On behalf of Company A, a medical device importer, Kim & Chang’s International Trade & Customs Practice filed a request for a tax adjudication in response to the customs authority’s assessment (the “Assessment”) of approximately KRW 3 billion—including customs duty, VAT and penalty tax—by changing the Harmonized System (“HS”) classification of medical endoscopy image processors (the “Product”), which led to a decision to cancel the Assessment in its entirety.
The Product is an image processor (video processor), which is a component of a medical imaging diagnostic device that visualizes lesions inside a human body as an image. The Product supports a doctor’s diagnosis of lesions by converting the signals received by an endoscope inside the human body into electrical signals, which are then processed back into video signals and outputted to a monitor.
Company A has long filed import declarations for the Product under Heading 9018 (devices used in medical, surgical, dental and veterinary sciences, tariff rate of 0%) of the Harmonized Tariff and Statistical Classification Table (the “HS Classification Table”). However, the customs authority determined that the Product fell under Heading 8543 (other electrical devices, tariff rate of 8%) for the following reasons:
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The Product has the “unique function” of processing video signals.
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HS classification is determined in accordance with the tariff schedule and the General Rules and Explanatory Notes. A device cannot be classified as a “medical device” (Heading 9018) solely based on the fact that it has been certified as a medical device.
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The HS Classification Committee of the Korea Customs Service (the “KCS”), which has expertise, determined that the Product fell under Heading 8543.
Company A appealed the Assessment by filing a request for tax adjudication as follows:
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In order to classify the Product under Heading 8543, “the goods should not be classified under any other heading of this chapter (Chapter 85) or under other headings of other chapters of the HS Classification Table.” However, the Product falls under Heading 9018, and thus, the requirements for classification under Heading 8543 cannot be satisfied.
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The Product functions only when combined with an endoscope and a monitor, and its function is indispensable for the entire diagnostic device. Therefore, the Product cannot be deemed to satisfy the “unique function” requirement for classification under Heading 8543.
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It is objectively clear that the Product is a part of devices that have been certified as medical devices at the time of import and customs clearance, and are actually used only at medical sites.
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According to past and recent precedents of the Customs Valuation & Classification Institute (the “CVCI”), there have been cases where goods with similar structures, functions and uses as the Product were classified under Heading 9018. Furthermore, overseas goods with almost similar uses were also classified under Heading 9018.
The Tax Tribunal accepted Company A’s argument and canceled the Assessment in its entirety.
More specifically, the Tax Tribunal ruled that classifying the Product under Heading 8543 is unlawful because the Product (i) can be classified under 9018.19-9000 (parts of electrical diagnostic devices) of the HS Classification Table, and (ii) does not have a “unique function” as it is combined with endoscopes and monitors to function as a medical diagnostic device. The Tax Tribunal further ruled that, considering the recent precedents of the CVCI on similar goods, the Product fell under Heading 9018.
As the HS Classification Committee of the CVCI and the HS Classification Committee of the KCS had already decided on the HS classification of the Product under Heading 8543, this was a very difficult appeal that took more than a year and several rounds of arguments and hearings at the Tax Tribunal. We submitted our briefs by making easy-to-understand summaries and briefly explaining complex HS classification cases through PowerPoint presentations, pointing out the logical fallacies of the customs authority, and actively arguing the illegality and unreasonableness of the Assessment through recent case analysis of similar goods at home and abroad. As a result of such defense strategies, we were able to conclude the dispute at the Tax Tribunal stage before going to the court’s litigation stage. If an appellant prevails at the Tax Tribunal, the respondent cannot appeal. Therefore, this was a huge achievement for Company A as it managed to obtain an early and definitive refund of customs duties without going through a prolonged court proceeding that might have lasted many years.
The Tax Tribunal’s decision presented meaningful criteria for determining the HS classification and application of tariff rates for medical imaging equipment and its parts. Previously, such goods were classified as electrical devices under Heading 8543, and thus, could be subject to relatively unfavorable tariff rates. However, as the Tax Tribunal’s decision supported the possibility of classification under Heading 9018, companies importing the same or similar goods have secured practical grounds to re-examine the appropriateness of the tariff classification and applied tariff rates of their goods.
Considering the recent increase in the number of cases where the customs offices have imposed high-rate customs duties and penalties by changing the HS classification of medical devices, the above decision may be used as an important precedent in similar HS classification disputes in the future. However, since the HS classification may vary depending on the specific function, use, composition and form of presentation of each product, it is necessary to carefully review the logic of this decision for each product before applying it to other products.
If new goods are imported or there is room for dispute over the classification of existing goods, the risk of customs duties and penalties stemming from changes in tariff headings may be reduced by applying for a pre-examination of tariff classification to the CVCI before filing import declarations and confirming the appropriateness of the classification in advance. However, as in this case, the pre-examination process may take a considerable amount of time, and the results might not always be favorable for the importer. Therefore, whether to apply for and maintain the pre-examination process needs to be determined strategically by considering the burden of delay in the process and the need to switch to an appeals process.
