Uoblic 0 Rht'! PH!Upp!Ni'\ Court of Tax Appeal..~ Q.U.EZON Ct'T'V Qhil Ippine Refining Co., Inc. vs. Commissio Ner of Internal Reve Nue

DECISION -

- 4 - Amount collectible as of 7/13/68 ••••••• V 373,8~0.13 Less: Amount paid on 7/12/68 per

OR 3221311

••••~ •••• a••••o~e• ~••••

Balance as of 7/13/68 ••••••••••••••••••

Add:

1% mo. int. fr. 7/1/68 to 4/15/71 ••• ~.~ •••• Compromise penalty fo late payment ., ••

TOTAL AMOUNT STILL DUE & COLLECTIBLE •••

-· 362.! 971.00 v 10' 889.13 3,593.41 50.00 Petitioner, Philippine Refin:inrJ Compa;,y, Inc. ,. .

(PRC for short), is a domestic corporation duly rirgAnized and existing under and by vi tL ~ of the Jaws of the Philippines.

Sometime on May 15, 1962 it entered into

an Agreement with the Unilever Limited (Limited for

short), a non-resident foreign corporation n t engaged in business in the Philippines orgb 1zed and exi~t ng · under the la~'<ls of Eng land (Exh. "G"). Under this A g r e e me n t L i nli t e d d i r e c t 1 y o r t h r o u g h i t s " A s s ':! c. i at e d . c o rn p a n i e s ."

'd u 1 d · r e n de r t h e s e r v i c e s :

2.

'IN ccnsideration··of the payments to be made byPRC (petitioner) under Clause 3 of thi s co ntract , Limited shall, during the contj- nuance of this Agreement, either by itself or at its option through one or !nor e of t. he Ass o- ciated Companies, render ce~tain services as hereinafter set out:- (a)

Trair~

In order Lo implement Unilever 1 s policy of encouraging nationals of the country of operation to assume positions of responsibility L"mited shall provide full-time training within Limited o

the Asoociated

Companies for such employees as Li i ted and PRC may from time to tlme jointly select.

The fares from anrl returning to the PhiJippines and the salaries of .uch employees fo · the period of their absence from the Pliilippines shall.be for the acco"n t of PRC.

23

DE CISION -

C A CASE NO. 2872 ..

- 5 - (b)

Research

Make available to PR those re- sults of Unileve . ' research in res - pect of the Agreement Products that Limited considers to be of mutual benefit for Unilever and PRC.

(c) Avoilabi1il_1 of Servi ce and Advi- sory Oep~rtment~ Buy·ng of Raw Mate rials (i ) Use of its knowledge of and c o n t a c t vt i t ! \ a 11 p r i n c i p a 1 111 or 1 d markets lu ussist it i handling on PRC's behalf the complex task o f purchasing at the most favour- able prices such quantit ies of ra w materials ~s mny frcm time to time be requ i r d fo the manufscture of the Agreement P oducts having regard particularly to the nerd for continuity of supplies anJ the prob l ems of shipping.

(ii) Render such anci l lary ser- vices in connection with the above in cl uding (by way of illus- tration but not of limitat i on) providing from ime to time mark e t r eports with price movements of raw materials in which PRC is in- terested checking contrac ts giving packing marking ond nthGr jnstruc- tion s to sellers neqotiatiil9 en quality clai ms and Jencrally as required from time to time oy PRC acting as a~ent betwe dn PRC ond buye~s and sellers outside of the Philippines.

~i!2_g_of Pla~ Hachiner & Sund1:y Supplie s Use its best enc'cavou :s to purchase as a principal or agent at the best prices its experienc~ enables it to obtain such of PRC's m a n i f o 1 d r e q u i r_ e m e , 1 t s l n d i v r s e fie ld s includjng (by way of illus - • tration but not of 1i mitation). meci J- nical and electrical plant and 24

- 6 - equipment and pack ng materials and sundry suppli~s for lhe Agree- ment Products as PRC shall from time to time request.

Perfumery

Assist PRC by checking such of the Agreement ·Products as con- tain perfume for stability of per- fume and for compatibility of product with perfume; advise PRC in regard to new perfume and per- fumery pr'Jd ;cts for the Philippine market ar, ,~ advise PRC generally in connection with perfumery matters. Make availatle to PRC the advice of the Unilever Specialist

Departments in London on

prorl ·. cl~ion and technical matters, market2.119 and distribution, insurance, bus~­ ness administration and fina~cialr legal, taxction and accounting matters.

(d)

Trade Harks

Swcure to PRC the right during the con- tinuance of this Agreement to apply to the Agreement Products the trade m~rks referred to in the First Schedule hereto and such further trade marks of Limited or any nf

the Associa Led Companies as Limited and

PRC may from tdm~ to timd mutually agree upon.

(e)

Communication

f Patents Secret Processes etc Limited shall communicate and make available to PRC for the purposes of the m a n u fa c t u r e o f t t. L. 1\ g r e c me n t P r o d u c t s s u c ;, secret processes inventions and irnproverr.er1ts now or hereafte r directly or indirectly owned by Li mited or any of the Associated Companies as in Limited's opinion are nece~­ sary t enable the Agreement P~oducts to" be man factured with the eff~cieG y and to the stflnd.Jrds of quality r .qu-' red by Uni- levcr of the Associated Companies. 25 / DEC IS I 0 r,J - - 7 - If any of such secret processes invent i o 11 s or i m 1) rove n: en t s so communi- cated and made available to PRC by Limited are protected by Let ,8 1'S Patent or othe, equival~nt protect:on within the Philip- pines Limited shall grant or procure to be granted to PRC a royalty - free non- excl usive licence under such Letters Pate nt or other equivalent protection for the unexpired re s idue of t~e term thereo f and any prolongation or extensior. (hereof which Limited in its discretion may obtain.

Such licence shall be granted with effect frJm ~.he date hereof in respect

of the Letters Pcttent and Applications for Letters Patent

r e '~rred to in the Second Schedule hereto.

All exp8ns e and renewal fees i~ connection with the gront- ing a nd maintainonce in force of ::1ny such Letters Patent or ~quivalent prntection shall be for the account of PRC. P R 0 VIDE D THAT however , not h . n g h c r c i r• contai ned shall impose upon Limited any obligation to accord to PRC priorit ove ~ any of the Associated Companies in re~ard to lhe deployment of any of the services enumerated in this clause 2.

3.

(a) I n consideration of Limited's securing for PRC the services hereinbefor2 sp ec ified PRC shall pay to Limited within fourteen days of the e nd of each quarter : - (i) For the service s of tra .i.ni.1g research and of Uni~e~cr's Service

and AdvJsory Departments -

as spe- cified under ( u) (b) and (c) of claus e 2 of this contract - a ser- vice of 1/2 per cent of ths total net sales val ue of the A~r ee ment Products during the quarter.

(ii) For the services specified under (d) a nd (e) of thi s 2ontroct a service fee nf l/2 per cent of t h c tot a 1 ! 1 e t. s a 1 e s value of the Agreement Products during tl e quarter .

By all a pearanc2s, the cas e b~ gan just lhe way the tax informer would have wished. The derogatory informalion 28

DECISIO N -

CTA CASE NO. 2871 - 8 - '" furni shed the res pondent somehow evoking a sense of a deja vu as to petitioner's alleged defrauding the Gove r n- ment of income t axe s due by way of de c laring as deduc - tions the value of its betterment s and improvements ins tead of capitalizing the same carr i ed over f or s ome 10 years commencing in 1961 , drumm e d an investigat~on and culmina ting into the tax assessm en t de mands f o r 1) deficien cy wi thh oldin g t& ~ bt source for the taxable years 1966 to 1971 and delinquency with ~o ldi ng tax pe r retu rn s for 1966-1967 on findings that the remitted legal and a dvisor y fees to Unil ev e r Limited were act uall y royalty payments s ubject to withh olding; an d 2) de fi - ciency . corpo rate in come t ax for 1968 consequenced by the incre ase d rates prescribed in R.A . No . 5431. On July 27, 1974, petitioner protest e d a nd sou ght the reconsideration and cancellation of the assessme ts. Respondent on Mar ch 23, 1976 after due inve s tigation withdrew and cancelled t he deficie ncy corporat e income ta x assessment of the sum of ?~37,568.8 8 for the year 1968 for obvio us lack of l e gal bisis, but sustained the defic iency withho l ding tax at so ur ce for tho years involved (19 66 -1977 and 196 6-1967), supra. Peti ti on e r s r equest for a nother r econsi dera ti on was de nied by th e respondent un der letter dated Marc h 7, 1977. He nce, thi s appeal.

By and large respond ent Commissioner of Internal Re venue holds on t he view th nt the payments made by 27 _/ ..

- 9 - .. petiti one r to Unilever Lim ited , a non-resident foreign corpo ration no ~ engaged in trade o r business in the Philippines are not for servi~es allegedly rendered by t he latter, but ar e a ctually 'oya 1ty fees for market- ing pr oducts car r ying the trade marks, labe l s or n~ mes of Unil ever Li mit ed which petition e r is licensed to manufac t ur e and sel l in the Phili ppin e s; that t he Agreemen t be t\-1 e e n petit ion e J.: :1 , d U n i 1 eve r Limited p 2 r - takes t he na ture of a li c ense and that whatever train- ing extended to petitioner's ~ersonnel, res ear hes t o imrrove or maintain the qua l iti e s and standards of the Agr eeme nt produc ts , t he availability of ser vi ce s, use of t rade ~arks and co mmun i cat ion s on se c ret proces se s in the ma nufacture of products of Unil e ve r Limited, in 'the Philippines ar e all re l ated to the aales of th e agre ement products in t he Philippines a nd not for se rvi ces all egedly rendered by said firm; that if the contractin g parti es inten ded to tre a t the alleg e d ser- vices as suc h, there sh ou l d have been a contractual price for each a nd ever y service actually render e d and not an a rb itrar y fee on the net sales of th e agree - me nt products in the Philippines; as such ~ payments made by pet i tione r t o Unil e ver Li mi ted of Londo n are royalt y payments \'thich or e inc om e fro m s o!J rc es v1i th i n t he Philippines of a non-resident foreign corporation, a nd, th e refore the income t a x due t he r eon should be 28

DECISION

CTA CASE NO. 287 2 - 10 - "" withheld by pe titioner ~ I n a scbsequent lett e r dated March 7, 1977 , respondent has t ened to rectify thal "co ntrn r y to your under st an ding, the assessment of J$3,330 1 617.30 is not pre dicrted on '.he assumpti··n that products of Un i leve r Li mited were exported to the Pi·1 ilippines and sold here by your client (pet i tioner). Said asse s sme nt is based on our findings that the amou nt s r e pre ::- ented a s l egal a ;.d advisory fe es, allegedly earn e d outs ide the juri sdictio 11 of th e Philippines " is actually pa rt of the royalty fees payabl e by yo ur client to manufac tu re th e so- cal le d 'Agreement Products' and ap ply th e r eo n th e tr a demarks of Uni l eve r pro ducts . " Petitioner wraps ~p its position t his wise:

''It

was agr eed that fo r services un der (a), (b) and ( c) a ·ser vic e fe e of ;\z% (increased to 1% under Exh. "G - 2 11 ) of the net sa l es valu e of the Agreem en t Products will be pai d by PRC (peti ti oner) to Unilever. For services und e r (d) an d (e) , a service fee of\% (in c rease d to 1% und er Exh . "G-2") of the net s~les value of the Agree- ment Pr oduc ts wil l be r~id by PRC to Unilev c r .

During

t he years 1966 to 197 1 voluminous services wer e render ed by Unilever in favor of PRC (Exhs. "0" - iiP -1 " ; Exh "Y";

Exhs . "DD" - 11 00 - 915" ; Exh s. "EE" - "EE-859-a") pur- suan t to the sai d Agre eme nt (Exh. "G"). Since tr ain - ing, rese ar ch, ass ist ance in purchasi ng o~ materials ;

purchasing of plant , ma chi nery a nd sundry supplies ; 29 DECISID r~ - CT A CAS E NO. 2872 - 11 - "' perfumery and genera l adv isory service s wer e all pe r - formed abr oad ~ y Unile : e r Ltd., the remittances made by PRC of its paym e nts for the fo re going services were no t subject ed to with holdin g i n accordance with Secti on 37 (c )( 3 ) of the Tax Co de which co ns i der s compensat ion f r ser vices performej outside of the Philipp i nes as i ncome from withou t the Phili pinos a n d t h e r e fo r e n o t s u l; j e c t t c. 'tL t h h o 1 d i n g v-1 h e r e t h e r ecip ie n t of said income is a non - r Lsident foreig n cor poration not doing busine~s in th e Philippines. \~ ith · r egar ds to the payments by Pi\C for its use of Unil ever 1 s tradema ks) patents and secret proces~ cs under the ·Agre e ;re nt ( L' h • " G" ) said r em it t. an c e s VJ e re subject ed to withholding (Exhs. "H" - "H-10 11 ) togethe r ·with r em i t t an c es of dividends, royalt1es and i nterests. Prior to 1966 no deficiency inc ome tax assess ment and withholding tax asse ssment similar to the case a t bar was made as a result of the BIR investigation of PI\C ( TSt: , p . 46, P.pril 25, 1989 h r:: aring, testimony o f Mr . fernando Mana lo ).

rrior to 1966 a nd during the per i o cJ i :1 \ ' o 1 v e d in the pet i 'cion ( 19 6 6-19 7 1) all remit tances were approved by th~ Centr Gl Bank.

All

of said re mittances wer e deducted by PRC as bu~in e ss expenses in its Corporat e In come Tax Returns; no di s- all owances thereof we r e ever made by the BIR; and the reasonableness th e r eof were nev e r questioned by t he BIR (TSN, pp. 10 1-103, April 29, 1980 hearing , 30 ,• /

DECISIO I

- 12 - ,.

testimony of Mr. Fernando Manalo) . On the metter by which PRC withheld taxes on the remittances, advice of cou i~sels were s~,licited and the inanner of v1it.hhold- ing were upheld by PRC's tax l o1y ers. (TSN, pp. 44-4:), April 25, 1980 hearing, t esti mony of Mr. Fern a ndo t··1 analo) ."

All told the material facts &le ~elatively simple and so 1s the issue under r~~8 ~ :e which is essentially addressed to the question of whether or not the peti- tioner is liable for de f i c i e n~c y \vi t h h o 1 d i n g tax sou r ce on the represented amounts of legal and ad vj so ry fees remitted to the foreign corporation for tha l~x- able years involved.

The case before U· hardly pre s ents a gripping · questioQ.

The Agreement (Exh. "G") itself furnishes the best means of it s own exposition. Enumer a t .d in C 1 aU S e 2 ( E Xll.

!! G- 3 II) th d .

f -- are e agree scrvlces o

(a) Traini ng, (b) Research, (c) Availnbility of ser- vice and advisory departments, _(J) Trademarks, · nd ( e ) c· om m u n i cat i on o f p a t ro n t s and s c c r . t pro c e s s e s • ,n.s pointed c 1 : .. bj the petitioner the contrnct consists mainly of two parts, vi z.: l) Performance of the ser- vices constituted in Items (a), (b) and (c) hy Unilcver Limited in London and 2) Availment of the use of paten ts, trademarks a ,d s c:;cret ro ces ses mentioned in Items

(d) and (e ) by the petitioner in lh8 Philippin es . 31 £ nN tp t - a 2 ey ion cit a oe el oa ! = un os = en a ‘ apo ae eo * + ws 2 Se a way or] post a i ~ au vee L oe fan] TL ra a = : o oe, te ny a os 7 ~ eens ee) . ~ bas ae ss 2 aon a ioe : on a at : C2 ne ~ o - 7 ry wo ut wee re cD iD : o ‘ ue 3 i 2 she!

_ o - c: ss net oN = ol Me a he e = at : 7 i fos a a hy a a Ge a wo aed oe os a , is Se on i we :

ae ues un “3 a ;

“4 3 “s : 3 tJ ~ : - ~ . a ns D — an a . “ co j “2 cas 2 cet ar om a Ce . : a re: cee ‘ a a ar a © ar we mM Y 4 a on :

os ae os hee iy 2 aa oe 3 mS uy an aa 7 . mt ew . ~ m~ Ne rt i fag - ame ae : - gt ow fen a a C: GJ au ai o tod : whe! a Bt what i) ban oes G ad fD nuk Oo “4 uD m iT oe mm whe Gc:

= ‘: co “S iy one che G “a a c ~ x - wo roo q be Hi a ae 43 ‘Se C Q ow we . ~ od ad “ ~ - “ oy ex io} a oo ae a - i bo re - 4 Ons ms : i te ; Wa o a fe oe a 3 ms Cc 8 ce {5 in 8 fl bee a Los i ~ 2 : roa wa on wee com ue an See a QQ - 4 rs aa uC 4 a 7 Ne a o * o - .

fy a. wd th. fo % - q @. ae oo .

asd ti on rm ie m J at am ot ad : See 30 x LY cod iva oe aad oN eee ae ool cet et fea 2 2 o ~ a = on a ot 5 ~ o et on a real wid & oh fy we ao mw 3 os

Mey

weet %

Cy

i

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ue ro 7) tn oe

- 15 - ~ tax asses sment on the leoal and advisory fees similar to the case a t bar l'>~as ever ma de as a result of 8itY BIR investig at ion of the petitiorer. P..ll the remit- tances were deducted by the petitioner as business expenses in the corporate income Lax returns. No dis - allowances were ever made by the Bureau of Inter~al Revenue and the reasonableness tnereof v~ere never h<ne been quastioned by the BIR. ' \e ithe r was there Rny showing of any excep t ional syndrome of change in the implementation of the terms df the service c ntracl as woul d warrant a quir k of a varia~ce in the tax treatment on such remittances For the ta xab le y e~·s involved. · We therefore hesitate to further fash1on an issue into an otherwise satisfactorily s8ttleJ l egal situation.

Although the reach of the issue upon which we res t our decision re nders resolution of other subsi- diary questions unnece s sary, suffi ce it to state that .

the apparent contentious quibble on the nature and purp bse of the le gal anJ advisory service fees as creating an impression and evoking a connotaLion of royalty payments, the rulings in Ing.rarn vs , Bo~vers, 5 F 2d 65; and Oppen hein vs. Commissioner of Internal Revenue, 31 BT 563, appear in point, that to dis- tinguish b~Lween compeDsation for service and royalty payments one must inquire on whether the payee has 34 ./