CTA Case No. 2818

DECISION

2 Cor-por-ation (BRC for- shor-t), a cor-por-ation or-ganized under- the laws of the Philippines. Under- this Deed of Assignment, ESSO Easter-n Inc. , with consent of the Bataan Refining Cor·por-ation

( BRC)

assigned to the Mobi 1 Petr-oleum Co., Inc., petitioner- her-ein, all its r-ights and obligations under- a Ser-vice and Technical Agr-eement originally executed by and between BRC and Standar-d Oil Company on Mar-ch 29, 1962, which agr-eement, on the date of assignment was in for-ce and effect betwee n ESSO Eas ter-n Inc. and BRC. By vir-tue of ass ignment, petitioner- Mobil Petr-ol e um Co. , Inc. (J supplied BRC with the manageme nt: ser-vices con temp 1 a ted in the agr-eement all of which were r-endered in the Philippines. For the fir-st quarter- of 1974, r-espondent Commi s sioner· of In ter-n a 1 Revenue assessed BRC, as alleged withholding agent, the amount of P387,639.87 pur-por-ting to be withholding tax at source, plus inter-est of P4,900.93, or- a total of P387,540.80.

This assessment which BRC paid "Under- Pr-otest" on June 28, 1976, in the amount of P387,540.80, was pr-emised ··,q the assumption of r-espondent !• DECISION .....

-::-· ... • Commissioner of Internal Revenue, that the payments by BRC to pet.i t.ioner Mob.i 1 Petroleum Co., Inc., were "royalty payments".

Similar quarterly payments were made by BRC to respondent's Bureau "Under Protest" as follows : Second Quarter - 1974 paid July 25, 1974 Third Qua rte r - 1974 paid October 25, 1974 Fourth Quarter - 1974 paid Januar1 24, 1975 F.in;t Qua rter paid April 1975 25, 1975 P452,437.55 P421,771.73 P433 ,956. 3 6 P326,846 .16 which t.oge . 1er with the amount of P387,540.80, totals P2,022,552.60. On ,June 4, 1976 and June 9, 1.976, peti t.ioner Mob i l Pet.n:>leum Co., Inc., fi l ed with respondent Bure~u·s Appe ll ate Division a c l ai m for refund and a su pp l emen ta 1 1 et ter to the c 1 aim, res pec ti vel y, copies of which, together with their respective anne:.:es, wer-e made .integral parts as Anne:-:es "A" and "B".

That the basis of the claim for refund is that the fee s received by petitione r Mobil Petroleum Co., Inc., from the Bataan Refining Corporation (BRC), a~e not royalties as contemplated in the Tax DECISION CTA CASE NG. 2818 - 4 - Code but personal services rendered outside of the Philippines under Section 37(c) of the National Internal Revenue Code. Respondent Commissioner of Internal Revenue has not to date refunded or decided the claim for refund.

Hence, petitioner · f i 1 ed the instant petition for review.

In r-esponse, however, to the petition for review filed by petitioner on June 24, 1976, respondent Commissioner- of Internal Revenue answered that the Service and Technical Agreement executed on March 29 , 1962, assigned to petitioner on March 1, 197 4, provided for a gr-ant or 1 icense in favor of the Ba taan Refining Corporation ( BRC) for its exclusive use in the Philippines of certain pater ts, sec ret processes, formulas and inventions belonging to petitioner without which BRC cannot operate its refinery units. The only issue in this case for our determination is whether the payments made by the Bataan Refining Corporation (BRC) to petitioner Mobil Petroleum Co., Inc., were for technical, management and administr~~ive services rendered :)91- D

DECISION ~

outside of the Fhilippines by petitioner or for royalties subject to withholding tax at source.

The law involved in this case is Section 27(c)(2) of the National Internal Revenue Code which provides as follows:

without the Fhilippi 7 The following items of gross income shall be treated as income from sources without the Fhilippines.

we we ways AMM AAW wy (3) The petitioner has shown that it is a non-resident foreign corporations that the income subject of the assessment qade in this case by the Commissioner of Internal Revenue was derived outside or without the Fhilippiness that under the Service and Technical agreement assigned to petitioner on March 29, 1962, petitioner's services to Bataan Refining Corporation (BRC) consisted merely of technical, management and administrative advice; and that no royalty payment is involved. This was devolved in an affidavit of William C. Whitham, dJr., Vice Fresident for Technical Services of Bataan Refining Corporation (BRC), dated September 13, 1979, who

DECISION ···

- 6 ·- was fami 1 iar with the technic a 1 services rendered by l"lobi 1 . i. l.

Corporation of New York or its subsidiary 1'1obil Petroleum to its affiliates all over the world~ having been employed in Mobi 1 Oi 1 Corporation Service in 1951 and have been assigned fF·om one affiliate to another, and who stated as follows:

"5) When I assumed my present position in BRC in August, 1977, I reviewed the requests for and results of technical studies or services made by BRC to Mobilpet under the Service and Technical Agreement between BRC and Standard Oil Company (Esso) dated March 29, 1962 which Agreement was assigned by Esso to Mobilpet on March 1, 1974;

the review was for the purpose of finding out whic:h studies were actually incorporated in BRC's facilities and/or operations; 6) In the course of my r·eview, I became familiar with the services performed by Mobil Oil Corporation, ,Mobilpet, Mob.il Resea rch and Development Corporation and under Mobil affiliates during 1974 and 1975 under the Services and Technical Agreement dated March 29, 1962, and assigned to Mobilpet on March 1, 1974;

7) All the technical studies or services made by Mobil Oil Corporation or Mobi 1 pet for· BRC for the period March 1, 1974 to the first quarter of 1975 were performed in New York or Princeton, U.S. or otherwise outside the Philippines by Mobil engineering, research, purchasing or other groups;

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DECISION --

- 7 - 8) Such services consisted of, and include the following: a.

General technical advice, ser- vice and information regarding operations of the Refinery; b.

Specific detailed technical advire and operating and maintenance information regard- ing each Unit, including the res ults of researc h, develop- ment, technical service and engineering activities of Mobi 1 and its affili ates which are pertinent thereto;

r.:.

Immunity ·from liability for infringement of any patents owned or controlled by Mobil and its affiliates (in the sense of having the right to grant licenses thereunder without accounting therefor to others) where such liability arises from operation of any Unit during the term of thi s Agreement; and d.

General management and adminis- trative advlce and service un op~?ra ting, corpo r·a te, account- ing, financial, legal, employee re J. at ions , recr·ui tmen t, training safety and other gen e ral matters as required to keep the Refinery operating in a safe and effi - cient manner.

9:

The above services did not inc: 1 ude the use by BRC in the Phi 1 i ppines of any patents, secret processes, formulas or inventions belonging to Mobil Oil Corporation or any of its affiliates; 10) Whatever patents or formulas Wf?re given or granted by Mobil Oil Corporation to BRC were given in 1962 when -:5:9 7- c

- 8 - the refinery was constructed and started up with no obligation on the part of BRC to pay any royalty fees;

no additional patents or- propriety formu1 a s were given or pr-ov ic:led BRC a 'f ter the a s signment of the Agreement to Mobilpet in 1974; 11) The technical services and engineering research rendered in 1974 and 1975 by Mobil Oil Corporation to BRC under the Agreement could have been rendered by another equally developed research and engineering company;

12) The management fee of US$0.03 rem.i. t ted to Mobi 1 pet for- each barre 1 of cr-ude pr-ocesses at BRC paid ·for the cost of the above-mentioned tE?c hn ica 1 ser-vices and er ~~ .i.neer ing r-·esear-ch; any portion of the co!:·. t.

of such services not covered by the management fee was absorbed by Mobi 1 Oi 1 Cor-por-ation."

Also, in a certification issued by Antonio G. Mac kay, Vic E? F'r··e s iden t. o ·f the F'hi 1 i ppine Na tiona 1 Oil Company, dated September 29, 1983, he certified that ·for- the per-iod January, 1974 to March 27, 1975, Mobi 1 Petro 1 eum Company, Inc. , of New York, U.S.A.

"performed technical services, researches and studies through its Technical Staff situated and working in New York, U.S.A. and Princeton, New Jersey, U.S.A.

for Bataan Refining Corporation pursuant to a then e:-:isting Service and Technical Agreement dated March 29, 1962 between Standard Oil Company and Bataan Refining Corporation, and which

DEC IS I 01\1

- 9 - was assigned in favor of Mobil Petroleum Company, Inc., by the Agreement of Assignment dated March 1, 1974, and which took effect on March 1, 1974, that the service fees paid by Bataan Refining Corporation under the said Service and Technical Agreement were fees for the per··for·mance of said services and did not inc 1 ude any roy a 1 ty for any patent or other propriety technology of Mobil Petroleum Co., Inc., or· its affiliates." (E:<h. s, p . 1 , Vo 1 • I I , B I R rec . ) And in a certified copy of the agreement dated Mar·c h 5,

1. 962 between Socrmy Mobi 1 Oi 1 Company, Inc., and Batann Refining Corporation, it will appear in par. 2.0.1, the fact that the latter is granted an i rr·evocab 1 e, royalty-free, the unrestr i.e ted f r .. eedom to use, operate and maintain Socony Process Units. "2.0.1.

SOCONY hereby grants to LICENSEE for the SOCONY Process Units an irrevocable, royalty-free, non-exclusive license and immunity under SOCONY's Patent Rights to the extent that such license and immunity is required to afford LICENSEE the unrestr·ict.ed freedom to use, operate and maintain the SOCONY Process Units 591- _!_ DECISION -..

- 10 - (including rep lacements thereof at the same ~ ocation ) and to dispose of the produc . ; ther-efrom thr-oughout the wor-ld." The evidence of respondent, Exhs. 1 to 3 , does not point out categorically that. the fees paid wer-e derived from sources within the Philippines, or that said fees ar·e in reality royalties . Royalty fee is payment by the grantor or licensor for- the use of a property or- property r-ights, such as patents, secr-et pr-ocesses, copyrights and the like. Nowhere in the Service and Technical Agreement does it show the character-istics and features of a royalty agr-eement.

As far as we see, in Sec. 1.01, MOBIL agrees to supp ly BRC the ff: "SECTION 1..01.. Jersey supply Bataan:

agrees to (a) Gener-a l technical advice, regarding .service and infor-mation operations of the Refinery; (b) Specific detailed technical advice and operating and maintenance information regarding each Unit, including the results of research, development, technical service and engineering activities of Jersey and its affiliates which are pertinent thereto; (c:)

Immunity from liability for infr-ingement of any patents owned or contro lled by Jer-sey and its affiliates (in the sense of having the right to grant 1 icenses thereunder without ac:c:oun ting therefor· to others) wher-e suc h 1 iabi 1 i ty

DECISION -·-

11 ar-ises fr-om oper-ation of any Unit dur-ing the ter-m of this Agr-eement; and (d) Gener-al management and administr-ative advice and ser-vice on oper·at.i.ng, cor-por-ate, accounting, financ .. a l, legal, employee r-elations, r-ecr-ui ·_. 1ent, tr-aining and other- gener-al rna t ter-s as r-equir-ed to keep the Refiner-y oper-ating in a safe and efficient manner-. It is Ser-vice and Technical Agr-eement , by Mobil Petr-o 1 eum Co . , Inc. , the ser-vices of which wer-e per-for-med in New Yor-k or- Pr-inceton, U.S.A., or- other-wise outside of the Philippines.

WHEREFORE, judgment.

is her··eby r-ender-ed or-der-ing r-espondent Commissioner- of Inter-nal Revenue to gr-ant a r-efund or- tax cr-edit in favor- of petitioner- Mobi 1 Petr-o 1 eum Co. , Inc. , the sum of P2,022,552.60, as income ta:·:

and inter-est er-r-oneously withheld at sour-ce and paid by the Bataan Refining Cor-por-ation. Without pr-onol1ncemen t as to costs.

DECISION --

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WE CONCUR:

F'r-esid .i.ng ,Judge Associate ,Judge C E R T I F ! C A T I 0 N I her-eby cer-tify that this decision was r-eached after- due consultation among the members of the Cour-t of Tax Appeals in accor-dance with Section 13, Ar-ticle VIII of the Constitution . AMANTE LLER Pr-esiding Judge Cour-t of Tax Appeals

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