SMITH-KLINE & FRENCH OVERSEAS CO., and SMITH-KLINE & FRENCH INTERNATIONAL CO., Petit i onet~s vs. COMMISSIONER OF INTERNAL REVENUE, Hespondent. X - - - - - - - - - - X D E C I I 0 N The instant case presents a fairly similar que s tion as that presented in S11ith Kline & French Overseas Co., and S11ith Kline & French Int ern.at i onal Co. v. The Co11111 i ssi oner of Internal Revenue, •:::0, June 30, 1989. The issue raised is whether or not petitioners are entitled to the refund of alleged erroneously paid withholding TAX at source on t~oyalties due a non- t~esident fot~ eign cot~pot~ ation not engaged in trade or business in the Philippines. The material facts are undisputed. Petitionet~ Smit h Kline & French Ovet~seas Co. <SK&FO> is a fot~ eign cot~ pot~ation duly licensed to engage in business in the Philippines with 66

DECISION

- 2 - established offices at Victor~ ia

Valley

Boulevar~d, Cainta, Rizal.

While

petitioner~ Smith Kline & Ft~ench Inter~ national Co. <s•~&FI> is a non - t'e s i dent f Ot'e i gn cor~por-at ion not engaged in t r~ ade or~ business in the

Philippines

with pt'incipal office at 1500 Spt'ing Garden Street, Philadelphia, Pennsyl vania, U.S. A.

For~ the yeat' 1982,

SK&FO

accr~ued in favot' of

SK&FI

r~oyalt ies amounting to P2, 691, 008. 00, computed at the rate of 5~ and 3~ on net sales of phat~maceutical and consumer~ pt~oducts r~espectively. On various dates, petitioner SK&FO withheld 35~ tax on said r~ oyalties equivalent to P941,853.00 ptwsuant to Section 2Lt(b) (1) [now Sec. 25(b) <l>J in r~ elation to Section 53(b) [now Sec. 50(a)J both of the National Internal Revenue Code. As certified and verified by the

Revenue

Accounting

Division

of the

Bureau

of I nt er~ na 1 Revenue, the following amounts with the it~ corresponding confirmation receipts have been paid by taxpayer-SK&FO, to wit: [Exh. NJ C. R. NO.

9910434 10047917 10742376 7489969

Total

DATE

04-20-82 07-19-82 10-20-82 01-18-83 6'7

AMOUNT

p 234,904.57 239,119.63 267,327.86 211,969.72 p 953, 321. 78 ==============

EXHIBIT

B-2

C-2

D-E

E- 2

On Apt~i 1 -=··=- L.. L-' - 3 - 1983,

SK&FO

filed with the <TTB) a letter requesting approval and registration of the technological S~~&r--o, as Philippine licensee, and SK&FI <USA>, as 1 icen!; ot~ CExh. JJ.

On

August

2, 1983,

the Technology

Transfer

Board

qualified ly approved with a mendment s the A g t~ e e m en t e f f e c t i v e Dec e m bet~ 8, 1 9 7 8 [ L x h •

K J •

T h e subject to amendment as a pre - condition fot~ the issuance of a Certificate of Registration. Th u s, the contt~act was amended "to t~eflect in At~t.

III, Sees. 3.0 1 .::md 3.02 t~oyalty t~ates of 3~ of net sales on phat~maceutical pt~oducts ancl 2il. of net sales on consumet~ health pt~oducts" EExhs.

~~ - 1,

M- 1

and M-2J .

In view of this amendment, petit i onet~

SK&FO

contends that was an ovet~ p ay ment of royalty tax totallin ~1 P376,678.00, computed as follows:

EExh. GJ 68

Phartace uti cal

Products

Consuter Products

Total

- 4 -

STATEMENT OF OVERPAYMENT OF ROYALTY DUE TO

SMITHKLINE INTERNATIONAL AND CORRESPONDING

WITHHOLDING TAX FOR THE YEAR ENDED DEC. 31, 1982 R 0 Y A l T Y ____ J!.RJ..Q.H~B!:-

AS AMENDED

NET SALES

RATE

AMOUNT

RATE

AMOltH

P531 766,312 5)( P2,688,316 3)( P1,6121990 89, 734 3)( 2,692 2% 1,795 ----------- ---------- ---------- P53, 856 I 0-46 P2,691,008 P1,614, 785 ---------- ---------

Withholding Tax Rate

35)( 35% ---------- ---------- . Withholding Tax p 941,853 p 565, 175 ---------- ======= ----------

OVERPAYMENT

P1,075,326 . 897 ---------- P1,076,223 35)( ---------- p 376,678 ======== In due time or on

April

18, 1984,

SK&FO

ttn~ ough its auditing finn

<SGV>

filed with the But~eau of Intet~nal Revenue a claim fot~ t~ efund of overpa id withholding tax for 1982 amounting to P376,678.00.

Simultaneous with the filing of the refund claim petitioner s filed the instant petition Respondent in his answer invoked the principle that c laims for refund are strictly construed again s t the taxpayer.

He added that the burden of proof lies on the taxpayer to show entitlement to the refund sought to be claimed. (.)san affit~ mative defense t~ espondent pointed out among that it is incumbent upon petitioner- SK&FO to show that it has complied with 69 the provisions of Sections £92 and #98 of the National Internal Revenue Cade. He maintains that the amended rayalty rates should be applied prospectively. The withholding taxes paid prior to the amendment was therefore lenal. Moreaver, the claim for refund Was merely an afterthought following the grant by TTS of the reduced rate.

Respondent misses the point. The evidence presented by petitioners bolster their claim for refund, On April 18, 1984, pretitianer filed its Claim for refund simultaneous with the filing of the instant petition for review. Hence, the suit was filecd within the two year prescriptive periad from date of first payment (April =O, 1962).

During the trial, respondent waived his right to present any evidence. Instead he submitted the ease based on the pleadings and the evidence offered hy petitioner.

Upon the records presented and the relevant legal standards obtaining petitioner has proved entitlement to the refund clain. Fetitianer has satisfactorily discharged its burden administratively and judicially.

In an earlier case involving the same parties Smith-Kline & French Overseas Co. and Smith-Kline & French International Co. v. The Commissioner of 70

~ & - Internal Revenue, BUPA. « this Court had the occasion ta rule:

"MOM Me After petitioners formally offered their evidence the respandent expediently submitted the case For decision on the basis of the pleadings sans the requisite BIR records probably "Jost in the eblivian of forgotten lore." And, since one who prays for judument an the pleadings without offering proof as to the truth of his allegations, must be understood to have submitted the truth af all the material and relevant allenations For the opposing party, and to rest his motion for judgment oan these allegations taken together with such of his own as are admitted (Bauermann v. Cases, 10 Phil. G&63 Evangelista v. De la Rosa, et. al., 76 hil. Lim), respondent, as pointed ant by petitioner may be cansidered as not questioning seriausly petitioner’s entitlement to its claim for refund. More Sa whem the evidence presented, which was not disputed by respondent sufficiently establishes petitioner’s right ta the refund, "

(Commonwealth Management and Service

Corporation v. Commissioner of Internal Revenue, CTA Case Na. Seca, June #6, 1985).

K K X x KR KR NR NM Ke ALL told, the basics of the claim is not short of smecifiec support in terms of tractabls data openly laid and fully disclosed, as such deserves the credence that shoaulcd normally be accorded in the absence of contrary evidence af relevance and campetence required to bash that patina of validity over the claim. And the recerds make it clear that the requisite statements or certifications of the tax withheld, paid and remitted tupon which tacked the refundable amount claimed could readity furnish the legal basis for a definite resolve but appropriate action thereon appears dawdled in a limbo of lingering 71 ee ie verification, whieh comes AS an angravated chutzpah, 80 to speak.

Petitioner or any similarly circumstanced taxpayer for that matter deserves a meagure of fair dealing in oa more expeditious and competently responsive actian."

In the case at bar, the same circumstance is obtaining as in the case above-mentioned. It must be stressed that petitioner-SK&FO was able to overcome its burden. Respondent presented na evidence toa rebut the evidence adduced by petitioners.

As far as pwbpentdt? « averment that the royalty rates should be applied prospectively, We see nae merit to such cantention, It appears Clearly from the record that the Agreement should be amended as a pre-requisite for registration. The amendment therefor WAS a condition for registration. Since royalty rates were reduced by TTB Fron 5% to 3% for pharmaceutical products and from 3% ta #% for consumer products, the same should be made to apply on the effectivity date of the contract, that is, on December 8, 1978 CExhs. M and OJ. Having complied with this condition, the TTB eaten the Corresponding Certificate of Registration to petitioners on April 9, 1984. As specified in the Certificate the Royalty Agreement dated December &, 1978 was approved for 72 registration pursuant to the provisions af Section 3 of Presidential Decree No. i520 [Exh. QO]. For all intent and pli heaps the Royalty avtelient took effect on December 8, 1978. The Agreement having been approved with amendments partictilarly on the royalty rates then the same should be applied from its effectivity date. It must be remembered that - the Agreement dated December 8, 1978 is the very contract that was approved subject however to the reduced royalty rates of 3% and e%. We see no Plausible reason why the amended rates should be applied only prospectively when the effectivity date of the Agreement which was approved was not changed at all but was in fact adopted.

WHEREFORE, finding petitioners’ Claim fer refund to be in order, respondent.is hereby ordered te refund in favor of petitioners Smith-Kline & French Overseas C€e:, and Smith-Kline & French International Co. the amount of FP376,678.00 as overpaid withholding taxes for the year 1982. No costs.

Cus 2 Ren

ERNESTO D. ACOSTA

Associate Judye

73 . . .

- 9 -

I CONCUR:

C E R T I F

I

C A T I 0 N

I

hereby certify that this decision was reached after due consultation between the member s

of the Court of Tax

Appea ls in accot~ dance with Section 13, Adicle VIII of :::S4~::~UIN ¥s oc1ate

Judge

Court of Tax Appeals

74