CTA Case No. 2402

DECISION -

CTA CASE NO, 2402 sources outside of the Philippiner. The said com- missions are not therefore subject to Philippine income tax pursuant to Section 240») of the Tax Code, according to petitioners, beceuse IwP, being & non-resident foreign corporetion, its gross ine come subject to tex consists only of ite gross in- come from sources within the Philippines, In brushing aside this stand of petitioners, respondent alleges that “IwP merely receives the percentage commission everytime the sales of logs — ere effected without rendering any service, this is so because IWP is @ sister company of the peti- tioners and, as a matter of fact, the majority mem nent of Ives Board of directors ere olso the majo- rity members of the petitioners*® Board of Directors," (op. 258, CTA rec.) And averring that since “the sales were consummated in the Philippines, the sel~ ling arrangement being F.0.B. Bislig, it necessary follows that the income that were genereted from | the transactions, is@s, gross income on the part of the sellers (petitioners) and commissions on the part of agent (INP) should be declarable in the Philippines” (p,259, CTA rec.); meaning probably, from profite derived from the sale of logs in the Philippines by petitioners which should be treated

DECISION «

CTA CASE NO, 2402 @- li « as derived entirely from Philippine sources, By this argument, respondent would seem to sug- gest that the agency contrects entered into by petitioners and IvP, appointing the latter as their exclusive agent to sell logs in Taiwan, Okinawa, Japan, Korea, united States and elsewhere, were merely profit-sharing arrangements with the agency commieritons given to IwP in the nature of its share in the profits derived from the trade or business of selling logs. Unless, of course, respondent would want this Court to Leck’ beyond the corporate form of petitioners and/or Lv? and ignore the sepe- rete entities of the corporetions, with the latter being but a part of the former scting merely ae their alter ego, conduit or subsidiary, .

The records provide no basis for such an inter~ pretetion, much less conclusion, which is evidently in conflict with respondent*s own admission (per. 8, Special and Affirmative Defenses, Respondent's Answer) ana his asabove-quoted statement of facts hat IvP was “a Hongkong (foreign) corporation non- resident in the Philippines", which means undoubtedly thet it wae not engaged in trade or business in the o if < ie Guring the period in question, I?, being admittedly @ non-resident foreign corporation, it is taxed only on “interest, dividends, renta, saleries, wages, premiums, annuities, compensetions, renumerations, emoluments, or other fixed or deter- minable annual or periodical or c sual guins, pro- £ite and income and capital gains” (see. 24(b) (1), ‘Tex Code), from sources within the Philippines, and profit from the trede or business of selling perso- nal property within the Philippines does not appareht- ly come within this enumeration or classification, Acting a5 agent in the sele of property in the Philip-~ pines would reecily constitute “engeging in trade or business within the Philippines" with the reeult that IwP would have to be clessified ae a resident esnekan corporsetion engaged in trede or business in the Philippines for such profit (commissions) to be texeble under cur income tex law, (ee Vol, 3, 1965 Predera} Taxes, par, 16, 295+c,) ( Moreover, it seems cleser thet Iwp*s income which respondent seeks to tex consisted of agency commissions cemitted to it by petitioners (Speciel end Affirmative Defenses, Respondent's Answer) was in no way related to the profits realized by petitioners from the sale of _ legs to their foreign buyers which, in accordance with the agency contrects entered into between then, DECISION .

. CTA CASE NO. 2402 were measured, depending upon the country where sold, by @ fixed percentage of gross sales, And in the ciroums tence thet “the majority mem- bers of IwP*s Board cf Directors are also the vajority members of the petitioners® Soard of Directors” (p. 258, CTA records), we cannot, on *heti basis alone, hold that IWP was merely on alter ego, conduit or extension of petitioners, Aside from tho admission of respondent that IWP is @ non-resident foreign ogre poration, it is an elementary principle of corporation law that a corporation is an entity separate and dis- tinct from its stockholders ana from other corporations to which it may be connected, [we evidence whatever was presented here by respondent that the notion of corpo- rete entity was used as a device to defeat public con- venience or defraud the Government of lawful revenue to justify disregard of corporate identity, A tax- payer is free to choose the form in whieh he will Go business, and if, having chosen e form, he actually carries on the business under the structure adopted, the government cannot deprive him of the benefit of the cho- sen form, except upon 4 showing that the form is anrea} or sham, (Higgins v. mith, 308 U.°. 473,)) Prom this : focal point, we cannot therefore extract s view that the agensy commissions peid by petitioners to IwP were

DECISION «=

CTA CASE MO, 2402 = 14.

profits realised from the sale of logs attributable to sources within the Philippines under Section 37(a) (b) of the Revenue Code, It seems clear in the present case that the com- missions paid by petitioners to Iv? were compensation for services rendered as their agent in the sale of logs in Korea, Japan, Taiwan and other foreign countries, By the contrects of agency (fxhibits "A" and "B") ene tered into by end between petitioners and IwP, the late ter bound itself to render the following services for and on behalf of the formers

(a) Handle the sale of export logs in Ame- ° rica, Taiwan, Japan, furope and else- where in the world; | (b>) Maximize, at its own expense, the sales exploitation to export sone throughout the world markets ' (¢) Protect and promote the interest, good name and reputation of petitioners to obtein maximum sales exploitetion of the logs of petitioners;

(4) Exert beet efforts to obtain the most fevorable prices not lower then current market prices; end

(e) Assist petitioners in the execution of existing and future contrects, and ob- tain and report regularly to petitioners on information and data sffecting log market conditions and general political and economic world conditions, To perform andaxcomplish these services for petitioners, IVP had to esteblish a sales force by 4191

DECISION «

- 15 « appointing sub-agents in Korea, Jepan and Taiwan, who had their own pooenetss oer contacts in need of logs to buy for use tr theis respective plywood and lumber manufacturing plants, These ouinagents, which conse tituted the sales facilities of IwP, contacted their prospects (or the latter contected them), informing these prospects of the availability of logs at a partie cular time, the volume, kind and grade, the price per onthe meter, and ingbired if the prospect wes interested to buy. Often, it was the prospect who contacted these sub-agents, asking of the availability and price Guo tations of the desired logs in desired volumes, When the sub-egent end buyer reached an agreement, the fore mer prepared the "acknowledgment of order” it “con- firmation of order” or “offer sheet." All of these were signed by the sub-agents on behalf of IWP, A copy of this acknowledgment of order or confirmation of order or offer sheet is sent to IP in Hongkong, and another copy to Picop or Bislig as the case may be, AS soon as the buyer approved such order, it immedistely opened letters of credit in favor of Picop or Bislig, until] 1969 and in favor of IvP, beginning January 1970, On the basis of the purchase orders, called either acknowledgment of order or confirmation of order, received by Picop end Bislig, these suppliers DECISION .

CTA CASE NO. 2402 - »~ 16 « prepered the manufacturing orders, In turn, these manufacturing orders became the authority for ship- ping the required volume and specificsetion of logs ‘ordereG, it appears that the buyers then took deli- very upon arrival of the logs in sheir respective ports, he records show that in December 196%, each of the oousuennnns and IwP entered into a contract tere minating tho seles agency relationship, siffective January i, 1970, IP was insteod converted into an 7 exelusive buyer of sl] the logs of Picop ené Bislig, IwP, af of thet date, ceared to be a sales agent of Picop end Bislig. . E For services rendered in the sale of the logs of petitioners to foreign buyers and for performing all the scts and services which it bound itself to render under the agency contrects, IvP received egency commissions from the former, During the triel of . this cose, petitioners through their independent eudi- tors and through the chertered accountont of IWP in Hongkong presented evidence as to the exact amount earned by IwWP as agency commissions. The Philippine “independent auditors snd the Hongkong chartered ac- Sentietiens Peat, Merwick, Mitchell & COs Lta,, cone

DECISION _

CTA CASE WO, 2402 ; \ . 4 \ a] \ \ - 17 «- ‘ firmed respectively by verified certifications and testimony in court in the cese of the Philippine auditors, Sycip, Gore res, Velayo & Co., that the figures shown below in United States.

dollers were acerneda respectively by petitioners and IvP qn their books as agency commissions earned by the latter, pursuant to the agency contrects entered into by them:

U.9 635,080.57

Are

11, 740,60 5,685.30 ‘16,491.48 16, 528,54 23,961.56 21,406.89 16,059.63 28,157,39 17,429.36 12,656.52 Ue! o814,091,58 16,190.62 17,689.86 11,176.54 10, 846.45 18, 365.23 18, $90, 96 15, 208.16 12,898.52 13,143.13 ae So Per SOV & Cost Per Peat, Marwick 3:

ane wWeaeweenwwe 7 wm *

BISLEO BAY

Per 50V & C9.1Per Peet,Mer= ’ wick s ;

: t 13968 , *y.5.2$35,080.$7 March U.S. $31,014.41 $31,069.47 11, 749,60 April 17,852.63 s 17,852.63 16,491.48 June 26,787.11 + 28,175.93 16,528,354 July 31,654.10 t 32,851.83 23,861.56 August 29,804.03 + 31,049,48 21,406.99 Sept. 37,566.61 t 32,348.73 16,959.63 oct, 17,318.03 : 17,318.03 25, 209,76 November 44,464.74 «+ 44,464.10 17,376.99 December 25,539.87 25,539.87 12,655.51 January 17,671.87 s 17,671.87

Pebruary :

e e s U.S. § . ry - ° 14,091,568 March 15, 790,03 : 15, 790,03 11,176.54 June 35,519,000 : 35,519.00 10,848.45 duly 25, 949,42 : 25,949.42 18,365.13 August 40,602.75 +s 40,602.75. 12,998.52 November | 33,571.82 + 33,571.82 13,143.13 December 43, 540,93 : 43,540.93 -

Vere

DLCISION «

- 18 - nid nil ney rs ruary U.8 $148, 202.95 state tories Use ~~ = Us, ra Ta

Tetal -

Uo oS 2G6Bg 924,75 $ 268,924,475 0.5. 9668, 698%.42 0.5 1668, 689, 42 * In 1970, no agency commissions were accrued for in that year, IP ceased to be «a commission agent.

JAS We have already stated above, all the acts snd services of IWP which it bound itself to reader for and on behalf of petitioners under the agency contracts, and for which it was paid agency commissions, were 011 performed in Korea, Japan and Teiwen, or outside the Philippines, The important factor therefore which determines the source) of income is not the residence of the peyor, or the place where the contract for services is entered into, or the place of payment, but the plece where the services were ectually rendered, (Sec. 15%, Rev. Regs. No. 29 @ Mertens Law af Federal Income Texation 45.32, pe.32.) Since come pensation fer laber or personal services performed with- out the Philippines is income from sources without the Philippines (Sec. 37(e)(3), Tax Code; Sec, 158, Rev, ®egs. ito, 2), IvP*s agency commissions which arose out of its acts and services rencered in Korea, Japan and Taiwan are . . “compensation for labor or personal services performed without the Philippines,“ Consequently, such agency ' 235

DECISION «

CTA CASE NO, 2402 - 19 « “commissions are, under the plein provision of the law* income from sources without the Philippines,” JY artnougn IvP*s commissions might have been the result of the sale of the logs of petitioners to their foreign buyers, it does not necessarily follow that the profit of petitioners from such sale constie tuted the source of its income, Respondent admits thet IWP is a nog-resident foreign corporation, and what is being sought to be taxed, through petitioners* liability to pay withholding tax-at source, sre IWP's commissions for services rendered in the sale of peti-= tioners* logs to foreign buyers, BSeing a son-resident | foreign corporation, which means foreign corporation not engaged in trade or business in the Philippines, under Section 24(b)(1) of the Revenue Code, IwP is taxable only en income from sources within the Philip- pines, Cleerly, therefore, IvP"s agency commissions, hikes wwe ingens teem enerece without the Ppilippines, are not subject to Philippine income tax, And since under the provisions of Sections 53 ond 54 of the Re~- venue Code, the legal and person&] liebility of peti- tioners to deduet and withhold from the agency com missions the income tax due thereon, file the requi- ‘site withholding tax return and pay the tax withheld to the Bureav of Internal Revenue is dependent on the de- 7

DECISION «=

rivation or realization of IwP of income from sources within the Philippines, petitioners* lisbility es with- holding agents did not attached, + We do not share the view of respondent that the services of IvP for which it received agency com- missions were performed in the Philippines because there is « decision of the supreme Court of Hongkong in the case of the Commissioner of Inland Revenue vs, International wood Products, Ltd.g in Inland Revenue Appeal No: 2 of 1971, steting that IwP 4s not subject to any tax for the reason that the services rendered by it were outside Hongkong, Nowhere in the Hongkong Supreme Court decision, relied upon by respondent, can we deduce, even only by implicetion, that the services rendered by Iw? under its agency contracts with petitioners were performed in the Ppilippines, Ang the fact thet the Supreme Court of Hongkong found that the services of IvP were rendered out- side Hongkong does not logically follow that such services were performed in the Philippines, As stated above, all the acts and services of IWP which it bound itself to render for and on behalf of peti- tioners ant for which it received agency commis ions were performed in Korea, Japan and tea

DECISION «

«tlhe Arment the question of whether or not the subse- quent examination of the books of accounts and other accounting records of petitioners in 1972 by respone dent, which geve rise to the present controversy, was ‘barred by the orior 1971 investigation, Section 337 of the Tax Code provides that examination and ins- pection can be made only once in « taxable year du- fing the fiveeyeer period that such books end records are required to be preserved, except in case of fraud, irregularity or mistake, or unless the taxpayer re- quests ctherwise, Indeed, os iia te petitioners, the purpose of the law is to secure taxpayers ageingt abuses srising from suitiple or unreasonable investi- gations, However, in ordering the investigation of pe- titioners, we notice that respondent acted on s confidential information filed with his Office some- _ time in Pebruary 1972 on their failure to withhold the tax on the commissions remitted to IwP for the yeers 1966 to 1970, Since, under the premises, the return required by lew as basis for the sssesement of the tax was not filed by petitioners endfor the tax due thereon paid (on the honest belief perhaps that they were not required to do so), or at least, . Pespondent had reason to believe that there was fraud, n a a a ee cee . DECISION « CTA CASE NO, 2402 irvegulerity or mistake, he should, before he can as- sess the proper tex on the best evidence obtainable under section 15 of the Revenue Coce, order en inves- tigetion. As Commissioner of Internal Revenue, res- pondent should endeavor to collect and insist on the collection of every centevo of internal revenue tax lawfully due the Government, but fairness also ree qvires that before he issues an assessment, he should first investigate to make sure that no harrassment or injustice is done to taxpayers, At any rate, we notice in the instant case that an investigation of taxable years 1968, 1969 and 1970 was made in.1971 by respondent, resulting in deficiency assessments that were duly paid by petitioners, It sppeers thet respondent wrote peti- ésenere Closing and terminating these taxable years.

While respondent euthoriszed another investigation in 1972, which petitioners cleim as not falling within ony of the exceptions mentioned in Section 337 of the Tex Code, it will be noted thet petitioners’ books of ' accounts and other seconds were subjected te exami- nation end inspection only once in a taxable year— in 1971 end in 1972, There was therefore no multiple examination and inspection of petitioners® books and Se a —_ ee ————

DECISION =

CTA CASE MO. 2402.

~- 23 = records im a taxable yeer, . :

aAecordingly, the decision ef respendent Com missioner of Internal Revenue holding petitioners Paper Industries Cerporation ef the Philippines and Bislig Bay Lumber Co., Inc., liable fer the amounts ef P1, 294,097.23 and P2,028, 790.00, respectively, representing withholding tex for the years 1968, 1969 and 1970 because of their failure to with- held income tax from the agency commissions re- ceived by theif sales agent, the International wood Products, Ltd., cannot be sustained,

WHEREFORE, the decision appealed from should be as it is hereby reversed, Ne costs.

Z

wE C ik % B ee SRISLAO R. ALY. F

Presiding Judge

COMSTANTE Co ROAQUIN

/heseciate Judge 200