Tax Appeal | A High Court Judgment Holding That Royalties Must Be Added to the Transaction Value of Imported Goods

This case, which developed into tax appeal litigation, was one in which the issues were whether a connection and a condition-of-sale relationship between the royalties and the goods could be recognized, and whether the method of adding the license fees was lawful.

This issue arose in a lawsuit filed by the plaintiff, B Co., Ltd., seeking revocation of the customs duties, value-added tax, and additional tax imposed by the head of the Seoul Customs Office.

The plaintiff had entered into a contract to pay royalties for manufacturing and selling Group A's finished tobacco products domestically. In this process, with respect to the imported goods, the Korea Customs Service argued that the royalties had to be added to the transaction value of the imported goods and imposed customs duties accordingly.

However, the plaintiff argued that the royalties were unrelated to the goods at issue in this case and requested revocation.

The arguments of the plaintiff and the defendant in this tax appeal litigation are as follows.

The plaintiff argued that the royalties at issue in this case were unrelated to the imported goods and that adding them to the transaction value was improper.

This was premised on the position that the know-how and trade secrets were limited to know-how and trade secrets related to the domestic manufacturing process for finished tobacco products, and that the trademark rights were likewise limited to the use of trademark rights to be affixed to finished tobacco products or to the act of affixing trademarks to finished tobacco products.

The plaintiff therefore took the view that there was no connection to the transaction value of the imported goods.

The defendant, on the other hand, argued that the royalties were directly related to the imported goods and that these royalties had to be reflected as a condition of sale.

Pursuant to the former Customs Act, the defendant's position was that the royalties were closely connected to the rights necessary for the manufacture of the finished tobacco products and that, accordingly, they had to be added to the customs value.

The court's opinion in determining the lawfulness of the matters at issue in this tax appeal litigation is as follows.

The royalties at issue in this case are consideration for all intangible property rights related to the finished tobacco products, including trademarks, patents, designs, know-how, and trade secrets.

However, because those rights are directly implemented in and embodied in the goods at issue in this case, a connection between the royalties and the imported goods is recognized.

In addition, the court held that, because the plaintiff would not have been able to purchase the goods at issue had it not paid the royalties, the royalties at issue should be regarded as having been paid as a condition of sale of the goods.

The court also stated its position that the method of adding the license fees was likewise lawful.

1) The royalties at issue in this case cannot be regarded as including any "consideration for other business activities in Korea" that is unrelated to the imported goods.

2) Among the rights for which the royalties were paid, the trademark rights are also directly related to the finished tobacco products, so in calculating the license fees subject to addition to the transaction value under the Customs Act, there is no need to separately deduct the trademark license fees.

3) Even if the rights for which the royalties were paid include "know-how and trade secrets relating to the domestic manufacturing process for finished tobacco products," this is consideration related to the manufacturing activity for finished products produced using the imported goods as raw materials, and it is difficult to regard it as an item that must be separately deducted before the application of the relevant published rules.

4) There is likewise no objective evidence to suggest that any unlawfulness existed in the process by which the defendant calculated the license fees to be added to the transaction value of the goods at issue.

The court ultimately concluded that the royalties at issue appear to have been lawfully added to the transaction value, that there was no legal defect in the defendant's method of calculation, and that the plaintiff's claim was therefore without merit and had to be dismissed.

Accordingly, the court accepted the defendant's appeal, reversed the judgment of the court of first instance, and dismissed the plaintiff's claim.

This case examined tax appeal litigation concerning the revocation of an imposition of customs duties of approximately 9.8 billion won.

This tax appeal litigation was a case in which the issue was how royalties for intangible property rights such as trademark rights, patent rights, designs, know-how, and trade secrets should be taxed.

At Daeryun Law Firm LLP, 🔗customs attorneys, 🔗intellectual property attorneys, 🔗attorneys experienced in tax matters, customs specialists, and tax accountants collaborate to provide close, thorough representation in situations such as the above.

We hope you will resolve issues concerning the Customs Act, the determination of customs value, and the establishment of royalty-related tax strategies through the one-team support of attorneys experienced in customs, tax, and administrative matters together with specialists in each field.