Non-party 1 (Law Firm Barun, Attorneys Cho Yong-min et al., Counsel for the defendant-appellant)

head of Sung Dong Tax Office

February 8, 2012

Seoul Administrative Court Decision 2010Guhap15643 decided April 21, 2011

1.The judgment of the first instance shall be modified as follows:

A. The Defendant’s imposition of KRW 120,40,07,040 of corporate tax for the business year 2004 with respect to Tae Young medicine Co., Ltd. on July 1, 2009; the imposition of KRW 282,792,856 of corporate tax for the business year 2006; the imposition of KRW 30,310,690 of corporate tax for the business year 2006; and the imposition of KRW 282,792,856 of corporate tax for the business year 206.

B. On July 6, 2009, the Defendant revoked the part of 1,469,248,409 won (300,139,302 won in 2004, 300,139,302 won in 2004, 416,514,156 won in 2005, 452,404,103 won in 2006, 450,573,230 won in 207, 4573,230 won in 207, 378,352,89 won in 208,248,409 won in 200,139,302 won in 2004, 381,37,381,37, 2005, 208, 2037, 20839, 2084, 20836

C. The remaining claims of the plaintiff are dismissed.

2. 30% of the total litigation costs shall be borne by the Plaintiff, and the remainder by the Defendant, respectively.

The judgment of the first instance shall be revoked. The defendant's disposition of imposition of KRW 120,40,07,040, corporate tax for the business year of 2004 with respect to Tae Young Medicine Co., Ltd. (hereinafter referred to as "T Tae Young Medicine"), KRW 384,148,250, corporate tax for the business year of 2006, KRW 30,310,690, corporate tax for the business year of 2007, and the disposition of imposition of KRW 1,997,983,688 (300,139,302, KRW 300,416,514,156, KRW 452,404, KRW 206, KRW 4503, KRW 507,3838,208, Jul. 6, 2009, shall be revoked in all, and the amount of income shall be revoked.

1. Details of disposition;

After conducting an integrated investigation into the corporate tax for the business year of 2004 and 2008 with respect to solar drugs, the head of the Seoul Regional Tax Office (hereinafter “Seoul Regional Tax Office”) issued a notice to the Defendant that the total amount of KRW 240,480,938, which was converted to the sales of KRW 192,38,750 for the business year of 2004, shall be disposed of as a representative bonus and the sales cost shall be included in the deductible expenses, and KRW 214,246,653, which is equivalent to the sales cost shall be included in the gross income and the total amount of KRW 2,94,00,000,000 in the calculation of gross income during the investigation period, and KRW 1,997,983,688, which is a bonus as a representative, shall be disposed of as a bonus.

In the attached business year included in the main sentence, 2004 2005 2006 2007 2008 400,139,302 416,514,156 452,404,103 450,573,230 378,352,897 1,997,983,6883,688

The Defendant adjusted the amount of income for each business year according to the content of notice, and notified the Tae Young medicine to correct and notify the amount of KRW 132,150,220 corporate tax for the business year of July 1, 2004, KRW 384,148,250 corporate tax for the business year of 2006, corporate tax for the business year of 30,310,690, corporate tax for the business year of 2007, KRW 292,810,210, corporate tax for the business year of 2008, and KRW 37,569,940 for the second year of 204, and KRW 238,464,626 for the representative bonus (income earner 1) on July 6, 2009 (the aggregate amount stated in the above table 1,97, KRW 983,688, + KRW 2040,840,9839).

On September 29, 2009, the Commissioner of the National Tax Service filed a request for re-determination with the Commissioner of the National Tax Service on December 31, 2009, and the Commissioner of the National Tax Service decided to the effect that on December 31, 2009, the Defendant would not have any inventory of the business year 2004; ② the sales incentives sent by the pharmaceutical company in 2008 and the difference between the amount reported by the Plaintiff and the sales incentives reported by the pharmaceutical company shall be reflected in KRW 220,575,948; ③ the difference between the pharmaceutical company’s sales accounts and the Plaintiff’s sales accounts shall be adjusted as losses compared to the investigation and confirmation of the pharmaceutical company’s sales accounts and the Plaintiff’s credit purchase accounts; ③ the Taeyoung drugs’s retail payment amount of KRW 1,035 million,5 million, and the closing accounts amount of KRW 217,700,000,000,000,000.

On March 9, 2010, the director of the Seoul Regional Tax Office re-audits the Plaintiff on March 9, 2010, and determined to the effect that (i) the amount corresponding to 11,743,180 won of corporate tax related to the omission in inventory in the business year 2004; (ii) the amount of the second value-added tax in 240,480,938 won of income disposal corresponding to the amount of the second value-added tax in 2004; (iii) the amount of the gross income in relation to the omission in sales incentives in the business year 2008 was deducted as 220,575,948 won; and (iv) the amount of the deductible expenses increased to 895,613,735 won to reduce corporate tax to 332,879,717 won; and (iii) the amount of income in question was disposed of as a representative of the corporation tax and the notice of change in the amount of income as a bonus.

On October 21, 201, when the lawsuit is pending in the trial, the Plaintiff, who was a representative director, was appointed as a custodian upon the decision of commencement of the rehabilitation procedure (Seoul Central District Court 201 Ma125) on October 21, 201, and the Plaintiff taken over the litigation procedure of this case.

【Facts without dispute over the grounds for recognition, Gap 1 through 4, 33, Eul 1 through 7, the whole purport of the pleading

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) Regarding the imposition of corporate tax of this case

Of the total amount of KRW 1,97,983,68, the sum of the following asserted amounting to KRW 1,869,127,145 (hereinafter referred to as “reward costs”) in the accounts of cash settlement for the pharmaceutical company (hereinafter referred to as “reward costs”) was actually paid to the parties to the transaction, such as a pharmacy, who is a drug option, in accordance with the practice of the pharmaceutical industry. The key costs at issue are merely treated as extra deductible expenses, taking into account the transaction counterpart’s position that the fact that the drugs received honorariums is revealed, and should be included in the calculation of the total amount because they constitute an ordinary sales unit cost directly related to the pharmaceutical sales.

(1) The aggregate of the amounts paid to pharmacies, etc. (hereinafter “1,179,366,970 won”)

In selling drugs at retail, Tae Young medicine agreed to pay in cash a certain rate according to the sales performance of the drugs at a pharmacy or other retail, and accordingly, the drugs were paid to pharmacies, etc. in 204 (the amount paid after December 14, 2008 shall be KRW 20,767,688, 2005, KRW 190,478,731, KRW 223,194,463, KRW 283,489, KRW 714 (the amount paid after December 14, 2008 shall be KRW 20,767,516).

2. The aggregate of the amounts paid to the closing party (hereinafter referred to as "II costs") 217,162,638 won

The Plaintiff secured a certificate of supply of pharmaceutical company issued by a pharmaceutical company necessary for the bidding of the pharmaceutical purchase contract conducted by a general hospital, and paid to the closing party KRW 17,162,638 on June 30, 2004, KRW 50,000 on January 5, 2005, and KRW 50,000 on September 6, 2006.

(3) The aggregate of the amounts paid to fire extinguishing (hereinafter referred to as "fire extinguishing") a stock company (hereinafter referred to as "fire extinguishing") 472,597,537 won (hereinafter referred to as "third expenses").

The end-up party requested to deliver 20% of the drugs supplied to fire-fighting (a drug wholesaler established by the △△ University affiliated with the △△△ University) (hereinafter referred to as “satisfying drugs”) to fire-fighting (hereinafter referred to as “satisfying drugs”) on the basis of the supply price of the previous year. At the request of the end-up party, Tae Young-young paid KRW 202,564,817, and KRW 213,198,370, and KRW 56,834,350 in cash in 2006, based on the supply price of the previous year.

2) As to the notice of change in the instant income amount

The major issue cost is that it is illegal to give notice of change in the amount of income, which is the bonus of the representative, because it is not clear that it is actually paid with sales incidental expenses.

(b) Related statutes;

Attached Table 1 is as stated in the relevant Acts and subordinate statutes.

C. Determination

1) Whether the costs of the issue constitute non-performing losses

There is no dispute over the fact that the account books of Tae Young medicine, which were recorded as if the total cost was paid in cash to the pharmaceutical company in repayment of the credit purchase amount for the pharmaceutical company, are false. However, in light of the following circumstances, the plaintiff's assertion that the issue cost (3) was actually paid as a honorarium to the pharmacy, etc. is true.

A) As to (1) Costs

○ The rate of honorariums agreed in advance, along with monthly payment rates, settlement methods, etc., shall be specified in the transaction approval letter, draft form, etc. prepared by Tae Young medicine to start the sale of drugs to a pharmacy, etc.. In fact, the amount of honorariums expressed in each data shall be accurately identical (Evidence 6.10, Evidence A. 31-1 through 6, Evidence A. 32, 34-2, and 34) in preparing a deposit certificate, disbursement resolution, etc. at the time of payment of honorariums, and entering each data in the company computer system (ERP)

The non-party 2, who is a business employee, and the non-party 3, the non-party 4, the non-party 5, and the non-party 6 who are in charge of accounting affairs in Tae Young medicine testified in the lower court and the court of the trial. They are credibility in that they are specifically stated in the employees of Tae Young medicine, business partners, methods of payment, amount of payment, etc.

Of the customers of the ○○ drugs, the ○○ pharmacy prepared a letter of confirmation that “I receive a discount fee.”

However, the fact that 13 pharmacies, such as 13 pharmacies, had received employee conference support, was prepared with a written confirmation that “not having received sales incentives,” and the fact that 18 pharmacies, such as △△△△ pharmacies, were “not having received sales incentives,” respectively (No. 1 and 14 of the evidence No. 19, No. 11-18 of the evidence No. 19).

In light of the fact that it is not easy for pharmacy founders to disclose the fact that they received honorariums from pharmaceutical companies, etc., and the confirmation document prepared by the ▽▽▽△ pharmacy, etc. was prepared at the request of the National Tax Service staff in charge of re-investigations, etc., it is difficult to believe that the part of the “employee meeting support” among the confirmation document prepared by the △△△△△△

(2) As to the cost

○ The statement of money and a written disbursement resolution prepared by Tae Young medicine stated that the relevant expenses have been paid to the closing party (A evidence 15-1 and 6). Nonparty 2 testified to the same effect in the original trial.

○ The closing party offers the deposit sheet for the relevant expenses to the Tae Young medicine (No. 15 No. 7 and 9). The relevant expenses are included on a similar date in the accounting book for the closing party (No. 28, 29).

Although the closing party asserts that the sales partner did not receive the relevant expenses in cash only as stated in the account book (see the evidence No. 12-1, 2, and 14-1, 3 of the evidence No. 12-1, 2, and 14). However, in light of the fact that the sales partner was agreed at a certain ratio compared to the sales amount, and that the relevant amount is not in a relationship with the sales amount, and that the deposit slip issued by the closing party with the actual interest rate is “the person to receive and sell within the country” in the deposit slip issued by the closing party with the actual interest rate, it is difficult to accept in light of the fact that the receipts related to the expenses are not written and actually paid in cash

Considering the relationship between ○ pharmaceutical company and a wholesaler, it is unreasonable to view that Tae Young medicine had made a false assertion against the closing party.

(c) As to the cost

○ The “The unit price contract for the △ Hospital (which has been signed by the head of the office and the head of the branch office in the upper end of the highest end)” prepared by Tae Young medicine in connection with the transaction of the drug at issue refers to 20% of the supply price (insurance price) and 15% discount rate for the hospital contract (Evidence A 21).

In light of the fact that the closing party is not only wholesale contract but also the hospital contract is agreed, and higher discount rate than the general wholesalers is applied with respect to the transaction of the drug at issue, part of the supply price in accordance with the discount rate application is presumed to be premised on the fact that the difference in the supply price in accordance with the discount rate is delivered to fire extinguishing.

○ In the year 2003 through 2005, Tae Young medicine supplied a fire extinguishing at the price indicated in the table below the key drug (an average of 4.2% of the insurance premium). Fire extinguishing was sold to the hospital concerned according to the insurance premium as listed in the table (B) below. Through such formal transaction, fire extinguishing could acquire the profits listed in the table (B-L) caused by the difference below.

In order to implement this, Tae Young medicine requires Tae Young medicine to obtain 15% profit (III cost) equivalent to the insurance cost in relation to the transaction of the drug at issue. In order to implement this, Tae Young medicine was paid in cash by settling accounts of the profits described in the following table (Ⅲ cost-related) that were not satisfied through the official transaction in the preceding year from among the profits requested by Tae Young medicine in each transaction year following each transaction year (A. 16, 36 and 38 evidence of the court below, and testimony made by Non-Party 2 of the court below).

1) Table 204. 2005. 1, 2004. 2006. 1,350,432,110,421,322, 465. 378,895,668,150,650,650,243. 1,297,598. 1,362,783,54362,670,670,183,183,641,335 of the Table 2006. 57. 1,3605. 648,57,485,468,47,505,47,57,47,508,641,57,57,649,657,57,57,57,208,305,641,658,636,57,57,294,67,57,641,2,57,41,67,2,208,2,2,

Note 1) The year of transaction;

○ Fire-fighting remitted KRW 100,000 out of KRW 145,320,305, out of the profits received from the transaction of the pharmaceutical products in 2003, to Tae Young medicine on March 19, 2004. Tae Young medicine donated the said money to △△ University and treated the said money as deductible expenses (A evidence No. 22-1 and No. 22). This should be deducted from the amount indicated in the said Table’s (i.e., non-foreign deductible expenses).

(3) The plaintiff's assertion on the cost is justified within the extent of the above recognition.

2) Whether to allow inclusion of non-performing losses in deductible expenses

According to Article 19(2) of the Corporate Tax Act, losses or expenses incurred in connection with the business of a corporation are generally accepted as normal or directly related to profit. “Generally acceptable expenses” means expenses generally acceptable to other corporations operating the same kind of business as taxpayers under the same circumstances. Determination of whether such expenses constitute expenses ought to be made objectively by comprehensively taking into account the details, purpose, form, amount, effect, etc. of disbursement, and barring special circumstances, expenses disbursed in violation of social order shall be excluded.

The key cost (i.e., part of the cost below, (ii) cost, and (iii) cost generally acceptable and should be included in the calculation of the sales unit cost paid to the trading partner in consideration of the special circumstances, etc. in the pharmaceutical industry for the purpose of encouraging the sale of medicines. Foreign loss incurred by the Plaintiff is not extremely contrary to social order. The reasons for such determination are as follows.

According to Article 47 of the former Pharmaceutical Affairs Act (amended by Act No. 10324, May 27, 2010), a pharmacy founder, etc. shall observe matters necessary to establish a distribution system of drugs, etc., as prescribed by Ordinance of the Ministry of Health and Welfare. According to Articles 76 (1) 3 and 95 (1) 8, a person who violates such provision shall be subject to cancellation of license, suspension of business, or criminal punishment. Article 62 (1) 5 of the former Enforcement Rule of the Pharmaceutical Affairs Act (amended by Ordinance of the Ministry of Health and Welfare No. 77, Dec. 1, 2008; hereinafter “former Enforcement Rule”), supra, provides a medical institution founder, etc. with a view to promoting the sale of drugs, such as prize goods and gift goods, etc., or to maintaining order in sales. However, the Enforcement Rule of the Pharmaceutical Affairs Act (amended by Ordinance of the Ministry of Health and Welfare No. 77, Dec. 1, 2008; hereinafter “the former Enforcement Rule”).

In full view of the content and purport of the amendment of the Enforcement Rule of the Pharmaceutical Affairs Act, and the prior meaning of the terms “diversary gift, such as prize goods, gift goods, etc.” as prescribed by the Enforcement Rule of the Pharmaceutical Affairs Act prior to the amendment, the honorariums paid by drug wholesalers to founders of medical institutions, etc. before December 14, 2008, when the amended Enforcement Rule became effective, do not violate the matters to be observed under the Pharmaceutical Affairs Act

The honorariums received between ○○ pharmaceutical company, wholesaler, and wholesaler are not prohibited by the Pharmaceutical Affairs Act until now. Even if the fire extinguishing is a wholesaler established by bypassing the hospital, the honorariums paid to the fire extinguishing is not the same as those paid to the medical institution.

Of the other party who received the honorarium, there was no person eligible for the application of the crime of breach of trust, and there is no room for the establishment of the crime of breach of trust if the person did not receive the said money for the future personal use, such as the hospital or pharmacy to which he belongs

Although there are cases where the Fair Trade Commission imposes corrective orders and penalty surcharges by deeming the act of receiving honorariums between pharmaceutical companies and general hospitals as unfair trade practices, it is difficult to view that the number of issues is the unfair trade practices.

In light of the fact that the Corporate Tax Act does not have a special provision denying inclusion in deductible expenses of the cost or expenditure itself that is unlawful in order to obtain illegal income, corporate tax should be imposed according to the taxable capacity regardless of whether or not there is any prohibition under other Acts in principle, and that the expanded application of the tax law to punish acts going against the protection of property rights of the people and the principle of no taxation without law is likely to result in a violation of the principle of no taxation without law when the tax law is extended. Such cost also constitutes “amount of loss arising from transactions that reduce corporate net assets.”

The honorarium paid to the pharmacy, etc. or the fire extinguishing pursuant to the prior agreement is to refund part of the sales proceeds to the customer who continued large amounts of transactions in substance. The honorarium of this nature is to reduce the sales proceeds in corporate accounting and is treated equally in tax accounting. From the perspective of sales, it is merely a return of part of the sales proceeds for drugs for which it was not originally entitled to receive for convenience.

○ An honorarium-receiving practice in relation to pharmaceutical transactions results in negative effects, such as tax evasion, connected with the creation of non-accounting funds, and bring about financial insolvency through distortion of the prices of pharmaceutical products. However, such practices are basically attributable to structural factors such as the pharmaceutical distribution structure and the medical insurance system, so it is not unreasonable to resolve the application of the tax law by expanding the tax law.

○ In order to promote the sales of drugs at the time the number of honorariums related to the transaction of drugs was deferred, the expenses were paid to pharmacies, etc. ① in order to maintain the existing transaction relationship. Among them, KRW 1,158,59,451 ( KRW 1,179,36,970-20,767,519) paid prior to the enforcement date of the amended Enforcement Rule of the Pharmaceutical Affairs Act (amended by December 14, 2008) which prohibits the receipt of honorariums should be allowed to be included in deductible expenses.

In order for Tae Young medicine to participate in a purchase contract tender conducted by a general hospital, a pharmaceutical company issued by the pharmaceutical company was required. Domestic pharmaceutical companies, such as the closing party, have independent distribution network and sales organization, so they could directly supply medicines to general hospitals, pharmacies, etc. without going through a wholesaler such as Tae Young medicine. Tae Young medicine paid part of expenses and ③ expenses as honorariums to the closing party (or the fire extinguishing designated by the closing party) in a superior position for business under the pharmaceutical distribution structure. These expenses should be allowed to be included in the calculation of losses.

(iii) the legitimate corporate tax;

Of the key costs, the following table amounts should be included in the deductible expenses for the pertinent business year, which are generally accepted as ordinary or directly related to profit, as normal losses or expenses incurred or incurred in connection with the Tae Young medicine business. Among them, the legitimate corporate tax for the business year 2004, 2006, and 2007, which was imposed by the corporate tax of this case, is re-calculated only for the business year of 2004, as stated in the separate calculation statement, 282, 792, 856 won for the business year of 2006, and 2007, 32,180,718 won for 207.

117,162,638,638,631 223,463,262,722,195 (ju 2) of the attached business year 2006, 2007 (1) 305,54,659,459,608,608,608,676,677,688 190,478,731 223,463, 262,722,195 (ju 2) of the attached business year included in the main sentence of this paragraph.

Note 2) 262,722,195

Note 3) 45,320,305

Of the disposition imposing corporate tax of this case, the part of the year 2004 and the year 2005 is unlawful, and the part of the disposition exceeding KRW 282,792,856 of the corporate tax of the year 2006 is unlawful.

4) On the notice of the change in the income amount of this case

(1) Of the expenses, part of the expenses, ①, and ③ were actually paid as honorariums to pharmacies, etc. in each business year. ① Some of the expenses do not constitute “ordinary expenses generally acceptable” and thus, the attribution itself is not unclear. The Defendant’s comparison of the amount that was disposed of as a representative bonus with respect to the payment of credit purchase amount and the amount that was confirmed by the payer’s office with respect to the payment of credit purchase amount by year is as listed below. The Defendant’s comparison of the amount that was disposed of as a representative bonus with respect to the payment of credit purchase amount by year is as listed in the following table. Of the annual amount of income change by year, KRW 1,469,248,409 is illegal.

In the attached business year 2004 2006 2006 2007 2007 2008 2000,139,302 416,514,156 452,404,103 450,573,230,378,352,897 1,997,983,683,009,373737,337,337, 147, 281, 287, 087, 223,196 223,463,483,489, 637, 637, 637, 1848, 4848, 297, 3784, 2884, 297, 3784, 194, 309

3. Conclusion

Of the disposition imposing corporate tax in this case, the part of the year 2004, the whole part of the year 2007, the part exceeding KRW 282,792,856 of the corporate tax in the business year 2006, the part exceeding KRW 282,792,856 of the corporate tax in the business year 384,148,250, and the part concerning KRW 1,469,248,409 of the notice of the change

[Attachment]

Judges Kim Jong-dae (Presiding Judge)

1) The year following the year in which the medicine was supplied to fire-fighting is paid in cash to fire-fighting.

Note 2) 283,489,714-20,767,519 (the portion paid after December 14, 2008)

Note 3) 145,320,305-100,000 (Contribution to △△ University)

Note 4) 20,767,519 won paid after December 14, 2008