Union Glass and Container Corporation vs. The Acting Commissioner of Internal Revenue

REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

QUEZON CITY

UNION GLASS AND CONTAINER

CORPORATION,

Petitioner ,

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versus -

C.T.A. CASE NO. 3144

THE ACTING COMMISSIONER OF

INTERNAL REVENUE,

Respondent~

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DE C

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This ca!.",;e is about an income ta:·: deficiency

assessment issued on December· 6 ~

19'76 against the

peti t .. ioner· in

t he

amount of F'2 0 ~ 965. 2'7,

inc: 1 usi ve

of

interest~ as

a

result:.

of

disallowance of

a

claimed

deduction

of

P4'7,301.90

representing

an

excess management fee payment for t he taxable year

ended September 30~ 1974.

F'eti.t .. ionel'·

pr .. otested the assessment on Apr·i.l

18, 19'77, but which respondent denied under letter

dated July 2, 1981, s tating that

-

Under·

t.he

ManagernEm t

Con tr-c:~. c t

en t€r·ecl

.in to

by

you

~-Ji. th

the

CF'J

Corporation

on

November

5,

1970,

you

3 6~)

DECISION -···

CTA CASE NO. 3144

2

~·"

shall pay a management fee of PB~OOO.OO a

month plus 12% of your net income after

ta:-:es~ bonuses and management fees.

It

appears~

however~ that you

computed

the

12% management fee on your net income in

the audited

·financial

statement without

consider· ing your

BO I

I nc:en ti ves

on

pr-·e --

oper·a tinq

e:-: penses

and

ac:c:e 1 era ted

depreciation

and

other

non - deduc ti b 1 e

items

as

shown

in

the

auditor's

reconciliation statement.

The net income

you

used

as

the

bas;.is

of

the

12%

managem~mt fee

e:-:ceeded

the net

income

after

deducting

the

BOI

Incentives

on

pre- operating

expenses

and

accelerated

depreciation

and

other-·

non-·deduc ti b 1 e

items.

Accordingly~ the

12% management

fee you paid to CPJ Corporation cannot be

claimed as a deduction in your income tax

return~ the same not being in accordance

with the aforesaid management contract.

Hence~ this appeal.

The case be ·fore Us presents no dispute as to

the

r·elat.ively

simple

material

·f ac t.s

but

the

parties seem trying to get the better of each other

over· by a quibble as to the pr-·oper import of "net

income" under· the ter·ms of the Agr- eement~ to wit:

CPJ

shall

be

entitled~

by

way

of

remuneration from UGC for services under

thi s

M.::magement.

Ccmtl·· act.~

to

the

·fo 11 owing fees:

A

f .i.:-:ed

fee of

PB~OOO.OO a

month;

plus 12% of UGC's net income after taxes~

bonuses and management fees.

Petitioner

maintains

that

the

phrase

"net

income after ta:-:es ~

bonuses

and

management

fees"

upon which

ba~.;; ed the .12% con t.ingen t

fee has since

.~ 70

DECISION .....

CTA CASE NO. 3144

.1972

been

consistently

interpreted

by

the

contracting

pal~ ties to mean the net income figure

appearing

in

the

audited

financial

statements

prepared by their external auditors.

(E:·:hs.

E~

F~

G~ H~

J~ K~ L; Testimonies of Mr. Nemesio A.

Sugue~

Mrs . Warrie Zenoval Totto and Mr. Luisito N. Reyes;

tsn August

3~

1982~ pp. 608; tsn Oct.

30~ 1983~ pp.

6 - 8~

9 - 10~

12-18~

CTA

recs.)

The

net

income

utilized

the

purpose

of

the

per·cen tage

contingent

fee

comports

with

their

contractual

intendment.

As

befor·e

noted~

however,

respondent's

unva1r·y ing

a sse r .. t i. on

is

that

for

purposes

of

asse ssment

the

net

income

appearing

in

the

petitioner 's income

tax

return

for

the

taxable

period

involv!:?d~ i.e., net income after deduct.ing

the

BOI

Incentives

granted,

should

have

been

utilized for computing the 12% management fee vis a

vis

the

net

income

in

petitioner's

audited

financial statement.

We

do

not

reach

the

same

conclusion

of

res pondent Commi s sioner.

It is perhaps hardly necessary to stress that

DECISION --·

CTA CASE NO. 3144

--

4 -

the contract of management is the law between the

parties and un 1 ess it fa 11 s

sharp 1 y at odds with

any

legal

constraint

the

same

deserves

valid

cognizance.

We sha 11

be 1 ess than respecting the

compe 11 ing import of the wi 11 of the contrac t.ing

parties should a

narrow and unvarying app 1 ica tion

of

the contractually stipulated

"net

income"

be

posed.

Thus stated "the computation of net income

in the income ta:-: return is simply not the "net

.income" con temp 1 a ted by the par· ties.

And there is

no inconsistency in this at all~ net income may be

computed differently for different

purposes~ as it

was

compu tF.:d

differently

for·

purposes

of

the

management and for purposes of arriving at taxable

income.

Since the net income for purposes of the

Con tr··ac t

is

the

net

income

appearing

in

petitioner's

audited

financial

statements~

respondent simp 1 y

has no au thor.i ty or·

1 ega 1 basis

to substitute his own computation for that of the

pat~ ties to the Contract."

We

share pet.i tioner' s

view.

We cannot help but think that the respondent

has mistakenly applied the net .income figure

~ ,_, -

•.J .

used

DECISION -···

CTA CASE NO. 3144

~- ·

5 -·

in petitioner's

ta:-:

retur·n

to a

situation where

what

the

petitioner

did

was

merely

to

use

permissible

business

judgment

that

better

e ·ffectuate a reasonable basis for compensation in

its contractual obligation.

Respondent has grafted

a meaning other than that conveyed by the plain and

c 1 ear· tenor· of the terms of the Agreement.

This

s hould not

however foreclose

the possibility of

having

the

legal

moorings

for

the

percentage

contingent fee voided should the arrangement prove

a sort of malarkey devised to evade the payment of

the rightful

dues~ but only then may the bridge be

cross ed for any such deficiency tax liability.

It

i s

too

much

of

a

stretch

to

hold

petitioner straight- jacketed

to

the

respondent's

own interpretation of net income by reason thereof

deny altogether any opportunity for petitioner to a

serendipitous availment of allowable deduction from

qr·oss

income

necess ar-y

business

expenses

incurred and paid during the taxable year.

Upon the records~ both circumstances obtaining

and relevant legal standards compel the conclusion

that

petitioner

has

proved

entitlement

to

a

favorable determination of the desired relief.

373

DECISION --·

CTA CASE NO. 3144

--

6 --

WHEREFORE, respondent's decision appealed from

is

hereby

set

aside

and

cancelled.

pronouncement as to costs.

SO ORDERED.

Quezon City

~ Metro M a n i l a~ Ju l y

31~ 1989.

WE CONCUR:

AMANTE ILLER

F'no>s .id ing ,Judge

(on leave)

CONSTANTE C. ROAQUIN

Associate ,Judge

Associate Judge

CERTIFICATION

I

hereby

certi f y

that

t his