thus, it is incompatible with each other. ③ The Plaintiffs cannot request the other party to pay the amount exceeding the input tax amount that is not deducted from the common expenses under the joint expenses settlement contract, and thus, the amount of excess expenditure cannot be deemed unlawful from the market price.

Nevertheless, the lower court determined that the excessive disbursement was included in the output tax amount as a VAT taxable. In so determining, the lower court erred by misapprehending the legal doctrine on the supply of services subject to taxation under the Value-Added Tax Act, thereby adversely affecting the conclusion of the judgment. The allegation contained

2. Judgment on the Defendants’ grounds of appeal

The lower court determined that each of the instant dispositions was unlawful on the grounds that only the amount of penalty tax was stated in the notice of tax payment, and there was a defect in omission of the matters required by the relevant statutes, such as the type of penalty tax and the grounds for calculation thereof, and there was no reason to deem that the defect was supplemented or cured.

Examining the record in light of the relevant legal principles, such determination by the lower court is justifiable, and contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine

3. Conclusion

Therefore, the part of the lower judgment against the Plaintiffs regarding the imposition of value-added tax is reversed, and that part of the case is remanded to the lower court for further proceedings consistent with this Opinion. The remaining appeals by the Plaintiffs and the Defendants’ appeals are dismissed. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Shin (Presiding Justice)