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Decision Acknowledging Problems in Selecting Comparable Companies under Method 4 by Customs Service

2021.11.05

The Customs Team at Kim & Chang recently successfully obtained a court ruling holding that, if the customs authorities select comparable companies to calculate the dutiable value of goods based on the domestic sales price pursuant to Article 33 of the Customs Act (“Method 4”), the HS code and business type requirements must be simultaneously considered when the top 100 comparable companies are selected (Busan High Court Decision 2019Nu24367, October 29, 2021).

The Plaintiff in the above case was a company engaged mainly in the business of importing goods from an overseas affiliate and supplying the goods to domestic retailers including hypermarkets.  The Plaintiff declared the value of the imported goods based on the amount stated in the invoices issued to the Plaintiff by the overseas affiliate (the “Transaction Value”).  However, the customs authorities (the “Defendant”) alleged that the relationship between the Plaintiff and the overseas affiliate had affected the transaction price after conducting customs audit of the Plaintiff, and the Defendant rejected the Transaction Value pursuant to Article 30 (3) 4 of the Customs Act and assessed customs duties, value-added tax, and penalties by determining the dutiable value under Method 4 (the “Assessment”).

The District Court ruled that the established facts and evidence in the aggregate seemed to show that the relationship between the Plaintiff and the overseas company affected the transaction price of the imported goods but that Defendant’s calculation of the same class or kind ratio for the imported goods based on the comparable companies extracted at the time of its search using the KCS Audit Information System, which has limitations in finding the importers of the same class/kind goods competing in the market at or around the time of importation of the applicable goods, cannot be deemed as a legitimate calculation of the same class or kind ratio, and thus, the imposition at issue was unlawful and in violation of the applicable laws and regulations.

The Defendant appealed the case to the High Court, alleging that the Audit Information System had been significantly improved after the Assessment in December of 2018 and that, based on the improved system, the Defendant had selected the top 100 comparable companies by using only the HS code in accordance with the Notification on Determination of Dutiable Value of Imported Goods (the “Notification”) and recalculated the same class or kind ratio based on the selected comparable companies by choosing the top 30 companies that satisfy all of the requirements set forth in each item of Article 26 (5) of the Notification taking into consideration the business type requirement and excluding the first 30 companies that fall under each item of Article 26 (6) of the Notification.  The Defendant argued that, when examining the Assessment based on the timing of the imports of the respective goods using the recalculated same class or kind ratio, it was clear that the Assessment was lawful in whole or at least in part. 

However, the High Court rejected the Defendant’s claim and ruled that paragraphs (4) and (5) of Article 26 of the Notification should be deemed to require the HS code and business type requirements be considered concurrently in the selection of the top 100 companies.  This meant the same class or kind ratio calculated based on the comparable companies selected by the Defendant using the method argued in the High Court appeal cannot serve as the basis for determining the reasonableness of the same class or kind ratio calculated at the time of the Assessment.

Recently, there are many cases where the legitimacy of the dutiable values determined under Method 4 is being challenged.  In this regard, the aforesaid ruling is significant because it confirms that Method 4 under the Customs Act is a method of calculating the dutiable value based on the average gross margin of competitors that handle the same class or kind of goods, and thus, the same class or kind ratio needs to be calculated strictly in accordance with the method stipulated in the applicable laws and regulations.  As the above decision by the High Court is currently under review by the Supreme Court, however, it is necessary to continue to monitor to see whether the decision will be affirmed by the Supreme Court.

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